Viktors Bolbats: we will resume lending in the nearest future!

News - April 23, 2020

Baltic International Bank has recently increased its share capital, but the bank's board has approved the bank's strategy for the next three years. In an interview with LETA, Viktors Bolbats, Chairman of the Board of Baltic International Bank, emphasizes that the first cornerstone of the strategy is lending and support to local businesses, especially the small and medium-sized enterprise segment. The Bank will take all necessary actions to resume lending as soon as possible. The second cornerstone, on the other hand, is the maximum use of electronic and remote operating channels, which has in some ways even been helped by the emergency that has now been declared.

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What is the impact of the emergency on the bank's work? Have any projects stopped, for example, on attracting new customers?

This situation is truly extraordinary and unprecedented for both us and our customers. We mobilized the opportunity to work remotely very quickly. More than half of our employees today work remotely and the work is in progress. Customers can also access practically all banking services remotely and, by applying in advance, can also use those services that can only be provided in person.

You once had plans to attract new customers from the eurozone countries, Scandinavia. What is happening to these intentions now?

As for attracting customers, we now mostly receive applications and questions from Latvian customers in remote communication channels. Demand from the regions you mentioned is now low and is due to the current situation. However, also taking into account the introduced restrictions regarding business trips, travel, we are now mainly focusing on the requests that come to us, and, as I have already mentioned, it is from Latvian customers.

What about the long-term impact? Will the emergency situation have an impact on the banking sector as a whole?

Given that this situation is global, it will have an impact on the economy both in Latvia and in the world. In all the crises we have already experienced, both local and global, a number of processes have taken place, including a change in the distribution of power in the market. However, the nature of the previous financial crisis in 2008 and 2009 was different, so unlike this crisis, this time we also see very strong support at the level of both national governments and the European Union and the European Central Bank. Depending on the decisions of policy makers in the world, in Europe and in Latvia, the position of entrepreneurs will also depend. It is also a time of opportunity, because it is in such unusual circumstances that many people have new ideas about what should be done differently, what to develop, where to invest.

Due to the emergency situation, have adjustments been introduced in the process of changing the bank's business model?

We have just approved the directions of Baltic International Bank's business strategy. Let me explain that there was a banking strategy that had been changed and that we were working on. However, the strategy, as a long-term document, requires regular evaluation and calibration. We are doing this in dialogue with the Financial and Capital Market Commission (FCMC), and the Board of Baltic International Bank recently approved the bank's strategy for the next three years. It is important that the bank has received confirmation from the FCMC that the bank's capital ratios meet and exceed the thresholds set by the commission, which accordingly means that the bank can return to the lending segment.

The first cornerstone of the strategy I have mentioned is lending and support for local businesses, especially the small and medium-sized enterprise segment. The Bank will take all necessary actions to renew lending as soon as possible, at the same time carefully and thoughtfully evaluating the segment of customers to whom this service will be available.

 

The second cornerstone is the maximum use of electronic and remote operation channels. From the second half of April, our customers will have access to a new Internet bank, to which we have devoted considerable work, and I am pleased that we are continuing to improve the digital services segment. Therefore, the emergency situation, even in a sense, enables us to take the decisions that are strategically necessary.

Are there any other changes in the business model change strategy?

We have exceeded a certain characteristic that we have set for ourselves as a point of progress, namely that at the end of the year more than half of the bank's active customers were local customers. This is a record number for us historically, and this proportion continues to grow every month. In addition, we have achieved higher capital adequacy ratios than required. We have worked on the only criterion - for Latvian business to dominate our assets.
In order to fulfill our promise to support local business, we need to develop further and we continue to strengthen our team with competent employees who have worked in large international organizations. In the summer, we plan to strengthen and supplement the bank's management team.

It is also important that customer service is available and relevant to their needs. Therefore, in parallel with the already mentioned new Internet bank, we have introduced a number of options for serving a modern customer, regardless of whether it is located in Latvia or abroad.

 

Do you see opportunities in local business lending?

I will say yes. Because even before the Covid-19 pandemic, the data collected by the regulator showed that the amount of loans issued to small and medium-sized enterprises, which are the backbone of Latvian business, has been declining every quarter for several years. We often look at the total loan portfolio of banks or the total loan portfolio of legal entities. However, small and medium-sized enterprises are an important part of the economy, and loans to them have fallen by almost EUR 500 million over the year. This means that more loans are repaid than these companies receive new loans. We see business growth opportunities in this segment. Our balance sheet today allows us to lend and lend in an amount that meets the demand of small and medium-sized enterprises. We expect growth in this segment, and demand there is consistently good.
Of course, its correction in the market introduces Covid-19 infection, but in my opinion, it only increases the need in the market for fresh cash resources for business.

Aren't you afraid that the crisis caused by Covid-19 will mean that many companies will no longer qualify for lending?

The Latvian economy is basically a relatively small market that is growing due to exports. Therefore, the Latvian economy has been affected quite extensively by the crisis and the turnover of companies is falling. However, various forms of state support are currently available, including Altum instruments, which allow banks to grant new loans or facilitate the servicing of existing credit, allowing banks to reduce their risks in this situation, as the bank risks its depositors' money and capital. All this, together with reasonable expectations that the range of instruments available will be expanded, gives banks the opportunity to grant loans.

Entrepreneurs also currently fluctuate between the two views. One has to pause, wait, not take risks. The second view is to look for new opportunities right now, to use support tools, to talk to the bank and to understand how to warm the economy together.

 

Baltic International Bank cooperates with Altum?

Yes! We have a regular dialogue with Altum. Given that our bank has historically not been engaged in large-scale mortgage lending, we currently have virtually no exposure to Altum. We are now happy to establish and increase this relationship. We are currently happy to consider projects that will also have Altum guarantees.
In order to strengthen its capital, the bank has increased its share capital by 2.7 million euros this year, attracting new shareholders as well. Who are the new shareholders - or residents of Latvia?
The new shareholders are Latvian citizens. These are the bank's customers who have been holders of so-called subordinated capital for many years. Now, with this subordinated capital, they paid for the bank's newly issued shares. As a result, the bank's total capital grew and shareholder proportions changed.
The 2019 report also mentions that it is planned to increase the capital by 10 million euros during 2020, attracting new shareholders. Is an increase of 2.7 million already included in these 10 million?
This investment of EUR 2.7 million is just one of the measures that has already given us the desired result. The bank's capital ratios comply with the FCMC regulations and allow us to focus on new strategic directions - to issue loans and create new venture capital assets, namely to lend and invest money. It is important that this is possible now.
The issue of shares is not an end in itself. The bank's founders and shareholders have a clear intention to develop the bank so that its contribution to the Latvian economy is increasing. By attracting new strategic partners, a new share issue can also be made. That is why I will say that it is not so much a question of money, because the bank's performance allows us to work as we want it to today. It is more a matter of development vision.

Could such an additional share issue take place this year or, given what is currently happening in the financial markets, sometime later?

I will not be in a hurry with the assessment of the financial markets for the time being, because the situation may develop in different ways. Until the Covid-19 crisis, we went ahead with our plan, the first step of which was to ensure that the bank met all the benchmarks set today, so that local loans could be issued immediately. The second step is to make sure that we have strategic partners for further development and growth. In addition, it is not just a question of investing in the bank's capital and money, but also of their bank's development vision and the fact that they can promote the bank's development both in Latvia and abroad. We have had meetings and consultations in a wide geographical area from Frankfurt to Washington. It is difficult to say exactly when such a partner will be attracted, given the circumstances. Sorry for the banal answer, but Covid-19 has made its own corrections in this regard as well.

Currently, the largest shareholders are Valerijs Belokons and Vilorijs Belokons - what will be their participation in the bank's capital after the share capital increase? Will they keep their share proportionately, or will you look at greater shareholder diversification?

Mr. Belokon, as the bank's founders and currently the largest shareholders, supports a development scenario of the bank, which will include attracting new strategic partners of the bank. In order to achieve a bank capital and asset size that will allow us to implement our strategy and support local business as much as possible, I do not rule out that the bank's capital may be doubled by attracting new strategic partners.
I can discover that the bank regularly receives offers to participate in the bank's capital from cooperation partners, customers. Nevertheless, there is a plan to attract strategic partners who could significantly increase the bank's capital. This, of course, will affect the proportion of the bank's shareholders.
Raising capital is not an end in itself, but a tool to allow the bank to gain even more momentum, it is a vision for the further development of the bank.
At the beginning of the year, Einars Repše became an advisor to Valerijs Belokons , Chairman of the Supervisory Board of Baltic International Bank . What is his role in the process of changing the bank's business model and attracting new shareholders?
Mr Repše is a strategy adviser. His advice is more related to questions about the bank's model and business strategy.

Has Covid-19 also introduced adjustments in the plans to renovate the Blacksmith Quarter in Old Riga?

Various scenarios have been discussed, but it has been decided that we will not freeze the construction of the Blacksmith Quarter. Together with the architect and the construction team, of course, we will think about how to proceed. The pace of work may not be exactly as intended for the project, but the work will continue. We approach this project responsibly and see it as another way to warm the economy.

If we are talking about the performance of the bank, do you plan to work with a profit this year?

This year we plan to work with a profit. Cooperation with the FCMC also envisages the submission of forecasts both in the context of the bank's strategy and in the context of the business plan. At the same time, Covid-19 has created an unprecedented situation, and we are not isolated from the outside world. That is why we are also thinking about efficiency solutions and cost reductions, so that we can achieve the results we expect.
However, due to the fact that we have achieved capital ratios that allow us to increase the bank's loan portfolio, we can also increase interest income. For example, last year we achieved a record in commission revenue of almost EUR 10 million, which proves that this has been the right way for us. This revenue depends directly on customer activity. Interest income depends on the issuance of new loans and investments made. It is precisely these components that we currently lack to make a profit, which is why our plan envisages it.

Could the bank also issue bonds to raise funds?

There are two things here. One is that the bank itself issues bonds to borrow in the financial markets, the other is that the bank helps customers to issue bonds so that they can borrow in the financial markets. At present, our work plan does not include the issue of issuing bank bonds, although the bank has such experience and our bonds are listed on the stock exchange. I do not rule out the possibility that this issue may appear in our work plan, although our liquidity ratios do not currently require the use of such an instrument.
We are currently following the development of the capital market, as we have a license that allows us to issue bonds both to ourselves and to our clients. When we say "investment bank", what we want to be and whose model we are developing, then we must remember that the amount of loans to be issued will always be limited by a certain threshold in the balance sheet.

On the other hand, the possibility to help your clients to borrow in the capital market is unlimited or it is limited only by the market demand itself. That's why we have clients we work with for potential bond issues.

 

Given that the markets are currently in decline, would you recommend any of your clients to issue bonds this year?

Let's see how the situation develops. Of course, the financial markets are currently in a state of shock. However, one thing is clear: there will be growth again, the economy will return to a new state of equilibrium, and all market players need to think about how to ensure this in their field as soon as possible. Exactly when it will be profitable to borrow in the financial markets, it is now very difficult to say, but one thing is clear - the financial markets will be as relevant after the Covid-19 crisis as before.

If we return to the issue of changing the business models of former non-resident banks, it can be seen that not everyone is doing well and there is also talk in the market about taking over banks and mergers. Has anyone offered it to you?

When it comes to investing in our capital, then, as I said, such offers have been made regularly for some time. But this does not really coincide with our vision of development, which I have outlined before.
The advantage of local capital banks is that they are owned by a local team and run by a local team. This gives better opportunities to understand the needs of local businesses and to decide on the funding available to them. If our entrepreneurs take advantage of the opportunities that this crisis will create abroad and develop their business, then a certain redistribution of the market will take place, because they will have very relevant banks that will be able to go into and provide support. The market is on the move. I will not make any predictions, because it is up to each player to decide how he sees the market.

Would you be interested in buying another bank in Latvia?

Our interest is to support Latvian entrepreneurs, provide jobs and continue projects. That is our overarching goal. The way to achieve this is already a tool. We are a private bank and we are looking at all ways to achieve our ultimate goal.

How do you currently assess the cooperation with the FCMC?

We have a regular and constructive dialogue with the FCMC. The last two years have been very intense and each differed. In each complex process, something happens faster than we expected, something slower. Both our and the FCMC's focus was on capital ratios, as it is in our interest to increase our operations, but it is in the regulator's interest to make sure that all market players have an adequate amount of capital. That is why I appreciate the cooperation with the FCMC.
I would also like to thank the FCMC for communicating with market players about the initiatives taken at the level of the European Central Bank and the European Banking Authority in the wake of the Covid-19 crisis to grant credit holidays to customers and not to immediately consider bad loans as bad. There were a number of nuances about which the FCMC communicated with banks several times a week.

It is planned that in the future the FCMC could join the Bank of Latvia. How do you rate it?

It is a decision at the political level, and let it remain a matter for politicians.

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