But
a boom in the banking business and the prospect of billions of dollars
to manage in nascent private pension funds have made him change his
mind, and quickly. He has returned to the banking business and at a
stroke created Russia’s second largest retail bank.
Mr Potanin made his first fortune with Uneximbank, formerly a household
name until it defaulted on more than $1bn of credits during the 1998
financial crisis. The remaining good assets were transferred to
Uneximbank’s smaller sister Rosbank and when the dust settled the two
banks were merged after all the outstanding debts were settled with
creditors on amicable terms in July 2000.
“All Uneximbank’s liabilities have been restructured with the agreement
of all the creditors and all were settled with the issue of $40m of
Eurobonds,” says Alexander Popov, CEO of
Rosbank.
Not much happened after that. With the biggest banks taken out of the
picture, medium-sized banks like Rosbank took over their clients and
built up a solid business as the economy recovered. But they were small
and uninfluential compared with their predecessors.
Banking genesis
Most of Russia’s leading businessmen had a bank at the core of what
came to be called the financial-industrial groups. However, after the
crisis most abandoned the banking business or left their banks to tick
over while they turned their attention to industrial holdings and oil
companies that were still making money.
Mr Potanin bought Rosbank shortly after the 1998 crisis but a year ago
Yevgeny Ivanov, Rosbank’s chairman of the board, complained that
Interros had little interest in investing into the bank because returns
from investments into the real economy were better.
“Our credit portfolio is $1bn and we could easily increase by another
$2bn with the pre-approved loans already made, but we lack the
resources and our shareholders still see better investment
opportunities for capital than banking,” said Mr Ivanov in May 2002.
With little interest in banking and none in retail banking a year ago,
Mr Potanin has made a sharp about turn in the past few months. As
household deposits in commercial banks overtook corporate deposits for
the first time earlier this year, there has been a mad scramble into
the retail banking sector in the past six months.
At the same time, the booming economy, increased competition for the
business of Russia’s top 40 raw material exporters, and a growing layer
of successful and expanding small and medium-sized enterprises (SMEs)
has made banking both an attractive and profitable business again.
Rationalisation process
Mr Potanin’s renewed interest in banking is part of a wider
streamlining of his holdings. In September, he announced he was selling
off the last of his oil and gas holdings, but he increased investments
in gold mining, utilities and agriculture.
His first big move in the financial sector came in July when Interros
announced a tie-up with the American Investment Group (AIG) the world’s
11th largest company, to float a $500m private equity investment fund
that would tap the Russian success story.
“This is an important sign as it shows growing investor confidence in
the Russian market,” Interros deputy director Andrei Bugrov said after
the announcement was made. “In 1997, we mostly had portfolio investors,
whereas now we see foreign direct investments.”
AIG was already investing in Russia during the Soviet-era, when it was
involved in several insurance companies. In 1994, it launched AIG
Russia and AIG Life insurance companies as well as the Russian-American
Investment Bank.
In 1996, AIG set up a 10-year AIG Brunswick Millennium Fund with about
$300m under management. And two years ago it started the $100m Russia
Growth Fund, which it manages with the Menatep group (the latter
controls oil major Yukos).
“In the past, Russian companies tried to build financial-industrial
groups. Now we see them trying to manage assets the way it is done in
the West,” says Ivan Rodionov, executive director at AIG Brunswick
Capital Management, that manages several investment funds in Russia.
“There is a trend toward separating ownership from management and
investment decisions.”
Then in September, in a surprise move, Interros bought the First OVK
retail bank for $200m – the single largest investment ever in Russia’s
banking sector – and hired western consultants to reorganise its
holdings.
First OVK is the rump of failed SBS Agro and together with Rosbank will
boast the largest retail bank network of 450 branches, albeit a
distant second to state-owned Sberbank’s 25,000-plus branches. Next
year Rosbank plans to boost the number of branches to 600 and will
invest $70m to $85m in an attempt to capture 6% of the market.
A consumer loans programme has already been rolled out and is projected
to reach $50m by the end of this year. The joint bank’s loan portfolio
is a little less than $2.5bn and joint assets are $3bn. Other products
in the works are car loans, credit cards, pension funds, insurance
services and developing private banking services for wealthy clients.
Merger difficulties
Interros is still considering how it will unite Rosbank and First OVK.
Merging banks remains difficult and time consuming under current
Central Bank of Russia (CBR) rules. Mr Popov says that the two banks
will not be formally wed until after new legislation is passed to make
the process simpler; this is due at the start of next year.
Rosbank was already doing well without the added impetus from its
parent company. The sixth biggest Russian bank in terms of assets and
in the top 10 in terms of capital, the bulk of its business comes from
traditional corporate banking activities, which make up about 90% of
revenues and 80% of its balance sheet.
Having built up the bank by concentrating on servicing the needs of the
group’s industrial companies after the crisis, Rosbank has been
diversifying its client base in the past few years and weaning itself
off handling the finances of the leading raw material exporters. Today,
Interros only accounts for 5% of the bank’s assets and 20% of its
liabilities, says Mr Popov.
“We have a strategic understanding that it is not possible to be
competitive without transforming and becoming a truly universal bank,”
he says. “The competition is increasing and the margins are going down.
In order to be a leading bank we need to develop all the major banking
businesses.”
While it has not been decided if Rosbank and First OVK will be
completely merged, Rosbank is likely to continue to play to its
strengths and develop its corporate and investment banking skills.
“We remain active on the corporate banking side, but we need to develop
our investment banking services, to go from plain vanilla corporate
loans to more sophisticated mergers and acquisitions consulting through
to trade finance and beyond,” says Mr Popov.
M&A activity
And Interros is not the only enterprise that is restructuring. After
the crisis, entrepreneurs snapped up factories and plants for pennies
but with no strategic interest in developing them. These assets are
being sold on again as the process of consolidating Russia’s industry
is well under way – Interros itself being a good example – and the
number of mergers and acquisitions has been growing fast in the past 18
months.
“M&A is a very large niche for Russian banks and SMEs are actively
restructuring or merging at the moment,” says Mr Popov. “M&A as a
share of our business is growing rapidly as entire sectors, like
telecoms, restructure, develop.”
First securitisation
Likewise, Rosbank has been casting about to make more of what it has.
As part of its increasing sophistication, it plans to complete Russia’s
first securitisation in the next six months.
Rosbank controls United Card Services (UCS), which clears and settles
three quarters of all Russia’s credit cards transactions. The bank
hopes to securitise the foreign credit card receipts – the payments UCS
receives from abroad after foreigners visiting Russia use their credit
cards – and use them to raise significantly cheaper funds on the
international capital markets than it can raise on its own.
Credit Suisse First Boston and Merrill Lynch will lead manage the deal.
A special purpose legal vehicle (SPV) will be set up abroad and given
the right to collect these payments. The spv will then issue a note
backed by these super-safe receipts. As the entire set-up is outside of
Russia and independent of whatever happens to Russia, these receipts
should be issued with interest rates an order of magnitude lower than
those that Rosbank, with its associate Russia risk, can hope to attract
on its own.
Mr Popov says the bank is hoping to raise up to $200m in this way,
which will be used to lend on to domestic enterprises, but everything
depends on the note being awarded an investment grade rating by the
ratings agencies.
Rosbank is preparing, along with the other banks, to be a player on the
nascent asset management market. It owns two of the 54 private pension
funds that were recently cleared to handle the portion of Russian’s
pay-as-you-go pension contributions that can be invested into private
pension funds.
In the past few months, every worker in Russia has been receiving what
the local press has dubbed “happy letters” (a play on the chain letter
pyramid schemes of the early 1990s) listing their employers’
contribution to the state pension fund as well as a form to specify
which of the 54 companies they would like the investable part of their
contributions to go to.
Exciting possibilities
Analysts disagree about how much this business will be worth by the end
of next year, with estimates ranging from $200,000 to $1.5bn, but
bankers are excited by the possibilities.
Rosbank has already made a start and set up mutual funds with some
$120m under management. But this is small potatoes against the sums
that the current pension reforms are expected to generate.
“We have a five-to-seven-year time horizon. We estimate in the first
phase of the pension reforms some $1.5bn of pension fund money will be
created and available for investment by next year. But this could rise
to as much as $10bn within the next five years,” says Mr Popov.