A record year for the state bank. How Oschadbank maneuvers between the desire to be a business and support the state during the war. Interview with CEO Sergii Naumov

Oschadbank CEO Sergii Naumov, 54, about the bank's performance during the war, additional taxation, cases of large clients from Wog to Gulliver, privatization prospects, and litigation with Russia.

As with the entire banking sector, 2023 is likely to be one of the most profitable years in history for state-owned Oschadbank, says the bank's CEO, Sergii Naumov. By this indicator, Oschad, which earned more than UAH 14 billion in three quarters, is second only to another state monster, PrivatBank.

Can this year be called a definite success? Not quite. The war suspended Oschad's attempts to transform from a socially and state-oriented bank into a more market-oriented institution focused on commercial success. State-owned companies still account for one-third of the bank's corporate loan portfolio, and 41% of its assets are government securities, says Naumov.

Oschadbank's top manager considers this normal for wartime. However, the bank is not abandoning its pre-war tasks. The key is to prepare for the sale to private hands. "I think that after the war is over, we will need about four years to prepare for privatization," says Naumov.

What is Oschadbank's current position, how does it make money, how is it going to sue Russia, and what does its top management think about the bank's level of technology?

The interview has been shortened and edited for clarity.

Contents

Is Oschad technologically behind and how much does it earn?

The bank's business: "5-7-9”, market lending, Novus, Eldorado, and Gulliver cases

Financing of the state by state-owned banks and prospects for the privatization of Oschad

The situation with the courts against the Russian Federation

Technology and money: where is Oschadbank now?

In May, Forbes published an article evaluating mobile applications of banks. Oschadbank was among the outsiders. Do you agree with this assessment?

I don't agree at all. Of the above, what we probably don't have is some additional "bells and whistles". The app should work stably and cover 80-90% of the customers' needs. As a customer of Oschadbank, I am satisfied with the app - it is comfortable and clear. I can pay remotely, make payments, create templates, and exchange currency online.

And it works stably, which is also important. We have already conducted 114 million transactions in a year for UAH 263 billion. Customers vote for it with their hryvnia. But there is no doubt that the app needs further development.

So you are satisfied with the technological level of Oschadbank?

I am not satisfied. Since the beginning of the full-scale war, we have carried out more than 20 major updates of the application. More than 70 new features, services and improvements have been introduced. These include new products, better communication with bank representatives, automatic crediting of transfers to the card, access to money for customers from the temporarily occupied territories, etc. I want to raise this level further. And I do not agree that we are outsiders.

What specific things do you want to implement? 

Onboarding - so that you can become our client remotely. I think we will have this option by the end of the year. This is just one example.

In the first nine months of this year, Oschad received more than UAH 14 billion. How much do you expect by the end of the year?

Yes, we have UAH 14.2 billion of net profit. However, we need to take into account the increased income tax rate of 50%. We also have a revaluation of securities in our PNL. These are derivatives whose value is primarily tied to the hryvnia exchange rate. It has a significant impact on the result. The impact of the revaluation of securities is about UAH 4.7 billion. We do not know what the revaluation will be in the last quarter, it is difficult to predict.

Most of the net profit - about UAH 9 billion - was generated by operating activities. Compared to the same period last year, net interest income increased by 33% to UAH 13.8 billion, and net non-interest income by 10% to UAH 5.5 billion.

Taking all this into account, we plan to earn about UAH 6-7 billion.

The draft law on increasing the tax rate on bank profits to 50% in 2023 has been approved. How do you feel about it?

We discussed the idea of additional taxation at the Independent Association of Ukrainian Banks and came to the conclusion that it is unavoidable in the current environment. However, we want it to be more or less civilized, not as originally proposed (MPs proposed taxation of interest income - Forbes).

I have nothing against the current version of the draft law. My shareholder is the state, so one way or another, the profit belongs to it. I believe that it is a luxury to make excessive profits in any business sector during the war.

Why does PrivatBank pay 80% of its dividends to the state, while Oschad pays 30%?

The terms of our Eurobonds issue have restrictions on the maximum percentage of dividends to be paid. If we pay more to the state, it could be an event of default. 

The state plays a significant role in banks' profits this year. How much profit did deposit certificates and government bonds bring you?

In 2023, we earned UAH 8.8 billion from our investments in government bonds and UAH 4 billion from deposit certificates.

But a large share is also lending to corporate business, MSMEs, and retail clients. According to our management reports, these three business lines earned over UAH 10.3 billion in interest income on loans in nine months.

If we cannot invest all of our liquidity in lending now, because there is no such demand, and the government needs to finance the budget deficit, then we will, of course, invest in government securities.

What is the share of government securities in Oschadbank's assets? Before the war, it was 42%.

This currently amounts to 40,9%. We are talking about government bonds, and there are also equity derivatives, which I mentioned earlier.

What was the peak of loans to private companies in the total loan portfolio of Oschad?

In 2020-2021, the share of state-owned companies in the net loan portfolio was less than 30%. As of January 1, 2021, it was 26.1%. At the beginning of 2023, it was 36.1%. Now it is 35.7%. I believe that this is a normal proportion in times of war.

How far is the bank now from your stated goal of reducing the NPL level to 10%?

We currently have 38% NPL after three quarters of 2023. During the war, the figure increased by more than 21 percentage points.

However, the loan portfolio we have built up over the past two years shows a good result: NPL does not exceed 4%. And in the total portfolio, it is 1.6%.

"5-7-9”, market lending, Novus, Eldorado and Gulliver cases

Oschadbank is a major player in the “5-7-9” program. But are you in the market outside of this program? For example, I am a businessman and I want to take out a loan on market terms. Why should I choose Oschad over other banks?

We have various programs for SMEs: our own, state, regional, partnership and international. An example of an international program is loan guarantees from the European Investment Bank (EIB). Thanks to these guarantees, businesses do not have to provide collateral for 100% of the loan amount, but only 30%. Under this program, we issued UAH 1.1 billion to 138 borrowers.

The total portfolio of SMEs is now UAH 21 billion. It increased by 90% last year. This year, we have already disbursed about 3,300 loans for UAH 9.3 billion.

In total, we have more than 300 partners. Thanks to them, we finance the purchase of equipment, vehicles, plant protection products, etc. for farmers on favorable terms. The collateral is what our customers buy. 

The share of "5-7-9%" in our MSME portfolio is large - 89%. When I took office, the portfolio amounted to UAH 6 billion, and now it is UAH 21 billion. This is our strategic direction, and it was separated from the rest of the business to give it a special priority.

But in corporate business, it is only 2.8%. There is a portfolio of about UAH 50 billion and mostly market lending terms. Our advantage is that we can provide larger amounts of funding. Many banks have limitations, but we are a large bank, we have enough capital and liquidity. And our rates are still below market rates.

Oschadbank has a lot of liquidity thanks to social and military payments. Excess liquidity is a headache for the market now. How do you perceive this? When the war is over, will Oschad probably not receive such a liquidity flow?

Of course, this is not a problem, we want to have customers. We are chosen, in particular, because of our large network of branches and the fact that we are the first to come to the deoccupied territories. We also have a number of attractive products specifically for the military and their families. As of the end of September, customers entrusted us with UAH 13.5 billion under one of these programs.

Having a lot of liquidity is good, but the question is: where to invest it? Our strategic goal is to channel liquidity into lending as much as possible. After the war, I think there will be no big question of where to direct it, as Ukraine will recover, and companies will increase investments.

As part of the “5-7-9 “ program, you, in particular, lend to the retailer Novus. But the program, under which the state compensates part of the interest, is designed for small and medium-sized businesses. Why did you approve these loans if retail doesn't seem to be a sector that is suffering much right now?

At the beginning of the war, the government made changes to the “5-7-9” program because it was important to help retailers. Many retailers did not have the working capital to fill the shelves with goods. This is also a strategic direction of Oschad's work during martial law.

Last year, Novus had a UAH 500 million credit line for 12 months. In September, the borrower decided to reduce its size to UAH 400 million for a new term.

We believe these agreements are very useful for the economy. This is not only retail financing, but also helping Ukrainian producers reach consumers through one of the largest supermarket chains.

Can you name the five largest borrowers of Oschadbank?

We cannot disclose the names of the companies, as this would require coordination with each of them in accordance with the terms of the agreements that provide for bank secrecy. The total number of borrowers in the corporate business segment is more than 60 companies.

The portfolio of loan agreements with the 10 largest borrowers accounts for more than 60% of the total volume in the corporate business segment. These are companies in the energy, oil and gas, infrastructure, food industry, retail, and real estate (business and residential) sectors.

We are working to reduce the level of concentration. However, during a full-scale war, it is more important that our loans help improve the stable operation of critical infrastructure.

Viktor Polishchuk is one of your problem borrowers. His company Eldorado is close to bankruptcy. Are you negotiating a restructuring with them?

This is our old problem loan, and we are now trying to find the best solution for the bank. We are not satisfied with the bankruptcy of some of the group's companies. We are trying to restructure the loans so that we do not lose anything. The loans must be serviced and repaid. Negotiations are ongoing, albeit difficult.

If you fail to reach an agreement, how much will you lose?

Now these loans can no longer negatively affect the bank's capitalization, as it could have been in previous years during the first restructuring. This gives us the opportunity to choose the best scenario. There are two: liquidation and restructuring.

Another case related to Mr. Polishchuk is the business center operator Gulliver. What is the situation there? 

We do not separate these companies. I was talking about the entire business group.

What is the likelihood that you will take Gulliver as collateral?

I can't say yet that it is low or high. We will see.

There is another creditor here, Ukreximbank. Does their position differ from yours?

I am not aware of any differences in our positions so far. But here we are the main bank that negotiates this loan.

State funding and prospects for privatization of Oschad

Before the war, your strategy was to reduce the amount of government bonds in the portfolio. Have you revised it now?

Of course we have. How can you reduce the portfolio of domestic government bonds during the war when the state has such a budget deficit? But if we have a strategy for privatization after the war, the structure of assets should change. We should be more focused on lending to the real sector, rather than having 50% of our assets in domestic government bonds.

How much has the volume of domestic government bonds in Oschadbank increased during the war?

In absolute terms, it amounts to about UAH 129 billion. This year, we have purchased UAH 47.4 billion worth of government bonds, including UAH 2.6 billion worth of securities for our clients.

Is Oschadbank ready to increase its investments in domestic government bonds next year if the Ministry of Finance needs to borrow more on the domestic market due to delays in international assistance?

If it is also attractive for banks (we cannot be unprofitable), then why not? We will invest if we have free liquidity. We are trying to maintain a balance between financing the economy and financing the budget. 

There were rumors about the possibility of merging Oschadbank with the recently nationalized Sense Bank.

There is no point in doing this with Oschad or any other state-owned bank. Sense Bank is a normal bank, capitalized, profitable, with a large customer base. It is a ready-made case for sale, it is competitive, technologically advanced, and it has a much better chance of being sold even now than any other state-owned bank. 

This is my personal opinion, but why merge it with Oschadbank, waste years and resources and create an even bigger bank? And then not know how to privatize it?

Does it make sense to ask you about the prospects of privatizing Oschadbank now?

We were making good progress in our negotiations with the EBRD, but the war put them on hold. We were talking about subordinated debt, which could be converted into equity. And this will be the beginning of privatization, because when you have such a respected institution as the EBRD in your capital, it is much easier to sell a large share of the bank to a strategic investor.

When the war is over, is there a timeframe for privatizing Oschad?

In the last pre-war strategy, we had four years to prepare for privatization. I think it will take about the same amount of time after the war is over.

Courts against the Russian Federation

Are there any chances to recover anything from Russia for the losses incurred by the bank?

Why not? We have won all instances in the arbitration court, and now it's a matter of enforcement. We want to legalize these awards in some jurisdictions, and we have some experience. We know where the chances are good, and we are looking for assets. But I can't tell you exactly what it’s about yet. 

How much are you counting on?

According to the court decision, it is $1.5 billion. The amount is increasing every day because they are not fulfilling their obligations.

Are there any plans to apply to international courts again?

We have already applied to the European Court of Human Rights for the lost assets during the full-scale invasion. The lawsuit was filed on December 8, 2022. 

For how much money?

The general practice when applying to the ECHR is to file an application on the merits of the violated right, and the claim for just compensation is filed closer to the judgment or even separately if the damages are difficult to calculate.

It was important to file the claim quickly, as there is only a four-month time limit from the date of the crime. In addition, the European Convention on Human Rights was about to expire in relation to the Russian Federation (the Russians had withdrawn from it). The calculation of damages is still ongoing as the war continues.

Forbes.ua