A SUPPLEMENT TO EUROMONEY/APRIL 1999: EASTERN EUROPE
Looking out of the boardroom of Conversbank, it is easy to forget that there is a banking crisis going on. The river Moskva flows below, half choked with ice, and the bank’s staff bustle about servicing the needs of their clients. It is business as usual. Well almost.
The financial crisis that swept through Russia last August has killed off such big players as Inkombank and crippled other leading banks such as Uneximbank, SBS Agro and Menatep. But medium-size banks such as Conversbank came through suffering little direct damage and have seen their business boom.
During the worst of the crisis deposits flooded out of the big banks: SBS Agro, Menatep and Rossiisky Kredit all lost between 10% and 20% of their deposits. The runs on these banks began as their liquidity evaporated. Confidence fell as payments failed to turn up.
The problem was that most of their accessible funds were tied up in state treasury bills, mostly GKOs, that were frozen by the central bank on August 17. At the time an estimated Rb35 billion ($5.8 billion at August 17 exchange rates) of GKOs were concentrated in the top 10 commercial banks, if Sberbank, which holds more than half of all GKOs, is excluded. By contrast the medium-size banks had minimal exposure (if any) to GKOs and forward contracts.
By August over two-thirds of Russian banks had less than 2% of their assets invested in treasury bills. These banks not only maintained their liquidity, but continued to make payments and allow their clients unfettered access to their accounts. As a result not only did they not experience runs but new customers were beating down their doors to open new accounts. An example is the International Moscow Bank (IMB), one of the largest medium-size banks and a primary dealer in GKOs. By the time of the crisis it had reduced its exposure to the minimum needed to satisfy the primary-dealership requirements and for liquidity management. It didn’t delay payments or freeze accounts and since August its client base has grown by one-third.
Queues to open accounts
Anri Amamchyan, Conversbank’s ebullient deputy chairman, has a similar story. He also boasts that not a single account was frozen, nor were restrictions placed on withdrawals from deposit accounts. Clients that had been using the bank in conjunction with other banks switched all their accounts to Conversbank and many others came through word of mouth. Queues formed outside the bank in the midst of the crisis to open new accounts.
“During the crisis we had an inflow of new customers and legal entities,” says Amamchyan. “Between August and October, 109 enterprises came to us to open accounts plus about 1,000 private individuals.” The biggest banks were living off their industrial holdings’ cashflows and handling budget funds. The medium-size banks made their living by doing more traditional banking.
Most of the successful medium-size banks were set up to cater to specific industries’ financial needs, mostly in export-oriented industries: Conversbank began life as banker to the nuclear power industry, the Joint Stock Company Bank served the diamond industry, and IMB was set up to finance hi-tech industries.
Moskovsky Delovoi Mir Bank is another example of a young bank that read the times right. MDM was set up in 1993 to capitalize on the fast-changing Russian economy. Initially it chased high-risk but high-return investments; two years ago it realized that it needed to diversify and started working with the metal and coal sectors.
The big banks never got round to diversifying. Uneximbank had more than 1,500 clients, but nearly half its loan portfolio was split between some 50 clients. Imperial Bank had 15 clients in total. Tying themselves so closely to big industrial groups made them vulnerable to external shocks. The collapse of oil prices last year was a major factor in triggering what turned into a systematic collapse of the big banks.
But not all the medium-size banks have done well. The strongest today have a significant proportion of export clients. Other banks guessed wrong. Toribank was an up-and-coming medium-size bank, and well run, but it specialized in clearing for other banks using GKOs as collateral. When the GKO market fell so did its business. Unibest specialized in derivatives. With a dead stock market there is not much to do and it has since been subsumed into Rosprombank.
Mosbusinessbank was also doing well and had a good reputation, but a large part of its business was with Gazprom. As the crisis hit, Gazprom transferred all its accounts to its subsidiary, Gazprombank, ruining several banks in the process, including Mosbusinessbank. These banks are among the “walking dead”, as Richard Hainsworth of Thomson BankWatch calls them.
But other zombie-like medium-size banks have found themselves necromancers. Sobinbank was also one of the better smaller banks, ranked 25th in July 1998 with assets of about Rb5 billion, and was actively building a retail business before the crisis. The run on the banks hurt it badly but by January 1 1999 it had shot up the rankings to become the fourth-biggest bank in Russia by equity. It was also named earlier this year as one of five banks to distribute some Rb7 billion of state agricultural money to farmers. Its rags-to-riches climb in the rankings has more to do with its ownership than any special business skills. Its shareholder list reads like a who’s who of bad banks: Imperial (now bust), Rossiisky Kredit, MDM, National Reserve Bank and SBS Agro (now Soyuz Bank).
The so-called oligarch banks have not only set up new banks into which they have poured their liquid assets, they have also made use of what were subsidiary – but largely independently run – medium-size banks. Nezavisimost was a medium-size bank that was making a decent living. It managed to restructure a $24m syndicated loan following the crisis but has since been absorbed by Unexim’s new shell, Rosbank, and jumped from nowhere straight into the ratings as the 18th largest Russian bank. And Lanta Bank has been the recipient of much of Inkombank’s liquid assets.
What will happen next to the aspirant medium-size banks? Will they be able to capitalize on their competitive advantage of being solvent and liquid to become the new leaders in the market?
Amamchyan says that Conversbank’s strategy is simply “to be a bank. The big difference between us and the likes of Uneximbank is that we are a bank and they never were”. Conversbank was the first bank in Russia to sign a restructuring deal and has already paid back half of a $24 million syndicated loan.
Five groups of banks will be fighting it out for domination of the Russian financial sector. The oligarch banks are down but not out for the count. If they are successful in dumping their liabilities and transferring their best assets and accounts to their new structures, these will remain powerful, if smaller than their predecessors. Of the oligarchs, both Alfa Bank and Most Bank escaped the worst of the direct damage caused by the devaluation and subsequent moratorium, thanks to their small exposure to GKOs and forwards.
Most Bank has kept all its many media accounts through its membership of the Media Most financial-industrial group and is mulling a merger with Bank Moscow, now one of Russia’s strongest banks. Alfa is capitalizing on its advantages as fast as it can. “We are doing a lot more retail and corporate business,” says Maxim Shashenkov, head of sales and trading. “Companies now only have a choice of us, Bank of Moscow, National Reserve Bank (NBR) or the state bank. Our highest priority is to open as many retail branches as we can afford. Then we are working as an investment bank, looking at strategic growth. Things are slow now but we expect them to pick up in a year or so. We are ready to leap forward when the Russian market allows it.”
Although not strictly speaking an oligarch bank, Gazprombank is also going to be a tough competitor. At the centre of a huge financial-industrial group it now handles all Gazprom’s business.
Another group that has done well is the regional banks. AK Bars, the bank of Tatarstan, had climbed from 35th by assets into the top 10 by December. Others such as Bashkreditbank (Ufa) and Chelinbank (Chelyabinsk) have also done well. “The strong banks in the well-managed regions will become institutions in their own right,” says Thomson BankWatch’s Hainsworth. “The regional banks have fared better than the banks in Moscow; whether this is by dint of their being in the regions or because they are simply smaller is a moot point.” Too small to have much exposure to GKOs and forwards, they suffered little direct damage last August. Their advantage over the medium-size commercial banks is their access to local budget funds. For example, Bashkredit ranked fifth in the list of all banks handling budget funds by the end of last year, in charge of Rb1343 million, which made up more than a third of its liabilities.
Moscow is a winner
The strongest regional grouping is Moscow, led by Bank of Moscow, the only real winner from the crisis. With the active support of Moscow mayor Yuri Luzhkov, the banks in this group – Diamat, Vozrozhdeniye, Guta-Bank, Unikombank, Promradtekhbank, Mosstroiekonombank, Mosbiznesbank and some others – are also linked to what is now one of the most powerful financial-industrial groups, Sistema. Apart from strong political support, the Bank of Moscow’s main strength is also its access to budget funds. By December 1998 it was handling Rb2.7 billion (30% of the bank’s total liabilities), the most of all banks bar Sberbank (with handled Rb4 billion, 2% of its total liabilities). Government business has been the path to riches for Russian banks since 1991. Menatep’s boss, Mikhail Khodorkovsky, once said that “the only profitable business in Russia is politics”.
The primacy of government business also applies to the state-owned banks, which have all come out of the crisis in improved positions. Sberbank now controls nearly all retail business and Vneshtorgbank, the former Soviet Union’s foreign trade settlements bank, dominates foreign-trade business, having picked up many of the largest Russian corporation’s accounts. Both are going to be difficult to dislodge.
The foreign banks are also going after the accounts of the biggest and best Russian companies. For the most part foreign banks followed their multinational clients to Russia, but they have always had their eye on the cream of Russian enterprises, which may one day become multinationals themselves. The central bank has recently relaxed the restrictions on foreign banks’ operations, and they have also enjoyed a big influx of new business. But as they are not particularly interested in competing with the domestic banks, analysts expect that many of their new accounts will leave again once the banking sector stabilizes.
Finally there are a few large stand-alone banks that have survived the crisis in fair shape and are battling on. Avtobank is the strongest of them. Although it was a big player on both sides of the forward game – it has forward contracts with non-residents of about $380 million – it is one of the best capitalized banks in Russia and is still fundamentally solvent, despite short-term
liquidity problems.
The medium-size banks are certainly in a strong competitive position. But growing in Russia at the moment is not going to be easy. “The economy is stagnating because of the crisis,” says Conversbank’s Amamchyan. “We have resources, the problem is what to do with them? There is no demand for money even if you were to offer the money at the lowest rates seen in Russia over the last 10 years. But we also can’t say to a client that we don’t want their money as they will go to another bank. So it makes life very difficult.”
There is a surplus of cash. Prices have not risen uniformly to meet the devalued rouble, tax bills were largely denominated in roubles and have not been revalued and 2% GDP growth has been turned into 4.6% decline, according to government figures. There is little in the way of investment and companies are slashing costs and laying off workers wherever they can. In short people don’t need to borrow money. Without a capital market, a stock market or growing businesses to which banks can lend money, the only option commercial banks have is to lend their spare cash to the central bank at whatever rate it dictates.
The mid-size banks are in a strong competitive position but have little business to compete for. They must wait for the government to resolve its differences with the IMF and formulate some sort of economic policy. Meanwhile Coversbank’s Amamchyan has little to do other than stare out of his window watching the ice in the Moskva melt. Many of his fellow bankers must be similarly underemployed.
Mid-size movers
Moskovsky Delovoi Mir Bank (MDM-Bank)
One of the best capitalized banks in Russia, both in dollar and rouble terms, MDM-Bank had assets of Rb84 billion ($3.6 billion) on December 1. “The president is one of the cleverest bankers in the country,” says Richard Hainsworth of Thomson Bank Watch, Moscow. A niche player before the crisis, the bank specialized in high-risk operations but had already begun to diversify operations well before the crash. Since the crisis the bank has been taking on new corporate clients, especially in the metal and coal businesses. it has taken on 700 new staff at a time when the rest of the sector has slashed staff by half and opened three new branches to accommodate new industrial clients.
International Bank Moscow
Set up in the 1980s as an experiment to establish joint ventures with foreigners in the high-tech industries International Bank Moscow quickly changed into a “plain vanilla bank” as the Finnish chairman Ilkka Salonen characterizes it. The bank is a consortium, more than two-thirds owned by foreign banks, including Merita (Finland), Japan Eximbank and Hypovereinsbank (Germany) and had assets of Rb21 billion ($880 million) on November 1 1998. The Russian stake is owned by Sberbank, Vneshtorgbank and Eurobank (based in Paris and owned by the Central Bank of Russia). Its main business is dealing with exporters. A primary dealer in GKOs, it had reduced its holdings by the time the moratorium was imposed. It also ran a forwards book, which was, “not small, but not as big as those of Inkom and Unexim banks,” says Salonen. Nevertheless it didn’t halt payments or place restrictions on clients during the crisis and since August has increased its clientele by a third.
Conversbank
Originally set up at the end of the 1980s by the Nuclear Power Ministry and 11 power enterprises, Conversbank has been independent of the ministry since the early 1990s. It had assets of Rb2.7 billion on November 1 1999. Its main clients are in the nuclear power sector, accounting for about two-thirds of its business. A second major source of income is trade finance. During the crisis the bank gained a significant number of new clients as it didn’t suffer from liquidity problems and was able to settle payments and cover withdrawals without restriction or delay.
Probusinessbank
Unusually for a Russian bank, Probusinessbank made money before the crisis with commercial loans. Even at the height of the GKO market it focused on corporate lending, which accounted for 70% of income of Rb170 million in 1997. Since the August crisis its customer base has quadrupled.
International Joint Stock Bank
International Joint Stock Bank has built up a strong business dealing with Russia’s diamond sector. Russia sells diamonds worth about $1 billion a year through De Beers. IJSB houses Russia’s principal diamond trading floor and a top-security depository. The bank held some GKOs but they were limited to “very insignificant sums” says Nadezhda Ardatova, vice-president.
The bank had assets of Rb1.04 billion on December 1. With good liquidity and no payment problems during the crisis, the bank picked up new custom throughout the crisis and subsequently.
