No such thing as a free Russian bank

Being a small fish in a large pond can be tricky – the smaller you are, the more predators could be waiting for you. Small Russian banks face a similar risk. Because the Russian economic and business environment is struggling, customers are transferring deposits from smaller to larger institutions in the belief that larger banks have more firepower – in doing so, taking away liquidity from those same smaller lenders. A vicious circle.

With this in mind, many small and medium-sized Russian banks are considering expanding their businesses through acquisitions. And there seem to be plenty of options. Some come without any cost at all – acquisition cost, that is. Failed financial institutions, which the Bank of Russia, the country's central bank, is trying to rehabilitate, can be snapped up without paying any fee under the so-called ‘sanation process’. In such a case, the bank rehabilitating the ailing institution even receives cheap funds from the central bank for itself and for the rescued lender.

A win-win situation, then. Not quite...

While the sanation process brings asset and market share growth for free, it also boosts the saviour’s non-performing assets, especially as the process usually does not follow a clean-up and bad loan write-off at the ‘free’ takeover target. This cries out for future capital injections.

Some groups that have taken part in the sanation process are now operating with very low or even negative equity on an aggregated basis, meaning not just a small bank but also a larger one could struggle.

And while cheap loans might look good, is simply adding debt the right way to grow a healthy bank?

A case for consolidation of small and medium-sized banks does exist. Expanding to rival the largest lenders in the market and create credible competition is key – but through finding the right match, not snapping up bad assets out of desperation.

So, beware of growing at any price. The cheapest option is not always the best.