Barriers on the road to credit heaven

Ukraine’s banking sector is gradually getting over the financial hardships that began in late 2008. Depositors are slowly regaining confidence in their bank accounts, and the banks’ deposit portfolios are slowly gaining in size. However, after getting over the initial shock of the crisis, the banks are in no hurry to spend the accumulated funds on loans to the real sector of the economy. It is also true, however, that banks can’t keep collecting deposits without investing some of this money, considering that loan interests are their key income items. Then why are these banks practically giving no loans to the economy? When will they change their attitude? More on this in the following interview with Viacheslav YUTKIN, first deputy chairman of the board, Prominvestbank (PIB).

We hear from the upper echelons of power about economic stabilization in Ukraine. Does the banking sector feel the crisis receding?

“There are signs of improvement on the financial market and within the banking community, of course. Now we can say that the crisis is receding, although we can’t say when it will be over precisely.”

What factors do you think will be crucial for the banks in overcoming the vestiges of this crisis in 2010?

“Completion of debt restructuring and making profits. Only then will it be possible to discuss the banking system’s status before the crisis. Another reason why it is important to overcome operating losses is that this status entails a number of limitations that have a negative effect on the bank’s performance. Put together, these factors will restore the depositors’ confidence and narrow risk margins. Only then our banks will be able to give loans on a full scale. At present, most of the banks are very cautious about issuing credits to the economy. Needless to say, the whole banking system will need a serious capital increase to overcome the crisis.”

SOME BANKS WON’T ESCAPE THE SECOND WAVE

As an experienced banker, do you think there will be the second wave of crisis in the banking sphere?

“I think there is no escaping it. Perhaps the consequences won’t be as bad and not all of the banks will be swept under, but some will. What’s happening now? The banks are actively restructuring their clients’ obligations. This process is taking place on a large scale, you could call it a campaign. No credit committee can do without processing such applications and sometimes this gets absurd. Once a bank says no to a customer, after figuring out that there is no use postponing an interest payment or trying to get a loan repaid, this bank finds itself under an avalanche of complaints that the customer sends to authorities on the highest level, demanding that this bank be brought to justice, even forced to erase this customer’s debts.

“At the same time, such campaigning in this sphere is inadmissible because by doing so a problem is put aside, never to be actually solved. Banks understand this, but hope to brighten up their progress reports by giving this customer another chance. Practice shows that customers often use this chance to feign bankruptcy or to sell the remainder of the mortgaged property at bargain prices. In other words, by doing so we aggravate this problem. No one will tell you today what percentage of the restructured credits will live to meet the new deadline. Let me stress once again that capital increase is the only way to protect a lot of banks against the second wave of the crisis, otherwise 10-15 banks will go under at the end of 2011. This would mean further bankruptcies, more cheated depositors, another outburst of public distrust of the banking system.

“To prevent this from happening, between 30 and 50 billion hryvnias (depending on estimates) has to be injected into the banking system. Even the PIB, with its authorized capital of more than five billion dollars, currently feels the need to accumulate additional funds. We intend to enlist some two billion hryvnias through a subordinated loan next year.”

UKRAINIAN CAPITALISM: BENT ON CONSUMPTION

They say that the misuse of the main principles of capitalism is one of the reasons behind Ukraine being hit so hard by the crisis. Do you agree?

“I do, if this means a desire to have everything, here and now. But we shouldn’t blame capitalism for this because most of us don’t want to return to socialism. It’s just that some people believe that Ukraine has stepped into an era of prosperity, and that the City of the Sun [as in Campanella’s utopian work] can be built here by having easy access to bank loans. Nothing could be further from the truth. The consumption boom in Ukraine before the crisis resulted in almost everyone applying for a loan, with banks obliging, trying to outdo each other, struggling for a market niche. The availability of bank loans stimulated the emergence of an extravagant lifestyle far in excess of one’s actual means. The banks accepted the new rules of the game because they were dictated by the market. Today everything has fallen into place. The crisis (and Ukraine was hit harder than most other countries) has shown the real value of money and caused people to reassess many things, resulting in the collapse of the illusion of social well-being, like a sand castle. Everyone has realized the weakness of our economy, the large share of imports in the domestic market, the inadequate infrastructure, the surging debt, and many other problems.

“Is capitalism to blame for all this? In my opinion, the economic and social crisis was caused by a misconception about the essence of market capitalism which, in our case, turned out bent on consumption rather than production. The uncontrollably increasing consumption rate, without being backed by real money, was what made the [newly] built system collapse. Here is an example of the difference between European and Ukrainian capitalism. A French family with a single child can afford a comfortable resort only once every three years. An average monthly wage in France is about €1,600 euros. Subtract from this sum health insurance, taxes, rent, tuition, car insurance and you’ll come up with that same 500 euros earned by a medium-income Ukrainian — but such Ukrainian families are accustomed to spending their vacations at resorts every year, often with money they haven’t earned as yet. In other words, European capitalism is characterized by production, when every cent is counted. In Ukraine, many people have grown used to living and holidaying on credit, and this is our problem, also one of the reasons for the crisis hitting us so hard. A crisis, however, has a positive aspect: it inevitably changes our approach to consumption.”

BANK RESERVES: SOME 50 BILLION HRYVNIAS

In an interview with Den, Vadym Kopylov, First Deputy Minister of Finance, said our banks have about 40 billion hryvnias’ worth of available funds. Do you agree with this assessment of our banking potential? Is this money enough to resume bank loans to the real sector of the economy?

“I do, although I estimate our banks’ reserves at 50 billion hryvnias. Compared to what happened during the crisis, when what was left in the banking system amounted to a mere 10 billion hryvnias, our banks now certainly have excess liquidity. However, even if they’d like to, they won’t channel these excess funds into the economy; they know better from their bitter experience. Some believe loan requirements should be made tougher. I’d say that they haven’t changed, it’s just that no one is in a hurry to increase the credit portfolio at all costs; the risks involved are now studied more carefully. Well, once bitten, twice shy. The banks have learned the lesson of the crisis, so they include mortgage clauses in the loan agreements and process hard currency loan applications with greater caution. All this inevitably leads to the denial of most applications and, consequently, to a competition for a bona fide borrower. Regrettably, business is taking its time getting over the crisis, so a substantial increase in the banking credit portfolio isn’t likely to happen before 2011. Today it’s worth talking about borrowers being in short supply.”

What do you think of the draft Tax Code, I mean its clauses concerning the banking sector?

“While generally appreciating the very fact of this important legislative document, I must agree with many experts that some of the provisions don’t help the banks. For example, outwardly the [draft tax] Code is geared to lower the income tax rate, but practically the situation is entirely different. We know that big banks, like ours, have a ramified network of regional offices. Objectively, some regions are rich in resources but lack advanced production facilities, while others have it the other way around. Therefore, the revenues of these offices are quite different. Today, banks, like other businesses, pay the tax levied on the sum total of revenues of a given business entity. In other words, the income tax may well exceed 100 percent.

“The stated mechanism of using the bank’s insurance reserves also leaves much to be desired. Writing off debts on securities envisages the possibility of writing off these debts at the expense of the insurance reserve, but only in terms of bills of exchange, excluding other securities. This draft even doesn’t contain the currently valid procedures of writing off debts on debt or equity securities. It further complicates the procedure of using the insurance reserve to write off collaterized debts by setting forth mandatory auction sales of mortgaged property. This protracts the procedure and adds expenses involved in the organization and holding of auction sales.

“Behind all these ‘innovative’ clauses is a desire to replenish the [central] budget at the expense of the banks.”

NATIONAL CURRENCY CAN GET STRONGER: UAH 7.6-7.75: USD 1.00

Do you agree with the head of the National Bank that the hryvnia has to be made stronger? What’s the most optimistic rate-of-exchange scenario before the end of 2010?

“That’s a point you can hardly argue with. We all of us need a stable hryvnia, except that I’m against an artificial strengthening of the national currency — as has been the case, now and earlier. A better investment climate and attendant foreign exchange earnings are the best remedy for the hryvnia. Without a doubt, the IMF’s latest decision will give the hryvnia a strong impetus and will serve as a guarantee of its stability over the next 2-2.5 years. During this period our economy will get back on its feet and show some growth, and our business will be able to recover from the crisis. The important thing is not to spend all this money on consumption, not to succumb to the temptation of easing domestic social tensions by using the international community’s purse. If none of this happens, there will be a strong likelihood of increasing the current exchange rate to UAH 7.6-7.75:USD 1.00.”

What about PIB deposit increment status? How do you feel about your bank’s current performance and plans for the nearest future?

“I don’t think I’ll let anyone in on a big secret, least of all experts in the field, when I say that PIB sustained near-death at the turn of 2009. For some reason it is generally believed that Prominvestbank triggered the crisis in the Ukrainian banking sector. [As it was] the bank’s internal problems had been piling up for years on end and sharpened following a media attack engineered by a group of persons trying to buy the stocks and take over the PIB. The consequences proved irreparable. The bank lost its liquidity.

“Starting in June 2009, when the bank’s performance had stabilized after being joined by the Russian stockholders, the deposit statistics have been on an upward curve. Allowing for the market’s overall negative rate trends, it is still over 30 percent, with the share of individuals in the bank’s resource structure being over 60 percent. This spells billions of hryvnias.

“Over 70 percent of problem assets have been restructured — these were really complicated loans — so much so that not one outstanding bill from this hundred-percent-restructured portfolio has amounted to even one percent during the year. In other words, our bank has come to terms even with the most malicious defaulters. There are several ill-wishing customers left — we’re fighting to the last man.

“PIB is on record as having issued corporate loans worth 485,000,000 dollars in 2009, with zero percent outstanding loan payments. Before December 2010, we intend to resume our bank’s performance the way it was before the crisis. Our solvency and liquidity had been restored by the end of last year, so we’re entering the active performance phase meant to raise PIB to the Top Five — eventually Top Three — Banks of Ukraine.

“PIB has an advantage, compared to other market operators. This is the presence of Russian stockholders who are prepared to invest large sums, by local standards, in this bank’s loan transactions, at a considerably lower loan interest rate (UAH 18-22 percent, USD 13.5-15 percent).”

MEDIUM AND SMALL BUSINESSES WILL AFFORD LOANS IN 2011

Aren’t you afraid to invest in this sector? Quite a few of your colleagues are in no hurry to make this decision.

“As a matter of fact, our bank has been issuing loans in this sector, off and on, after making sure a given business has a clean bill of financial health. We’ll deal with it seriously next year. We believe that doing business with big national companies isn’t enough to penetrate the market and stabilize the bank’s financial position. It’s time to master — rather get back to — the market segment made up of small and medium business, considering that there is practically no competition there.”

Are there new instruments with which your bank is planning to access the deposits market?

“This bank has had more than thirty deposit programs throughout its history. This diversity has confused PIB customers. They weren’t sure which program to choose. Now we have five programs, so that a depositor can have an account and add to it (or leave it alone) while enjoying an interest rate, so this depositor can have this money toward the end of the deposit term, and so on. We didn’t try to re-invent the wheel working out these provisions. In fact, all banks have similar provisions, despite their ads and commercials featuring ‘new banking products.’ I’d also like to state that our bank has succeeded in getting back 95 percent individual depositors who quit during the crisis.

“With regard to PIB’s loan/deposit interest policy, we proceed from the current stable resource [funds] increment, so we’ve never suggested excessively high deposit interest rates to our clients. In fact, these rates were lowered by an average of UAH 1.0-3.0 percent and USD/EUR/RUB 1.0-2.0 percent, as of May 1 and August 1. This rate of exchange conformed to the market profitability of the deposits of Ukraine’s largest banks. PIB’s current deposit rate won’t be higher than UAH 19 percent and USD/EURO/RUB 8.5 percent.

“PIB offers a diverse choice of corporate banking services, allowing for positive fund-allocation dynamics. PIB boasts a stable annual corporate account balance accrual, considering that corporate entities make up one-third of PIB’s resources. This is additional proof of the confidence placed in this bank by its clients.

“By waging a balanced resource policy, PIB has been able to secure a sufficient degree of liquidity, so that it returned to the National Bank of Ukraine a record sum of UAH 7,000,000,000 worth of refinancing aid. At present, we aren’t using any NBU resources.”

Are there any especially interesting projects involving PIB and Ukrainian industrial enterprises?

“We’re crediting practically all economic spheres, including energy companies, steelworks, food industry, and agriculture. It’s true that we treat construction projects with special caution, in the aftermath of the crisis. The fact remains, however, that PIB did agree to finance the completion for two large housing developments in Donetsk oblast, hoping to sell them at adequate market prices, starting at 0 — rather than ,000-4,000 — per square meter.”

GOVERNMENT-RUN BANKS AREN’T INTERESTING

Will PIB purchase recapitalized government-run banks?

“No, it won’t. These banks are faced with mind-boggling financial problems. Trying to figure them out and finding remedies would take three to five years. Besides, there have been too many executive replacements, along with difficulties with the holding of stockholders’ and supervisory board meetings. All this is proof that these banks are faced with a number of controversies and are [legal] time bombs. Buying such a bank means shouldering someone else’s heavy burden. It’s best to set up one’s own bank or invest in another bank that may have problems but the kind you can understand. The year-and-a-half experience accumulated by the team at the head of Prominvestbank is further proof that this is hard work. I think that buying government-recapitalized banks is a venture only market-battle-hardened people should risk. I can’t see any Russian bank, let alone one in the West, taking this risk. In other words, I’m not one of those optimists who believe that the government can sell such banks at a profit, even in the next five years.”

PIB is ranked with the big-time banks on the list today. What about charity?

“The National Bank of Ukraine forbade PIB to take part in any benevolent/sponsored projects for the duration of the crisis. We’re thanking our stars for this restriction period nearing its completion in regard to PIB. Our 2011 budget envisages measures aimed at systematizing the social aspect. We’re planning to launch several socially oriented projects (with our stockholders’ knowledge and consent, of course) aimed at supporting Russia’s programs in Ukraine, including financing the drama festival in Yalta (based on the Chekhov Theater, Lesia Ukrainka Russian Drama Theater, one of children’s homes or a grade school with Russian as the language of instruction.

“Supporting Den/The Day’s annual photo competition has become our tradition, for this is a unique and very important phenomenon in the cultural life of Ukraine.”