Banks, whether in developed or emerging markets, tend to be wary of lending to the elderly. Some will reluctantly extend credit to a privileged few, but for most, the main purpose of pensioners is to serve as a reliable source of deposits.
A notable exception to the rule is Sovcombank. Today one of the largest and most profitable privately owned banks in Russia, it owed its initial success to a readiness to provide consumer finance to the country’s underbanked senior citizens.
Founded in late 1990 in the small town of Bui, 450 kilometres northeast of Moscow, Sovcombank began life as a tiny local lender with only one outlet.
In 2001, it was bought by a 23-year-old lawyer, Sergey Khotimskiy, in partnership with his brother Dmitry, an investment manager who had made his fortune in the meat and dairy sector. The pair’s original intention was to move the bank to Moscow, obtain a general banking licence, and sell for a quick profit.
That plan fell by the wayside as the Khotimskiy brothers became increasingly interested in the business of banking. Instead of Moscow, Sovcombank’s headquarters were moved to Kostroma, one of the historic Golden Ring towns outside the capital, and the lender began expanding in the surrounding region.
Initially, the focus was on providing credit to small and medium-sized businesses, but by 2007 the bank’s shareholders had come to the conclusion that consumer finance offered better returns.
The only problem was that the segment was already overcrowded. Rather than go head-to-head with established players such as Russian Standard Bank, Home Credit Bank and Orient Express Bank, the Khotimskiys decided to look for areas less well served by their larger competitors.
We can take decisions more quickly, there is direct access to senior management of the bank and in general the bureaucracy is lower- Sergey Khotimskiy
The first was older borrowers, a demographic generally shunned by retail lenders due to the heightened risk of illness or death.
For Sovcombank, however, it proved a hugely rewarding market. Chief executive Dmitry Gusev, who joined the bank from Deloitte in 2007 at the start of its retail venture, says pensioners have several advantages over younger borrowers.
“They take a much more serious approach to taking out a loan,” he says. “They don’t just see a smartphone and decide they have to have it. They think carefully about their purchases and they are more disciplined about repayments.”
He also notes that while income levels in the segment are relatively low, they have increased steadily over the last 15 years – “especially during electoral cycles”.
“Pensioners also have a reliable source of income,” he adds.
Sovcombank’s other innovation was to set up shop in towns that were too small to have attracted the attention of big banking and consumer finance players. To make this financially viable, however, costs had to be pared to the bone.
The bank’s answer was to roll out what Gusev calls “mini-offices”.
“Basically it was just a desk, a chair, cash-in and cash-out machines, and one full-time employee,” he says.
These outlets were tiny – usually occupying just seven square metres – but numerous.
“We never opened one or two offices in a region where we began working,” says Gusev. “We would always come in with plenty.”
To kickstart its retail expansion plan, Sovcombank also bought a pair of consumer finance players with operations across Siberia and the far east – Arka Finance and Regional Capital Bank in 2007 and 2009 respectively.
As the Russian banking market rebounded after the financial crisis, however, the focus was on aggressive organic growth. In just four years, Sovcombank’s asset base jumped from R34 billion ($520 million) to R125 billion, while its physical network nearly trebled in size to cover 732 towns.
A timely warning from the Russian central bank of the risks of a monoline business model helped to focus minds, but there were also internal reasons for the move.
“Our capital base was growing rapidly, and sticking exclusively to the retail sector limited our opportunities for growth,” says Gusev.
The decision was taken to transform Sovcombank into a full-service universal bank. The first tangible results of this new strategy came in February 2014, when the lender won the bidding to buy the Russian operation of General Electric.
While also a consumer lender, GE Money Bank Russia had a different customer base and geographical footprint to Sovcombank. It also gave its new owner access to an advanced technological platform, as well as valuable expertise in areas such as risk management and underwriting, and a strong capital base.
On the back of this acquisition, Sovcombank expanded its retail product range and began to roll it out across its extended network, which now covered more than 900 towns and cities across Russia.
Adding collateralized retail lending to the bank’s product offering was a particular priority, according to Gusev.
“The maturity of collateralized loans is longer than for unsecured loans, which allows us to create a longer-term relationship with clients,” he says.
Again, Sovcombank’s shareholders preferred to buy market share and expertise rather than try to build it up organically; thanks to the bank’s impressive profitability, they were able to take their pick of the banking assets that came up for sale in the wake of the 2014/15 Russia crisis.
In 2016, they bought Metcombank, the country’s largest privately owned auto lender, from Severstal parent Severgroup, and added auto loans to Sovcombank’s retail offering. Then in January of the following year they acquired the Russian mortgage portfolio and lending team of Nordea Bank.
Meanwhile, Sovcombank had also branched out into lending to large corporates. This brought the bank into direct competition with some of the biggest players in the Russian banking sector, but founder Sergey Khotimskiy, who is still on the management board as deputy chief executive with responsibility for strategy, says the size of the market was sufficient to allow for new entrants.
“It’s true that everyone is chasing the same corporate clients, but there are a lot of them,” he says. “We work with the 500 biggest companies in Russia.”
He also notes that the changes in the Russian banking market after the imposition of western sanctions and the collapse of the oil price in 2014 worked to the advantage of local lenders.
“Foreign banks decided they didn’t want exposure to Russia and the state-owned banks weren’t able to service the needs of all the other businesses in the country, so there were huge opportunities for the private banks and we made the most of them,” he says.
The competition was thinned out again last year when three of the largest Russian private banks – Otkritie, B&N Bank and Promsvyazbank – were bailed out and nationalized. As the three came under state control, a number of their corporate clients went looking for alternative banking arrangements.
“There will always be some clients who prefer private-sector banks,” says Khotimskiy. “We can take decisions more quickly, there is direct access to senior management of the bank and in general the bureaucracy is lower.”
On the corporate side, Sovcombank’s growth has been mainly organic – although it did buy the Moscow subsidiary of Turkey’s Garanti Bank in 2016, which gave it a foothold among international corporates and financial institutions operating in Russia.
In the SME segment, the bank’s shareholders have been more acquisitive. In March 2015, they bought ICICI Bank Eurasia from its Indian owners and rebranded it as Modern Commercial Innovation Bank. The lender was then integrated with Fintender.ru, an online platform set up by Sovcombank in 2014 to provide guarantees and other services to small and medium-sized businesses looking to participate in public procurement processes.
The acquisition in 2016 of online procurement marketplace RTS-Tender further expanded Fintender’s offering and helped to make it Russia’s most prolific provider of guarantees for state procurement.
“We issue every third guarantee in the country every day,” says Khotimskiy.
Sovcombank is now investing in a range of cutting-edge technologies, including blockchain, AI and big data, with the aim of developing Fintender into a “procurement ecosystem” for SMEs.
The bank was wary of direct lending to the segment, however.
“To create a healthy SME lending business, you need years of experience, good statistical knowledge and very careful execution. Lots of banks in Russia have failed in this area and only a few have been successful.”
At the same time, Sovcombank’s owners were well aware that, to fulfil their universal banking ambitions, they needed a presence in the segment. Once again, their solution was to use some of their comfortable capital cushion to buy an established player.
The chosen target was Rosevrobank, a mid-sized Moscow-based bank with international shareholders, solid financials and nearly two decades’ experience in SME lending.
Sovcombank took an initial minority stake in the bank in 2015 and gradually built up its holding over the next three years. The acquisition was completed in August and the decision was taken to merge the two banks.
The merger, which is due to be completed by the end of this year, will boost Sovcombank’s total assets to more than R1 trillion, making it the third-largest privately owned lender in Russia – behind Alfabank and Credit Bank of Moscow – and the 11th largest overall.
As well as rounding out Sovcombank’s coverage, Gusev says the move will open up new avenues for growth.
“Rosevrobank has never been very strong in retail, so this will give us an opportunity to develop payroll projects,” he says. “It will also hugely expand the distribution of Rosevrobank’s SME products.”
The merger was well received by analysts and rating agencies. Moody’s said the banks’ business models “complement each other well”, while Fitch upgraded Sovcombank to BB in August, citing its “more balanced business mix and improved funding profile resulting from the acquisition of Rosevrobank”.
Rosevrobank has a stronger deposit base than Sovcombank, which has traditionally relied on interbank repo transactions for a substantial chunk of its funding. In terms of asset quality and profitability, however, the banks are well matched.
Sovcombank’s return on equity over the last three years has been stellar, topping 50% in several quarters thanks to gains on large holdings of high-quality corporate and sub-sovereign bonds, which until this year accounted for around half the bank’s assets.
Even without these mark-to-market gains, however, Sovcombank’s ROE from core operations has come in at more than 30% since 2010. Rosevrobank’s profitability has been slightly weaker at around 20% but equally consistent.
Gusev says 25% is a “realistic” target for the merged banks in the medium term.
The two lenders also outperform their peers on asset quality. Rosevrobank’s non-performing loan ratio stood at just 1.5% at the end of June, while Sovcombank’s was also well below the sector average at 2.4%.
Despite its recent diversification drive, however, Sovcombank has maintained the core elements of its original business model. Older borrowers still make up more than half of consumer loans and the lender has so far been able to defend its leadership in the segment, despite increasing competition from rivals.
“Originally other banks thought we were insane to be targeting this market,” says Sergey Khotimskiy. “They soon realized that this was actually quite a good category of clients and many of them began working in the same direction, but by that time we already had the first-mover advantage.”
He admits, however, that Pochta Bank, a lender launched in 2016 by VTB in partnership with Russia’s post office, could give Sovcombank a run for its money in the segment.
“That’s another reason we wanted to diversify,” he says.
The other element of its original strategy that Sovcombank has retained is its focus on geographical expansion. Over the last five years the bank has more than doubled the size of its network to more than 2,200 outlets across Russia, making it the third-largest lender by physical presence after state-controlled firms Sberbank and VTB.
Perhaps surprisingly, at a time when other lenders, including Sberbank, are rationalizing their network and focusing on digital banking, Khotimskiy says Sovcombank plans to continue its bricks-and-mortar – or rather table-and-chair – expansion.
“Received wisdom today is that the traditional banking format based on a large physical network is out of date,” he says. “We don’t agree. Our mini-offices are extremely efficient, and with new technology we can now provide them with 24-hour support no matter where they are, enabling them to sell products of any level of complexity.”
Khotimskiy also notes that, given the nature of Sovcombank’s retail client base, positioning the lender as a rival to Russian digital leaders such as Tinkoff Bank would be counterproductive.
“That doesn’t mean we don’t invest in new technologies, but we believe it’s better to acquire the ones that have proved most efficient rather than trying to create them ourselves,” he says. “By our estimates, maybe one in 10 new financial technologies will add value, so we want to be selective.”
As to investing in more bank acquisitions, Gusev says for the moment Sovcombank will likely take a break. Instead, the focus in the coming months will be on preparing for the bank’s debut on the public equity markets.
Originally mooted in 2016, plans for an IPO were put on hold while the merger with Rosevrobank was finalized. With that nearing completion, the Khotimskiys have indicated that a listing could happen in the first half of next year and raise up to $300 million.
Gusev – who holds a 7% stake in the bank – says an IPO has always been on the agenda.
“We believe that a good privately owned bank has to be publicly listed,” he says.
As part of the pre-IPO process, Sovcombank has already added several large international investors to its shareholder base. In July, it announced plans to raise more than $100 million of new equity from the Russia-China Investment Fund (RCIF), Japan’s SBI Holdings and several sovereign wealth funds.
By mid October, the participation of Saudi Arabia’s Public Investment Fund and the Qatar Investment Authority had been confirmed. Details of the rest of the investor group, which will consist of partners of the state-controlled Russian Direct Investment Fund, were expected by the end of the month.
As well as positioning Sovcombank for a public listing, Gusev says the move will open up new opportunities for the lender – particularly through the tie-up with RCIF, which is seen as a key part of China’s Belt and Road outreach in Russia.
“There are a lot of projects in the works between Russia and China and this will give us access to that process,” he says. “It will help us to build relationships in the Chinese market, as well as in other international markets.”