15 January 2018

«Actually, one could brazenly disregard all banks lower than the top 100»

Expert review for Banki.ru by Vladimir Tatarchuk, Board Chairman and Chief Managing Partner at Proxima Capital Group

Before moving to the investment business, Vladimir Tatarchuk worked for almost two decades in the banking sector

In an interview to Banki.ru, he explains why, despite the absence of serious external shocks, the banking system continues to be in distress, and discusses whether or not banks will be able to handle a wave of corporate defaults.


—Vladimir, what do you think, why major Russian banks are facing problems now, at a time when it seems like the economy has begun to recover?

— Yes, I suppose you could say that we are past the acute phase of the crisis. However, the macroeconomic situation remains rather challenging. Russian companies and banks still have only limited access to foreign capital markets, and the prices of oil and other commodities traditionally exported by Russia are still low. This inevitably affects how fast our economy and investments grow. And yes, on the whole, interest in Russia as an investment destination is quite reserved at the moment. All of this together affects the situation for banks today.

In addition, the regulator closed its eyes for quite some time to problems the banks were facing. While the economy was growing, it was of course convenient to put one’s head in the sand, hide and cover up some mistakes. But when the economy stopped growing so quickly, it became much harder to conceal the problems. In fact, some of these issues, both in state-owned and private banks, had been around for a while. The specifics of banking reporting, the abundance of opportunities to interpret events one way or another make the regulator’s job even more difficult.

Unfortunately, the predominant approach in Russia has been and continues to be that it is best to hide a problem in order to avoid publicly admitting to bankruptcy of a bank or a company. Although for the economy, it’s always best to disclose the problem and go through the bankruptcy process, so that new people and owners could come in with a fresh perspective. In the end, there are an enormous number of latent issues in the banking system and in the economy on the whole.

— Do you mean by “latent issues” situations where owners of banks borrow money and then use it to fund their own projects?

— Not only and not so much this, but the question is much broader — the issue is in the macro economy, the lack of a culture of competition, transparency and compliance, in a failure to match the length of assets and liabilities, and not just in lending to related parties.

When, for example, people take funds from individuals and invest them in real estate projects, if the market grows, then everything is wonderful: excellent yields, huge returns. But when the economy stops growing and execution of projects in the real estate requires the usual, quite long time, then quick payback becomes impossible. And the banks’ liabilities are mostly comprised of short-term cash.

When the economy stops growing so quickly, there is less of a chance to exchange old deposits for new ones. A systematic mistake is not matching the length of assets and liabilities. This leads to problems in the bank, and no kind of rate increase will fix this. As long as everything was good, the regulator could close its eyes to this – the economy was growing, and despite any problems things would come right in the end. Now, the same regulator has to become tougher, but the desire to say “All quiet in Baghdad” is still there.

— If you compare Yugra and Otkritie, were their problems similar or different?

— In both banks, there was a fairly cynical situation, when real assets were in the hands of the bank owners, rather than the banks themselves. From this point of view, the situations were similar, but the scale of the problem was way beyond any comparison. I think that Otkritie not only was more cynical in its abuse of norms and reporting, but it also made systemic mistakes from the point of view of the bank’s development. For a long period of time the group included seven banks and this was not a competitive advantage, but rather just a means of spreading out costs. And as for the adventurous deals conducted by the owners and management, I think enough has already been said in the market.

— The issue of corporations’ bad debts regularly comes up in reports by western rating agencies. Could it be that the banking sector is in for a wave of corporate defaults?

— Banks are trying to solve that issue via acceleration and restructuring. One major bank has an official policy stating that if an owner of commercial real estate is in trouble and the property used as collateral is not able to cover the difference, then the account manager should recommend to the owner that he restructure his debts in such a way that the majority of the debt, which isn’t covered by cash flow, is due at the end of the term of his existing borrowings. This is a classic example of self-deception both on the part of the bank and the borrower — that is exactly the desire to bury your head in the sand rather than fix the problem. There are also examples when loans have been restructured to 40 year terms. Can you imagine what 40 years is in our reality?

In our society, for some reason there is a misconception about what banker can be called good and professional. Often, someone is considered to be “good” despite the fact that he works against the bank’s interests and those of the people who entrusted him with their money. This “good banker” then offers the borrower conditions which allow him to survive for a long time despite systemic business problems, thus misleading both creditors and the market. I believe that a truly good bank is one which pays back on time the money it takes from retail customers and fulfils all of its obligations.

Corporate defaults are today a large problem for any bank — small or large, good or bad. And the problem of “heads buried in the sand” is even more acute in banks where top managers are separate from the owners and, therefore, from the bank’s long-term interests.

If you take a look, you will see that regulators all over the globe are focused more and more not on formal signs of adequate loan collateralisation, but rather on actual cash flows which will enable borrowers to pay back their debts and interest. With us, on the contrary, the most important thing is the good old collateral, and not the ability of an asset or project to generate returns.

I think that these problems are so common that to estimate the amount of bad debts in private banks, you should take the official figure and multiply it by 2, and in state banks, I’d even say by 3 or 4.

— Will this lead to a debt crisis?

— It’s already happened. Despite enough liquidity in the banking sector, lending growth rates are rather low. Banks are looking for quality risk, of which there isn’t much in the market. 

— And what will happen if only 50 banks remain in Russia?

— Actually, one could brazenly disregard all banks lower than the top 100. I totally support what the regulator is doing now. How can you protect yourself from the banks’ irresponsibility? You either have to constantly monitor each and every transaction, or say that every institution with capital below a certain level is already not a real bank. For our country, 50 to 100 banks is more than enough. A radical reduction in the number of banks will be a healthy step and will not negatively impact the financial system.

— Is it possible that when we discuss banks, we are actually talking about the past, and soon banks will be replaced by fintech? 

— I think that very soon the market will not be the same anymore. However, the direction specific changes will take is the subject of heated debate and analysis. We live in dynamic, interesting times.