Efforts to overcome the turbulence of 2004 have resulted in a growing economy and a positive outlook.
The banking ‘turbulence’ that occurred in the summer of 2004, in which 10 banks either had their licences revoked or were forced into ‘arranged marriages’ with other banks, now appears as just a minor blip following prompt action by the government, the central bank and banks themselves, and the Russian banking system has enjoyed the benefits of a buoyant economy. Driven by high oil, gas and metal exports, real GDP grew 6.8% in 2004 and is forecast to grow by around 5% in 2005. For our Top 50 Russian banks, aggregate pre-tax profit grew 37.2% to $4186m, aggregate assets increased 42.5% to $182.4bn and aggregate Tier 1 capital rose 22.7% to $21.5bn.
Our listing, and the banking system in general, continues to be dominated by the Russian state-owned banks, with Sberbank, Vneshtorgbank, Gazprombank, Bank of Moscow and Vnesheconombank accounting for 59.5% of the total assets of our Top 50, 49.4% of the aggregate Tier 1 capital, and claiming 48% of the aggregate pre-tax profits. In the banking system as a whole, the government directly controls through these and others (for example, Rosselkhozbank, Russian Bank for Development etc) more than 50% of the total assets. This in itself indicates the relative size of about 1100 banks that fall outside our Top 50.
State ownership grows
With Vneshtorgbank having acquired a 25% plus one share holding in Industry and Construction Bank St Petersburg, and possibly looking to acquire the remainder in the near future, the state-owned percentage of the banking sector will grow further. Indirect government ownership, through regional government, of regional banks further increases the percentage of assets controlled.
Although discussion on part or full privatisation of one or more of these banks occurs from time to time, the state is unlikely to give up control over these institutions in the medium term because it uses them to influence public policy and economic development. Progress on the sale of smaller banks, first announced in 2002, has been slow and Transcreditbank, the largest slated for sale, remains state-owned.
Outside the state sector, the strongest banks come from the financial industrial group (FIG) sector, owned by wealthy businessmen, and include banks such as MDM, Alfa, UralSib and Rosbank. There are also many smaller FIGs, each with their own captive bank. Reliable information on groups is often difficult to obtain. The structure of cross-holdings between industrial and financial companies within the group makes monitoring difficult and ownership opaque while related party loans lead to increased risk.
At the moment, the industrial sectors in which these groups operate, energy and commodities, are buoyant but in bad times it has been known for a FIG to abandon its bank to save its industrial companies. Mergers and acquisitions in this sector have started to occur in 2005, with the transfer of the OVK banking businesses to Rosbank, the completion of the merger of Avtobank-Nikoil, Nikoil IBG Bank, Ural-Siberian Bank and its subsidiary, Kuzbassugolbank, and Bryansk Narodny Bank to form URALSIB on October 3. On a smaller scale, Investsberbank and Russky Generalny Bank merged in February.
Foreign banks have tended to enter the market through establishing their own subsidiaries rather than by direct acquisition, largely because of the difficulties of carrying out due diligence on banks and also because of local resistance to foreign ownership.
However, this appears to be changing with the announcement of the acquisition of DeltaBank by GE Capital in November 2004, Banca Intesa’s purchase of 75% of KMB-Bank in May 2005 and Société Générale’s interest in DeltaCredit. Deals can fall apart, too, as witnessed by the January 2005 collapse of the proposed acquisition of a large stake in Russian Standard Bank by Cetelem, BNP Paribas’ consumer finance subsidiary.
The Russian banking system plays a very limited part in the national economy, according to a recent report by Moody’s (Moody’s Banking System Outlook: Russia, October 2005). Banking assets represented only 42.5% of GDP at year-end 2004, comparing unfavourably with other transition countries in central and eastern Europe (CEE). Borrowing from banks is not a major financing source for the economy with a gross loan/GDP ratio of 29.2%. Major corporates prefer to go abroad for the bulk of their financing ($19bn in 2004) and domestic bank loans account for only 7% of investments.
Retail banking low
The retail banking sector is equally under-developed with Moody’s estimating that 42% of savings do not reach the banking system and about 90% of the population do not use bank loans. Retail loans are at 3.8% of GDP, a very low figure compared with other CEE countries, even though interest rates in Russia have been reducing since 2000.
Year-on-year growth in loans is high but has started from a very low base. Russian banks therefore remain dependent on trading income for the bulk of their income. Consumer confidence was dented by last year’s turbulence and has been slow to return. PIE1: TOTAL ASSETS % PIE2: TIER 1 CAPITAL % PIE3: TOTAL PRE-TAX PROFITS % CHART1: AVERAGE TIER1 CAPITAL/ASSET RATIO BY COUNTRY (%) CHART2: AVERAGE PRE-TAX PROFIT/TIER 1 CAPITAL RATIO BY COUNTRY (%) CHART3: AVERAGE PRE-TAX PROFIT/ASSETS RATIO BY COUNTRY (%) CHART4: AVERAGE DISCLOSED CAPITAL ADEQUACY RATIO BY COUNTRY (%)
