Banking is still a wild business in Russia. Last month, Alexander Slesarev, chairman of Sodbiznesbank, was driving his Mercedes down the Moscow-Don highway when assailants drew level with the speeding car and riddled it with Kalashnikov gunfire. Mr Slesarev, his wife and elder daughter were killed, although his younger daughter survived.
The murder is almost certainly a revenge killing. Sodbiznesbank was shut down by the Central Bank of Russia (CBR) last May, sparking a mini-banking crisis that nearly brought Russia’s rocky financial edifice down for a second time.
It was the first time the CBR ever exercised its power to pull a bank’s licence, citing massive money laundering. Sodbiznesbank managed to whisk $130m offshore to an unknown destination before its doors were padlocked but its clients probably lost a lot of money because of the closure.
However, Russian’s banking system is changing for the better and the strong-armed tactics, like Mr Slesarev’s murder, that marred the 1990s are no longer the norm. The audits Russia’s banks had to pass through last year as part of the vetting process for the new deposit insurance scheme has stamped out many of the most egregious practices that allowed banks like Sodbiznesbank to flourish.
At the same time, the CBR has started to regulate the sector aggressively and is even showing some independence from political interference by the Kremlin.
Analysts were pleasantly surprised when registration for the deposit insurance scheme was closed earlier this year: 927 banks out of a total of 1270 were admitted to the scheme – a lot less than anyone was expecting, although still a lot more than the 200-300 that are needed. More than 120 banks chose not to apply, being little more than treasury departments for their corporate owners, and the CBR rebuffed 220 of the more obvious fronts for scams.
The tougher supervision of those in the scheme has already claimed its first victims. Two small banks that were admitted to the scheme, Vneshagrobank and Soyuzobshchemashbank, were closed at the start of the year and the Deposit Insurance Agency (DIA) was appointed the receiver. Once the courts ruled that depositors were eligible to be reimbursed by the deposit insurance fund, the agency took a mere 10 days to pay out.
Economist Andrei Belousov, head of the Centre of Macroeconomic Analysis and Short-Term Forecasting advising the government, caused a stir at the end of October with a report looking at the long-term trends in the Russian economy to 2020. He predicts three crises by then because of the uneven development of the economy, with the first arriving in 2007-2008.
While the big banks have been flourishing thanks to strong economic growth and access to cheap and long-term financing from the international capital markets, the smaller banks’ margins are being squeezed and they are starting to struggle.
Private sector debt
Banks are now issuing so many Eurobonds and drawing so many syndicated loans that Russia’s external debt is starting to climb again although it is shifting from the public to the private sector. The CBR said Russia’s total foreign debt reached $230bn on July 1, which is more than double the $112bn Russia owed as of January 1.
In the latest deal, Sberbank drew the biggest and cheapest credit in Russia’s banking history at the start of November, raising a whopping $1bn syndicated loan at a mere 0.55% over Libor. Originally, the bank was only asking for $500m but almost as soon as it dipped its toe in the water to test the temperature this summer it was clear that demand for the deal was huge, and the increased issue was still two times oversubscribed.
Haves and have nots
Russia’s banking sector is splitting into winners and losers and those with access to international money are gorging themselves in an attempt to buy market share.
Lending was up 48% since the start of the year in September with Sberbank extending the most – Rbs140bn ($5bn) of loans last year, a 46% increase. However, Russia’s retail giant is losing its lead to the top commercial banks.
Consumer credit pioneer Russky Standart and its main rival Home Credit are clear leaders in the short-term credit business (loans of less than one year) but Sberbank lost another 5% of the long-term business to commercial banks – long-term credits make up 57% of its credit portfolio – and its market share fell to just under half for the first time. Sberbank used to command more than 90% of this market in 2004. Analysts expect it to incur further losses.
Part of the reason is that competition from foreign banks is starting to bite. Raiffeisenbank is the fastest growing bank in Russia and its resources increased by more than 70% after it issued new shares, which were bought by its parent Raiffeisen International Bank Holding for $195m.
Foreign banks are also collecting deposits faster than Russian banks, despite the fact that they offer lower interest rates. The deposit insurance scheme has yet to gain any traction: polls showed that a third of Russians have never heard of the scheme and another 28% still do not trust Russian banks despite the scheme. The mistrust clears the field for banks like Citibank, which streaked away from most of its Russian rivals, with lending ballooning by 227% by September year-on-year, thanks to aggressive marketing and the introduction of new products.
The field is still wide open, though, and Russian banks have the advantage of larger branch networks. Leading commercial bank Rosbank increased its credit portfolio by a massive 635% after taking over OVK group. Impexbank, the new kid on the retail-banking block, boosted its credit programme by 255% through a car loans programme.
The ballistic growth is proving to be tempting for foreign banks – and is also making Russian banks very expensive. There have only been a handful of acquisitions so far but foreign banks are paying a ratio of four times book value to earnings, which is twice the going rate in central Europe. However, Andrew Keeley, a bank analyst at Renaissance Capital, says that the return on equity generated by the huge growth potential still makes Russian banks very attractive.
Storm clouds
Despite all this frenetic activity at the top of the pile, the overall growth of Russia’s banking sector has stalled. The Kremlin is worried by rising inflation (cited by Mr Belousov in his report as one of the causes for the first crisis), which is on course to end the year at 11.5%, missing this year’s target of 8.5%. An economic downturn could wreak havoc in the banking sector.
“What is unclear is which banks will be hit or how hard,” says Richard Hainsworth, CEO of RusRatings, the leading Russian bank ratings agency. “However, compared with 1998 the solidity of the regulation by the CBR is an order of magnitude better.”
The government has been sterilising excess petrodollars by siphoning them off into a stabilisation fund, which passed Rbs1000bn in November, and is already a third of the size of Russia’s gross international reserves.
The lack of liquidity has hit the banking sector hard and sent rates on the Interbank market skyrocketing. Smaller banks, which rely on the Interbank market for funds, are being squeezed and some are already getting into trouble.
Total banking sector assets have been rising by a third a year since 2001 and are now $290bn, 44% of GDP, but they have now got stuck at the 2004 level. Likewise, total loans to GDP have been stuck for the past two years at about 24% of GDP.
Taking risks
Some smaller banks are turning to retail deposits to make up the missing cash but they have to offer interest rates of more than 11% (the rate of inflation) to compete with foreign-owned banks, which are offering 5%-6%. This raises the spectre of moral hazard – small banks offering high interest rates and being forced into ever-riskier investments to cover the promised returns.
“There is no problem with moral hazard as yet but the customers gravitating towards the banks with the higher interest rates is the start of a new trend,” says Natalyia Orlova, a bank analyst at Alfa Bank.
Moral hazard can only be avoided if the CBR cracks down on struggling banks. And it looks like doing just that. A year ago, the CBR reported a fifth of Russian banks were using “virtual capital” to boost their balance sheets – extending soft loans to shell companies that used the money to buy the bank’s shares and so pad its capital – but this practice has been almost completely stamped out.
In October, new rules on capital were introduced. New banks must have a minimum capital of Rbs505.2m but, more importantly, banks already in existence with less than this amount may not reduce their capital from its current level or they face being shut down.
Just over half of Russia’s banks had more than Rbs171m of capital as of September 1 and so analysts are expecting more bankruptcies or mergers.
Independent spirit
While the Kremlin has been roundly and repeatedly criticised for favouring the state-owned banks, especially Sberbank and Vneshtorgbank, over the commercial banks, the CBR is starting to look a bit more independent. It pushed hard to complete the merger between retail bank UralSib, and its sister banks Avtobank and Nikoil, which finally went through at the start of November.
The merger has created a big new commercial bank that immediately knocked Alfa Bank off its pedestal as biggest private bank in terms of assets and turns up the heat on the state-owned banks. Insiders say that the CBR is making enemies among the state-owned banks by pushing the accelerated development of the commercial banks.
But Nikolai Tsvetkov, president of UralSib Financial Corporation and CEO of Bank UralSib, summed up the new mood in an interview after the merger was completed. He said: “The process of consolidation in the banking sector is speeding up, and there are many reasons for it. In spite of the domination of so-called state banks in the sector, we observe a cautious, but more and more visible, presence of foreign players.
“They help to increase market competition with their experience, stimulating Russian banks to expand their product range and to compete in terms of quality,” he said.
“At the same time, the increased capital requirements for banks forces them to establish a new strategy of development, first aimed at creating a modern system of financial intermediation. In this regard, mergers are a good way to improve the efficiency of the banking business,” said Mr Tsvetkov.
