The Russian banking sector has survived. In the first quarter of 2009, analysts were ready to predict a far-reaching crisis and, even as late as mid-year, there were still fears that the government would need to recapitalise many privately owned banks. But with oil bouncing back towards $70 per barrel, that threat appears to have receded.
Of course, with gross domestic product forecast to contract by 8.5% in 2009, unemployment is up and company revenues are down. This has a lagged effect on non-performing loans (NPLs) for both retail and corporate customers. However, the doomsday forecasts of 20% to 40% NPLs across the sector that were gaining credence in early 2009 have not played out. Data from leading international credit bureau Experian shows personal loan arrears in Russia reaching 12.5% in October 2009. But this is a historically high-risk, high-yield business - the arrears rate was at 10% even in June 2007. Real estate loan arrears are far lower, at less than 6%.
Oleg Tinkov, retail entrepreneur and 71% owner of Tinkoff Credit Systems (TCS)
Rethinking bank strategy
So the worst-case scenario has been avoided. But this does not necessarily mean the future is bright, says Evsey Gurvich, the head of the independent Economic Experts Group, which advises the Russian federal and regional governments.
"We will start to grow, but growth will be very slow compared to the recovery after the 1998 crisis, and one of the reasons is the banking sector. The central bank has so far failed to create strong incentives for banks to address their NPL problems, they have been allowed too much flexibility on classifying NPLs so that problems have not been resolved," says Mr Gurvich.
However, the central bank has begun to tighten capital requirements, pushing the focus of bankers away from asset growth. Combined with higher but still manageable levels of NPLs, this has obliged a change of priorities for the owners and managers of Russian banks that may ultimately prove beneficial.
"There is a new paradigm for any business. We have to forget leverage, debt and market share. We have to think net profit, operational income and cash-flow. The era of buying shares for capitalisation growth is over - we have to go back to 10 or 15 years ago, when people bought shares for the dividends," says Oleg Tinkov, retail entrepreneur and 71% owner of Tinkoff Credit Systems (TCS).
He launched pure-play direct mail marketed credit card bank TCS on the eve of the crisis in 2007, inspired by mail-shots received from Capital One during a stay in the US. His original plan was to sell the business in 2011, but the downturn has added at least three to five years to that schedule.
TCS initially envisaged relying on capital markets funding, including securitisations of credit card receivables, but that approach has had to be reconfigured, says CEO Oliver Hughes. The bank obtained a loan for Rbs1.5bn ($51m) in December 2007, partly from two of TCS's shareholders, Goldman Sachs and Swedish investment fund Vostok Nafta, which each own about 15% of the bank. It also issued a $70m Eurobond in the Swedish market in June 2008. Both debts mature in 2011.
"Our approach at the moment is to talk to leading lending institutions for rouble funding if possible, although we are able to hedge foreign currency positions if we have them. Our funding needs by end-2009 will be Rbs3bn, and there is a very good chance we will be able to do some rouble funding in the fourth quarter [of this year] or first quarter next year," says Mr Hughes.
In parallel with that strategy, the bank launched a pilot retail deposit platform in June 2009 in three regions, to test the marketing concept and technology. "We have found a channel that we are happy with, maintaining our branchless banking mode, and we have already raised more than $2m," says Mr Hughes.
As the TCS credit card business is mass-market, the deposit scheme targets a different, more affluent audience. In a similar vein, one of the most active consumer loan firms in Russia, Czech-owned Home Credit & Finance, also launched deposit collection in October 2008 - despite the obvious marketing hurdle of the bank's name.
"We already had Rbs3bn in deposits in August, and we would like that to rise to Rbs10bn by the end of 2010. Considering that we only had full branch coverage from May, and considering that we do not offer foreign currency deposits because we don't need them for our funding mix, that is a very good result, and could make a significant contribution to our funding position," says Ivan Svitek, Home Credit's CEO in Russia.
Outsourcing credit control
Unlike TCS, Home Credit has a physical network, mostly through affiliates or merchant outlets, but increasingly through ATM machines (250 nationwide by August 2009). But both banks have benefited from a low-cost and high-technology approach that marks them out from traditional Russian retail lenders. Mr Hughes says the emergence of a Russian credit bureau industry in the past five years, together with increasingly professional debt collection agencies, has been vital to the bank's business model.
According to Daniel Zelenski, head of Experian's operations in Russia, the legal environment is supportive, because banks can share both negative and positive data - in other words, credit histories for both defaulters and reliable repayers. His firm has seen an increasing uptake in its services during the downturn. Having sold the first full suite of products to Alfa Bank in 2002, including automated credit application processes, fraud detection and customer marketing and acquisition systems, Experian now has 40 clients across Russia, Ukraine and Kazakhstan.
"Currently we have 200 partner banks supplying us data, and some limited information from telecoms firms. We have an appetite for getting additional data from collections agencies to understand what happens after a default, but there are limits to this in the legislation. We are working with federal migration, pension and tax services to get data from them," says Mr Zelenski.
The collections area is also growing rapidly. TCS shareholder Goldman Sachs has a characteristically well-hedged position by owning a stake in one of the largest collections agencies servicing the bank, Sequoia Credit Consolidation. And Jyrki Talvitie, the senior advisor to East Capital's private equity Financials Fund in Moscow, says its 33% stake in Russian credit management service Morgan & Stout is one of the fund's highest-return investments at the moment.
"Bigger banks are beginning to look at selling retail NPL portfolios, but collection agencies mostly do not yet have the capital. Many of the customers have small outstanding receivables that turn out to be easy to recover - often they have just moved without telling their bank, and they pay quickly once they are found again. Until now there has simply been a lack of professional collectors able to calculate recovery rates and cost and manage their services properly," says Mr Talvitie.
The use of highly professional credit risk management helped Home Credit stay in profit even in the tough first quarter, and its cost of risk began to improve by the third quarter. TCS entered profit in the second quarter, and expects net income of $15m for 2009.
"On average, the cost of risk doubled in the first half of 2009. But by July, new delinquencies were on a par with the same month in 2008... There was a significant improvement in September, and this tendency continued into October," says Mr Hughes.
Ivan Svitek, Home Credit's CEO in Russia
Changing landscape
Both banks were once again acquiring new customers by the third quarter. Nonetheless, Mr Svitek says the consumer lending market has changed, as some of the largest players such as Russian Standard and Renaissance Credit were also the most dependent on capital markets funding, so their portfolios are running down.
He believes Home Credit has moved ahead of those two banks to take the top spot for new consumer loan origination, but says there is fresh aggressive competition from the Russian arms of well-capitalised foreign players such as Hungary's OTP and the French banks BNP Paribas and Société Générale.
The downturn has also favoured the more conservative retail banking build-out model of some of the largest corporate banks such as International Industrial Bank or Bank Petrocommerce, which was originally part-owned by Lukoil. These banks have developed a retail portfolio from the payroll of their large corporate clients, giving them good visibility with regard to retail customers' earnings and job security.
Oleg Grishin, vice-president of retail banking at Petrocommerce, explains how he has given mobile banking a whole new meaning. "If a customer works at one of our large corporate clients such as Lukoil, and they want to open an account or take out a loan, we will take the documentation to their workplace," he says.
Petrocommerce has temporarily suspended new mortgage origination, but hopes to restart in the fourth quarter of 2009, and also plans to increase its physical network by opening smaller branches in locations more carefully selected for customer convenience.
