Trust Bank forecasts profits of 1-1.5 billion roubles for 2013 and expects a 20% increase in loans
Trust Bank, whose products over the last few years have been advertised by the Die Hard star Bruce Willis, plans to open 50 additional branches in the next few months. Growing infrastructure is an expenditure few banks can afford these days. Bank Chairman Fedor Pospelov talked to RIA-Novosti about Trust’s plans for expansion and investment, the strategies regarding capital a nd risk and its plans to promote perpetual bonds.
- Russian banks earned record profits last year. What is Trust currently investing in, and what are its forecasts for 2013?
- It is important to understand that numbers taken out of context are relative. Banks use different strategies in business and despite the market being difficult or sluggish, some participants are trying to expand. The last few years have not been particularly favourable to the financial sector, yet Trust is always evolving, resulting in an increase in spending. In 2012, we opened about 300 “mini” offices which on the one hand allowed us to double our infrastructure, but on the other affected our financial results. Here the speaker is not talking about a beneficial influence of the expansion the infrastructure, on the contrary – he wanted to point out the effects of the additional expenditures on the financial results.
In 2013, we plan to open about 50 full-scale branches and establish ourselves in cities where we have no presence as yet. We are looking at the financial data of towns with a population of over 30,000, and we have a clear idea which of those 50 cities, with a population of between 30,000 and 200,000 people, we want to be in.
A mass launch of new branches requires considerable expenditure, which very few can afford today. Moreover, last year we strengthened our management team – and as you know, recruiting top managers from the open market also costs a considerable amount of money. In 2012, the forecast was for Trust to make about 1.5-2 billion roubles in profit (excluding investment in infrastructure). This year, according to the Russian Accounting Standards, we are aiming for pure profit of 1- 1.5 billion roubles, with 50 new offices taken into account.
- What additional profit did your “mini” offices help you make?
- I think I should paraphrase: what would have happened if we had not opened those 300 offices? I think our sales would have gone down. But as a result of launching the new offices, sales actually grew by about 20%. And taking into account that many of our products are for the long-term (3-5 years), this investment into infrastructure will pay off, should the country remain stable, which is beyond our control.
An open market means the quality of the flow of borrowers is becoming lower, and there are several ways you can deal with it. Here the speaker points out the lower quality and not the quantity of clients coming to the bank. For example, you can relax your risk policy – the bank will not be lending less, but it will lower its risk indicators. You can also leave the risk policy as it is but then you will give out fewer loans as there will be insufficient number of clients meeting the criteria.
There is a third way – the way to extensive growth, which Trust follows. We understand that there is no potential to substantially increase the numbers of quality borrowers in areas where we already have presence; not unless we want to weaken our risk policy (and this is not something we wish to do). This is why one should spread geographically, find new cities and find new clients there. This expansion strategy cannot go on forever, however, but at the moment we have the potential for extensive growth if we follow this particular strategy.
- What type of growth have you planned for your credit portfolio, taking into account the Central Bank’s measures aimed at tempering the growth of consumer lending?
- I estimate that in 2013 we will show growth of about 20%. This is due to the regulator’s measures, a rather sluggish market and Trust actively restructuring its portfolios. Over the last few years, we have changed our asset structure considerably, by decreasing lending to corporate clients. From 2009-2012, we focused on consumer cash lending, and loans to small and medium-sized businesses (SMEs). Following that, we lost the “S”, and in 2012, we lost the “M” out of the SME abbreviation. This is due to gradually decreasing the size of loan to individual borrowers (from US$5m to 1.5 million roubles). We have also stepped away from the expensive, subjective and risky technology of individual evaluation of the borrower.
Our goal was to build a “loan factory”, which we did, and today we are working with small businesses (individual entrepreneurs primarily), based exclusively on score models. If a person, say, has two kiosks and three vans, he is our client. The owner of a company with 50 employees, formally considered as a small business by Russian law, is not our client really.
- Which products is the bank focusing on for its business growth?
- We have largely turned towards retail. If in 2011, Trust issued US$100m loans to individual borrowers and US$100m to SMEs, today we loan up to 1bn roubles a month to SMEs, but have considerably increased the amount we loan to individuals. Additionally, if in the past our main product was cash loans, for the past eighteen months we have been actively promoting POS-loans and growing our credit cards portfolio. Naturally, we have not had 20% annual growth in these areas; we have had a two-fold growth in credit cards (up to 11 billion roubles). This year, we want to increase this portfolio two-fold (up to 20 billion roubles). This is an aggressive growth made possible by encroaching into our other products. Just like our colleagues in the market, we think through operational costs and we understand that a credit card is the optimal product for an effective client relationship: they remain faithful, you can track their activity and you can easily control their credit limit; for example, we can increase the amount they can borrow while lowering their interest rate at the same time.
- A bank’s rather high loan growth always gets the Central Bank’s attention…
Trust is a dynamically developing bank which is focused on individual customers (both in terms of liabilities and assets). Therefore, we are under constant attention from the regulator, and since we are not doing anything outside the norm, we are not afraid of attracting additional attention.
- What are your plans this year regarding POS loans?
- POS loans come with rather high risks and operational costs. We have deliberately slowed down the active growth in this area. At the same time, Trust has a 6 billion rouble portfolio, which we maintain. However we are not trying to compete with state lenders operating in this niche. As a rule, new players tend to operate within federal networks, but we have never considered this a priority. Trust was a relatively late comer onto the market of POS lending. From the start, we have settled on a slightly different approach – we work with regional chains and individual stores. Obviously, we have more complex logistics and set ups, but it is worth it – our colleagues from other commercial banks are starting to feel the pressure from Leto Bank and Cetelem Bank for instance, whereas we are feeling rather confident about our own position.
- Will you slow down with regards to the release of other products?
- In our case, we are talking about the lack of active growth, but not cutting down on lending. Trust is not closing its POS lending programme, it is only stopping active growth in this area. For example, during 2012 we increased the number of operators at our call centre dealing with online applications. We have reached a plateau where we would like to remain until, at least, the end of 2013. Considering the growth in other areas of our business, in the second part of the year the significance of the online channel will decrease in relative figures – just like the significance of POS lending in terms of new clients.
- Where do you see your growth areas?
- From the beginning of this year, we are actively growing our corporate sales channel as we see lower risks there.
- Isn’t the profit margin smaller here?
- The gross profit margin here is lower. A clear margin at normally lower rates can be the same or higher than you would have in the open market, as the cost of client acquisition and risk is lower when you are working with corporate clients.
- Speaking about risks, many banks say that risk increases when it comes to consumer loans. Do you see this tendency in your portfolio?
- No. We have seen a drop in the quality of the incoming flow of potential clients – certain groups have taken out too much credit. We are seeing more customers who miss payments, including over a long period of time. Accordingly, the number of loans we approve for new clients is going down. For this reason we are looking at developing other opportunities.
In particular, we are growing our corporate channel, working with existing clients, and so on. Therefore the quality of our new client base remains the same as we have a selection mechanism in place.
- Can you quantify the percentage of missed payments in your credit portfolio?
As per our forecast it is about 5.9%, which does not exceed our competitors’ indicators.
On the whole, there is a tendency in the market to lower risk indicators, but this has less to do with the quality of clients in the portfolio, and more with the worsening of payment discipline as well as the double standards of some government agencies in this regard. Today the collection rate is getting worse everywhere – it is the same for phone operators and utility companies.
- How long did it take Trust to build up a reserve following the new requirements (which increased the level of reserve payments for unsecured retail loans), and which were released by the Central Bank in March?
- Of course, we, just like other banks are creating reserves following the changes now required by the Central Bank. According to our projections made at the end of 2012, we estimated that those innovations may cost us between 1 to 2.5 billion roubles. A more exact figure depends on many factors, including the portfolio turnover. Most of our products have a five-year term, while an average loan term is shorter; we observed a tendency to shorten them even more. We welcome early loan repayments, because it means we have chosen the right client. We offer new products to “good” clients, but this is considered to be a new portfolio. A quicker portfolio turnaround means that we have to create bigger reserves than originally planned.
- Will Trust lower its credit rates in the light of yet another requirement from Central Bank which raises risk ratios in the calculation of capital adequacy if the full cost of the retail loan exceeds 25%?
- Trust is not lowering its rates as it were, but we are re-considering plans for the issue of various products – offers with lower rates have received priority status in our portfolio structure as they create less pressure on the capital. We have turned towards the corporate channel, as it has lower risks and it costs less to acquire a client, allowing a bank to offer products with lower base rates.
- It is not a secret that Trust does not have extra capital…
- We are implementing our strategy with the capital, and our own capital adequacy ratio is within the acceptable corridor. It also meets all the requirements set by the regulator. At the same time, one needs a maximum amount of leverage for the bank to be effective when it comes to the working assets to capital ratio. We maintain it at 10% to 11%, which shows its maximum profitability. When it comes to this indicator, “higher” does not mean “better”.
- Do you have plans to increase your capital this year?
- It grows in part due to the capitalisation of profits, and in part due to contributions by shareholders (although we have not resorted to this for a number of years). We had a perfectly normal, rational idea – the business must pay for itself and find avenues for growth within itself. We were able to achieve this over the last few years, but when, in a short period of time, the rules changed, we were forced to turn to the shareholders who invested an additional US$50m.
We are planning to raise capital this year and are currently preparing for the bonds issue – we want to see how the market will react to them. Naturally, the bank is interested in first-rate capital; this is why we are focused on perpetual bonds, and today we are working together with the Central Bank to this effect. If the regulator agrees the final terms and quickly approves our project documentation, we will aim to attract capital from the market via this tool as soon as 2013.
- In which currency will you borrow?
- We have not decided which currency the bonds will be in; maybe in Roubles.
- What level of yield would you be happy with?
- We have in the market “perennial” instruments belonging to a number of banks. For example, you can purchase VTB securities with a coupon payment totalling 9.5% in US dollars.
We understand that Trust is not VTB, and must provide a premium compared to a state bank. Just how big this premium should be, is up for discussion. We have a pretty good understanding of the limits, from 9.5% rising up to a maximum of 11%.
Our rouble-based investment tools yielded a 13% interest, but that happened at a time when our deposit rate was slightly higher. Today, the rates are lower and if exchange rates stops growing at such a fast pace, clients will once again be prepared to bet on the rouble long-term, and we will go down that route. If monetary powers weaken the rouble exchange rate, it will be difficult to offer a long-term rouble tool. We have a Russian proverb that says that “you count the chickens in the autumn”, so we will take a decision in the autumn.
- What are your plans concerning your Ukrainian subsidiary. Ukrainian media say you are selling it for 12 million Euro. Is this true?
- We are pretty happy with the way business is growing in our Ukrainian subsidiary. Its sales volumes are growing, it’s got value and is earning money. The motivation to sell only arises when something is not working or when someone urgently requires the money or there is no understanding of the development strategy… We do not have these problems. The Ukrainian bank is definitely not for sale.
In Ukraine, we are implementing the experience we have acquired in Russia. We think this experience is representative as local peculiarities are not universal. At the same time, just like in any other business, everything is very rational, and if we receive an interesting offer attractive to our shareholders, they will, at the very least, consider it.
- How effective has your Bruce Willis advertising campaign been in attracting clients?
- Here is a telling example: we launched the deposits advertising campaign with Willis in December 2010, and in just one month, it had brought in an additional (i.e. above the planned) 11 billion roubles of private individual deposits. In January, when everyone was back at work after the holidays, the first thing we did was to take down billboard advertising of the deposits. In 2011, the bank’s retail portfolio increased by 70%.
Without a doubt, as far as drawing clients’ attention to the bank’s products and services, is concerned, every dollar spent on the advertising campaign with the Die Hard star has seen a return on our investment. Additionally, since Bruce Willis has been involved in the publicity campaign, brand recognition has increased considerably: last year, Trust was voted the third most recognised bank by Russian consumers. The fees of a leading Hollywood star are not that different from those asked by top Russian celebrities, but using Bruce Willis is, without a doubt, far more effective.
Interview by Tatyana Chubasova