Two years of recession and periods of currency depreciation have put stress on Belarus’s banks. But some recovery is in sight, thanks to a slowly improving economic outlook, a monetary policy focusing on greater exchange rate stability and cautious steps towards the privatisation of a largely state-owned sector. Still, experts agree, the resolution of the banking sector's non-performing loan (NPL) ratio and a reduction of the economy’s high degree of dollarisation need to be addressed.
While the National Bank of Belarus, the country's central bank, does not report on NPLs in the sense of overdue loans, it does publish data on problem loans, relying on a more qualitative assessment of a borrower’s credit quality. Figures from 2015 and 2016 show that on average, problem loans have risen across the sector: from 7.3% in December 2015 to 14.7% at the end of 2016. And as demand for loans is still limited (although not contracting as in 2016), comprehensive strategies across banks are vital to reduce NPL ratios.
Updating NPL strategies
According to Bernd Rosenberg, deputy chairman of the management board at Priorbank, NPL reduction is “a very important task for the Raiffeisenbank International Group in general”. Priorbank is the largest foreign and privately owned bank in the country by Tier 1 capital, and has a majority shareholding by Austria’s Raiffeisenbank.
“At Priorbank, NPLs peaked at a little above 10% in 2016,” says Mr Rosenberg, adding that the ratio now is “already much lower” and that “the new inflow of NPLs is slowing”. Still, he would like to see additional measures to support a clean-up of NPLs across the sector through reforms to the laws governing debt sales. “Currently, you are not able to sell debt at a discount to non-bank investors, you can only refinance it with another bank,” he says. “There is interest [from] banks to sell, but investors would only buy at a reasonable price.”
According to Dmitry Kalechits, deputy chairman of the board of the National Bank of Belarus, both the National Bank and finance ministry are looking at ways to “establish a market for bad loans”. “Banks will be able to sell bad debt at a discount – this is a very important project for us,” he says.
Previously, the Belarusian government has intervened several times to improve the balance sheet, especially of some state-owned lenders, “by swapping NPLs in the wood processing and agricultural sectors for central and local government bonds”, according to rating agency Standard & Poor's. These bad loans were related to state-owned enterprises (SOEs), one of the main areas of NPLs in Belarus alongside foreign currency-denominated loans.
But with rising government debt and a need to tighten fiscal policy further, the administration’s ability to fund such NPL security swaps will likely reduce going forward.
The need for de-dollarisation
Aside from pressures from uneconomic SOEs, the Belarusian economy’s high degree of dollarisation also bears significant risks for the country’s banks. At the end of 2016, the share of dollar-denominated loans was about 60% of total loans in the sector, according to S&P, exposing borrowers and lenders alike to substantial foreign exchange risks.
While the central bank has taken key measures to stabilise the currency, it has also sought to reduce inflation and with it the refinancing rate, enticing lenders and customers to bank in local currency instead. The refinancing rate was gradually reduced from 24% as of April 2016 to 11.5% in September 2017, which has caused a “move from lending in foreign currency to lending in Belarusian rouble”, according to Priorbank’s Mr Rosenberg.
The stabilisation of the currency and an increase in the reserve requirement on borrowed funds in a foreign currency have also enhanced “the attractiveness of savings denominated in Belarusian roubles”, according to BPS-Sberbank’s chief executive and chairman of the executive board Sergey Inyushin. He adds that this has strengthened the trend towards a reduction in the share of foreign currency deposits at Sberbank, the country’s fourth largest lender, from 77.7% at the beginning of 2016 to 61.3% as of September 2017.
According to Mr Kalechits, both local currency lending and deposit taking have increased across institutions.
The increase in local currency deposits is crucial since, as in the past, depreciation in the Belarusian rouble has added to a weakening in banks’ Tier 1 capital ratios, according to rating agency Moody’s. Still, all banks are meeting minimum capital adequacy requirements of at least 10% (11.25% including buffers), according to Mr Kalechits. “The regulatory capital adequacy in the banking sector as a whole totalled 19.3% as at September 1, 2017, creating a considerable safety margin,” he says.
However, more commitment from the government is required if bigger steps towards de-dollarisation are to be made. With Belarus having signed up to a local currency initiative with the European Bank for Reconstruction and Development (EBRD), EBRD country head for Belarus Alexander Pivovarsky notes that “the government will now have to start issuing bonds in Belarusian rouble”.
“One of the government’s roles in developing the capital market is becoming an issuer in the market,” he says, adding that of course the first bond issues would come at a higher cost “but when there is more liquidity, the premium will decline and prices will get more attractive”.
Attracting investors
Government action and commitment is also required to change the nature of the Belarusian banking sector, which is widely dominated by state-owned lenders. International observers underline the benefits of a larger market-owned banking sector as, they say, this could improve operations and risk management.
Among Belarus’s 10 largest lenders (which account for some 96% of assets), three banks are owned by the Belarusian state and four by the Russian government, while there are only three majority privately owned banks: one each from Austria, Belarus and Russia. But crucially, the share of total assets between the country’s largest two lenders, Belarusbank and Belagroprombank – both state owned – equates to about 60%, according to data from The Banker Database. But things could change, if only slightly.
The government announced plans to sell off a minority stake of up to 25% in the country’s largest lender, Belarusbank, to a Western investor in 2016. But so far there has been little movement. An easier sale could be the country’s fifth largest bank by assets, Belinvestbank, which is working with the EBRD on a pre-privatisation programme.
The EBRD, which used to focus on providing credit to Belarus’s private sector only, adopted a new country strategy for Belarus in 2016, allowing for the development bank to lend to SOEs slated for privatisation and to support the public infrastructure sector. The change enables the EBRD “to better support the transformation of the economy”, says Mr Pivovarsky, after a difficult period when “the few commercial banks were very conservative in their lending policies” during the 2015-16 recession.
The new strategy further opened up the opportunity for the EBRD to lend to Belinvestbank in an effort to improve its capitalisation ahead of an anticipated privatisation. The EBRD agreed a €50m subordinated loan to Belinvestbank and is working on improving the bank’s corporate governance before it considers whether to take a stake in the bank on a standalone basis or along with an international banking group within the next couple of years.
Another privatisation candidate is the smaller Bank Moscow-Minsk (BMM), which accounts for only about 1% of country's banking sector assets. Currently owned by the central bank, BMM received a €20m credit line from the EBRD and Mr Pivovarsky expects that it could be ready for privatisation even sooner.
In both cases, the state is looking to sell the full equity stakes of the banks and Mr Pivovarsky notes the government “is determined to attract strategic investors to both lenders”.
Efficiency savings
Yet, as much as privatisation could help the overall efficiency of Belarus's banking sector, it is likely to make the environment more competitive. Lenders are aware that in a falling interest rate environment, profitability is set to decline. And fierce competition over the best borrowers further highlights the need for cost savings and potential for consolidation.
Alfa Bank Belarus, the eighth largest bank by assets in the country, has already taken part in some level of consolidation, having purchased and integrated the assets of Belrosbank in 2012. CEO Rafal Juszczak believes further consolidation is possible, especially “in order to create new hi-tech services or to develop new forms of banking services, such as banking marketplaces”.
The National Bank of Belarus supports technological optimisations across areas such as electronic signatures and blockchain for letters of credit, allowing banks to also target digitalisation as a way to achieve more efficiency. Priorbank was one of the first banks to give customers the opportunity to pay through their smartphones, and it is also using voice biometrics, according to Mr Rosenberg. “This is very convenient for our customers but can ultimately also be a good tool to banks,” he says.
With much potential for change ahead, all eyes are on what the future holds for Belarus’s banks.
