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Losing ground but not heart

Growing competition and the countdown to losing its state guarantee on retail deposits are two challenges that Russia’s giant Sberbank faces. But as chairman Andrei Kazmin tells Ben Aris, he isn’t panicking.
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Sberbank is still a tower that dominates Russia’s retail banking sector, but it is slowly losing market share to its commercial bank competitors and with the key deposit insurance law now in place, its chairman Andrei Kazmin is expecting it to lose more.

Sberbank has 500 times more branches than the second-biggest retail bank in Russia, 1st OVK, but just over half of these are in impoverished rural areas where none of the other banks would dream of establishing a branch.

The state-owned bank has closed down some 16,000 unprofitable branches over the past few years in an effort to cut its burgeoning costs and rationalise a service that it provides to three out of four Russian citizens.

Remote banking

The number of branches has fallen from a peak of more than 35,000 to just over 20,000 now, but only 8% of these are in the 13 biggest cities and another 38% are in small towns. The rest are in the depths of the countryside, where the local branch may open only one day a week or the remotest settlements are visited by a Sberbank truck that doles out money to account holders.

“The rural branches are very costly and we continue to optimise our presence there,” says Mr Kazmin. “There is some money in these regions and it is possible to earn a profit but the profitability of these branches is very low. But we can’t close these branches down as our main shareholder [the government] would not be happy. Nevertheless, Sberbank opens about 200 new offices in big cities a year and closes the same number in rural areas.”

Mr Kazmin says that the bank doesn’t enjoy a monopoly in the big cities. Russia has 13 cities of more than a million residents, where competition for the emerging middle class is already fierce. The commercial banks are happy to leave the countryside to Sberbank and what Mr Kazmin calls the “social mission” of providing basic banking services to the bulk of the population. Instead, they are targeting the big urban centres, the middle class and the growing layer of rich businessmen who are demanding private banking services.

VIP services

Not to be outdone, Sberbank is also offering VIP services to these clients through special departments at 30 of its regional banking headquarters, which allow customers to invest into shares or buy pension funds, among other services. “We have created a new packet of services for clients as we are interested in more diversified clients than just relying on our traditional customer base. Each of the branches has a personal manager that can cater to the interests of these clients,” says Mr Kazmin.

Sberbank’s competitive advantage in catering to the limited number of well-off customers is its solid reputation and neutral image since most of the commercial groups are linked to one Russian industrial group or other.

However, Sberbank is slowly losing ground to the commercial banks and has seen its retail deposit market share fall steadily over the last years.

“Our falling retail deposit market share brings no disappointment as we had an enormously high share after the [1998 financial] crisis. Sberbank was the only bank that survived without governmental support, unlike the private banks,” says Mr Kazmin. “Our retail deposit market share has fallen from 85% then to about 64% now, while other market shares of Sberbank have been increasing.”

All the banks are sharing out pieces of a growing pie. Although Sberbank’s market share is falling slowly the amount of roubles it is taking in across the counter is growing strongly. Sberbank is sustaining and strengthening in all other segments of the market.

Mr Kazmin says confidence in Russia’s banking system has returned. Russians who have held somewhere between $40bn and $80bn in hard currency stuffed under their mattresses for most of the past 13 years are beginning to deposit it in banks, where it can earn interest.

“In 2002, wages grew by 9% but savings [in Sberbank’s deposit accounts] grew by 40%,” says Mr Kazmin. “And our share of the market is decreasing so the amount of mattress money going into the commercial banks is probably even higher. We have nothing against this, since it helps to optimise our costs. We deliberately reduce our interest in short-term deposits at the same time as accumulating long-term private monies.”

With bank deposits rising across the board by about 60% last year as interest rates continued to fall (state securities are now earning negative real interest rates), the problem all the banks are facing is finding things to do with the incoming capital, says Mr Kazmin. “Mattress money is coming into the banks faster than it is possible to allocate it.”

Sberbank has been expanding its credit portfolio both to absorb this flood of funds and to diversify its risks. Last year the bank collected additionally over Rb350bn ($11.6bn) in both corporate and private deposits but extended additionally over Rb285bn of credits (at the end of 2003, the bank had total liabilities from corporate and private household deposits of more than Rb1315bn).

Of these loans, just over half of all new credits issued were to small and medium-sized enterprises, which accounted for a tenth of the total credits in money terms. And Sberbank’s consumer credits portfolio has grown 30-fold since the economy started its ballistic recovery in 1999: the bank extended Rb123bn of consumer credits to 2.5 million customers in 2003, who now make up 12% of the bank’s credit portfolio from nearly nothing a few years ago. Market share of Sberbank in retail lending increased to 47%.

Most of the banking sector’s recovery has been driven by the frenetic economic activity that Russia has been enjoying, but at the end of last year the Duma passed into law the rules to underpin a deposit insurance scheme that is the cornerstone of the Central Bank of Russia’s reform efforts.

The new law’s most controversial feature is that Sberbank’s state guarantee on 100% of its retail deposits will end in 2007 (or if its market share falls below 50%, whichever comes first), which is designed to put all of Russia’s retail banks on an equal footing, ending the social mission of Sberbank.

“There are some weak points in the law and lots of possible dangers to the whole banking sector ahead, but I hope that the implementation of deposit insurance will contribute to the growth of the banking sector, and we are for the eventual elimination of Sberbank’s privileges,” says Mr Kazmin.

He is not anticipating a drastic change after the scheme’s implementation over the next year as no one is expecting Sberbank’s millions of depositors to break the habit of a lifetime and flood to the sparkling new branches that the commercial banks have been setting up.

Smooth transition

“The transition to deposit insurances must be done smoothly with no tremors. Is this possible if you immediately remove a guarantee on three-quarter of the population’s deposits?” asks Mr Kazmin. “In Germany they took 15 years to make a similar transition. We are going to do it in two.

“In a few years there will be no need to speculate about monopolies. We will remain strong in retail, as well as in all other segments of the banking market, despite very strong competition in other sectors. Our net profits exceed $1bn and our return on assets and return on equity are on the top of the European banking list.”

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