Press releases

It is important to use intellectual capital and technology

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Marcia -Elizabeth Favale

At the moment, it is quite difficult to imagine a world without modern technology. Tech innovations are firmly entrenched in every aspect of human life: from industry and finance to medicine and education and is developing at an exponential rate. Given the pace of application and rapid innovation which provides a competitive and comparative edge, it is important not to be an out-sider. In a special interview for Forbes Kazakhstan, Independent Director of the Development Bank of Kazakhstan JSC, investment banker, hedge fund portfolio manager, internationally ranked emerging market credit analyst, entrepreneur and Tech inventor, Marcia -Elizabeth Favale told why no one can afford to ignore digitalization and smart capital. One of the best international analysts in the financial sector, she shared her vision of work of the National Development Institution of Kazakhstan.

- Ms. Favale, in your perspective, as an Independent Director of DBK, what has changed over the 4 years that you have been working diligently at DBK and, most importantly, what needs to change in the Bank?

- When I joined DBK, people were surprised by my style of being an independent director and committee Chairwoman. I like working with my sleeves rolled up and in creating an environment that best utilizes the skills and experiences of all committee and board members. A board and its committees shouldn’t be a rubber stamp. Rather committees should be working committee, a place or a forum where analysis is the driver and where you can actually challenge, and ask tough questions and work as a team. This improves performance and given the important of DBK to the Country’s economy, imperative to good decision making. I have been told that DBK can be considered as a benchmark in terms of how it welcomes the independent board members efforts to continually improve governance, transparency, and analytical and contextual thought and the implementation process. We all have contributed to a culture of team-work that continues to positively impact performance. It is important to note that the DBK board culture would not exist if it were not fostered by its leaders, Mr. Zhamishev, and now Mr. Sarkulov and if not supported by Baiterek board participants and the chair of the DBK board, Mr. Arifkhanov.

What needs to change? I don't think anything needs to change as a Board or our culture on the Board. DBK need to invest more into technology. Strategically, Kazakhstan needs to better use and foster digitalization, which is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities, and employ smart capital that encourages productivity gains. The world has gone digital, DBK and Kazakhstan have to go digital and encourage investments that positively utilize technology for sectorial efficiencies. Not a single company or Country can afford to ignore the importance of productivity enhancing investments.

DBK has done some notable things. One thing I am very proud of is the first-ever tenge denominated benchmark Eurobond deals. The success of the tenge eurobonds, with foreign participation, opens International appetite for Tenge exposure and an avenue of funding that minimizes currency risk. I would love to see the Bank, selectively and within its mandate, participate in joint funded projects with foreigners, which in turn would help the Country’s FDI efforts. Foreign investors would welcome the Bank’s credit expertise and funding participation.

- Recently the World Bank has published the study “Overcoming stagnation of productivity”, where they are pointing to the fact that economic growth in KZ can no longer be sup-ported mainly by increased investment. What do you think about that?

The World Bank study is talking about the importance of productivity gains, which are essential for a healthy economy. This comes back to my earlier statement. Kazakhstan must encourage technological innovation, and the application of smart technology for sectorial-efficiencies through the value-chain, and it needs to be part of the business and Country culture. The need to invest smart money that propels productivity gains is evident throughout economic history. Investments into the Country alone does not create a competitive or comparative advantage. You need smart capital.

DBK can help the development of this culture, and to an extent does so, by critically assessing the technological profile and sectorial productivity gains of the projects financed. Fostering this environment where Kazakhstan is able to employ smart capital is of paramount importance. So don’t just throw money into agriculture, put smart money into agro-tech; not just oil and refinery, but into new technological innovations; not just a hospital, but into smart hospitals. For example, Kazakhstan is in a very geopolitical beneficial location, so let's put money into the technology that increases logistics productivity and therefore efficiency —enhancing the Country’s investment appeal.

- You said that DBK is a benchmark now. Can you recall the most successful projects with your participation?

- We, as a team, have all contributed to the successes of the Bank. And for me to say "Oh I personally did this" is not correct. Besides the tenge eurobond deals, I am very pleased with our focus with regard to import substitution industries such as poultry. Most recently we have financed the Makinskaya plant that created 700 jobs in the region. Given the technology employed, the Makinskaya plant is able to supply international food chains with high quality product. I’m also excited that the Bank is focusing on green tech and renewable energy. Most recently we financed a Wind Turbine company. I would like to see more AgriTech investment. Agriculture can be the new "black gold" for the country as food security grows in importance. I am happy that we continue to invest in mining, aluminum production, with a view to improve productivity- in machines that do better, in technology that is more efficient and productive.

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- The quality of the loan portfolio is a very pressing issue in the Kazakhstani banking system. What can you say about this in the context of DBK?

- When we talk about NPLs – non-performing loans, we need to make the separation between the commercial banks and DBK. We are not exposed to retail, and extend loans at a longer maturity and at more competitive rates. But I think the best way to answer this question is to give you the numbers. In 2009 the NPLs were around 6.6 percent by the end of 2018 it was at 0.5 percent. So the journey has been well navigated. And I applaud management for doing a great job.

- Can you share the "recipe", how not to drop the quality of the loan portfolio?

- You have to be vigilant and proactive and engage in regular discussions and oversight. We look to be forward looking. Rather than saying: “Oh my god, something happened to the credit, or the tenge devalued - what do we do?!” Experienced risk managers know that risk is something that you manage, proactively. That's why in DBK we created an informational structure that allows for regular reporting. We know for example the currency exposure of the Bank each month, and at what devaluation level we have problems with a particular creditor or a group of creditors and therefore our own liquidity exposure. We understand the challenge of recovering collateral and continuously probe collateral value of a credit. We discuss the situation of the larger banking sector and actively manage sectorial and bank related risk. We consider global trends or political policies that may have direct or indirect impact on our credit portfolio. We discuss at the committees what do we do if a certain situation happens. So we have a game plan. I think that over these years we’ve been proactive and vigilant over the credit quality of the DBK portfolio as well as DBK itself. Nonetheless, the spirt is to always find ways to do better and to that end we continuously challenge ourselves.

- At one time you contributed to the successful debt restructuring of the commercial banks in Kazakhstan. Was that experience useful in DBK, in terms of the work with the problem borrowers?

- I think what you are referring to is the 2009-2010 crises. At that time I was the Independent Restructuring Advisor to BTA Bank and was the Senior Advisor to the prime-minister, Karim Massimov. I also advised on the restructuring of Alliance Bank and Temir Bank. By working on these restructuring, in addition to having been a bank analyst at UBS, and having invested in banks as a portfolio manager, I gained operational knowledge of the causes of non-performing loans. More specifically, the structural deficiencies and failures of oversight and management and the difficulties in recovering your asset and collateral. One of the most clear structural fail-ures was the lack of transparency and a lack of a probing culture within the banks. It’s important to ask questions and not to be penalized for doing so. Being diligent should be welcomed. So the answer is yes. This experience and adding to this experience, my over 20 years in analyzing and in investing in banks worldwide, benefits DBK through a more questioning and proactive and critical view to credit and structural analysis.

- As far as I know, your "working romance" with Kazakhstan has been going on for 18 years. Please tell us more about your professional experience in our country.

- That's right, the first time I flew to Kazakhstan about 18 years ago. I remember my first flight from Almaty to Astana, now Nur-Sultan, at 6 o'clock in the morning. I was able to see Kazakhstan’s beautiful geography, and over time witness the development of Astana. At the time of my first visit, I was a Managing Director at UBS in London, Head of CEEMEA and LATAM Emerging Market Corporate Research and a Member of UBS Emerging Market Steering Committee and Credit Committee (for capital markets). We did the first Eurobond for the Development Bank of Kazakhstan, bringing DBK into the portfolios of foreign investors. My interest and support for Kazakhstan continued. When I was a portfolio manager at Brevan Howard and then Advent capital, I actively invested in Kazakhstan exposure.

- During the financial crisis in 2009, I was invited to work on the Restructuring of BTA Bank and Alliance and Temir Bank and on the second BTA Restructuring in 2011. I want to note that BTA Bank became a benchmark, as the first successful bank bail-in during the financial crisis, and is a Case Study published and thought at The University of Oxford where I teach part time at the Said Business School. After the restructurings I worked on the People’s IPO. During this entire period, I was the Senior Advisor to Prime Minister Mr. Massimov and an Advisor to Mr. Kelimbetov, the former CEO of Samruz-Kazyna. I subsequently was an Advisor to Prime Minister Mr. Sagintayev. I have the privilege to be an Independent Board member at DBK and a former Independent Board member at KazakhInvest and to work closely with the current Government. Working in Kazakhstan, I’ve had the privilege to work with some of the most visionary and highly professional, intelligent people who always gave me a sense of “let’s make Kazakhstan better”, “let's push the country forward”.

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- How do you cope with such long and frequent flights?

- For a top finance person, and even a tech entrepreneur, you must be global. I spend a lot of my time on a plane, and it's been that way since the first day of my financial career, straight out of university. I began my carrier doing Japan M&A and then covered the emerging markets, often flying to Latin America, the Middle East, Africa, Central Europe, and Central Asia. How do I cope? I like what I do. I don’t see getting on a plane as a chore, on the contrary. So first it is a state of mind combined with taking care of your body—eating well, exercising, hydrating, and a lot of yoga – it provides a clear mind and a calm mind and body. I love what I do. Of course, it's tiring, you can't do it every week but I do enjoy traveling to Kazakhstan and have a keen interest in my daughter’s birth Country.

- And the last question. In your perspective, what qualities a successful independent director have to possess?

- Oh, that's a very good question! I think an Independent Director should foster a culture of best practice and make it real within the culture they are working. It’s about being an experienced leader, with specific and broad knowledge and the ability to transfer this knowledge and experience, contextually. You must be someone who guides, stewards, shepherds people, and has great communication and motivational skills. It is very important to be generous with your knowledge and transfer your skill-sets in a way that motivates people, in way that they can absorb it, digest it and use it in an everyday context that directly impacts the institution; and, whereby people feel that they are growing as a result. Being an Independent Board member means sometimes not making a popular decision; but doing what is right because, it is the right thing to do for the institution. I think this is extremely important because excellence breeds excellence. If someone asks you to be on the board, you assume they respect your judgment and integrity.


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