Sehiy Chernenko is a banker with 20 years experience. In 1997, he began his career in FUIB as a risk specialist, and in 2012, he became the head of the bank. In an interview with Ukrainian News, the head of one of the largest banks told about the situation with problem borrowers and about how the bank reduces the level of insider lending.
The other day you handed over the Parkhomivskyi Museum in the Kharkiv region to the Kharkiv Art Museum. How did it happen that the museum was first on the balance sheet of your borrower, and then on your balance sheet? What kind of borrower was it?
This story began in 2011 with the fact that we issued a loan to a Sintal-Agro company for the amount of 70 million UAH. About a year later, the client started having problems, and we discovered that the collateral was missing. During another year or so we were conducting negotiations, tried to find an economic solution to this situation, but nothing worked. In 2013, legal proceeding began, then the company went into bankruptcy with the subsequent liquidation. The process itself took a long time. Only at the end of 2016 we started the sale of collateral. We found the building of the museum in the company's liquidation estate. Approximately at the same time, the leaders of the Kharkiv Museum, the branch of which was the Parkhomivskyi Museum, contacted us. All this time there was very active communication between us.
They drew attention to the fact that this is a historic building, in which there is a unique collection. As a result, we decided to buy out the building in order to help preserve it by transferring its ownership to the museum. The auction took place in April the same year, and the bank bought the building and put it on the balance sheet.
As for my personal attitude, there really is a special attraction when it comes to the museum. We found ourselves in this situation with the museum quite by accident, but gradually all of us – the team that was dealing with this case – were worried about its fate and began to perceive its story as our personal one. No matter how pretentious it sounds, it was a matter of honor for us to resolve this issue and return the building. This is a manifestation of our social responsibility and our personal and public stance.
How did it happen that the museum was first on the balance sheet of this enterprise?
We assume that historically the building was on the balance sheet of one of the sugar factories, which was subsequently privatized. In the course of privatization the building of the museum became private property.
What is the debt of your borrower as at the moment of going into bankruptcy?
As at the moment the company went into bankruptcy, the debt amounted to about 78 million UAH. This is the body of the loan plus interest.
Have you collected other collateral of this debtor?
We sold the collateral that we had initially as the security. We have not got around to the stock-in-trade, which was also collateral. In addition, we had personal guarantees of two owners of the company. With regard to one of the owners criminal proceedings are open, now he is on the run, outside Ukraine.
What kind of businessman is this?
This is the partner of MykolaTolmachov - Vadym Mohyla.
What about Tolmachov's debt? As far as we know, his company TMM - Energobud went into bankruptcy.
TMM - Energobud is a branch of the main business (TMM holding). The business was not associated with real estate, it was engaged in the implementation of programs in the field of energy construction. This business was going through hard times and by 2013 the company didn't manage to demonstrate its previous financial performance, sales volumes. The company stopped maintaining its loan. As a result, the bank moved to the stage of legal recovery. At the moment the company is at the stage of bankruptcy. Within the framework of this procedure, we have impounded the property that we had as collateral, put it up for sale and have already sold part of it. In addition, we brought legal action against N. Tolmachov as a guarantor under this loan. We have received a court ruling, impounded and sold his apartment, car, collected his salary in one of his companies. As early as in 2016, the court banned him from traveling abroad. We, on our part, continue to bring legal actions.
Tell us about other bad borrowers of the bank. What about the debts of the Dnipropetrovsk plant Enerhoavtomatyka and Ukrsplav, which belong to Oleh Zimin?
As for these borrowers, this summer our relations moved to the judicial phase, we brought legal action for interim measures. After that, we managed to find a mutually beneficial solution.
Is there progress in the restructuring of debts of the agricultural holding Mriya?
In August 2017, after much thought and long legal proceedings, we decided to sell this debt. We sold it to one of the Ukrainian factoring companies.
What was the amount of debt there?
The content of the debt was quite small, it included market quotes, so their debts are quoted.
With what discount did you sell it?
In this case discount is not quite an exact definition. We have chosen the concept of net book value. In other words, it is a debt excluding reserves. The quotes that were on the market corresponded to this level.
Do you carry out the restructuring of debts of the company "Milkiland"?
We continue to work with this borrower concerning cheese production. In this holding we had cheese production. In principle, Milkiland is a good example of cooperation, when a bank and a client can reach an agreement. The company started experiencing difficulties at the time of the crisis with the loss of the Russian market, as one of the largest consumers of cheese products. During these three years, we are going through economic restructuring. We provide the client with benefits, and they continue to make payments to the bank in certain amounts. Moreover, at the moment, a strategy has been agreed, which, in the long term may lead to the repayment of this loan.
What is the share of bad loans in the bank now?
During these 3 years we effectively finished the entire NPL, which was formed in 2014-2015 as a result of devaluation, annexation of the part of the country's territory and the loss of part of the markets. As at 1 September 2017, our bad debt portfolio was about 1.4 billion UAH, or 6.5% of the total portfolio. As at the beginning of the year, it was 2.3 billion, or 10.2%, respectively.
What is the reason for the decrease of this indicator?
Here we need to note 2 aspects. The first one - if we see, as a result of the analysis, that this is a hopeless debt, for example, enterprises of the ATO zone or the Crimea, we will recognize them as a loss and will form a reserve, after which we will write them off at the expense of the reserve. The second - those enterprises where the collateral is physically accessible. In such cases, we try to reach an agreement, find an economic strategy, since it is always more profitable in comparison with the enforced recovery.
If we can not reach an agreement, we follow the path of legal collection and we get around to the sale of collateral through the Executive Service. We have been working effectively using this scenario for the last 3 years. Thus, the last year we received a cash-out of 2 billion UAH. This is either the direct customers' repayment as a result of restructuring, or through the voluntary sale of property, or as a result of judicial proceedings. This year we will receive about 2.1 billion UAH in total from the work with bad debts.
How much money was allocated this year for provisions?
530 million UAH in 8 months.
Is this a corporate portfolio?
It is exclusively a corporate portfolio. This is because our retail mortgage has been formed a long time ago, and the current indicators related to consumer credits are at a good level. They are significantly better than they were before 2014.
Have you fully created provisions for the loans in the ATO zone and the Crimea?
The Crimea and the ATO were completely written off last year. This year, we bring to a logical conclusion the work with clients who are in the territory of Ukraine and who have some problems. Our task is to solve as many issues with the debt portfolio as possible by the end of this year.
Are there any preliminary results of the bank's work for the 9 months?
There are no results for 9 months yet. We have earned 756 million UAH over the 8 months. In addition, the bank's operating income for the first half of the year amounted to 2.2 billion UAH, while this indicator for the same period of time in 2016 was equal to 758 million.
What financial results do you expect at the year-end?
This will depend on a number of circumstances related to the work with bad loans, but according to our estimates, we will receive a net profit of about 850 billion UAH.
Due to what did you manage to increase profits?
In the middle of the last year we decided that we are ready to start actively lending. The last year we were conducting market testing, were restoring work skills, and this year we started full-scale work with all segments. We focus on mass retail, consumer lending, credit cards, small and medium-sized business, and very tageted work with large corporate business. According to the results of this year, we have more than doubled the number of issued loans in all areas. We have already earned 4,2 billion UAH in retail, while the profit for the same period last year was 2.3 billion UAH. This is plus 83%.
Is there growth in the corporate sector as well?
The corporate portfolio is also growing. Over the 8 months of the last year, we issued 827 million UAH, and this year we have already issued 2 billion UAH. With regard to medium-sized business, there is a double increase in issuance; with regard to small business, there is a fourfold increase. All three portfolios are growing. There is a decrease only with regard to the portfolio of SCM-related companies in accordance with our 5-year schedule, which has been agreed with the National Bank.
Since we have started talking about insiders, please, tell us, what is the situation with the standard regarding lending to related parties?
We have experienced the exceedance of the standard, but we have agreed the repayment schedule with the National Bank, and now we are performing this program.
How do you plan to reduce the portfolio of related parties?
As I have already said, last year we have approved a program to reduce the portfolio of insiders. Later, the National Bank amended this program, which allowed us to increase the loan repayment period to 5 years. We have taken advantage of this and signed a new agreement, according to which the period was in total increased to 5 years.
So by 2021 you should bring this indicator back to normal?
Right. By 2021, we must complete everything. In 2017, the 2-year program will be completed, and there will be 3 more years to bring them back to normal.
You have seriously increased investments in government bonds. What is the bank's situation with liquidity and what interest income does the bank receive from the work with securities?
We have a large amount of investments in government securities. At the same time, we have reduced the investments in the National Bank's certificates of deposit. We have moved the certificates of deposit to government bonds. Part of it was used to increase the hryvnia loan portfolio.
We have also, formed a fairly large portfolio of government bonds in foreign currency over this year and the last year. After all, there is no alternative to foreign currency investments on the market. We invested about 117 million dollars and 18 million euros in total in this portfolio.
The repayment of Eurobonds is planned for the next year. Can it be said that your government bonds in foreign currency are a cushion for repayment?
You can say that this is our liquidity cushion, a cushion of additional security. In parallel with this, we have a program in the bank to reduce the influence of the dollar on the total balance. We are gradually changing our portfolio from dollar to hryvnia, and this forms, among other things, additional dollar influx. We expect that by the end of this year and during the next year we will still have a large dollar flow, which is the result of the conversion or repayment of the dollar loan portfolio. For us, this is more than enough to repay all our external liabilities, bonds that are in circulation. As a result of the repayment of these bonds, we will still remain with a pillow.
In the summer you performed an early redemption of Eurobonds. You wanted to redeem up to 40 million dollars, have redeemed only 16 million. Will you perform such a debt operation in the future?
At the beginning of this year we started working with the National Bank on the amendments to the regulations which would allow a number of banks that have issued bonds to perform early redemption. The National Bank met us halfway and gave us such an opportunity. At the end of June - the beginning of July, we held a public redemption, but faced the fact that the attractiveness of our bonds is very high and that the yield rate of 11% is a unique thing on the market. The desire of investors to part with our securities at a price that is acceptable for us was not as significant as we expected. We wanted to redeem 40 million dollars, but managed to redeem 16 million dollars.
You have increased your retail presence. This year, you claimed to purchase assets of the Platinum Bank , but the deal fell through. Are you interested in buying portfolios of insolvent banks?
Now the sales of bad obligations is in an active phase of development. The exit of a large number of banks from the market led to the fact that many of the remaining players switched to the work on getting rid of ballast, and they are cleaning their assets. This formed a large market. We are also present on this market, our competence allows us to work with bad assets. Last year, we bought through a tender one of the debts of the client that was a bad borrower in our bank. This allowed us to build an effective work strategy, thanks to which we managed to return our debt. We were working on the direct purchase of loans from a number of banks that have a portfolio reduction strategy. In this case, this is not a purchase of a problem, but rather relending to clients on more favorable terms, for the purpose of obtaining a good client. We did consider Platinum, but in the end we canceled the deal, because we did not find a justified economic model. We monitor the market constantly. For example, quite recently we have set quotations when selling two pools of bad assets that were formed with the participation of two large US funds involved in the organization of the sale of bad assets of the Private Deposit Guarantee Fund.
Why didn't the auction take place then? Were your quotations low?
This quotation was lower than the strike price. Accordingly, the tender was invalid. Now we are waiting for the continuation. Perhaps there will be a repeated auction, thus, we will participate in it.
Are you interested in the portfolios of Russian banks that reduce their presence in Ukraine?
We have good contacts with all banks that are present on the market, including banks with Russian state capital. I do not exclude the purchase of their portfolios, if this will be in conjunction with our existing or potential customers. We consider such a possibility, and even bought loans from Russian banks.
How do you see the further economic situation in the country, and what risks for the banking system can you single out?
In order to change the situation in the country radically, we need foreign investments. The influx of investments can spur twofold economic growth and faster recovery. But the probability of this is quite low. The scenario that is most likely in our case is the so-called slow recovery: the GDP growth of 2-3%, annual devaluation of up to 10%. At such rate, we will restore the economy of the level of 2013 not earlier than in 2022-2024. Nevertheless there are positive things in this, because the recession is better than a further fall. Even small, but stable growth gives more confidence and predictability, which can further stimulate the investment activity, including the influx of investments within the country.
This year the National Bank's objective with regard to inflation is unlikely to be achieved, how will this affect the rates?
Now the rates have balanced out. We do not expect a further decline under the conditions of such inflation. The forecast of the Ministry of Finance is about 8% of inflation next year. If it proves to be true, this will lead to the fact that the rates may slightly decrease. For now, this sounds optimistic, especially against the background of statements about the increase of social payments. We are in a situation where with regard to hryvnia we have reached an expected level. The existing rate for good borrowers from 16% is already at a competitive level. The rates will stimulate competition in the banking sector. In the system, the influence of the public sector is now noticeable. The concentration of forces falls on the four largest banks and the actions of these players can greatly influence the landscape of the market. We also see that competition for good borrowers is returning. This is a positive factor for the market, because it forces us to revise the lending practice, making it more comfortable for clients. We also expect the recovery and growth of loan portfolios within the banking system. The last 2 months, August and September, showed quite high activity of the commercial banking sector in terms of lending, including lending to the corporate sector.
In which areas are solvent borrowers present?
The agricultural sector is an area that has suffered less than others and that has a good turnover. Such areas also include processing and trade.
Which loans are in greatest demand?
Investment loans for the purchase of machinery, construction of new capacities, elevator business, financing of working capital. New investment projects emerge with regard to solar power, which has now received a stimulus for development, taking into account the guaranteed "green" tariff. We see a smaller demand in the field of mechanical engineering. This sector is still in a state of depression, it is still recovering from the crisis, looking for new markets and restoring production.
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