Not content with its stranglehold on the Russian retail banking market, Sberbank now aims to dominate every aspect of the digital life of consumers in its home market.
A new three-year strategy, launched in December, envisages the extension of the state-controlled bank’s reach into non-financial sectors, from education and healthcare to analytics and cybersecurity – a business model the bank’s management is calling B2C2B2G (the G stands for government).
For the moment, however, the priority is e-commerce.
Undeterred by previous setbacks in the sector, including a failure to buy local player Ozon last autumn, Sberbank’s management has once again set its sights on a leading position in this underpenetrated and fast-growing market.
“The pandemic gave a huge push for e-commerce penetration, so we believe it’s a great segment to be in,” says Alexandra Buriko, who took over as CFO in July.
The pandemic gave a huge push for e-commerce penetration
Sberbank’s new target is to be number three in the sector by 2023, by which time it expects the total market to have grown to R4 trillion ($53.4 billion) and annual growth to be running at 20% to 30%. Within 10 years, it aims to be the market leader.
Buriko says Sberbank’s advanced tech capabilities and huge client base – the bank boasts 98 million customers, or more than 80% of Russian adults – will give it a competitive advantage in the e-commerce space.
“We also believe that the efforts we’re putting into non-financial business will be complementary to our financial business,” she adds.
“What we’ve seen so far is that higher penetration of non-financial products into our customer base translates very well into growth rates for our financial services.”
Indeed, Sberbank reports better cross-selling rates for clients onboarded via non-financial services than from traditional banking products. On the corporate side, it expects every third client to come initially from the non-financial segment.
Branch network
E-commerce development also offers an opportunity to leverage Sberbank’s extensive branch network, which still comprises around 14,000 outlets even after big cuts in the early 2010s. Proposals for further reductions proved politically unpalatable, provoking vigorous opposition from regional governors.
“Our physical network is the only place where we can see our clients and explain our products and services to them, so we believe that it will be very useful as we grow our non-financial services ecosystem,” says Buriko.
“And, of course, when clients come to pick up or drop off deliveries, we can use this opportunity to upsell our financial services.”
On the financial side, Sberbank is also targeting further expansion of its already extensive ecosystem, with a ramping up of its retail brokerage and life insurance offerings planned for this year.
The bank’s scale, however, limits its growth potential – under the new strategy, management’s modest target is to maintain its current financial services market share through to 2023.
By contrast, growth projections on the non-financial side are aggressive. Overall revenues from non-financial services are projected to reach 5% of the total by 2023, from less than 1% last year, on the back of tenfold growth in key segments including e-commerce, healthcare and digital education.
On the question of when this will translate into returns, Buriko is cautious.
“On the B2C side, we are of course not talking about net profit in 2021,” she says. “However, we do look very attentively at unit economy and we will ensure that this turns positive within six to 12 months from launch of a new product or location, and we expect that they will be breakeven by 2023.”
The key message right now is that [Sberbank] will be active
Sberbank in December reduced its three-year return on equity target to 17% from 20% in the previous strategy period. Analysts note, however, that this will be primarily driven by plummeting base rates in Russia, which are expected to knock 100 basis points off the bank’s net interest margin by 2023.
Elena Tsareva, senior banking analyst at BCS Global Markets, says: “Sberbank’s ecosystem development plans will contribute to higher-than-inflation operating-expenses growth and put some pressure on their profit and loss over the next three years, but the lower return on equity target is more about the expectation that margins will be thinner.”
More broadly, Sberbank’s new strategy met with cautious approval from analysts in Moscow.
“Their ecosystem ambitions make sense,” says Andrey Mikhailov, financial institutions analyst at Sova Capital.
“They plan to spend around R220 billion on this over the next three years, on our estimates, which might seem big but is not that material for Sberbank. In return, they will get the option to succeed, plus they might achieve their ambition of getting the market to value them at the sum of their parts.”
Natalia Berezina, a senior equity analyst at Uralsib, also notes that failure to pursue ecosystem development could leave Sberbank at a disadvantage.
“If they don’t do it now, then someone else will, and in several years’ time they could be lagging,” she says.
Buriko confirms that this is a factor behind the bank’s strategy.
“Tech companies and e-commerce players are moving very fast into our area and starting to bring some financial services into their ecosystem, so we also need to be playing on a broader field,” she says.
Implementation
The key question this year for markets will be how Sberbank starts to implement its plans, particularly in the e-commerce space.
Management has signalled a shift away from the previous strategy of pursuing joint ventures, such as the tie-up with Russian online giant Yandex, which fell apart within two years of its launch in July 2017.
The split between the two was finalized in June, with Yandex taking full control of a joint marketplace venture and Sberbank getting the digital wallet part of the project.
Relations with another joint venture partner, Mail.ru, have remained more cordial. The initiative resulted in the development of ride-hailing and food delivery services – Delivery Club and Citymobil – as well as an e-commerce grocery platform, SberMarket.
In line with the new policy of control, Sberbank in December announced plans to acquire a majority stake in the latter.
The next step will be to fill in the gaps in the group’s offering.
“We have already built some of the infrastructure for e-commerce,” says Buriko. “The key challenge for us this year will be piecing it all together and completing it with a non-food platform that already has a number of merchants onboarded. For that we are considering M&A amongst other options.”
Reports suggest that a potential target could be M.Video-Eldorado Group, which includes Russia’s largest electronic retailer – online and offline – as well as the Goods.Ru marketplace.
Failing an acquisition, Sberbank could fall back on building from scratch – an option Sova Capital’s Mikhailov describes as “quite aggressive”.
“It will be hard for them to gain critical mass because the Russian market is extremely competitive – although given their size and ambitions, this is not impossible,” he says.
Berezina at Uralsib also notes that the failure of a planned tie-up between Yandex and Tinkoff Bank announced last autumn will give Sberbank more room to manoeuvre.
“If the acquisition of Tinkoff by Yandex had gone through, the combined entity would have been more of a challenge to Sberbank’s ecosystem ambitions,” she says. “They will likely be more comfortable with their plans now this has fallen apart.”
Whether Sberbank will achieve the range of ambitious targets for e-commerce and ecosystem development laid out last month remains to be seen. Mikhailov argues that the focus should be on the bank’s intentions rather than the numbers.
“On the ecosystem front, the key message right now is that they will be active,” he says.
“The formal goals and targets presented at the investor day are less meaningful than their resolve to continue to expand in this space, to gain market share, to launch anything that can be launched and to buy any big players that are available at reasonable valuation.”
