Could Russian banking survive another crisis? It is now five years since the financial meltdown that followed Russia’s debt default and devaluation.
A spectacular economic recovery on the back of rising oil prices has created a semblance of normality in Russian banking. Management quality has improved with banks led, in many cases, by an even younger team of executives than before and tasked with making the industry more professional.
Gone is the business of betting on government bond yields and massive forward positions, and in its place has come classic lending that the real economy desperately needs. The clarion call of the sector is retail and the institutions that get it right will make huge profits because Russia is a highly under-banked country.
Yet for all this, there remain many question marks over Russian banking. Much of the old structure still persists: the system is dominated by state-owned Sberbank, which boasts two thirds of retail deposits and has more than 20,000 branches. Beneath Sberbank, the market is fragmented with no bank having more than a 6% share of loans or deposits. The financial industrial groups (FIGs) continue to exist, encouraging intra-group lending and concentration of risk. And the reform process is slow and bedevilled by politics. There are many remaining risks in the banking sector.
A research report by rating agency Standard & Poor’s poses the question like this: “Will Russian banks be lovelier the second time around? Four years after the devastating financial crisis of 1998-1999, the Russian banking sector has rebounded and rebuilt its commercial and financial base. But some old bad habits live on, and in certain important ways the sector has not reformed, limiting the potential for significant improvement in the creditworthiness of its banks.”
Priorities for progress
Reform progress was one of the subjects discussed by a high-level group of bankers at The Banker’s Banking on Russia conference in London in late May.
“Priority number one is the deposit insurance system, which has been postponed many times. Even when the law goes ahead, it’s likely that state guarantees will stay in place until 2007 [this assists Sberbank] but we think this is a good compromise from a highly politicised situation,” says Evgueni Ivanov, president of Rosbank.
He sees great opportunities in the retail sector as well as private and investment banking. “Only 20% of Russians have bank accounts, only 7% have credit cards, only 9% have applied for loans and only 5% have received loans in the past 10 years,” he says.
Legal constraints
Presently, Rosbank’s retail operations are limited to Moscow and Norilsk in Siberia, where the Interros FIG, of which Rosbank is part, owns industrial giant Norilsk Nickel. “To catch up in retail, we cannot grow by merely opening branches. We need to grow by M&A,” says Mr Ivanov.
Here again, though, Russian banks run into legislative problems. Russian law makes buying other banks so difficult – whether the merger goes ahead or not is almost a collective decision by individual deposit holders. Rosbank is lobbying for reform of the law.
Russian market leader MDM Bank has successfully expanded by acquisition but it has been a difficult process. “Acquisitions play an important role in MDM’s expansion strategy because it is quicker than growing organically, providing the group with suitable premises,” says a Fitch report on the bank. “MDM believes that it also helps with gaining access to a ready customer base and with immediate integration into the local business community. However, there are risks associated with this way of expanding, which include the possibility of customers leaving, cost pressures and reputational risk.”
Reforms are needed
MDM chairman Vladimir Rashevsky, who opened the Banking on Russia conference, also believes that the reform process is holding up Russian banking. In a speech on ‘Russia’s investment climate and opportunities for foreign players’, he concluded that while the Russian banking sector has recorded strong growth, its structure remains substantially unchanged and reforms are still to be implemented.
His other conclusions were: the banking sector’s role as a financial intermediary and source of investment capital remains marginal; leading Russian banks are well placed to intermediate between foreign financial institutions and Russian corporates; select Russian banks are taking proactive measures to increase their attractiveness for foreign creditors and investors.
Technically, the way is open for increased participation of foreign investors in Russian banking with the benefits this could bring in terms of capital, technology and expertise. The central bank removed the 12% ownership limit in November, although many barriers remain against foreign investors. Share purchases still require central bank approval and any stake above 20% would have to hurdle anti-monopoly laws.
One of the better prospects for foreign investors could be a strategic stake in state-owned Vneshtorgbank, which is due to be privatised. Talks between the European Bank for Reconstruction and Development (EBRD) and Vneshtorg about the sale of a stake are reported to be ongoing. Whatever solution is arrived at, it will have to take account of Russian national sensitivities.
Government vision
“The general vision of the Russian government is that privatisation should be done in such a way that Vneshtorgbank will remain Russian and independent,“ says Andrei Kostin, president and CEO of the bank. “We know the experience [of banking sector reform] in central and eastern Europe, where national capital has almost ceased to exist, and we do not want to go down that path.”
Vneshtorgbank’s strategy is to become a universal bank. It is the second largest bank in Russia in terms of loan market share and the fifth largest in terms of deposits. “The strategy of the bank is to create a fully fledged universal bank,” says Mr Kostin. “This means expanding on all fronts – lending to SMEs [small and medium enterprises], retail, mortgages, consumer finance and investment banking,” says Mr Kostin.
“The Russian market is expanding very fast and the opportunities will be taken by others if Russian banks don’t take them.”
Survival tactics
However, it is not necessary to be large to exploit opportunities or to survive a crisis should one arise. Promsvyazbank was established in 1995 and became famous by surviving the 1998 crisis unscathed.
“We were not active in the GKO market, all our liabilities were in roubles and all our assets were in hard currencies so we made a big profit due to the devaluation,” recalls Promsvyazbank president Alexsander Levkovskiy, who at the age of 31 has already held the top post for two years. He is one of a new breed of Russian managers making waves in the sector. The bank is among the major trade finance players in the country.
Individual Russian banks have made great strides in the past few years and should be well placed to take advantage of the opportunities to come. But they are not helped by the slow pace of reform or the lack of restructuring. Unless that process goes ahead, not all Russian banks can expect to sail through any future crises unscathed.
