We're only at the start of a global pandemic, but it's already clear what companies want

Portfolio: In recent weeks, the government and the MNB have announced a number of loan programs and economic protection measures. Which of these do you think will have the most important role to play in terms of rescuing leveraged SMEs?

Balázs Toldi: We’re at the start of a global pandemic and of the economic crisis that has arisen in its wake, which could result in a decline in GDP and in the revenue of almost every sector. However, it’s important to note that despite the crisis, the Hungarian banking sector is in a strong position in terms of capital and liquidity.  Citibank’s portfolio is stable and performing very well, and our capital and liquidity position as well as our global market position allow us to stand by our clients in these difficult times, and to support them with funding, financial solutions and advice.

Of the various programs announced, I believe the greatest need is for guarantee programs that help companies deal with their temporary liquidity problems. It’s not primarily low interest rates, hedging interest rate risk or long-term investment incentives that are needed, but the need to survive the transition period and improve liquidity in the short term. In such times it’s rare for a large number of companies to have significant spare funds or additional collateral, or for them to think about a long-term financing plan. For this reason I believe that

the guarantee programs, EXIM’s bank guarantee and loan programs, Garantiqa's guarantee and the Growth Loan Program [NHP for short in Hungarian, also known as the Funding For Growth Scheme, or FGS for short, in English] are now the most useful for our clients.

These programs existed before, albeit in other forms. What has changed about them to specifically mitigate the effects of the crisis?

Firstly, the level of guarantee coverage, as up to 90% of the loan receivables are guaranteed by Garantiqa, and secondly, the guarantee fees: they’re much cheaper than they were, with the fee as low as a quarter of what it used to be, and they can be accessed quickly and easily too. Alongside the guarantee programs, the NHP Hajrá (FGS Go! in English) and the EXIM refinancing programs are also helping to ensure that corporate lending rates do not rise despite the increase in credit risk. A big question is whether the coronavirus will pass as one wave or whether we can expect another wave to follow. It’s hard to say, but this too will certainly determine to a large extent the demand for the programs and the performance of the loan market this year.

How did your clients react to the crisis; where have you noticed the most significant change in the use of banking services?

 At most of our clients, and this is true for us at Citi as well, the vast majority of employees have been working from home, and this requires different communication arrangements and technology. Demand for digital banking and online communication has already risen 20% – from what was already a high level – as a result of the coronavirus. Everyone is focusing on efficiency gains and cost optimization now, regardless of company size and sector.

Digitization is not just a temporary phenomenon, but something that has grown hugely in importance and will continue to do so over the long term. The integration of enterprise management systems through an API system has created an opportunity to interconnect transactional systems, a development that greatly simplifies the use of financial services for clients. Thanks to built-in artificial intelligence, 90% of the incoming transactions are allocated by the system itself at our bank without human intervention.

Finally, exchange rate volatility has also changed customer behavior: Citi provides hedging solutions and automated risk mitigation options against unexpected and unfavorable changes in the forint exchange rate, for which there is very high demand among clients. Of course, business travel has fallen sharply: for understandable reasons, international executives are reluctant to travel abroad at the moment, and if someone banks with us, they don't actually have to, as the world is open at Citi:

We can open accounts in 101 countries and 140 currencies without the customer leaving his or her home or office.

How important is lending at Citibank for treasury services, in addition to investment banking?

Investment banking has traditionally been a focus at Citi, but commercial banking, including lending, can be considered a primary activity in the SME segment. Of course, all banks can lend – given adequate capital and liquidity – but at Citi, the fact that we also provide world-class treasury services creates added value. We can create the greatest value for clients that need to conduct foreign exchange transactions and that have global or regional relations. In this, we can provide clients with a competitive advantage in terms of convenience and the management of foreign exchange and commodity exchange rate risks.

In lending, as I mentioned earlier, we’re currently seeing mainly short-term, temporary liquidity needs on the part of clients, and we’re trying to meet these; for example, even before the launch of the state rescue programs, we were able to provide several of our clients with billions each in funding.

The country is gradually “reopening”. What can still be saved and what not, do you think, at Hungarian companies? Is the firefighting phase over?

Hungary was one of the first countries to introduce a general and comprehensive moratorium on loan repayment. The reaction was fast and effective, but the big question is will this be enough. Many companies are only participating in it as a precaution, and some are not paying any principal back this year, but they are paying interest.

Overall, businesses are pursuing a cautious strategy, and so most of them are taking advantage of the moratorium. If there is no new wave, many may go back to their previous business models. The crisis is exacerbating the differences between firms: persistently stable and strong firms perform differently than those that have struggled in the past.

Mutual trust, of course, plays a big role in the taking of every step, and in line with the changing needs of our clients, the number of calls has increased; instead of the previous quarterly reviews, we’re now talking to our clients every 1 to 2 weeks. Already existing, sincere client relationships and transparent financial management have become even more important.

According to the MNB, 9% of companies may face short-term viability problems. Is this figure realistic based on the development of the quality of your loan portfolio?

To the extent that the loan repayment moratorium allows us some insight into this, this number may be higher in the bottom segments of SMEs, but the situation at Citi is different. We have strong positions in the medium and large corporate sector, which is much less affected by these kinds of solvency problems.

Less than 30% of our Hungarian clients have resorted to the moratorium, and almost none of the multinationals and large companies have. Our clientele is more stable and stronger than the average in the banking sector due to the average company size and their ownership structure.

How typical is the extension of trade-debtor payment deadlines and the formation of supply chain arrears among these companies?

Multis and large companies tend to survive these periods quite well, as they have sufficient financial reserves, so their suppliers are also in a better position. I don't really see this kind of problem in their case. Where small and medium-sized enterprises do business with each other, such difficulties may occur.

However, we’re still at the beginning of this whole process; the latest statistics are still for the first quarter. The really telling data will be from April to May; it will take a few more months for us to get a clearer picture.

What do you expect in terms of corporate lending, including SME lending, this year? How much will the overall loan portfolio in the banking sector and at your bank increase or decrease, do you think? The MNB expects a 6-10% increase in the corporate loan portfolio in the sector.

If there is a return to investment activity and a rapid recovery of the economy, then this is realistic, but it will be strongly influenced by how the cycle develops depending on whether the coronavirus returns. Of course, stockpiling should certainly be started anyway. I don’t want to start pointlessly speculating on numbers; what is certain is that the second half of the year will be relatively good if the coronavirus does not return.

How might corporate banking be different after the coronavirus crisis? Will the current crisis bring far-reaching long-term changes like 2008 did?

Commercial banking services will continue to be based on personal relationships. Corporate banking services are complex and personalized solutions that cannot be developed without a personal connection. Although the interface of communication will be online as much as possible, it will also take place between people in the same way. The “home office” will become more important: we’ll be working more from home than before. We’ll be organizing many customer events in the form of online conferences and webinars.

This crisis is also accelerating the implementation and development of the digital banking customer relationship, enabling us to make all banking connections available online, in one place, and at the same time, and to initiate orders for our businesses on the other side of the world. These international cash-pooling solutions are already available in the corporate segment and are also being taken up in the SME sector. In one sentence: What we have called digital so far will indeed be truly digital, and banks will evolve further in the direction of tech companies.

How do you feel working from home?

I’ve borrowed my daughter’s room, and she’s bagsied the living room. It was a little strange at first, but after a while you can get used to anything! I rarely go into the office; we use video calls to communicate with each other at work most of the time. It’s certainly a special treat to be able to spend more time with the family; as there’s no school, almost every day we have lunch together, for example.

I like the whole “home office” thing, but the future will be a combination of working from the office and working from home. Having said that, I’m now really missing having personal contact with my clients and colleagues.

The publication of this article is sponsored by Citi Hungary.

Cover photo: Mark Kauzlarich/Bloomberg via Getty Images