Times are tough in Belarus. The economic and geopolitical troubles in its larger eastern European neighbours Russia and Ukraine have filtered through in the form of an economic slowdown, a decline in exports and a devaluation of the Belarusian rouble – all of which are putting pressure on the country’s banks. As capital bases and asset quality are in decline, banks are now hoping that financing small and medium-sized enterprises (SMEs) could be the solution to at least some of these problems.
Belarus, a former Soviet Union state run by recently re-elected president Alexander Lukashenko, spans 207,600 square kilometres west of Russia, north of Ukraine and bordering the Baltic states and Poland to the north and east. Its location makes it a transit country, so it has therefore suffered since Western sanctions were imposed on Russia.
The Belarusian real economy contracted by 2% year on year in the first three months of 2015, compared with gross domestic product (GDP) growth of 0.7% in the same quarter in 2014. And the economic downturn is deeper than expected, says Francis Delaey, head of the European Bank for Reconstruction and Development (EBRD) in Belarus.
“Belarus’ high dependency on Russia – it is the country's largest trading partner, sole energy provider and main financial backer – is exposing it to significant headwinds,” he says. “GDP contracted by 4% in the first seven months of 2015. In the absence of international support, there is further downside risk.”
The International Monetary Fund’s World Economic Outlook forecasts a 3.6% contraction in the Belarusian economy in 2015 and 2.2% in 2016, at constant prices.
Weighed down by Russia
While the devaluation of the Belarusian rouble was necessary for the external adjustment, it has been severe. The official exchange rate to the US dollar has risen from Rbs14,377 in January of this year to Rbs17,662 in September. Even compared to the troubled Russian rouble, the rate has increased by Rbs39 to Rbs264 in the same period.
This devaluation “increases credit risks and triggers negative balance sheet effects”, according to Mr Delaey, while “the tight fiscal and monetary policies pursued by the authorities to address imbalances will also affect domestic demand”.
With average growth rates about 5% over the past 10 years, the contraction in the economy is unusual for Belarus, according to Alexander Zaborovskiy, first deputy minister of the economy.
“Several years ago, nobody would have predicted this sharp decline in the oil price, the very sudden freeze in the Russian economy, the contraction in GDP and in investment demand in Russia, the very deep recession in Ukraine and the significant adjustment of the European currency,” he says. “Of course, this doesn't contribute to the competitiveness of the Belarusian economy and requires some adjustments to our economic policy, which we have done.”
Mr Zaborovskiy mentions a move by the country's central bank, the National Bank of the Republic of Belarus, to implement a flexible exchange rate regime in January, which supported, among other things, a reduction in the current account deficit.
Devaluation weighs on capital
Yet, the negative trends in the economy are also filtering through into Belarus’s banking sector. The number of banks operating in the country fell from more than 30 at the beginning of 2015 to 27 by September, largely due to erosion of the banks’ capital bases related to the devaluation of the Belarusian rouble, as regulatory capital is denominated in US dollars.
Victor Perepelitsa, acting chairman of the board at BPS-Sberbank, the country’s third largest bank by assets, notes that some smaller banks were hit by 2015’s devaluation. “After the devaluation, the level of capital at four banks was no longer sufficient to fulfil the regulatory requirements, [and thus these banks] lost their licences,” he says. "In this situation, universal banks are better positioned because they can compensate for lower income or losses in one segment with better performance in another.”
Dmitry Lapko, deputy chairman at the central bank, points out that the National Bank, together with the government, is working on a “comprehensive policy on de-dollarisation” of the economy, which includes plans to require banks to hold their capital in Belarusian roubles rather than foreign exchange. “This policy is aimed at a gradual reduction of market risk as well as interest rates,” he adds.
The central bank currently requires banks in Belarus to have a 10% capital adequacy ratio, and while the capital adequacy ratio for the banking sector was at 16.8% at the end of the second quarter 2015, it was 50 basis points lower than in the previous quarter.
“The majority of banks are protecting their capital by hedging their funds,” says Valery Smolyak, deputy chairman of the management board at MTBank, the country’s largest privately owned bank, which has its main shareholders in Belarus. MTB’s normative capital adequacy ratio as of September 1 was 16.7%.
Asset quality issues
Aside from capital requirements, the quality of the banking sector’s assets is the most pressing issue in Belarus. The National Bank speaks of a “deterioration in the quality of assets” related to the “economic state” of some of the country’s larger corporates. “Some enterprises have difficulties in servicing their debt,” says Mr Lapko. “As of September 1, non-performing loans have reached 6.7%, compared with 4.37% on January 1.”
Exports fell by more than 20% and exports to Russia by more than 30% in 2015, while 48% of Belarus’s foreign trade turnover is with Russia, according to Mr Perepelitsa, who adds that Belarus’s largest trading sectors are agricultural products, oil, natural gas and automobiles.
“It is obvious that the demand from the Russian side has decreased dramatically due to the [fall in the] oil price and sanctions and that is why the branches of our economy, which usually export, are more heavily influenced by this situation,” says Mr Perepelitsa.
He adds that Belarus’s exporting enterprises are “systemically important” for the national economy, which is why the problem of the quality of assets is now “typical for the whole economy”. Overdue debt in retail is much lower than in the corporate sector – at BPS-Sberbank overdue retail debt is about 0.4% compared with 2.7% in its corporate operations.
Meanwhile, according to the EBRD’s Mr Delaey, asset quality at state-owned banks may be “overrated” as they tend to “evergreen loans to state-owned enterprises”, which could suggest that NPLs are actually higher than stated.
He adds: “NPLs are expected to increase further as the debt-servicing ability of businesses decline with a drop in revenues and the devaluation of the Belarusian rouble.”
But National Bank’s Mr Lapko points out that bank-specific figures largely depend on the individual bank’s policies, the markets and risks it operates in – for banks specialised in retail banking, this could mean a higher figure could be acceptable and for those lending to the real economy it could be lower. “The results of stress testing confirm that banks are well capitalised in case of further deterioration in the quality of assets,” says Mr Lapko.
A concentrated market
Of the country’s 27 banks, as of the end of September 2015, the largest are the state-owned Belarusbank and Belagroprombank, which hold about 58% of all banking sector assets – mainly catering for the country’s largest corporates. Overall, the Belarusian state controls five banks accounting for 65% of all banking sector assets, while another 22% of assets are held by Russian state-owned banks.
This, however, could at least change slightly, with a memorandum of understanding over the privatisation of the country’s fourth largest bank by assets, Belinvestbank, signed by the Belarusian government and the EBRD. The plan includes the sale by 2020 of the government’s controlling stakes, for which the EBRD is ready to make pre-privatisation funding available, which could include taking an equity stake.
Until then, however, the largest privately owned bank is Priorbank, a subsidiary of Austria’s Raiffeisenbank, representing 4.4% of assets.
“The [Belarusian banking] sector is highly concentrated and marked by significant state involvement, both through ownership and state-lending programmes,” says Mr Delaey. “While there are no official figures, state-lending programmes are estimated to account for 45% of the total loan portfolio of the banking sector. The bulk of directed lending is composed of loans to large state-owned enterprises, agriculture and housing.”
The big chase for SMEs
In the quest for better quality assets, banks are increasingly turning to SMEs. Traditionally the specialism of only a few Belarussian banks, SMEs are attracting increasing attention, as it is the smaller businesses that are tending to be more successful within Belarus’s economy. Added to this, the government is further encouraging financing for the sector, meaning that most banks are vying for SME business.
Constantine Tsereteli, chief executive at Belarussky Narodny Bank (BNB), a bank focused on SME financing, says that all banks in Belarus are now considering targeting SMEs, “because they realise that the quality of the loan book is better in that segment and the non-interest income is much more attractive – at our bank it is up to 50%”.
BNB, a subsidiary of Bank of Georgia and about 20% owned by the International Finance Corporation (IFC), is one of the country’s smaller banks, with assets of $210m at the end of June. But BNB has found its niche with SME financing and private banking for business owners – a model that has proved successful.
BNB’s strategy is based on serving 150,000 to 200,000 unique SME entities in the country, according to Mr Tsereteli, and most of them are privately owned. In comparison, he suggests that there are only 500 to 1000 large privately owned enterprises in Belarus. And with a private sector employment rate of about 40% to 45% of the economically active population, he suggests that banks have “realised that the market is more likely to be in SMEs than in large companies and that is why we are concentrated there”.
According to Mr Tsereteli’s calculations, the current SME loan portfolio in Belarus is about $2bn.
Classifying SMEs
MTB similarly has SME banking at the core of its business, as well as retail banking. As of January 1, 2015, MTB had Rbs1410.7bn of loans to legal entities, of which 59% were extended to businesses in the micro, small and medium-sized enterprises (MSME) area. By September 1, MTB’s total loans to legal entities had increased to Rbs2120.7bn.
Mr Smolyak says that it is difficult to tell how big the SME segment is and who the market leader is in Belarus, as the only statistics published by the government differentiate enterprises based on the number of workers. This can be misleading in businesses with a high turnover but few employees, he adds.
Typically, banks classify MSMEs on an annual revenue basis, excluding value-added tax. In the case of MTB this means: 'micro' includes businesses with sales of up to $60,000; 'small' $60,000 to $2m; 'medium' $2m to $10m; while 'large' businesses have more than $10m of sales.
“We are working with the Belarusian Association of Banks, which has been proposing to make this information available between banks but the large banks don't want to share the information because they don’t want to show their small share in the SME segment,” says Mr Smolyak.
Despite the lack of openly available information on SME banking, he suggests that, apart from MTB, the three other leading banks in the segment are Priorbank, BNB and Belgazprombank, which is owned by Russia’s energy giant Gazprom and its affiliated bank.
But others have also jumped onto the bandwagon of late. BPS-Sberbank, traditionally more focused on catering for larger corporates, has also identified SMEs and retail banking as areas of focus, as has the country’s second largest bank Belagroprombank.
Pavel Vasilevsky, deputy chairman of the board at Belagroprombank, suggests that although the bank’s speciality is the funding of the agricultural sector across the production line, which is primarily represented by large state-owned enterprises, Belagroprombank also aims to support the development of the private sector.
“Our strategy for the next three years includes the goal to support SMEs,” he says. “Our competitive advantage is that Belagroprombank has a very wide network of branches, so we see ourselves as having a strong position in this segment.”
Cheaper funding through SME support
And while funding for Belarusian banks is not cheap – as of mid-October the general refinancing rate was 25%, overnight credit was 30% and interbank rates in Belarusian rouble were 21.9% – many financial institutions are receiving additional, cheaper funds through targeted SME-support lending.
Private sector banks such as BNB and MTB, as well as BPS-Sberbank, are enjoying co-operation with international financial institutions such as the EBRD, the IFC and Dutch development bank FMO, which do not work with the public sector in Belarus. The development banks are offering SME-targeted funds, which at BNB, for example, make up $35.7m of outstanding financial support. MTB has received $59m of international SME support since 2006, as well as a further $20m of credit lines related to trade finance.
All banks can meanwhile attract funds from local Development Bank of the Republic of Belarus, which in mid-2014 also launched an SME-targeted financing programme. The Belarusian Development Bank so far offers funds to 10 partner banks including state-owned Belinvestbank, Russian-owned Alfa-Bank, Bank VTB Belarus, Belgazprombank, Belvnesheconombank, BPS-Sberbank and Bank Moscow-Minsk, as well as BNB, MTB and Priorbank, and it expects to expand its range of partner banks in the future.
“Banking SMEs is one of the main areas of attraction for banks,” says MTB’s Mr Smolyak. “SMEs are more flexible in an economic crisis, whereas the big enterprises are feeling the slowdown in activity more, which makes SMEs one of the most competitive sectors going forward.”
