Total assets among Russia’s banks have posted robust growth in excess of 50% and there have been some structural improvements, but banks remain vulnerable to sudden changes in the health of the national economy and are looking decidedly over concentrated. Writer Stephen Timewell.

Russia’s continued strong economic expansion and further improvements in fiscal and current account surpluses provide further growth pros­pects for its booming banking sector.

But while the total assets of Russia’s Top 50 banks grew by a robust 50.5% in 2007, following 58.9% growth in 2006, analysts are cautious. Rating agency Standard & Poor’s commented: “While structural improvements are evident, most positive measures remain cyclical – fuelled by favourable economic, political and industry conditions – and therefore Russian banks remain vulnerable to shocks in these areas.”

Meanwhile, the Russian banking sector continued the outstanding growth that began in 2004 and hit some new heights in 2007. The aggregate Tier 1 capital of Russia’s Top 50 banks rose by a staggering 77.2% in 2007 to reach $80.4bn. Aggregate assets were up 50.5% to $614.5bn while aggregate pre-tax profits rose 28.3% in 2007 to reach $16.0bn.

Over concentration

But while the results for 2007 are positive and are reported to have advanced a further 26% in asset terms to about $720bn in the first five months of 2008, the Top 50 is showing significant signs of over-concentration. Although Russian banks have shown virtually no exposure to the US subprime crisis, tightening credit in wholesale markets has meant the big state-owned banks with relatively easy access to deposits are able to take an ever-larger share of the market.

The majority state-owned Sberbank continues to dominate the listing and is effectively a third of the market, accounting for 31.5% of aggregate Tier 1 capital, 32.7% of assets and 35.5% of pre-tax profits. Sberbank, along with VTB-Bank and Gazprombank, represent an even more powerful trio, with the three combined accounting for a staggering 60.3% of Tier 1 capital, 54.1% of total assets and 59.6% of aggregate profits, higher shares than the previous year.

Beyond these three giants the market is rather small and fragmented, with 13 banks having Tier 1 capital of between $1bn and $2bn and 26 of the Top 50 with capital below $500m. And as S&P notes: “The franchise value of most banks is limited because they lack branding strength and customer loyalty.”

Foreign presence

In the latest listing, eight foreign-owned banks were represented, with Rosbank moving up from 12th to eighth, Raiffeisenbank Austria moving from 16th to 10th and Absolut Bank from 41st to 35th in the ranking.

In analysing the best performing banks, Moscow-based TransCreditBank topped the list this year with a return on capital of a healthy 51.1%. TransCreditBank is closely connected with the state-owned monopoly Russian Railways. The second most profitable banks were Moscow-based Sviaz-bank, a universal bank linked to the telecommunications sector, and Conversbank, a Moscow bank which also produced a return of 45.9%.

In terms of soundness (capital/assets ratio), the top Russian bank was Moscow’s Bank Severo-Vostochny Alliance, with a high ratio of 56.86%, followed by the Moscow-based Natsionalnyy Reservnyy Bank, with a ratio of 55.19%.

HIGHEST MOVERS

2006-2007

Moscow Industrial Bank, a medium-sized bank that focuses on the construction and industrial sectors, moved up 12 places in the latest Tier 1 capital listing to 36th while other significant movers were Moscow-based Bank ­Vozrozhdenie, a corporate and retail bank up 11 places to 25th, and URSA Bank, a Novosibirsk-based bank which rose nine places to 18th. Other high flyers include the prominent foreign banks, ­Raiffeisenbank, Absolut, Rosbank and UniCredit.

Analysts are concerned, however, that while the big three state banks and the foreign banks have ready access to capital, the other medium-sized banks are finding capital expansion more difficult thereby creating a two-tier system.

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