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Karlis Cerbulis, Senior Vice President of NCH Advisors, Inc.
As the bank leadership changes, will anything change in the bank's continued operations or goals?
Our strategy and course of development remains the same. At the same time, changes nowadays, particularly from the impact of Covid-19, happen every day regardless of any changes on the bank's management board.
There may be changes in management style, but it is too early to say what specifically. I am not Guntis, and we definitely act differently, as different people do. However, I have no different plans in particular that I could tell you about now.
In general, how do you rate the bank's operations? Perhaps you see bigger opportunities for growth in certain fields?
One of our strong points is that we are a Baltic bank. This means that we want to be here and support the Baltic economy in good and bad times. We want to support everything that is local-regarding large businesses, medium businesses, small businesses and private customers-and, in the end, be a catalyst for economic growth in the Baltics, as the state of emergency will come to an end and the economy has to recover. We see opportunities everywhere, but right now, during this state of emergency, there are many uncertainties and unpredictable factors.
With our acquisition of UniCredit Leasing, we are also aiming not only for natural growth.
This means that you are ready for more acquisitions?
It could happen.
Do you have your eye on anything interesting? Including in Estonia and Lithuania?
We have ideas. At the same time, takeovers are always opportunistic to an extent, and you cannot fully control everything that happens, because there is both a buyer and a seller. However, we are certainly open to new takeover deals.
Speaking of specific countries, we are currently comfortable enough in Latvia. However, we have a smaller market share in Estonia and Lithuania, and natural growth in these markets may take longer. So it would be nice to find something in these markets which matches our profile, of course once the global situation has stabilised and can be predicted.
But you're thinking about leasing and similar services, rather than another bank?
It could be many things. At the same time, merging banks is very complicated, and we have already experienced this in the market. We prioritise things which can be adopted into our structure quickly.
That's why I won't say that merging with another bank is impossible, but there are also other ways to reach our goals. You can buy assets, financial service providers, etc. But I will emphasise that, currently, there is nothing specific on our agenda.
Latvia has several former non-resident banks which must now reconsider their future. Do you see any interesting assets that you wish to acquire, or is this sector uninteresting to you?
We are not interested in non-resident business. Full stop. The resident side is interesting, and it could be that one of the smaller banks has something in its pockets which we could be interested in. However, these are probably relatively small assets, so they are not our main focus.
How do you rate the past year, including the bank's work last year?
The bank's results last year were very good, at the same time, we always want more, and our aim is 15% growth. My opinion is that our growth was good, and, despite the state of emergency in Latvia, the bank is in a good shape. But have we achieved everything? By no means. We still have a lot to do, but at the same time we are satisfied with what we have achieved so far.
What are your aims for this year? For example, are you thinking about growing your market share?
Yes, we want to grow our market share, but at the moment our main task is to provide uninterrupted financial services in Latvia and the Baltics. We are a responsible business, and Latvia is our home market-we stand alongside our clients not just in good times, but also in difficult, challenging ones. The market share, of course, is important, but we mainly want to stand out from other market participants. In everything we do, we aim for excellence, because customer experience is incredibly important.
Have you seen an increase in number of clients as the banks who used to serve non-residents reduce their operations?
Yes. Last year we had more new clients than before. It seems that clients want to stay with us and clients want to join us.
At the same time, competition is fierce, because the market has good players. We respect them, but we are focused on how we can work as well as we can.
How large is Citadele in Estonia and Lithuania currently?
In Lithuania, our assets total more than 750 million Euro, and in Estonia around 287 million. However, this does not include UniCredit Leasing assets. With these, our assets in Lithuania will double, and around 200 million Euro will be added to the total for Estonia. In Latvia, our assets will increase by around 400 million Euro.
What is your aim in Estonia and Lithuania regarding market share or assets?
Size isn't the main factor. A stable client base, which we can serve in the best possible way, is much more important to us. If we can achieve this, we will attract more clients.
To be more specific, I will say that we want our operations in Estonia and Lithuania to reach figures which mean that we have a balanced offering throughout the Baltics. That's why we are currently focusing less on Latvia. This certainly does not mean that we do not have ambitions for growth in Latvia, but rather that we want our growth to be quicker in the other two Baltic states.
Will this be difficult to achieve? How strong is the competition in Estonia and Lithuania right now?
It will never be easy. We are not willing to compromise our profit. We want to increase our market share based on offering better services, better products. Up to now, we have demonstrated that we are able to do this, so that's how we will continue.
Our competitors are all the large banks-three in particular. And each market has strong local players. However, competition is a good thing, because it helps us become better. In some aspects we are ahead of other market players, in other aspects others are in front, and this enables us to ask ourselves what we can do better. We have also had good suggestions from our owners on what is happening worldwide.
For example, we have been made to think not only about how to create the best payment solutions in the Baltics, but also how to create payment solutions that can become global. Instead of thinking about becoming the best in the Baltics, we have to think about becoming the best in the world. For example, we were the first outside the Nordic countries to offer payments using phone numbers. I don't have to know your account number, I can transfer you money if I know your phone number. This is very convenient for various private payments, like splitting a bill with friends in a restaurant. This can now also be done with SEB clients.
This was an example of us working directly on introducing a completely new product to the market. Now we are one of the first to offer cards linked to Apple Pay. We are convinced that the more we can offer our clients what we call a "bank in your pocket", the more stable our position among the leaders will be. It is also a way of creating new products much more easily.
Speaking of new products, Citadele has for some time now offered various new digital solutions. How popular have these become among your clients?
The results are good. Last year, the number of clients using digital solutions grew faster than the total number of clients. In total, 40% of our clients currently use our digital tools. Plus, we have to remember that our total number of clients includes not just active clients, but also those clients who do not regularly use our bank's operations.
Our number of app users is growing particularly quickly; for example, in the past year our number of active mobile app users has increased by 64%, reaching 131,000. I believe that, in the end, most of our clients will use digital channels-the state of emergency will certainly promote the development and use of remote services.
At the same time, all banks are now offering digital services, so we want to be unique in offering digital solutions with a personal touch.
Additionally, we do not want to lose personal contact. This means that we are also reachable by phone for our clients. We do not want to be just a digital voice.
Is it the younger generation who are generally using digital tools, or does it no longer have any connection with age?
It is currently extremely varied, and this is generally linked with how comfortable people feel with smartphones. The youngest generation have grown up with them, but nowadays they are everywhere, and they are no longer unusual for others either. I remember when I bought my first smartphone-I really hated it for the first two weeks. But I gradually learned how to use it, and now my smartphone helps me do so many things that it would be hard to live without. That's why more and more people are switching to smartphones, because we can now do more and more things with them.
What is the future of banking? Is it linked with digital services, or will the traditional banking business also be important?
Call me old fashioned, but I still believe in personal connections and the experience we gain from speaking in person. At the same time, this doesn't mean that we cannot unite this with a digital experience. The digital does not negate the personal, just as the personal doesn't exclude the digital. We simply have to find the right balance.
I am certain that 98% of our clients will use our services digitally. But for those 2% who want a personal connection, we have to offer it quickly and at the highest quality. This means that the usual branches could become, for example, "pop-up" service centres, or home visits could make an appearance. We still don't know the right answer, but the direction is clear. Clearly, many intentions nowadays have adapted to the new situation, and we have fully moved to the "new normal"-doing everything digitally and remotely. Once the state of emergency ends, we will all review our plans, adapting them to the situation in the sector and the country in general at that moment, but our digital direction won't change.
Will branches still exist?
Something will exist. The question is what. Everyone in the market is currently thinking about this and testing various solutions. Of course, our branches still exist, and we are represented outside of Riga. The question is to what extent this will continue in the future. I will use this chance to add that Citadele branches are currently by appointment only to enable us to comply with Covid-19 related safety measures as much as possible.
What competition is there currently from fintech companies and service providers such as Revolut?
We research anything new and innovative that appears in the market, which makes us think about our next steps. I believe that fintech companies challenge banks in a very good way. We are currently working hard at learning from and working with the fintech sector, and sometimes even financing fintech companies.
In your opinion, how could the Latvian banking sector develop? Can we expect increased competition from the former non-resident banks who are currently changing their operation models? Or will the market sooner see mergers or even bankruptcies?
The Latvian banking sector has to continue to mature. It is evident that non-resident business has moved on from here. We have focused on the local market, and there is no lack of competition here. Therefore, if one, two or more banks start focusing on this market, it won't create large changes.
Because they're smaller?
If we look at market shares, the Latvian market is dominated by four banks. So it would even be healthy for several smaller banks to focus on the local market. However, I don't believe that it will change the general landscape.
How has the Latvian financial market been impacted by the FATF's decision not to include Latvia in its so-called "grey list"?
I will turn the question on the other side and say that if the decision had been positive, we would be seeing negative consequences. It would impact direct overseas investment, and could create problems with issuing new securities. The fact that this decision was not made means that work can continue as previously.
At the same time, if we don't count various external factors, the development of the Latvian economy has always largely been dependent on the mood of the Latvian public, on whether they believe that the future will be better or worse. In all other aspects, nothing leads us to believe that Latvia will develop differently to Lithuania or Estonia. Before the state of emergency, all three countries were in a phase where the economy was transitioning from manufacturing-based to service-based.
How could bank operations change? Banks have been heavily criticised for spending the past year, in which we were afraid of making the "grey list," becoming very conservative in issuing loans, with much stricter client checks than in Estonia and Lithuania. Could this change?
First of all, I disagree that Latvian banks are stricter than Estonian or Lithuanian banks. Secondly, I do not believe that the reason is FATF and Moneyval. It is once again a question of whether the glass is half full or half empty, whether we want to avoid all risks or take on a carefully calculated risk. The main thing that changed the market was the money laundering scandals we experienced. These events create a wish to avoid anything which is not fully secure.
That's why banks have to work together with the government, the regulator and businesses to find a common language, to find common standards and to ensure that everyone feels comfortable. This discussion is ongoing, but its conclusions still have to mature.
At the same time, I should emphasise that for us, unlike some of our competitors, this is our home market. We can't say: we will now be slightly more passive in the Baltics, and return in three years or so! We have to be more international than some of the smaller local banks, but we have to be more Baltic than the Nordic banks, because this is our home market.
At the same time, this is a classic chicken or egg scenario. We already saw these discussions during the last financial crisis. Who created the crisis? Banks generously giving out mortgages, or politicians declaring that everyone should be able to buy a house? Now we are in a similar situation, but with a different issue. When all is said and done, we all want to see a clean market, and the banks want to see clean clients. However, if there is a great amount of pressure from the government, the banks will be much more careful. If there is no pressure from the government and not enough regulation, some banks may take too many risks. There has to be a balance. At the end of the day, the question is what moral values and standards are prevalent in society, and for this to change, we need time.
How are loans developing right now?
Right now, our task is to offer the necessary support to our clients and partners. As I mentioned earlier, we are a responsible member of the financial system, and our main task is to ensure uninterrupted access to financial services in Latvia and the Baltics. Since the start of March, Citadele has offered affected businesses support in meeting their loan obligations, evaluating each situation individually. Meanwhile, we are offering private individuals who have lost their income and who have completed their loan obligations responsibly before now the chance to receive loan breaks on their base loan repayments for three months or up to six months, evaluating each case separately. We see the amount of applications for loan breaks growing.
At the same time, I should emphasise that we are also open to anyone with a stable financial situation, transparent operations and a long-term business model or good professional career. We will continue to support these clients in these uncertain, challenging times. Helping clients is at the heart of our work, regardless of whether they need advice on investing, making payments, insurance or loans. We must be the glue that holds the economy together.
What development is there in the deposit segment?
Before this state of emergency, the situation was good. The Latvian and Baltic public is generally saving money, mostly in their accounts. This is a good thing, but, once this situation becomes stable, we certainly want to develop the investment market.
This is a very bad time to talk about this, as we observe what is happing in the financial markets. However, we have to understand that these fluctuations impact those who speculate. If you are methodically saving for a pension, the house you want to buy in 10 years time, then that's different. The question is on the consequences. If you invest a certain sum every year, then it doesn't matter if this coincides with a rise or fall in the market, because, in the end, you will receive the average profitability for that period.
What can we currently say about interest rates, as they are currently close to zero for deposits?
I think the low interest rate will remain. It is very difficult to say for how long, but we have been living with low interest rates for about five years now. This also means that banks are actually subsidising private individuals who keep their money in deposits, as the rates are negative in the financial markets. This brings me back once again to investments because, if interest rates are zero or negative, then where else can you grow your investment other than by trading securities or in funds? Just as simply as how all banks have to define their appetite for risk, private individuals also have to answer the question of how much they are willing to risk.
What is happening with Citadele's new bond issue?
Bearing in mind the current market situation and the large fluctuations in the capital markets, Citadele has made the decision to cancel its third issue of unsecured subordinated bonds. Although there was high interest from private and institutional investors during the public offering, since we announced the planned bond issue the situation in the capital market has worsened significantly as uncertainty grows. Citadele anticipates that it will maintain its strong capital and liquidity indicators, which outstrip normative requirements. At the end of 2019, the Group's Capital Adequacy Ratio (CAR) was 22.2%, its Common Equity Tier 1 (CET1) was 18.8% and its Liquidity Coverage Ratio was 358%.
What happened to the plan to list the bank's shares in the stock market, as has been discussed?
We are not currently working on listing our shares. Do we want to expand the bank's operations and become more attractive to investors? Yes. Which is why we may list our shares at some point, but it is not on our to-do list right now.
Together with AmCham we can develop our networking not only in the local market with local companies, but also reach out to good partners far away from Latvia.
Ugis Grigorjevs, Head of Sales at Nordwoc