Consumer finance growth in Russia is expected to slow after the introduction of central bank curbs on over-indebtedness, forcing its leading banks to look for new ways to target retail borrowers.
At Sovcombank, one of the country’s largest private sector lenders, chief executive Dmitry Gusev sees opportunities in offering equity release loans to its core low- to middle-income customer base.
“The big Russian retail players – the state-controlled banks and Alfa-Bank – don’t bother with this product, because it’s relatively new and they’re busy enough with classical mortgages,” he says.
“For us, however, it’s a very interesting niche. It allows us to offer our customers lower rates and longer maturities than consumer loans, and the margins are higher than for traditional mortgages.”
Sovcombank has a track record of finding lucrative untapped niches in the crowded Russian banking market.
Today a universal bank with a balance sheet of just under RUB1 trillion, Sovcombank’s initial success in the late 2000s and early 2010s was built on providing unsecured credit to older retail customers, a demographic largely overlooked by other Russian lenders.
The bank began to diversify in 2013, just ahead of the bursting of Russia’s post-financial crisis consumer finance bubble. In 2016, it moved into collateralized lending with the purchase of auto finance specialist Metcombank, and the following year bought the Russian mortgage portfolio of Nordea Bank.
Secured lending now accounts for two-thirds of the bank’s retail portfolio and is at the heart of its expansion strategy.
As well as equity release loans, Gusev believes Sovcombank can hold its own against larger players in traditional mortgages thanks to its nationwide network of “mini offices” – tiny outlets with a one or two full-time employees.
“We are present in every city and more than 1,000 towns across Russia, which gives us access to a market of more than 100 million people,” he says. “That gives us a competitive advantage even over the big state-owned banks.”
Sovcombank has not abandoned its consumer finance roots, but unsecured lending currently equates to just 8% of total assets.
“Strategically, we don’t want to grow that part of the portfolio,” says Gusev. “We expect a slowdown in the segment due to the initiatives of the central bank and also rising cost of risk.”
Fears of downturn
Rapid growth in consumer lending and over-indebtedness in Russia during the past two years have sparked fears of another sharp downturn in the segment. Gusev echoes these concerns.
“It’s not a healthy situation,” he says. “Consumer lending is a very cyclical business, so there will inevitably be a crisis at some point, and there are clear signs that it could be sooner rather than later.
“Fortunately, we have limited exposure to the segment and can easily reallocate equity to it, so we are very well-prepared.”
Meanwhile, Sovcombank is working to tackle over-indebtedness through financial education.
“We operate in remote regions, with low- to middle-income customers, and with older people, so it’s critical our clients have a clear understanding of what their borrowing decisions will mean for them,” says Gusev.
This fits with the bank’s wider efforts to position itself as a leader in environmental, social and governance (ESG). It was the only Russian bank to sign up in September to the principles for responsible banking, an initiative launched by the UN Environment Programme Finance Initiative.
Participants are committed to strategically align their businesses with the Sustainable Development Goals and the Paris Agreement on climate change. Gusev says Sovcombank already has a pipeline of projects in sectors including renewable energy, waste management, and energy-efficient technologies.
The main challenge was to explain why we are different from those that failed- Dmitry Gusev, Sovcombank
The bank also plans to be one of the first issuers of domestic rouble debt under the Moscow Exchange’s new sustainable bond framework. It is targeting a pilot issue of RUB500 million for a water supply modernization programme in one of Russia’s single-industry towns.
The deal will mark a second bond market debut for Sovcombank this year, after its inaugural Eurobond issue on September 30.
The $300 million subordinated bond priced a week after the lender received ratings upgrades from Moody’s, Standard & Poor’s and Fitch. It is now the second-highest rated Russian-owned private sector lender after Alfa-Bank.
As Gusev notes, this means Sovcombank’s standalone rating is higher than that of some state-controlled Russian banks, which are supported by their ownership and systemic status.
It is the largest lender in Russia not counted as systemic by the central bank, although rapidly catching up with the three subsidiaries of foreign banks – Raiffeisen, UniCredit and Societe Generale – on the list after the integration last year of Rosevrobank.
The bank has also expanded its shareholder structure during the past 18 months, attracting investment from a consortium of sovereign wealth and public sector funds as part of a pre-IPO funding round.
Gusev says one of the main drivers of the Eurobond issue was to create a relationship with investors ahead of a public market listing.
“We wanted to start building a track record in the market,” he says.
The deal attracted strong demand, although Gusev says Sovcombank had to overcome initial investor scepticism sparked by the spectacular failure in 2017 of three of Russia’s largest privately owned banks – Otkritie, B&N Bank, Promsvyazbank.
“The main challenge was to explain why we are different from those that failed,” he says. “But that’s fairly easy, because all the problems of the failed banks came from corporate loan books full of related party lending and real estate development, which we don’t have.
“Our corporate book is small, and the vast majority of our business is retail, which is simple to analyze. It’s just a question of statistics.”
For the moment, however, IPO plans are on hold.
“Our new shareholders expect us to go public and we want to go public, but investors are still very negative on financial institutions,” says Gusev. “Most European banks are trading below book value. So, we don’t think this would be good timing.”