The Economy Has Learned its Lesson!

On the Internet we saw your description of a rational and operational professional – are these two virtues enough since almost two years ago when you stepped into the shoes of the President of the NLB Management Board?

You need to understand the complexity of circumstances, the constellation NLB is working in. We are the most important, systemic financial institution in Slovenia and one of the most important players in the region. This, naturally, brings along particular responsibility. We simply cannot afford to pursue only the interests of making profit, we need to act in a socially responsible manner and have a long-term sustainable vision in our business moves, one that goes beyond the economic cycles. Given that everyone treats this “house” as an entity working in the public sector – and here I refer to remuneration, which is considerably smaller than in comparable companies – I believe that in order to do this job a man also needs a great deal of idealism and passion.

We read that last year the NLB Group made EUR 225.1 million net profit, which could entirely be used for dividend pay-out. What moves are you going to draw in this direction?   

We, the employees of NLB, would like to maximise the refund of the state aid as we are aware of the responsibility that comes with it and the Bank’s obligation to give it back. The Bank can only refund it via two possible levers: dividend pay-out and privatisation funds. We have done whatever was possible for both options and today the Bank is ready to be sold at favourable valuations, which would maximise the refund of the state-aid. We could not have done more for the reputation and credibility of this institution. However, due to the judgements of Croatian courts, the Governing Council of the European Central Bank decided that a prior consent of the ECB is required for potential dividend pay-out. We are going to present all the arguments to the ECB to show that dividend pay-out in full amount is justified, but the decision is in their hands. Lack of protection before the afore-mentioned judgements would unfortunately have an adverse effect, lower purchase price.

A couple of years ago you said you are not a proponent of privatisation at any cost and that the state can remain the owner, provided it is a responsible one. Do you still share the same view?

I still believe that a suitable owner is the one that is responsible. I feel that the selected model, the IPO for 75% minus one share dispersed among a large number of small shareholders, is the optimal model. With 25% and one share owned by the Republic of Slovenia, it guarantees preservation of the public interest or prevents any strategic moves that might have a negative effect on the Group’s performance and the interests of Slovene economy in the region, and at the same time in the long run reinforces professional corporate governance, which is a warranty for the bank to stay robust and healthy, offering quality services to its customers. This also means that the headquarters stay in Ljubljana. This way we will not be working based on the principle “out of sight, out of mind” but with a good understanding of the local environment. We will play an important role of the regional specialist, for which there is definitely room in this region, as there will never be large global players here. It is also of vital importance that this “house” will be listed, presumably at Ljubljana and London stock exchanges, and will thus help develop the capital market. In the long term Slovene citizens and Slovene legal entities or companies from the region will most likely mainly be the owners, which will only integrate us with the local environment even more. We could not wish for a better scenario. 

Currently the interest rates on the market are still very low (even negative) – do you take this also as a challenge, in the series of other events associated with NLB?  

This is a quite unusual situation that had not occurred in the history of banking and we had to manage it one way or another. On the one hand this means stress for the banking sector and on the other it creates a highly favourable environment for investing. This stimulates businessmen to finance their production and development programmes. Moreover, banks are now so fit that they are willing to allocate funds to sound programmes with clear cash-flow projections without hesitation. Apparently, banks have overcome this stress, but our results are not as good as they could be.   

What about the current geopolitical context?

At this point in time, the geopolitical situation is a much bigger challenge than the interest rates. If we assume that there will be no serious complications in the geopolitical context and by consequence no major corrections on financial markets and slow-down in the economic activity due to greater uncertainty, trade war, etc., then we can see economic activity that has been set highly ambitiously. After all, we have a 5% economic growth, last year and expectedly this year as well, we have practically structural unemployment – almost nobody can find qualified profiles in economy, which is a highly demanding environment. Germany and Austria together are looking for almost 3.5 million employees in total. And if in the past we received employees from the pool of SE Europe, we are now a stepping stone. SE European markets are also experiencing great difficulties in obtaining qualified staff. This is then followed by pressures on increase of salaries and will structurally effect the health of economy, as it will increase the fixed costs and the economy will relatively worse be prepared for a potential new cycle. As a result banks will still have the potential to monitor the working capital, as even when the cash flows go down, the debt to cash flow ratio will not be so poor as it was in the years from 2009 to 2014, practically. Moreover, banks are in a better condition now, more capitalised, more liquid, equipped with knowledge, tools and employees to fight against another potential restructuring of the economy.

What precisely can your borrowers and depositors expect?

If there are no aforementioned geopolitical shocks, we can expect a move from the negative zone sometime in the second or third quarter of 2019. The rhetoric of the ECB is slightly changing, there are no more announcements of unlimited interventions on the markets with quantitative easing, etc. These are the first mild signals that the economic growth in the European monetary area is moving close to the target levels. Inflation is still slightly below 2%, but with such economic activity, where signs of overheating are showing in certain segments – in Slovenia this is true for the real estate market, where there is practically no supply, and the same goes for salary pressures – all this results in the increase of fixed costs in the economy. I personally think that we should not lose compass with such robust economic growth. Instead we should sustainably, for the long run and beyond the economic cycles. I think that there will be corrections on the interest rates also for the ECB to have some influence and tools available for accelerating economic growth in the next crisis.

When is this going to happen?

I expect that the first moves can start by the end of this year, and the international forecasts and analyses show that sometime in the second, third quarter of 2019 Euribor might leave the negative area. This means that the interest rates will go up, first credit interest rates, which are to a large extend linked to Euribor, and deposit interest rates will follow.     

A rapid technological development is probably also one of your challenges. Why is digitalisation of such extraordinary and strategic importance for banking?

Digitalisation is a phenomenon forcing everybody, not just bankers, to realise that user experience comes first. It means that today we can use our mobile phone and do the majority of services at any time, from anywhere, paperless. It is our challenge to understand what this Fintech approach leading to a more comfortable user experience actually means in relation to banking services. I am convinced that the banks are definitely not on the brink of extinction. They are robust and regulated institutions, which makes it safe to do transactions via banks. These new service providers have more or less particle solutions; rarely can we see a universal range of services. If the banks do their homework as they should and offer our range of services with the same level of user experience, we will be the winners this time. Naturally, this means that we liaise with one of the Fintechs. Buy one, to get to certain solutions faster.  But the most important thing is to maintain 24 by 7 a great user experience for the services that we provide. Our vision is to provide basic services (account opening and overdrafts, standard loans and card overdraft) via any mobile application and other channels – 24 hours a day, from anywhere, without any physical contact with the bank or signature on a piece of paper. Which is something we do extremely well already with some of our services!

Will the services get any cheaper this way?

This definitely means that they will get somewhat cheaper, and to a certain degree this will be replaced with a much better user experience. The fact that you do not have to go to a bank, maybe even several times, to get a standard service, also saves you some money, which may not be evident from the fee charged for that particular banking product, but your time and going somewhere also have a price attached. In the branches we would like to talk to our customers about important life decisions with long-term consequences. In this segment the users expect to talk to somebody, somebody they can trust, somebody who has the knowledge and experience. This is why we are planning to keep our branches as the heart of our operations. Everybody can do routine transactions when it suits him and there is no longer any reason or need to go to the bank in person to do that.

In this spirit there is probably some difference between large, small and micro companies?

Correct. Large projects concerning large companies and greater sums still need a personal contact, detailed discussions and cash-flow analyses. We can’t do this with a mobile application (laughter), we should also have a look at the machines in the company, pay it a visit, feel it. My mantra is that we should be there in the courtyards of those companies instead of waiting for business. The key is to understand how the company works. With small and micro companies the situation is different. They need a quick intervention from their bank to buy a small amount of material; they can’t wait for 3 weeks to get a loan for EUR 5,000. Because of that some services will to a certain extent be available in a mobile application, for example a loan or overdraft on the transaction account anytime anyplace. If something goes wrong, our contact centre is available 24/7. If they can’t find the solution with the adviser, a mobile banker will come to them or they will be invited to the branch. These are the new approaches we are now very determined to introduce. It is my opinion that we have the right response to digitalisation.  

Will you take any other steps in the future to get closer to the economy?

You can never have everybody happy and there are always two sides of a coin. The Bank may seem too rigid to a person but the Bank’s perception may be that a person does not meet the criteria to obtain a specific deal. I claim that NLB played the key part in the restructuring of the economy, thus expressing its support. We are now much more active on the market in all segments and we are looking for business and opportunities. The fact remains, however, that we are, for the time being, still rather limited because we received state aid. These commitments to the European Commission are mainly price-related. We must not drop the prices under a certain threshold even if we wanted to. Hence, we see that we are losing our competitiveness with customers with highest credit ratings. Our market share in the public sector dropped from 30% to 18%. Moreover, we cannot follow regional economy, despite our desire to do so, because we must not engage in cross-border financing. What particularly affects us at the moment in order to be able to support the Slovene interests even more, especially in Serbia, is the ban on acquisitions. We would very much like to upgrade our presence in this region by acquiring a medium-sized bank in Serbia. This way we would be a systemic bank with a local approach in all countries – in Slovenia and abroad. I strongly believe that this is an exceptional opportunity for the Slovene economy and for the Bank and that the NLB Group can be a regional champion here.   

It will soon be two years since you became the CEO. What are you most proud of?

I am proud of my team, which is cohesive and really works well together on the level of the NLB Group. We now have unified NLB brands; before the banks in the Group had different brands. When I meet my colleagues from daughter banks, I can feel this team spirit, I can feel that we have serious opportunities and that we address them together. I am proud that we started a revolutionary implementation of solutions that nobody else had implemented before, we are pioneers again. I am also proud of the Bank’s social responsibility projects. And, finally, if I had to sign the worst balance sheet in the history of Slovenia, believe me that I am most happy to also sign the best one.

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Source: Glas Gospodarstva
Release date: 10 may, 2018
Author: Ksenija Sedej
Photo: Archive NLB

Blaž Brodnjak, President and CEO / CMO