Banking sector Interview

Political instability is a crucial point, as investors need stability and predictable political environment in the country

The Head of Deutsche Bank Ukraine (DBU), Bernd Wurth, told about the impact of political and social factors on the financial industry of the country, the necessity of massive implementation of digital technologies; as well as shared his thoughts concerning features of the investment policy in Ukraine, about current challenges and what needs to be done to solve them.

: How do you assess the prospects for the development of financial services in Ukraine in 2019-2020? What directions will you develop most dynamically?

B. Wurth: The financial industry has two sectors: banks and their security and insurance companies. Let’s be focused on the banking industry, as the insurance market is a little bit complex in Ukraine compared to other markets. The banking industry formed by the National Bank in Ukraine went through a painful period with the execution of the stabilization program for the financial market of Ukraine by cleaning up the banking system, setting the improved framework, taking it to the international standards, establishing a quite focused, professional and experienced team in National Bank. It depends on politics. In 2019, the biggest challenge for banks is revitalizing the loan market for small and mid-sized enterprises in the domestic market. This will carry on through the elections because we cannot really assess what is coming up in the second part of the year, with the new parliament and completely new government. So, the pace will definitely slow down developments.

Coming back to the question – we will not see miracles, it wouldn’t be fair to predict a rosy future, but all the components are there to launch a kind of self-dynamic towards a prospering and sustainable financial system.

Comparing the Ukrainian Market with the «Old Economies», the statement would be quite clear – Ukraine is far ahead in terms of Electronic Banking and IT System applications in the banking industry. Real-time transfers, daylight booking, smart apps for electronic banking for both corporate and retail world, face recognition for ATMs, already established standards in the Ukrainian market.

In combination with the available workforce in Ukraine, a perfect opportunity to build a new pillar for the economy by attracting Ukrainian capabilities and capacities to international corporates and/or Financial Institutions to establish Shared Service Centers or Centers of Competence for financial tasks and services.

Cashless/Instant payment as well as electronic wallet technologies – taking slowly grip on a global scale (excl. China as a booming market), already successfully implemented in Ukraine.

Just a few examples where Ukraine is already playing a leading role in Europe and is able to build on as a role model for other markets by transfer of experience and knowledge.

: What risks in the field of finance in Ukraine do you consider the largest in the next 2-3 years?

B. Wurth: In the international financial market, long-term is starting from 4 years. Midterm is between 1 and 4 years, shortterm up to 1 year. Here in Ukraine, long term is already 6 months. So, talking about a 2-3 year horizon, that’s just the best guess. Whatever I say could be wrong. Look at what happened over the past 4-5 years, it was unpredictable and you could not really expect that. I wouldn’t dare to make any prediction.

As for risks, there are many challenges, which need to be controlled or tackled while going forward.

One of the hot topics is definitely the integration of the grey economy into the white economic circuit. The grey economic activity materially affects the sectorial structure of the country’s economy and economic growth. The negative impact on the Ukrainian Economy is obvious. The conflict with Ukraine’s monetary and credit system, unaccounted cash flows for the state statistics, not being able to execute control over them, debt capital that creates a parallel, uncontrolled financial market, not obeying taxes and levies due to the state budget. The distortion of the monetary system structure is leading to increasing investment risks, uncontrolled inflation, and has a negative effect on the exchange rates of the national currency towards hard currencies.

Despite the first right steps to protect the legal rights of creditors with the implementation of a credit registry and strengthened laws towards protection of creditors, there is still the risk of losing momentum in paving further legal grounds for the security of international investors and local banks. An important point that is focused, especially by international investors and could stimulate an increasing foreign direct investment if the pace is kept.

After five very successful years in cleaning up the financial market, creating an independent guard of the domestic currency, fostering the hard currency reserves, establishing monetary stability, reaching control over Ukraine’s inflation and building a sustainable financial environment, National Bank needs to enjoy the freedom going forward to continue with the strategy of a strong guard of the economy. Ultimately, leading the Ukrainian market into a free financial market and consequently free market economy. Ideas in restricting powers, getting control over interest and FX rates or limiting the freedom of managing proper monetary stability seems to be rather counterproductive for solid economic growth and positive future for the Ukrainian economy – ultimately for the well-doing of the Ukrainian society.

Looking into the various markets, the ongoing dominance of sovereign structures in the corporate and banking market, creating a displaced picture of competition, the risk of slowing down the implementation of liberalized markets, supporting the freedom of doing business, populist measures towards uncontrolled social spending, erosion of a tight monetary control over inflation, integration of all Financial Industries under the supervision of Nationalbank including Insurance companies, there are much more topics that could create substantial risks in future and may not be neglected. Ukraine passed such a dynamic positive development over the past years that maintenance or even return to the «old economy» should not be an option.

: Last year, you stopped servicing Loro accounts of about 60 small Ukrainian banks opened through large financial institutions. What risks did your bank consider to be strong enough to take this measure?

B. Wurth: Here we have to distinguish between Deutsche Bank Ukraine (DBU) and Deutsche Bank AG. As a domestic bank and subsidiary of a global institution, Deutsche Bank Ukraine (DBU) was impacted by that decision as well, as Deutsche Bank AG was following the – at that point of time – updated standards and principles of the global regulators in terms of frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies.

FIs had to adapt to the current regulatory market environment, considering the risks described, the applicable regulatory standards and their own defined risk management strategy. In line with the updated standards of the global financial industry in the fight for transparency (FATF Recommendations, Wolfsberg Principles, global update of local regulatory requirements), the step to further strengthen the AML principles was imperative. Having said that, Deutsche Bank AG followed the route of the global financial industry in tackling downstream correspondent banking flows also known as ‘nesting’ to foster the initiative to gain extended transparency in the global payment flows. In a very wide range, Ukraine used a so-called ‘nested’ approach when smaller banks used bigger banks to execute payments. Consequently, relationships with banks following the ‘nesting’ approach were orderly terminated.

Defending our position, even the National Bank of Ukraine’s deputy head Kateryna Rozhkova called on banks to work to establish effective corporate governance to enable them to pass compliance controls and participate as a reliable partner in the financial market on a global basis.

: What global economy risks do you consider to be the highest for the next few years and what actions should companies in Ukraine take to minimize them?

B. Wurth: Taken into account the current global tendencies and domestic dependencies, it is hard to point out the most influential or important drivers for economic risks of Ukraine. Too many «if» and «then».

We have political and economic risks. We have local and international obstacles. Look at what is going on with USA and China and all the countries in the news today. There is no stability, neither in politics nor in economic affairs anymore. Growing nationalism, increasing dissatisfaction of societies with their established governments, growing influence of populists, tectonic shifts in political orientation of countries, unpredictable leaders with pure national views, global trade wars, Brexit, slowdown of global and regional economic developments, increasing risk of geopolitical conflict zones, change of climate, countless to continue.

There is, unfortunately, no standard recipe to follow in order to mitigate all the risks or to resolve substantial political or economic issues. The banking industry and financial markets need to stay on top. Real-time, transparent and clean information is key to react upon changing situations and environments in order to mitigate risks and protect an economy, especially through its market players.

: But you consider risks, probably you have targets and plans for 3 years or 1 year at least?

B. Wurth: Except for financial risks like credit risks, we have country, political, economic, transfer risks. That is basically a mixture of everything that I have just mentioned. An endless list of topics you have to tackle, and going forward. What will happen in the trade war of China and the USA, who are future suppliers for some economies? Do you know the outcome? What will be the next idea of Mr. Trump tackling some other industrial, industrialized countries, or simply some industries? We don’t know whether European manufactures face further completive disadvantages in global economies. The development wheel is turning so fast, we can’t really predict what will happen in the next few years.

: Maybe you have your own vision and opinion, and you can recommend other companies on how to minimize all the risks.

B. Wurth: Stay on top of the news and the information. Make your own judgment on a daily basis, compare it with your strategy, see whether an alignment is needed. That is the only thing we can do. As a bank with global span, we enjoy a research team, who is looking at various markets and developments but, quite honest, they are no clairvoyant as well.

: What are the highest investment risks in Ukraine today?

B. Wurth: According to IMF, three major topics need to be addressed in order to limit risks for investors and support the Ukrainian economy:

• The Land Reform

• The Juridical System Reform

• The Fight against Corruption

To my mind, there is still a close correlation between the economy and politics in Ukraine. The upcoming presidential and parliament elections put many investments on hold. Not clear who will succeed as President on 2019. Potential investors will wait to get a better understanding until mid of the year.

The frozen conflict in the eastern part of the country is a permanent source of uncertainty, what leads most likely to a kind of maintenance of the status quo, as the consequences of a military conflict obvious for both parties.

Brain drain is currently an issue for Ukraine – young and mid-aged people are leaving the country despite the fact that Investors are looking for qualified people. In Ukraine, you have a solid basis education which is fundamental for further development. Unfortunately, young people are leaving the country due to the lack of prospects, and many of them are tired with the politics here in the country.

The legal system in Ukraine is based on a civil system of codified laws passed by the parliament, the Verkhovna Rada. In principle it is independent of the executive branch, however, a widely spread view and painful experience still talks about problems of the Ukrainian judicial system with its overall lack of capacity and the existence of prosecutorial influence on judges.

The State Anti Corruption Forces are opening case after case in view of embezzlement of state property, the constitutional court sheds a law, prosecuting Members of the Parliament, a member of the government is involved in a corruptive set up dealing with spare parts for military goods. Corruption – a topic that needs to get under control urgently.

The last one is the grey economy which does not allow getting finacial resources to develop the country. People are somewhat jealous about the German system in terms of health care, social care, infrastructure, etc. But why do we have working mechanisms ? German’s have to pay taxes, so if we pay about 25 percent here in Ukraine, German’s pay almost 50 percent.

: Initially, we have other payoffs from the salary.

B. Wurth: Of course, but we have them as well. Social contribution like Sovereign Pension Fund, unempoyent fund, etc … A material part of the salary is gone.

: Despite all these weak sides, should international investors come to Ukraine and invest in our companies?

B. Wurth: I am convinced that Ukraine is a huge opportunity for international investors, because of the people, resources and its location. In 24 hours, you can reach any point in Western Europe by truck. That is a huge advantage compared to the Asian market. The next advantage is education and language abilities of the mid and young generation. If we look at the international community which started to invest in Western Ukraine, companies especially in automotive industries, they are very happy and engaged. The very focused labor force is willing to work, which is helpful in creating the needed infrastructure. There is a good administrative environment in order to support investments. For me, this is a huge plus. One important aspect is, of course, the cost. The level of wages is comparable with India where all internationals are going. China, it is even more expensive than Ukraine. For me, Ukraine is the market we have to consider, make a reasonable analysis, subject on its own industry that could be interesting for others, not only as a sales market but also as production hub for international industries. Look at the Ukrainian industry from agriculture to space technology – it is all there. Ukraine has qualified people who understand what they do, maybe not the latest technologies or developments, but for professionals it is only a piece of cake to catch up. So, the first step is to analyze the market.

: Which segment is the most interesting for German investors?

B. Wurth: We have chemical and automotive industries. Over the past few years, the German automotive industry invested a lot into its production hubs in Ukraine and created about 50 000 jobs. Agro companies analyzing the market, machine building industry as supplier for western European producers, IT, as German brands opened centers of competence for engineering in Lviv. There are many attractive partners for German companies in many industries.

: What should German companies operating in Ukraine pay attention to?

B. Wurth: For companies already present in Ukraine, there are no recommendations, as they know their tricks-of-the-trade probably better than we do. This question is much more important for market rookies. The key word for that is well known in the German economy.

Understanding that Ukraine is a very attractive market for the German industry on both ends – as a consumer and as a supplier market, I’d recommend simply following the German virtues, ensuring sustainable due diligence with the right partners. Developing a feasible business plan is an open secret that will open opportunities in the domestic market.

Ukraine has a unique suite of advantages – young, motivated labor force with a solid education; all industries are represented in the market, the proximity to the EU markets, the moderate remuneration level for the workforce, the basic infrastructure, and so on.

It is worth to spend the effort to analyze and assess opportunities and feasibilities. Information is the most important thing companies need. You have to deal with authorities, establish your business, and take care of your labor force and the resourcing. Proper visibility eliminates a lot of risks. What you cannot really predict is the development of the country, the politics in terms of raids, tax authorities and new laws. However, Ukraine is really heading to international standards and getting rid of the historic heritage.

: How does the banking environment respond today and how will it respond in the nearest future to the development of the cryptocurrency and blockchain market?

B. Wurth: Blockchain is still a kind of hype, but I wouldn’t follow this approach. I would rather say that this is an important tool we will have in the future. It needs to be properly structured in terms of transparency and security. As you know, blockchain is a decentralized kind of information bucket made to keep or settle something like transactions in financial terms or bookkeeping in terms of land administration. It could be a huge opportunity to use it as a functional tool for settlement in the wide distance. As far as we can control transparency and security, there will be such access in the banking industry.

The use of blockchain technology has just started now. The first ideas to utilize the opportunities of blockchain have been born, the train started to take up speed… Companies like Telefónica or Daimler are also testing blockchain for financing projects. Due to legal regulations, digital technology can only be utilized simultaneously in the regulatory emission process. But, as soon as the path is clear, larger companies could switch to handling structured financing or capital market issues entirely via block chains. There are also opportunities for greater efficiency via block chains in payment transactions, securities trading and cross-border goods traffic.

A decisive advantage of the blockchain technology is that information and processes can be exchanged transparently and seamlessly in real time without a central control authority, making them virtually forgery-proof. With the possibility to conclude secure, self-monitoring remote contracts, the blockchain can save time and transaction costs in various areas. For example, a promissory note issue has so far included many manual process steps that can be automated via blockchain. Sweden is already testing land register entries via blockchain. In the future, patent applications, approval procedures or proofs for the tax office would also be conceivable. Direct trading with renewable energies could also be possible via blockchain for private households and smaller, local producers directly among each other.

Cross-border trade financing could also soon become easier for SMEs thanks to blockchain. Together with European partner banks, Deutsche Bank is working on setting up a joint blockchain platform for trade finance. The new platform networks all parties involved, from the buyer and his bank to the seller, his bank and the carriers involved, in order to carry out trade transactions faster and more efficiently and to secure them reliably even without a letter of credit.

: Will it be safe?

B. Wurth: That’s a good question. That is exactly the point where the banking industry should be very cautious in development and consequent application in new products. We should be extremely careful in usage, because of the security issues.

: What innovations has your bank introduced and does it plan to introduce in the nearest future taking into consideration the rapid development of digital technologies, internet solutions and services, automation of many procedures, for example, online banking and self-service for customers?

B. Wurth: We have to distinguish Deutsche Bank Ukraine and Deutsche Bank Group. Here in Ukraine, we have only a corporate bank and no service for private individuals. In corporate banking, it is quite easy. In the ideal world, companies need a multi-banking financial platform where they can communicate and deal with the bank in every single question and service transaction. That is the platform we offer and further develop in offerings in the future to deliver a suitable electronic banking platform, so there is no need to visit the bank at all. Of course, this is always a subject to domestic laws and regulations in the country where we are present with an operative unit.

One example for Ukraine is that a ‘paper economy’ with seals and signatures is still present. Electronic tools provided by us could offer much more than we are allowed to do, but to be fair, over the past years, many things changed. We are going into an electronic world. As an example let’s mention electronic communication with authorized electronic signature. We are catching up in terms of electronic banking in its widest sense. In the banking outside Ukraine, there is a platform for individuals which we are investing in. For our retail clients outside Ukraine, we are developing and delivering quite amazing high-quality service products and products for our clients via smartphones and the Internet.

Also, one of the milestones of 2018 was definitely the pilot project with the International Air Transport Association (IATA), to test a new payment model. Deutsche Bank will look to reduce costs for processing payments between airline clients and airlines. For travelers, this will result in a wider choice, a smoother and less complex payments process and ultimately more convenience when paying for airline travel.

To lead the trends in the modern banking industry, except for the famous blockchain technology, there is biometrics combined with facial recognition, a new generation of e-signature technology, cashless payment platforms and transaction protection through data mining for fighting cybercrimes.

: How are other systems of personal motivation and process management in Deutsche Bank changing under the influence of online solutions?

B. Wurth: Our HR vision is important in building a better bank: working in partnership to create an environment where people can thrive for and are enabled to deliver sustainable organizational performance. In line with this vision, Deutsche Bank has made good progress towards achieving a number of key HR priorities. One of these is to enable the bank’s digital transformation, which not only affects products, processes and services but has a profound impact on how we work. The way in which both clients and employees experience our bank today is a direct result of this change.

If I compare how it was when I started my career and where we are right now, these are two different worlds. Changes arising from digitalization affect every aspect of the bank’s workforce – from the way employees are hired, trained and managed to the way they communicate, interact and experience their workplace. Having experienced increased convenience and efficiency through the use of technology in their personal lives, they expect similar options from their employer. Deutsche Bank began tackling this challenge several years ago and has started to systematically digitalize its HR services.

The bank’s electronic HR platform, a modern HR portal that offers numerous related tools and services located on DB’s INTRAnet, provides all bank employees globally with fast, easy, 24/7 access. The updated portal led to a noticeable and quantifiable increase in efficiency in a kind of a cloud based one-stop-shop going forward.

Our new digital curriculum strengthens further expansion and systematic online learning and training opportunities for employees. Tailor made online learning materials that employees use extensively on a global level.

To sincerly support social responsibility and team spirit development, an information platform for the DB community worldwide was established to share all news and activities related to these topics. The initiative is called «Positive Impact» where the DB community is sharing it’s activities in terms of projects and events, may be as a trigger for other individuals an teams to deliver something similar.

In the area of the employer brand, we are making extensive use of the opportunities afforded by digitalization, using social media and apps to ensure success when it comes to recruiting new employees and raising the brand profile among university students and graduates.

As part of Deutsche Bank’s innovation management and ideas program (DB Idee), people may submit ideas for improving the bank, such as enhancing business processes or cutting costs. The program seeks to promote innovation by harnessing employees’ creative power. If an idea for implementation is chosen, the respective employee may receive a financial award based on the estimated or actual value of the innovation’s economic benefit.

: What other risks should be considered today in managing the business in general and managing investments in particular?

B. Wurth: Human resource. To establish a business, you have to maintain your team. That is one of the main aspects. You have to focus on the subject industry, the legal environment, the importance of the market as sales destination or sourcing hub. Ukraine did that quite successfully after 2014, when the Russian market was basically seized. Ukrainian companies were pretty fast switching to different markets and developing their roots. That needs to continue to maintain the focus on new markets.

Think beyond the borders and look for a ‘plan B’ in case something happens. Companies with a non-diversified sales market probably lost during the crisis period.

But that creates new opportunities in finding creative solutions to sell in new markets. Political instability is a crucial point, as investors need stability and predictable political environment.

Please read: The most important recommendations on business protection in Ukraine for 2019

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