Russia’s banking sector is hot and investors are circling, hoping to get a piece of the triple-digit growth that the best banks are putting in. However, the growth is uneven and the sector’s assets did not increase at all if taken as a proportion of GDP. All the gains are being made by a handful of niche players and a few stand-alone banks among the biggest two-dozen.
“The banking sector indicators remain weak. The bigger banks are growing very fast, while the overall size of the banking sector has not grown compared with the overall economic growth. It suggests that banking sector assets are becoming more concentrated at the top,” says Alfa-Bank chief economist Nataliya Orlova.
The average assets of Russia’s banking sector increased by about a third last year – keeping pace with the growth in money supply – and the top 30 banks are starting to look very appealing to strategic and private investors.
Russia’s first foreign acquisitions took place in the summer of 2004 but Austrian bank Raiffeisen International’s decision to pay $400m for Impex bank at the start of February changed the rules of the game. While the previous deals involved small niche players, Raiffeisen has bought a top 20 bank and one of the fastest growing retail operations in Russia. The deal has cemented Raiffeisen’s position as leading foreign bank in the market. And valued at three times book value, Impex was cheaper than the four times book that Russian owners have been demanding in the previous deals, although still a third more than central European banks go for.
The rising valuations are also attracting private equity investors ahead of a rising tide of banking initial public offerings (IPOs). Sberbank is the only liquid bank stock on the market and its market capitalisation rose from almost $10bn last year to $30bn by the start of this year.
Investors are desperate to get more exposure to the financial sector but finding a toehold is hard. The lobbies of Moscow’s best hotels are full of investors chatting up small, but fast-growing banks that they are hoping to buy a minority stake in before the IPO wave breaks next year. Russia specialist fund East Capital went a step further last year, raising a $350m investment fund specifically targeting the banking sector, although experts say it will struggle to place so much money.
IPOs on the cards
Rosbank will be the first to take the IPO route this summer and at least four others, Vneshtorgbank, Gazprombank, Uniastrum and St Petersburg International, have announced plans for IPOs in 2007. Several more are expected to announce IPO plans this year.
Rising valuations are only half the story. Russia’s banks typically lag 18 months behind the industrial economy, where the first big IPOs took place last spring. However, bank owners are under pressure to tap new sources of cash because rapidly rising assets are reducing their capital adequacy. A tougher-talking Central Bank of Russia (CBR) has made it clear that it will close any bank whose capital falls below the norms.
“Everyone needs capital now because the market is growing so fast. At this pace, by 2009 the capital of Russian banks will start to fall under the 10% capital adequacy threshold imposed by the central bank,” says Ms Orlova.
Bank development has also had a push from the Kremlin, which is desperate to encourage economic diversification and has made financial sector reform a priority. Although the Kremlin continues to build up its ‘national champions’ – it gave state-owned Vneshtorgbank (VTB) a $1.2bn capital injection to buy the CBR’s foreign subsidiaries in December – it is happy to see the smaller banks sold off. At the end of January, the CBR eased rules covering foreign ownership: foreign banks are now free to buy up to 10% of Russian banks without asking the CBR’s permission, up from only 1%.
The change of heart even extends to the state-owned banks and characterises the Kremlin’s public-private partnership approach to running the economy. Although there are no plans to sell off more of Sberbank, about 20% of VTB will be sold early next year. VTB’s IPO will mark a watershed for Russia’s banks but an IPO is not the only way forward for Russia’s fast-growing banks. Here we look at the different strategies of four of Russia’s most dynamic banks.
SIBACADEMBANK
Businessmen used to say there were two Russias: Moscow and the rest of the country. Money and political power are still concentrated in the capital but business has been moving out to the regions. Sibacadembank (SAB) is the first regional bank to burst onto the national scene since the 1998 financial crisis.
SAB is headquartered in Novosibirsk in the mineral-rich west Siberian region. It is the end product of a series of mergers by the bank’s owner Igor Kim. SAB’s assets trebled in the past year to reach $1.1bn by January, while profits rose from $43m to just over $100m between January and December 2005.
Mr Kim dominates the banking business beyond the Ural mountains that define Europe’s eastern-most border. A trained mathematician of Korean extraction (former premier Josef Stalin deported most Koreans living in Russia’s far east to Siberia in the 1930s), Mr Kim started in banking as a shareholder in the Rossisky Narodny Bank (Russian People’s Bank) in 1994.
In the same year, Rossisky Narodny was made an ‘authorised’ bank of the Western Siberian Railway Company giving it the authority to handle the company’s budget, and it flourished. Three years later, the owners of a struggling SAB went to Mr Kim for help. The two banks were merged just before the August 17, 1998, double whammy of government default on its debt and rouble devaluation.
“It was the first merger between two banks east of the Urals and the start of a period of fast growth for us,” says Ilia Mitelman, who runs SAB’s Moscow office. “The crisis was a blessing. We had no exposure to the GKO [state treasury bills] and no retail operations. There was a flood of economic refugees from other banks brought low by the crisis.”
In the following four years, Mr Kim’s banks grew fast and he bought into others in Siberia and Russia’s far east, of which UralVneshtorgbank (UVTB) is the biggest.
Retail strategy
SAB was quick to spot the potential of retail banking. Its two-year head start in the Russian market has made it second only to Sberbank in the retail business east of the Urals, with 1.3m customers; household deposits now account for about half the bank’s assets.
“The retail operations quickly lifted our bank into the top 50 banks in terms of private deposits and consumer credits as well as one of the leading issuers of plastic cards,” says Ms Mitelman.
With a solid base in Siberia, the bank launched the second plank of its growth strategy in 2002: integration with the international financial markets.
As Siberia remains about as far from anywhere else in the world as it is possible to be, Ms Mitelman travelled to Moscow to open a representative office and start talks with the European Bank for Reconstruction and Development (EBRD). SAB was quickly admitted to the EBRD’s small and medium-sized enterprise (SME) loans programme and then graduated to the trade finance support scheme until finally the EBRD bought a 25% stake in SAB in 2004.
“The EBRD participation was a key event in our history and lay the groundwork for a very successful 2005,” says Ms Mitelman. “This year should be just as good and after the consolidation with UVTB, we will move into the top 30 of Russia’s banks by assets.”
UNIASTRUM
Uniastrum bank is another niche player that was virtually unknown until a few months ago. The bank made headlines in January when it announced it had hired the UK’s former Chancellor of the Exchequer Norman Lamont as chairman of its supervisory board. IPO fever is gripping Russia’s banking sector, but Uniastrum is growing so fast that it plans a double IPO at the start of next year.
Founded in 1994, Uniastrum is Russia’s 81st largest bank in terms of assets but ranks in the top 20 in terms of the number of branches. Its main business lines are retail banking, catering to Russia SMEs and money transfers operated under the ‘Unistream’ brand.
Retail banking is booming but money transfer has taken on a life of its own. Uniastrum’s owners decided to split Unistream off last year after the volumes rose from $260m in 2004 to $750m in 2005 and show no sign of slowing down.
“The spin-off of Unistream into a separate bank will boost investment in our rapidly growing money transfer business. Unistream’s turnover is growing by 300-350% a year. Expansion of our branch network requires significant investment. Earlier we could do without external investment. But the booming growth of our retail business gave us the idea of going public,” says Uniastrum chairman Georgy Piskov.
Mr Lamont was brought on board after the main shareholders, Mr Piskov and Uniastrum president Gagik Zakaryan, invited him to speak at a conference they organised in the UK last year on the international money transfer business. Russia’s blistering economic growth has sucked in millions of gastarbeiters (illegal immigrant workers) from across the Commonwealth of Independent States – and increasingly from further afield – who sent between $3bn and $6bn home last year, according to experts. And, with Russia’s population losing nearly a million people a year because of high death rates and low birth rates, promoting immigration has just become official policy.
The Russia-CIS money transfer corridor is the latest addition to a global business worth $250bn last year, according to a recent World Bank report. Most of the cash flows from Russia’s biggest cities to the capitals of Kiev, Yerevan, Dushanbe, Tashkent and Baku. But more recently immigrants are arriving from Vietnam, Korea, Mongolia, India and China – by some estimates a third of the population in Russia’s far east is now Chinese.
Unistream already operates 115 offices and is in the process of opening branches in Cyprus, UK and the US. Counting in Unistream’s partner banks and financial companies, it has a total of 22,000 outlets in 80 countries.
One of the most active corridors outside Russia is Los Angeles-Yerevan: the three million-strong Armenian émigré population in Hollywood sends tens of millions of dollars home every year. Unistream has also targeted other countries with large Russian émigré populations, such as Germany, Ukraine and Israel.
The IPOs will run simultaneously in Moscow and London. Uniastrum will offer 25% of its shares and hopes to raise at least $100m. Unistream will place 25% of the bank in 2007 and hopes to raise about $30m.
“We will IPO because we need to raise capital for our expansion, but we are also interested in increasing our transparency because of the international nature of our business. It is a simple business and it can’t be operated in the shadows,” says Unistream CEO Hayriyan Souren.
NOMOS-BANK
Both SAB and Uniastrum have come to the fore by exploiting well-defined niches that have been largely ignored until recently, but Nomos-Bank has grown fast by simply doing what it has always done, but concentrating on doing it really well.
Being a huge dinosaur was a definite advantage when all Russia’s banks were scrapping over the country’s blue chips. However, as economic prosperity spreads to medium-sized companies and beyond the raw material extraction business, the table has been turned and being a nimble second-tier bank has turned into a competitive advantage.
Nomos-Bank’s profit doubled to more than Rbs1bn ($35m) in 2005, deposits on personal accounts increased four-fold to reach Rbs16bn ($571m) and corporate deposits were up more than five-fold to Rbs5.6bn ($200m), according to Russian accounting standards.
“The high rates of growth in the bank sector are to be expected,” says Andrew Gaek, vice-president of Nomos. “Following the 1998 crisis, banks had a lot of problems and were slow to recover. Now they are catching up with the rest of the economy.” He says that high oil prices are contributing to the growth, but oil has a limited impact because most of the windfall profits from high oil prices have accrued to the government.
| Andrew Gaek: everything to play for in retail |
Russia’s leading banks’ entry to international capital markets last year has been far more important, but Mr Gaek says that building up the bank’s reputation is the key to success in an increasingly “normal” market.
Nomos raised a $120m two-year syndicated loan recently that was guaranteed by the bank’s gold export operations. That follows an $80m one-year syndicated loan in August, bringing the total syndications it has raised since 2001 to $428m. “The top 20 banks have spent a lot of time establishing their name to give them access to international capital markets, but Western money is not the cheapest resource on the markets. Now there is lots of money on the domestic market, which can be cheaper,” says Mr Gaek.
Seeking diversification
Nomos-Bank is traditionally associated with the metals trade and continues to be a big player on the precious metals market, but it has been trying to diversify. It has targeted a swathe of sectors, seeking out the fastest growing companies in each. It specialises in medium-sized companies in emerging industries, such as food processors, agricultural companies and transport, but its specialities remain gold mines, energy and heavy machinery producers.
“Western banks were afraid of companies below the top tier, where margins are bigger. There are a lot of good companies of medium size that already have international audits, international accounts and transparent shareholdings,” says Mr Gaek.
Like most of Russia’s banks, Nomos is getting into retail but has a long way to go. The bank opened its 12th branch in Omsk in January but retail deposits still only account for 1% of assets and 6% of liabilities. However, Mr Gaek says that because three quarters of Russians still have no bank account, there is still everything to play for.
PROMSTROYBANK
Like Nomos, Promstroybank (PSB) was one of Russia’s fastest growing banks last year but, unlike Nomos, it grew fast by bucking most of the trends in the market. Retail banking is all the rage but PSB has been cherry picking among the retail products, and household deposits make up only 3% of its assets. While many other medium-sized banks have been aligning themselves with industrial groups to recreate the financial-industrial groups of the 1990s, PSB has diversified so that no one sector accounts for more than 15% of its loan portfolio.
As many of its peers are getting ready to IPO, PSB chairman Alexander Levkovsky remains very sceptical of the benefits from public ownership.
The bank was founded in 1994 and originally worked closely with the telecoms sector (Russia’s long distance operator Rostelecom still has a 1% stake in the bank), but PSB has made a virtue of its lack of ties to industry and has been trying to make itself the most universal of the universal banks.
“Oil and gas is the locomotive of the Russian economy but we are not catering to this sector,” says Mr Levkovsky. “However, our clients have had injections of money from these sectors.
It has been a very successful strategy. The bank’s capital almost doubled last year, making it Russia’s fastest growing bank and catapulted it into the top 12 biggest banks by assets. It is well capitalised and looks forward to continued strong growth in 2006 with trade finance as a mainstay of its business. Its assets nearly doubled last year to Rbs111.1bn, while capital grew to Rbs10.6bn and it cleared a net profit of Rbs1.1bn.
Like many of its peers, PSB has put a lot of effort into building up its reputation to tap international capital markets. It has already organised several syndicated loans and offered the second of two Eurobonds in September to raise $200m. Mr Levkovsky says that, taken altogether, the bank has used its reputation to tap international markets for between $1bn and $1.5bn in syndications, export credit agency guarantees and other forms of international lending in recent years. “Access to this international money is a huge competitive advantage because this sort of financing is not available to all banks – not even all Russia’s big banks have access because you need a long history of transparency and partnership.”
Tough competition
Competition in the Russian market is already strong and most of Russia’s leading banks are looking for ways to extend their reach. A few, like Impex, have chosen to sell to foreign strategic players and many more will bring in foreign partners through an IPO, while most of the leading banks are setting up branches in places like Kazakhstan, Kiev, Cyprus, London and New York.
However, in a typical trend-bucking move, PSB’s owners, the Ananyev brothers, chose to go their own way: the bank sold a 7.7% stake to Slovenia’s Ljublanska Banka last year, one of the biggest banks in central Europe with which PSB has been working for years.
Mr Levkovsky is very wary of the imminent IPO wave. “I can see a lot of dangers in the IPO process. One is the entry of less than reputable investors into the bank’s ownership, which opens up the possibility of greenmail and there are still a lot of holes in the legislation,” he says. “Increasing the capital of the bank is one reason to do an IPO, but I think bankers should think 100 times before floating their shares.”
