Housing Finance Bank is a monoliner. Its priority activity is mortgage lending. Regardless of the fact that there are hard times for the mortgage lending development, Housing Finance Bank manages not only to increase the volume of the total loan portfolio but also to maintain on the minimal level the share of loan defaults. Chairman of the Board of Directors of Housing Finance Bank Nikolay SHITOV told in his interview to NBJ about facts thanks to which such results are gained and about his vision of the situation on the banking market.

"WE HAVE LOST IN THE FIGHTS AGAINST INFLATION – WE SHOULD TRY TO WIN IN THE FIGHT FOR INVESTMENTS"

NBJ: Nikolay Vyacheslavovich, the first question which I would like to ask you concerns the general situation on the Russian banking market. How do you evaluate the main challenges which our banking system are facing?

N. SHITOV: One of the most topical challenges in this year is surely the long-term liquidity. And it to any extent is topical for all financial institutions including our bank. We have here deficit of long-term liabilities and this is natural enough within the conditions when American and European loan markets appeared to be practically closed for us. But banks are accustomed to placing in them their Eurobonds and other securities in order to attract the long-term funding.

NBJ: Have not markets of the Southeast Asia on which much hope has been put become an alternative?

N. SHITOV: Not yet. Investors in those countries do not take decisions as fast as we would like to. They take much time to examine Russian issuers because they have not dealt with them before that.

The second point which I would like to mark is the volume of the key rate. We currently see the trend of its reduction, and this is surely a positive trend. But it is important for the regulator to bring it in the nearest future to the low level. Thus, the cost of the loans will be acceptable both for the companies and individuals.

NBJ: The low level of the key rate is an ambiguous definition. How much it should be to your point of view for resuming the demand for the credits and creating conditions for the recovery of economic activity in our state?

N. SHITOV: That is not the case to name any specific numbers but to give a clear signal to the market: the rate is reducing and further reduces. Let’s draw our attention to the foreign experience. We see that even in the countries where banks do not face the heavy deficit of liquidity regulators reduce the key rate to 0.5-1% and sometimes even to negative values in crisis times. This is done for financial institutions not to "store" money on the accounts in the Central Bank or interbank accounts but "contribute" it to the real sector in the form of credits. When it happens, conditions for business growth are created. Successful businesses create new working places and that result in GDP growth, rally of consumer demand. Tax revenues for the treasury respectively increase. That allows to increase both state investments to significant long-term projects and expenditures for the social sphere.

NBJ: It appears to be a spiral of a certain kind when one link holds another one. But as a rule opponents of reduction of the key rate to minimal values say that it is impossible in Russia due to the very high inflation. Even in "fat years" it was balancing on the level which was close to 10% per annum. According to the results of this year, it will appear to be much higher. How can we speak here about the key interest rate of 0.5-1%.

N. SHITOV: You know that our government in general and our financial authorities in particular shall find their position with this matter. What is the priority for them: fight against inflation or create conditions for economic growth in the country. According to my personal opinion, we have already lost in our fight against inflation. And the second goal is achievable enough. Is not it better to move towards it, simultaneously caring for the investment climate?

NBJ: Do I correctly understand that you are the supporter of the quantitative easing policy?

N. SHITOV: Quantitative easing policy is just the only possible instrument of economic policy aimed at the activation of GDP growth in the state. It can be applied but other measures which promote improvement of the investment climate and GDP growth also should be taken. Otherwise, Russia will face the extended economic stagnation.

NBJ: Could you please tell with more details about measures you are talking about except the reduction of the key rate?

N. SHITOV: First of all about elimination of excessive administrative barriers, optimization of taxation and most importantly about elaboration of certain clear rules of work for small and medium-size business. We need a number of systemic structural reforms aimed at creation a favourable order of small business operation (including tax ones). SMEs should know that no revolutionary changes of these rules will happen within the nearest 5-7 years. At that very time they can become fully operational, will be able to increase the staff, production of goods and services, i.e. work for the future.

NBJ: You actually appeal to the creation of conditions for getting the investment process rolling.

N. SHITOV: Exactly so. Moreover, if external capital markets have appeared to be closed for us, we need to attract internal investments. Within the current conditions when the key rate remains high enough and administrative barriers have not disappeared, it is hardly enforceable or even impossible.

I would like to return to the matter which we were discussing at the beginning of our conversation because it is directly connected with the things I am talking about. Banks are incurring a deficit of the long-term liquidity not only because external capital markets have been closed. The system has accumulated too much inefficiency including the development of new segments of the securities market, for example, covered bonds. From the theoretical point of view, pension funds and insurance companies should be interested in investing money into these instruments. But we do not see active demand from their side on practice. 

NBJ: Is it explained with the availability of administrative barriers?

N. SHITOV: Yes but not only. There also should be motivation for such investments, preferential tax treatment for investors to get accustomed to such reliable products. The fact that we have not managed to gain significant results directly influences the pace of housing construction. Money does not go to the real sector or go in the insufficient volume. Funds invested in the real estate could be the locomotive of the economy.

NBJ: Actually, as far as I understand, the state is investing funds in construction by means of the implementation of different programs. But it is insufficient…

N. SHITOV: Surely, not. The state in this case can be the process catalyzer. Private investors should joint it – they are pension funds and insurance companies which I have earlier mentioned and surely banks. If we manage to involve this very powerful but unfortunately currently unapplied internal resource, our economy will start successfully developing irrespectively of the fact whether restrictive measures imposed on Russia will be preserved or not.
 
NBJ: You suggested correcting monetary and administrative policy pursued by our power authorities. What about other questions – should be anything changed in the format of interaction of the regulator with the banks?

N. SHITOV: You know, in the last year, the Chairman of the Bank of Russia Elvira Nabiulina supported a very correct initiative on creating the consultative group on mortgage lending by the Central Bank of the Russian Federation. Housing Finance Bank which is by the way in TOP-15 according to the volumes of providing mortgage loans also actively participated in work of this group. But unfortunately many suggestions made by us and our colleagues remain open. I understand that the Central Bank possibly has had more important affairs during the last 6 months but banks which work in this segment are waiting for renewal of teamwork format because it really can be very rewarding.

NBJ: Probably the Bank of Russia is short of time because even despite the quiet conditions on the exchange market, the mega-regulator has many things to do. Possibly when more quiet times come...

N. SHITOV: The thing is that. Problems which we specify should be solved now, but not when "quiet times" come. Otherwise, we would take a risk to been there, done that. That means we do the things which have been done earlier: we postpone indefinitly all and in the next crisis we will suffer from the deficit of the long-term liquidity and decline of economy growth rates.

"WE MANAGE NOT ONLY TO MAINTAIN THE MARKET SHARE BUT ALSO ACTIVELY PROMOTE THE BANK IN THE RATINGS"

NBJ: You have mentioned that Housing Finance Bank is one of the leaders at the mortgage lending market. Is it managing to maintain its positions in TOP-15 now when small and medium-size financial institutions are having hard times?

N. SHITOV: We are managing and not only with that. Our bank is progressing up in ratings increasing its volumes of loans (if we see the statistics for the last three years we see that the volumes of mortgage loans providing have annually increased by 25-30%). First of all promoted by high technological effectiveness of processes and proven business model. We have 18 our own offices in 18 regions of Russia but we work with more than two thousand of credit brokers and mortgage lending agencies. Cooperation with these companies allows us not only to reduce the volumes of lending but also increase them.

The second moment I would like to mark answering your question is that we have managed to "build" the integrated IT-system which enables on a real time basis trace the ways how credits are provided and serviced. Thanks to using modern technologies we have get rid of the necessity to "blow up" the staff of the bank.

NBJ: And how does Housing Finance Bank solve the problem with liquidity? You have said that it is not easy to find "long" money at the market.

N. SHITOV: We had three sources of liquidity initially: first of all we were selling mortgage pools, secondly, we were receiving credit funds from banks-partners and institutional investors. And thirdly, we were issuing and placing covered bonds at the market with the Agency for Housing Mortgage Lending (AHML) and other partners. Now the first and the second sources have almost "dried up" unfortunately. We have to rely predominantly on the cooperation with AHML. We hope that we will cooperate with the Agency in the same active way in the next year.

NBJ: It is well-known that it is very important in crisis times not only to save the market share but also to prevent aggressive reduction of the volume of provided loans. Not less important task for the banks is also to maintain control over the process of the growth of troubled debts share in credit portfolios. What is the situation with Housing Finance Bank with this respect?

N. SHITOV: Surely, the share of loan defaults has slightly increased but we have managed to avoid the dramatic scenario thanks to the availability of the efficient underwriting system of borrowers in the bank. We also try to prevent the occurrence of the really problem loans, we communicate with the clients in the course of the problem occurrence and try to restructure the debt. This is possible only under the condition when the clients are not hiding from bank employees but come to the bank and frankly tell about their paying ability problems.

The task of the financial organization is not to "drain dry" money from a person but to preserve loyalty of the client on the one side, and create a situation under which debt servicing will again become possible on another side. In this case both the bank and client win.

NBJ: There is one more favorite topic of nowadays, i.e. foreign exchange mortgage. Has Housing Finance Bank faced this problem and if yes, then how acute is it for it?

N. SHITOV: So-called foreign currency borrowers surely have faced certain problems but we do not see the mass refusal to serve the credits because of leaps of the dollar or euro rates of exchange. In some cases, restructuring has been suggested to the clients but the clients predominantly continue regular payments. Moreover, the ruble rate of exchange has started to enhance.

NBJ: Thus, can we make a conclusion that Housing Finance Bank has easily enough passed the acute period of the current crisis?

N. SHITOV: Yes, I think that it has become possible first of all thanks to the strategy of bank-monoliner chosen by us. And secondly, thanks to the fact that we have well-balanced assets and liabilities both according to the terms and rates. By the way, this is the reason why we have not allowed ourselves to "be carried away by enthusiasm" with respect to the attraction of short-term deposits at very high interest rates in the end of the last year.

NBJ: Does it mean that the standard problem of post-crisis periods called interest "scissors" does not threaten Housing Finance Bank?

N. SHITOV: Exactly so, despite hard moments, when loan rates have skyrocketed at the market following the key rate.

NBJ: But the crisis is crisis and it usually pushes the banks towards correcting their strategies. Was it necessary for you to bring corrections to the business model of Housing Finance Bank regarding new challenges and trends on the lending market?

N. SHITOV: No, it was not necessary to make such corrections of the strategic plan. But conditions of providing various loan products surely have been changed. It is normal considering the rapid change of the key interest rate in the last year and respectively the cost of funding for the banks.

NBJ: What new products have you introduced to the bank line during this period or on the contrary, what products have you possibly excluded?

N. SHITOV: You know we have made a lot of modifications to mortgage products depending on the classification of clients according to the risk level. That is why there are no talking about changes in the product line. We have brought changes connected with interest rates and LTV (Loan to Value, correlation between the main debt sum and the assessed value of the asset which is a security. – Edit. remark).

"OUR PURPOSE IS TO MAKE CLIENT SERVICING MAXIMUM COMFORTABLE FOR THEM"

NBJ: You have indirectly answered the following question I’d like to ask you. Many experts say that the most important thing during any crisis irrespectively of the fact whether it has been caused by external or internal reasons is to maintain the client focus. It is easy to guess that it is not simple because interests of the clients and banks in crisis times differ significantly as a rule. How does Housing Finance Bank manage with that and what do you personally mean under the term client focus?

N. SHITOV: You are right saying that it is not easy to save it in crisis periods. But according to our experience this problem can be solved. Housing Finance Bank interprets this term in the following way: the financial institution shall do everything that depends on it to make the life of the client, i.e. the central figure of the business, comfortable and convenient.

On practice it means the following: when a person comes to our bank for a credit, we try to provide to him a full range of required services. We provide legal maintenance of the deals, checking and appraisal of purchased property, suggest to him the list of accredited insurance companies which are able not only to correctly execute the insurance contract but also give a response on commitments later if required. All these services are provided to our clients on a free of charge basis.

The second moment or better to say our competitive advantage is the speed of processing client requests and taking decision on them. It is not a secret that mortgage deals in large financial institutions are approved within several weeks. In our bank, this process takes several working days because the credit committee is gathered several times per week. That means that we try not to delay the process of loan approval knowing that purchase and sale of real estate in most cases are complicated, and it is important here to obtain a credit and make a payment.

NBJ: You have said that the branch network of your bank consists of 18 branches. Do all of them work in Moscow or is the network distributed all over Russia?

N. SHITOV: We have branches in almost all cities with a million-plus population. Thus, about a half of our credit portfolio account for clients from Moscow and St. Petersburg. Approximately the same share – to other Russian regions. In this matter we also strive to the balance.

NBJ: Are there any plans for this or possibly for the next year to expand the presence of the bank?

N. SHITOV: We have considered this matter but decided to refrain from the extension of the network. We are enough satisfied with what we currently have – 18 branches in different cities of Russia and about 2,000 of companies with which we have signed partner agreements.

NBJ: Can any credit broker or mortgage agency become the partner of Housing Finance Bank or shall such a company conform to certain selection of criterias?

N. SHITOV: I’d say in the following way: any broker or mortgage agency conforming to criterias can become our partner. It is a more complicated task to remain our partner. This problem is solved in different ways. If any agency or broker regularly supplies customers with a high degree of risk or if we often have problems with credits provided to their customers, then we will surely terminate cooperation.

NBJ: The crediting process is a bilateral one: there should be the direct wish of the bank to provide borrowings. At the same time, there should also be demand for credit resources. The impression is that people have curbed their expenditures. Does this factor influence the crediting process? Do you explain client calm with the rates on mortgage loans which are now higher than the pre-crisis rates? Has not the paying capacity of current and potential clients improved?

N. SHITOV: You know, when the market of mortgage lending was only forming in Russia in 2000-2001, credit rates for the purchase of real estate were much higher than current rates. Suffice it to say that special popularity was enjoyed by credit products offered at rates of 15-16% per annum in USD! Nevertheless, the demand for them was active enough because the real estate price increase was from 20% to 30% per annum. The question is not only in the value of the credit interest rate. As a rule real estate is very underestimated under high interests rates. 

NBJ: If I understand you in the right way, the question is that the prices for real estate were increasing and now they have either stopped to increase or decrease?

N. SHITOV: Absolutely right. And we again return to the question which we were discussing in the very beginning of the interview. Conditions for renewal of the economic growth in the country shall be increased – the demand for real estate will occur then and as the results this market segment will be again interesting from the investment point of view. That means that the clients will be much willing to obtain mortgage loans.
As you can see it for yourself, everything is interconnected in such matters. It is impossible to solve one problem ignoring another one.

NBJ: And the final question about the plans of the bank in 2015 and results of its operation upon four months of this year.
 
N. SHITOV: As far as you understand, we can talk only about preliminary results upon four months. But even now, it is clear that we have easily enough overcome the acute phase of crisis avoiding losses both with regard to the client base and dynamics of the share of troubled loans, and with regard to the volume of the total credit portfolio.

We plan to gain good indices of the increment in profit at year-end. This is the primary target. In this year, the bank does not set itself a goal to repeat our achievement of the pre-crisis period when we have showed the growth of the credit portfolio by 30% annually. We understand that it is not only impossible but also undesirable. The main priority for the Bank for 2015 is increase of efficiency and profitability of business and technological improvement of the business model chosen by us which has proved its consistency and successfulness.