Bank goes public
The Bank’s annual meeting of shareholders has decided to issue new shares
Bank actively grows its capitalization: an increase of RUB 971m already took place
in March this year. On May 23, the annual meeting of the Bank’s shareholders further
resolved to raise funds amounting to RUB 2.5bn by issuing new shares. We have spoken
with Dmitry Leus, Chairman of Bank , about how the Bank plans to invest the new funds
and what rate of return investors may expect.
A RETURN ON INVESTMENT OF UP TO 40 PERCENT
- Dmitry Isaakovich Leus, which are the main parameters of the share issue?
- Dmitry Leus: The annual meeting of shareholders resolved to issue 2.5 million additional
shares at a nominal price of 1 rouble. The Bank may thus raise RUB 2.5m in new funds,
thereby increasing its capital base by 127%. As a result, Bank ’s overall capitalization
will amount to RUB 5.5bn. We plan to place these new shares on the Moscow Stock Exchange
in open subscription.
- What is the objective of the current shareholders in conducting an IPO?
- Dmitry Leus: The Bank is actively expanding. Its retail loan portfolio grew 2.5
times, its total assets amount to RUB 23.1bn. To take it a step further, Bank needs
fresh investments. A public placement will provide us with more favourable refinancing
conditions and may even lead to bond placements in the future...
- How did you come to this conclusion?
- Dmitry Leus: We have invested heavily in the Bank’s infrastructure. Since November
2012, we have actively expanded our branch network and have opened over 21 regional
offices. Overall, the Bank currently has a network of 70 branches stretching from
Kaliningrad to Novosibirsk, and from Surgut to Gelendzhik.
We have equally transformed the Bank’s governance by implementing a matrix model of
management (more than one reporting line). Our regional offices function like hubs
headed by local banking experts. In addition, branches have received a unified format
and branding with an equally unified client service using Group standards. We have
centralized HR procedures and our employees are highly incentivized.
- What rates of return may investors in Bank expect?
- Dmitry Leus: Since the beginning of the year, the Bank earned 30% on its capital
and there is significant potential for future growth. The Bank’s top management is
targeting returns of 35 to 40% over the next two years. This is our current roadmap
- a revised version of our long-term strategy will soon be published.
- This is the first time you raise public capital. What type of investor do you plan
- Dmitry Leus: The Bank’s business is sufficiently transparent to being accessible
to a wider audience. For the moment, the shareholders of Bank are its top management.
We are also in negotiations with a number of institutional investors.
- What is Bank ’s competitive advantage? What makes it attractive for potential investors?
- Dmitry Leus: The Bank’s business is very transparent and easy to apprehend. Every
month, over 10 000 Russian citizens become our new clients. These are individuals
and small to medium-sized businesses. This trend is accelerated by an increased presence
of points of sale all across the Russian regions, thereby doubling our customer base.
Our clients are becoming more loyal and have recourse to more than one product over
a longer service period. Alongside an increase in productivity, we observe that the
profit share stemming from our non-interest business is rising too.
PENSIONERS MORE DISCIPLINED THAN YOUNG PEOPLE
- Let us speak about the Bank’s core business in more detail. How does the Bank generate
- Dmitry Leus: In February 2012, the Bank presented a strategic plan focusing on high-yield
product lines. Traditionally, our main profit centre was in the domain of consumer
lending. Our corresponding credit portfolio constitutes approximately RUB 8bn, with
monthly new lending volumes ranging from RUB 700m to 1bn or, alternatively, 8500 new
credits each month. In this segment earnings derive largely from the Bank’s commission
and interest business. The commissions do not derive from arrangement fees (as this
is against the law in Russia), but rather from the insurance component within a loan.
Credit insurance is not mandatory, but we incentivize clients to buy insurance by
substantially lowering their interest rate in return. The insurance component constitutes
18.8 to 18.9% of all consumer loans. Put differently, if we award RUB 700 to 1bn in
credits per month we expect approximately RUB 180m in commissions income from these
transactions. On the other hand, our interest rates for credits vary depending on
factors such as the client’s overall assets and liabilities, his income situation,
age, in addition to other indirect indicators calculated by our credit analysts.
- Does the Bank engage into other forms of lending?
- Dmitry Leus: Of course. Our portfolio of mortgage loans amounts to RUB 1bn, not
including RUB 100m in car loans. We continue to lend to small and medium-sized businesses.
However, as you can see, the Bank’s strategic orientation is directed at high-yield
- Consumer lending is a risky business indeed. What is your default rate?
- Dmitry Leus: Our default rate is not higher than 6%. Bearing in mind that our consumer
lending portfolio is of relatively short existence (1 year), we consider this number
as high. We try to create a system of internal incentives keeping default rates at
a minimum. Also, we have created appropriate IT systems to monitor loans in default
and constantly work on our soft-collection department which works successfully in
identifying and resolving issues with late payers. We are also speaking to the 5 largest
domestic collection agencies. Accordingly, the situation is under control.
Our consumer loans come at a rate ranging between 50 and 60% p.a. (broken down into
a minimal credit rate of 36.9% plus the credit insurance component of approximately
19%). We tailor our credit products to market requirements and the composition of
our internal credit portfolio.
- Who is your typical client?
- Dmitry Leus: There are two categories of clients: we sell our normal “” loans to
clients between the age of 23 and 65. Pensioners up to the age of 80 may profit from
our “Pensioners” loans. I may add that we consider pensioners as our best clients.
They have few liabilities and possess a very high repayment discipline. In practice,
pensioners return loans by far more responsibly than our younger clients.
- What is the approval rate for consumer loans?
- Dmitry Leus: We approve only about 20% of all applications we receive (whereas our
competitors consider approval rates of 40% as “conservative”). In the beginning, an
application lands on the desk of our scoring experts who use various databases and
mathematical models in their analysis. Then the credit application is passed over
to our analytical team. Next, during the verification process (which we conduct for
all credits regardless of amounts), we ask the potential borrower to provide us with
two mobile and two land-line telephone numbers (private and work), which we call...
When calling the client’s employer we also use an alternative number we usually take
from the telephone directory or any other open source.
- How do you verify pensioners?
- Dmitry Leus: The process is almost identical. We have a method which gives us access
to average pension payments per region. If we are not dealing with military pensions,
average pension payments in Russia do not exceed RUB 5000 (USD 152) per month. Obviously,
we don’t call their employers, even if they are still working (unofficially). However,
we do call their neighbours and close relatives. We may also want to speak to their
children about the usefulness of a loan.
CALL CENTRES AS MAIN SALES DRIVERS
- How does the Bank stay in touch with its clients?
- Dmitry Leus: We work very closely with our clients. In the wake of the reorganization
of our back office, we have created a client service centre in Voronezh, comprising
a contact centre, our credit analysis team, the IT department, and operations.
A year ago, we have created a full-fledged call centre performing client advisory,
sales, and after-sales functions. In our Bank the main sales agent for new loans is
the call centre. Thus, the client has the opportunity to submit his credit application
by telephone. The actual signing takes place at a later stage when the client is physically
in the Bank. Let me add that our centre is very efficient. Two thirds of the 1500
credit requests we receive daily come in through the call centre.
When a credit has been awarded our quality management department enters the scene.
Their task is not only to monitor client satisfaction, but also to identify default
risk at an early stage. Thus, we usually give new borrowers a short welcome call and
ask them whether they have taken good note of the credit agreement. In case their
phone does not answer for five days, we contact our security desk. This enables us
to immediately address cases of fraud.
- How manageable is the structure of the Bank?
- Dmitry Leus: We use video surveillance systems allowing us to see what happens in
any branch of our regional network. Our specialists from quality management provide
real-time evaluation of our staff’s behaviour during client meetings and the on-boarding
process. A bank is first and foremost a service provider and we are well aware that
only high-quality service deserves customer loyalty.
- Is it very important for you to have real-time access to the Bank’s processes?
- Dmitry Leus: Yes, I think this is important, also in view of identifying any shortcomings
at an early stage - before they become systemic. In addition, the system informs me
about the number of credits awarded in every branch [Dmitry Leus turns around the
screen of his computer where constantly changing numbers appear...].
The computer system allows us to monitor the effectiveness of the Bank’s newly created
regional branches on-line. For example, as at April 29, fresh loans amounting to RUB
610m were issued. If we multiply this amount by 18.8% we get RUB 116m in gross revenues.
If we subtract from this amount costs of goods sold (approximately RUB 80m) and loan
loss reserves, we get the Bank’s net profits.
Bottom line, the Bank’s centralized system provides decision makers with an objective
source of information and may correct the regional management’s actions if need be.
We conduct conference calls with the regional leadership on a daily basis...
CHATTING WITH THE BANK
- Which growth perspectives do you see for the future?
- Dmitry Leus: Going forward we intend to actively develop a number of new financial
products. One of them is a lending product for small and medium-sized businesses which
is in the launch stage now. For historical reasons, we have a well-balanced mortgage
loan portfolio we would like to grow further should we be able to attract funding
at comfortable rates. In addition to cash loans, we would also like to grow credit
card loan solutions and plan market-entry strategies by October this year. Currently,
we are developing our own payment processor for credit cards and plan to integrate
it into the existing IT infrastructure.
- Such projects require substantial marketing efforts.
- Dmitry Leus: Correct. The Bank invests considerably into marketing - approximately
RUB 8.5m per month. Hence, every credit application the bank approves “amortizes”
RUB 1000 in marketing costs. As we lend massively in the Russian regions we used to
advertise on Russia-1, a TV channel with many regional variations, but we didn’t include
Moscow and St. Petersburg. When promoting credit cards we will also use TV as a medium,
but we shall mainly have recourse to the internet and social networks when promoting
credit card lending.
- Will there be changes on the Bank’s internet site?
- Dmitry Leus: Of course. For the moment, we only sell loans via our internet site.
The next step will be to accept deposits on-line too. We also intend to link the Bank’s
internet site to social networks and provide on-line chat rooms with client managers.
By the end of this year, our customers will be able to communicate with their banker