Miloš Vujnović PhD, President of the Executive Board of JUBMES banka a.d. Beograd speaks

for Profit magazine.

1.Mr Vujnović, where were you born and educated, and how did your career develop before you became the President of the Executive Board of JUBMES banka a.d. Beograd?

I was born in Zemun, where I started my formal education. After graduating from high school and the Faculty of Economics in Belgrade, I acquired the title of Master of Economic Sciences in 2007, from that same faculty. I attained my PhD at the Faculty of Organizational Sciences in 2016 in the field of credit risk modeling and model validation. I completed my academic education by going through the certification process and acquiring a professional risk manager certificate issued by the “Professional Risk Managers International Association”.

My entire career up to the present has been associated with JUBMES banka. In 2003, I began my professional affirmation with JUBMES banka in consumer credits. Since 2006, my primary engagement has been in risk management activities. I spent four years as the Head of the Risk Management Department and after that nearly five years as the Director of the Risk Management, Finance and Back Office Division.

The development of my career was strongly influenced by the fact that the beginning of my engagement in risk management coincided with the beginning of significant regulatory improvements in these activities on the domestic market which provided me with the opportunity to gain vast experience in that area. Working on the aforementioned activities and projects in a small bank was a professional challenge, but it allowed me to gain a broader understanding of all the aspects of banking and, in a certain sence, even allowed some business creativity. All of this also contributed to the improvement of my strategic thinking abilities which helped me a great deal in terms of taking over the position of the president of the Executive Board of the Bank.

2.You became the president of the Executive Board of JUBMES banka a.d. Beograd in December 2015. What were your expectations and were they different from the actual state you found in the Bank?

Having in mind that I had been an employee of JUBMES banka for a long time, I was largely aware of the unenviable state the Bank was in when I took over this function. Consequently, accepting that function was a great professional and personal challenge for me.

After years of stable business, the Bank entered a period characterized by extremely unfavorable trends in 2013. This primarily refers to the growing negative result from business operations, not taking into account the significant negative net effects, from impairment of placements , to the nearly 40% drop in placements to clients in all business segments in 2015 , as well as to growing trend of NPL’s rate, which reached almost 47% at the end of 2015, being significantly above the banking sector average .

As someone who had spent over a decade in JUBMES banka up to that point, I was aware of these problems and the activities which had to be implemented in order to achieve a very ambitious goal, that was, stopping the unfavorable trends and turning the Bank’s financial situation around. The Bank’s significantly decreased capital resource, caused by the growth of doubtful debts and the Bank’s very high losses in the previous period, as well as the Bank’s decreased number of clients and volume of placements, portrayed a low and pessimistic starting ground and a significant limiting factor for achieving the specified goal.

A dedicated team of professionals ready to give their best was created at that moment, and they shared my vision with a great amount of trust, that was to successfully change the trend in the Bank’s business activities and renew the creation of value for our shareholders.

The realized turnaround in the Bank’s business activities is reflected in the growth of commercial placements to clients, establishing a more efficient business, and collection of a significant amount of doubtful debts.

3.In your opinion, how does the banking market currently operate in Serbia, in comparison with other countries in the region?

Serbia’s banking market and its operations are not that different when compared to the region. Basically, the only difference is the size of the market, which is a consequence of the sizes of countries and the strength of their economies. A common situation for all markets in previous years was the struggle to resolve the issue of bad placements which took a large share in total placements. Different systematic solutions undertaken by central banks and governments, produced a significant drop in the percentage of bad placements in banks’ balance sheets. Common to all the markets is the fact that after high losses suffered by the sector, due to impairment of a significant part of these placements, the sector managed to stay profitable and well capitalized. Another noticeable thing is the changes within the sector in terms of withdrawal of certain groups from these markets and the consolidation of the sector, as well as the new participants access to the market. Serbia’s banking sector has the highest number of banks in the region. Despite large number of banks, new banks have emerged with capital coming from markets out of the European Union, which will certainly lead to further strengthening of the competition on what is already a very competitive market. Bearing in mind the challenges banks are facing , for example how to improve profitability, more complex regulations and growing competition, it is realistic to expect the trend of bank market consolidation to continue at the same pace in the upcoming period as well. The trend created conditions for growth which is not organic, but rather based on taking over banks or placement’s portfolios, enabling higher yields despite the trend of continuous margin decrease in the market. The banks that plan further business operations on the local market, and in the region, expect significant new investments and adjustment of business models in order to fully respond to the fast changes and new trends in banking, e.g. mobile banking and online services.

4.How do you rate the cooperation with NBS? What should perhaps be changed in Serbia (having in mind legal regulations) in order to improve and facilitate the operations in the banking industry?

I can say that there is constant improvement of cooperation between banks and the NBS. Even though the NBS is primarily a regulatory institution and performs control functions, we can see that a number of changes in regulations which recently happened were made through dialog and the exchange of opinions with the banks, through their association. The regulations which regulate the banking business are becoming increasingly complex year by year, and present growing challenges for the banks, primarily in the reporting segment. Considering these kinds of solutions are primarily the result of harmonization with regulations under which the banks operate in the EU, it is not realistic to expect any easing up in that segment. After the implementation of the ECB project, also known as AnaCredit, we can probably expect that instead of presenting traditional reports on credit activities to the central banks, the banks would present them complex database, enabling the central banks to process data by themselves.

The trend of accelerated processes of harmonization with EU regulations and standards is clearly noticeable in Serbia. With this respect regulations have been significantly changed up to present while there is a need for further harmonization of regulations interpretation and implementation. What banks, as creditors, find important is by all means an efficient process of collection. As practice has shown, this is an area with a clear need for improvement which would affect and limit the ability to unilaterally extend the collection period, making collection questionable. Despite the fact that there were significant improvements in this area in previous years, there is also room for improvement with the tax treatment of deoubtful receivables write off, as a prerequisite for relieving the banks balances from the burden of such receivables. Improvement of legal regulations is also in-line with the government strategy for resolving issues of the share of doubtful receivables in the domestic bank market, as a significant macroeconomic factor.

5.What is the expected net gain of the Bank in 2017 and do you expect to form a base this year for significant growth of profitability in the following years?

The business policy for 2017 estimates earnings before tax in the amount of RSD 34.2 million. The trend of client portfolio growth started in the previous year which is continuing in 2017, as well as the expansion of Bank’s offer, are creating thereby the base for significant profitability growth in the following years. It should also be pointed out that the Bank in the first half of 2017 achieved a result which represents a significant surpass in relation to the business plan. In this period, earnings before tax amounted to RSD 47.6 million, which already exceeds the planned result for the year. Having this in mind, the result which will be achieved this year is almost sure to exceed projections from the start of the year. The above fully confirms the continuation of the positive trend and successful business from the previous year.

6.Will the trend established in 2016, concerning increased active commercial placements, continue in 2017 as well?What is your business policy on the market?

The Bank’s capital adequacy ratio, despite the significant placement’s growth, at this moment amounts to 37.7% and is still traditionally very high related to the regulatory prescribed minimum, as well as related to the banking industry average. This high capital adequacy ratio shows that the Bank has significant room for expansion of its business activities in the upcoming period.

One of the main reasons for the change of trend in achieved results compared to the previous period is the progressive growth of commercial placements of the Bank from the beginning of 2016, which have almost doubeled to this point.

Growth of the active commercial placements portfolio volume, primarily through further expansion of the portfolio to new clients, continued in 2017 as well. The focus of activities is on acquiring new clients and on growth of the credit portfolio, based on the efficient banking services provided to clients, and also on a careful approach to risk assessment. I would especially like to point out that, apart from significantly exceeding goals regarding profitability and growth of active placements to clients, in the previous and the current year we also increased portfolio diversification, at the same time preserving healthy positions regarding the traditionally very high Bank’s liquidity, as the principal guarantee for our deponents. We consider this to be an outstanding result, especially bearing in mind the market conditions and the current lowering interest rates trend on Bank placements.

The significant growth of placements has resulted in the historically highest level of active placements to clients, counting from the beginning of business operations as a universal bank, i.e. for the last 20 years.

Even though the Bank offers a wide range of services to individuals, the Bank is strategically orientated to corporate clients. Other than financial support, the Bank also offers consulting support to its clients, starting from the initial phase of an making agreement to the final realization of an individual deal. The ability to provide and create different, high quality services and innovative products and solutions tailored to clients’ needs are one of the main competitive advantages of the bank.

7.What results did you record in the first half of 2017 regarding the collection of doubtful receivabless?

In the first part of 2017, significant efforts were taken to utilize all legally available measures and activities in order to collect doubtful receviables. This resulted in the continued high percentage of collection, which also had a significant effect on the Bank’s result in the current, and previous, year as well. In accordance with NBS recommendations, the Bank also performed a write-off of the dominant part of uncollectible receivables in this period.

The non performing loans (NPL) share in the total amount of credit receivables continues to fall significantly. At the end of the first half of 2017, the NPL share in the total amount of credit receivables was 11.25% and continues to record a fall of 5 percentage points compared to the end of previous year. While this indicator kept growing in 2013-2015 and was certainly at the top of the banking sector with a level of almost 47% at the end of this period, in the previous year we managed to reduce the level of NPL share indicators below the banking market average, where it remained at the end of the first half of 2017.

It is expected that the NPL share percentage in the entire banking market will be further reduced significantly, as a result of the implementation of the strategy developed by the Government of the Republic of Serbia and the NBS, as well as adopted NBS regulations, with regards to the write-off of these debts.

The Bank’s NPL coverage ratio by impairments for credit risk is at a high level of cca. 78% and significantly, i.e. almost 10 percentage points above the banking sector average. The above represents a guarantee that these placements cannot have a materially significant negative effect on the Bank’s results and capital.

8.Another important part of the business strategy of JUBMES banka ad Beograd is corporate social responsibility. Which projects have you already completed and which areas will be in your focus in the following period?

In all phases of its development and business, JUBMES banka has confirmed its position as a socially responsible business entity which considers its development and business goals to be in synergy with the principles of corporate social responsibility and sustainable development.

Our membership in the UN Global Compact, since March 2008, has encouraged us to participate more actively and creatively in the community’s development goals, which are harmonized with the Agenda for the EU accession, as well as carrying out regional and global projects — initiatives supporting sustainable development.

In accordance with our potential and previous experience supporting similar projects, we have continued to promote the significance of preserving the cultural identity of vulnerable groups, especially in the territory of AP Kosovo and Metohija. When it comes to environmental protection, we have continued our collaboration with the Uvac Special Nature Reserve, which has lasted for several years now, by supporting the project involving feeders for griffon vultures, which are the symbol of one of the richest nature reserves in the Republic of Serbia.

We have been actively supporting different humanitarian, social and development projects on a local, as well as on a national, level for a long period of time. As founders of the “Za dečje srce” (“For the Children's Heart”) Charitable Foundation, we provide our full support to its activities, which is, at the same time, an expression of our permanent devotion to universal ethical corporate principles. Since it was established in 1992, the foundation has confirmed its goals and its mission by undertaking constant activities aimed at raising funds to enable a higher quality of surgical treatments, rehabilitation, and social adaptation of the youngest patients suffering from congenital heart defects.

9.Last year was the year of transformation into a more efficient bank for JUBMES banka ad Beograd. What have you been especially focusing on this year and what are your business goals for the following period to achieve better business results?

Last year, our primary tasks were to stabilize our business, results, as well as to reduce the risks that the Bank was exposed to. Despite the serious challenges which we faced at the beginning of the last year, the accomplished financial results are proof that we successfully overcame all challenges through our hard work.

I am especially proud of the fact that, through our activities in 2016, we completely managed to remove and eliminate the critical negative tendencies which were evident in the last years and achieve our corporate policy goals for the year in question. The achieved results confirm our efforts to become a more efficient bank which is starting to generate essential positive results once again. These are obviously the expectations of our foreign and domestic shareholders as well, with whom we are in very good communication. One of the motives is surely the fact that we are aware of the task which we have been assigned, seen not only from the perspective of JUBMES as a commercialbank today, but also with regards to the significance that it had as a relevant and influential institution, unique in the activities it performed and important projects it successfully realized. This legacy prompted an obligation to preserve it in the following period, regardless of the fact that we are operating in different circumstances today.

Although we are satisfied with the progress made in 2016, we remain devoted to the continuous fulfillment of our strategy and the realization of our vision in the context of that which we have been recognized, as a very reliable financial partner. This year’s focus remained the increase of the credit portfolio, primarily through expanding the client base. The fact that we started 2017 in a much better position and having resolved a large number of problems we had at the beginning of last year, we have had a chance to completely devote ourselves to the further improvement of our business. In response to favorable movements in the market in the last year and a half, trust in the Bank has significantly increased, especially trust by individual depositors, which has resulted in a 35% increase of their deposits in the first half of 2017, achieving a historical level. The increase of these deposits enabled stable growth of placement for the clients.

In order to keep the Bank profitable and prepared for all challenges in the future, we wish to further improve our basic competitive advantage as a bank which offers quickness and efficiency in realizing products and services adapted to their specific needs. The financial sector is in the process of significant changes which are based on multiple factors. Information technology development, macroeconomic conditions and clients’ expectations which are constantly changing all create a challenging economic environment in which the Bank operates. This kind of development creates many opportunities for us to strengthen our market position.

10.Expressed in a percentage, what is the market share of JUBMES banka ad Beograd and what is your ranking in the banking sector market in Serbia? Do you expect growth in your business activities in the following period?

According to balance sheet amount value based on the official financial reports for 2016, our Bank was ranked 27^th in the banking sector with a 0.29% market share, measured by its share in the banking sector’s balance amount. With a stated net income of RSD 63.5 million at the end of 2016, we occupy 18^th position in the overall result of business operations in the banking sector, which puts us nine positions higher, compared to the end of 2015.

We will try to increase our relatively small market share by providing efficient services to those market segments that value the quality of service above all, be it legal or natural persons. We are a small bank, which is why we have our focus on each and every client. All this can be seen in the way we approach our clients, the efficient service we offer, as well as the full support we provide through consulting services. Our clients have a competent and professional team at their disposal that can be very helpful when making financial decisions, and this is how we can tailor all our services to fit the needs of each individual client.

Starting from this approach, I believe that it is realistic to expect a steady continuation of current business activity growth in the period to come, in accordance with the evident changes made by the Bank in terms of business operations.

11.What are your plans when it comes to expanding your portfolio and attracting new clients in the following period?

JUBMES Banka has been present on the domestic financial market for almost four decades. The synthesis of experience we have gained from various developmental phases of business, from an export credit agency to a commercial bank, represents an incredibly significant aspect of business, which will continue to play an important part in the way we operate in the future. Aside from tradition, another important aspect of our business operations in the future is going to be something so often mentioned by not only bankers, but also the leaders from various sectors, and that is digitalization.

Even though significant expansion of our business network by opening new branches is not something we are considering at the moment, we are aware of the fact that we have to make all our products and services more widely available to our present and future clients. Therefore, the plan is to develop alternative distribution channels in the following period, focusing primarily on digital banking and improving existing online services, which will both increase client satisfaction and bring us closer to potential new clients.

12.The consequences of turbulence in the eurozone are undoubtedly felt in Serbia, and one of the problems banks face in such circumstances is the safety and preservation of the real value of Bank’s placements. What steps are you taking to deal with this problem in Serbia?

The banking market in Serbia is mostly owned by foreign entities, which is why their primary goal is to preserve the real value of foreign currency – primarily the euro. This, together with a large share of banks’ sources of funds in foreign currencies, is the reason why EUR-indexed loans still have a predominant share in banks' credit portfolios on the domestic market. As an additional means of preserving the real value of placements indexed by exchange rate movements, banks have been using the so-called unilateral currency clause when granting loans to legal entities with lower interest rates on indexed loans, compared to loans in RSD. It represents a kind of option embedded into placements, so that if the exchange rate of euro drops below the level where the placement was granted, the bank may collect receivables following the initial exchange rate. The initiative of the NBS forbids the use of such clauses on the domestic market.

Interest rates play an important role in the process of protecting the real value of loans during inflation. Banks protect loans by negotiating variable interest rates. A drop in interest rates, however, leads to a rise in inflation, which is currently happening in the eurozone. In Serbia, where sources of funds – both those obtained from abroad and those collected from deposits – are very cheap; interest rates on placements are continually dropping, spurred by strong competition on the market. When talking about indexed and foreign currency loans to legal entities, average interest rates on the market are rapidly approaching, and are very close to the inflation rate in the eurozone, which could, in the period to come, result in the impairment of the real value of these placements by dropping below the inflation rate level in the eurozone.

13.How do you intend to gain new clients and increase your credit portfolio in the following period?

When it comes to attracting new clients, although a challenge, the solution is pretty simple. Our main competitive advantage is the fact that we provide the same banking services in a different way thanks to decades of experience and by fully dedicating ourselves to each and every client – an approach we have developed over the years based on the exact fact that many saw as a handicap. Labeled a small bank with a relatively small number of clients, we are able to fully dedicate ourselves to each and every client, whether they are a legal, or a natural person. Client satisfaction has a strong influence on the Bank’s reputation and the establishing of long-term quality business relations with new clients.

Five star hotels can be ones belonging to large hotel chains, or the increasingly popular small boutique hotels that are more intimate and provide more privacy, and above all, offer the highest quality of service. The size of the bank and the amount of attention we are prepared to give each of our clients make this business concept quite close to what we do – it is something we completely identify with.

14.If you could, would you have changed anything in your career up to this point?

I don’t mean to sound pretentious, but even if I could, I would not have changed anything in my career. As someone who only looks to the future, I believe that the choices I have made and the steps I have taken in my career were – even if wrong – very valuable, since they have provided me with priceless experience that, alongside formal education and continuous learning, make one’s career complete.