Belarus’s economy is in good shape and the government has secured substantial foreign investment. But a few matters still need attention, not least the high level of non-performing loans and the dominant role of the state in the banking sector. Michael Imeson reports.

Belarusbank

The Belarusian banking sector is riding a wave of optimism, and understandably so. The country’s economy is undergoing a healthy revival following the recession of 2015 and 2016. The first sovereign Eurobonds issued in 2017 and 2018 raised a total of $2bn, and the government is planning to privatise two banks within the year. Meanwhile, digitalisation is creating countless new opportunities in mobile banking, online banking and other areas.

However, there are a few negative factors to consider. Ratings agency Fitch re-affirmed its B rating in 2018 for long-term issuer default, with a 'stable' outlook, for the three state-owned banks it rates: Belarusbank, Belinvestbank and the Development Bank of the Republic of Belarus. B is considered low for a bank.

Fitch justifies its rating with the government’s limited ability to support banks if they get into trouble, especially if any support has to be in a foreign currency, and these banks have large foreign currency liabilities. Another vulnerability, says Fitch, is that banks in general have high levels of impaired loans because of the recent recession.

Healthy GDP

The International Monetary Fund (IMF) is upbeat about the Belarusian economy. Its latest World Economic Outlook shows that the country’s gross domestic product (GDP) grew by 2.4% in 2017, and is projected to grow by 4% in 2018 and 3.1% in 2019. This is comfortably higher than the Commonwealth of Independent States (CIS) averages, which are 2.1%, 2.3% and 2.4%, respectively.

However, elsewhere the IMF voices a few concerns. One is that efforts to restructure the state-owned enterprise sector, which is large, are proceeding slowly, hindering growth. The banking sector is 70% owned by the state, and government-directed lending continues to “distort resource allocation and efficiency”, according to the IMF. The IMF and the European Bank for Reconstruction and Development (EBRD) are, accordingly, advising the government on bank privatisations.

Belarus had two lenders in The Banker’s Top 25 Central and Eastern European Banks rankings in 2018: Belarusbank at 14 (and ranked 580 in the world), with Tier 1 capital of $1.5bn, and Belagroprombank at 25 (859th in the world), with Tier 1 capital of $705m. So while the banks have a strong profile in central and eastern Europe, globally they are not such big players.

As regards The Banker’s Top 100 CIS Banks rankings of December 2018, Belarus fielded 12 banks accounting for 15% of total assets. Seven of the 12 banks were in the top 25: Belarusbank, Belagroprombank, Priorbank, Sberbank Belarus, Belgazprombank, Belvnesheconombank and Belinvestbank. Only Kazakhstan, with 33% of total assets, and Ukraine, with 21%, had a grater share. (The table excludes Russian banks which are ranked separately by The Banker.)

Back on track

Maksim Yermalovich, Belarus’s finance minister since September 2018, says the measures taken by the government during the recession helped get the economy “back on track” in 2017. The finance ministry expects GDP growth in 2018 of 3.5%, slightly below the IMF’s 4% forecast.

“We have confidence that further recovery will be attributed more to structural, not cyclical, factors,” says Mr Yermalovich. “The quality of growth is supported by the balanced fiscal and monetary policy, the deliberate foreign exchange regime, and by recovering business activity stimulated through institutional environment improvements.”

He recognises that “a number of vulnerabilities remain”, as highlighted by international organisations. “The low performance and potential risks of state-owned enterprises is probably the most cited concern. We are making efforts to improve the situation, in line with IMF recommendations,” says Mr Yermalovich.

The government eased its near-term financing pressures by issuing a $1.4m Eurobond in mid-2017 and a $600m Eurobond in February 2018. Citibank and Raiffeisen Bank International were joint lead managers. “I’d like to praise the teams at Citi and Raiffeisen for their work – a lot of blood, sweat and tears went into the deal,” says Mr Yermalovich. The issues were “significantly oversubscribed”, with demand coming mainly from US and UK institutional investors, he adds.

The government aims to raise a further $1.5bn in 2019 and 2020, but probably not in Eurobonds. “We have plans to tap the Russian and Chinese onshore market,” says Mr Yermalovich. “We aim at floating bonds in rouble and renminbi in 2019 and 2020 as an alternative to Eurobond issuance. For the deal in the Russian market we have already mandated several banks to act as joint lead underwriters, and we are monitoring the market carefully. The news related to the Chinese deal is yet to be announced.”

Mr Yermalovich argues the IMF’s concern about state-directed lending is “trivial”, as it “decreased from 5% of GDP in 2015 to 1.8% of GDP in 2017 and will be zero by 2020”. However, the government is proceeding with some bank privatisations, and the EBRD is providing assistance.

“A memorandum of understanding has been concluded between the National Bank of the Republic of Belarus [the central bank] and the EBRD regarding the privatisation of Bank Moscow-Minsk,” says Mr Yermalovich. It is possible the EBRD will take a 25% stake in the bank, but the goal is to sell a controlling stake to “an acceptable strategic investor” before January 1, 2020. “In addition, the government intends to sell no less than 75% of shares of Belinvestbank to a strategic investor by the same date,” adds Mr Yermalovich. 

The development bank’s role

One of the most important drivers of investment in the country's economy is the Development Bank of the Republic of Belarus (DBRB). It was set up by the government in 2011 with three main goals: to assist in the financing of capital-intensive infrastructure projects, to support small and medium-sized enterprises (SMEs) with special loans through partner banks, and to provide export credits to exporters.

“During a very short period the development bank has become an integral and unique component of the national financial system,” says Tatsiana Sasnouskaya, the bank’s first deputy chairperson. “The bank participates in the most vital infrastructure projects – road building, underground line construction, national airport modernisation and so on.”

Ms Sasnouskaya says the bank aims to “further facilitate the economic and social development of the country through the realisation of socially important projects by structuring efficient, and sometimes even unique, financial solutions”. These goals would be “difficult to achieve by means of classical commercial financing, because of high costs or long payback periods”.

The DBRB was co-manager of the government’s $600m Eurobond issue in Feburary 2018, and of the even bigger $1.4bn Eurobond the previous year. “It was a great honour for us to become a co-manager of a sovereign Eurobond issue, to finance jointly with our Brazilian partners the purchase of new airplanes for the national airline Belavia and other projects,” says Ms Sasnouskaya.

“When we, as a financing bank, are invited to the opening of a small farm or factory in a regional town and see the joy of the people living there, we feel a powerful emotion and pride for the work we’ve done. Even though these projects are not that significant they create warm feelings. Emotions are really important for us. I guess it is unusual for you to hear such words from a banker.”

Market leader

State-owned Belarusbank is the country's largest bank, accounting for 42% of assets in the domestic market, and the strength of the economy is providing many opportunities, especially in lending to SMEs. “SME development in Belarus is prioritised by both the Belarusian government and representatives of foreign financial institutions,” says Belarusbank chairman Viktar Ananich.

“We will continue lending to large enterprises and infrastructure projects, including projects with the participation of foreign capital such as the Slavkali project [a potash mining and processing factory]. The recent visit of representatives of the European Investment Bank [EIB] and the EBRD also proves that we are moving in the right direction.”

The EIB announced in November it is providing its first support for Belarus: an €84m loan to Minsk Vodokanal to modernise the capital’s main wastewater treatment plant, and loans to Belagroprombank (€50m) and Belarusbank (€74m) to on-lend to about 200 SMEs.

“The retail sector shows growing demand for credit resources, attributed to a decrease in interest rates and accumulated deferred demand for housing and durable goods,” says Mr Ananich. “As a result, the retail loan portfolio in the banking system has expanded by Rbs1.86bn [$862m] since early 2018. Consumer loans have grown by Rbs1.01bn since the beginning of 2018 and mortgage loans at market-based interest rates have increased by Rbs932m.”

Knock-on effects

Interest rates in Belarus have dropped because of falling inflation, a strengthening of the national currency and the Organisation for Economic Co-operation and Development’s upgrading of Belarus from seventh to sixth in its Country Risk Classification.

The areas with limited potential for lenders are commercial real estate, because of a glut of office space, and agriculture, which is already burdened with debt.

“The impaired loans ratio across the banking system is falling due to the improving financial situation of Belarusian companies,” says Mr Ananich. “This may be partly attributed to a decrease in interest rates and alleviating the debt burden of businesses and households.”

Although loan-loss reserves are generally “thin” across the sector, Mr Ananich says this does not apply to Belarusbank. He describes his bank’s loan-loss reserve policy as “cautious and conservative”, which has enabled it “to build up a financial cushion that will keep us safe and stable regardless of any disturbances that may happen in the coming years”.

Belarusbank’s profits for the first nine months of 2018 were 50% up on the same period in 2017, and its cost-to-income ratio of 41% is the lowest in the country. 

Foreign owners

There are 24 banks in Belarus, and about one-third of them have foreign investors. Priorbank, owned by Austria’s Raiffeisen Bank International, is Belarus’s third biggest bank by Tier 1 assets. It was also The Banker’s Bank of the Year for Belarus in 2017. For chairman and CEO Sergey Kostyuchenko, digitalisation is the biggest trend in the country’s banking sector.

“We see how society is changing, and that is why our key area of further development is the implementation of new services and products based on digital technologies,” he says. “We were the first to introduce a number of new service technologies, such as host card emulation, which allows customers to use contactless payments via phone.

“In November 2018, we, together with Raiffeisenbank Russia, issued a cross-border bank guarantee using blockchain technology. Some new features are currently being developed and will emerge on the market in the near future. In terms of innovation, we are an undisputable leader in our country.”

Failure is not an option. “We try to succeed in everything we do,” says Mr Kostyuchenko. “It’s my personal belief that either you do something on a high level or you do not do it at all. We are fast, adaptive and have a winner’s mindset. We have good people, good innovative products and we never stop moving forward. So whenever something is performing moderately or badly we take measures to change it. It is my first task as a CEO to track the weaknesses and eliminate them while they are still small.”

The favourable business climate has helped stabilise the loan portfolio across the entire banking system, and at Priorbank in particular. “Despite a very conservative lending policy in 2018, Priorbank shows consistent results in terms of revenues,” says Mr Kostyuchenko. “Now we are seeing a decrease in market interest rates and interest income. It directly affects revenue growth. However, we are pretty good at cost management. We expect that business volume growth will continue in 2019. The main driver will be in the retail business development.”

Compared with certain other eastern European countries such as Russia and Ukraine, Mr Kostyuchenko says Belarus is “a haven of stability”. “Several years ago there were some economic imbalances, but this didn’t affect the functioning of the banking market. This makes Belarus attractive in general,” he adds.

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