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Digital transformation saves the day

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By Cristian Cojanu
In spite of the heightened lending risks, macroeconomic threats and legislative unpredictability, Idea::Bank powers through the economic downturn, relying on solid online products and services, and a sound development strategy. In an interview with Business Arena, Idea::Bank CEO Mioara Popescu shares some of the efforts the bank has put in place to ensure a safe environment for both employees and customers and further development prospects.
What are Idea::Bank’s objectives this year in the context of the coronavirus pandemic?
While in the first two months of 2020 our operations followed the strategy approved in December 2019 and our financial plans, the pandemic crisis, through its extraordinary impact on the entire economy, required the adaptation of our strategic objectives to the new conditions.
Moreover, pandemic-triggered business plan changes, affecting many of our customers, have raised the need for a rapid adaptation both towards solving some customers' difficult situations and ensuring support for companies that have developed their operations due to increased demand, especially in the era of telecommunications and information technology.
A first new objective on our agenda was related to protecting the health of both employees and customers, by reorganizing the activity in the branches and at our headquarters. I’d like to point out that since the beginning of the pandemic we have kept all our units open and no point of sale has been closed. My colleagues in the IT and cyber security department have had to make considerable efforts and have taken great responsibility for organizing the telework activity for all employees whose positions allow this new type of work arrangement, with full cyber safety and security.

The second objective deals with the efficient organization and operation of the process handling loan repayment postponement requests from customers who have been negatively affected by the sanitary crisis. The solutions offered by both the national and private moratorium, and the implementation of the SME Invest program, for which we have requested and received a supplementation of the initial fund allocation, required a combined effort to adapt our IT systems as well as an outstanding mobilization of the departments involved. Prudence is permanently present in our activity and, from that perspective, we very carefully analyze the behavior of our customers who have resumed installment payments and of those who are still in the grace period, so that we can correctly estimate their capacity to comply with the agreed reimbursement schedule.
The health crisis has found us with our priority agenda focusing on continuing the digital transformation of the organization, one of the strategic objectives before the pandemic, and introducing the latest procedures and innovations in order to constantly optimize processes, as part of our overall strategic concept. Apart from the negative impact of one of the most complex and systemic crises that mankind has ever seen, there have been some positive effects, the most notable for Romania being the acceleration of digitalization. Digital development has always been one of Idea::Bank’s major strategic objectives, which is quite fortunate because virtually all routes and processes have been created and oriented in that direction, while the speed of development has been adapted to the current conditions. The health crisis has not involved a transfer of resources from a digital project that was in progress at the outbreak of the pandemic to another unplanned project caused by the crisis. It has simply meant increasing the speed of decision and implementation of new solutions. The process has also been helped along by our customers’ increasing appetite for online services and products.

Currently, the three basic components of banking, lending, saving and trading, are all accessible online. With the Idea::WebCredit platform, customers can access a personal loan of up to 100,000 lei 100% online, signing the loan agreement with a qualified electronic signature. The Idea::WebDepo platform, allowing the creation of deposits even by new customers, has benefited from optimizations both in terms of customer experience and security, to keep up with the latest IT&C and security innovations. The new internet banking platform, Idea::myBank, allows our customers to make online transactions in real time, benefiting from an adaptive solution for any type of screen (desktop, tablet or mobile). The central strategic objective of the Idea Bank team is to create added value for customers through the products and services offered.

To what extent do you think the bank’s results will be affected by the coronavirus pandemic?
All mankind, all industries have been affected by the lockdown one way or another, and Idea::Bank makes no exception. We live in a highly interdependent world and this has its drawbacks. The shrinking job numbers and resources for a segment of the population generally translates into non-performing loans, higher lending risk and provisions for banks. As I said, we analyze loan and customer portfolio scenarios and we make decisions responsibly and prudently. A new line has appeared in our accounting books, covering the costs generated by the pandemic, and I will mention both investments and mandatory expenditures in the area of cyber security and IT&C, and in health protection, i.e., disinfectants, continuous nebulization, masks, gloves, tests, plexiglass protective screens, branch design changes as well as many messages and tips sent to our colleagues to ensure their personal protection and the protection of the entire team. Even if this accounting line has grown, the effort translates into safety for customers and employees, and it is part of the “non-negotiable” aspect of this situation.
In this context, Idea::Bank’s activity is characterized by the continuation of its strategy focusing on organic growth and consolidation of its market position. The half-year results show a stable liquidity position, adequate risk cost control and a profitability that is slightly below target. Because we did not suspend lending during that period, the bank’s assets increased by 9.8% in June 2020 compared to June 2019, the loan portfolio being an important factor supporting the bank’s revenues, and the increase in provisioning expenses was correlated with the evolution the loan portfolio, the cost of risk being maintained at an adequate level for the bank’s business model. Following the digital solutions offered to customers, our operating income increased by 11.7% in the first half of 2020, compared to the same period of 2019. In terms of liquidity, deposits increased by 8.7%, the loans to deposits ratio standing at 73.1% on June 30, 2020.
We offered clear and concrete solutions to 5,965 customers, 13.5% of our portfolio, who were in difficulty due to the introduction of the state of emergency and the measures to limit the effects of the pandemic, through the tools offered by both the national and private moratorium. In the meantime, 40% of them have already resumed payments.

What measures has the bank taken in order to avoid major disruptions during this period and what protective measures have been put in place for employees and customers?
The main protective measure has been telework, when possible. Now about 70% of our headquarters employees work from home, while our branches have stayed open all this time. We have constantly taken sanitary measures and adopted protection regulations, involving physical distancing, disinfectants, frequent nebulization of spaces, well-established access routes, and temperature checks. We have also created new processes for implementing payment deferral solutions, the SME Invest program, for speeding up the digitalization process, and a faster decision-making process. All this in the crucially important context of ensuring increased cyber security, because working from home involves both a considerable financial and human effort. As I said before, our colleagues in the IT&C and cyber security department have been very busy during this period.
But above all, our constant communication with the people has proven its importance, because we live in times that need to be explained and discussed. Let’s not forget that the psychological, psychosocial and behavioral aspects learned during this period will last for a long time.

What is your view on the evolution of Romania’s economy in 2020 and what are your predictions for 2021?
I am sure that we will see rewritten business models, new types of businesses, while digitalization will make its mark more and more. There will also be difficult situations to overcome at national level next year, and without a good governance strategy it’s going to be very difficult for the private business environment.
Certainly, this year, the entire national economy realized just how important local production is, and I would like to see more and more initiatives leading to more local production activities, accessing European funding that is crucial for the development of the economy. .
According to the recent World Bank evaluation and estimation, the Romanian economy could see a 5.7% contraction this year, only to recover in 2021, when it is expected to bounce back 4.0%. The current account deficit could reach 9.1% of GDP in 2020, compared to a 3.6% target before the health crisis. Next year’s deficit is seen at 6.3%, as the Government is expected to support the economic recovery process.
I believe that the main challenge in 2021 will be to keep the Covid-19 crisis under control and limit both the health and economic threats, as relaunching the economy is absolutely necessary.
On the other hand, the legislative unpredictability and a possible increase in budget expenditures could affect macroeconomic stability and lead to a downgrading in the sovereign rating, negatively affecting investor confidence and increasing financing costs.
The predictions for 2021 definitely depend on the fiscal policy, election results and the measures taken to avoid a possible downgrading of the country rating.
Considering the central bank’s (BNR) inflation target of 2.5% +/- 1pp for the next period, as well as the necessary measures to be taken in order to manage and mitigate the effects of the health crisis, I believe that the policy interest rate will remain low. However, the CDS scredit default swapt value, measuring country risk, will have significant values compared to the region's average, until the twin deficits are corrected.
As for the labor market, after being severely affected during the state of emergency, the average net salary registered an annualized increase of + 8.1% (in July 2020 compared to July 2019), mainly fueled by the public sector, with an impact on increasing budget expenditures. Without further measures to support private companies, 2021 could come with high unemployment and possible moderate wage increases.

How will these trends be reflected in the banking sector?
The current banking landscape is characterized by a series of challenges: a higher lending risk over the coming period; a potentially slow economic recovery with a negative impact on new loan transactions; Romania’s wide twin deficits, a potentially unstable financial-banking legislative framework, the existence of uncertainties worldwide, and, at the same time, a lower investor confidence level, with effects on financing costs.
We are handling these challenges with a prudent approach to banking as a whole. But we have few options when it comes to legislative risk management, as certain initiatives that concern our activity make no professional sense. I can say that they are destructive because they do not take into account basic economic concepts. We need laws to support development, to increase financial intermediation, a key factor in the savings-investment process, and in this sense our industry’s actions are praiseworthy, as they seek to educate and gain public confidence.

COVID-19 changes are here to stay

In turn, Idea::Bank’s Executive Vice President Business Alin Fodoroiu
provides insights on the changes affecting the banking industry, the challenges and the economic prospects for 2021.

What changes has the pandemic brought about in the banking industry and which of them will have long-term effects?
The main changes that the pandemic crisis has generated across the board, regardless of the business sector, are the way we work and the way we shop. Obviously, those changes have also made their way in the banking industry, a field that involves the creation of added value with the help of human capital as well as the promotion and sale of products in the online environment.

The work from home system existed before, but the outbreak of the pandemic, with its highly uncertain duration, has simply pushed the two sides - employee and employer - towards transferring their relationship in the online environment, from setting up the technical equipment (laptop, VPN connection, granting access rights to computer systems, etc.) to the delegation of responsibilities and moving strategic meetings online. Saving time and travel costs, on the employee’s side, and slightly reducing utility costs, on the employer’s side, are the most important advantages of the new work system that outweigh disadvantages such as the impossibility of direct communication, which is not a major issue most of the time anyway. However, the online work system does not completely exclude the physical presence in the office, but rather the two systems coexist in a specific proportion depending on the industry and emplo­yer. As for online shopping, I think that we were already drawn by the convenience provided by simple and intuitive experiences with the platforms of major GAFA players (Google, Apple, Facebook, Amazon) worldwide, and the pande­mic has only increased the degree of adoption and the use of online solutions. Therefore, consumers’ expectations on their interactions with an online store or a bank have already been subconsciously shaped by the user experience created by the big players in the tech industry.

What are the most appreciated products and services in the current context?
Obviously, online platforms for trading or contracting a banking product are the most sought-after solutions in a context where there is a need to limit social contact.
A bank has three basic functions, attracting deposits, granting loans and trading, which is why customer requirements have increased from the classic internet banking service - an online trading tool - to providing easy online loan options or 100% online deposits, without visits to the bank.
In terms of classic lending products, real estate/ mortgage loans have seen an inelastic demand during the health crisis. Demand for such products has not been affected by the specific fluctuations during the state of emer­gency or state of alert. Despite the health crisis, the monthly volume of new housing loans continued to be significant in 2020 (over 1 billion lei), a trend that can be explained by certain particularities of the product: getting a home loan takes about two months, so the time gap between the loan application and the actual loan disbursement reduces the influen­ce of any emotional decisions or crisis-related events. Also, as the pandemic encourages isolation and spending more time in our own homes, we have found a migration of demand from apartments to houses, which offer increa­sed comfort and more living space. In other words, the advantages previously offered by city apartments, by being closer to the workplace and areas of interest, is now surpassed by the benefits of a house on the outskirts that offers more space or a garden for us to carry on the now widely accepted work from home system.

What are your expectations on the evolution of the banking market in 2021?
The banking industry has to answer a strategic question in 2021: how many of the deferred payments will turn into non-performing loans? Basically, starting from the beginning of next year is when we will be able to really receive the answer to this question because all loan payment deferrals will have ended by then, with no further grace periods. Of course, whether debtors - individuals and companies - have the capacity to resume payments in good conditions largely depends on the same factors that generated the payment deferral schemes in the first place - the pandemic crisis and the government’s measures to limit its spread.

So, although the banking industry will start next year with a big dilemma concerning the fate of the deferred loans, banks have to remain optimistic. And that optimistic approach must take into account a potential subsiding of the health crisis probably with the arrival of an anti-Covid-19 vaccine in the spring of next year, and the relaunch of consumption and investment demand. Last but not least, our country has access to an unprecedented volume of non-refundable European funds and loans, so it is once again up to us as a country to maximize fund absorption, and the banking sector plays a significant role in supporting projects financed by European funds.
While the above-mentioned aspects still carry a certain degree of uncertainty, some of this year’s trends have developed into certain­ties for the future. Work from home will conti­nue to grow because the system has demons­trated its validity and even proved itself to be more efficient than the traditional system, while digitalization is no longer a luxury, but a hygiene factor for companies and institutions that trade or interact with the population.

What do you think will be the main challenges for the banking market in the near future?
Obviously, the biggest challenge for banks next year will be the same as for all other entities - companies, institutions, population and the government - namely the evolution of the pandemic. The successful resumption of deferred loan payments depends on it, and so does economic recovery, which is normal after a period of contraction.
Another challenge for the banking sector is its contribution to a post-Covid-19 economy, providing financing to businesses that have potential for development although they have been affected by the pandemic. It’s going to be very difficult to identify those companies that have growth prospects in the coming years, while their turnover dropped dramatically in 2020. Similarly, banks need to identify those segments of the population that are creditworthy, although they were furloughed or lost their jobs during the pandemic. Last but not least, banks must manage their own condition as players in an unfavorable economic environment, with increased non-performing loans, and lower loan and transaction volumes, and therefore with a lower profitability. Cost optimization, prudent growth, diversified loan and transac­tional portfolios, as well as the digitization of products are some of the tools conducive to development in a post-crisis situation.

In fact, the digitalization process will help banks prove that they are immune to the health crisis, and that they can continue their natu­ral evolution launched before the crisis.
Idea::Bank’s digital platforms (Idea::WebCredit, Idea::WebDepo and Idea::myBank) represent concrete online banking solutions (lending, saving and trading), and their main strengths are their immunity to the pandemic and mobility, as they can reach customers anywhere and anytime.

This is also available in our print edition of Business Arena.

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