For the first time in a few years, Oschadbank received a functioning supervisory board with the majority formed by independent members. These corporate changes should intensify the reform of the state bank. The newly elected Chairman of Oschadbank’s Supervisory Board Sevki Acuner told FinClub in what direction Oschadbank will develop, when its privatization is possible, and what should be done with the toxic loan portfolio.
- What is your vision of Oschadbank's development strategy for the next three years?
- Oschadbank will continue to develop in a balanced way, focusing on retail, small and medium-sized businesses, and will also keep its strength in the segment of large corporate clients. All of these priorities are included in the broader strategy for the development of state-owned banks that was developed by the Ministry of Finance. This strategy obliges Oschadbank to become a leading universal banking institution that will contribute to the development of the Ukrainian economy. By implementing this strategy, Oschadbank will increase its value as a bank. In addition, it will attract private capital, thus reducing the role of the state in the banking sector.
To achieve this goal, Oschadbank will become more efficient, competitive, properly manage its costs, provide customers with an infrastructure that will be based on both physical and electronic platforms. Thanks to this, Oschadbank will be able to achieve sustainable development and profitability, and bring value to its shareholder. We still have a lot of steps to take in the future, but thanks to a well-coordinated management team and Supervisory Board with right competencies, I hope we will be able to do all of it.
- When is it possible to privatize Oschadbank with the participation of an international investor?
- First of all, Oschadbank must achieve a sustainable level of profitability.
- When is it possible?
- This process will last from 18 to 24 months, and this is the first step. Oschadbank and the European Bank for Reconstruction and Development (EBRD) have signed a Memorandum of Understanding, and a roadmap for attracting private capital to Oschadbank has been developed. The Memorandum, as the first step, provides for the EBRD's participation in the capital of the state-owned bank. The next stage is the bank's IPO so that its shares could be purchased by other investors. Many different programmes and projects are currently being implemented under this Memorandum.
- What will be the EBRD's share in the equity of Oschadbank?
- As the President of EBRD declared at its latest general meeting of shareholders, and it is the public information, it is planned that EBRD participation in capital of Oschadbank will be 20%.
- What is the current status of negotiations with the EBRD regarding its participation in the equity?
- I cannot speak on behalf of the EBRD because I no longer work there. But I don't think it's about negotiations. The Memorandum of Understanding was signed by the Ministry of Finance, EBRD and Oschadbank. It describes all the steps to be taken. And it is these steps that are being taken now. At this stage, the bank is also participating in the EBRD's Trade Facilitation Programme and is working on participating in some EBRD lending programmes aimed at developing and supporting small and medium-sized businesses.
As for the EBRD's technical assistance, these are projects in the following areas: management accounting, bad debt management, SMEs and risk management.
- In your opinion, what is the realistic period of Oschadbank's privatization?
- Attraction of private capital is possible tentatively in the period from 2020 to 2022. For privatization, we want to find right, real investors. And we need to show them that the bank has stable profitability and a well-functioning system of corporate governance. Such a bank will be profitable for investors to invest their money. Economic progress of Ukraine will also play an important role in attracting investors to participation in the capital of Oschadbank.
- How do Europeans see the future of state-owned banks in Ukraine? What is the role of Oschadbank?
- Ukraine's international partners, in particular the IMF, EBRD and World Bank, want to see a growing role of the private sector and a diminishing role of public financial institutions. At the same time, PrivatBank, Ukrgasbank and Oschadbank are working to reduce the role of the state in their management. And we want to be a leader in this process – to show, through stable profitability and enhanced competitiveness, that we can do it faster and better than others.
The initiative of reforming corporate governance is aimed at reducing the political influence on the activities of banks and on their lending process, so that they become truly independent. If we look at the history of the banking sector in Ukraine, we will see the consequences of poor corporate governance. But thanks to the fact that the renewed independent central bank has freed the banking system from the parasites and swindlers who used it for their own enrichment, the modern banking system of Ukraine becomes stronger. With the support by the professional regulator, corporate governance reform will take place in the right operating environment. Thus, we will be able to bring the entire banking system of Ukraine to a high level of profitability and strength.
- To what extent does the current corporate governance structure of Oschadbank comply with European standards of a systemic bank management?
- The corporate governance system in Western banks has a longer history than the one in Ukrainian banks. The Management Board of Oschadbank led by Andriy Pyshnyy has done a lot for the transformation of the bank. We need to continue on this path so that the corporate governance system of Oschadbank becomes more similar to the western one. We need to implement more and more efficient solutions, use new tools, including big data analysis, to become more convenient and competitive for clients. We will continue to build up our talent pool so that our customers will know that if they work with us, they work with professionals.
- How do you see a solution to the problem of NPLs at Oschadbank and in what time frame?
- It is impossible to talk about specific terms. It is necessary to create the right mechanism to reduce the level of bad debts to an acceptable level. The legacy that the bank's management inherited in 2014 requires significant work. When we talk about the problem of non-performing loans, it is necessary to free the time and mind of the bank's management from working with this portfolio. It should be dealt with by a separate body specializing in managing NPLs, and the management should focus on the development of the bank.
When managing NPLs, it is necessary to apply as much effort as possible to recover the maximum possible amount of funds. After all, loans were issued at the expense of people's deposits. As part of this process, it is advisable to involve private companies, such as asset management companies, to which NPLs can be sold. They will independently decide what to do with them, and it will allow comparing the efficiency of banks and AMCs.
The process of restructuring NPLs should be deprived of archaic bureaucratic restrictions that do not allow managing them effectively. If the application of old rules, which are no longer used in the market economy, does not reduce the level of NPLs, these rules should be removed. Oschadbank already has a successful experience of NPLs restructuring. Although we are not the only state-owned bank that has applied this approach, we are the leader in terms of volume: Oschadbank has carried out dozens of restructurings, while other state-owned banks just one or two each.
The "Kyiv approach" allowed us to restructure UAH 24 billion debts. Today, several other procedures for the amount of about 4 billion hryvnias are in progress.
The NPL portfolio of Oschadbank is now fully worked out with all instruments: more than 50 billion hryvnias are now being enforced based on court decisions in favour of the bank, 55 percent of viable enterprises in the portfolio of the bank, whose activities are promising, have been restructured (24 out of 45 billion hryvnias).
Unfortunately, even despite all the work of the Bank with the NPL portfolio, it continues to be a burden for the Bank's balance sheet. Alternative instruments are needed.
- Who should remove the old rules: the National Bank or Verkhovna Rada?
- It means that it is necessary to remove subjectivity when making decisions on debt forgiveness. Forgiveness of debts by banks is not prohibited by laws, but due to subjective perception, including by law enforcement agencies, the management of state-owned banks does not make such decisions, because there is a risk that they will be accused of inflicting losses to the state.
By the way, the bank's Supervisory Board has established a subcommittee for managing NPLs within the Risk Management Committee, so that the newly created structural unit could deal with NPL.
- The National Bank has changed the methodology of determining the systemic banks, so their number has increased from 3 to 14. What do you think about this innovation by the NBU?
- It is about a more extensive and rigorous approach supervision by the NBU. And I approve of it. This is an evidence that the system itself is becoming healthier. This is a good sign. It should be noted that Oschadbank has been a systemic bank since 2016.
- How will the introduction of special requirements to capital and lending affect Oschadbank?
- The presence of strong players in the banking system indicates that the system will be healthy in any crisis. The introduction of new capital requirements by the National Bank will make us stronger. Naturally, we will have to maintain a higher level of liquidity, meet the new requirements for lending, but this does not limit us, as we are going to a more reliable, disciplined bank.
- According to the results of the past stress testing, Oschadbank had to solve the issue of UAH 1.56 billion capital deficit. Since May, we have been undergoing a new stress test and it is possible that we will need capital. What is the situation with the capital in Oschadbank today?
Now I cannot operate with an exact figure, but the situation is improving due to the management of NPL. According to the approved Restructuring Plan, under the unfavourable macroeconomic scenario, the regulatory capital adequacy ratio (Н2) should amount to 15.37%, equity adequacy ratio (Н3) should amount to 10.75% by the end of the current year. The issue of capital is part of the discussion with the shareholder. Taking into account that the final goal of Oschadbank's activity is privatization, it is very important for the bank to develop significant value for the shareholder before becoming private. In this light, the requirements of the National Bank to further strengthen the capitalization of the bank which will help towards creating great value for the shareholder.
- Could other banks have difficulty in finding the necessary capital to meet higher requirements?
- The Ukrainian banking system needs to go through consolidation. If we look at the economies of other countries that are comparable to Ukraine, the number of banks the fewer is. In today's banking environment, it is very difficult to be a small institution and stay afloat. I think the purpose of the NBU is to consolidate the banking market so that all banks in the system are strong. Therefore, there is no need to characterize the call for additional capital a problem. This is an opportunity for Ukrainian banks to become stronger by way of consolidation.
- Regular financial crises have shown that Ukrainian banks are more likely to leave the market rather than to unite. How real does the task of consolidating the market look like?
- There are prospects for uniting, given the economic and banking sector development forecasts. The banking sector has not yet penetrated enough into various spheres of life of Ukrainians, especially in retail, so banks have room for growth. It requires a clear structure of capital, technology and knowledge. All this cannot be achieved if you are a small bank. But if you are a large bank or part of a large structure, it is more realistic.
- In March, Oschadbank paid $420 million under Eurobonds without entering the borrowing market. How will the bank refinance the remaining debts?
- Taking into account that Oschadbank is profitable and has good partners not only in Ukraine but also abroad, I think we will have a lot of options for attracting support from the international banking community. Part of our work will be the development of a network of international partners to cooperate and attract funding if necessary. In addition, both Eurobonds and some other loans have an amortization structure of repayment, the peak of external debt repayments falls on 2019-2020. Payments for 2019 have been almost fully made. Excluding interest, the bank will have to repay about $442 million in 2020. (or just over 40% of the current debt). In the coming years, the amount of payments will be much less and will not have a serious burden on the bank's balance sheet.
Even now, all forthcoming repayments are fully covered with liquid assets denominated in foreign currency possessed by the bank. In general, external debt repayments are distributed until 2025.
- What are the prospects of recovering $1.3 billion from Russia under the November decision of the International Investment Arbitration Court in favour of Oschadbank?
- Taking into account the fact that we are talking about already issued court decision, we are using all legal means to recover these funds for the Bank and thus for our shareholders. Our team of lawyers considers various options as to how these funds can be recovered in favour of Oschadbank. The Supervisory Board intends to decide on the possible options for monetizing this decision at its next meetings, and there are several ideas, ranging from the enforcement of compensation at the expense of the assets of the Russian Federation and state-owned companies abroad, to the transfer of the creditor's right of claim to the bank. Of course, the prospects of obtaining the compensation are high, but the costs of legal support for enforcement will also be significant, therefore the Supervisory Board will analyse and consider all possible options for monetizing the decision.
This is not a victory on paper. This is a real victory. And I am sure we will be able to recover the funds awarded by the court. Oschadbank has created a legal precedent, which other companies will be able to use to obtain compensation for lost assets.
- The state, as the owner of the banks, often involved them in unprofitable lending for state programmes or individual businesses associated with the authorities. How will this situation change with the appointment of the new Supervisory Board of Oschadbank?
- Yes, that's why there are NPLs in Oschadbank. This is not even a subject of discussion – the bank's activities should and will be separated from political influence, from political insider lending, because we already know what the results may be.
All decisions on lending will be based on market principles and rules, there will be no "chosen ones". We will focus on retail lending, lending to small and medium-sized businesses, and will be inclusive. We will try to reduce the share of loans to state-owned enterprises in the portfolio of corporate clients.
The Bank has already done a lot, for example, payment cards have become available to the general public. We are already among the leaders in car loans and housing loans. New technologies will allow our customers to have faster and safer access to modern financial services. Among the independent members of the newly appointed Supervisory Board of Oschadbank, we have is an IT specialist – Baiba Apine, who will help us introduce modern information technologies and approaches.
- How strong is the temptation to earn not by lending, but by buying high-yielding government bonds? How exactly does the new development strategy solve this dilemma?
- The purchase of government bonds and other public financial instruments is not our goal. Part of the liquidity will be placed in these safe instruments to manage it, but we will diversify our loan book, work with the retail sector, small and medium businesses.
- Many large state-owned enterprises are now establishing independent supervisory boards, but often there are hidden or even public conflicts between them and the government, as, for example, it happened in Naftogaz. Do you think Oschadbank's Supervisory Board will be able to avoid such conflicts with the state? Will you be able to defend your vision of the development strategy and resist political influence?
- I have already gained experience working in supervisory boards of two companies and I would like to say that this work is based on building trust, openness in communication and adoption of a strategy in favour of the company. Our task is to create a strong commercial institution that will attract private capital and create great value for the shareholder. If we act in accordance with our goals, be open and honest, and build trust, there will be no conflict but also no way to interfere in the work of the institution. The entire Supervisory Board will work in this direction and we will insulate the Bank from the influence of the state as a commercial bank.
Our activities will be transparent. We will not tolerate people who want to interfere in the bank's activities and break its commercial orientation. These people have no chance at all!