Russian banks: Joining up the dots

TO SAY THAT the modern Russian banking industry has had a chequered history ranks as a gross understatement. In the freewheeling early 1990s the Bank of Russia seemingly handed out licences like confetti with the result that the country boasted – if that’s the right word – more than 3,000 banks, more than five times the number in the whole of western Europe. To the casual observer it looked as if the only qualifications needed to hold a banking licence were the ability to sign your name and the money to pay the registration fee. ‘No previous experience required’ could have been the appropriate tagline in any advertisement for a bank employee. Given the benefit of 20/20 hindsight it now looks obvious that such a slipshod system would only end in tears, as indeed it did in August 1998, when the Russian government’s finances collapsed and eviscerated the capital bases of many of the country’s banks. Fear and loathing seems an appropriate summation of the ordinary Russian’s view of the country’s banking system at that point. That was unsurprising given that millions had lost their life savings in the banking collapse that swept across the country.

Almost a decade later the banking system is still not quite a picture of perfection but it has improved greatly, with much higher levels of competence across the whole sector resulting in much improved public confidence. The number of banks has now shrunk to a still large but more realistic 1,200, and the level of regulation by the Bank of Russia is also much stricter than before, with valiant – if not always successful – attempts being made to stamp out racketeering and money-laundering.

Given that Moscow and – to a lesser, albeit growing extent – St Petersburg still bulk large as centres of economic and political power it’s not surprising that many banks, especially foreign ones, are still heavily concentrated in those two metropolitan centres. "Most foreign banks feel they can handle Moscow," says Florian Fenner, managing partner at UFG Asset Management in Moscow, adding that it’s a different story outside the capital, which is why regional banks are becoming prime takeover targets for those foreign banks looking to establish a presence in the rest of Russia. "International banks like to buy regional banks in Russia for their local knowledge and expertise and as a platform to expand into other parts of the country," he says. Fenner remains convinced that regional banks in Russia are still attractive M&A targets. "Takeover multiples in future may be lower on the back of the reduced availability of leveraged finance, but Russia still remains a prime hunting ground for foreign banks."

"There’s still plenty of potential in Moscow. You still see long lines of people in many branches" Johann Jonach, Raiffeisenbank

A Russian regional banking play needn’t necessarily mean going into the far reaches of the country. One of Fenner’s favourite banking stock picks is Vozrozhdeniye Bank, which has a strong franchise in the Moscow region. "Drive around Moscow and you’ll see lots of Citibank branches all over the city for example, but go beyond the outer ring road and you won’t see a single one." Vozrozhdeniye Bank’s competitive advantage beyond strong representation in the Moscow region, says Fenner, is based on a simple proposition: "It’s a poor man’s bank that offers much better service than Sberbank."

Another widely respected regional play is Bank Zenit. It has a strong foothold in Tatarstan, which is growing fast on the back of oil prices, says Fenner. As a result of its strong franchise in its home region, Zenit has been able to expand beyond Tatarstan through organic growth and acquisitions to cover St Petersburg, Kemerovo, Kursk, Nizhny Novgorod, Rostov-on-Don, Chelyabinsk and Samara. Most recently it bought an 85% stake in Sochigazprombank from Gazprombank. Bank Zenit is looking to launch an initial public offering in the coming months.

Richard Hainsworth, founder of Rus Ratings, a Moscow-based independent ratings agency, says that the Conversbank group is one to watch. Although headquartered in Moscow the group has built a strong portfolio of banks in the Baltic republics and Russia, including Latvijas Krajbanka in Latvia and Bankas Snoras in Lithuania, and in Russia it has Investbank in Kaliningrad, Bank Gran in Yekaterinburg, Bank Enisay in Krasnoyarsk and VoronegPromBank in Voronezh, all up and coming economic centres of the country. It also boasts a UK arm following the acquisition of Pointon York Bank, which has been renamed Conversbank (UK).

Successful regional banks in Russia seem universally based on simple selling propositions. Vasily Vysokov, chairman of Bank Center-Invest, the leading private sector player in southern Russia, believes that quality of service is a key differentiator in an increasingly competitive banking marketplace. "At Center-Invest branches our bank tellers smile at our customers – you wouldn’t get that at Sberbank," says Vysokov, adding that at Center-Invest customers get to sit down while bank staff run around for them, rather than the other way around at a more classical Russian banks.

Igor Kim, chairman of Ursa Bank, one of the leading banks in Siberia and the Urals, takes a similar view of the importance of responsive front-office staff. "We have a young, goal-oriented team of workers with an average age of just 26," he says. Sberbank in contrast has inherited Soviet-era personnel who are older, less enthusiastic and less motivated, he says. "Sberbank faces a very serious challenge in that it needs to do a large-scale rotation of staff," says Kim. He says that Ursa’s young team helped the bank to triple profits in 2006. A further doubling of profits is expected in 2007.