The FINANCIAL -- The Azerbaijani and Ukrainian banking systems have been the most affected by the recent crisis caused by the devaluation of national currencies, Mikhail Zadornov, President-Chairman of VTB 24, member of VTB Group, one of Russia’s financial market leaders, said to The FINANCIAL in an exclusive interview.
Georgia’s financial sector managed to remain healthy, but is still in need of real economic growth. VTB Group believes that the Bank has the ability to be involved in the process as one of the key actors.
“The main strategy for now is to grow by approximately 10% per year organically within assets and resources over three years and to continue discussions with Georgian businesses, the Georgian Government, to highlight fields where the Georgian economy is in need of our help in order for our balance and financial results to become more successful,” stated Zadornov.
Recent years have been quite difficult for Georgia as well as its neighbours and economic partner countries, members of the CIS. The crisis has negatively affected business in general and therefore the economies of various states. Devaluation of currency as well as a drop of GDP in some countries has struck the banking system too.
VTB Group highlights the fact that VTB Georgia remains profitable despite the crisis and recent processes of banks merging.
“I think the merging changes in the banking sector negatively affect customers in general, people, entrepreneurs and enterprises. VTB Georgia, with the support of its shareholders, is a neutral and very strong player on the market, ready to be involved in projects of different sizes. First, we are a profitable bank. The net-profit of VTB Georgia over the last five years, including 2016, is close to GEL 81.2 billion. So it is a profitable business; not so big for Georgian standards, but profitable anyway. Further development is still in the process of happening. We are just discussing our strategy for the next three years, connected to both organic and potentially non-organic growth. We are not excluding the possibility of merging with some other players. We are keeping this possibility on the table in the event a good option arises,” said Zadornov.
Q. Recent years have been quite difficult for CIS countries and Russia. How did VTB Bank meet the crisis in these countries and what was your response to it?
A. The last two years were some of the most difficult years for the Group, which I have been a representative of for almost 15 years. Devaluation is typical for the whole post-Soviet area. The minimum devaluation that was seen was in Armenia - less than 20%. For Georgia as well as some other countries the level of devaluation was closer to 30%; and for Russia it was 45%. However, now, after intensive appreciation of the Rouble since the beginning of this year, it is now closer to 15% at the beginning of November. The most devaluated currency is the Ukrainian Hryvnia and the Azerbaijani Manat. The general range for devaluation is from 20% to 50%.
For Ukraine it is not only due to economic reasons but also the political conflict. Taking Ukraine into account, each country is following on from this period with a different level of influence on the respective balances of our banks.
Georgia has been the least affected by devaluation. We have very low company risks; there is almost no influence in terms of loans, arrears damage and so on. It is a very good result even with the very high penetration of hard currency loans in the portfolio of VTB Georgia. Despite the fact that a large share of the assets and resources of Georgian Banks are in USD and EUR, the effect is not zero, but we have experienced almost no influence in this period of time.
In spite of the lower level of devaluation in Armenia, the influence there was bigger, damage to the balance was high for the whole group and especially for VTB Armenia, however this year the situation has been much healthier. We are trying to eliminate the risk of damage to the balance of VTB Armenia simultaneously with the situation in the country.
Russia, and maybe Belorussia, is in the middle of a process of devaluation. It has had an influence of course (not as strong as Armenia), and it is a clear influence not only towards devaluation, but also a drop in GDP, in the real income of the population, and for the balances of banks as well. But Russia experienced the highest change in the key rate of its national bank, Bank of Russia. This was connected to the great interest shock on the total balances of the Russian banking system, so the system became the very first victim of not only hard currency devaluation shock, but also of shock connected to the interest rate in 2015.
The Russian banking system had almost zero net income last year, but if you look to our balances and the balance of for example VTB 24 and VTB Bank Russia, we are getting back to our profitability of the years 2013-2014, even more for VTB 24 - for which it will be the most successful year in terms of net profit and profitability.
The main victims of the crisis have been the banking systems of Ukraine and Azerbaijan. Azerbaijan, unfortunately, has had the least resistant economy, most connected to one industry and it is the oil refinery industry. Manat (the currency of Azerbaijan) in reality was devised three times, so it created an expectation of devaluation for all economic agents in Azerbaijan and unfortunately, even now this process has not finished yet.
So maybe there is not such a big link between the country and the size of its devaluation, but instead the resilience of the economy and the policies of authorities, governments, ministries of finance and national banks which give different results for this period of time.
For VTB Group, 2014 was more or less a profitable year, as for 2015, we had negative results in other countries, as well as in Russia, except for in the retail business. In 2016 losses in CIS countries will be fully recuperated by the profitability of business in Russia.
The volume of business in Russia, Belorussia and Kazakhstan will be higher than in 2015 even this year. Despite the fact that it is not yet a pre-crisis level, it is quite close already for Georgia and Armenia.
The corporate portfolios are not growing as fast as they were two years ago, but the retail and small business portfolios for both the countries Georgia and Armenia are in quite good conditions of growth.
Azerbaijan is the only country in our group where real growth has not been detected. It is still in need of making portfolios healthier with the cooperation between the Bank and countries’ monetary authorities.
Q. International sanctions and low oil prices forced Russia to revise its economic policy. Where the Russian economy now and what is are the key points, which were changed in the policy?
A. First of all let me concentrate on the positive changes. Bank of Russia, as the main regulator, has fully changed the basics for its economic model. Before 2014, we had a floating rate, but in reality Bank of Russia also had some control mechanisms on the exchange rate, which was the key orienter not only for the Government and Bank of Russia, but for all economic agents, including the population.
From November 2014, Bank of Russia changed its policy and refused to influence the exchange rate of the Rouble, and fully concentrated on a real floating exchange rate and inflation. They took only one task, low inflation with a target of 4% by December 2017. So, for two years now we have really been living with a fully floating exchange rate, and the population and business are month by month convinced that there is no one’s interest in the currency rate.
Whereas two years ago a devaluation of 15-20% was causing an immediate reaction in all economic agents, now even 15% fluctuations in a hard currency exchange rate have almost zero influence on the behaviour of people. We are able to check it against the example of VTB 24’s balance, because we are a servicing bank for at least 10 million active clients, so we can see all exchange activities, not only for people, but for small businesses, and we can prove that such a reaction is quite common nowadays. So this is the main change in the policy of monetary authorities and it gives the possibility of manoeuvrability to the Government in the event of a drop in oil prices.
The second point is inflation targeting. It is a very hard position of Bank of Russia and now more and more people understand that it is a real task for Bank of Russia to have inflation of 4% by the end of 2017. For Armenians and Georgians maybe it is not the real task, because the inflation rate is not as high, but for Russia 4% inflation has never happened before in the history of Russia and is a real challenge.
The Ministry of Finance is now trying to consolidate the state budget at least on a federal level and also in the regions. The problem of the Russian economy is connected to state expenditures. From the years 2001 till 2008, economic growth was 7.2%. It was increasing simultaneously with oil prices till 2012 and gave the opportunity to the Government to increase the share of federal budget expenditure in GDP to 22%. It is just a federal budget, without pension fund and social security funds. All so-called wider government expenditure equals 36-37% of GDP. It is a huge share and in the current situation the Russian State could not keep up this load on the economy.
Even now the expenditure of the federal budget is 20% of the GDP, over 2 years it has shrunk by 2% of the GDP, and the task for the next three years is to decrease budget expenditure by 1% per year, so in the next three years another 3%, till 17% or maybe 16.5% of the GDP will be cut. It is a very difficult task, but this type of three-year project of the federal budget was proposed by the Government and I am sure that the parliament will support this task.
My conclusion is that from the macroeconomic side the prospect of the Russian economy is not bad, we have very low debt and very clear macroeconomic targets. The problem is that because of very high oil prices the Russian Government stopped almost all structural reforms from the years 2004-2005 for the last ten years. Just to be fair, there were some reforms in some fields, like tax administration; the financial sector; banking sector; some anticorruption laws and practices were implemented; also our Ministry of Defence was fully reformed and restructured; but the Government must face some changes in fields like pension and social care, education and healthcare. The absence of reforms became clear on the table during the crisis and made it difficult to move forward with old institutions, old processes in key spheres of the Russian economy. This is the main problem for now.
Q. In 2016 a set of documents were signed between VTB 24 and Russian Post on establishing Post Bank. What is the concept of the Bank and is there a possibility of seeing the same project in the different countries where VTB operates?
A. This concept is suitable for Russia, just as to adapt the same concept for other countries first we would need to be sure that our idea will be profitably realized in Russia. We have to observe that for at least one year for full understanding of the results, and then afterwards we should check the status of the national post networks in each country individually.
Unfortunately Russian Post is not so modern and developed as other infrastructural organizations in the country. Despite this, post offices are located in almost 42 thousand spots around the whole of Russia. It is really one of the few infrastructural networks which connect the entire country. These include the Russian Railway; Banks like Sberbank and VTB Bank; Defence infrastructure, because there are millions of people located throughout the country; Rostelecom and Russian Post.
For millions of Russians, post offices and small shops are the only islands of civilization, for example in Siberia or in the North of Russia. When we combine our money and technologies with small offices of Russian Post around the whole country, we really modernize the lives of millions of people around the country.
It’s a very sensitive and important task, but we should realize that we are not state-run. We are a business and we need to receive profit from this project as well. Our business is very profitable in Russia and we want to keep it on the same track in terms of any kind of project.
Our plan is to have banking branches (or windows) in at least 15,000 post offices in Russia. By the end of this year, we hope to have 2,600 branches, while already having more than 2,000. You could compare quantities: in Georgia there are just 900 banking branches, VTB 24 now has 1,050 branches and in one year’s time we will have created 2,600 offices of Post Bank, so it is a huge project.
There are three categories of clients, first of all pensioners, because retired people prefer to use cash even now. The second category is so-called consistent buyers buying goods over the internet. The number of people trading online has increased by more than 2.5 times during the last two years. The majority of these (typically small) parcels are going to the post offices. Some people are collecting parcels every month, or even every week. Additionally, the majority of Russians, about 60 million people annually, go to post offices for payments, letters, court documents and so on, so they are also our potential clients.
There are simple products for all of these categories and it is not only about their physical presence in post offices, but creating a modern internet platform as well; the platform for this bank specifically, also mobile banking and internet banking for the customers of Post Bank. The final mission is to connect three different types of systems: Bank, Post and State Service systems, which is not as developed as in Georgia, but still gives lots of additional opportunities for us and for local people.
After the almost full year since introducing Post Bank, it has already given us almost 1 million additional clients. It is very important to mention that this year it will be a profitable bank. We will have at least RUB 1 billion as profit from this business. The profit incurred is because we connected with Leto Bank, which had an IT platform, team and some technologies which we could provide to post offices very quickly.
Q. Trade remains one of the most dominant loan products in the Georgian banking sector. Which other types of loan products seem to have more promising potential according to your portfolio?
A. First of all, the most popular loans for the next few years are going to be mortgages, because their level is not big enough now. They are almost at a minimum level of demand, so I do believe that mortgage loans will be increasing not only in number, but that the share of these loans will grow in the GDP as well. It will be one of the drivers for loans.
Car loans, unfortunately, are not so popular these days. There has been evident decrease in demand in all post-Soviet countries and in Russia also. The decline in the auto loans portfolio has been continuing for the last four years, since 2012, when it was in quite high demand.
Because of the increased need for education payments, repayment of a car or flat, typical consumer finance loans will also be in high demand from families.
Q. During recent years VTB Bank Georgia started actively implementing technologically-friendly products. Recently you even launched video banking. How are modern technologies changing the traditional approach of the banking system?
A. It is the typical view in the US, there are some voices in Europe, in Russia, in Georgia also that there are no more traditional banking branches. But we need to understand the different segments of the population, for instance in Tbilisi, Kakheti, Rustavi. Life expectancy is higher than it used to be ten years ago, so there are people, older than 50 years old, who are connected of course with traditional branches, traditional branch banking. And of course for younger people, millennial and younger generations, whose main behaviour is merged with the internet, new channels of information and new banking platforms.
So the universal bank, which is working with enterprises and different segments of the population, needs to be suitable for different segments. Of course VTB Georgia is more a bank for affluent and rich clients, but these clients also vary in age. We must be ready to meet the expectations and demands from younger people as well as from the older generation.
When we are talking about cutting branches in Tbilisi, Kutaisi and Batumi, it is one case, while for rural Georgia it is a different case, because I am sure that in some rural areas of Georgia, even now there are not enough branches to meet the demand. There could be smaller branches serving with new technology, but they should be physical branches and the countryside of Georgia needs additional branches.
Q. Prominent Russian banker Herman Gref recently stated that he does not see the future of the banking sector in a traditional way, like it exists today. So he predicted that branches will disappear from time to time. Would you agree with that?
A. I think that the number of banking branches will be increased within the next few years, and may vary in number according to country. For example, in Russia we are fully changing the typical branch of VTB 24 every 2-3 years. It automatically modifies clients’ behaviour and their demand.
Sometimes, we are pushing for new channels and it’s also very important that this new form of servicing will be fully supported by the IT platform of the Bank. I think that here at VTB Georgia, you will see now and will see in the future that new forms of not only our branches, but a new form of our mobile bank, interconnection between mobile bank, video bank and ATM machines will be presented. Our main task is to be the most technological bank on the Georgian market. We could not compete in terms of number of branches, it is not our aim, but we do need to make the Bank suitable for each potential client for 24 hours in all the main regions of Georgia.
Q. What are the main challenges for VTB Bank in Georgia and in the other countries you operate in?
A. First of all, 2015 was the most difficult year for all banks, not only VTB Group, but for all banks in CIS countries and Russia. It was a year of devaluation, hard currency liquidity and interest risks, which were realized after the devaluation of all our currencies and of course stagnation and even decline in economic growth.
2016 has been a much healthier year and we are able to discuss our future strategies and plans for the next three years. Now we are preparing our strategies here in Georgia, Armenia, Russia, and for the whole VTB Group. The main challenges are of course connected to economic growth. If it will be real, not 1% or 2%, but real economic growth, it will be translated into the demand for banking services and products. Therefore, financial results will be much better than in this current situation of economic stagnation. Actually, banks have an opportunity to help business and government in increasing the economic growth level, because our money transmission is one of the main tools for increasing the growth.
Secondly, technological modernization will emerge. We have already discussed different demands, from different segments, not only from the point of per capita income, but new behaviour considering different views and ages. Our channels will be split into physical and digital ones. Similarly, segments will be differentiated between micro business, small business, medium size business, corporations and the retail standard segment, low mass segment, so-called privileged clients and wealth management for different segments with different levels of income.
So, if VTB Georgia, VTB Armenia, VTB Azerbaijan and VTB Russia, and VTB 24 will be prepared to make such models, it will be a success for our business. We could increase the market share and profitability of the Group. In all markets, VTB Group will be growing faster than the market, the increase of client numbers, market share and influence on economy with again profitability for our business is the common strategy in CIS countries and in Georgia.