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Belarus’s modernisation push moves up a gear

With its infrastructure being overhauled, backed by private money, a renewed focus on SME lending and mobile banking taking off, Belarus appears to be on an upward spiral. 
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Belarusbank

Belarus’s banks are on a major drive to finance the country’s capital-intensive infrastructure projects, lend to small and medium-sized enterprises (SMEs) and provide credit to exporters. The Development Bank of the Republic of Belarus (DBRB), a government institution, has been leading the charge since its creation in 2011 and the pace of activity is speeding up.

Several of the DBRB’s milestone projects have come to fruition in 2019. One was the completion of Minsk airport’s second runway. “This allows it to accept the largest airplane in the world, the Airbus A380, in any weather conditions,” says Andrei Zhish-kevich, the DBRB’s chairman.

Another was the bank’s first ever issuance of Eurobonds, which raised $500m and Rbs210m ($102.7m). “The Eurobond tranche in the national currency was a historic event for the Belarusian financial market,” says Mr Zhishkevich. “For the first time in history, the Belarusian rouble has left the circle of the domestic financial market, and we created a new exotic product for investors in local currencies – the ‘squirrel’ [‘belka’ in Belarusian] bond.”

The DBRB has increased its efforts to attract inward foreign direct investment by organising an annual conference entitled Belarus Crossway, the second of which was held in September 2019. “It brings together representatives from all major Belarusian banks, exporting companies and their financial partners from all parts of the world,” says Mr Zhishkevich.

EBRD assistance

The biggest foreign investor in Belarus is the European Bank for Reconstruction and Development (EBRD). It has a four-year strategy for long-term debt and equity financing in the country, which ends in 2020. The objectives are to develop the private sector, promote privatisation and encourage private sector participation in public infrastructure.

“By the end of September 2019, we had invested Ä2.53bn in 117 projects in various sectors [in Belarus],” says Alex Pivovarsky, head of the EBRD’s Belarus office. Its current project portfolio in the country is Ä696m, of which financial institutions account for 26%.

In 2018, the EBRD lent $10m equivalent in local currency to Belarusky Narodny Bank, and the same amount to Minsk Transit Bank, to on-lend to local micro businesses and SMEs. These were the first ever local currency loans to banks in Belarus. “It is very important that we have been able to organise financing in Belarusian roubles, which is now totalling Ä100m,” says Anton Usov, the EBRD’s chief spokesman for eastern Europe.

“This is something we do in other countries and now is Belarus following the trend,” he adds. “The authorities support us in this undertaking because they recognise the importance of local currency lending and the role it plays in achieving macroeconomic stability and building investors’ trust in the country. Our plan is to continue tapping the market, providing there is appetite from the real sector.”

The EBRD is also advising the government on its privatisation plans for Bank Dabrabyt, which changed its name from Bank Moscow-Minsk in early 2019, and Belinvestbank, both of which are scheduled to be privatised by next year.

Belagroprombank’s SME focus

Belarus’s banks are falling over themselves to lend to SMEs in this way. As well as funds from the EBRD they are borrowing from the European Investment Bank (EIB), the DBRB and Abu Dhabi’s Khalifa Fund.

Anatoli Lysiuk, chairman of Minsk-based Belagroprombank, says SME lending is one of the most important and fastest growing parts of its business. The bank is the country’s second largest by Tier 1 capital according to The Banker Database, and the fifth biggest in the Commonwealth of Independent States (CIS), not far behind Belarusbank, which is ranked first in Belarus and second in the CIS.

In February 2019, the EIB lent Ä50m to Belagroprombank, Ä25m to Belarusbank and Ä84m to Minsk Vodokanal, the capital’s water utility company, in the EIB’s first loans in the country. The loans to the two banks were for on-lending to SMEs.

“This project [is the first of its kind] for Belagroprombank, as well as for the EIB within the framework of its co-operation with the Republic of Belarus,” says Mr Lysiuk.

Belagroprombank is also creating business incubators for start-ups, called ‘centres of attraction’, to provide banking, insurance, consulting and accounting services.

Banking business slowdown

Non-performing loans have been a problem for the Belarusian banking sector in recent years, but the situation appears to be improving. “The level of distressed assets in both the banking system of Belarus and Belagroprombank has stabilised,” says Mr Lysiuk. “We do not expect a significant increase in bad debts… and for the next two years the bank will maintain a sufficient level of loan-loss reserves.”

Despite Mr Lysiuk’s optimism, Fitch Ratings’ conference on Belarus’s banking sector in Minsk in July sounded a more realistic note, summed up by the event’s title: ‘Growth moderates, asset quality still vulnerable.’

The agency rates six Belarusian banks. It says their issuer default ratings (IDRs) are underpinned by potential state support (in the case of Belarusbank, Belinvestbank and DBRB) or support from Russian owners (in the case of BPS-Sberbank, BelVEB and Belgazprombank). Their IDRs are therefore dependent on Belarus’s sovereign rating or Russia’s country ceiling, and all six banks are rated B/stable.

Fitch expects “credit growth to moderate” in 2019 to 5% to 6%, down from 9% in 2018, “given the slowing economy, the continued phasing out of government-directed lending, still-high leverage in the corporate segment and tighter regulatory standards for retail lending”.

In addition, it views the banks’ asset quality as “vulnerable” due mainly to the weak financial profiles of their corporate borrowers, and the fact that a lot of that borrowing is in foreign currency.

Compared with other countries in the CIS region, Belarusian banks still have relatively high ratios of non-performing, impaired or risky loans. This reflects their large exposures to highly leveraged corporate and public sector borrowers.

“Material improvement in asset quality is unlikely in the near term given Belarus’s slowing economy,” Fitch cautioned. Even a moderate macroeconomic stress or currency depreciation could push significantly more loans into the non-performing or stressed categories.

Alfa-Bank gets mobile

As in most other countries around the world, mobile banking is becoming the channel of choice for many retail customers. Alfa-Bank Belarus, a subsidiary of one of Russia’s biggest banks, won The Banker’s 2018 Bank of the Year Award for Belarus because of its mobile-first strategy. Mobile phone and tablet services are regarded as the bank’s main channels, not ancillary channels, for service and sales, allowing customers to open accounts, make payments, apply for loans and do other things remotely.

“Adapting quickly to market conditions, both in the region and globally, Alfa-Bank operates as a fintech company rather than a traditional rigid financial organisation,” says Rafal Juszczak, who was Alfa-Bank’s CEO at the time of this interview, but has since moved to become CEO of Alfa-Bank Ukraine. “Since 2016, we’ve been running our mobile banking offering under a separate brand, InSync,” he adds. The InSync app has 250,000 users, with about 100,000 using it every day. It now handles nearly 1.5 million financial transactions a month, twice as many as in 2018.

“The success of InSync has allowed for a 92% ‘transaction offload’ – financial transactions performed through digital channels versus offline. It also accounts for 15% of loans every month, and up to 70% of monthly deposits,” says Mr Juszczak.

In 2018, a ‘video-selfie loan’ was made available on the app, allowing existing and new customers to use the video function on their mobile device to borrow money. “It incorporates video and voice verification, using blockchain technology,” says Mr Juszczak.

“The important part of this project was the development of end-to-end fully automated credit scoring. This allows Alfa-Bank to fit the ‘time-to-yes’ procedure into a mere seven-second window. Such speed is extraordinarily fast for the Belarusian market and even for global financial organisations’ standards.”

Breaking with tradition

In 2018, Alfa-Bank also launched InSync Now, a micro-media outlet and social media tool within the app. Five posts are published each week, each of them getting between 5000 and 8000 views on average, and each post getting between 100 and 1000 “likes”. This helped Alfa-Bank Belarus pick up the social media category in The Banker’s Technology Projects Awards 2019.

“Since we began our journey towards the digital bank, we’ve noticed how the traditional channels of interaction with clients have changed,” says Mr Juszczak. “They have not become unnecessary – their functions have just changed.

“Simple operations – payments, opening accounts and so on – are migrating to the mobile application. This, in turn, is allowing branch staff to focus on consultations. If you plan to take out a large loan, then you probably want to speak personally with your manager, and now the branches have time for such consultations. As a result, the format of branches is changing – instead of them being places for quick operations, they are turning into comfortable offices where you can drink coffee while talking to a personal manager.”

In the call centre, Mr Juszczak reports a migration from the voice channel to the chat function. “It is often easier for customers to write a chat than to make a call. For the bank, the chat is also a more effective channel of interaction,” he says

The culture of Alfa-Bank Belarus, and how people see it, has been transformed by its mobile strategy. By creating a mobile bank within a bigger bank “customers relate to InSync as an extension of themselves”, says Mr Juszczak. “It’s the concept of psychological ownership, which means that customers become very emotionally invested in a service or product.

“You see examples of this everywhere, from Apple to Star Wars, and we are starting to see something similar with our mobile banking product. By changing the culture and building the right processes, it is possible to create a bank that is perceived as a trusted partner and friend, rather than a boring and hostile institution that controls the customer’s money.”

The state of the economy

Fitch Ratings gave Belarus a B/stable sovereign rating in its July 2019 full rating report. It said this reflected several positive characteristics about the economy, such as the improving macroeconomic stability, strong income per capita, strong human development indicators and a clean debt repayment record.

But these plus points are offset by several negatives: low foreign exchange (FX) reserves, relatively subdued gross domestic product (GDP) growth prospects, government debt exposed to FX risk, a weak banking sector, high external debts and weak governance indicators relative to other countries in the region.

Dmitry Krutoy, Belarus’s minister of economy, not surprisingly prefers to accentuate the positives. He says the country’s economic stability is underpinned by a “credible macroeconomic policy framework, a more flexible exchange rate, a strong commitment to limiting inflation, relatively low government external debt and a prudent fiscal strategy”. This is despite the fact that “global growth is sluggish and being weighed down by prolonged trade tensions”.

Belarus’s consumer price index is at a “historically low level”, which has promoted “a faster than anticipated reduction in interest rates” and “a positive impact on business recovery”, he adds.

Belarus’s GDP rose 3% in 2018, reflecting structural policy measures undertaken by the government in 2015 to 2017 to support private sector growth, economic diversification and the export of goods and services.

GDP growth in 2019 will be lower, “reflecting the impact of geopolitical tensions, a broader slowdown in Belarus’s key trading partners and weaker investments”, says Mr Krutoy. But growth should accelerate in 2020, supported by recovering corporate investment and government investment in infrastructure and other projects.

As for the banking sector, “the risks taken by banks are fully covered by their regulatory capital and the banking business remains profitable”, says Mr Krutoy. Risks to banks are decreasing, partly due to enhanced financial regulation and supervision.

SOE pressure

The International Monetary Fund and EBRD have been encouraging the Belarus government to reduce the size of the country’s large state-owned enterprise (SOE) sector, because they say it hinders economy growth, productivity and competitiveness.

Mr Krutoy says this advice is being followed. “We are addressing the issue from two sides, with a gradual approach. On the one hand, we are working on enhancing the competitiveness of the SOE sector; on the other hand, we are creating conditions for robust growth in the private sector, especially among SMEs,” he adds.

Some progress has already been made. Mr Krutoy says: “The public sector’s share of the economy is about 45%; 10 years ago, it was 10 percentage points higher. Another positive sign is that SMEs are growing. Their share of GDP has grown one-and-a-half times to 30%.”

Foreign investment in Belarus’s private sector is being encouraged through tax and customer incentives, free economic zones and technology and industrial parks.

“Moreover, together with the EBRD, we plan to create a Foreign Investment Council under the auspices of the Belarusian president to offer international investors the opportunity to conduct regular policy dialogue with the authorities,” says Mr Krutoy. “We plan to run the inaugural meeting on February 7, 2020.” 

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