MORIBUND FOR A year, Russia's banking reform began to move again by the end of 2003. It is being driven more by rising competition as bankers scramble to get a piece of the burgeoning retail business than anything the government has done.
The ball started rolling in December after the Federation Council, the upper house of parliament, finally signed off on the laws that underpin the deposit insurance scheme, the cornerstone of the Central Bank of Russia's (CBR) reforms.
Andrei Kozlov, the CBR first deputy in charge of banking sector regulation, said that the first contributions to the fund, which will eventually insure depositor's accounts against a bank's failure, will be paid in this year. The CBR has still not decided who will be eligible to join the scheme.
All banks applying for the scheme will have to undergo stringent inspections and any bank that is excluded will automatically lose its right to take retail deposits.
Consumer lending is the fastest-growing bank businesses. Only 11% of Russians have ever taken out a loan, according to Alfa Bank's deputy CEO Oleg Tumanov, and every bank with retail aspirations has piled into this potentially lucrative business.
Alfa Bank was first off the mark, launching a network of Alfa Express retail outlets that take advantage of recently relaxed CBR rules governing branches.
Renaissance Capital is the latest to announce its entry into consumer loans and plans to buy a small bank this spring for the purpose. Insurance company Rosgosstrakh and investment bank Troika Dialog teamed up to establish a mortgage bank with $40 million capitalization. But even the biggest commercial bank's retail branch network is still counted in the hundreds, against Sberbank's 67,000 branches.
The deposit insurance scheme should weaken Sberbank's dominance over the retail sector and reformers won a key concession – Sberbank enjoys an explicit 100% guarantee on its deposits that expires in 2007, although it will pay contributions into a separate insurance fund until then. Commercial banks are already eating into its market share, which analysts say could fall to 40% in two years.
Fear of banks
Russians have lost their life savings at least twice in the past decade, but strong economic growth and a promise of stability from president Vladimir Putin means they are finally getting over their fear of banks.
Corporate deposits reached a plateau in 2001, but household deposits continue to soar and are streaking ahead of economic growth and growth in money supply.
Total deposits were up 46% by December 2003 year on year to $160 billion. Sberbank's deposits grew at 27% over the same period; its market share fell from more than three-quarters of all deposits at its peak in 2002 to 64% at the end of last year.
"Retail deposits in commercial banks have been rising over the last four years. However, that increase usually tracks the increase in money supply – the more roubles the CBR prints the more deposits rise," says Richard Hainsworth, CEO of RusRatings, a bank rating agency. "The difference now is that deposits are rising twice as fast as money supply."
As confidence builds, household and corporate customers are moving out of Sberbank, attracted by better interest rates and vastly better service elsewhere.
Sberbank's share of corporate deposits fell from 18.2% in 2002 to 7.9% of the total corporate funds on deposit in 2003, while the commercial banks are aggressively targeting the growing middle class.
The arrival of ordinary Russians in banks has ousted the handful of oligarch-controlled raw material producers that dominated the banking sector.
Consumer loans and mortgages grew by 60% over the first eight months of last year, pioneered by domestic specialist Russky Standard in 2000. Consumer credits rose from about $20 billion in 2000 to $250 billion by the end of last year.
"This type of lending is rising very fast, but the retail business in Russia is still right at the very beginning of its development," Hainsworth says.
The boom in retail and household deposits has encouraged banks to allocate more resources to meet the rising demand and even Sberbank, traditionally uninterested in consumer credit, nearly doubled its allocation to retail loans to 11.3% of its loan portfolio by the middle of last year.
This rising competition, especially in the retail sector, is making life more difficult for the banks. Return on capital is expected to fall from 18% in 2003 to 15% this year, which is on a par with other central and eastern European countries.
Competition has already depressed interest levels on credits to enterprises. Loans to enterprises earned one to two percentage points less at the end of last year from over 8% a year before and 25% in 1999, as risk premiums fell thanks to lengthening credit histories.
To counter falling spreads, commercial banks are hunting for business among the 8,000 medium-size businesses with about $100 million turnover.
The days of easy money from big industrial corporations are over. Banks have replaced this business with equity and debt trading, which accounted for half net income last year, according to S&P. This year bankers will have to turn to high-volume, lower-margin credits for income.
"In other countries retail accounts contribute 50% to 60% of a bank's earnings. In Russia the banks have not been concentrating on attracting assets but only liabilities," says Vladimir Rashevsky, chairman of MDM Bank, one of Russia's top two commercial banks. "Now there is a kind of experiment going on. There are no statistics on [consumer credit] default rates and enforcement is not effective. Retail will never be as profitable as working with the big corporations but competition means this business will have to be developed."
Russia's banks have made a lot of progress, helped by sparkling macroeconomic results over the past two years, but they will need help from the CBR if they are to keep up the pace. Despite conditions in which banks can flourish they are still not playing the role of financial intermediaries.
Banks' capital has been growing by about a third a year as confidence in the banking system returns, and the economy is roaring ahead by just under 7% a year. But banks' loans continue to account for only 4% to 5% of all invested capital.