Victor Kapustin, CEO and chairman, National Bank of Ukraine
Andrei Kostin, CEO, Vneshtorgbank
Erik Sultankulov, financial director, TuranAlem Bank
EM: How strong is banking in the CIS generally?
Victor Kapustin: In November/December 2004 the Ukrainian banking system overcame a serious political crisis without losses, unlike the Russian one in the summer of 2004. Since then the system's liquidity has grown considerably. That resulted from both a more homogeneous composition of the Ukrainian banking system as compared to Russia, and professional and balanced policy pursued by the regulator of the National Bank of Ukraine – in that difficult period.
In general, shortcomings of the banking system are insufficient capitalization and low consolidation. The total banking assets to GDP ratio in Ukraine is still rather low at about 40%. Though the growth of assets in the Ukrainian banking system is impressive – about 30% per annum – there is too much to be done in order to make the banking system really strong and turn it into the engine of economic growth.
Andrei Kostin: Presently, the banking industry in the CIS in terms of its scale, both relative and absolute, is not yet comparable to that of the industrialized economies. In Russia, for example, bank assets still do not exceed 43% of the GDP, while in industrialized nations they account for 80–120%. At the same time, the Russian banking sector has demonstrated robust growth for the sixth year running, with lending to real sector, investment and household services developing at the fastest pace. If such tendency persists, the Russian banking system can and should become a major driving force of the national economy, while financial performance of the banking sector will continue its sustained growth.
Erik Sultankulov: Developments in the banking sector are closely tied to developments in each CIS economy. Looking at the last 10 years, different countries have been able to progress at different rates as a result. The major player is still Russia, and her influence extends into other former republics. But Kazakhstan's political stability has, I think, enabled us to gain an advantage over Russia in some areas. We have put in place the economic reforms necessary to be competitive. The banking system, in Kazakhstan at least, is now almost totally adjusted to international standards.
EM: What major trends should we expect in 2006?
VK: In 2006, the banking system will face a considerable number of tasks. At the macro level these tasks are: further reforms of the banking legislation, enhancement of the banking sector capacities, and at the level of each specific financial institution, improvement of competitiveness and efficiency of business; extension of the range of services as well as efficient mergers and acquisitions. In particular, it is necessary to note that the competition is considerably stepped up in view of the entrance of foreign banks into the Ukrainian financial market, which in the near future will be the furnace where some Ukrainian banks will harden and become stronger, and some will melt and disappear. To speak about major trends, these trends will be capitalization and consolidation of banks as well as M&A.
AK: An important factor to enhance the development of the banking sector in 2006 will be a further surge of foreign banks operating in the Russian and other markets of the CIS. Today, among the largest foreign banks who most dynamically and aggressively seek to gain a larger Russian market presence are the Russian divisions of such financial institutions as Citi, Raiffeisen, etc. Other leading global banks are also planning to get a larger footing in Russia. In 2006, this tendency will only build up, with these banks trying to reach out to both the most lucrative market segments and relatively new ones. Among business lines which are expected to be most popular with the Russian banks are lending to households, placement of customers' issues on the Russian and foreign markets, and investment banking.
ES: In general in the CIS, there is an increasing trend towards embedding democratic structures. Globally powerful states like the USA and the EU are influencing political developments and encouraging market reforms. This is a good thing and will help what we're trying to achieve.
EM: Where are the main opportunities in the banking sector?
VK: The development of household lending and SME financing, diversification of funding sources (including international capital markets) and enhancement of business efficiency are the major potential for banking sector growth.
Progress in household lending also shows significant potential growth. (The household loans to GDP ratio in some Eurozone countries is approximately 50% while in Ukraine this ratio is approximately 5%.)
At the same time, SME financial support will allow diversification of loan portfolios and avoidance of aggressive and "exhaustive" competition in order to attract big corporate customers. SME development for Ukraine is also the important factor for further economic democratization.
AK: At present, development prospects for the Russian banks mainly lie in raising long-term and large-volume funds that have recently become more available. Without such funds it is not feasible to ensure adequate liquidity under such long-term operations as investing into construction of new production facilities, or mortgage lending to households. Among the main factors facilitating the banks' raising long-term funds on both domestic and foreign markets are considerable volumes of forex proceeds resulting from super-high export earnings, increased households' income and people's restored trust in the banking system, and finally, investment-grade rating of the Russian Federation.
ES: The potential for growth is huge. If GDP per person is below $6,000, western banks are less willing to get involved. In Kazakhstan, the figure is now $4,000 and rising, which is a real signal to everyone to step up retail banking operations to meet demand for credit cards and other consumer services. We are also developing competitive mortgage products.
EM: One of the problems in the CIS, especially in Russia, is that there are too many banks. Is more consolidation probable?
VK: In fact, the Ukrainian banking system is "overcrowded", and 163 performing banks are too many for our country, especially if you take into account that over 45% of total assets are allocated in five top banks. A consolidation process is inevitable, and it will be supported both through the strengthening of regulatory requirements by the National Bank of Ukraine and growing M&A. However, changes that are too radical may have an adverse effect.
AK: Further consolidation of banks is inevitable. Taking into account pro-active relations of Russia with the global business community and its future accession to the WTO, floods of powerful western capital channelled into the Russian fledging banking system can just crush it. This is exactly what happened in many countries of eastern Europe, where domestic markets are now fully dominated by lending institutions belonging to the leading international financial groups. Therefore, Russian banks' owners will inevitably be faced with a need to consolidate their potential with other market participants.
ES: Consolidation will definitely continue. In Kazakhstan alone, the number of banks has reduced from 240 to 34, of which 14 have foreign participants. Of the 1,200 banks in the CIS, the bottom 50 will disappear, while the hundreds of middle ranking banks will have to consolidate. Russia itself should have about 340 banks in five years' time. Basel II's provisions on corporate governance will also facilitate further consolidation.
EM: How profitable is the CIS for foreign banks?
VK: The Ukrainian banking market has good perspectives based on the 47 million population of the country, the attractive geographic position, the export-oriented structure of the economy, with high capacity agriculture, and the well-educated and still cheap labour force. The Ukraine's status as an emerging market allows foreign banks to rely upon the high yield in the short and medium term.
AK: No doubt returns on operations in any emerging market are higher than those gained in industrialized countries. But this is not the only, and even not the most important factor to attract major international banks. The very name "emerging market", which is presently applied to the CIS, implies that this market is to continue developing even more energetically. Naturally, international banks are well aware of this growth potential and seek to best position themselves in this market while the current competitive environment there allows them to do it at the lowest costs.
ES: Foreign banks are getting a good margin of 3–4% and will continue to do so for the next five years. The important point is that our banks are now able to compete with them too.
EM: What is the most pressing challenge facing banks in the CIS today?
VK: Further capitalization and consolidation of Ukrainian banks, improvement of the corporate governance, further development of banking technology and risk management procedures for the purpose of credit portfolios quality improvement, risk mitigation and compliance with the Basel II requirements are prerequisites to ensure the Ukraine banking system is an efficient booster of economic growth.
AK: Admittedly, growing stabilization of the economic situation in Russia leads to fewer opportunities to get speculative trade income and to the need to build up active lending operations. But today a relatively low capitalization of the Russian banking system negatively affects its efficiency and capacity to meet the industrial demand for long-term investment financing which is most needed nowadays. Therefore, the issue of further capitalization of the Russian banking sector seems to be of crucial importance, with IPO a most promising perspective in this regard.
ES: On the whole, I don't see any major problems over the next few years, in terms of the global economic environment. It's really a question of staying the course of reform. Kazakhstan in particular has the human resources, raw materials, and proven ability to innovate when required to do so. We are a young, stable area with the ability to accept change.
Across the region, we are meeting the challenges, though at varying times. Russia and Ukraine only last year adopted the international regulations governing mortgage products that we in Kazakhstan implemented back in 1999. So it's a mixed picture. In general, all CIS economies are in need of capital investment and financial resources. It's our job to meet that challenge.