Our plans A, B and C were always strictly about business
DELO, Sobotna priloga, 24 June, 2017
Mr Brodnjak, the Government recently decided to stop the privatisation of Nova Ljubljanska Banka despite the intense preparations you had made. Were you surprised and disappointed with their decision, or did you expect it?
Life has taught me that anything can happen. This decision has affected us and the tremendous effort we put into this process has taught us something new. Now we must ask ourselves how to go forward and how does this decision impact our company. We have no preferences concerning the ownership or its origin, we only care about responsible ownership.
I am interested in your emotions. Were you surprised or disappointed?
I was relatively unburdened with the decision. However, I was very impressed with the opportunity to present the bank to global investors, whose feedback was extremely positive. Our reconstruction process was perceived as a pure success, one of the few of this kind. Such reactions have brought fresh energy to my colleagues in the management, as well as to other employees. This means that the bank has come to a position where it can be competitive on the global investment market, which is a special achievement for us after the crisis we had in 2012 and 2013.
And how should you go forward? What do you plan to do in the months ahead? Do you have a plan B?
Our plans A, B and C were always about business. Bank’s employees are always trying to be successful in their basic operations, which is managing the daily operations of the largest financial group in former Yugoslavia while preserving our HQ, as well as our strategic interests here in Slovenia. I have to say that we are doing very well so far. Above all, my plan B is to become more dedicated to our basic stakeholders - our clients. I want to discuss new business opportunists with them.
Well, let’s start from the bottom. According to the commitments towards the European Commission, Slovenia is facing a “black scenario” which includes selling the entire branch in the Balkans and imposing further limitations to your operations in Slovenia. Minister of Finance is currently attempting to mitigate these commitments with the European Commission and Commissioner Vestager. How much will you be involved in the effort to preserve the Group and mitigate other commitments, knowing that you wish to keep the Group as it is?
Yes, I honestly believe that NLB Group has the potential to become the regional leader. We are on an excellent path do make this happen, so it would be a radical business change for our operations, as well as the entire Group and the Slovenian people, who own the bank. I am convinced that the Ministry of Finance has enough arguments to explain to the European Commission which changes to our daily business were made over the last four years in order to fulfil the commitments we had. We were forced to miss out on multiple business opportunities due to those commitments. Additionally, the bank was supposed to do whatever it can not to disturb competitors - not only can I say that we have not bothered our competitors, I can even say that we had troubles competing. By doing so, we already paid the high price for the received state aid, which we have started paying back. I believe this is a solid foundation for negotiations with the Commission. However, the Ministry is competent for negotiating appropriate conditions.
Are you up to date with the negotiations with the European Commission?
We have constructive, active and regular collaboration with the Ministry of Finance and the SSH. The Bank offered maximum support for the preparation of negotiating positions and it has an active dialogue with the European Commission. Of course, the Ministry of Finance is competent for these negotiations. I have full confidence that the Ministry will be able to reach an agreement that will be the least bothersome for the bank.
What would be an acceptable compromise with Brussels in your mind?
You understand that I am unable to answer this question. As I said before, the Ministry of Finance is in charge of these negotiations and the bank will be their constructive partner.
As I hear, the Bank spent a lot of time preparing the sales prospect. Employees were spending nights in offices in order to prepare all the documents in time. Government’s decision was surely frustrating for employees, whose morale had suffered because of it. How are you motivating yourself and your colleagues after all that?
We worked extremely hard. Over the past 12 months we worked intensely and came to a point at which we were ready for the transaction. On the other hand, we learned a lot. Now we know how to approach a process like this. If we ever face the sale again we will be ready for a successful implementation immediately. We are very satisfied with the outcome in a sense that the investors thought we were very interesting. That inspires us. We understand that we succeeded with the transformation process of the NLB Group. Today, we are able to compare ourselves with those we would like to be compared with internationally. We believe our future is bright as we continue to enthusiastically develop our story of a regional champion. That will make our ownership, wherever it is from, proud.
One of the commitments you have is to automatically limit lending to the non-banking sector - companies and households - to €7 billion if the growth of collected deposits exceeds €9 billion. How will you deal with this limit?
We hope that the Ministry of Finance is able to ease the burden on the Bank during these negotiations, particularly in terms of commercial commitments. This would allow us to finally live to our full potential, after years of waiting. That is something we deserve. We sacrificed a lot over the last few years. Both in terms of the minimum price we can offer to our clients and in a sense of limiting our international operations, as well as potential takeovers, which were interesting for us, particularly in Serbia. I believe that the Ministry understands our negotiating points very well and knows what to do.
How burdening were the commitments towards Brussels for NLB’s business on the domestic market?
It is a serious burden. Over the last two years, we only got one big job in the public sector because the prices were at levels which we are not allowed, or not able to achieve. However, the bank is in a good condition and it would be able to compete with other competitors without a problem – if European Commission’s commitments were removed. At a given moment, these chains are very important because they prevent us from actively marketing our products. On the other hand, there are limitations concerning the profitability of certain businesses, we are unable to operate outside Slovenia and make any purchases in the region. We also have imposed limitations concerning our leasing operations. All of these are preventing us from being able to fairly compete with our competitors.
When do you expect initial compromise solutions with the European Commission?
At the latest by the end of September.
What is NLB Group’s business and financial condition like at this moment? What would be an appropriate price per share in your mind?
I will not make any assumptions concerning the appropriate price. It is defined by the market.
It was estimated between €55 and €71 per share.
One has to take a look at the basic evaluation in relation with possible discounts that are generated by the privatisation model, share limitations imposed to owners, as well as legal risks related to those limitations. In my opinion, the achieved price was fair with regards to the current market conditions and limitations of the sales model. In any case, I can confidently say that the Bank is in a very good condition at this moment. We have a clearly defined strategy and scope of activities for the upcoming mid-term period. I believe we will come out of this period as market leaders, not only in Slovenia but also as a powerful systemic bank on all markets where we are present. This year is going great as we are building on our previous work. We are becoming a bank that is able to provide healthy and high dividends to our owners, whoever they may be.
The government has given three reasons to justify stopping the sale of NLB. The first reason pertains to the issue of Croatian transferred foreign currency deposits, the second regards the alleged money laundering in NLB between 2009 and 2010, while the third reason is the parliamentary discussion about the excessive recapitalisation of NLB in 2013. Are these reasons adequate, true and sufficient to stop the privatisation?
It is not my responsibility to judge the government's justification of its decisions. However, I can explain the theses about the alleged excessive recapitalisation of NLB. NLB Group’s capital adequacy amounted to 16.7% at the end of the first quarter. Contrary to statements made by certain public opinion leaders as well as key politicians in Slovenia who are using different numbers, capital adequacy is always monitored on group level and NLB is a large international group.
This percentage is exactly comparable to the institutions with which we want to compare and is even lower than the majority. This house disposes with exactly the right amount of capital to be able to implement its full strategy while paying the dividends at the same time, thus returning the state aid.
So, according to your judgement, the taxpayers did not invest too much money in the recapitalisation of NLB?
I claim that exactly the right amount was invested and that in the long run, this bank is capable of repaying the entire state aid that was invested in it.
How do you explain the government’s second reason, namely the allegations of Iranian money laundering in NLB in 2009 and 2010, which was three or four years before you arrived to the bank?
The prevention of money laundering and financing of terrorism regime in NLB is extremely robust nowadays and any kind of large-scale money laundering is no longer possible. I can agree with you that in those years, unusual transactions were taking place. I can also state that similar initiatives were present also during my term, but they were not accepted with understanding by this leadership.
What about the Iranian transactions?
These transactions were specific. The current team cannot imagine that they would be perceived as desirable. The current money laundering prevention regime would immediately detect and warn the competent authorities.
For several years, the bank has had a business compatibility centre. How is NLB operating now?
I believe that NLB should be a role model as far as the prevention of money laundering and the financing of terrorism is concerned. When it comes to assessing the past, the orders were issued to correct the irregularities and they were resolved timely and comprehensively. I assert that at this moment our clients and other stakeholders should be reassured that the bank will operate in accordance with the regulations and regulatory requirements.
What do you attribute the fact to that the eight-year-old story of money laundering is now once more being discussed in the public during the planned privatization? Is it merely a coincidence or is it the political interests of some group of people?
Now, you have mentioned the field where the origin of ownership is no longer necessarily neutral. The state ownership obviously brings some consequences that NLB must face. The bank is treated in a very unusual way. Public opinion and political leaders, as well as some academics, are publicly discussing our business, referring to unverified or irrelevant numbers, presenting the assumptions as facts while some of them are even revealing banking and state secrets and thus illustrating the operations of the bank in a way the bank and its employees do not deserve. In the last 18 months, 17 different institutions - parliamentary inquiry commission, the Court of Audit, special prosecuting bodies, etc. – have required the bank’s documentation. These authorities, however, seem to leave the competitive banks in peace. The banks which have received much higher state aid have also usually been left alone.
This is an exceptional burden not only for the Management Board but also for dozens of crucial employees in the bank since they must deal with these assumptions rather than business and customers. Thus, they cannot focus on strategy implementation and competition in a highly competitive market. State ownership brings a different way of dealing and a full publicity of business operation. Ownership must be responsible.
The Slovenian nation is the owner of this property, but certain individuals do not miss the opportunity to blacken the bank’s reputation, thus undermining the trust of our clients and, consequently, its value for the owners – the Slovene taxpayers. For me, this is a perverted behaviour, which remains unsanctioned in Slovenia. Today, the bank is controlled and managed by independent international professionals with relevant experience in international markets. We are focused on the future, especially in improving the experience of our clients, developing new solutions in order to provide the customers with the relevant banking service, and not in the discussion of what happened 25 years ago.
Now another parliamentary commission will be established to deal with this particular issue exclusively.
I would not add anything to this assertion.
The majority of your banks in the Balkans is systemic, they have a 15% market share or even more.
Five out of six banks have the mentioned market share.
Some of them are also important for pension schemes in their countries, for instance in Macedonia. Does NLB have a geostrategic role for the stability of the region?
NLB is certainly among the system players in the region. For example, the Slovenian economy provides the backbone of the Macedonian financial system. Supplementary pension insurance is practically exclusively in Slovene ownership, the insurance sector also has an important role as 35% of all card transactions in Macedonia are made through our bank. Slovenian capital represents an extremely important systemic support in these markets. This role has wider implications.
On the one hand, there is an enormous information capital and, on the other hand, there is an ability to monitor commodity and financial flows for the Slovenian economy and the economies of the countries that want to penetrate the global markets through NLB and the Slovenian economy. This is a geostrategic role. Any consideration that NLB can be a comparable institution even without such a network is detrimental, not only for the interests of the bank but also for the wider interests of the Slovenian economy as well as the economic and diplomatic dimensions in a small open economy in an international context. NLB takes the Balkan region as a great opportunity, we are a kind of a regional specialist and we will remain here in the long run. We understand the language, culture, mentality, we have a common history and we intend to strengthen our position there. As the Manager of the Board, I visit corporate clients and affiliates in Serbia, Macedonia, Bosnia, etc. There, you will not be able to see the President of the Management Board of a large international group.
My employees and my clients have the opportunity to see me in their local environments. We conduct an open door policy and they are able to listen to us and make sure we have a respectful attitude. For instance, when we talk about political stability in Macedonia, we are now saying that we believe in this market and we will remain there. We are not sending some frightened messages. I agree that some people may find it a risky behaviour, but it is a great opportunity for us as business people. All of our banks in the region are independent in financing as they have their own deposit base, and, therefore, we only take a risk with the invested capital. Even if a major political turmoil occurs in an individual country, this does not in any way threaten the NLB Group.
But I repeat: all these banks should be sold in 2018 if the commitments made by the government of Alenka Bratušek, and later, in a modified form, by the government of Miro Cerar are to be carried out. And how can NLB survive if it loses its network abroad?
We are sure that we will not lose the network.
What inspires you to this belief? Do we have such a capable government which will be able to persuade the European Commission not to sell your network abroad?
I have full confidence in the government negotiating team.
Do you consider it appropriate for Prime Minister Cerar to discuss the case with President of the European Commission Juncker?
I leave this to the government, we have a full support and are ready to cooperate constructively in this process so that negotiators will be provided with all the necessary information. I am optimistic that we will get a positive outcome for the NLB Group.
Do you have the appropriate political support for your vision and strategy?
I have the support of the Supervisory Board, which matters a lot in corporate governance. If the Supervisory Board was dissatisfied with my work, the conversation could be very short.
Have you, like the Minister of Finance, thought of a resignation after the privatisation of the bank has been stopped?
Not at all. As I have already said, I am thrilled with the fact how a story on the transformation of NLB has been met in the globally qualified financial public. This has convinced me that it is worthwhile to insist on the next stage, which will position the group among the champions. My goal is also to make this bank the most desirable employer in the country and the region – and this is quite a serious ambition.
Well, when trying to meet this objective we encounter at least one serious obstacle, the famous Lahovnik’s Act. Should it be abolished?
(Laughter.) You know my opinion. I claim it is harmful and I expect it to be properly addressed right now.
You said that the global financial community had shown much interest in NLB: who was interested in entering the bank before the government decided to stop the sale?
I can disclose that we talked with the largest and most respected global financial investors and that we received positive feedback almost without exception. There are differences in the price at which someone would be willing to enter, but in principle, this is an important recognition for me as the bank, which was still in a complete chaos a few years ago, was able to awaken the interest of the global investors from the US, London and beyond. Another recognition is also that we have been compared to the banks which are our role models. This means that they believed what the management and the employees were saying – that we would achieve the medium-term objectives of the strategy. It is very inspiring that we have successfully surpassed such a demanding test of credibility.
But will all these investors still be ready to talk about entering NLB after the government changed its mind and turned them down?
This is not a question for me but for the seller – the SSH – as well as for the owner – the state. I can only say that, as far as the Bank and the SSH is concerned, everything was done to make this process credible, and we were all ready to complete it.
Bad loans are generated at a time when the economy flourishes and is at the top of its cycle. Similar events were happening in NLB in 2007 when high growth was registered. Such a high growth has also been recorded this year. How will you make sure the same story does not happen again?
The credit process has been thoroughly amended in the recent years. As far as the risk management strategy and risk appetite are concerned, we think about long-term sustainability through economic cycles. Even now, we do not loosen lending criteria below the thresholds that could potentially cause problems. So we do not release too much insurance and do not go too far. We are a system player and a price leader in this market and we cannot afford to compete with the price or with an inferior structure of business. By doing so, we would not take advantage of the full business potential available - in addition to having additional restrictions of the European Commission. However, on the other hand, this is a guarantee that we will expect the next cycle in better shape. Thus, we are able to play the role of the market leader using all the knowledge we have acquired during the last crisis. We were also in charge of two thirds of the restructuring processes of the Slovenian economy.
What is the condition of the Slovenian economy now?
We are familiar with macroeconomic data on economic growth and practical structural unemployment. Although we are constantly talking about the excessive number of employees in the banking sector, we now have a problem of hiring employees for a post in the network, at the window. Everyone in the economic sector with whom I have recently spoken has told me that now, the main problem is to find a skilled workforce. We have come to a point where book orders are actually filled, when capacities approach full utilisation and when a more serious investment cycle is being prepared. Slovenian production and service companies can no longer acquire a workforce which could be used productively. This indicates that the Slovenian economy is in a very agile development mode.
Is it overheating?
I would not say it is overheating since we are replacing the period of stagnation and the backlog of the ten-year period. We need to think very creatively – about the tax reform and the labour reform that will stimulate people to work as the lack of labour force is becoming a serious limiting factor for even faster development of Slovenia.
The Slovene public and politics are also divided on the Second Track and it seems we are heading towards a referendum. What is your opinion on the government project? Would NLB support and co-finance it?
NLB wants to closely monitor all major projects in the country, especially in infrastructure, as there has not been a lot of such projects in the recent years. Once every such project is ready for a bank review, it will be thoroughly examined. As we see, at this moment, discussions are still taking place at the political level. We are ready to talk to the government and other banking providers and we are clearly showing our willingness to cooperate. The investor will eventually decide whether or not to give us a chance.
What about Magna’s project, what is your opinion as a banker: does Slovenia need this factory?
I do not know the case well enough to take sides. We do welcome any investment that presents a new drive for manufacturing, an upgrade to the international supply chain, that makes Slovenia an interesting investment environment. If all legal and environmental aspects are considered, I see no restraint for promoting such investments.
NLB ended last year with a record profit. What kind of profit are you counting on come end of this year?
The profit and the dividend will be significantly higher than last year. We are fulfilling what was forecasted and we demonstrate our plans to be credible. The bank experienced 13 consecutive positive quarters, the 14th will be such as well, indicating that our business model is predictable, robust and sustainable.
You generate profit largely by releasing provisions, the potential for continuing this trend is reducing. Where will NLB’s profit come from in the future?
Last year, NLB was still forming provisions. The profit before provisions amounted to about €180 million. The amount of the net profit then depends on the level of provisions. In a positive cycle, there is not much additional load of new bad loans. Loans are being paid back, companies’ cash flows are improving, therefore the need to form new provisions is at a very low level. Our medium-term ambition is to reach a 10-percent capital yield and keep the cost of risk below the percentage point of the relevant portfolio. Currently, the costs of risk are significantly lower.
What about the political risk of state ownership? You know, a new administration comes along and with it a new broom and a new strategy. Do you agree that a stable form of ownership is especially vital for the bank?
A responsible ownership.
Just before we determined that the state ownership is not necessarily very responsible. How responsible is Slovenia as an owner?
In my opinion, there are two key areas that must be ensured and then it does not really matter who the owner is. The first is independent corporate management – an assurance that there is opportunity for talented people to work in the bank who will put it in a higher gear and secure the role of a regional institution that Slovenia will be proud of. Revenues are only a part of the story. I believe that we have a Supervisory Board that is acting in a professional and independent manner and that we can operate normally this way. I do not feel any political influence on running the day-to-day business activities.
So, no important politician, minister or lobbyist ever calls you and says, Mr Brodnjak, I expect such and such decisions from you?
No. These influences are indirect, through various attempts of opinion and political leaders, through management and manipulation of information from the bank and through presenting this information in an unverified, unselective or irrelevant way. This encourages the public impression that there is always something wrong in this bank. We are absolutely shooting at our own knee by acting this way as these are the assets of the citizens of the Republic of Slovenia that are being publicly sullying. And that hurts us.
This is how things are done in Slovenia. NLB has always been known as the most important economic corporation and a primal national interest. And politics always wishes to keep the influence over this national jewel. The recent decision to stop the privatisation process is just a little piece of this puzzle. Do you agree?
I am going to paraphrase what I have already said: the fact that NLB is trying to be kept under state ownership is not necessarily a bad idea. The bank can operate very successfully, it can be the most profitable Slovenian corporation and can pay out very high dividends. The problem arises when the corporation is used for partial interest that are not national interests but interests of individual interest groups. This is seriously wrong.
On the other hand, there are the bureaucrats from Brussels with their narrow views who also do not understand our actual national interests. There is a lot of pressure from the outside and from within. This armchair of yours on the 12th floor must surely be very hot?
(Laughter.) I spend relatively little time in the armchair, I want to spend as much time as possible with the clients. We have accepted that, we are running the bank and keeping within the realm of what is possible and what is permissible. When the bank can proceed at full throttle – when it reaches its full advertising potential again and puts its services on the market and operates abroad – it will have the ability to significantly improve its results and make the owners proud regardless of who they are.
You may wish it to be so but the bonds that restrain you must be released first. And there are probably not many people who want NLB to remain trapped in Slovenia alone, to be a somewhat larger savings bank with perhaps one thousand employees as one of the darker scenarios implicates?
True, but you can also find those that would be willing to accept that, in order to apply some of their interests in NLB d.d. As the legal representative, I believe it to be harmful for the bank as well as for the Slovenian nation.
Have you got any contact with the Prime Minister Cerar and the presidents of DeSUS and SD Erjavec and Židan – the three politicians who have extremely clear and entirely politically profiled standpoints toward NLB?
The bank practically does not communicate with the politics, we are, however, available for a potential consultation at any time – last Monday, I participated in the panel that the Prime Minister organised on the topic of cooperation and where we discussed how to be more successful together. We have offered the hand of cooperation but it depends on the government whether they choose to accept it.
The reasons that the government is mentioning for stopping your privatisation also include the unsolved Croatian transferred foreign currency deposits that are part of the story which had already been taken care of by the memorandum on the succession of SFRY. What is your view on the matter?
This is a matter of succession. NLB has been released of the legal succession with a constitutional act. We believe that NLB cannot be held responsible for these deposits in any way, the fact of the matter is, however, that the Croatian courts have their own way of interpreting these matters.
You have been in NLB since December 2012, four and a half years. Do you ever regret that you accepted the offer for this job?
Absolutely not. It has been a difficult road but I could not have gotten a bigger acknowledgment than that of the investors. After four and a half years of invested efforts, I was proud to receive feedback from qualified counterparts about how the bank operates today, about what it has achieved. I am sharing this pride and joy with my colleagues now and would do the same all over again at best.
You radiate a lot of optimism, energy, and an incredibly firm belief that you will be able to bring the bank back on track, that you will not be a victim of the European commitments, restrictions, trapping, forced sales etc. Do you possess some encouraging information from Brussels that we do not yet know about?
I do not. I do know, however, what we have done in the bank in the past four years, the sacrifices we have made. We have carefully followed all the commitments towards the European Commission and I believe that to be a good enough starting point for Slovenia to achieve and negotiate a scope which will be good for the bank as well as for the taxpayers that have invested a lot of money into it.
How are you returning the money to the taxpayers?
We paid €63.8 million in dividends this year and €43.9 million last year. I have predicted that the dividends from this year’s operations are going to be much higher. The bank will pay healthy, high dividends every year and will pay back the state aid. If the decision is accepted to sell the bank, there will be an extra payment in the form of the received purchase price. I am sure NLB will return the entire state aid amount, to me it is only a matter of time.
Let us look at the bad loans that drove the bank to the verge of bankruptcy before the rehabilitation. What is your means of reducing them, what are your plans for them?
At the peak, before December 2013, we had over 30 percent of bad loans. According to the international definition of EBA, we have already radically reduced this share below ten percent. Our medium-term goal is to drive it under five percent by the end of 2020. Even now we are no longer far away from the international banking groups of the region. We have achieved the key goals, we are adequately equipped with staff, tools, approaches, and knowledge to deal with the remaining bad loans appropriately. I am sure that accounts-wise, we have adequately acknowledged the value of these loans hence I do not expect negative material effects.
What shape will the NLB be in one year from now?
The NLB Group will be in excellent shape; when the commitments towards the European Commission are released, we will be doing exceptionally well.
“The bank will pay healthy, high dividends every year and will pay back the State aid. If the decision is accepted to sell the bank, there will be an extra payment in the form of the received purchase price. I am sure NLB will return the entire State aid amount, to me it is only a matter of time.”
“As far as we understand, there are still undergoing discussions on a political level: [second track] yes or no and what kind of resources will be used. We are willing to discuss with the government and other banking service providers and are showing a clear willingness to cooperate. The investor will eventually decide whether or not to give us a chance.”
“Certain individuals do not miss the opportunity to blacken the bank’s reputation due to partial interests, thus undermining the trust of our clients and, consequently, its value for the owners – the Slovene taxpayers. For me, this is a perverted behaviour, which remains unsanctioned in Slovenia.”
Source: Delo – Sobotna priloga
Release date: 24 June, 2017
Author: Miha Jenko
Photo: Jože Suhadolnik
Blaž Brodnjak, President and CEO / CMO