Events

Mentality Demolition

Interview of Denis Gumerov to the Expert North-West magazine
The Chairman of BFA Bank Management Board gave interview to the  Expert NorthWest magazine

Mentality Demolition // the Expert North-West magazine, No. 11 (507), of March 21, 2011

Fullservice banks can increase retail service volumes against the background of credit operations profitability drop in the corporate segment. Credit organizations oriented exclusively on the judicial entities is a different matter: they have to search for the profitability growth possibilities only in their segment and this is quite a complicated task with the view of tough competition in rates. Denis Gumerov,  the Chairman of BFA Bank Management Board described to the Expert NorthWest magazine the way how a small regional bank can share clients with the state banks and why major deals are bad for the portfolio.

Stake on “undistinguished ones”
- The previous year failed to justify bankers’ hopes for corporate crediting growth and you are working in this particular sector. What is the dynamics of the bank credit portfolio?
- We managed to double the volume of loans issued, as a result the portfolio amounted to 7 billion rubles. This is undoubtedly a very good performance. BFA Bank plans to work over not only the size but the structure of the portfolio as well. The point is that the main growth in 2010 was secured by several major deals with new clients. On the one hand, it cannot but satisfy, on the other hand, we need to work for attraction of a larger number of middle-sized companies which would ensure further stability of the bank in the future. Concentration on major projects is accompanied with risks related to the credit portfolio stability: no one can guarantee need in credit resources of such clients after contract performance. The target of this year is to increase the number of clients from the middlesized companies.

- Does such situation exist due to the fact that you have not paid sufficient attention to the middle-sized companies or the reason lies in their low credit activity?
- According to our observations, it is very difficult for small and middlesized companies to cope with the crises consequences. A number of major enterprises could account on the State support in difficult times, however situation in other companies depended on the prices for raw materials which have been restored in the most branches. Smallsize organizations were forced to cope by applying their own forces. And now those who managed to survive after the crises still consider possibility of bank loans very cautiously. The greater activity is demonstrated by major companies, in particular, that deal with the projects of full or partial State funding.

- State banks compete strongly for such clients. What can small commercial structures counter them with?
- We do not set the task to compete with the State banks directly as we understand that we have no possibility to compete with them in terms of credits cost and loans length. At present, State banks and major federal credit institutions own infrastructure, standard products and technologies allowing to meet practically all business demands in bank services under attractive terms and it is next to impossible to compete with them in this aspect.
However, scale effect is a drawback to some extent. Due to the cumbersome system of internal processes and procedures it is often difficult for the clients to obtain the required product quickly and under individual terms in the State banks. This is the strong side of a commercial bank. We can offer relatively short funding of the period from one to three years for realization of particular stages of major projects, including investment projects. This gives us the possibility to service the same clients and not to compete with the State banks.

- How do you estimate financial results of the bank summarizing the year 2010? Is there any disappointment?
- On the contrary, the year was a success. Key indices put up in the financial plan for the year 2010 were exceeded. Profit amounted to 495 million rubles and exceeds the planned twofold, the capital assets were increased by 24% and amounts to 2.7 billion rubles, assets were increased by 44% - up to 16 billion rubles which also exceeds the anticipated level.

Irreversible downfall
- Banks are still conservative in borrowers estimations. Is the situation going to be changed this year?
- This is true that banks offer and business demands differ to some extent. The reason is the lack of stable financial indices in some of the companies. Their management realizes it is the time for a new cycle in development however not all of them have financial possibilities. In this situation banks tend rather to watch than to risk. Nevertheless some market players take more liberal approaches in risks estimations.
However, I think some changes in risk management which occurred after the crises are irreversible. This concerns BFA Bank at least. We have determined the top prioritiesfirst of all, what is really important for us it is high quality loans repayment sources, not mortgage as it used to be. Mortgage availability is a specific tool of influence on a borrower but the bank task is to return its money not to sell property exempted. Moreover, the crises indicated that even realizable collateral does not guarantee funds repayment to the bank.

- One more trend of 2010 was reduction of credit operations profitability especially in the corporate sector where rates are minimal. Was it a concern to you?
- Reduction of the bank interest margin is the inevitable process for the Russian market. Local bank system somewhat repeats the historical process which the world financial institutions have passed. Western banks are operating with very narrow option spread: difference between passive and active rates is rather small there. The essential component of their income basis is commission receipts.
We are still on our way to the same. Severe competition and growth of infrastructure expenditures result in banks profit drop and we feel that. Profitability of credit operations will probably not return to the former level. Interest policy of banks is limited by the market: firstly, it is unreasonable to increase cost of credit resources in line with low demand, secondly, commercial banks are under pressure of the State banks to some extent. We are not competing with them directly but have to search for external and internal reserves to approach the level of rates set by them.

- Today when the peak of rates drop have already passed, to which sphere will the competition between the banks be transferred?
- Credit institutions will have to return to the struggle for a client through high quality service. Besides, we can say that clients lately demonstrated no mass demand for any specific products, demand in compound structured deals are not often as well. The clients still show primary interest in simple credit products. That is why the competitive advantage of the bank can be a better correlation between credit cost and decision making period.

- Due to the small number of major borrowers bankers demonstrate growing interest towards small business. Are you going to enter the segment?
- To become a notable player at the market major lump-sum costs are required: the bank needs extensive network of offices, enhanced personnel staff trained specifically for service of the clients category, technologies on risks assessment and decisions making which are often based on score systems. Thus, mass switchover for small business crediting shall not be expected, only banks operating in the sphere for a long period of time can strengthen their positions in this respect.
The issue of small enterprises crediting is directly linked for us with the increase of service posts: when territorial coverage permits the bank to render high quality service to the clients near their offices, services can be offered more actively. At present we are concentrating on the clients of middlesized business but it is not excluded that after accumulated potential realization the sense to invest into small business segment will appear.

Psychology matters
- Growth of investment activity of the real sector is connected to the course for modernization declared by the State. However commercial banks can hardly be active player here…
- On the contrary, they can and must participate in the process. Any modernization demands large scale and long term funding. But for major part of the Russian banks funding of complicated investment projects is not quite typical. The banks have developed in a more simple way for the last years, main mass of investment credits were granted to the construction branch. Technical upgrading of enterprises represents more complicated projects. Moreover, their funding demands fairly long term money at maximum comfortable rates, and way of thinking of credit institutions and the enterprises themselves plays the major role. Effect of such projects is the matter of a far away future in terms of the existing standards. We have been living for a long time in the reality when investments not paid back within threefive years were of no interest to anyone. Now we are gradually, as well as the entire civilized world, approaching the idea that the payback periods of ten years are not the most hopeless. This demands a definite psychological reorganization both in the real and bank sectors.

- Which strategy do you follow in liabilities formation sphere?
- BFA Bank is oriented to the operations with corporate clients, therefore the main funding source are deposits of legal entities. Moreover, this year we consider the possibility to increase own bank capital on the account of additional emission of shares and profit capitalization, entry to the loan market by allocation of debut bill debt in the amount up to 1 billion rubles.

To buy in order to survive
- Consolidation at the bank market is going on. In this situation smaller regional banks have to search for the possibilities of their integration. Do you consider such perspectives?
- We undoubtedly have to grow including expansion of our presence geography. In the future we do not exclude the possibility of deals with M&A to expand our business.

- There is an opinion that in view of enforcement the Central Bank requirement related to capital increase up to 180 million rubles, the number of deals on undercapitalized banks purchases can be increased. Do you pay attention to the segment?
- Reasons for banks sale can be different, however, undercapitalization is far from being a positive signal. Offers on such banks sale are appearing at the market, however, we do not consider such option to be optimal to us.

- What are the principle tasks of the Bank for the year 2011?
- The plans are ambitious enough  we plan to increase our credit portfolio up to 15 billion rubles. In the segment of middle and major corporate clients the bank can see the preset development potential which will be realized both in the sphere of interests of the head office in St. Petersburg and at the new site opened in 2010 in Moscow.