Dmitry Pankin: “IFRS 9 expose us to no financial risks”

Abctv.kz talks to Dmitry Pankin, Chairman of the Management Board of EDB, about the current activity and development prospects of the financial institution.

The Eurasian Week Forum has been recently held in Astana. It is a major business event focusing on economic development, investment, and export capacity expansion in the Eurasian Economic Uni on countries. One of the key institutions engaged in that is certainly Eurasian Development Bank (EDB), which is an interstate development institution with the mission to facilitate the development of market economies and the expansion of mutual trade and other economic ties in its member states. In the context of the forum, Dmitry Pankin, Chairman of the Management Board of EDB, has shared with аbctv.kz his vision of the current activities and plans of the regional development bank for the future.

– Good afternoon, Mr. Pankin! What is the current currency composition of EDB’s loan portfolio? Will tenge depreciation affect the quality of EDB’s loan portfolio?

– Loans in dollars make 39.2%, those in rubles – 29.6%, and in euros – 10.1%. Loans in tenge account for no more than 21% of the loan portfolio of our bank.

As to the second part of your question, I can say that our projects in Kazakhstan have not been affected. They had a safety margin built in at the time of the project preparation and stress-testing.

– The oil price drop, which occurred not so long ago, resulted in a sharp devaluation of currencies of several post-Soviet countries, including the Russian ruble and tenge. How did it affect the quality of EDB’s loan portfolio and have you managed to off-set the effects? Are you planning to change the debt currency denomination, refinance or restructure some part of outstanding debt?

– There were such problems in previous years prior to my appointment at the Bank. There were problems with a few borrowers. In particular, with Tikhvin Car Building Plant, where the management converted the loan into rubles.

Now, our loan portfolio is quite balanced from the point of view of its currency composition. If a company has got foreign exchange proceeds, we can provide a loan in foreign currency to such a company. For instance, mineral companies. But if the borrower focuses on its domestic market, e.g. infrastructure, it should be getting loans in its local currency.

Before we provide a loan, we always analyse the company’s resilience to external shocks, including exchange rate fluctuations. Thus, we cannot say that certain clients have major problems. Everything is quite sustainable.

– When getting ready for this meeting with you, we noticed that the share of Kazakhstan’s project in your loan portfolio prevails over projects from other countries. What is the composition of your loan portfolio by countries?

– Over 41% of the current investment portfolio is located in Kazakhstan, about 38% – in Russia, and 18% – in Belarus. The remaining share is that of other EDB member countries. If we look at these numbers, we see that the figures for Kazakhstan and Russia are quite close.

– What is the reason for Kazakhstan’s projects prevailing in the Bank’s portfolio? How does the fact that the Bank’s headquarters are located in Kazakhstan impact the geography of its lending?

– The fact that the Bank’s headquarters are located in Kazakhstan to a certain extent indicates that EDB plays a marked role in implementing large local and national projects.

I would also like to note the qualitative improvement of the investment climate in Kazakhstan. Especially in recent years.

– The economies of Russia and Kazakhstan demonstrate some recovery. What are the Bank’s plans for lending this year in this context?

– We are actively expanding the project portfolio. It should be noted that a lot of attention is paid to both the number of projects, and their quality. It is important. Last year, there were 21 loan agreements signed totalling US $800 million. This year, our plan is to sign loan agreements totalling a billion US dollars, expanding the balance sheet portfolio by US $400 million.

– What are the mid-year results? Will you manage to achieve your annual planned targets?

– It is hard to tell now. The key aspect is the loan disbursement rate, which is unfortunately quite low. That means that we sign loan agreements, stand ready to finance the projects, but then the time of the project implementation is postpones for certain reasons by the client. That correspondingly affects our plans as well.

As to our performance in the first half of the year, I can say that EDB’s net profits were nearly US $18 million, while its assets reached US $3.4 billion. The signed investment projects totalled US $2.5 billion. It’s not a bad indicator. It should also be noted that the size of EDB’s issued debt securities has exceeded one billion US dollars.

– Do you plan to borrow in the market?

– At the moment, we see excess liquidity in the market. We do not face a particular need to tap the debt market to mobilise large loans. Therefore, the Bank’s key current task is to expand its loan portfolio.

We are also getting quite big repayments. A large project related to Pulkovo Airport in Saint Petersburg has been repaid. Tikhvin Car Building Plant has just repaid its loan. That influences our cash needs as well.

However, we are planning to place an issue of tenge-denominated securities. Tentatively this autumn. The size of the issue is about KZT30 billion. If we do consider borrowing in rubles, then not before the end of the year. As to liabilities in dollars and euros, we have no plans to expand them within the coming 12 months as there is no such need.

– Could you tell us about the most interesting current projects?

– We now have quite a lot of interesting projects. This year, we are planning to finance toll road construction. We have signed loan agreements to participate in the construction of the third section of the Central Ring Road surrounding Moscow. The second road project is the construction of a toll express way in Saint Petersburg. Several similar projects in Tatarstan are now under consideration.

In Kazakhstan, we will hopefully sign an agreement with Bogatyr Komir. The objective is to implement a large-scale project of about US $200 million to modernise a coal mine. The agreement is to be signed closer to the autumn.

– The Bank’s portfolio includes very many production projects. Could you tell us in more detail about the way the Bank organises its technical experts’ appraisal and audit of such projects? How do you find and sel ect experts in this area?

– Development banks differ from others exactly because they must arrange competent project appraisal both at the stage of project selection and signing, and at the stage of their implementation. At the stage of selection, it’s critical for us to find a consultant, who would perform a high-quality market analysis confirming that there is demand in the market for the product.

Then a technical consultant enters the picture, appraising the technical solutions, their relevance and efficiency. We do not have a fixed list of accredited consultants. As a rule, we send an invitation to three or four companies that we find competent and able to prepare a reasonable appraisal. They share their price offers. And then, based on the offers, the Bank’s management performs further selection of the technical and marketing consultants.

The next, and probably most important stage is the project implementation. Why is it essential for us to monitor the project implementation? First, we appraise how rigorously the technologic and other solutions incorporated into the project are observed. Secondly, we monitor the procurement prices for materials and equipment. It is important for us to prevent money from being stolen at the implementation stage and to ensure its efficient use.

– In conclusion, I can’t but ask about IFRS 9. There is an opinion in the market, that the new financial reporting standards would require significant additional provisioning that would result in losses. Could you comment how the standards would affect your business?

– We think that IFRS 9 represent a correct approach and should be implemented. Under the existing reporting standards, we all analyse the risks already undertaken, when the problem has already emerged, and then create provisions. While the idea behind IFRS 9 is to try and foresee potential problems, provisioning for future problems. And that is an absolutely correct approach.

Talking about us, our portfolio is not very risky. The share of provisions is 6% of the loan portfolio and we expect it to go down to 5% by the end of the year.

IFRS 9 exposes us to no financial risks.

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