For the fourth year in a row, state-owned Oschadbank has taken first place in the annual Top 50 Banks in Ukraine ranking. This recognition reflects the progress made by an institution that was once a symbol of the dysfunction and mismanagement associated with the vast state-owned enterprises inherited by Ukraine following the Soviet collapse. Business Ukraine magazine invited Oschadbank Management Board Chairman Andriy Pyshnyy to reflect on the changes he has overseen since taking up his current post in the tumultuous days of spring 2014:
“As I look back at the historic events of the past year, I realize that we will never be the same again.” This was one of the key messages from a speech I gave five years ago to mark the unveiling of the 2015-17 Oschadbank Development Strategy, entailing the modernization of Ukraine’s oldest bank with the country’s largest branch network. It is now possible to view the events of 2014 from a distance and assess the path we have since travelled. The bank certainly performed well in 2018, but it makes no sense to analyze the results of the past year without also taking into account the fascinating journey we have been on for the entire post-Maidan period.
Fateful Year of 2014
In the first few months of the year, Ukraine as a state, along with the entire population of the country, withstood a series of staggering blows. Reality was changing before our very eyes. In these circumstances, it became essential to act decisively and make pivotal decisions at a rapid pace. It was a question of “change or disappear”, both for the country as a whole and for Oschadbank in particular.
I can still clearly remember the reaction of our team during our first strategic session in autumn 2014 when I set the goal of becoming the leading Ukrainian bank. In the conditions of the time, this objective sounded somewhat fanciful, to say the least. Based on their initial responses, it was obvious that my colleagues recognized this. Nevertheless, I refused to let the difficult circumstances we faced serve as a barrier to our ambitions. Looking back, I can now say that we managed to implement 90% of the modernization strategy first laid out back then in early autumn 2014. This has allowed Oschadbank to assume its current position among Ukraine’s top banks.
Immediate priorities included stopping the outflow of resources, which we achieved in the summer of 2014. By the end of that year, we had restored our resource base and begun accumulating again. The bank has since become market leader in terms of individual deposit growth. In 2016, this allowed Oschadbank to repay NBU refinancing loans that had featured on the balance sheet of the bank since 2008 and amounted to more than UAH 20 billion.
In essence, we have built a new and modern bank inside the existing framework of an old bank. This includes the transformation of 600 branches to embrace an entirely new format. Twenty of these new branches are fully inclusive, making them the first of their kind both in Ukraine and throughout Central and Eastern Europe. The bank has also introduced mobile branches hosted in secure vehicles to ensure we can serve customers living in areas close to the conflict zone in eastern Ukraine. Over the past few years, we have entered the premium banking segment and built up our premium services from scratch, including the launch of a range of dedicated VIP facilities. The results speak for themselves. If Oschadbank’s premium banking division were treated a separate bank, it would be equivalent in size to one of the top three banks in the country in terms of deposit portfolio.
Joining the Digital Revolution
Today’s banking industry is about a lot more than upgraded branch networks. The transformation of Oschadbank has also involved the rapid expansion of digital technologies and online services. Five years ago, the bank’s “Oschad 24/7” app had just 13,000 users. I would actually be interested in meeting every one of them, because the functionality of this old app was something of a puzzle in itself. We have since developed and implemented a new, user-friendly app and built up our online banking services virtually from zero to become the number two bank nationally in the digital sector with 3.5 million users.
Oschadbank now also occupies second place in the Ukrainian market in terms of number of active payment cards and POS terminals in retail stores, despite lying in twentieth and thirtieth positions respectively not so long ago. Thanks to our growing reputation in these fields, major Ukrainian and international brand names like McDonald’s, Auchan, H&M, Turkish Airlines, KFC, DHL, TUI, PZU, Nova Poshta, Epicenter, ATB, Rozetka, SOCAR and many others have become customers. Among the many innovations of the past five years, we have established a new business line in support of Ukraine’s small and medium-sized enterprises (SMEs) entitled “Build Your Own”, which has enabled us to compete with the national market leaders in this strategically important and growing segment.
Addressing Loan Issues
One of the most challenging issues facing the bank since 2014 has been working with a significant existing non-performing loan portfolio, which rapidly increased following the annexation of Crimea and the war in Donbas, together with associated damage to the national economy. In order to meet this challenge, the bank’s organizational structure underwent changes with a new division established featuring many of the best lawyers in the market. We have since won numerous court cases and increased opportunities to recover damages incurred due to unscrupulous borrowers. In line with the Law of Ukraine “On Financial Restructuring”, we also launched the largest non-performing loan restructuring process among Ukraine’s state-owned banks.
Internationally, we have prepared and filed a lawsuit against the Russian Federation for assets lost in Crimea, engaged in complex arbitration hearings, and won! Meanwhile, to improve the bank’s operational procedures moving forward, we introduced a new risk management system, having first carried out a detailed review with due consideration of the Basel Accords on credit risk management standards and global best practices.
Within the bank, we have developed and implemented a modern employee development system, established a new corporate culture, and clearly defined the mission and values of our team. Perhaps even more importantly, Oschadbank has become a reliable and desirable employer.
From the very beginning of our transformation efforts in 2014, our team recognized the key role of Oschadbank among the country’s state-owned banks, and we have been directly involved in efforts to develop a reform strategy for the entire state banking sector. This strategy has identified roadmaps towards commercialization, specialization and the partial privatization of state-owned banks via the equity participation of reputable international financial institutions. The European Bank for Reconstruction and Development (EBRD) has emerged as a strategic partner and likely investor for Oschadbank.
In summer 2014, I went on my first overseas business trip to the EBRD headquarters in London. This trip came immediately after visits to the cities of Sloviansk and Kramatorsk in Donetsk region, where Oschadbank branches were able to resume work just 48 hours after liberation by Ukrainian forces and the end of combat operations. Within two years of that first trip to London, the Ukrainian Ministry of Finance and the EBRD signed a memorandum of strategic partnership and a roadmap for the transformations that must take place for this international financial institution to become a shareholder of Oschadbank along with the Ukrainian state. We remain focused on this strategic goal on a daily basis.
New Targets in 2018
Thanks to the implementation of our 2015-2017 modernization strategy, the bank entered 2018 with many legacy issues resolved and a new range of skillsets in place. Inevitably, this led to the question of what our next strategic focuses should be. The process of modernization had evolved from future goal to everyday reality, with the Oschadbank team learning to adjust to rapid change while seizing on new challenges and learning how to monetize them. We chose to refocus our strategic thinking from modernization to development, leading to a step-by-step strategy covering 2018-2022.
The overall goal of this strategy is to become the largest universal bank in the country. On the one hand, this means preserving and enhancing the unique leadership competencies required in order to work with large companies, including those from the public sector, power industry, infrastructure and agriculture. On the other hand, it envisages taking leading positions in the SME and retail banking segments while becoming an even more modern and tech-friendly bank. Ultimately, the goal is to cement Oschadbank’s position as the first-choice bank for ordinary Ukrainians and major corporate clients alike.
This new strategy was set forth within the framework of the strategic partnership memorandum with the EBRD. It represents a new chapter in the development of Oschadbank and of the entire Ukrainian banking system. Why is it so important? When we drew up the next stage of the Oschadbank development strategy in early 2018, the bank’s corporate governance was not yet reformed. The planned Independent Supervisory Board, which among other things would be responsible for approving this strategy, was had not yet been appointed. In order to move forward and maintain the momentum of the bank’s transformation, we had no choice but to submit this development document for the consideration of the shareholder, the Cabinet of Ministers of Ukraine. In an unprecedented move for the Ukrainian banking industry, the government reviewed and approved the plan, which set out a series of important markers, including the growth of assets to UAH 334 billion by 2022. In line with this overall roadmap, we established eight priorities for 2018.
Priority 1: Loan Portfolio Diversification
According to Oschadbank’s approved development strategy, by 2022 the bank’s loan portfolio should have the following composition: 64% corporate sector, 22% retail sector, 14% SME sector. Back in 2014, the breakdown of the bank’s loan portfolio was strikingly different, with 95% of loans to legal entities, 5% of loans to individuals (91% of which were in default), and zero loans to SMEs. It was already possible to identify clear shifts underway in the bank’s loan portfolio by the end of 2018, with 87% of loans to large corporate businesses, 8% of loans to individuals, and 5% of loans going to SMEs. Additionally, the share of public sector companies within the first category fell from 40% to 36%.
Priority 2: Fee and Commission Incomes
Five years ago, Oschadbank came seventh in the market in terms of fee and commission income, with this stream covering only 38% of the bank’s administrative costs (including network maintenance and staff remuneration). Currently, we rank second in the market. The bank’s fee and commission income now covers 63% of administrative costs, which is consistent with average market indicators.
Priority 3: Non-Performing Loans
By the start of 2019, Oschadbank had secured 7,200 court decisions in the bank’s favor to collect a total of UAH 45 billion from borrowers, of which UAH 14.6 billion were claims against ultimate individual beneficiaries. Funds and property amounting to a total of UAH 5.9 billion have already been collected in favor of the bank. Oschadbank won a victory against the Russian Federation in the International Court of Arbitration regarding the loss of Oschadbank assets in Crimea. The arbitration process lasted from 2015 until the second half of 2018. The compensation awarded is huge and amounts to USD 1.3 billion. This ruling also included an additional sum of approximately USD 100,000 for each day’s delay in payment of the principal amount.
We understand our responsibility to the shareholder, represented by the government, to increase Oschadbank’s authorized capital and cover sums allocated in previous years to meet losses incurred by the bank due to external aggression and the loss of investments and assets. We are therefore committed to fighting for every single Oschadbank hryvnia in the Ukrainian, foreign and international courts. Moreover, Oschadbank was the first Ukrainian bank to implement the Law of Ukraine “On Financial Restructuring” to manage non-performing loans and improve the quality of the bank’s loan portfolio. In 2018 alone, Oschadbank conducted seven separate financial restructuring procedures amounting to UAH 16 billion. In total, the bank has conducted 14 financial restructuring procedures amounting to about UAH 23 billion. With this in mind, it is not surprising that the Oschadbank team received recognition as number one in the Ukrainian banking system according to the “Best Legal Departments 2018” rating.
Priority 4: Retail Sector Growth
In recent years, Oschadbank has become a market leader in terms of individual deposit growth, almost tripling its market share from 7.12% in 2014 to 21.92% by the end of 2018. In 2018 alone, this market share increased by 2.31%. The bank has gained a leadership position in the mortgage market and currently occupies 14% of the auto loan market, despite the fact that it did not issue any auto loans at all as recently as two years ago. We rank second in the card market, with 6.1 million active banking cards.
Innovation has been central to the bank’s retail sector expansion. The development of the “Oschad 24/7” app continues, with new products and services regularly introduced. Oschadbank was among the first Ukrainian banks to introduce GooglePay and ApplePay functions. Our premium banking services gained recognition as the Ukrainian market leader from Euromoney magazine as well as British publications The Banker and PWM (“Professional Wealth Management”).
I would like to pay particular tribute to the Oschadbank e-commerce team for pioneering the creation of cashless spaces at major national festivals such as Atlas Weekend and Ulichnaya Eda, as well as international showpieces including the 2018 UEFA Champions League Final at Kyiv’s Olympic Stadium. Together with Visa and Mastercard, Oschadbank has pioneered the introduction of contactless payment technology throughout the Kyiv Metro transport system and other public transport in an expanding list of Ukrainian cities.
Oschadbank has consolidated its position within the Ukrainian retail sector and now ranks in second place nationally, with the number of POS terminals currently at 45,000. As the range of services and convenience levels continue to improve, more and more of our existing customers are ready to recommend the bank to friends, family and colleagues. All this is helping to boost the prestige and the valuation of the Oschadbank brand. In 2018, influential Ukrainian current affairs publication Novoe Vremya included Oschadbank in its list of Top 100 Brands in Ukraine, noting an estimated 71% increase in brand value compared to the previous year.
Priority 5: Support for SMEs
We have cooperated with the EBRD and the Frankfurt School of Business to train credit managers and prepare a microcredit program. Due to these efforts, the bank’s loan portfolio for SMEs increased in 2018 by 67% and exceeded UAH 3.5 billion. Oschadbank’s deposit portfolio in this segment amounts to UAH 16.7 billion. Additionally, we have launched the CorpLight mobile app, giving entrepreneurs the opportunity to transfer their business to a smartphone and manage it 24/7.
Priority 6: Unified IT Platform
We are working hard to create a single IT platform throughout the bank. Oschadbank previously had a wide array of up to 300 different platforms and databases, but we have since moved towards a “one-stop shop” database scenario. The next step is to configure business processes for the new level of service we are striving to achieve. The bank’s new IT system provides in-depth analysis, identifies customer needs, and offers up-to-date services. It helps to modify existing approaches to customer service and create new dynamics. As a result, customers will be able to benefit from all existing products at any Oschadbank branch, regardless of where they opened their account. For other banks, this is a common enough function, but due to a range of historical factors, this has been a significant challenge in the past for Oschadbank.
Priority 7: Risk Management Reform
In 2018, the National Bank of Ukraine approved new risk management approaches for banks and banking groups of Ukraine (NBU Resolution No 64). As a result, Oschadbank now focuses on implementation of the standards, requirements and principles of this updated risk management system. We have developed an action plan and implemented the first two steps in accordance with the aforementioned resolution of the National Bank of Ukraine. We have revised risk rules and updated our methodology for various customer segments accordingly. This includes project financing, leasing, financing of municipal development budgets, construction financing for alternative energy generating companies, and the accreditation of developers and insurance companies.
Priority 8: Transition to IFRS 9
All Ukrainian banking industry market players were obliged to complete transition to the IFRS 9 (International Financial Reporting Standard 9) by the end of 2018. This represented a major transformation for Oschadbank. It involved moving from changes in methodology (accounting, valuation, forecasting) to the automation of complex processes calculating expected credit losses. It also meant moving from implementation of modern software solutions in the bank’s IT landscape to the creation of a new data quality management model.
In March 2019, Oschadbank met external obligations amounting to USD 477 million, confirming not just the bank’s efficient management of resources, but also the reputation of the bank as a reliable partner. We intend to keep going in the same direction. We continue to add new products and services while seeking to monetize our customer base more effectively. The bank’s toxic assets portfolio remains a significant challenge. We are actively using the available institutional financial restructuring tools to work with a non-performing loan portfolio formed prior to March 2014 that exceeds all of the similar portfolios of other state-owned Ukrainian banks put together. At the same time, our team continues to work on the development of new tools for the better management of non-performing loans.
Strategically, we plan to move the bank to an entirely new technological level. This will involve the complete digitalization of all processes and the implementation of the large-scale “Integra” innovative project developed jointly with Deloitte. We continue to invest in the bank’s IT platform and information security as key priorities.
The bank will soon experience a change in corporate governance with the appointment of a new Supervisory Board consisting mostly of independent members. This means that the bank will acquire additional expertise. New internal regulations will help facilitate better interaction among the Oschadbank team. Within this broader development of our corporate governance, my personal task is to ensure the quickest and most profound involvement of new Supervisory Board members in the issues facing the bank, in order to keep our strategy updated and fulfill our tasks. These tasks are indeed numerous. Implementation requires not only adherence to new corporate governance standards based on global best practice, but also consistency from a team that has already succeeded in transforming and developing the bank.
The Oschadbank Team
For the past five years, the Oschadbank team has demonstrated unique skills that reflect their qualities not only as professionals but also as fighters. I am proud of everything we have achieved. The core of today’s team took shape in 2014–2015. Many talented and ambitious people joined us and high salaries were not their main motivation. Instead, most saw it as an opportunity to accept a unique challenge, take responsibility and, of course, work in a dynamic professional environment where they could truly reach their potential.
Together, we have built a new corporate culture within the bank. This began with a manifesto outlining the core principles that underpin everything we do. The original Oschadbank manifesto of 2014 began with the simple statement: “My country is changing and I care because I want to live here.” This was followed by the message that as the country changes, the bank and its employees must also necessarily change and adapt to the new environment.
Over the past five years, the bank has embraced this spirit of change. Today’s Oschadbank has a democratic communication system that reflects the culture of openness within the bank. Oschadbank employees have received the opportunity to grow professionally and become leaders in their respective fields. We offer a full range of development courses including our own banking equivalent of an MBA, which already boasts five waves of graduate managers.
The bank we changed is now helping to change the country. As our updated manifesto now states, “Together with us, Ukrainian startups are growing and larger businesses are becoming more powerful. Together with us, millions of Ukrainians are taking their first steps financially and planning their futures.” Despite this upbeat outlook, we remain acutely aware of the huge challenges that lie ahead. We approach these challenges with a sense of optimism and confidence rooted in the strength of the Oschadbank team. As American basketball legend Michael Jordan said, “Talent wins games, but teamwork and intelligence win championships.”