Have you received the results of stress tests of the NBU already?
No. Maybe in September we will receive the results.
What results do you predict?
It is difficult to predict, because it seems that the National Bank still works on the stress test methodology within itself.
Are there norms of the NBU that you do not correspond with?
At the current moment, we do not have any violations of the norms. There was a little difficulty due to the fact that the National Bank has changed the specification for calculating short-term liquidity after making changes to the Civil Code - real term deposits have appeared. As a result, the National Bank said that the whole old deposit base that was present, is now to be considered as deposits withdrawable on demand.
But given the fact that the period was fairly short, we did not have time to process the entire deposit base. And we saw that there is a threat of violation of the N5 norm. For many banks, this was a problem as well. But at the end of July and in August, we have coped with the implementation of this standard.
Do many questions arise related to the parties?
This process has now also started. The National Bank has launched a verification by audit companies, who have to check all the large banks from the point of view of the norm. The legislation has changed very much concerning the interpretation of what falls under the term "related parties". The amendments to the Law "On banking activity" added such factors as the judgment of the National Bank on what is considered as related parties, and what is not. And this is what we need to work through with the National Bank, as the SCM Group is the largest financial and industrial group in the country.
Are there forecasts concerning the need in additional capitalization as the result of the stress test? Are you ready for this?
Based on our internal stress tests, we will fulfill all the requirements of the National Bank without additional capital. Our ability to generate operating income, to work with the loan portfolio and the capital adequacy, which we had when we were in a crisis, shall allow us to pass the stress test without additional capitalization.
How do you assess the situation in the banking market in 2015?
The first quarter was quite hard for the banks: exacerbation of hostilities, panic among the population, exchange rate leaps, another quite tough decline in GDP. This has negatively affected the servicing of the loan portfolio and the mood of investors. But the second quarter showed that the situation has stabilized not only in terms of the behavior of individuals (the outflow of deposits has decreased and the money started to return to the bank), but even in terms of efficiency. Now we again came to the break-even point and we see that it is possible to start earning gradually. This is a positive signal for the market.
Bankers are now saying that an inflow of hryvnia began in the banking system during the last month, but an outflow in dollars. Are you having the same trend?
In April and May, there was an inflow of hryvnia. In June and July, the inflow has slowed down; this is due to the fluctuations of the dollar rate in the market.
What sums are we talking about?
The amounts actually are still not significant, but the fact itself is important. For example, in April, it was about 100 million UAH, in May, it was about 200 million UAH, in June we broke even, i.e. the inflows and outflows become compensated. The scale may not have been significant but, nevertheless, the fact itself is important. It speaks of a return to normal servicing, of the return of money into the system, which should go beyond the normalization of the interest rates - these are the first signals, but they are very positive.
And in the foreign currency?
In foreign currencies, we can say that the outflows, which took place last year and early this year, decreased and decreased seriously. Literally, outflows decreased every month. Of course, populist statements about the default of Ukraine heat the pessimism of investors very much. And payments for the large banks, such as Delta Bank, are in large amount spent on purchase of foreign currencies, what led to an increase in fluctuations in the currency market.
Do you feel the influx of hryvnia liquidity in the market?
Yes, the hryvnia liquidity in the market is high enough. If you look at the statistics of the National Bank, the balances on correspondent accounts plus certificates of deposit are at a level of about 50 billion UAH, which is about twice as much as the required minimum level, which should be in terms of the regulations of the National Bank.
How do you work with this short-term liquidity?
A certificate of deposit of the National Bank is the most popular tool nowadays. Until mid-July, the yield on them was very attractive - 27% for monthly certificates of deposit. In terms of risks, it was probably the most reliable tool. At the same time, this instrument had and has a built-in mechanism for early withdrawal, if there is suddenly the need for money. We use this tool to generate the short-term liquidity.
The National Bank has plans to produce securities in foreign currency. Are you interested in this instrument?
In order for us to begin to use this instrument, we need the dollar to start returning to the system. Today, we hold funds in the foreign currency as a cushion of liquidity that we need for possible panic waves in the future. Our current strategy is to be conservative and to be on the money.
How do large corporate clients from the Eastern Ukraine behave?
Many clients from the eastern regions either ceased servicing their loans, or took the way of restructuring them. The economic situation in this region is very complicated. It includes problems with the production facilities and logistics, with sales - in fact, most of the territory has become depressive.
Is there a need in forming additional reserves?
We have already formed reserves in the past year and this year. But the first quarter of 2015 was the most difficult in terms of the pressure on the banking system in terms of reserves. We have formed most of the reserves exactly during this period of time. The reason was the revaluation of the foreign currency, which has thrown another blow to the servicing of debts, including the enterprises from the East. Well, in principle, businesses in other regions of Ukraine seriously worsened their performance. Two factors - the decline in GDP and the growth of inflation in the short term - hurt the real economy. According to our estimates, we have already reserved most of our potential losses.
Now we see that there are already signs of recovery - enterprises start having at least some kind of planning horizon. We see the stabilization of inflation; the stabilization of the exchange rate is already at a certain level, even though it is due to administrative methods, but, nevertheless, it is positive. The banks have accumulated liquidity, which reduces pressure on the loan portfolio. This makes it possible to resume the work with corporate clients.
Do you have a forecast of FUIB's earnings for this year?
We make a forecast of financial results of the bank on a quarterly basis. Ukraine's GDP forecast, even with the participation of the IMF, was adjusted two or three times during the six months. We have the same situation. We update the forecast on a quarterly basis. Our goal this year is to be at the break-even point.
After forming the reserves?
Yes, after the accrual of reserves. Operationally, we are doing even better than the last year. For the first half of this year, we had an operating profit growth of 59%. But reserves have increased by about the same amount.
Do you have an increase in the demand for safe-deposit boxes?
It is consistently high.
Do you plan to build new vaults?
There are such initiatives. We are considering the increase of the number of safe-deposit boxes in a number of branches.
Will the banks only earn on commission income during the next two years?
No. I think that they will earn on credit incomes too. Moreover, in principle, there can be no stable and successful banking system without lending. It is a sufficient and necessary condition for a bank to be successful. In the near future, lending will be, most likely, very conservative, and probably for short terms.
How do things stand now with the lending business?
Now it is difficult with the loans. Their price must be adequate and affordable for business. In addition, in order to obtain loans, corporate clients should see their planning horizon. They should come to us with some sort of a business plan that they believe in and should make us believe in it. It will probably be difficult to do this in the current situation. Therefore, lending is limited to existing clients, existing credit lines, short-term factoring lending and short-term tranche lending with a term up to a month, to 45 and 60 days maximum. That is, to very short products.
What needs to happen in the market in order for the banks to return to lending?
The horizon of stability must appear. The second important point is the stabilization of the interest rates. Now the rates are high both for dollar and hryvnia, and in some cases it is even prohibitive. And political stability is the third poits.
There is a working group that deals with the draft of a law on protection of creditors' rights. It is predicted that by October they should prepare an entirely new law. What do you know about the work of this group and do you belong to it?
Our representatives participate in the work of the group. The process goes on. It is important that the National Bank understands the importance of protecting the rights of banks as creditors. A bank is very susceptible to fraud, corrupt practices on the part of customers. This is a very serious barrier in terms of development of the lending in the future. Banks will not lend if their rights are not properly protected. If, for example, there is a possibility to go to a court to invalidate the loan agreement or the guarantee, to re-register the collateral, to find a bunch of other tricks, and thus escape from the obligations.
Bankers actively say that a new memorandum on foreign currency borrowers is being prepared. Have you heard about it?
Yes, this topic is the most acute and the most urgent. Verkhovna Rada, in our view, has adopted a populist enough law, which threatens serious losses to the banking system. The problems of solving the foreign currency loans has been completely transferred only on the shoulders of the banks, which, in our opinion, is totally wrong. This is a threefold problem: for the state, which should take some of the load, for the bankers, who, in turn, also have to be ready to take part of the load, and for the borrowers and clients. We must look for a solution only in such a threefold system. We have decided to sign a Memorandum developed by the National Bank and the Independent Association of Ukrainian Banks, which, in essence, allows one to write off up to 50% of the debt of the client.
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