Dmitry Leus: “The Development of the Russian " 2

- I have often heard private bankers complain that the mortgage sector is an “unlevel” playing field. Do you agree that privately-owned and state banks are not competing at arm’s length?

- Dmitry Leus: I agree, but we should keep in mind that unequal conditions do not only prevail on the mortgage market. A big player such as Sberbank is able to provide SME lending at a rate of 8% p.a. whereas our average-weighted cost of funds ranges between 8.5 and 8.75%.

On the other hand, we have our own competitive advantages. We can afford to show flexibility when it comes to evidentiary requirements with regard to a client’s income. In addition, as a small bank, we can immediately adapt to sudden market changes. To turn around a big bank is something else. Our mortgage rates are therefore cheaper than Sberbank’s at the moment. This is because we were recently able to sell an important portfolio of securities, and have even excess liquidity now. These funds need to be invested somewhere, and this enables us to lend at lower margins.

Every international consultant will confirm that an ideal credit portfolio should have the following outlook: 50% of it should be invested into collateralized loans, 10-15% should be invested into consumer lending, or other high-yield credits, and 20-30% should be kept in treasury bonds or other safe-haven securities which can easily be sold or refinanced with the Central Bank.

- You have recently engaged in consumer lending. What has been your experience?

- Dmitry Leus: We had mortgage rates starting at 9.95% and noticed that some client agreed to these conditions. The average rate on the market is currently 10%. We can afford lower rates and have no plans to raise them because we dispose of sufficient liquidity. However, at some point we will nevertheless have to increase our rates, because the next wave of funding is likely to be more expensive. In any event, consumer loans are a good way of boosting our overall profitability

- There are many similar products on the market now.  What is your competitive advantage?

- Dmitry Leus: The most important thing in consumer lending is a good organization of sales, in addition to a high-quality client service. For instance, our “New Year’s Loan” is designed for people who cannot afford to buy Christmas presents for their beloved ones. What counts for such clients is the speed at which the loan is issued. They are not bothered by the fact that they will have to pay a premium of RUB 200 per month. We can offer a quick service if the client has good scores and underwriting results. The first criterion is credit scores. Some lenders get satisfied with good scores and will mechanically award the loan. For us, scoring is just the first step, the second step being underwriting. We may not have the lowest rates on the market, but in order to keep default rates low we put quality over volume.

- Let’s return to funding.  Is it correct to say that client deposits constitute about half of your liabilities?

- Dmitry Leus: Yes, we have more than RUB 9bn in deposits and an overall balance of RUB 18.5bn.

- At the same time, I understand you are not attracting clients by means of higher deposit rates. By which means do you attract them?

- Dmitry Leus: I have the impression that we have less and less people shopping around and going from bank to bank in search of the best interest rates.

- Well, I shop around...

Dmitry Leus: “The Development of the Russian "

- Dmitry Isaakovich, there is a general belief that small banks must specialize in order to be successful. On the other hand, you offer a relatively broad product line and behave like a universal bank. Why did you choose such a strategy?

- DmitryLeus: The truth is that we are not a universal bank in the full sense of the term, as our main focus is still in retail banking. But our retail offering is universal indeed – mortgage loans, car loans, overdraft loans, and other consumer lending products. When it comes to loans for small and medium-sized enterprises (SME), we currently adopt a more cautious approach. I am not saying that we are not working at all in that sector, but corporate lending requires a more complex analysis of our customers. In addition, the last two years have seen defaults mostly in the sector of SME lending.

On the other hand, an analysis of default statistics shows that mortgage lending is a relatively safe product. Unfortunately, it is impossible to survive from mortgages only, due to lower profit margins in this segment.

- Can you tell us more about the mortgage lending market? Are you working with the Agency for Housing Mortgage Lending (AHML), an institution studying the international experience of mortgage lending in order to introduce best practices into Russia?

- DmitryLeus: AHML requires its partners to fulfil certain criteria. However, in my opinion, a large part of our country does not meet these criteria. Unfortunately, unofficial revenues still constitute an important part of the Russian economy.

In general, the belief that credit should only be awarded based on documented income is misguided. Take a 15-year mortgage – who in our country can look back to a 15-years track record within one single company? The focus should therefore be on the collateral. If a loan can be justified in light of the collateral, then less attention should be given to the income history of the creditor.

- Does that mean that you raise capital based on your liabilities?

- Dmitry Leus: Correct. We basically use deposits when lending, in addition to the Bank’s capital, of course.

- Is this not too risky? A bank’s liabilities are of a short-term nature, as deposits may be withdrawn at any moment. A bank’s assets, however, often take years to mature.

- DmitryLeus: I do not deny that there is a certain risk involved. Nevertheless, on average, a mortgage loan’s maturity amounts to 5 years. In addition, any loan, even if it hasn’t been awarded according to AHML standards, may be ultimately sold. Sberbank, for instance, offers such programmes, as well as the other banks. There are also partner programmes that allow raising liquidity when necessary. But for us this is the last resort, because it is not our goal to work as an agent. We intend to preserve our client base and to offer them the products and services they ask for.