Published on February 26, 2019
Anete Skurbe, Inguna Ukenābele, LETA
Translated by Finance Latvia

 

In the past few years, Latvia has achieved a lot, and there is clear, intensive movement in this country towards addressing the issues surrounding the control of money laundering. Therefore, the issue now is more of whether the officials responsible will be able to “sell” this story, explained Chairman of the Finance Latvia Association and Citadele Bank Chairman of the Board Guntis Beļavskis. He also discusses the innovations which are more frequently entering all of our lives, banks’ competition with FinTech companies, and the development of loans.

 

How has the bank done in the past year? Have you managed to achieve everything you set out to do?

As you know, we can’t reveal any specific information before we report our results to the stock exchange. However, the year, in general, has ended on a positive note. In truth, last February, within the space of one week, both the ABLV Bank event and the arrest of the President of the Bank of Latvia took place, and it seemed as though the year would be very challenging. Everyone had to work harder for a few months at the level of the Finance Latvia Association and with the government to understand everything down to the last detail, and then step by step we kept moving forward. The path to a solution for specific aspects is still a long one, and there are still many unanswered questions, but, regarding our bank, I feel good about the past year. There will be no surprises when our financial results are published. In basic indicators, the year was certainly the one which management wanted to see, especially bearing in mind that the industry was experiencing a crisis and much uncertainty.

You certainly also had to work to get rid of high-risk clients. How did this affect the bank’s operations?

I wouldn’t want to particularly emphasize this process. I should begin by saying that this process for us was comparatively small - at the start of the year, these clients amounted to less than a quarter of our business. All of the bank’s clients have always been vetted very carefully in accordance with established guidelines for quality. Several years ago, we made the strategic decision that it would not continue to be worth it to serve the clients of this segment over the long term; therefore, we have systematically reduced this segment. Furthermore, these clients were able to offer either cash guarantees or high-liquidity securities. We are already seeing that even banks which reduced their number of these clients by three or four times had practically no effect on their balance.
Meanwhile, after these February events, we decided to stop working with higher-risk clients completely, because no matter how secure they were or how long we had worked with them, it became too difficult for the bank.

Those clients accepted your decision without complaint?

It’s never pleasant for us to split with good clients merely for geopolitical and strategic reasons. However, the proportion of these clients was insignificant to our balance, and what we had to do in 2018 has been done, and our current focus is solely on the Baltics.

But are just Baltic clients enough? Are you thinking of attracting clients from other countries?

Our bank’s long-term goals are definitely not just limited to the Baltic market. However, in the next few years, speaking of any other markets would be too ambitious. We still have a relatively small market share in Estonia and Lithuania. To reach around a 10% market share in the Baltics, which would be natural for our bank, we still have a couple of years of work ahead of us. With the group of products and technologies which we currently have on the market, the bank has its natural place. We are a local bank with products adapted for the local market, and technologies created using inspiration from local clients. In Latvia, we see that, over the years, despite various crises, image problems and competition, we have not just maintained our market share, but increased it. We still have a lot to do before we reach this natural market share in Lithuania and Estonia, including offering a much wider range of products in Estonia starting this spring.

Several years ago, the bank planned on making an Initial Public Offering on the Riga and London stock markets, but this was put off for an unspecified length of time. Is the bank still considering the option of returning to this issue in the near future?

This is a question for the shareholders. If I had to answer as a representative of the management, the stock market is an opportunity to attract additional capital. Currently, our capital indicators are more than sufficient and in line with our growth plans. This was also noted by the rating agency Moody’s, which last year increased our rating by two levels, giving us a positive prognosis. If the capital market is good and accessible to Baltic businesses, if we and the shareholders have big, far-reaching plans, then this possibility will be considered. Any business which works according to good management principles and already lists its securities looks to the stock market as an option for attracting additional capital if needed. But this isn’t a management-level issue. Our task is to work with the bank’s development plan. It’s shareholders who decide on the need for additional capital.

Do you plan on issuing new bonds?

We certainly want to be active in the bond market. We don’t have a need for second level capital, but a Minimum Requirement for own funds and Eligible Liabilities (MREL) requires banks to look for long-term financing for a set proportion of their assets. I think we are more than ready to address the capital market, and as soon as we have a need, we will do it. For example, LHV Pank recently issued this type of security in the Baltics very successfully, and it is evident that demand is very large.
We are ready, and regardless of whether it’s an Initial Public Offering or a bond issue, the capital market is one more resource available to us.

Latvian law changed regarding remote service opportunities, and you have already introduced the opportunity for new clients to apply remotely via the mobile app. What other changes can we expect due to these new opportunities?

In Europe, this is a very extensive topic. We can even look to our neighbors, Lithuania, who are currently practically drowning in applications from various financial technology and payment service providers, because the Bank of Lithuania clearly stated several years ago that it wished to become the gateway to modern financial services in the Eurozone. I think that our Financial and Capital Market Commission wants to finish its work regarding complicated and high-risk clients as soon as possible and turn its attention to something more modern. We have talked with them and we are of the same opinion that this is the next step in which we can use the whole financial infrastructure which has been forming here for years - banks, qualified people, and payment infrastructure. I am very hopeful about the development of this field.
Regarding our bank, the digital transformation in which we have invested many resources is slowly starting to give results. Our basic digital solutions - mobile app, payment card functions, and things we are still developing - are already allowing us to pull ahead of the rest of the market. In this regard, we will only accelerate. We have also made strategic investments, working hand-in-hand with Mobilly, the largest payment service provider in Latvia. We have always said that mobile technology and the use of smartphone functions will be the basis of the bank’s ability to compete with FinTech businesses.
From a legal point of view, Latvia is also quite well prepared. We can now accept clients without ever making them visit a branch. We also saw that, in the first few weeks, interest in signing a contract with us through the mobile app was high; people are excited and are trying it out.
We have to maintain our niche. There are worldwide trends; there are businesses such as Revolut and N26 who are developing a new market standard. Our task is to make this standard more convenient for local clients - here in Latvia, Estonia and Lithuania. Our innovations and investments in developing IT have been focussed on transitioning to the same type of development offered by FinTech companies. For example, we are currently building our mobile app with the same principles used by FinTech businesses, and we are constantly renewing it instead of releasing a new version every few years. Our development plan is truly exciting. Clients are already saying that our mobile app is at another level from classic banks.
Furthermore, I believe that, in the coming years, the whole industry will have to make important decisions. The main issue is whether all of these new financial businesses will be able to develop a sufficient range of products, service and compliance level so that clients choose them as their main bank, have their wages paid into them, etc. That’s what is exciting because I believe that all these new businesses will have to build a bank anyway at the end of the day. This is shown by the fact that they are increasingly applying for banking licenses. Attracting a million clients from different countries is just the beginning, not the end. These businesses will have to settle down in one country and begin working as a bank with loans and other banking services. At some point, the classic banks and these new businesses will meet, and at the point at which we meet, I believe that we will be able to offer the same thing as them. Except we already have the parameters of the classic bank, while the new businesses will have to develop theirs.

You already mentioned that many FinTech businesses in Lithuania are applying for and receiving banking licenses. Do you already see businesses such as Revolut as your direct competitors in this market?

I have a very simple attitude towards our competition - the more we can feel them, the better! We have built this business based on competition. Competition is what gives us energy, prevents us from dozing.
Competition with FinTech businesses is not yet fiscal, but rather communicative. An image is being created on the market that this is something very new and good, and will soon come and stick their fingers up at all the banks. That’s enough to perk us up. But, fiscally, we don’t feel any competition from this side.

What are the new things that will soon appear in the banking market? In which areas will they happen?

With innovations, it’s always the case that, out of ten, maybe one comes into use. Processors are developing so quickly and offer so many opportunities. Everyone is rushing to use them, and we can already see that now, with our phones, we can do this and that, and we can make payments happen on our phones. I am convinced that the only things which will develop are those which clients use in their daily lives. Warren Buffett had a good definition for which businesses to invest in. He invested in businesses which were in customers’ minds, their daily life. And in the field of payments, we have to carefully watch what becomes used by customers every day, rather than what people say is interesting and cool but doesn’t become part of their everyday life. This can best be seen by watching the actions of the average client. We can’t base our development on the 2% of clients who try everything and like everything that’s new. The development has to be based on our everyday clients and their actions.
For example, we see that contactless payments have been adopted by everyone. Why? Because it’s easier! We also see that in other countries which have introduced contactless cards - Poland and elsewhere - they became an instant standard. And so we also invested in other contactless payment methods, and we now offer products in sticker format, wristband format; there will also be others. But the main criteria - the clients like it because it’s easier! We can’t invest in payment technologies which can’t beat the simplest payment card. Well, for example, many people talk about phone payments. But the way I see it, you have to unlock your phone, open the app, scan the QR code, confirm the payment, and I think that it certainly won’t beat a card because there are more steps. You always have to think about competing with a payment card, because they will be in our wallets for the next ten to fifteen years. However, for example, a payment sticker on your phone which can be scanned on a POS terminal is around three steps less than taking a wallet out of your pocket and taking out your card. That’s why I believe in the things which are more convenient.
The next thing which will definitely develop, and is also in our mobile app, is our chat programme. Furthermore, it is a secure chat after logging in. I also feel very good about this kind of development. Chats have become our method of communication nowadays because they make life easier. In this way, we can communicate with another person without encroaching on their day. If someone calls me, I have to stop doing what I was doing at that moment to answer the call. Chats allow us to communicate later when it’s convenient. So we see that, nowadays, practically everyone uses chats as a great convenience.
Regarding payments, we should highly appreciate the fact that Latvia is at the forefront of instant payments. We are a step away from payments to any bank being made within seconds. This also allows us to overtake the payment functions offered currently by FinTech. A large proportion of these businesses are based on convenient, fast payment algorithms. These businesses have practically no place in this market because most payments in the Baltics happen in seconds.

In general, how willing are the Latvian public to accept various innovations?

The Latvian public always adopts everything which makes their life easier. But if the solution is too complicated, no one will accept it. There have also been those kinds of innovations. I really believe that the client will always say what does and doesn’t have potential. As I said, usually one in ten innovations which we can offer through phones or algorithms come to life.

But with all these innovations, are you not losing the client segment who don’t and won’t ever use them? For example, the older generation, who probably don’t use chat programmes and will still want to simply call their service provider?

I think it’s the opposite. Of course, it depends on the business and its service promise to clients. It has nothing to do with chat vs. phone, but rather the business’ commitment. For example, there are new businesses which have clearly defined that they will have no physical contact with clients, no exceptions. Meanwhile, in our case, the chat function makes communicating with the bank easier for those who wish to communicate in this way. Each client who uses the chat programme makes communicating with us easier because communicating through the chat is usually quicker and can also be put off until later.
However, this is an important issue, and here we can return to the issue of whether people will accept an institution that they can’t call up as their main bank and main service provider. Experience shows that the more we use a service, the more issues we have to resolve with the service provider. So the question is whether these institutions will be able to conquer more of the market than that fairly small amount of people who always try the newest things. I believe that we will meet in the market at the point when institutions have to provide regular contact with clients, introduce all compliance requirements, monitor cash flow, etc.

Will bank branches disappear completely?

If banks continue to work with small- and medium-sized businesses, with microbusinesses, then there will always be things which are easier to do in-branch. If we promise a client that a service will be provided, then we have to provide it. If we have said that small and medium businesses can receive financing for their development from this bank, then we have to serve them, and if a business owner from another Latvian town calls us, we can’t say, “Come to Riga, to Republikas laukums 2, and we will provide this service.”
At the same time, we have to look at truth in the eyes: the number of branches is decreasing, especially in places where people have greater mobility. The regularity with which people have to physically visit a bank is also decreasing. Once, it was certainly monthly, then every quarter, then every six months if that. If something only has to be done in person at a bank once per year, then people from smaller towns can drive to a branch in a larger town. As mobility increases, so does the option of doing many things remotely.
Therefore - yes, there will be fewer branches, but the range of services they offer will improve. They will truly be service centers, not places to wait in a long queue to pay a bill.

What is the future of cash circulation? It is said that it should significantly decrease, but, due to the shadow economy and other aspects, it is still significant in Latvia.

This isn’t really a question for banks. I think that banks would be happy for cash to cease to exist someday. On the other hand, we should respect the particularities of each country, and we shouldn’t hope that, in a few years, we will have a cashless society here like in Scandinavia. The reality is that a large number of people live hand to mouth, getting by with private cash transactions. You don’t have to like it, but it’s part of our economy. Of course, with time, this section will decrease. For example, we are currently working seriously with markets, because the market is the place where contactless payments could solve many things. Those who regularly shop at markets know that there is no option other than to walk around with a pocket full of coins. Ideally, stallholders will realize that they have to pay taxes, for which they can receive a lot of benefits. There are currently contactless POS terminals installed in the new Riga Central Market Gastronomy Pavilion, and we hope that this will gradually spread to other stallholders, as it will be much more convenient for both shoppers and sellers.
I believe that cash transactions will gradually be taken over by the ease of contactless payments as well as by the knowledge that the State Revenue Service will sooner or later ask questions about cash transactions. However, to hope that the amount of cash used in Latvia in the next few years will decrease by half, for example, would be naive.

People have also said that Latvia should close cash deposit ATMs. Do you believe that this won’t change anything?

I would be happy to close them, because they are expensive for banks, difficult to service, often make mistakes, the money is often dirty, stuck together or has paper clips in it, and all of these situations have to be resolved. But I don’t see what cash payments into ATMs have to do with the shadow economy or anything like that. Just the opposite: each sum paid into a bank account becomes visible. So a deposit ATM is more likely to be a filter.
We clearly see that cash deposit ATMs have become a depositing tool for small shops who, at the end of every day, go and pay into their account what they have earned that day. It’s hard to say where money paid in by private customers comes from, but, as I said, at least in this way it becomes visible. We should sooner worry about money which doesn’t appear anywhere.

You already mentioned that last year was very complicated. What is the current situation in the Latvian banking market?

The foundation of the Latvian banking market is clear: 90% of Latvian clients use one of four banks. This is the Latvian banking market. The fact that we have a range of banks which have historically operated in various niches of the market… it could be said that this is also the Latvian banking market, but as we now see, the link and impact of these banks to the Latvian economy is not at all significant. It’s probably quite difficult for those banks, because this business model, as we have heard from several sources, has ended. For example, when we decided to stop working with our relatively small section of high-risk clients, it barely influenced our income, because our decrease in income was balanced out by the fact that we no longer had to conduct compliance checks, etc. Plus, our main business is Baltic clients. However, how banks whose business is made up of a majority of high-risk clients will fare is difficult to predict. It will be very interesting to see.

Do you feel as though your clients are going to these banks which have begun advertising actively in the local market?

We see that our number of clients is growing. Maybe some are also leaving, but in general, we are seeing growth. However, if the competition grows, then that is very good! Building a bank serving such a universally wide range of clients is not so simple.
Changes to the banking market and Moneyval recommendations will still continue to be relevant for at least 18 to 24 months. At the same time, thanks to the hard work of regulators and the attention of the government, the crisis has been thus far managed very well. It will allow Latvia to release itself from a business model which would have become difficult sooner or later. Plus, afterwards, when visiting our business partners abroad, we will no longer have to answer the usual question: “Well, how’s it going with that Russian money?” I have been hearing this question for 17 years now. Going forward, hopefully, we won’t have to answer this and we will be an industry focussed on technology and modern banking services for local clients.

At the end of the summer, Latvia will have to submit a report on how it has introduced the recommendations set by Moneyval. What is your opinion - will we be able to do as they asked by then?

I am not so knowledgeable in the nuances of how Moneyval and the anti-money laundering Financial Action Task Force (FATF) rates countries. However, if I were Moneyval, I would be very proud of what Latvia has done in the past year. I would also be proud of what Latvia has done over the past five years, but I would admonish us for certain things being too slow. But Latvia has to be able to “sell” what they have done over the course of a year. If officials are able to “sell” this to partners, then I hope everything will turn out well.
I really don’t know how the evaluation takes place, but I know what the Finance Latvia Association has done; we all know what the banks have done. We know how quickly the number of high-risk clients has decreased and continues to decrease. This industry, built within the past 25 years, has simply ended over the course of a few months. That’s why, if I were Moneyval, I would be very pleased with what Latvia has achieved. But we have to be able to “sell” this, and there are unfortunately a few things which are completely unlinked with the banks - the investigation of economic crimes, etc. Unfortunately, economic crime is not yet a true crime here.
Meanwhile, with the banks, everything is clear. When representatives of the US FinCEN arrived and unleashed this Sword of Damocles, I didn’t believe that changes could happen so quickly. As residents and Latvian citizens, the most important thing for us is to reduce risk. Those bank clients who now remain with us certainly couldn’t provoke incidents like those which took place in Moldova and other places. For our citizens, this is a huge bonus. We can sleep soundly. Now, we just have to wait for Latvia’s reputation to recover and for the international financial system to see Latvia as an ordered environment.

But if we don’t “sell” this story?

I don’t think we need to focus on that so much. I see the country as having a clear, intense movement towards fixing these problems because money laundering affects our well-being in one way or another. It is largely a political issue, and our government and the Ministry of Foreign Affairs has a huge role in lobbying for this internationally. We know what we’re like - we are honest and hardworking, and if we have to do something, we do it, rather than trying to trick people or play political games. And we also know that we want to sort these issues out - the Ministries do, the police do, the Prosecutor General does, the Office for Prevention of Laundering of Proceeds Derived from Criminal Activity does. If we can “sell” this story, everything will be great. And if we can’t, then everything will also be great, but later on. Latvia is already world famous for getting things done and emerging stronger, regardless of the crisis.
At the same time, if one bank in a country receives a FinCEN warning for systematic money laundering, if several banks have stated that the President of the Central Bank has tried playing with influence, then what worse thing could happen to us? Last February, we were in the headlines around the world as the epicenter of money laundering with the potential involvement of the Head of the Central Bank.
At the same time, just last year we entered into a correspondent relationship with Citibank. They knew the general risks of Latvia very well but saw us as a separate institution with separate controls, etc. I think that the other large banks are in a similar situation, and they will continue to operate.

How do you see the Prime Minister’s initiative on reforming the financial monitoring system?

I have said before that we have to use this reputation crisis for the benefit of Latvia in the long term. There is a saying, “Don’t downplay a crisis!”. The new government and especially the Prime Minister’s resolve and understanding of this is a pleasant surprise - it is inspiring and shows that the country will have long-term gains in many industries. The basic elements of the reforms are considered, precisely defined priorities to ensure Latvia becomes an example for countries throughout the region. The path to this won’t be easy or short.

What are your predictions for the development of the loan market this year?

This is largely dependent on how banks view the process of implementing Moneyval’s recommendations, bearing in mind the risks of how it could impact the economy. Perhaps they will be slightly more guarded. We currently have no limits in this sense. Furthermore, in the next few years, we anticipate larger growth for our bank in Lithuania and Estonia, because our market here is already quite saturated.
The economy will continue to grow this year, thanks to internal spending, so loans are also growing.

One of the macroeconomic problems of recent times is that wages in Latvia are growing faster than businesses’ efficiency. Do you see businesses taking loans out at the moment to improve efficiency - for various innovations, process automation etc.?

I don’t really see this trend. According to market rules, efficiency has to be sorted out; it won’t be left behind. But I am not sure that it will happen quickly. The urgent workforce problem began around 18 months ago, and in the middle of last year, everyone recognized that the workforce mess is really significant. It has been too short of a time to make an investment analysis, prepare a plan, etc. But I am sure that all businesses are considering it. Especially those with a high intensity of concentration of manual labor. Sooner or later, it will sort itself out, because it’s hard to believe that significant changes to immigration policy will occur.

Banks often mention that it is difficult to lend to small- and medium-sized businesses because of their financial indicators. Do you see businesses’ balance sheets slowly being sorted out?

No. They are being sorted out in the sense that more and more businesses are working without the use of the shadow economy. But my experience also shows that small and especially microbusinesses worldwide do their financial management “on the back of an envelope”, and I don’t see anything bad in that. We shouldn’t worry that not all small and medium businesses know about cash flow projections, capital management and all the rest. It’s very good if they do, but for small businesses, this normally comes with experience. Plus, the strength of small and medium businesses lies in making decisions faster and with more flexibility. Although this doesn’t help banks to issue loans to these businesses.
The breakthrough will happen when banks are able to put this fairly scattered balance structure through an evaluation model and offer small- and medium-sized businesses individual solutions for evaluating their risks and issuing loans. That’s our goal - to create a model suitable for the smallest businesses whose balance sheets will never be like the larger companies. It would be wrong to say: we should wait for them to sort themselves out before issuing a loan. At the end of the day, small and medium businesses are the heart of the economy. Our task is to change the economic pulse of the region, to find the key to small and medium businesses.

Last year, Citadele signed an agreement with the European Bank for Reconstruction and Development (EBRD) on its guarantee programme. Is there a lot of interest in EBRD guarantees?

Interest is large. Bearing in mind that we don’t have such a large core capital and loans for 10, 20 or 30 million Euro, we don’t like issuing them on our own, as it poses a concentration risk; sharing this risk with the EBRD makes it easier for us to work with larger transactions. Furthermore, I think that this won’t be the end of it, as the EBRD is our shareholder. Due to the geopolitical situation, they want to do more in the Baltics again. This is a good thing.

Which industries are currently the most active in receiving loans?

Construction. Before, they had less activity, but now they have access to EU funds. Meanwhile, the real estate market is slowly regaining a sense of reality. As always, agriculture is active. Transactions are also taking place in transport and logistics. The office and warehouse segment is active, but this can be explained by following the local economy, because there is too little office space in Riga, and soon there may be too little warehouse space. However, there is not currently a clear leader. Of course, we would like to take part more in the development of manufacturing, which is developing real added value. Soon bank financing will also be needed for Rail Baltica projects.

How could loan rates change, because there is currently speculation around changes to the European Central Bank’s set base rate?

If, two or three years ago, no one wanted to forecast any changes to ECB rates, then today we are closer to that moment. I don’t want to be a fortune teller and say this year or next year. But, sooner or later, rates will have to be raised to ensure the sustainability of the European fiscal space. We are closer to this date than one, two, three years ago.

How are deposits and investments currently changing?

The amount deposited depends on the economy - local client deposits are growing. A bad sign is that deposits in business accounts are growing because this tends to mean that they are not investing. But, in general, there are no big changes. Perhaps Luminor will bring about changes, causing client “migration”. But the general picture is currently quite conservative.
The proportion of clients which uses risky instruments to grow their savings is around the same as before.

Can this be changed somehow?

While the difference in income rates between the most secure term deposits and a secure alternative investment will remain as small as it is now, it will only really interest those residents with a lot of money and for whom this difference will mean a difference in income. So I am not so optimistic. It won’t change until our household savings grow enough that one extra percentage point means something. In developed nations, the investment structure only differs in that their households have much higher savings. If the average Latvian yearly household savings is 1,000 - 2,000 Euro, then you won’t really play on the stock exchange with that.

Stock exchange representatives often complain that Latvian pension and investment funds managed by our banks invest very little in the local economy: business shares and bonds. Are you willing to invest more? Under what conditions?

This pressure hasn’t gone unnoticed. Funds are certainly looking in this direction, especially bearing in mind discussions over whether level 2 pensions are a sustainable solution for Latvia. This unmistakably means that funds are thinking about local Baltic investments.

But, looking at what is offered by the Riga stock market, does it have interesting investment opportunities, or is something missing?

A lot is missing from the Riga stock market. I think that we should sooner look at risk capital funds. The true benefit to the economy will not be from some pension fund buying shares of a company that has been listed for a long time, but from pension, capital money coming into a well-managed risk capital fund, which will, in turn, stimulate the creation of new businesses.

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