Capital Weekly interview with Zdenek Turek, Sofia, 19 July 2019
How is the banking industry in Europe preparing for Brexit?
The banking industry in Europe has made a lot of preparations for Brexit. Most of the preparations were made by banks with significant presence in the UK, mainly banks from US, Japan, Switzerland, etc. Those banks had to establish/reposition their business with European customers towards entities located in other European countries. I think a lot has been done from the point of view of creating the entities, having the ri ght licenses, having the technological capability, etc. to accommodate change. The problem is we do not know what the change will be in view of the political situation in the UK and Europe.
It is interesting to note that the customers are also making their preparations, building contingency plans that cost money while waiting for the decision. I cannot speak for the industry but what I am getting from our customers is that most would prefer for Brexit not to happen but if it has to happen, they would like to see a decision and are prepared to operate in the new environment.
At Citi, we built the whole concept around our existing entities in Ireland and Germany. Citibank Europe Plc, headquartered in Dublin as our European legal vehicle, is ready to accommodate all the transactional banking, lending and foreign exchange activities of our European customers while Citibank Global Markets Europe based in Frankfurt will provide all the broker dealer related products.
We are well positioned and completely ready, the systems have been tested and some clients have already moved irrespective of the Brexit outcome.
Why has Ireland benefited so much from this process?
I would say Ireland is not the only one. Germany and France are also experiencing a number of businesses moving there.
No one came to Sofia …
Ireland has a number of advantages – the language to start with. Also, the common law system. This facilitated the move of business from London to Dublin. But you should not look at Dublin or Frankfurt as the “new” London. This is an evolutionary process that will take many years, and London will continue to be an important global financial center
Why not Bulgaria? Like I said, in preparation for Brexit most businesses focused on building around entities they already had in place in other European countries. And this is true not just of the banking industry. I think Bulgaria, and this is not related to Brexit, has however attracted many companies who moved their operational or treasury centers here, so I think the Bulgarian economy is getting its fair share of globality as well.
Banks are prepared for Brexit, according to the Chief Executive Officer of Citibank Europe.
How do you expect the situation to develop with Brexit day approaching?
I am not a politician and I cannot predict the outcomes but I believe people are concerned that there will be a hard Brexit. Both customers and business would like to see an organized and well-planned transition. I also think it will take time to see the impacts of Brexit – the changes in customer behavior andhow the banks will react to that. Overall, I believe that – f we have a hard Brexit – over a longer horizon of some 5 – 10 years we will see some fundamental changes in the way people invest and do business. We are monitoring the process carefully but it is too early to call anything we are seeing a trend. Logically, when such a big country as U.K. leaves the Union there would be consequences for both sides.
How do you find the overall condition of the European banking industry after so many years of low interest rates, negative bond yield and slow credit growth?
The good news is that despite low interest rates and low credit growth, because of the regulatory focus we have much better capitalization and much better liquidity in the industry, and therefore I do agree with the view that the banking industry in Europe is better prepared for potential downturns in the future. In addition, lending has started to pick up over the last few years. The less good news is that industry has low return on capital and not all banks, but some segments in the sector are struggling with their profitability and the overall business model they are trying to pursue. The interest rate environment is likely to stay, the growth of the European economy will remain slow and the banks need to accept it and learn to adapt to the new environment. Most of the regulatory changes have already been done. There is no external help on which banks can rely, so they need to review their business model and focus on what they do better than the others. The universal model where banks offer the whole range of financial services is now difficult and expensive to maintain. In addition, there is an increasing number of companies offering financial services in the digital space and they should not be ignored.
In your view what is the worst-case scenario the banking industry has to prepare for?
As I said, the industry has to learn to live in this environment and be prepared to do so for an extended period of time. Banks need to look for ways to be efficient – have good cost management, good credit management, careful capital management and focus on their competitive advantages. And as we are in the service industry, you need the best quality people to be able to service your clients in the best possible way.
Is the optimization process among the drivers of consolidation on the market?
To some extent, yes. Another reason is that small and medium sized banks are finding it more difficult to operate in a profitable and efficient way, as the costs of doing business are increasing. These include not only regulatory and technology costs, but costs to hire and retain the best quality people as well.
In terms of consolidation, what do you expect on the European market? Do you expect large transactions?
I think it will take some time. What we see is consolidation within the countries and regions and Bulgaria was part of this process recently as well. The banks are trying to build around what they do well and make it bigger. Transformational, big mergers creating European champions are, in my opinion, still difficult to execute because on the one hand, you need to prove the synergies to the board and the shareholders. While, on the other hand, although the European regulatory framework is overall the same, there are many country specific differences that impact the process. Also, from a regulatory point of view you need to consider the complexity of the business – to acquire something which adds 10-20% to what you do is one thing, to double up or get into new countries or new lines of business is another. The regulators are quite right to require that buyers have capacity to manage the acquisition and to prove their current business models before making big decisions of strategic nature.
What has changed in the perspectives for CEE region? What are the trends for this segment of the market?
CEE is a good region with a higher economic growth than the average for Europe. This is logical as the region is catching up with the living and economic standards of Western Europe. Banking profitability in the region is solid as well and there are many business opportunities. We still see FDIs coming into the region with large international companies bringing their business – Bulgaria is a good example. In addition, there is still the need for large infrastructure projects – airports, ports, pipelines. But we also see another new trend – we have some very good new companies coming out of Eastern Europe operating on the international markets in the digital space and e-commerce.
Citi has been in the CEE for a long while and has grown with the region. We are committed to the region and believe our business model works – opening opportunities for strong, capable local companies to access investors and global capital markets and providing international companies with access to the local market. We believe this is a successful model that adds value and positions Citi very well vis a vis the other banks in the market.
“The interest rate environment is likely to stay, the growth of the European economy will remain slow.”
What do you expect for large corporate events in Europe in the course of the year? Do you expect more M&As? In which sectors?
Overall, the M&A activity is expected to decrease in volumes. At the same time sectors like technology, media, retail remain vibrant. As far as investment in infrastructure is concerned, there will be a need to finance infrastructure projects but not all of the financing will be provided by banks. Long- term investments require government participation, public-private partnership and support by development banks. There are many infrastructure project in Eastern Europe that require combination of financing.
We wholeheartedly support the efforts to establish a strong European capital markets union, which benefits clients by diversifying their sources of financing. It will also be beneficial for banks, who can intermediate the flows of capital and tap into it. We are looking forward to the capital markets reform.
Do you see any significant disruption in the banking business because of tech challengers?
This is not a new phenomenon and technology has already changed the industry. The big change now are the new digital companies trying to get a share of the business. We take them very seriously because banks might have the scale of millions of customers, but fintechs are very agile, they have ideas and the capacity to develop quickly technological solutions that the customers like. Citi’s approach is to engage and partner with these companies. We are also running our own innovation labs around the world and in EMEA region as well– Dublin, London and Tel Aviv. We try to follow the trends and team-up with these companies as we each have something to offer. We should not look at this trend with enmity and try to defend what we have at any cost. Ultimately, big changes are coming, client behavior is redefined and we need to respond to the new realities.
Do you think there are threats that disruptors bring into the financial system that regulators need to address?
I would not underestimate regulators. If fintechs start taking customer deposits and/or become systematically important in the digital payment space, then I would expect the regulators to take a closer look. My view is that regulators are working on adequate controls at this stage.
How does Citi view its operations in Bulgaria? Are you happy with the performance and do you envisage any changes?
Citi is present Bulgaria for over 20 years and we are happy with the strong performance of the bank and the team. Bulgaria’s economic growth is good and we can see both investments coming into Bulgaria and big projects as well. We will continue to invest in the development of our people, technology and products and we do not plan any changes to the business model.
Zdenek Turek is the CEO of Citibank Europe plc and is responsible for the business in Ireland, as well as the 25 countries in the Europe cluster, including Bulgaria.
Born in the Czech Republic, he graduated with an MA in Finance and Banking from University of Economics, Prague. He joined Citi in 1991. His career growth saw him holding various positions in the bank in Romania, Hungary, South Africa and Russia.