After more than two years of rebuilding, Industra Bank is entering the competition for customers in the financial services segment with a tailored approach and an business income account. Raivis Kakānis, the Chairman of the Board of Industra Bank, reveals this in an interview with Dienas Bizness. 

He admits that the initial challenge was not to see the light at the end of the tunnel, but to find the tunnel at the end of which to see the light, but that the results are now proving that the decisions made were the right ones.

What was the situation when you became Chairman of the Board?

I can only admire the courage and willingness of the shareholders, Jurijs Adamovičs, Anda Kļaviņa and Ralfs Kļaviņš, to take control of a bank whose value at the time was negative, not even zero.  Why? Because JSC Meridian Trade Bank (that was the name of the bank at that time; before that it was SMP bank, before that JSC Multibanka, which was established on the basis of the Latvian branch of the USSR Bank for Foreign Economic Relations, which after nationalisation became the Foreign Operations Department of the Bank of Latvia) was not a bank until the overhaul of the Latvian financial system, triggered by the US Treasury Department's report on the risks of money laundering, worked almost exclusively with foreign clients, to whom it provided financial services that were not legally barred but almost impossible to implement in practice after the regulatory changes in Latvia. New shareholders of the bank changed the bank's strategy for 180 degrees, making it a financial services provider that is accessible to and understands Latvia's medium and small businesses. The fact that there are enough of these local-capital companies that are undervalued and not very welcome in the big banks is also demonstrated by Industra Bank’s successful track record in lending to local medium and small enterprises.

At the same time, in order to successfully attract customers - to target potential borrowers - the bank, which initially dealt predominantly with non-residents only, did not actually have a team dedicated to this and had to create one. The bank used to worked with those who came to the bank and enquired about lending opportunities, rather than the bank working with such potential borrowers from medium and small businesses. Unfortunately, the bank's information and communication technology solutions were also behind the times - at the end of the last century or at the beginning of this century - and it was not possible to serve customers with them, so in addition to the above-mentioned change of course, large-scale IT investment projects had to be implemented to create new opportunities for the bank and a new online banking system, new products and new conveniences for customers. The digitalisation of the Bank's products and sales channels is already proving its worth. In 2021, the bank was more concerned with rebuilding - moving to a new business model - while restructuring its balance sheet, which included an inventory of assets, separating income-generating assets from those that required expenditure but did not generate income. Paradoxical as it may sound, it was the Covid-19 pandemic that gave the bank, which was in the process of rebuilding and changing, a surprisingly unexpected positive boost. In particular, there was a growing appetite for people to buy different types of real estate, but at the time the bank had a relatively large portfolio of foreclosed properties that it wanted to get rid of. In this way, the bank benefited and so did the stakeholders.

What do you offer to medium and small businesses in Latvia?

First of all, the bank's redevelopment is not yet complete, but we are already proactively offering a range of financial services to medium and small businesses. From October 1, we will be the only bank in Latvia to offer a business income account service to business operators. It will be a show of support for small business, not just in words but also in actions. I assume that no other bank in Latvia will offer a business income account service in the near future. The legislation already provides for a business income account for the convenience of small businesses from 2022, where tax would be automatically transferred from the money received (the tax rate for turnover up to EUR 25 000 per year is 25%, and 40% for turnover exceeding EUR 25 000 per year), but so far no bank has developed such an account.

The most important thing is that the tool is easy to use and of practical benefit to the entrepreneur. There are more than 30 000 business operators in Latvia, but if they do not see the benefits for themselves, they will not choose and use the business income account service. It is an opportunity for the Bank to attract new customers, but it is also a great challenge. The business revenue account solution will most likely be fine-tuned with the users of the service and in cooperation with the tax administration and the Financial Industry Association. The idea of the business income account was born in the Ministry of Finance and the State Revenue Service, but the solutions have been borrowed from abroad and adapted to the Latvian situation. And in support of Ukrainian refugees, we responded to the Bank of Latvia's call to exchange Ukrainian hryvnia for euro, which we do free of charge.

Why did Industra Bankdecide to take over PrivatBank's assets and liabilities at a time of such change?

If you have a machine, you need extra petrol, and the quickest way to get that is to add or take over a bank that has customers. Negotiations with PrivatBank's owners started some time ago, but the deadline for such a takeover was undoubtedly accelerated by economic pressures, as PrivatBank's financial indicators were not the most encouraging - every month brought losses. The transaction was completed in an unprecedentedly short timeframe for the banking sector - four months, which would normally have taken 6-9 months. The whole summer of 2022 was a hot time not only in terms of weather, but also for the bank's employees, because pricing PrivatBank's assets and liabilities and taking over its client portfolio are not one-click activities. With the takeover of PrivatBank, Industra Bankexpanded its client base. While Industra Bank previously worked with around 16,000 individuals, it now works with 21,000, while the number of legal entities (commercial entities) has increased from around 1,000 to 1,300. Industra Bank’s assets increased from EUR 190 million to EUR 280 million. Such an increase would take many months, perhaps even years, to achieve without a PrivatBank takeover. As a result, Industra Bank’s assets will reach EUR 300 million at the end of this year through new lending, but asset size is not an end in itself as our primary focus is on asset profitability.

In the current situation of relatively high inflation, war in Ukraine and an unpredictable tomorrow, who is seeking to take out loans?

Demand for loans remains strong, as business development always requires cash, which is mostly scarce for companies with local capital. There are entrepreneurs who initially approach the Big Four banks, but for some reason they reject the potential borrower because the credit policy of the big banks does not include financing a company of a certain size or business model, or the potential borrower's business (e.g. with Eastern countries or even Eastern and Central European partners) and possible solutions require in-depth research - work that the big banks do not want or that takes a long time and is also relatively costly. Latvia's relatively large companies are no more than medium-sized companies at European level, but the Latvian medium-sized business is no more than a micro-enterprise at European level, and therefore not very interesting in the eyes of the owners of the big banks (the parent companies), even though it may be promising.

Another category of companies that become potential customers of Industra Bankare those who, for some reason, feel unappreciated and want a closer relationship with the bank rather than a conversation with an answering machine or a queue-based conversation partner, even though this is a solution to increase the number of customers to be serviced. An understanding and unconventional attitude is one of the cornerstones of attracting new customers, especially in the business segment. Of course, in this context, the fact that the bank's shareholders are local entrepreneurs who understand the specific nuances of the local market and the development of local entrepreneurs, which the big banks may not be willing to spend time and resources on researching and clarifying, plays an important role. This does not mean that Industra Bank is distributing loans left and right to everyone, but that it tries to look into the specific details of potential clients' businesses, assessing balance sheets, profit/loss calculations, reputation, etc. In lending, the key word is the credibility of the borrower.

The largest volume of loans is currently issued for the establishment of industrial premises - warehouses, factories - including commercial premises, which are leased to both legal entities and individuals. In a situation where prices of building materials are rising, construction costs are rising and metal has become significantly more expensive due to sanctions, developers of industrial premises are the biggest winners, as the market value of the property has increased (also the price of creating a similar project) and the bank as a lender has some peace of mind.

In the real estate segment, is there not now an increased risk of vacant premises, as digitalisation has made it possible to work remotely, and rising energy prices may render tenants insolvent?

This risk is more relevant for office premises, while the industrial sector - manufacturers - needs warehouses for both raw materials and finished products and, of course, production facilities that do not yet operate remotely. The fact that the demand for office space is likely to shrink is evidenced by the experience of Industra Bank, where about half of employees work from home. So far, I don't see any argument why remote working should not become a way of life wherever possible. In particular, during the pandemic, many staff have become accustomed to working remotely, which has even been more productive than face-to-face work. I suppose the time when all employees came to work every business day to work is over.

Undoubtedly, if a lot of warehouses have already been built around Riga and the population of Latvia continues to decline, and inflation has eaten into the purchasing power of many people, then one may wonder what will be stored there and for what markets, if the eastern markets - Russia and Belarus - have been closed due to the EU sanctions. The movement of goods from east to west and vice versa will decrease for some time or even stop completely for many years. Industrial buildings in ports are another real estate segment that may suffer a major defect in the current situation - no cargo from Russia; but there might also be an opportunity, for example in the form of a grain cargo terminal that can be used for transhipment of grain crops produced in Latvia and also in the neighbouring Baltic countries. Those in this segment can also enter the Ukrainian grain logistics chain to Northern Europe. Similarly, port terminals in Latvia can take advantage of Polish interests in coal transhipment.

Uncertainty has increased not only in Europe, but even worldwide. Does it affect the bank's performance, increase risks?

The slow decline of stock markets, the increase in refinancing rates by national central banks, which makes credit more expensive - both existing and prospective - are also having an impact on many segments, including banking. Of course, the most common prediction is that the number of borrowers who will be unable to pay their lender will increase, but there is hardly any discussion of the other aspect, namely that in the 14 years that the European Central Bank has kept rates negative, banks have built up large liquidity buffers. In Latvia, it amounts to more than €6.5 billion, and banks still had to pay a fee (0.5% of the amount) to the Bank of Latvia for storing this money.  If the European Central Bank sets a positive rate, banks will no longer have to pay extra to store money, making them more profitable. Private investors can allocate their money to the stock market, where bonds of all countries are traded at a positive interest rate. In a sense, the banking sector has been in a kind of stalemate for the last 14 years, as the state tried to stimulate economic growth by printing huge amounts of money. So in the current circumstances, I don’t see how the European Central Bank could stop inflation. 

The pandemic crisis is unlike any in the past, as producers emerged from it with higher profits than before. Producers in many sectors have achieved the highest historic profit margins. Of course, this result is partly due to the fact that raw materials were bought at the old - pre-crisis - prices, while goods were sold already at the additional crisis-era markup. Only time will tell whether these profit figures will remain at the same level. However, producers have generally adapted well to the new circumstances by balancing their income with their costs and there is therefore no reason to believe that the new situation would put producers in any sector in limbo.  Entrepreneurs always adapt to the situation, no matter how bad, and find ways not only to survive but even to thrive in such situations.

Yes, energy-intensive companies, which rely heavily on energy for their costs, are in a different situation, because they cannot buy energy in advance - they can reserve it for the next year - so they may also be forced to run at a loss for a while, stop producing a product or even shut down a factory for a while. None of the choices are very good. Some producers will certainly change their outlets or sourcing markets, in particular those on the Russian and Belarusian markets. It should be noted that even with some small flows of goods to and from Russia and Belarus, the large Latvian banks have refused to process such transactions because the verification of transactions is manual, it is impossible to set up automated verification systems to process every payment, and it is therefore expensive and time-consuming. Small banks, on the other hand, try to service such transactions to the best of their abilities, but the resources spent on reviewing them are more expensive than the potential fee, plus the risk that something is found to be different from the documents, which could jeopardise the bank's future operations, so more and more are refusing to service such transactions. As a result, some companies that worked relatively closely with Eastern countries are now out of the market or are looking to do business with other EU banks.

Text: Māris Ķirsons