Vneshtorgbank is using its acquisition of Guta Bank to build up its retail services, planning more branches and aiming for a leading role in the mortgage market. By Brian Caplen.

Russian state-owned Vneshtorgbank is pushing ahead on the retail front, aiming to claim an 8%-10% share of the market by 2010. During that period, total assets are expected to rise from $15bn to $35bn, including a forecast rise in mortgages from $150m to $2bn and in consumer lending from $300m to $3bn.

The bank’s retail strategy was given a major boost by last year’s acquisition of Guta Bank and a major rebranding exercise is now under way using the name Vneshtorgbank 24. Eighty branches of Vneshtorgbank 24 will be located in Moscow and 40 major Russian regions. The aim is to increase the number of branches to 175 next year and to 300 in the next couple of years.

“The plan is to divide Vneshtorgbank into two parts, one part will be Vneshtorgbank retail services, based on the former Guta Bank, and which will focus on retail services and small and medium-sized enterprises (SME). The other part will be the corporate and investment bank. We will swap assets between the two parts to achieve the required focus,” says Andrey Kostin, the bank’s chairman and CEO.

The chairman and CEO of Vneshtorgbank 24 is Mikhail Zadornov, who is charged with growing this part of the business. Vneshtorgbank’s $2bn in deposits will be transferred to Vneshtorgbank 24 while $420m of Guta corporate loans will go in the other direction.

Mortgage potential

Mortgages will be one important area of focus that has huge growth potential as the average Russian seeks to own their own home. At present, with some gaps in the law regarding foreclosure, mortgages are usually guaranteed by employers and the repayments paid direct from salaries to banks. Sberbank is the largest lender.

But Vneshtorg’s mortgage business has shot up 700% this year and the bank is advancing $20m a month. “Many flats in Russia are sold before the developer even starts digging the ground,” says Mr Kostin. “We have a list of real estate developers that we work with and we accept the risk that the flats will be completed. We also finance people buying into the secondary market and we feel comfortable with the legislation as it is. We are not pushing to establish an equivalent of [the US’s] Fannie Mae or Freddie Mac in Russia.”

The Russian mortgage business is constrained by the lack of housing supply and low levels of income, although banks try to overcome the latter by lending on the basis of informal as well as formal sources of income. Mortgages are short with a 20-year maximum and 10 years being the preferred term.

Specialised platform

Such has been the demand for mortgages that last month Vneshtorgbank opened another specialised sub-office in Moscow called the Consumer and Mortgage Lending Centre. It is the second centre in Moscow and there is another in St Petersburg.

“Opening another consumer and mortgage lending centre in Moscow was driven by a need to establish a new specialised platform to deal with growing volumes of mortgage loans extended by Vneshtorgbank,” says Andrey Suchkov, the head of the consumer and mortgage lending department. He says the aim is to increase the number of centres to five by 2010.

A statement from the bank said that the centre was opened in compliance with “Vneshtorgbank’s strategic plans to maintain and to solidify its leadership in the mortgage lending market of Russia”. The bank has spread its mortgage product, launched in October 2003, all over Russia and claims leadership due to its mass-scale character and accessibility.

Building blocks

Vneshtorgbank has also bought into the equity of the Industry and Construction Bank (Promstroybank) St Petersburg, which will provide further weight to its retail expansion. In the case of Guta, its technology – for example, its ATMs – was strong (even though it had a small client base). This has provided another building block for Vneshtorgbank’s retail strategy.

Earlier this year, Vneshtorgbank participated in the establishment of the National Credit Bureau (NCB) to facilitate the development of consumer lending. This will record credit histories, allowing banks to minimise credit risks and borrowing costs and so extend loans more widely to ordinary Russians. Stockholders in the NCB include AK BARS Bank, Alfa, Zenit, Petrocommerce, Gazprombank, Delta, Rosbank, Citibank and Impexbank.

Vneshtorgbank introduced credit cards six months ago, adding to the debit cards that were already on offer. The bank has issued a total of 781,000 cards [debit and credit] and there has been 20% growth during the past five months. It has its own processing centre.

SME lending is another big focus of Vneshtorgbank 24, targeting companies with a turnover of less than $3m per year. The bank has a scoring system that allows it to advance up to $30,000 in three days and $1m in 10 days.

Overseas activities

As well as its domestic operations, Vneshtorgbank is developing quite an extensive overseas franchise that will be boosted still further when the Russian central bank sells it the London-based Moscow Narodny Bank and the Paris-based Eurobank. There are already overseas holdings in Europe – in Austria, Cyprus, Luxembourg and Germany – and the aim is to have these holdings supervised as a group under regulation of the Financial Services Authority in London. The Russian government will provide the bank with new capital to replace its deposits that are being withdrawn.

“We would like to create something substantial in western Europe. We want to go beyond the borders of Russia to provide stable growth for our bank,” says Mr Kostin.

Vneshtorgbank also has operations in Ukraine, Georgia and Armenia as part of its strategy to develop a transaction network across the Commonwealth of Independent States. With such ambitious expansion plans, capital raising has been a key part of Vneshtorgbank’s strategy.

On the debt side, in February Vneshtorgbank became the first Russian bank to make a public issue of subordinated debt with a $750m Lower Tier 2 deal in the form of 10-year non-call 5 notes at 222 basis points over mid-swaps with Barclays Capital (featured as The Banker’s team of the month in April), Deutsche Bank, HSBC and JPMorgan as joint bookrunners.


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