More competition makes better banking sector

More competition makes better banking sector

Mr. Smolić says that the banking year 2015 will be characterized by “redistribution” of various loan products within each bank and between different banks i.e. within the banking sector.

- There will be redistribution between banks also. There are 17 banks that either operated at a loss or generated profit that was low, given the present environment. If I was an officer in any of such banks, I would be extremely focused on each, if not daily, move. We are yet to see who will end up losing their slice of the pie in 2015, as the possibilities of organic growth of the sector have been all but exhausted.

Nobody talks of the growth of loans anymore, but of maintaining the current level of loans, especially in the corporate segment, said Smolić.

There is a decrease in credit activity in the banking sector. Last year this decrease was a staggering billion euros. How does Komercijalna banka manage to generate growth?

- The fact is that there has been a decrease in lending activity in the banking sector both this year and the last year and the decrease in corporate loans is what caused this negative trend. A billion euros last year and 55 billion dinars in the first quarter this year are frightening figures for our economy. Decrease in this segment was partially compensated for by the still viable growth of loans in the retail segment. However, the scope in this segment is also narrowing and, for example, the market has experienced a decrease of 25% in demand for housing loans. Both customers and banks have turned to dinar cash loans with shorter repayment periods of one to two years and it is widely known that these loans are used for personal consumption. It is through the retail segment, especially agriculture and microclients, that Komercijalna banka manages to generate growth of loan volume. KB growth in this segment is considerably above sector average.

Even before this the banks had found themselves in a position where they were liquid enough but had nowhere to invest at an adequate return, and many had already reached their limit of exposure to the government. The increase in NPLs in the corporate sector induced fear among banks, especially parent banks and shareholders who became much more cautious. That is why the banks are turning to, among other things, various forms of municipal lending.
Competition among banks in this segment is now fierce, even to the extent of questionable rationality of certain moves.

What is noticeable is that this year again some banks have recorded a loss, but some have also posted unusually small profit.

- It is always emphasized that the banking sector is stable, which really is true if you look at the figures synthetically, jointly for the banking sector as a whole. Thanks to the image that the banks generally have, it is heard much less frequently that, for example, in the past five and a half years 20% of employees in the banking sector have been made redundant, that last year the whole sector, in total, operated at a loss… At that moment 15 banks with a negative business result generated a loss of over 34 billion dinars in total. Now there are nine banks that in the first 6 months of 2014 generated a loss of three billion dinars and eight banks that returned a profit of under EUR 500,000 each. Eleven banks have operated at a loss during at least three of the past five years, and that is a “red flag” for many, especially their shareholders. Developments in this segment of the banking sector will set the tone for the upcoming period… If, on the one hand, you cannot operate at a profit and, on another, you cannot easily access a sufficient amount of additional capital, you will find yourself in a bind you cannot escape. There is also the additional pressure of the increasingly adverse operating environment. Only if you are a profitable bank and are generating a more substantial profit, with easy access to capital, can you say that you have secured for yourself a relatively safe future.

One of the features of our banking sector is the considerably high level of NPLs that has reached 23% and is getting close to as high as 30% in the corporate segment.

- When talking about such a high percentage of NPLs, which stands at over 20% for the banking sector, this means that we are facing a systemic problem i.e. systemic NPLs. According to our internal analyses, since 2008 it has been only 70 clients in Serbia that have “eaten up” 2.6 billion euros of bank loans that are either barely collectible or not collectible at all.

For the moment, this year has been the year of stagnating NPLs, as even a slight shift that has occurred is a result of fluctuations in the total level of loans and not a result of more severe portfolio erosion. What can cause concern in the upcoming period is the slow but steady growth of NPLs in the retail segment which, despite being drastically more up-to-date in repayments compared to the corporate segment, is experiencing ever increasing difficulties in servicing their debts.

What about the pre-packaged reorganization plans (PPRP)? There are a lot of advocates of this process, which the banks believe have not produced the expected results.

- Our experience so far is that these processes are quite lengthy, inefficient and with an extremely uncertain outcome. The issue of further sustainability of the majority of these plans is yet to be settled. This shows that, on one side, there is not an efficient judicial system nor an efficient system for lenders to reach an agreement among themselves, while the increased duration of this process is often in the interest of the borrowers. In this game called PPRP it is the lenders – banks that get the raw end of the deal.

It is estimated that over 1.8 bn euros of total receivables is currently in some of the PPRP stages. Given that the moratorium on debt repayment is in effect during this period, that write-off of already accrued interest is contemplated, that repayment periods are considerably extended, etc. we can say that the position of lenders is and will be quite precarious in the upcoming period.

It turns out that these borrowers were wiser than the banks?

- I would rather describe them as being more willing to gamble. As a result, some will turn out wiser. Others…

Wouldn’t you agree that the banks were also more than willing to gamble but not so willing to accept a loss?

- Absolutely. In simple terms, the banks and their borrowers are the joint generators of high NPLs and there is no doubt about it. Following that logic, NPLs may be decreased either by collecting such debts or increasing the level of total loans. All other models are, of course welcome, but they do not get to the heart of the problem, as both the debts and the inability to pay them remain, but only change form. One can often hear that there are various “new” models for solving the problem of high NPLs or such models are suggested, but this raises the question of where to find funds for something like that. There is a cost involved in each model and the issue is who will pay for it. The solutions would include increased collection of loans and greater protection for lenders, faster completion of bankruptcy proceedings and foreclosures, as well as increase in economic activity.

Traditionally, this year again the savings and savers day, 31 October, will be marked by absence of higher interest rates. Their decrease is noticeable. How did the savers behave at the time of crisis?

- Our bank, a long-standing leader in savings with more than 1.5 billion euros of deposits, has had decades of experience which shows that when the structure of savings is dominated by smaller deposits, the increase in the total volume of savings is slower but more stable. Likewise, the crisis from 2008 and a huge outflow of foreign currency savings of over a billion euro from the banking sector showed that the banks with this structure of savings had slower decrease when compared to the banks where large deposits dominated. Let me remind you that the banks had differentiated interest rates depending on the amount of deposit and the duration of fixed term period. Banks preferred large deposits fixed to the longest periods possible. Our concept was to have smaller deposits fixed to the longest possible period, as in that case you can manage savings more actively. Such a bank is not forced to offer special incentives in order to keep the deposits, especially in the period of the so called savings month. In general, the concept of savings month is a systemic risk both for the banking sector and the Serbian financial sector as a whole.

It is, therefore, important to reduce the concentration of a large number of deposits that mature in a single month or even week. If 30% of total savings of a bank mature in a single month, accompanied by insufficient liquidity and the necessity to compete by offering high interest rates on this source of funding, this poses a risk not only for that bank but for the banking system as a whole. This has proved to be true during the recent winding-up of banks.

What are the specific features of foreign currency savings and savers’ behavior after the onset of crisis in 2008?

- In 2008 outflow of savings reached one billion, then in 2009 that billion was returned and in 2010 there was an inflow of additional deposits of one billion euros. What followed was a two-year period when the inflow of new savings halved and now amounts to about 150 million euros, and maybe not even that. There is substantially less potential for inflow of new savings. However, interest rates are now closer to the European level. Due to the decrease in living standards, people are most likely going to use these deposits as a personal spending supplement i.e. as support to home budget liquidity. Evidence of this is the fact that last year the growth of savings was below the level of interest accrued that year.

The golden days for savers in Serbia, when annual interest rates went as high as seven or eight per cent, are over. Nowadays the banks are decreasing their interest rates four or even five times in a year and we are getting closer to the European average of 1.5%. All this, however, is a logical sequence of events and it was unrealistic to expect anything different than that. Such outcome was only a matter of time.

Given that the sum of interest will be lower, is it possible that the Government will increase tax on interest gains to compensate for lower budget revenue from interest?

- We do not know what the Government intends to do, but what is evident is that the deposit insurance premium payable to the Deposit Insurance Agency has been additionally increased recently by 50%, from 0.1% to 0.15%. This resulted in an additional increase in the price of this source of funding. For example, this imposed an additional cost for Komercijalna banka of over four million euros in this year. Unfortunately, the system is such that large banks with large savings compensate for part of the funds that are spent on banks which went bankrupt.

By the end of this year we are expecting to see in Serbia new banks that are not typical for this region. What will be the effects of this competition?

- We have already witnessed the launch of Telenor bank and the finalized purchase of Čačanska bank by the Turkish Halk bank. Establishment of Mirabank has been announced with the capital from UAE… We are keeping a close eye on each move of new players. All three of these banks are very different and specific. Without the slightest intention to sound cynical, I can frankly say that we strongly support the emergence of new banks in our market, as they force us to maintain good shape and wittingly or unwittingly they influence the solution-seeking process for both the banking sector and the economy. At any rate, additional appraisal and evaluation of our products and all the risks is more than welcome. There is also the additional capital and additional potential that these banks will bring with them, ranging from technology to corporate governance. There is no doubt that each new player in this market will require sufficient knowledge and good-quality analyses, and a lot will depend, more than ever, on management.

Serbia’s problem is not the potential for lending, but the creditworthiness of those who can take out a loan?

- The volume of quality demand for loans in our economy is saturated. This is shown by the fact that, on the level of Serbia, approx. 750 million euros worth of subsidized loans has been disbursed, while the potential is approx. 1.2 bn euros. This points to the fact that there is not enough quality demand for loans. Banks have been quite active and very aggressive as they realized that subsidized loans would be the flagship product this year which would dominate overall lending. The banks that did not take part in this program, or were not active enough in its implementation, lost not only a considerable number of clients but also market share in the lending segment.

It is noticeable that banks have been introducing some previously non-existent fees, such as fee for postponed payment of installments, authorized overdraft approval fee…

- Banks’ reaction to poorer earning capacity varies widely. Most leading and self-responsible banks have already implemented harsh internal cost-cutting measures and, as a result, have significantly improved their operational efficiency. It is legitimate that certain banks are attempting to increase their revenues at the expense of their clients, but this can only be successful in very short term. I don’t think such tactics or strategies are smart.

In three to four years the Republic of Serbia should withdraw from Komercijalna banka. What are the plans until 2018?

- Maintaining a top position in Serbian banking, increasing the homogeneity within the Bank, strong capital basis, increased operational efficiency, further technological advancement, maintaining positive client perception and continued profitable operation will make the Bank safe in the upcoming period. Our current projections are based on the developments in the environment and in the banking sector. The environment in 2015 will be similar to the second half of 2014. Current end-year projections of GDP are unfortunately negative. There is no additional economic activity and, as a result, any additional credit expansion is almost impossible. Stagnation of lending will, in fact, mean a positive result. Also, borrowing will be more difficult for both corporate and retail customers. This year would have been a catastrophe in terms of corporate lending, if it hadn’t been for subsidized corporate loans in dinars. Their effect is plainly visible. Over 750 million euros worth of these loans has been disbursed so far into more than 16,000 loan accounts. Roughly, almost 50% of the total number of small, medium-sized and large companies are using this loan.

Nevertheless, we should remember that this is an efficient and short-term measure that will allow economic policy-makers additional time for strategic moves.