Volatility in the foreign exchange market, drastic growth of the key rate, liquidity shortage — all of this negatively affected the lending process. Some financial and credit organizations had to cut or even almost stop these customer service programs. At the same time, new players emerged on the market, which, on the contrary, began to increase the volume of loans granted. Elena NABITOVSKAYA, Chairman of the Eurasian Bank, told NBJ about the ways to achieve such results and about business strategy of the organization as a whole.

NBJ: Elena, our first question usually has an introductory nature. We would like to know how you assess the current situation in the Russian banking market, and what are the main challenges and problems that our financial and credit organizations face today?

E. NABITOVSKAYA: I will not be unique saying that at the beginning of the year the shortage of liquidity was the main problem. To date, it has lost its relevance to some extent thanks to, first of all, the actions of the Central Bank that saturated the market with ruble liquidity. However, this does not mean that there is no liquidity shortage. Some tension is maintained though, and the difficulty to predict further development of the situation, both in economy and in geopolitics, does not contribute to reducing the demand for liquidity from banks.

Naturally, the situation with the borrowers became a very serious challenge. We all understand that the loans granted with the currently effective interest rates may constitute a problem for some businesses. Therefore, hardly any of the experts doubt that the proportion of bad debts in the aggregate credit portfolio of Russian banks will grow. We should be ready for this and take preventive measures to keep the situation under control.

Moreover, the third very topical challenge for the Russian banking system today is recapitalization. It is truly a problem for a large number of market participants; we can even say that this is a problem for the banking sector as a whole at this stage.

NBJ: In other words, we can see that, despite the great influence of the geopolitical factor, the current banking crisis, in fact, undergoes standard development: the liquidity problem arises and exacerbates first, and then it deepens into the domain of bad debts and recapitalization of credit organizations.

E. NABITOVSKAYA: Yes. It is the standard scheme of the crisis unfolding in the banking system. And you are right saying that the reasons behind the crisis do not have a strong impact on this scenario.

NBJ: Recently, the head of Sberbank German Gref said that for Russian banks the most acute phase of the crisis has already passed. Frankly speaking, his declaration was quite unexpected. Gref usually gives pessimistic forecasts and estimates. Do you agree with his words?

E. NABITOVSKAYA:  It’s hard not to agree with him. The acute phase of the crisis has really ended. The exchange rate of the ruble to the two main reserve currencies, dollar and the euro, has stabilized. It is possible to speak about the relative stabilization of oil prices in the world, which is also a calming factor. But the problem is, as I said above, the total uncertainty. No one can predict how capital markets will behave or how foreign investors will act. Moreover, the dynamics of oil prices produces more questions than answers. No one knows what will happen with the quotations of oil contracts after the traditional summer "standstill", we are not sure whether we will see a new recession or not. This general uncertainty affects the behavior of banks holding them on the alert.

NBJ: Typically, the crisis is not only the time to react on all sorts of challenges, but the time for banks to review their business models. This is logical, because in the "battle" all weaknesses, failures and mistakes become particularly apparent. Did Eurasian Bank have to adjust its business model or did this model prove its value and effectiveness?

E. NABITOVSKAYA: You know, these few months since the crisis outbroke, have showed that our bank was able to withstand negative external influences and deterioration of the situation on the market for quite objective reasons. Eurasian Bank is a subsidiary of the eponymous Kazakh bank, one of the largest banks in the Republic of Kazakhstan. In the Russian market it is represented through its branch since 2010.

NBJ: Do you mean that Eurasian Bank entered the Russian market after the acute phase of the 2008 crisis has passed?

E. NABITOVSKAYA: Yes. However, we should take into account that in Kazakhstan the events unfolded differently than in Russia. The crisis there started a little earlier, not in the fall of 2008 as in Russia, but about a year before, in 2007. Once the United States experienced the first defaulted mortgage bank, the foreign capital markets were almost completely closed for Kazakhstan and its financial and credit institutions...

NBJ: Yes, a lot has been written then about the fact that Kazakhstan was hit hard, because it was too heavily dependent of external borrowings.

E. NABITOVSKAYA: It was. About 70% of the banks’ liquidity in the republic was attracted from foreign capital markets. Still, Eurasian Bank was one of the few credit institutions (one might say, even the only one) that did not have a single penny of foreign debts in its capital. This fact allowed us to survive the crisis easily enough and to strengthen our position in the market. When most banks completely stopped lending, we, on the contrary, started to actively develop this service and increased our credit portfolio. In a relatively short period we both formed a pool of high-quality customers and decided to transform the bank into a universal financial and credit institution.

NBJ: Haven’t Eurasian Bank been such an organization before?

E. NABITOVSKAYA: Prior to that, the bank mainly served the companies of its shareholders. In 2009, the management was replaced, and, as I have already said, it was decided to diversify the Bank’s business. The Bank actively entered the "retail" market, expanded its product line with new products. Of course, due to this the structure of its customer base changed… 

NBJ: No wonder they say that for someone crisis is a test, while for others it may be an opportunity.

E. NABITOVSKAYA: It is true. I would say that crisis is a double-edged sword. Banks that play risky games before crisis face serious consequences of their ill-conceived policies. However, the banks like ours adhere to conservative thought-out strategy and thus get an opportunity to use crisis as chance to develop.

NBJ: You said that Eurasian Bank as the parent company, and its branch in Russia adhere to a rather conservative strategy. Did this influence the dynamics of the share of problem assets in the loan portfolio of the bank?

E. NABITOVSKAYA: Absolutely. Speaking of the parent company, the index of non-performing loans in its total loan portfolio does not exceed 7%. For the largest retail bank in Kazakhstan this figure is quite low. If we talk about Russian branch, today this figure there is less than 1%. I suppose, very few credit organizations can boast of such figures. At the same time, our business model — I would like to emphasize that — is very customer-oriented. We keep our NPL ratio at this low by means other than too stringent requirements for borrowers.

NBJ: Well, that’s good we started talking about customer focus. In times of crisis, this topic expectedly comes to the foreground. What do you mean by this concept, what, if I may say so, do you fill it with?

E. NABITOVSKAYA: I will answer in the following way. First, we consider customers who require our products and services of our equal business partners. We do not strive to get higher margin of certain products and services in shorter terms. We want to grow together with our customers, which is we are initially focused on long-term cooperation with them. This approach, of course, has a positive effect on the development of our relations with them.

NBJ: Today, who are the clients of Eurasian Bank, what is the structure of its customer base?

E. NABITOVSKAYA: In the Russian Federation, we adhere to the following strategy: the focus is made on attracting small and medium business clients and large corporate businesses.

NBJ: That is, the Bank does not engage in the most risky segments, for example, in unsecured loans to individuals.

E. NABITOVSKAYA: So far, we do not. Our plans for 2015 envisage the launch of a mortgage-lending program.

At the same time, if necessary, we can provide our proven and long-term partners with services of unsecured lending. I would like to note that technologies of retail service and promotion of product offerings are well known to us, as soon as Eurasian Bank is the leader in automotive lending in Kazakhstan. The strategy of our bank in Russia provides that in 2015 we would start with a mortgage, and then perhaps we would consider the development of other retail areas. In any case, we will act steadily and elaborately, because, as I said, the one who plays risky games pays for it during yet another crisis.

NBJ: According to the NBJ rating of banks in terms of loan portfolio growth, Eurasian Bank was able to show very impressive results. From April 1, 2014 to April 1, 2015, the said figure has increased by nearly 120%. How did you achieve this? Is it true that the Bank took advantage of the same situation as in Kazakhstan — it provided loans to clients when the rest of the market had actually ceased their credit services?  

E. NABITOVSKAYA: At the beginning of the year, we were among the few banks that did not cease their credit programs. I often travel to the regions, and I know firsthand about the challenges many Russian companies, especially small and medium businesses, faced in the first quarter of 2015. Even very large Russian financial and credit institutions restricted their services to customers from this segment in this period; they focused their efforts on serving large clients. Of course, in some sense, we took advantage of the situation and attracted new customers.

NBJ: On the other hand, you say that interest rates on loans established on the market today are overwhelming for businesses. At the same time, banks cannot significantly reduce them, as the cost of borrowed funds depends on the size of the key rate, but until recently, the key rate equaled 17%, and even now, it is double-digit. How does Eurasian Bank attract customers?  It is difficult to imagine that it credits them at a loss.

E. NABITOVSKAYA: Of course, no bank will do anything at a loss, and we are not an exception. However, we can offer very favorable credit terms to our potential and existing borrowers. How? We do not use credit lines of the Central Bank of the Russian Federation. Our bank operates within its own capital — the funds that our shareholders infuse. The recapitalization of our financial and credit organization is planned in the strategy and occurs on a regular basis. Thus, on the one hand, we have no shortage of lending funds, and on the other hand, we can offer our clients comfortable prices and conditions.

NBJ: In other words, are you not influenced by the key rate set by the Central Bank of Russia in determining the cost of loans for different categories of borrowers?

E. NABITOVSKAYA: We consider the current rate, but we treat it rather as theoretical average — the weighted average of loan costs currently established on the market. For us, neither index is binding. As I said, such approach is a result of our strategy: we want the client to come for our service and stay with us for a long time, thus we do not want to overstrain their companies by excessive debt burdens.

NBJ: Nevertheless, your small and medium business customers may have problems with loans. How do you solve a problem of holding the share of NPL at this very low level of less than 1% of the total loan portfolio?

E. NABITOVSKAYA: This again is a result of our strategy. I guess, I will not reveal the big secret if I say that many banks mainly rely on mortgages in lending to legal entities. We implement a slightly different approach: we carefully analyze cash flow, solvency, return on projects, financial cycles and so on. We create our client offerings based on the results of this analysis.

If we talk about the difficulties faced by our customers in paying out their loans, it would be foolish to claim that they do not exist. However, this is just a chance for a bank to prove its customer focus. We are sympathetic to their problems and to the cash gaps they experience; in such cases try to help them by offering a debt restructuring or loan extension.

NBJ: You referred to your work experience in the parent company in Kazakhstan. Is this experience sought-after and applicable in Russia? The countries have common history, but they are different in terms of economic structure, cultural and historical traditions, mentality, and so on. 

E. NABITOVSKAYA: They are both different and common at the same time, if we speak about the parameters you just mentioned. From the perspective of mentality, the peoples of our republics are very similar; respectively, the approaches to business development and business cultures are also similar. The creation of the Eurasian Union also played significant role: economic and migratory ties between Russia and Kazakhstan were very strong, but now they are strengthening more and more with each passing day. Trade is growing, new joint ventures are created, and it offers conditions that are more favorable for many companies, including our bank.

NBJ: The creation of EAEU certainly changed things in the former Soviet Union, and will change even more. 

E. NABITOVSKAYA: Yes. Here I would like to mention one more thing. We have already discussed on in our conversation that many foreign investors left Russia under the influence of negative geopolitical factors. Seemingly, this is joyless news, but let’s not forget that "nature abhors a vacuum". If someone closed their business, there would certainly come someone other to take the vacant place. And Eurasian Bank is one of these organizations: we are very interested in developing and expanding our business in Russia.

NBJ: So, you have many common interests and plans...

E. NABITOVSKAYA: On the other hand, it is worth noting the differences in the banking market regulators’ approaches to the supervised entities. I would say that in Kazakhstan, the banking supervision is more systematic and formalized.

NBJ: In Russia, does the reasoned judgment of the regulator play an important role in deciding the fate of banks?

E. NABITOVSKAYA: I’m not comparing Russian and Kazakh regulation systems. I can only mention a slight difference of rules. At the same time, we see that the supervisory policy of the Central Bank is not static; it changes. The Central Bank advances stricter capital requirements for financial and credit institutions, the market is "purified" of unscrupulous and non-viable players. Some may claim that Russian regulator is too demanding, but in my opinion, it acts quite well.

NBJ: As far as I understand, Eurasian Bank has no reason to worry because of stricter requirements of Central Bank to the size of the supervised entities’ capital. Earlier, while responding to one of the questions, you said that the bank regularly recapitalized.

E. NABITOVSKAYA: That is true. At the moment, if rated by the size of capital, we are in the fourth hundred among the banks (according to www.banki.ru, the bank is on the 325th position in the capital ranking as of 01.01.2015. — Edit. remark), but will plan to rise higher. We are now completing the registration procedure for the next capital increase, which took place earlier this year.

NBJ: Does the bank have any other sources of the liability base growth except the assets of its shareholders? You said that you do not use borrowed capital, but what else remains? Are these the deposits of individuals?

E. NABITOVSKAYA: Mainly these are the deposits of legal entities. For us, it is a very important source of passive capital replenishment. As for the deposits of individuals, our strategy in this regard is the following: the proportion of these deposits in our passive base should not exceed 30%. This is an important moment. We want to protect ourselves from the flight of investors similar to the one that took place in the Russian market at the end of last year. To be honest, last year, similar events have also occurred to some banks in Kazakhstan. However, they were rather caused by a large-scale black PR campaign then by geopolitical factors.  People were threatened by the possible bankruptcy of several major banks.

NBJ: But the 30% share is not small. 

E. NABITOVSKAYA: And yet, this number is giving confidence that the bank would stand even in the hypothetical case of all individual investors simultaneously withdrawing their savings. For financial and credit organizations it is important to maintain stability and prevent delays in the return of deposits in such difficult times. All this is possible only on the condition that, on the one hand, the necessary liquidity reserve is available, and on the other hand, if the bank’s passive base is balanced and free from any imbalances in the sources of its replenishment.

NBJ: Attraction of individuals’ deposits, even in the limited amount, requires the bank to have a branch network. Please tell us more about its current state and plans for its further development.

E. NABITOVSKAYA: Today, our branch network is concentrated in the regions near the border with Kazakhstan; such location is in line with the strategy of the Bank. The Bank has lending and cash services offices in Novosibirsk and Omsk. Both work quite well, despite the fact that they were just recently opened: Novosibirsk branch was opened about a year ago, and Omsk branch started operations just a few days ago. We plan to open another lending and cash services office in Chelyabinsk and the office in Moscow.

NBJ: That is, the Bank adheres to a very careful strategy. It does not seek to increase its presence dramatically.

E. NABITOVSKAYA: Yes. Of course, there is nothing technically difficult in the task to increase the number of offices in Russia. However, this involves costs which may not pay off, and with which we would inevitably burden our customers. We do not seek this. You are right in saying that we observe balanced and conservative policies in this matter.

NBJ: In the last few years, the statement that the modern bank is actually an IT company providing financial services became very popular. Do you agree with this and, if so, does the bank pay attention to the development of its technological component?

E. NABITOVSKAYA: I absolutely agree with this statement. Eurasian Bank invests a lot of money and human resources in the development of its IT infrastructure. We have very effective Internet Banking services for corporate and individual customers. By the way, the development of IT allows us actively building up a customer base without major investments in the development of our branch network. Many of our legal entity customers that operate in Russian regions come to our Moscow office once or twice to sign a contract, to pass identification and fulfill a few other minor formalities. Then they can remotely perform all the necessary operations, as well as get all new products and services in a remote format.

NBJ: Let’s get back to corporate lending. As far as I understand, now that this is the main direction of the bank’s business. Please tell me whether Eurasian Bank cooperates with state organizations established to support and develop the SMB segment? Does it cooperate with MSP Bank, Loan Guarantee Agency or other agencies?

E. NABITOVSKAYA: Of course. We cooperate with MSP Bank for several years; and we are very satisfied with this cooperation. It allows crediting borrowers in various Russian regions more actively. As for the Loan Guarantee Agency, it is a new organization founded just last summer. Today we seek for signing an agreement with them and we hope that our partnership with LGA will be no less successful than the cooperation with MSP Bank.

NBJ: Do you expect that this year the bank will show the same spectacular growth of the loan portfolio as it did last year? Perhaps we should consider that the solvency of borrowers has changed and many companies went thrifty because they have trouble in serving new loans provided at very high rates...

E. NABITOVSKAYA: We expect the results of this year to be no worse than the results of the previous year. The specifics of the emerging markets, new businesses and destinations is that companies entering these markets can show good results for several years in a row without slowing down the pace. However, I have to make a reservation. Good results will last if the management of the company is highly professional: the company should have a well-thought-out strategy, which has proven its effectiveness, and a team to follow this strategy.

NBJ: According to NBJ rating, Eurasian Bank has good performance indicators in the period from April 1, 2014 to April 1, 2015, both in terms of growth of the loan portfolio and in terms of growth of such indicators as income and assets. How did you manage to get such results?

E. NABITOVSKAYA: This is all due to a well-thought-out strategy and good business model with effective risk management and conservative approach to our asset quality problems. And, of course, teamwork!