Russia: Big brother helps little brother

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By:
Guy Norton
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Government support has prevented a systemic run on the banks, but funds are not getting through.

Consolidation in Russian banking is finally taking place, raising hopes that the system will be able to effectively meet the demands of the real economy.

"The message from the authorities is that they are ready to support consolidation in the banking sector," says Dimitri Kryukov, managing partner at Russian fund manager Kazimir Partners, adding: "Right now every bank is struggling."

Despite the authorities in the Kremlin having pledged Rb3 trillion ($108.5 billion) or so to prop up the banking system, market participants say that it will take time before the measures take effect.

"The liquidity issue in the inter-bank market has still not been resolved – the government money has not filtered down yet," says Steven Meehan, chief executive of UBS in Russia.

Johann Jonach, Alfa Banking Group

"The government has made the right decisions very fast and given an impressive level of support for the banking system, but implementation has been slower than hoped for"

Johann Jonach, Alfa Banking Group

Johann Jonach, recently appointed chief executive of Alfa Banking Group, the leading Russian privately owned financial services provider, agrees. "The government has made the right decisions very fast and given an impressive level of support for the banking system, but implementation has been slower than hoped for."

Although a growing number of small banks have had to be rescued by their bigger brethren, banking analysts believe that the moves by the government have been sufficient to avoid a systemic run on deposits. "We think that the measures should help to avert a countrywide bank run even given further bank failures," says Rustam Botashev, banking analyst at UniCredit Aton.

Russia is facing a potentially harsh economic winter but Jonach at Alfa Bank says that while smaller banks may be falling by the wayside as the global credit quake claims a growing number of victims in Russian banking, Alfa is looking to use the turmoil to cement its position as the leading private sector banking player in Russia.

In its latest move, Alfa bought a controlling stake in Severnaya Kasna, a regional bank headquartered in Yekaterinburg in the Urals federal district. Jonach says that the acquisition forms part of Alfa’s strategy of expanding its presence in economically active regions throughout Russia. "Severnaya Kasna had a good regional footprint in the Urals but faced a run on deposits after a smear campaign claimed it was in trouble," says Jonach. "Our due diligence revealed that it had been well managed." Jonach says that Alfa continues to monitor the banking markets with a view to further potential acquisitions.

On a day-to-day operational level Jonach says that 2009 will be a challenging year. "We don’t expect any quick improvement in market conditions. We think 2009 will not be any easier than the second half of 2008 has been." As such Alfa is looking to bolster its asset base rather than increase its liabilities in 2009. "We don’t expect any major growth on the lending side of the business, we will be focusing on deposit growth."

In terms of funding prospects, Jonach claims that on the back of its reputation for creditworthiness – Alfa was the only Russian bank to repay its Eurobond debt in full and on time after the August 1998 financial crisis in Russia – the bank could still raise funds internationally but says that at present it is more cost-effective to source money locally. "Alfa is the clear market leader among the privately owned banks in Russia and enjoys significant liquidity support from both the finance ministry and central bank in Russia," he says.

Alfa Bank’s position as the biggest privately owned Russian bank could come under threat in the future though if a proposed merger between MDM-Bank and Ursa Bank comes to fruition. In December 2008, Sergei Popov and Igor Kim, the owners of MDM-Bank and Ursa Bank, initiated discussions about a union that would create a bank with a network of more than 500 outlets – the third-largest in the country – a pro-forma asset base of Rb530 billion and capital of Rb71 billion, second only to Alfa Bank.

The merger has received a warm welcome, with Dmitry Vinogradov, head of strategy at UBS in Moscow, noting: "The merger makes a lot of business sense – in this environment the bigger you are, the better as its gives you enhanced access to capital through government programmes." He adds that the business models of the two banks are also mutually compatible, with Moscow-headquartered MDM Bank boasting a strong corporate banking franchise in European Russia, while Novosibirsk-headquartered Ursa Bank is a big retail-banking player in the Urals, Siberia and the Russian Far East.

Peter Grishin, fixed-income research analyst at Renaissance Capital in Moscow, says that the planned merger is a triumph for Ursa’s owner, Igor Kim. "I think Kim is a banking genius who has done a great job of turning Ursa into a major retail banking player in Russia."

UralSib, another example of a regional-turned-national banking player, will also consider acquisitions in the coming year. It is seeking to raise about Rb17.5 billion of capital through a series of transactions including a planned Rb5.5 billion share issue in the second quarter. As well as providing a buffer against a potential rise in bad loans, the money will be used to expand further in the regions, such as Tatarstan and the Russian Far East, as well as centres such as Moscow and St Petersburg.

In addition to the share issue, UralSib hopes to receive Rb6 billion of subordinated loans from state development bank VEB. It has already raised a similar amount from private investors in order to finance its expansion plans.