Meet Peter Baron, the chief executive officer of VAB Bank, one of Ukraine’s larger banking groups.
Peter Baron is chief executive officer of VAB Bank, one of Ukraine’s larger banking groups. Born in Moscow and educated in London, Baron has nine years of banking experience. In this Kyiv Post interview, Baron said that inflation and the government’s response are the main cause of Ukraine’s credit crunch.
KP: What is VAB Bank’s market position?
PB: It is very difficult to say. For example, in [investing pension funds] we have 40 percent of the market, in leasing, we are the leading smallandmediumenterprise provider [in financing equipment and supplies]. I’d say in banking we’re in the top 20. In insurance, we are 30th. In reinsurance, we are No. 1.
KP: How is inflation affecting the banking market in Ukraine?
PB: Inflation is a key driver when you talk about the national currency. The government is trying to fight inflation by printing less money, releasing less into the system. You can see that this slowed the rate of growth in retail banking, particularly mortgages. The higher interest rate on longterm loans, like mortgages, really slowed growth.
KP: How is the banking system being affected by the credit crunch and the world liquidity crisis?
PB: I do not believe there is a credit crunch in Ukraine, even though the country is integrated in the global economy. Ukraine has been able to delay the impact for quite some time. Yes, it costs more to borrow on international markets. But we never suffered from a lack of foreign currency.
The domestic credit crunch was caused by the government’s antiinflationary policies.
KP: So retail lending has slowed dramatically. How do the books look yearonyear?
PB: The mortgage market has slowed down significantly. But I don’t see a significant slowdown in the growth of consumer loans, cash loans, credit cards and overdrafts. The pace isn’t as good as last year, but the volumes are still very high.
KP: Ukraine doesn’t have effective credit rating agencies. How does the industry mitigate risk?
PB: We have found that price [increased interest rates] doesn’t necessarily mitigate risk. Price often attracts people who actually don’t care because they have no intention of paying you back. Quality customers actually care about pricing. The lower the rates, the higher the quality of our customers. Unfortunately, Ukraine doesn’t have an efficient credit rating system as seen in the West. Credit bureaus are being set up now. We already have elements of them and they are learning. The biggest problem for risk management in Ukraine is the mentality. People do not frown upon those who do not pay back bank loans. It is almost acceptable in Ukraine.
A person who has defaulted has not felt anything yet. But they are in the system. Eventually, in a few months, or years, when the credit bureaus are set up, their lives will get more difficult.
We are also seeing, finally, credit collection agencies being set up in Ukraine. This is potentially a very young business. It has only been around for two or three years. But they are learning and becoming more efficient.
KP: So how much bad debt is the industry carrying?
PB: It might seem there is a lot of bad debt in the system, but I don’t believe a large amount of bad debt exists for the midterm. It does exist in the short term. But in the mid and longterm these people [who defaulted] are in the financial system, they live in this country and they will mature. They will want to take loans in the future and they will have to repay their loans.
KP: Many of your competitors have been very aggressive with pointofsale lending. What is the situation now?
PB: Everybody has been rolling them down. Most of the banks that went out aggressively gathered statistical data and identified good customers and are now scaling back. It isn’t as efficient to throw money around anymore.
KP: How about mortgage lending. Who is buying houses and flats today? Who is your average customer?
PB: What we have here is an emerging middle class employees of large and medium corporations with high salaries. The salary inflation in this country over the last three years has been unbelievable. When I came here five years ago, the salary for a third or fourth level manager was $700$800 per month. Today it is $5,000$10,000 per month, a tenfold increase. Housing has increased about three times. Of course in the regions, the salaries haven’t risen as high, but the housing is much cheaper.
KP: There are about 170 banks in Ukraine. Is the country due for consolidation?
PB: This is going to start happening when the pace of growth drops significantly. Whenever you can grow organically, at the rates we see now, it doesn’t make sense to shift your focus to acquisitions. Banking acquisitions are difficult. Bank mergers are difficult. Value is often lost.
I think this will be the case in three to four years when the pace of growth flattens out. But right now there is a lot of organic growth left in the system. There may be exceptions, with multinational banks entering the market by acquiring small or mediumsized players. They may want to acquire local banks to increase their share.
