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The rise and rise of KIT

In just 18 months, Russian bank KIT Finance has become a major player, and it plans to get a lot bigger. By Ben Aris.
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Banks in the West are built on their conservative reputations and stolid approach to risk. In Russia’s fast-moving banking sector, it is the deal-makers that are leading the way.

KIT Finance is one of Russia’s up-and-coming second-tier banks that is moving into the mainstream by using its investment banking skills to woo the more sophisticated Russian retail clients.

For example, KIT is now the third-biggest player on the rapidly growing mortgage lending market almost by accident. It entered the market simply because the owners wanted assets to securitise.

Vice-president Sergei Grechishkin, who cut his teeth working at Morgan Stanley and JP Morgan, says: “We had already done some securitising of leasing products but mortgages was an obvious place to start.

“In 18 months we had built this up to be the third largest lender after VTB and Sberbank.”

The bank, initially known as Webinvest, was founded in St Petersburg in 1992. But it did not begin to flourish until it was bought by Alexander Vinokurov in 2001. He now owns 63%.

The bank was a pioneer among the Russian online brokerages, catering to the small but growing number of Russian day traders.

“We still have several thousand customers using the online brokerage and they are very active,” says Mr Grechishkin. “They buy or sell shares on average three times a day and have anything from a few thousand dollars in their portfolio to several million. Most make their living from trading.”

Lifted by the growth of the entire banking sector, Mr Vinokurov is now looking for ways to broaden the bank’s customer base and product range.

Rebranded as KIT Finance in 2005, the bank began to build up its retail and has reorganised into six divisions. It has always been strong in the capital markets and was a pioneer of Russian rouble-denominated bonds, organising some of Russia’s post-1998 crisis first municipal bond issues in 2001. But the newer divisions are targeting upmarket retail banking customers.

Finding solutions

Rather than concentrate on the more basic products of car loans and credit cards that most banks are targeting, Mr Grechishkin says that their “product factory” strives to “provide our customers with solutions that cater to their everyday financial needs”.

For example, the bank offers retail clients deposit accounts in three currencies (rouble, dollar and euro) as standard and customers can choose to link the interest rates on these accounts to, among other things, the performance on the Russian stock market or the price of oil – products that are almost unique in Russia.

KIT was also very early into the nascent asset management business, having rolled out 22 mutual funds (known as PIFs in Russian) in the past couple of years. The bank has already collected an impressive $1.3bn of funds, making it one of the biggest players on the market, although even this pales in comparison to Russia’s $1000bn total equity market capitalisations.

Although it is still early days for Russia’s mutual fund business, KIT is more interested in being in a prime position when the goods are shared out. Anticipating the increasing sophistication of the Russian domestic investors, KIT went into a 50-50 joint venture with the Dutch fund manager Fortis earlier this year.

“We used to run [the asset management] business on our own, but were looking for a partner,” says Mr Grechishkin. “Fortis was also looking for a partner and after we had both looked at several alternatives, we decided to go into business together. Asset management is a global business and Russians want to buy Merrill Lynch’s luxury index, while foreigners want exposure to Russia’s fast-growth story. It is a natural partnership.”

The bank has grown fast but next year will be KIT’s coming of age. Mr Vinokurov announced in October that KIT will seek an IPO in the third quarter of 2008 and hope to raise $1bn, including a $200m-$300m GDR programme.

The money will be used to finance organic growth or possibly buy a smaller retail bank.

“We plan to float in Russia and a [Global Depositary Receipt] issue on the London Stock Exchange,” Mr Vinokurov said at a press conference in October, adding that the bank’s owners were prepared for a scenario whereby investors could get more than 50% of KIT’s shares.

“We will probably float more than a blocking stake,” he adds. “The main thing here is to raise an amount sufficient for the bank’s further development.”

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