Dienas Bizness, 15.05.2019
Having experienced the turmoil in Latvia’s financial market in 2018, local capital banks now are in the process of transformation, increasingly thinking about specialising their services. BlueOrange Bank is already focusing on lending and intends to develop a platform, which will allow everyone to participate in the funding of prospective businesses, says Dmitrijs Latiševs, Chief Executive Officer at BlueOrange Bank, telling about the Bank’s plans for the future.
The Bank, like any other company, develops a strategic plan for the period of at least next three years, which is regularly updated in line with changes in financial markets both at the local and global scale. Over the past decade, this environment has changed dramatically. Firstly, — it is the intensified fight against corruption, terrorism and money laundering which, through financial transactions, had a direct impact on policy-making and gave rise to tax evasion. Secondly, changes in legislation were introduced also on a global scale, where for many years companies registered in low-tax countries were accepted. With the intensified fight against the criminal world, offshore companies were considered as posing an increased risk, and banks started to segment their customers more strictly and focus more on risk assessment. Considering that the primary function of banks is servicing financial transactions, banks were subject to reinforced requirements. Today, each bank devotes considerable resources to client research by introducing new technologies for monitoring and controlling client transactions. Banks today do not need high-risk clients that pose reputational risks. This is the third aspect describing the changes in the financial sector, which force each bank to reconsider its business strategy.
In the first 15 years of operations, our bank specialized in international business: we serviced companies engaged in international trade and shipping, as well as private individuals, to whom we offered asset management services. However, understanding the reputational risks in servicing such clients, we decided to change our strategy radically and extend our service offering to domestic customers — both private individuals and corporate entities. A separate strategic line was the implementation of new technologies. Considering the range of technologies available to us at the time, instead of developing a branch network we decided to focus on the potential for offering our services online. We recognised that in this way we could offer our services not only to domestic customers but also to the European market — on a much larger scale. Considering the changes in our strategy, we also decided to switch to a new brand so that the name of the Bank does not evoke associations with the Baltic region alone.
The year of 2018 was a year of major changes for the financial sector of Latvia as such. Our advantage was that, at the time, BlueOrange was already halfway through the development of its new business model: already in 2017, we started attracting customers and offering new products to new segments, both individuals and businesses that helped us to withstand the overall turmoil in the financial market.
Already last year we started focusing on credit offering for both individuals and business entities. Last year we encountered two major challenges — developing and maintaining a resource base large enough for us to be able to issue new loans in the amount of approximately EUR 100 million a year, mainly to domestic customers. To achieve this goal, we started cooperating with European financial technology companies and this allowed us to raise funds from private individuals in Europe, mainly in the form of fixed-term deposits for the term of 1–5 years. Alternative fundraising in the local market would be more time-consuming and more expensive. Average market interest rates in Latvia are very different from those of the Western European countries, such as Germany, France, the Netherlands, Spain, so we are in a position to offer much better terms to those depositors and this makes our offer attractive. The second challenge for us was to promote our new brand on the market. We coped successfully with these two tasks.
Last year, we decided to terminate a relationship with the majority of international clients from high-risk countries, and we closed over 4,000 customers within a few months, thus abandoning more than 300 million EUR. To meet the targets set forth in the Bank’s development plan, we needed to compensate these funds with other deposits, and we successfully achieved that: 250–300 million EUR were raised from other types of customers and other regions, not posing reputational and money laundering risks and those were mainly private individuals from the Western European countries. Our offering to those clients included only deposit services, with no use of current accounts for regular transactions, which usually pose the highest reputational risks and provide the lowest share of bank income.
Our plans include speeding up the Bank’s customer service. We do not feel pressure from market saturation, our customer base has increased and we are satisfied with the quality of clients joining us. These are good companies.
In the view of experts, currently, the biggest challenges for the financial sector are coping with money laundering risks and compliance assurance. If in the past financial risks dominated the market, currently we are facing events related to corruption and reputational risks. Whenever information is spread about any bank having been used for such transactions, it is common to assume that the credit institution was involved in money laundering, but I am convinced that in most cases the banks have not done so knowingly. However, today’s legislative requirements impose full responsibility for client transactions on banks, therefore banks must ensure control over client operations. This difficult, complex process requires large investments in both human resources and IT to ensure timely identification of suspicious transactions. This has a negative impact also on the Bank’s financial results, and often the current account service charges are relatively small compared to the costs incurred by banks.
We will continue developing the existing business model and be active in lending. However, the Bank’s equity capital and development opportunities may be limited. To provide for the future growth of the loan portfolio as rapid as before, equity capital must increase significantly on a year-to-year basis, which is not always possible. To achieve this, the Bank intends to develop a technological platform, through which new loans will be issued and offered to investors, which are interested in crediting prospective companies with good creditworthiness and sound financial performance. Such service may be a good alternative to fixed-term deposits, since currently, with this form of deposits, the return is approximately 1% per year, but we believe that with an appropriate offering and potential to invest money with higher return, let’s say 3–4% a year, the demand for such service would be large enough. There is already a similar offering in the market from mutual lending platforms, where rates exceed 10%, however, we believe that this product also bears an increased risk — loans are not secured, it is not clear, who performs debt collection activities, and the creditworthiness of borrowers varies significantly. Currently, there is no offer like ours in the Baltic States, but there are some Western European companies that already offer such service in cooperation with banks.
Our services range includes both loans to individuals and legal entities, but we see the largest potential in loans to corporate-segment. We anticipate that all types of investors — both individuals and institutional ones, will be able to invest via the platform.
We plan to launch the platform next year.
Over the last year, significant changes have occurred in the lending market — businesses are ready for faster development, while the range of the available lending services has decreased because several market participants have restricted their operations or have exited the market of Latvia. Supply has changed, the demand is increasing, and this allows us to operate successfully enough.
For example, by the end of 2018, our total loan portfolio and credit liabilities amounted to 264 million EUR, which is an increase of 20% in comparison with the previous year. Of the loans issued, 73% pertains to loans to small and medium-sized companies. In total, in 2018 new loans were issued for EUR, with lending income increasing by 33%.
We have developed individual lending programs for both small/medium-size customers, and for large companies. As per our credit policy, there are no industries, which we wouldn’t cooperate with. We are actively supporting the manufacturing and commercial industry, port and terminal business, construction sector, but, of course, we evaluate each project individually.
Competition is fierce in the Western market, so I don’t think that currently, it would be efficient to expand our product offering in one certain country. The experience with deposit collecting is positive, and it is clear, why foreign clients choose to make deposits in Latvia. Meanwhile, a question arises about the scope of investments required to develop a new market and start marketing a new product, and, even if a positive decision was taken, the question remains, whether the financial results would be positive enough, and I must admit there are certain doubts about that. In addition, the current situation shows that virtually any foreign client could potentially pose a reputational risk, and this is desired neither for the Bank, not for Latvia as such, so it is easier for us to work with local clients that can be subject to review more efficiently. Besides, offering such a widely demanded product as current account services can always pose disproportionate risks. It is important to diversify our products and services, therefore we are focusing on acquiring fixed-term deposits and lending. From the money laundering perspective, such a model is safer than providing day-to-day services.
Of course, the future economic developments may potentially result in a decrease of demand for loans, and we cannot predict, how the supply would change or what would be the effects of reputational crisis, so all risks must be considered.
I think it will not be easy for banks to deliver good results. Mergers can be a good, economically sound solution, but banking business models vary significantly and I don’t really see any banks with a philosophy similar enough so that they would merge. Local capital banks will continue to develop new strategies and improve their business models. The requirements for the financial sector will become stricter, changes in legislation are envisioned by reinforcing control, which potentially would result in an increase of customer-service related risks. A deeper specialisation of banks will be required in selecting products that pose lower risks. This leads to a conclusion that more efforts will be required in solving these issues since the owners of local capital banks have a legitimate interest in continuing their work in Latvia. Time is very limited, and banks have to adapt to all requirements. That, as well as the willingness and ability to deal with these issues, depends, of course, on each bank individually. It is not easy, and will not be easy.
At the moment, there are no plans to acquire any membership, but we are considering other ways of increasing the Bank’s equity capital. We are considering the possibility of raising funds in the public market over a three-year period through the offering of shares in order to provide for the increase of capital. Currently, the Bank’s equity capital amounts to EUR 81 million, however, we believe that from the business perspective it should be higher, so we have to think, how to increase it.
We are considering proceeding with the Bank’s listing on the Warsaw Stock Exchange, which offers a wider range of potential investors. However, the realisation of this plan still requires a lot of work in order to align our business model and demonstrate the potential of the Bank to the investors.
We plan to close this year with a profit large enough to provide for the return on capital of approximately 5%. This year, one of the main challenges is to finalise the transformation process, also by improving the Bank’s internal processes. We are doing a lot to automate the processes, — we are developing the IT systems, introducing significant changes in our customer service, which was more personalised in the past, and now our goal is to increase the efficiency of the processes.
|December 31st, 2015||December 31st, 2018|
|Term deposits (million EUR)||18,375||208,551|
|Share of clients from increased-risk regions (%)||20%||2%|
|Share of clients from Latvia and the Baltic states (%)||15%||68%|
|Credit portfolio (million EUR)||109||264|
|Share of interest income (Gross) (%) 4Q||27%||47%|