Sberbank adds sparkle to somnolent banking sector

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By:
Elliot Wilson
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Russia’s state-owned bank is forging ahead with market-share gains in Kazakhstan as local competitors fail to make a comeback from the financial crisis. And Sberbank’s success seems to presage a broader Russian resurgence that might counter Chinese influence.

Shukhrat Sadyrov bounds through the doors of Almaty’s InterContinental Hotel with a grin a mile wide. At first, his jollity – and the speed and exuberance with which he speaks – is confusing. This, after all, is Kazakhstan, a country whose banking sector suffered a series of near-mortal spasms at the hands of the financial crisis.

Even now, bankers here are wary of sounding positive about the future. Most conversations involve a modicum of tentative hope mixed with big dollops of despair, self-recrimination and thinly disguised prayer. It’s like coaxing an entire industry through AA’s 12-step programme.

For Sadyrov, though, life is good, as he explains almost gleefully over a generous hotel breakfast. His employer isn’t a troubled Kazakh bank, such as BTA or Alliance Bank, or a troubled and retrenching western lender. It’s Sberbank, the Kremlin-controlled lender with global aspirations and seemingly limitless financial backing.

Shukhrat Sadyrov, Sberbank's  deputy chief executive
Shukhrat Sadyrov, Sberbank's  deputy chief executive
Russia’s leading state-owned bank didn’t have a presence in Kazakhstan before 2007, until it bought local minnow Texakabank. Since then, its rise has been stunning. In 2009, it was the country’s 10th-largest lender by total deposits, and 14th by assets. By the end of 2011, according to Kazakhstan’s financial regulator AFN, those numbers had jumped to sixth and seventh respectively (and higher if one disregards restructured lenders BTA and Alliance).

Yet Sberbank, promises Sadyrov, its Kazakhstan deputy chief executive, is just getting started. "Our official strategy is to hit 5% market share in terms of total assets [at end-2011, its share was 3.8%] by 2015, but I think we will easily achieve the target earlier, probably by the end of 2013 or just after. We could have 7%, even 8%, of the market by 2015. In terms of deposits we are already past the 5% mark."

Sadyrov warms to his theme. Sberbank’s branches will grow by 70 this year, to 120, and by a further 80 by end-2015. It is now the preferred banking partner of 17 big Kazakh firms, he says – and this isn’t a market where there are many billion-dollar corporates to go around.

"We have got to the point where the big customers have started coming to us," Sadyrov says – a point underlined by a $2 billion loan extended in February by Sberbank to Kazakh resources company ENRC. That loan was a blow in particular for Citi, which assumed it had that slice of business in the bag.

Why has Sberbank risen so far, so fast? The answer to that depends on whom you ask. To Sadyrov, Sberbank is merely harder-working and more nimble than its peers in Kazakhstan, whether they are local or western-owned. It is able to evaluate a customer rapidly then make a quick-fire decision about whether to extend credit or finance expansion.

"We take responsibility; we help the customer quickly," he says. "If you want to meet me, it takes five minutes. Meeting top management at Kazakh banks takes much longer. Our decision-making is very quick. Many local banks don’t like taking risks – they’d rather be average."

He adds: "In our book, you are either up or you’re out – that’s our model. Our CEO [Sberbank Kazakhstan chief executive Alex Smirnov] is very focused on feedback. If customers say the IT system is crap, he will find out and tell us. He’s not sitting on the top floor on a golden toilet."

And for sure, Sberbank has grabbed its chance here with both hands, making clever and timely moves.

After buying Texakabank, it rebranded itself Sberbank Kazakhstan and began touting its local flavour, focusing on disaffected local retail customers and an underserved corporate sector: mid-sized engineering firms, often sub-contractors, doing the dirty drilling and extraction work on behalf of global miners and energy majors.

Then came the financial crisis. It was a troubling period for everyone, Sberbank included, but it was downright disastrous for the Kazakh banking industry, which suffered a collective nervous breakdown, with BTA at the heart of the country’s financial darkness.

Many European lenders also retrenched, wholly or partly: Société Générale sold its booming consumer finance division, ProstoKredit, to Eurasian Bank; RBS sold its retail division to HSBC; UniCredit remains desperate to unwind its position in troubled ATF Bank.

Through all the chaos, Sberbank quietly moved up several gears. It opened shiny new green-hued branches, promoting itself as an investment-grade bank with, in Moscow, an investment-grade backer. "We are big," ran its implicit strapline. "Unlike your bank in Kazakhstan, we can’t fail."

Sberbank's market position against Kazakhstan's peers* 
market share by assets (%)
Source: AFN, Kazakhstan's Financial Supervisory Authority

As well as being big and fast, the bank offered its loans cheap. While interest rates on loans at stressed Kazakh lenders rarely started below 11%, Sberbank would regularly advance capital at rates as low as 9%. Sadyrov disputes this view of his bank’s strategy, saying that merely competing on price would be "a lose-lose for us – our rates aren’t as low as competitors claim".

But clients of the Russian bank, and foreign and Kazakh banking peers, interviewed in Almaty, vouch for Sberbank’s seemingly excessive generosity. "They are using their financial strength, to buy a position in Kazakhstan," says the chief executive of a foreign bank with a big presence in the local market. "To be fair to them, it’s working."

There is also a sense here in Central Asia’s largest economy that the Russians are coming – again. You see it on billboards promoting Sberbank and state-owned rival VTB Bank, along with Russian Standard Vodka and the mobile network Beeline, both owned or controlled by Muscovite oligarchs. And you hear it in bars and cafés, where agents of leading Kremlin billionaires troll quietly for cheap mining and energy assets.

It can hardly be happenstance that Sberbank’s rise has coincided with this Russian revival. Officials in the capital, Astana, are spooked by China’s increasing clout: Beijing controls and consumes around a third of the country’s oil output. Casting around for a way to counteract their acquisitive eastern neighbour, Kazakh leaders have settled on handing more power to their old nemesis from the north, Moscow.

Hence the long-delayed signing in early 2012 of a common economic zone linking Kazakhstan with Russia and Belarus, allowing money, workers and capital goods to cross the vast Russo-Kazakh border visa- and tariff-free.

"This [new zone] will lead to the integration of Russian banks in Kazakhstan," says Sadyrov, who echoes the view of many when he says this renewed push by Moscow into Central Asia is seen as the precursor to a new era of global expansionism by Kremlin-linked capital and corporates.

"If you can’t deal with your neighbours, how can you deal with people from across the street?" he asks. "Kazakhstan is seen as a core Russian market, with strong cultural and language links. The roots of the economy and basics of the economy are roughly the same. This is the natural backyard of Russian banks, in the same way that Central and Eastern Europe was the next natural stop for [western] European banks."

Guran Andronikashvili, chairman of local mid-sized lender Metrocombank, a Georgian who has worked in London and New York with JPMorgan Chase, says: "Russian banks have been very aggressive in terms of gaining clients. It’s about market-share gain, not profitability, for them."

Not all Russian banks with a presence in Kazakhstan have succeeded. Alfa Bank opened its doors in 1994 and has done precious little since. It mans just five branches (most of them in heavy-mining and oil-drilling regions), with no outlets at all in Almaty. VTB ranks outside the top-20 Kazakh banks according to AFN, although its corporate-lending-heavy Kazakh loanbook expanded by 48.5% in 2011, suggesting that it is on the same track as Sberbank.

Sberbank’s central overlords clearly like what they see in Kazakhstan. The lender posted local net profit of KT7.7 billion ($52 million) for the full year 2011, more than double the total generated by HSBC, its nearest foreign rival. It will open its first private-banking outlet in Kazakhstan in late 2012 in Almaty, with plans for a second branch in Astana slated for 2013.

This success seems to have prompted Sberbank to promote the Russian-born Smirnov, who is being recalled from Kazakhstan in June and placed in charge of 1,700 outlets in the greater Moscow region.

Sadyrov, who is widely tipped to replace Smirnov (although he politely declines to comment on the pending job vacancy), professes himself surprised at the speed with which Sberbank has carved itself a strong, if not yet dominant, position in Central Asia, bypassing several larger Kazakh banks en route.

To be sure, the local banking sector was thrown into confusion, first by the troubles at BTA and other banks, then by the government’s cackhanded efforts at limiting the fallout (the more they splashed around, the wetter everyone got). But perhaps more damaging was the inability of relatively robust Kazakh lenders to recover from the crisis and move on.

Sadyrov highlights the case of Halyk (People’s) Bank, probably the country’s healthiest lender in the post-BTA era, and with the best medium-term prospects. Halyk is very profitable – it posted earnings of KT36.4 billion in 2011, more than three times as much as second-placed Kaspi Bank, and has become the leading lender by deposits, with KT584 billion at March 1.

Yet it still trails rival Kazkommertzbank (KKB) by market share of total assets and gross loans. And while new net lending by Sberbank grew by 279% in the 24 months to end-2011, faster than any other lender, Halyk’s loan book grew by just 8%, ranking it 11th nationwide.

Top 15 Kazakh banks
By net profit
Source: AFN, Kazakhstan's Financial Supervisory Authority

"Halyk has better resources than us," says Sadyrov. "They could have 30% of the market. Why aren’t they fighting for every loan? Why aren’t they more active in retail [lending]? Five million customers take salaries from them every week, so they have these huge points of touch with customers. Yet they have created their own artificial goldfish bowl that keeps them smaller than they have to be."

Until recently, most Kazakh lenders dismissed the threat of a new Russian influx. This failure to recognize a genuine competitive threat was caused in part by existential concerns (notably the financial crisis) but also by local lethargy.

Kazakh banks had become accustomed to fighting with each other over local scraps, while foreign lenders (Citi, HSBC) focused on providing premium banking to foreign multinationals and wealthy individuals. Before they knew it, Sberbank was not just banging on the door demanding admittance, but was sat in the drawing room, drinking Scotch by a roaring fire.

The question now is: what next? This is a question local officials must answer for themselves. Do they want a banking sector open to all, thriving as the Kazakh economy continues to recover, even if that means a key industry dominated by Russian interlopers?

Or do they want to change tack, promoting, with explicit government financial support, a small group of state banking champions? "Before long, officials [here] will be faced with these two choices," says a leading executive at a big local bank. "Don’t be surprised to see lobbying [for state support] start pretty soon, as a lot of [Kazakh] banks remain in a very bad state."

That latter choice might wind up being the only viable option. Many of Kazakhstan’s mid-sized lenders remain rudderless, lacking strategy or direction, while a handful of larger ones, notably BTA, are essentially insolvent. Even the more fiscally sound lenders remain plodding and stodgy. Halyk is tipped by Jason Hurwitz, an analyst at Alfa Bank in Moscow, to grow its loan book by 11% this year, compared with growth of just 2% at KKB.

In a March 14 note, Hurwitz notes that the "slower growth of the largest [local] banks allowed other banks to pick up market share, notably Sberbank Kazakhstan".

Russia’s leading state lender, then, is committed to being an important long-term player in Kazakhstan. Sadyrov says Sberbank can become "one of the biggest banks in Kazakhstan – though not the biggest".

Then he stops and catches himself, grins, and adds a biter: "But if shareholders decide [we should be market leaders], we would execute that plan."

Little wonder that Kazakh and foreign rivals are starting to fret. Or that Sadyrov’s grin is a mile wide. His conversation is peppered with plenty of such upbeat optimism. It’s still enough of a rare sight here: a banker with a reason to feel cheerful in an industry still in remission.