The acquisition of an investment bank and subsidiaries across emerging Europe are transforming Sberbank from Russia's retail savings bank of choice into a genuine international player, just as Western competitors are retreating. But its management team is treading carefully.

When the Russian central bank sold $5.2bn of its controlling stake in Sberbank, the country’s largest bank, to investors via the London and Moscow stock exchanges in September 2012, only two Russian equity offerings had been successful all year, totalling less than $450m. Yet Sberbank’s outsized deal ended up more than twice oversubscribed.

Based on the bank’s performance, this should not come as a surprise. Return on Tier 1 capital exceeded 45% in 2011, even though the bank is highly capitalised – its Tier 1 Basel ratio is 11.6%. And this performance has been sustained throughout the crisis years. The other large state-owned Russian banks, VTB and Gazprombank, both suffered multi-billion dollar losses during the financial crisis, and the country's banking sector as a whole, excluding Sberbank, tipped into a loss in 2009.

No surprises

“The beauty of Sberbank is its strong capital position and the absence of surprises. Taken together with its low loan-to-deposit ratio, that makes investors very comfortable,” says Jacob Grapengeisser, a portfolio manager of asset management firm East Capital’s $1.6bn Russia Fund, which holds a substantial position in Sberbank.

Sberbank has a retail deposit market share of close to 48% in Russia, thanks to its legacy position as the Soviet era savings bank and a branch network of more than 19,000 – compared with, for example, 16,900 for China’s largest bank, Industrial and Commercial Bank of China. As a result, Sberbank’s loan-to-deposit ratio has only just exceeded 100% in 2011, and the bank’s management has made it clear that they will not aggressively defend deposit market share by hiking rates. The bank is on course to exceed a 40% retail loan growth target for 2012, faster than the market as a whole.

“The funding situation implies that Sberbank’s margins should widen compared to the industry average, even while it is actually increasing its loan market share. There is no bank in an equivalent position in other large emerging European economies such as Poland or Turkey,” says Mr Grapengeisser.

Strategic direction

The prospects for Sberbank’s financial performance have also been greatly enhanced by the strategic direction adopted since Russia’s former economy minister, German Gref, was appointed chief executive of the bank in 2007. He has built a management team that includes former Morgan Stanley executive Anton Karamzin as chief financial officer, and former McKinsey consultant Denis Bugrov as head of strategy.

The first round of reforms at the bank focused on process changes, developing a 'Sberbank Production System' modelled on Japanese car manufacturer Toyota. These changes were, in Mr Grapengeisser’s words, “low-hanging fruit” in a bank where most record-keeping was still on paper, with no centralised data storage. The measures have brought time-to-decision on lending down to international standards.

“The proportion of remote to branch transactions has also been transformed over the past four years, with remote transactions rising from 25% to 75%. This frees up branch staff to provide loan advice and generate fee income from bolt-on product sales,” says Mr Karamzin.

The bank also acquired greater consumer banking presence and technology through its 70% stake in Cetelem, a joint venture with France’s BNP Paribas in Russia that was sealed in August 2012. And moving in a very different direction, Sberbank acquired Russian investment bank Troika Dialog in March 2011.

Clearly Sberbank is changing under Mr Gref. Although it is an oil tanker, some of the improvements are already tangible and apparent, [and Mr Gref] has a vision that he is implementing step by step

Patrick Butler

“Clearly Sberbank is changing under Mr Gref. Although it is an oil tanker, some of the improvements are already tangible and apparent, [and Mr Gref] has a vision that he is implementing step by step,” says Patrick Butler, an international adviser at Petrus Advisers and Omada Capital, who was on the board of leading central and eastern European (CEE) banking group Raiffeisen Bank International until April 2012.

Beyond the borders

The ability to compete outside the Russian market is Sberbank's next key test. It purchased BPS Bank in Belarus in December 2009, and has since expanded the subsidiary’s market share from fifth to third in the country, staying in profit in 2011 despite a massive currency devaluation in Belarus. Sberbank’s Kazakhstan subsidiary has also grown rapidly, to reach sixth place by assets in the country and fourth by profits.

In February 2012, Sberbank closed the purchase of VBI, the CEE subsidiary of Austria’s troubled Volksbank, which operates in eight CEE countries. Its Ukrainian operations will be merged with Sberbank’s own pre-existing subsidiary there. In October 2012, the bank closed its largest acquisition to date, purchasing DenizBank in Turkey from Belgium’s Dexia Group for $3.53bn.

“All these acquisitions taken together substantially change our bank as a whole, we do now view it as an international bank,” says Mr German Gref.

His aspirations for how the bank relates to its clients are very ambitious. Sberbank’s five-year strategy, concluding in 2014, envisages earning 5% of its revenues outside Russia, but Mr Gref wants more than a Russian retail bank with a few high-end cross-border activities. His intention is that Sberbank should ultimately offer the same range of services across the whole of its burgeoning network.

“We are not targeting people of any specific nationality, gender, age or wealth. To us, each of them is simply the client. It is not complicated just to provide services to a small number of affluent clients or companies. In Russia we have 106 million clients, and every one of them is important to us. Different clients require different services, but our aim is to deliver the same quality of service to every client, outside as well as inside Russia,” he says.

Stepping out

The signs of Mr Gref’s global vision are evident right across the bank’s activities. Sberbank became a partner for the European Bank for Reconstruction and Development (EBRD) annual meeting in London in May 2012, when a number of western European banks that are active in CEE scaled back their presence at this key deal-making event. The retreat of capital- and liquidity-constrained eurozone banks from CEE is the flip side of Sberbank’s progress.

The EBRD has expressed repeated concern about trends in small and medium-sized enterprise (SME) lending and trade finance, both of which look set to receive relatively punitive treatment under Basel III bank capital regulations. It will take time to build up a suitable local network in CEE that can serve SMEs, but Sberbank is already making strides into the trade finance void. In the first half of 2012, its total trade finance portfolio reached $8.2bn, a rise of 44% year on year.

The retrenchment of leading Western players also provides an opportunity for Sberbank Corporate and Investment Bank (Sberbank CIB), formed in October 2012 through the integration of Sberbank and Troika Dialog. However, Alexander Bazarov, co-head of CIB who originally joined Sberbank from Deutsche in 2008, emphasises that the bank is careful not to over-reach itself.

Certain markets such as the Czech and Slovak Republics, and DenizBank in Turkey, are naturally self-funding, but others, such as Serbia, will need parent funding

Sergey Gorkov

VBI plus the subsidiaries in Ukraine, Belarus and Kazakhstan are already generating a certain amount of routine flow of corporate and investment bank business that does not have a specific Russian client angle. But for deal-based business, Mr Bazarov would usually expect Sberbank to be involved only if there was a Russian company or investor on the deal.

“If we have no competitive advantage in the area, we will not try to compete. Even if the deal involved a Russian participant but was in a market where we do not have a local presence – for instance in western Europe – then we would look to syndicate with a local partner who knows that market well. But right now, Sberbank’s capital allows for sole financing of up to $10bn without syndication – that is something few banks worldwide can match,” he says.

Funding strategy

Sberbank’s capital and funding are also significant for VBI. Prior to 2008, western European banks were growing fast in CEE using very cheap funding that a Russian bank – even the most liquid – could not hope to match. That has changed today, and while Sberbank does not have a funding cost advantage in currencies other than the rouble, it is no longer at a significant disadvantage either. Mr Gref remains cautious about making any aggressive bid to grab market share.

“Our plans are for the long term, in each country we want to be seen as a domestic bank that is there to stay. That is why we will first have to build confidence among customers in those markets, to completely rebuild technology and platforms, to build client loyalty in our brand,” he says.

From the closing of the Sberbank acquisition in February 2012 to September, VBI has increased its loan portfolio by 6% and deposits by 14%, compared with market average increases of 1% and 2%, respectively. This has also helped bring its loan-to-deposit ratio down from 148% to 128%. But Sergey Gorkov, Sberbank’s head of international business, says the aim is to fund growth, not specifically to build a self-funding model.

“Certain markets such as the Czech and Slovak Republics, and DenizBank in Turkey, are naturally self-funding, but others, such as Serbia, will need parent funding. In each case, we will look at what is most effective from an economic viewpoint, and large clients from any market will usually be funded from Moscow,” says Mr Gorkov.

Reshaping VBI

At present, eurozone banks enjoy something of a subsidy in the form of cheap collateralised liquidity from the European Central Bank (ECB). Since Sberbank intends to be a long-term local participant, Mr Gref expects the bank’s subsidiaries in eurozone countries – Slovenia and Slovakia – to have access to ECB liquidity on equal terms with other participants.

However, risk management at VBI subsidiaries was not in line with Sberbank’s own standards, and non-performing loans are currently occupying management time, especially in Hungary. The intention is also to rebrand the network with Sberbank’s own name in 2013, after initial soundings suggested this will be well received in the markets in which VBI operates. Further adjustments are in the pipeline.

“We will be increasing the total number of branches, but also relocating some branches to optimise the network. Also, VBI had limited experience dealing with the largest corporates, so we are developing some more specialised facilities for that client group,” says Mr Gorkov.

Moreover, VBI is a small network, with assets of €9.5bn across eight countries, less than half the assets of DenizBank on its own. Mr Butler says VBI currently lacks a clear strategic position in its markets of operation. He warns that Sberbank will need to scale up VBI quickly if it is to prevent the acquisition becoming a long-term wasting asset.

The priorities for Sberbank were reliability and safety, like an airline. Troika Dialog was the right partner to build out our flow and transaction banking into investment banking activities

Alexander Bazarov

“In reality, VBI is little more than a collection of banking licences and an archipelago of relatively small franchises at the back end of the top 10 or 15 in these markets. It is less of a platform, more of a springboard into these markets,” says Mr Butler.

Mr Gref acknowledges that turning VBI around is a challenge for Sberbank’s management team. Based on the experience of acquisitions by other global banks, he anticipates that it will take at least two years to complete the restructuring of VBI, install suitable management and build out new product lines. From year three or four, he hopes to see a multiplier effect of operating as a cross-border bank.

“There is nothing unique in VBI. Small markets require the same effort as large markets, [and] we will always have to build the team and adapt to local specifics. This is what makes the operations in CEE more complicated, but taken together the market is roughly the same size as Russia, and for the next 10 years it has a great potential for fast growth and economic convergence,” says Mr Gref.

Turkish jewel

By contrast, DenizBank is a potential contributor to the bottom line from day one – a “little jewel” in Mr Butler’s words. Turkey’s ninth largest bank by Tier 1 capital, its profits of $659m in 2011 were among the top 25 for any foreign-owned subsidiary in the world. Only the troubles of its previous owner, Dexia, were holding it back.

“This was the best bank that Sberbank could have acquired,” says Tolga Egemen, who was until February 2012 the executive vice-president of Garanti Bank, one of Turkey’s top tier of four privately owned banks. He says majority control was not available at any of those four banks.

The Turkish banking sector is a highly profitable one, but competition is intense and with interest rates at record lows, margins are gradually coming under pressure. Mr Egemen believes the key to success in the future is a well developed client franchise that can generate high-quality new loans and growing fee and commission income opportunities.

“Along with Garanti and Yapi Kredi, Deniz is a bank that has that model already, as well as good management know-how. In Turkey, foreign managers tend to fail, but if Sberbank retains a strong local management team, DenizBank’s deep market penetration gives it a good chance to succeed,” says Mr Egemen.

In particular, he believes DenizBank’s SME platform is sufficiently sophisticated that it could help the rest of Sberbank’s own network. Mr Gorkov confirms that Sberbank is indeed considering whether to adapt DenizBank SME technology to help roll out a stronger offering at VBI.

Sberbank performance chart: relative return on Tier 1 capital

National champion

However, this international expansion must not distract Sberbank from its home market, especially the integration of an investment bank. Rob Leith, who was hired in 2011 from South Africa’s Standard Bank to become Sberbank’s head of global markets and investment banking, says he was sure from the start that it would be much healthier not to leave Troika Dialog out on a limb.

“Our success will come from the CIB concept, allowing investment banking to feed off the credit appetite and client base of the parent, and combining Sberbank’s foreign exchange, rates and credit products with Troika’s equity and advisory expertise,” he says.

There were questions in the market about whether a state-owned commercial banking giant and a partnership-based investment bank could work together successfully. But Ruben Vardanian, who had headed Troika since 1992 and is now a co-head of Sberbank CIB, says his team viewed the combination as essential.

“Times are changing, balance sheet has becoming increasingly important, the Russian local market was growing deeper and we wanted to be able to offer a fuller range of products including financing. We realised we needed to be part of a national and regional champion story, and that could only be achieved through Sberbank,” says Mr Vardanian.

Even before the formal creation of a single, integrated corporate and investment bank in October 2012, the rank and file had taken to referring simply to Vavilov and Romanov offices, the street names of Sberbank and Troika headquarters locations. And Mr Vardanian says existing brokerage clients also liked having a strong counterparty behind Troika at a time of volatile market conditions. His Sberbank CIB co-head, Mr Bazarov, says Troika’s team-oriented culture and defensive attitude to proprietary trading or principal investing made it a suitable fit for Sberbank.

“The priorities for Sberbank were reliability and safety, like an airline. Troika Dialog was the right partner to build out our flow and transaction banking into investment banking activities. What we do, we do for the clients. If they do not need the service, then we do not provide it,” says Mr Bazarov.

He estimates that Sberbank has about 1.5 million corporate clients, including small businesses. Of these, about 5000 have sales of $500m or more annually and are already regarded as corporate and investment bank clients. In addition, he sees another 15,000 corporate clients who could become customers for some global markets and investment banking products. If this universe of 20,000 companies is provided with the full suite of products that Sberbank can now offer, Mr Bazarov says it would multiply Sberbank CIB revenues many times over.

Setting the standard

National champion status brings with it responsibilities, and if Russia and Sberbank CIB are to fulfil their potential in the capital markets, they will need to address the management skills shortages and poor corporate governance that blight investor appetite for Russian assets. Mr Bazarov believes Sberbank’s reputation for strength and tight risk management is itself a major competitive advantage.

“We try to educate clients not just to do the right thing, but to do it the right way. That is a long-term aspiration, it is a challenge. To be honest, I do believe it is profitable in the end not to get involved in situations that are not win-win for every participant,” he says.

Investors regard Sberbank’s transparency as good by international standards, and Sergey Guriev, rector of the Moscow New Economic School and an expert on corporate governance, has been appointed an independent member of the supervisory board. Mr Guriev says that weak documentation and the depth of the informal economy hold back the Russian SME sector, and Sberbank has an opportunity to promote best practice.

“Lending imposes requirements on clients, they have no choice but to play by the rules, and favourable rates for more transparent companies encourage them to do so,” he says.

Sberbank purchased one of Russia’s leading management consultancies, Strategic Partners Group, in 2008 precisely to assist larger clients in improving their financial and general management. In particular, Sberbank is a major creditor to Russia’s massive but underperforming autos sector.

“We have rich experience from our own transformation – the Sberbank production system, talent management, total liquidity management, and new techniques such as crowdsourcing business intelligence – answers for a new era that can also help transform our clients,” says Mr Gref.

He is confident that Sberbank can also avoid simply reproducing the pitfalls of the Western cross-border universal banking model that is now beset by regulatory pressures and poor profitability. Prudent management at the investment bank and the absence of a large derivatives industry in Russia should minimise results volatility and avoid exposing the bank’s retail customers to inappropriate risks.

“The essence of management as an art is learning from mistakes, and naturally it is better to learn from someone else’s mistakes. Whenever an issue arises in any global bank, that bank’s business model is a subject of detailed scrutiny for us, to help us build a model to protect against such situations,” he says.

As for the man who has driven Sberbank onto the world stage, Mr Gref is insistent that he has no aspirations to return to politics. Perhaps running the bank that holds almost half Russia’s retail savings and extends almost one-third of the country’s loans gives him greater influence over the Russian economy than he had in his ministerial career?

“These are 100% different roles, today I am a businessman. The principles of management are similar, but the objectives and possibilities are completely different. I am in charge of just one single organisation, which is what I like about this role. Sberbank has a responsibility to the Russian economy, but it is different – if I run an efficient business that keeps my clients happy, I will have fulfilled my role in the economy,” says Mr Gref.


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