Ben Aris in Hong Kong -
Delta Bank is the new kid on Ukraine's consumer-finance block. Only two years old and initially relying on international wholesale funding, Delta Bank should have been hammered by the current crisis. But some deft footwork and prudent planning means it's rescuing banks rather than looking for a bailout.
Delta Bank and state-owned Oschadbank said in the middle of November they would create a consortium to rescue troubled banks, Delta Bank co-owner Mykola Lahun told a banking forum organized by Adam Smith Conferences. "We are in the process of creating a consortium with Oschadbank to rehabilitate banks," he said.
To put itself in this remarkable position, Delta Bank hasn't actually done anything particularly special; it simply copied the enormously successful Russian consumer lending operation Russky Standart (Russian Standard bank) - but with a few important differences. "The bank was founded in 2006 as a copy of Russian Standard, but we also looked at the experience of some other countries, like South Korea as well as other Eastern European countries," says Vitaliy Masyura, first deputy director of Delta Bank on the sidelines of the first-ever Russian and CIS Capital Markets conference organised by the Financial Times in Hong Kong in mid-November.
The key to making a consumer bank work well is to develop a good scoring system that's used to decide who gets a loan. While the likes of Russky Standart and rival RenCredit, the consumer arm of the Renaissance Group, spent millions on buying and developing scorecards, Delta Bank took a cheaper "suck it and see" approach. The bank hired an expert panel to draw up the first scorecard system that was ready in 2006 and has been constantly revising the card as the statistics pour in from actually doing business.
The bank also uses the traditional points of sale like supermarkets to push its loans, but unlike its Russian peers, it has been very fast to try to wean the punters off express loans and instead issue proper credit cards. "Now revolving credit cards are two-thirds of our credit portfolio," says Masyura. "Cards have the advantage of lower cost, you don't have to pay commissions to the sales staff and, most importantly, you can build a long-term relationship with the customer."
All the leading Ukrainian banks have got into the consumer lending business and are battling it out in the market place, but the advantage of revolving credit from a credit card is that once the card is issued, a bank tends to hang on to that customer. Delta Bank, whose name is maybe better translated from Russian as "Profit Bank" as that's what Russians understand by the word "delta," started issuing credit cards in June 2007 and a year later had issued more than 1m. "The average loan is about $400 and [annual percentage rate] is up to 70%. It is quite high. When we started there was only one other bank doing the same thing, as most of the other banks were issuing debit cards based on their payroll business," says Masyura. "Replacing the consumer loans with the credit cards is a more efficient way to issue loans and [you can use the cards] as a customer acquisition product, as retailers are pushing the APRs down on the consumer loans."
How does a start up bank build up such a large customer base so quickly? The answer is to make use of Ukraine's vibrant media and the bank was from the start amongst the top-three biggest advertisers of bank products, spending over $6m in 2007.
The Russian consumer-oriented banks have also been pushing credit cards - albeit not as fast as Delta bank - but where the Ukrainian bank differs from most of its Russian peers is that a year ago it started to aggressively go after retail deposits. This has turned out to be a prescient move. A year ago, the bank had 25 branches and has increased the number to 75 this year. "A year ago we introduced retail deposits as part of our liability diversification strategy," says Masyura. "But we are not going too fast. We try and keep it at a sufficient and necessary number to finance the retail [lending] business. The bank branches only sell retail deposits. We didn't use them yet to issue loans. The only attract deposits to gather the cash to finance the lending."
Masyura says the bank looked at the building credit crisis that kicked off with a massive sell-off on the equity market and tightening of credit conditions in the summer of 2007, and decided to switch their funding from international to domestic sources.
A small and young bank, Delta Bank managed to raise $200m in 2006 and another $250m in 2007, but has already paid off $400m of this amount and now finances all its lending with the domestic retail deposits. "We understood that we are a young bank and understood you need to establish a certain amount of trust to gather deposits, so we offer customers the highest interest rates in the Ukraine," says Masyura. "Right now, we offer close to 20% in local currency. Everyone has now caught up with this level because of the need for local financing, but a year ago no one was offering this rate - our rates were at least 1% higher than the next highest rate."
As the bank was only a year old, it raised money with a few targeted private placements - the Russia-based Icon Private Equity fund managed by Kirill Dmitriev bought a stake, among others - as well as tapping a few private wholesale funding investors and replaced most of its international funding with domestic sources just as liquidity in the international market evaporated completely. The cost of funding for Delta Bank may be the highest in the Ukraine banking sector, but it also still enjoys highest margins. From a standing start, the bank has built up an impressive market share. "In terms of deposits in 2008, we are number five in terms of growth - growing at 6.5% - and have now about 1.5% market share of the whole retail deposit sector. It is not much as we started only a year ago, but in two or three years time we are targeting 5% market share. The domestic sources are more than enough to meet the banks financing needs for the meantime," says Masyura.
Of course, the crisis has hurt the bank along with everyone else, but the pain is uncomfortable, not life threatening. "We have become more selective in terms of the customers that we lend to, because we are cautious about the macroeconomic situation. We prefer to sit on cash now and see how things develop," says Masyura.
The bank's decision to learn on the job as far as its scoring system was concerned means it has a relatively high non-performing loans (NPL) ratio of 6.5% of total loans, which has more recently climbed to 8%, says Masyura. But thanks to its strong funding position, the bank has increased its provisioning for bad debts and also added to the interest rate of its regular loans to compensate for the higher risks. "We are expecting the bottom of the crisis to hit the middle of next year and we will then decide on where to take the business next," says Masyura.
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