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National Banking Journal. Artem Konstandyan: Innovation as competitive process weapon

Promsvyazbank, one of TOP-15 Russian banks attracted the observes' attention by the demonstration of its last year profit, the largest one during the whole history of its existence and by this year it was one of the first private banks which performed Eurobond issue placement at foreign capital markets. The reasons of its financial results increase and the investment atmosphere during another "Greek influenza attack" were described by Promsvyazbank president Artem KONSTANDYAN in the interview taken by NBJ.

NBJ: Artem Georgievich, the first traditional question of "Business and personal profile" interview: what were the bank financial results for the last year and for the first quarter of this year?

The results of the last year were declared and commented some time ago. I may repeat again with pleasure that these results are the record ones for all Promsvyazbank history. For example, according to IFRS the profit made 5,2 billion rubles which exceeds the maximum value demonstrated by the bank at pre-crisis period about 1,5 times.

NBJ: Do you hope to repeat this result or probably overcome it by this year?

A. KONSTANDYAN: As a matter of well known fact nowadays the world economy and world financial markets experience the instability period. It is difficult to predict the further development of the situation: the chances of Greece to exit from euro-zone are very high. And it is difficult to estimate the results of such exit for the world economy and the world financial system. That's why it is difficult to promise anything right now. But, if to abstract from these external factors, it is possible to predict that results of activity of bank, probably, even will be better, than last year.

NBJ: What are the reasons of such a prediction?

A. KONSTANDYAN: Financial activity results concerning the first quarter of the year 2012 demonstrate it besides other factors: Promsvyazbank profit made 1,8 billion rubles according to IFRS.

NBJ: You mentioned that this year situation is complicated by external negative factors. Although the year 2011 was also difficult one taking into account the USA credit rating decrease and the Europe debt crisis escalation. But despite all these facts you said that the bank managed to achieve some record profit. What business lines or other factors helped to achieve it?

A. KONSTANDYAN: There was no marvel, you know. All business lines were developed and the main source of income became the client service as usual. This allowed us to keep the former level of interest for a corporate net margin - 3,9%. It's a good result.

NBJ: Espenally if you take into account that most banks nowadays complain the margin decrease of this segment. Maybe the marvel reveals in the avoidance of this fall by Promsvyazbank?

A. KONSTANDYAN: No. It's the result of normal and constant systemic work. Frankly speaking Promsvyazbank does not have a lot of material competitive advantages. Despite the banks partially owned by the state or the subsidiary credit and financing companies we do not have any access to cheap funding. That's why we may not propose to our clients the credit product rates which are less than market average ones. Our competitive advantages are different ones. These advantages concern the establishing of clear relations with clients and quality management of internal affairs.


NBJ: When we talk of corporate clients, do we mean the servicing of large and average companies?

A. KONSTANDYAN: Yes. As of SME the bank attained considerable results. The last year results showed that SME credit portfolio increased by 43%. And that's not a marvel but the result of a hard constant work of the bank. The half of this increase is provided by traditional organic activity of the bank servicing small and average enterprises. The second half was made due to the last year acquisition of the TRUST bank portfolio.

NBJ: Last year there was a lot of talk about this deal on the market as a successful one. Do you intend to continue SME portfolio increase at the cost of similar portfolios acquisition from other banks?

A. KONSTANDYAN: We take into account such a possibility. We were looking and are looking now the portfolios meeting our demands. Although frankly speaking I don't think that there is a lot of such portfolios on the market nowadays.

NBJ: So, you bet on organic increase of SME activity and not on the increase due to portfolio of other banks acquisition?

A. KONSTANDYAN: Yes - because of the present conditions. I also want to add that the success of our activity can be judged by the following aspect: if the asset volumes allow Promsvyazbank to be in the list of TOP-15 largest banks of the country, the credit volumes of small and average business allow Promsvyazbank to be in the list of TOP-5 largest banks.

NВJ: Do not you feel confused by the fact that small and average business crediting is traditionally considered as rather risky one? You may often hear that bankers complain about the non-transparency of SME companies, about the unreliability of their reports, etc.

A. KONSTANDYAN: I agree with the fact that the transparency level of small companies in Russia is considerably less than the transparency level of such companies in Europe which even increase the transparency level of our average and large companies. Well, banks should work with any clients if they want to show profit and develop their own business. We can't refuse from SME as the companies of this sector make a huge layer of the client base: only Promsvyazbank has more than 70 thousand clients from SME companies. And only 10 thousand of them are borrowers.

NBJ: It's an interesting correlation.

A. KONSTANDYAN: In my opinion it's quite an explicable fact. SME servicing doesn't mean that all our clients of this sector are the bank loaners. And our strategy is not in making loaners from all our clients, although SME crediting brings main part of the profit within this segment, but in expanding the list of products which we propose to small and average companies. Let's talk again about risky SME crediting. I admit that we have considerably high risks there. But let's think over the following fact. The European Bank of Reconstruction and Development by all means recommended Russian financial and credit institutions to work with small and average companies when it entered the market and long before the moment it became the minor shareholder of Promsvyazbank. The EBRD did so as it perfectly understood that small and average business crediting from the "risk-profit" point of view is as attractive bank activity as the work with large companies.

NBJ: Besides the rivalry in this SME segment is not probably so hard as in "corporate" sector.

A. KONSTANDYAN: Wouldn't say so. Of course, there is a considerable rivalry between the banks concerning the corporate business servicing. Nevertheless many of our colleagues entered SME segment a long time ago. Not everyone managed to attain a success there, but they try to work with small and average companies...

NBJ: It's true for almost all banks. In any case it is evident for the banks of TOP-100 list.

A. KONSTANDYAN: Yes, that's true. Moreover we predict the further hardening of the rivalry as Sberbank has already announced its serious plans of this segment development. Of course, it's not the reason for us to reduce our activity here, but we understand that there is a lot of work to be done and the situation will depend mostly on the quality of the provided services.


NBJ: It happened so that we immediately started to discuss corporate clients and SME. Can we state on this basis, that Promsvyazbank pays less attention to retail aspects nowadays in comparison with these aspects of business?

Well, it's difficult to answer this question unequivocally. On the one part retail business rate increase in Promsvyazbank are decreased considerably in comparison with SME increase rates last year. SME credit portfolio augmented by 43%, as I already mentioned, and the retail portfolio increased only by 14%. Such number is considerably less than the average market indicator. Such situation was not because of our lack of interest for retail but the fact of making several deals of selling problematic loan portfolios accrued by the bank during pre-crisis period. Last year we sold more than 10 billion of such debts and thereby we are almost out of problematic retail credits. If we do not take into account the effect of such sales, the retail portfolio growth increase would be quite another one exceeding 40% at the end of the year 2011.

NBJ: And what is your competitive advantage in retailing? Do you have a material component here?

A. KONSTANDYAN: Our main advantage here is the service quality and the treating of clients. Our basic factors are professionalism, friendliness and the readiness to help. These are simple human emotions, which any of us expects. The bank attains trust by the development of such qualities. Also we change our offices in order to provide our clients with comfort: we give them free Wi-Fi, special places for children, take into account the public quality standards and follow their fulfillment.

NBJ: As you mentioned the fact of problematic loan portfolios sale I would like to ask you the following question: it's not a secret, that the validity of collection agency business is discussed nowadays. Rospotrebnadzor, for example, supports quite a radical point of view: the transfer of private person debts to collector agencies does not correspond with Russian legislation. If such a position wins and will be accepted by the law will banks suffer immensely?

I hope this issue is quite a theoretical one and that no one considers the collector business prohibition seriously. As far as we know the legislators work over the collector business issue nowadays which we support by all means as the work over "Consumer crediting" law. I won't deny that not all the statements of such documents satisfy us but in my opinion any order is better than chaos.

And the collectors' works is an integral part of the developed financial systems. As far as we plan to develop our financial system I don't see any chance or necessity of collector business prohibition. But the companies' activity working within this segment should attain more civilized forms. That's quite another question. Nowadays a lot of claims on the one part concern collectors' behavior and the violation of "Personal Data" law on the other part. I hope that the first problem will be solved by the ratification of collector activity law which is already regulated. Of course the banks have to reconsider seriously the processes of problematic loans transfer to collectors via agent or assignment schemes. Such measures demand financial and time costs. In any case the sale of "bad debts" to collectors is much more profitable way of the problem solution, than keeping these debts on the balances.

NBJ: At the beginning of our conversation about retailing procedures I wanted to ask you a clarification question: when we talk about this type of the bank activities, do you mean cash crediting, credit cards and car loans? Does mortgage refer to retail crediting?

A. KONSTANDYAN: Yes, it does. If we consider the retail line of our bank it comprises all mentioned products except for car loans.

We do not provide car loans after crisis and we don't plan to revive such service.

NBJ: And what's the reason of it? Did the car loan demonstrate bad results during the crisis period?

A. KONSTANDYAN: That is also the reason. Car loans are the least profitable products among other credit lines. The low profitability is not the main reason. The mortgage is not considered by any bankers as a highly profitable business line. But mortgage showed very good results during the crisis period from the credit portfolio point of view. And all this despite difficult financial conditions experienced by many loan-ers. But we had serious problems with car loans despite of security, registration certificates, etc. Of course, we concluded the following: the product profitability is low and the risks are high.

As for mortgage I do not want to describe all its advantages in detail. They were described long ago. But I want to specify one more positive moment: the clients wo attract mortgages often become active consumers of other bank products.

NBJ: And taking into account these factors the choice was made to restore the mortgage service. As far as I remember, Promsvyazbank completely ceased the mortgage crediting during crisis period.

We ceased not only mortgage crediting. We did not provide retail services for a year and a half. During this time we completely reconstructed all business process and came back quite successfully, as you see. The mortgage credit volume issued by Promsvyazbank since the February of 2011 has been seriously increased the pre-crisis period values by now. The second half of the year 20 n was especially successful when the bank issued mortgages to the sum of 2,9 billion rubles. And the results of the year 2011 showed the mortgages to the sum of 3,6 billion rubles. We predict that the mortgage portfolio of this year may increase 10 billion rubles provided more or less stable condition of the world financial markets.

NBJ: Do you refinance the credits issued by AHML programs?

A. KONSTANDYAN: No, we do not use the refinancing tools proposed by the agency. We have a lot of reasons not to use them. But the main reason is the following: the mortgage volumes which we have nowadays almost do not influence the bank liquidity values. That's why we don't feel the necessity of mortgage refinancing but taking into account the dynamic increase of our mortgage portfolio we consider the possibility of it securitization according to AHML program.


NВJ: I remember that during the first interview which you gave to NBJ in 2010 you talked a lot about factoring and trade financing as about two most perspective tendencies of Promsvyazbank business. Do you treat them as before or the stabilization of the bank sector demand to promote first of all some classic bank products?

A. KONSTANDYAN: Not at all. Factoring and trade financing are still our most progressive products. Their advantage concerns their attractiveness. They are more attractive than standard corporate products as by the net margin point of view so as by additional commission profit. If we take into account the trade financing the Promsvyazbank share of import credits makes more than 6%, which is slightly less than the value of the two year period. And the total share of international financing products within the general bank credit portfolio remains stable and makes about 12-13%. But the export credit segment has augmented our share during the last year by 5%, and now it makes about 15% for the year 2011 and the value of this year first quarter makes 20.22%. These facts mean that Promsvyazbank has very serious positions at trade financial and factoring markets.

NBJ: When we discussed SME, you mentioned that almost all large and average banks have already entered or try to enter this segment. It looks like the same may be told about factoring market.

Of course, this business line is not so popular as SME one, but I can't deny that the factoring attractiveness is growing due to the abovemen-tioned factors. And, of course, the struggle for clients becomes sharper. I can't but notice the VTB bank activity increase within this sector. Because of TransCred-itBank purchase VTB bank became a close rival for Promsvyazbank and one of the bank factoring leaders.

NBJ: One interesting moment: when we talked about SME, you mentioned Sber-bank ambitious plans concerning the development of this business line. According to your words VTB group becomes a comparable player along with Promsvyazbank in the factoring segment. Do state banks approach and seriously complicate your life?

I wouldn't say so. Nowadays almost all segments and all business lines experience serious rivalry including the rivalry from the state banks. For instance, we should take into account VTB24, when we talk about SME. But it doesn't mean that the private banks are ready to give up and do not have any chances. Do you remember, when five years ago lots of experts gave pessimistic predictions concerning the arrival of non-residents and the disappearance of the national private banks? These fears were not realized. The crisis came up and state banks received a huge support from the state. The state banks received a considerable number of private deposits and everyone told that state banks will capture the whole market. These predictions didn't happen if you analyze the present situation and they hardly happen in the future.

NBJ: Frankly speaking not only state banks but also private banks received the state support during crisis period. May be they didn't get as huge support as the state banks but nevertheless...

Only one financial and credit company received the support in amounts comparable to the respective amounts of the state banks. It was Alfa-Bank. All other private banks received the support in the form of additional liquidity access, but not in the form of capital investment. But nowadays not the banks and the ways of support are important but the fact that the fears concerning the seizure of the market by state banks were not confirmed. For example, the state banks share at private deposit market ceased to grow and even start to reduce little by little.

Let's look at the other market segment which we've discussed already: corporate crediting. The rivalry here is especially sharp and not always the rivalry proposal may be outbargained by lower credit rates. So, even within this segment we form such a portfolio which we consider to be necessary and give out as much credits as we consider necessary.

NBJ: So you don't feel the deficiency of good borrowers?

A. KONSTANDYAN: No, we don't. Frankly speaking, we may give out more credits but today volumes of credits are considered as normal taking into account business marginality and the existing risks. State banks do not prevent us from the development of this business line.


NBJ: I do not want to leave the question concerning the state support provided to the banks during crisis period. Nowadays, and thaf s the moment from which we start our discussion, we also have not an easy period when we don't have any crisis events in our economy but there is more than enough fears of the second crisis wave arrival. If we consider the last REPO auctions results performed by Central Bank we may be sure that the banks increase their liquidity volumes. May such a fact be considered as a signal to a soon crisis arrival?

A. KONSTANDYAN: It's rather the signal that the bank does not exclude such a possibility. I already told that the Greece situation is not clear and all market participants understand that the world financial system risks during last several weeks have increased immensely. That's why the banks and regulators are preparing just in case for the worst of possible scenarios. In this case the liquidity will be of use to everyone. And if we take into account the largest players of our market they do not have any liquidity problems as far as I know.

NBJ: The liquidity means as a rule short-term cash assets the bank possesses. And what about Promsvyazbank capital? As far as I remember last year the bank took the credit to the amount of 3,5 billion rubles from its minor shareholder on behalf of the European Bank of Reconstruction and Development.

A. KONSTANDYAN: When we talk about capital we should first of all mention that by the end of the last year the bank performed an additional share emission to the amount of 4 billion rubles with the participation of major shareholders and EBRD. Moreover we took a subordinate credit from EBRD, which we mentioned before. Thus, the capital base of the bank has considerably increased.

NBJ: Why do you need such an amount of additional capital?

A. KONSTANDYAN: There is never enough capital for the bank. Moreover, analytics state a low level of capital sufficiency in our bank and tell that it's competitive disadvantage. And in my opinion such a statement is quite fair. Although I do not quite agree with their conclusions but we take their opinion into account and try to increase the capital sufficiency.

If the increase continues the profit will be more considerable source of the bank capital increase. Although new capital investments are also possible the bank market and business increase dictate such a necessity.

NBJ: Promsvyazbank also placed 5-year Eurobonds during spring time to the amount of 400 billion dollars. You've already answered the question concerning the purpose of such a measure. So I'll give you another one: what's your prediction concerning the results of such placement? It's not a secret that the bank placed its bonds not at the very successful moment when the world financial market started to shiver from a new fit of the "Greek influenza".

A. KONSTANDYAN: You are right. It was a difficult moment. And in my opinion the placement of this Eurobond issue was the most difficult of all placements which were ever placed by Promsvyazbank. Volatility played its role and we were placing the bonds when the markets started to shiver. Nevertheless I consider the Eurobond placement deal became a successful one. There was enough demand on the tools from investor part. The Eurobonds were sold at reasonable price with a reasonable profit.

NBJ: I suppose that Eurobond placement deal is prepared not in a day and even not in a month. Why did you deride to place the bonds by the end of April? Did you suppose that the markets wouldn't be shivering at this period or you did you deride not to wait the stabilization moment?

A. KONSTANDYAN: You know, Eurobonds are usually placed during so called "break periods" when the market situation is considerably stable and the investor appetites are rather high. These "break periods" may last for a week, a month, it depends. When I started to work at the bank sector I thought that this term means the "chance period" and that it's rather an allegorical term than a real thing. But the life proved otherwise: the break is limited and it's impossible to tell when it's finished. In the case of our Eurobond placement I may say that the beginning of April was quite a good situation. Then the break started to end because of the well known events...

NВJ: But Promsvyazbank managed to use it.

A. KONSTANDYAN: At least we've managed not to lose it.


NBJ: The last questions which I want ask within this interview are connected with the Promsvyazbank positioning as an innovative bank. Explain, please, the meaning of this term as very often it looks like a fine expression as, for example, "the bank of the future".

A. KONSTANDYAN: It's a very good question. Maybe some banks use such term as a fine expression but Promsvyazbank considers innovations as a key element of its strategy. We actually position ourselves as a technological and innovative leader of the Russian bank sector. What is specifically meant by the term "innovative bank"? In my opinion it's the ability to react clearly and quickly to all changes taking place on our market.

NBJ: To react on the basis of the business IT-component?

A. KONSTANDYAN: It's quite a spread delusion. When we say "innovative bank", we mean by this a more widespread phenomenon than a technologically advanced bank. Innovations are the technologies making people life easier and more comfortable. These technologies may refer to IT-solutions and IT-systems and may concern quite different aspects of the bank activities.

The world changes rapidly and the client demands also change fast. Innovation bank is a credit financial company which may perfectly react to these changes. This ability in my opinion is the competitive advantage which Russian private banks have. Not all but some of them in comparison with state banks and its subsidiaries.

NBJ: Well, state banks rather quickly react to private bank changes. You may consider Sberbank for instance.

A. KONSTANDYAN: It's quite true, of course. But I am sure that the leading private players still have certain odds.

interviewed bу Anastasia Skogoreva