The second part of the interview with Serhiy Chernenko, FUIB's chairman of the Board. He took up the position of FUIB's chairman of the Board instead of Kostiantyn Waysman in October 2012. However, this market is familiar to him since 1997 and from the very beginning he was building a career in the First International Ukrainian bank, which is owned by Rinat Akhmetov, through the LLC "SCM Finance".
In the first part of the conversation FUIB's chairman of the Board told, how he sees the future of the banking system, about the consequences the war in the East could have for the bank and about the attitude to the innovations for the market on the part of the government and the NBU.
In this part of the interview will be discussed resolution of a question of problem creditors, cooperation with "Ukrzaliznytsia" and the future of the bank.
You've taken up the post of the CEO coming from the "risks". Is this a plus or a minus? Does the overcautiousness of the risk worker hinder?
I think this is a plus. My history of work at the bank was fairly wide − I worked with the bank's risks, and then shifted to the Supervisory Board. There were periods when I was assigned to supervise other areas of work. Risks and my experience allowed me to see the bank as a complete picture. It is very important to perceive the bank as a single living organism.
Now I have to see a balance between the business development and the risks, my background helps me to make the right decisions of this kind. Probably, according to my philosophy, I am more oriented to not being too risky or too aggressive.
Based on how the situation in the country is developing in the last five years − it is more a plus than a minus. At the same time, there is a strong team of like-minded people by my side who have a lot of great ideas, including for business development.
Does the bank have problems with creditors?
We have an old portfolio, which we continue to work with and which has been generated before the crisis of 2009. Thanks God, it is small, but, nevertheless, those are very sustained problems. We litigate against some of them for a long time. We have vivid examples of active counteraction on the part o the judicial system and its executive service. In the last year we were not receiving the money for the sale of collaterals for a long period of time. They just did not get through to us from the treasury. We understand that the judicial way of settling problem loans is the most inefficient. Economic settlement is the most efficient.
Restructuring, programs for the extension of loans, and even the decrease of interest rates. But the key question here is the presence of a partnership between the bank and the client. The client must be interested not in how to take advantage of the situation in order to avoid taking on obligations. Economic restructuring is the most efficient way in terms of NPV calculation (net present value − editor's note), receipt of money and their return, even in case of a problem.
But if we see that there are no economic ways, there is a good alternative, that is, a joint voluntary sale of collaterals at a reasonable price and on transparent terms.
Bankers say that if you manage to save 50% of the cost it is already a success. Is that so?
Percentage, which can be saved in this way, varies from 40 to 60. Everything depends on how the loan was repaid before, with what first payment it was done, and how much the property fell in value. Because even within one city there may be different changes in the value of the facilities in different districts.
What is the real level of problem debts now and how did it change after the devaluation?
According to the estimates of international rating agencies, before the last year (before the beginning, before the end) the level of bad debts in Ukraine attained 40% of the portfolio. The devaluation has definitely become an additional load primarily for the clients who still have mortgage loans in the foreign currency.
At the same time, we still manage to keep the portfolio quality at a fairly high level. Thus, based on the results of a half-year period, troubled assets in FUIB account for 8.6% of the total loan portfolio.
We managed to achieve such a result due to the fact that one of our requirements, when giving loans in dollars to our corporate clients, was for the client to pass a stress test. He had to stay within our credit policy in case of devaluation from 8 to 12 UAH.
At the same time, we assumed that he could experience drop in sales and EBITDA drop up to 25%. Thus, the load on the EBITDA came from two directions. First: this is due to the fact that interest costs are increasing, since the devaluation of the automatically increases their hryvnia equivalent. And the second − EBITDA itself was falling by 25%. The maximum debt should not exceed EBITDA by more than 3 times, and the interest rates in EBITDA should not be more than 40%. This kind of conservatism in the credit policy has led to the fact that we have absolutely no problems with foreign currency loans in the corporate business.
At the same time, it still should be noted that the situation has worsened for the enterprises located in the East. It is impossible to objectively conduct normal operating activities out there now: procurement is hindered, removal of goods is hindered, cash flow is virtually absent, plus there is a risk to human lives. This leads to the fact that many enterprises stopped. This category indeed faces a serious risk.
You were talking about carrying out stress tests. Can you tell us more about it?
We lived in a situation where some kinds of stresses arose every year − now in the form of a liquidity crisis, now in the form of sharp increase of the interest rates, now in the form of some panics and the like. Therefore, we were developing for ourselves a set of stress tests "what if". And what if a repetition of the crisis of 2009 suddenly happens and we simply lose 25% of the deposits? And what if some of our largest depositors decide to withdraw money from us? And what if the dollar exchange rate collapses? And we were preparing a protection system for each of these scenarios, included it in the framework of our credit policy. In many ways this helped us to go through the period of liquidity problems quite confidently.
You said that all clients took your internal stress test. Including "Ukrzaliznytsia"?
Not all the clients take the stress test, but only those who either take out a loan in dollars, or they already have a formed foreign currency loan portfolio. As for "Ukrzaliznytsia", it is a natural monopolist; its ability to generate cash flow is fantastic. However, its ability to service debts is dependent on how much money the state withdraws, and how much money they have to spend to maintain their structure. These two factors always determine their ability or inability to pay. But, at the same time, they have been rigorously fulfilling all their financial obligations to the bank.
How do you like working with the new leadership of "Ukrzaliznytsia"?
Everything is very constructive. Because the obligations are the obligations. A banker is like a priest, he can not be cheated, because it is bad for karma, bad for history. "Ukrzaliznytsia" cherishes its credit history, we see it, at least until now they have done everything rigorously and thoroughly.
Stefan Guglieri has left the bank just recently. What is the reason for his departure?
In fact, he did not leave the bank. There was a mutual agreement to reduce his operational load and to transfer him to work in a different role. So Stefan Guglieri will continue to work with us as a consultant. I know that on the part of Mr. Guglieri, this decision was preceded by a whole set of factors, including ones of personal nature.
Now there is some political uncertainty about the future of Akhmetov; a couple of months ago there were calls to boycott the bank. Did it somehow reflect on the financial institution?
I will honestly say that we absolutely do not participate in politics. We work with the need of people, with money management. We see our role and task in this. I can not say that we have felt an impact of any political processes. Moreover, if we look at the figures, we will see that the pressure, which the entire banking system was experiencing, was much bigger than the one our bank was under. This is evident in the outflow that occurred.
What outflow did you record in your bank?
The market has lost about 15% of deposits in UAH over six months. The drop for our bank amounted only to 6%. The market has lost about 30% of dollar deposits, whereas we have lost 18%. At the same time, when the entire market fell drastically, our balances of corporate clients have increased. The number of clients that came during this year is twice as big as the number of the last year. Unfortunately, we have lost about 20 thousand clients on the payroll programs in the Crimea. This is about 2.5% of the total portfolio. But at the same time, about 70 thousand new clients came to us over the same period all over Ukraine.
When was the last time you asked for refinancing?
We regularly participate in tenders, which the National Bank conducts; it is a very convenient instrument for balancing short-term liquidity.
Bank's assets have decreased by almost a billion during the last quarter. What was it due to?
We have quite large clients who have large balances, and one of these clients simply transferred money to another bank just on the transition date. The money returned to us literally on the next day. These were natural fluctuations on the clients' account balances.
Your portfolio of legal entities has grown by almost 800 million since the beginning of the year. Is this due to the revaluation of the dollar component?
Within this period we have purposefully worked to accumulate liquidity. Because the liquidity is one of the key factors of bank stability.
If you look at our balances, we have more than a billion UAH of cash in cash desks and ATMs. Over this period of time we have traditionally kept about 800 million UAH on our correspondent account at first, and now we have raised the balances to 2 billion UAH, and continue to accumulate liquidity. It is necessary to use this money efficiently. One of the directions that we have now is tranche loans. That is, a short revolving credit loan for corporate clients with good quality, maximum maturity of which is two months, mostly − up to 29 days. In fact, the growth of the portfolio of legal entities occurred because of this product.
For the existing clients or for the new ones?
We were purposefully preparing ourselves to the fact that such a situation can occur, and were accumulating base of clients who use this kind of treasury management of their resources.
You have approximately 2 billion in the correspondent accounts; it is a very large figure when compared with the banks in the group. Why do not you use this liquidity?
I have talked about the fact that conservatism is our genius. I believe that the banker must be a conservative. He should not to hurry to spend available money, and then to run around in panic "and where can I get the money now, and what should I do with my clients, who have come to queue up." Now we should have a surplus of money.
If you look at the portfolio of liabilities, almost half of it are the liabilities of legal entities in foreign currency. Why is the structure like that?
This is related to the nature of business of our clients who have foreign currency earnings that have accumulated over a certain period of time. In the current situation, clients have started to spend less on investments. They are also trying to have a liquidity reserve, which they need as a certain cushion. We simply have this money too.
But almost 8 billion of these funds are the funds provided on demand. Is this the money of the SCM Group?
No, we have a wide diversification. Of course, the work with our bank on the part of the SCM Group has become particularly active during this year. All of this was done on absolutely market terms. We were chosen because our quality of work and services was better or more reliable in the market.
Furthermore, the liquidity in the market has become very short in general. The tendency for allocation is the following: from 3 to 6 months is a standard term, for which the allocation is now made in contrast to how it was before − from 9 to 12. So people, both corporate clients and individuals, strive to be able to quickly get their deposits back, if necessary.
Can you tell the share of the SCM in these liabilities of legal entities?
Approximately 21% of our liabilities were formed due to the SCM Group balances. At the same time, as I have already told, when working with the companies of the group, we work on absolutely market terms, winning the competition from other banks in the market. It is pleasant, because it confirms our high level of professionalism and trust on the part of other companies of the group.
Interest income of the bank has increased a lot during the last quarter. More than 50% is the increase in the interest incomes. What is it due to?
Revaluation of the portfolio takes place. In the work with corporate clients we agree on the new terms when resuming the lines. New terms also imply the increase in the interest rates, since the money value in the market has really grown.
Many bankers told me that our banking sector is not oriented to the commission income now and that it is a secondary source of income for the bank. Do you think so too?
I completely disagree. Existence of permanent commission income is one of the guarantees of bank's stability. It is not connected with risk business; it is connected with the provision of services for the clients. If you look at our accounting, we have really improved the indicators of commission income by 40% in comparison to the same period in last year.
You presented a strategy for five years last year. How did the strategy change in connection with the recent events? Are you revising it?
The situation that occurred in our country must certainly affect our strategy as well, but the basic principles will remain. Perhaps the tempos, accents and tricks will change. But before moving on to the strategic planning again (we are planning to do it in autumn), I would like to wait for the stabilization of the situation. We have to see where we left off, and with what we will start anew. We believe that the banking business has a huge potential. If they manage to implement at least half of those undertakings, about which the National Bank and the government say, if they manage to reduce the level of corruption and to increase the transparency of the judiciary, its executive service, then the banking business will be one of the first to show good dynamics of development.
It was said in the strategy, which was announced earlier, that the bank is planning to increase its branch network. Is this question frozen now?
We are continually examining how efficient each department is in terms of client flow, convenience and efficiency of areas. It is quite difficult to find a perfect combination. Now a number of players in the market are closing their branches, other (non-bank) institutions are also moving out and new opportunities at a quite attractive price open up. We are continuously testing them and are ready to use them. Earlier this year, we were still opening new branches both in the "Renaissance Credit" bank and in FUIB.
Have you sold your branch network in the Crimea or does it still remain frozen?
The majority of our branches were rented, accordingly, we have simply stopped renting them. Just a couple of sites that were owned by the bank remains. At the moment, we are at the stage of strategy development regarding what to do with this.
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