Focus twice-monthly English-language supplement to the daily Focus business newspaper
# 13 (14) November 17, 2009
pages 6-7
Editorial tel.: (727) 3888 133
Eurasian Bank Growing, Looking for Opportunities, New Leader Says
Michael Eggleton, the new chairman of Eurasian Bank, has more than two decades of experience in developing financial businesses in emerging markets. The bank’s board is counting on him to help Eurasian become one of the top five financial institutions in Kazakhstan and to go global. The bank is on the move, recently moving up from Number 9 in the country to Number 7. Eggleton, an American with a lot of experience in the former Soviet Union, spoke about the challenges in a recent interview.
Question: In the wake of the banking crisis, Kazakhstan will be toughening its financial-market regulation. What’s your view of the current level of regulation?
Answer: Kazakhstan began dealing with the crisis earlier than many countries. At first it was hard for regulators to get a grasp of the situation, since it was complicated by that fact that Kazakh banks had borrowed a lot of money from abroad to extend loans for real estate projects. By doing so the banks helped create a bubble in the property market. The situation was worsened by the huge number of borrowers who ended up being unable to repay their debts. It’s important that both banks and regulators pursue balanced policies in regard to such borrowers.
It seems to me that when the government first looked at options for dealing with the financial crisis, it had three possible solutions.
The first was to shore up the banking sector and small and medium-sized businesses, making as little to-do about it as possible. This option involved the possibility of the government intervening in a number of banks’ operations. It would have required massive amounts of money to support all the shaky financial institutions.
The second option was for the government to do nothing. It could have said that since this is a free-market economy, the players themselves are responsibile for doing what is necessary to save their businesses. This option was acceptable only if one -- or a maximum of two or three -- financial institutions were in dire straits. The scale of this crisis was too large for this option to be acceptable, however.
The third option was a blend of the first and second. The government would support only the backbone financial institutions whose influence reverberates across the entire financial sector. This is the option that the Kazakh government is currently pursuing. The actions it is taking are rational and well-balanced, it seems to me, although it will be years before it becomes clear whether the choice was correct.
This option also requires extensive financing. The problem is that Kazakhstan’s financial resources are limited, unlike in the United States, China or Europe, which possess massive resources. Besides, it’s important to keep in mind that Kazakhstan should preserve part of its financial resources to support future projects.
The bottom line, I think, is that the actions we are seeing regulators take now are balanced and the available resources are being used rationally.
Q.: Are you suggesting that the level of regulation in Kazakhstan was the same as in the West and that Kazakh regulators could have done nothing to prevent the crisis?
A.: It’s impossible to make comparisons like that because the systems are totally different. Regulators here are trying to solve the problem resulting from banks borrowing excessively. They are trying to decrease the level of debt by means that include writing it off or restructuring it.
In the next three to 12 months, I think, we’ll continue to see a rather chaotic situation in the market because so far regulators have taken only the first steps. We’ll see where this leads. If the prices of the natural resources that Kazakhstan relies on are not falling, then we’ll be experiencing growth. We can also expect investors to return to Kazakhstan’s market. They are keeping a close eye on the situation now as corporations and financial institutions begin shoring up their balance sheets and lowering their debts.
In general I would note that regulators’ actions have been timely, although they are in a difficult decision-making position because right now it’s unclear where the decisions will lead.
Q: If regulators were powerless to prevent the crisis, is there any hope that the measures they’re taking now will be effective? Maybe this has nothing to do with them. Maybe other factors are playing the decisive role -- for instance, the global market or the personal responsibility of top managers.
A: This question has been asked around the world. And there is only one thing to say about it: The responsibility for the crisis falls on everyone -- bankers, investors, regulators.
The work of the regulators who are trying to find a way out of the situation is harder than that of all the rest of the players, however. The others should not be relieved of their responsibility, of course – neither the bankers who were borrowing excessively nor the investors who were investing in risky schemes.
The important thing now is to make decisions quickly and learn the lessons from the financial crisis to prevent it from recurring. History has shown that no financial crisis has ever been like the previous one, though, so we need to be ready to face new challenges. Each and every one should understand their responsibility to others in these situations.
Q.: Many banks have cut staff since the financial crisis began. What’s been the situation at Eurasian Bank?
A.: In the past 20 months the bank has increased its staff by 50 percent because it’s been growing despite the crisis. It’s possible that after a thorough analysis of our situation, we might make some structural changes in the bank or even reduce staff slightly. But the purpose of any cuts would be maximizing efficiency, not reducing expenses because of the crisis. The number of people the bank employs in the future will depend largely on acquisitions we’re considering making. This may involve mergers or it may involve acquiring subsidiaries. One thing is certain: Nothing is going to happen fast.
Q.: What are your acquisition plans?
A.: Our plans are to become one of the top five banks in Kazakhstan. This means not only internal growth, but perhaps acquiring other banks as well. Any deals will depend on many factors, including price and a deal’s impact on the bank, its clients and shareholders. But generally speaking, acquisitions are a good way to expand the bank right now.
Q.: When BTA Bank started having problems, rumors surfaced that Eurasian Bank was ready to obtain a stake in it. What banks would Eurasian Bank be interested in acquiring?
A.: I can’t give you the details of our plans now. But I can say that what’s important when considering a purchase are the quality of the bank’s portfolio and the quality of its assets.
Q.: Are your acquisition intentions near-term or long-term?
A.: The next year to 18 months is a good time for acquisitions. But we won’t acquire any financial institutions that could saddle our bank with insurmountable problems or hinder its development.
Q.: What ways besides acquisitions are you considering using to help the bank grow?
A.: Eurasian Bank has proven its reliability and stability during the crisis. It has always pursued moderate, conservative borrowing and lending policies. But it’s quite possible we’ll be borrowing in the domestic market.
The funds we would raise this way would be distributed mostly among our corporate clients and used for developing our network. We would also be working with small and medium-sized businesses, but this focus would be secondary to the first two.
Let me point out that many players in the market are narrowing their business instead of expanding it these days.
Q.: If you’re going to focus on corporate clients, does this mean you’ll be intensifying your competition with other large banks that are strong in the corporate sector? Every bank has its own, often affiliated corporate clients. And the big players have pretty much carved up this market already.
A.: This is the charm of the crisis: Large banks are having to spend most of their resources paying off foreign debt. With limited resources, they can’t lend their clients as much as they used to. Because of this, companies are changing banks, shifting to those that are capable of providing them with the funds they need. We have a good liquidity level and we’re actively lending. With this advantage we won’t have much trouble attracting an additional $1 billion in assets – a level that would put Eurasian Bank in the top five in Kazakhstan. Part of the reason I say that is that our bank is a large, serious corporation with a good reputation.
Q.: How much will you need to increase deposits and lending to large clients in order for you to raise an additional $1 billion?
A.: It’s impossible to forecast now, but most of the money will come from lending to corporate clients. In addition, we expect significant growth in our deposits. We also expect to obtain revenue from serving our existing clients, both inside and outside the group. I’ve also spoken about our potential plans to acquire a bank. With our resources, and with the opportunities provided by the domestic capital market, we expect the bank to grow.
As for our plans to purchase assets outside the bank, it isn’t difficult to find financial institutions with assets. The issue is not the quantity, but the quality of assets. Our goal is not just to report figures on paper high enough to get us into the top five, but to create a steady base of assets, which lowers our risks.
According to our internal targets, 20 percent of the $1 billion would come from liquid assets, such as deposits, and interbank lending. The corporate sector would account for 60 percent, and the other 20 percent would come from small and medium-sized businesses and retail banking (accounts of individuals).
Q.: What are the business sectors that Eurasian Bank is primarily interested in?
A.: I’m not concerned about which sector a company is in, but only about the company’s financial stability. The strongest sectors today are the industrial sector, natural resources, energy and agriculture. In addition, there are projects the government supports.
Q.: So the bank is not going to focus on the real estate sector?
A.: The bank is not going to abandon this sector completely. But now it is hard to understand and forecast prices so we won’t be taking risks for the time being. As soon as the situation in the real estate market becomes clear, our bank will provide services in this sector as well. As for the construction sector, the question is whether projects will be viable and whether they will be financially stable. We won’t be giving up projects proposed by the Samruk-Kazyna Fund, either. (This government fund puts money in projects it believes will both help the economy recover and benefit society.)
Q.: Usually the new head of a bank is given a set of goals. Have you been given such goals?
A.: These days we’re talking something broader than mere financial indicators. Eurasian Bank is strong, and we’re considering an expansion strategy that will globalize the business. My relations with the bank’s shareholders were established years ago, starting with the initial public offering of Eurasian Natural Resources Corporation, where I was an independent board director. (Eurasian Bank and Eurasian Natural Resources Corporation have had longstanding ties.) So we have known each other for a long time already.
It’s now important for us to pursue transparency in the bank and ensure its growth and expansion. Now is the best time to do it. If the bank can come up with a formula for proper returns and high efficiency, I’m sure the shareholders will receive a good return on investment.
Q.: Why have you moved so much from country to country in the past 20 years?
A.: In fact this was mostly traveling for the company where I was working at the time. Eurasian Group is the fifth company I’ve worked for in 20 years. I began working at Pricewaterhouse Coopers in 1989. I was married and in 1993 the company asked me to move to Moscow to work in a bank. My wife and I were young, and the idea of living in another country was interesting, so we agreed. I understood that I was not going to do one and the same thing till the end of my life. This is how my career in the banking system started. I joined Credit Suisse First Boston in 1995.
Five years later, at the end of 1999, I was heading all of that bank’s business in the Commonwealth of Independent States. Then I was asked to work in Istanbul. About the same time, trouble surfaced in their bank in Egypt, and I was asked to go there to set things right and do a restructuring. After I completed the job, I was offered a position in London, heading operations in 40 countries that were part of one system – from South America to Asia.
In 2004 I was invited to join Merrill Lynch, where I headed the emerging-market business. After awhile the company asked me to restructure its operation in Russia. I became chief executive offer of Trust Investment Bank in Russia in 2006. It was when I was working in Moscow that Eurasian Natural Resources Corporation’s shareholders asked me to become part of the corporation’s board of directors. That led to my accepting the offer to head Eurasian Bank and to work in this market of many opportunities.
I’ve worked in many cities not just for the business opportunities but also because of my desire to work in developing countries, to take part in establishing businesses amid new conditions. This is my strong side; I like this work a lot. My wife supports me in this, and she has been with me everywhere, so I’m a happy man. This has also given our children an opportunity to know and see more. We have a lot of friends all over the world. And my two kids speak Russian fluently.
Q.: You said you’ve put things right several times in one place or another and taken part in several restructurings. Would you call yourself a crisis manager?
A.: In the 20 years I’ve been traveling to different countries, five or six times I’ve had to set things in order at financial institutions after serious crises. Even at the very beginning of my career in the United States, my first project at Pricewaterhouse Coopers was restructuring banks during the savings and loan crisis in 1989. These efforts give you immense experience. The important thing in these situations is arriving at a formula that combines protecting what you have and searching for new opportunities.
Background
Michael Eggleton has spent two decades as a financial professional in the United States, the United Kingdom, Turkey and Russia.
Before joining Russia’s Trust Investment Bank in August of 2006, he was with Credit Suisse First Boston and Merrill Lynch.
He was managing director of Credit Suisse’s Russia, Turkey and North Africa operations before becoming head of its Tactical Markets Group, where he oversaw equity and debt investments in developing markets across the globe.
Then he became managing director of Merrill Lynch’s emerging-market business, working in London and Moscow.
In addition to giving up his position with Trust Investment Bank to come to Almaty, Eggleton gave up a director’s position with one of Kazakhstan’s largest companies, Eurasian Natural Resources Corporation.
He was an independent non-executive director of the company from the time of its initial public offering of stock in 2007 until August of this year.
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