At one time, the Development Bank of Kazakhstan (DBK) accumulated ballast of problem loans, the share of which in the volume of the loan portfolio exceeded 40% (at the end of 2012) In 2014, the DBK got rid of this ballast, assigning claims for non-working loans to its "sister" for the holding company Baiterek, the Investment Fund of Kazakhstan (IFK). Until now, the bank manages to withstand the quality of loans issued against the backdrop of multiple portfolio growth. An important role in this matter is assigned to the risk management system.
"Where are risk managers watching?", "Are there any skeletons in the Bank's closet?" These were some of the questions "Kursiv" asked Vadim Kim, Deputy Chairman of the DBK Board of Directors.
- How do the Bank risk managers interact with credit officers and find a balance between the desire to minimize the risks and the need to carry out project financing plans?
- The issue you address is quite an intereting one. This "war" between credit officers and risk managers actually arises from the fact that there is not always a common understanding of strategic objectives. We have one goal for every staff member here in DBK - we find interesting and viable projects aimed at diversifying our economy and try to support them. And in this sense, the risk managers are not stop factor, but rather act as an Assistant and Adviser for credit officers.
- How have IFRS-9 standards affected the work of DBK? What has changed in bank approaches to risk assessment due to these innovations?
- The introduction of the new standard is the first and a giant step to the "unification" of risk management and IFRS. Earlier, we had separate management reporting reflecting risk statements, and financial reporting in accordance with IFRS. The introduction of the new standard required the integration of these two components. We have been working hard for the last two years to build that relationship. All three areas of IFRS 9 are important to DBK: the recognition itself, calculation of provisions and hedge accounting. We have reviewed the business processes in terms of improving internal control and developed the necessary methodology to properly reflect transactions in the financial statements.
-Whether the bank takes currency/exchange risks into account when considering projects. How exactly?
-There are two types of currency/exchange risk. The first risk is a typical one, when we provide customer with financing in foreign currency, and the customer does not have the foreign exchange revenue. In such cases we try to convince the client that it should consider the possibility of financing long-term project in national currency. Perhaps, this will be more expensive in the short term because of the interest rates. In the long run, however, project economy may be more favorable. If the customer refuses anyway, and we understand that the foreign exchange risk is significant, then we decline the loan.
The second type of currency risk is the contract risk. The project equipment is mainly purchased abroad, and production, supply, and installation takes a long time, often more than a year. The exchange rate may change during this period. All this imposes a certain currency risk to the project payback. As a result, a situation may occur where the client will be unable to service its liabilities. In such cases, the Bank considers the structure of the transaction and may help the client to manage currency risk.
- What is the current quality of the DBK loan portfolio, the proportion of non-performing loans? Are there any "skeletons in the closet"? If the Bank shall use the practice of transferring problem loans to other development institutions within "Baiterek" Holding as it has done in 2014?
- The quality of the DBK loan portfolio is currently good. The proportion of non-performing loans with overdue payments over 90 days in the gross loan portfolio at the end of the first quarter stood at 2.41 percent. As for the "skeletons in closets", the Bank has no such "closets" to store "the skeletons" in. That is, the Bank management does not hide real situation caused by bad assets from the concerned information users. In this regard, I wish to inform you that, as for the interbank lending, the DBK faced defaults from "KazInvestBank" and "Delta Bank". The total amount of bad debt on these two banks is KZT 21.8 bln., that would not substantially affect the quality of the loan portfolio.
With regard to the financing of investment projects, the proportion of non-performing loans here is also insignificant-2-3%. However, it should be considered that the loans issued by the Bank are long-term ones (7-10 years in average), and funded projects are often technically and technologically difficult in execution and require high quality participation of all stakeholders (contractors, shareholders, management of the company, etc.). This all carries increased risks for the Bank. Therefore, we are always ready to ensure that a project can become toxic and stop generating cash flow.
Not to speak to soon, but I would also note that the DBK portfolio currently has no candidates to be transferred to the (knocks on the table), I hope this is the practice will no longer have to return to.
- Since we have started talking about interbank lending, what risks does it pose to the DBK? Will the Bank change approaches in this direction given the current situation in the financial sector of the country?
- What is the difference between project funding and the bank funding? In reviewing the project, we create such a funding structure that provides reasonable guarantee for creating an asset on the client's balance. In this case, we have access to information, and we see the project "from the inside", i.e. how well it is elaborated (FS, DED, contracts with suppliers and contractors, the financial model, etc.), and what is the quality of its cash flows.
When we finance commercial banks, we provide funding for asset creation. However, we do not see the quality of these assets, since access to information about the real situation in the banks is limited to financial statements, periodic reporting to the National Bank, the information provided by the international rating agencies. And here I would like to draw attention to the fact that we see the regulator has become much more active in clearing balances of the Second-tier banks, establishing requirements for risk management and internal control systems at banks. The quality of banking supervision has increased significantly.
As regards to the second part of the question, I would like to point out that the banking sector in general never stands still and there are always some movements up and down. Seizing the moment and to reacting, taking the necessary corrective measures - this is the part of the risk management system. In turn, we constantly keep abreast of and look what's happening at the macroeconomic level, in Kazakhstan, in the banking sector, and take one action or another depending on the change. Our actions can be both at the level of strategy (for example, in terms of changes in our risk appetite towards the second-tier banks with one rating or another), and at the operational level (for example, in terms of improving our approaches to financial analysis of banks' financial status).
- How does the perfect borrower that meets all the requirements of the DBK risk management looks like? Are there any such borrowers?
- There are no such clients, actually. Any customer of the Bank is valuable because it carries a business idea, at first. According to our mandate, this business idea is important for the development of the national economy. The most important thing is that the client understands the project is viable and properly elaborated. Such a project is interesting for the Bank.