Corporate Statement
World / Central & Eastern Europe / Russia
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Sergey Khotimskiy, first deputy CEO of Sovcombank, explains how private banks can respond to new challenges and opportunities in the face of stricter regulations and the growth of digital technology.

Q What opportunities does the future hold for private banks in Russia?

A Historically many privately owned banks in Russia were established and developed without any real capital. Instead of building transparent and efficient business models those banks kept providing loans to their shareholders to support their numerous risky ideas. Current large-scale attempts to cleanse the market by removing or recapitalising those zombie institutions has been painful, because it turns out there are too many banks that are not profitable and consist of phoney assets. The good news is that the few ‘clean’ banks have not been losing their market share and have enjoyed tremendous success. Several private banks successfully compete in credit cards, current accounts, retail loans, SMB (small business banking) products and even debt capital markets. In the mid-run, after the cleanup is over, the privately owned banks’ share of assets will begin to increase once again.

Q How have stricter regulations impacted the Russian banking sector? Have they led to an increase in the state banks’ market share?

A It is true that not every bank can effectively deal with new regulations and requirements such as Basel III or Solvency II. Naturally, it leads to smaller banks leaving the market, especially those with insufficient revenues or low margins. But if a larger bank is struggling to comply with the new regulations, there is a good chance this is due to the low quality of their assets and ineffective management. If a bank operates transparently and is big enough, the stricter regulations are an advantage, since the clients of the weaker competitors are looking for better alternatives. 

Q What business models are the most successful ones in the Russian market? Does Sovcombank’s current business model fit the modern challenges?

A Today, Russia is a very appealing market. The banks that possess a strong capital base, who do real business, are making good profits. Due to the strengthening of supervision banks cannot lend to their shareholders any longer. So those who did not build competitive businesses simply lose their capital (if, of course, they still have any). At the same time, the well-capitalised and well-run banks are succeeding greatly.

Sovcombank focuses on the business segments where we can be one of the leaders and have no structural disadvantages. For instance, we give more bank guarantees than anyone else does. Even if you do not have the lowest cost of funding you can be very successful in this niche as long as your risk management and marketing are strong enough. This is why our share in this segment is 20-25% and we can base our entire ecosystem for SMB on that. We try to concentrate on investment banking services such as the organising of bond issues when dealing with our biggest clients. It gives us unique access to all the largest companies without the need to provide loans at the lowest rates. So we became the largest privately owned book runner for local bonds. Finally, when it comes to retail, we dig deep into small towns and we currently operate in 1000 cities and towns all over Russia.

Q All banks face digitalisation. How are Russian banks adapting to its impact?

A Digital channels grow even faster than offline, so obviously Russian banks are transforming to meet this trend. Russia has one of the highest internet penetration rates, so online and mobile banking has become the main channel for transactional business. But people still go outside, take walks, shop and go to restaurants – and we believe that as long as this is the case, the banks need to be physically present on streets. But the form of this presence is different now – favouring small outlets with professional consultants. Branches are no longer for facilitating paperwork but rather for discussions with your clients about their financial goals. Everything else is to go digital.

Q What technological innovations do you have underway at Sovcombank? 

A We have been robotising our operations for a long time. For instance in collections, robots communicate with clients about overdue debts and help prepare legal documentation. We are also using Artificial Intelligence to make trade decisions within our bond portfolio and Machine Learning is proving indispensable for retail loans underwriting. The Russian government is preparing to launch its Unified Biometric System and we are among the first group of banks starting to test it. Digitalisation has not only led to the deployment of new technologies, it has also created a positive change in the philosophy of our employees and management team. It is really exciting to see how fast innovations turn into standards. 

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