Analysts See Mergers in Store for Bank Sector

A fast-growing economy and looming competition from larger, stronger European banks will force a spate of mergers and acquisitions among Russia's 1,319 commercial banks, bankers and analysts said.

Russia's banking system is slowly rebuilding -- helped by overall economic recovery -- after it was pushed to ruin by the 1998 crisis.

Analysts and bankers say the needs of a growing economy and the threat of stronger competitors, if Russia's bid to join the World Trade Organization is successful, will force a wholesale cleanup of the fragmented, inefficient sector.

"It is obvious that a trend has formed toward a decreasing number of banks ... and one way this happens is through bank acquisitions," said Vladimir Rashevsky, CEO of MDM Bank, one of Russia's largest commercial banks.

Few of Russia's banks -- state-owned Sberbank is an exception -- have the ability to supply credit in the volumes major industrial players will need if the economy grows strongly this year -- and they risk becoming irrelevant.

"At this point, they already cannot meet financing demands of larger Russian corporations," said Alexander Korchagin, chief analyst at the Prospekt brokerage and among those predicting mergers over the next three to five years. "If the economy continues to grow, the resources of the banks will be totally inadequate for the country's needs."

While Rashevsky said consolidation among larger banks would be driven by the need to increase efficiency and expand profit margins, he said smaller banks, especially regional ones, were likely to be swallowed up by larger ones seeking to expand their branch networks outside the main cities of St. Petersburg and Moscow. "We have a program for our presence in the regions which will be carried out through acquisitions of banks that will be turned into our branches," he said. "It is our growth strategy. It is going on quite rapidly now, and we intend to speed it up," he added.

The chief consultant of the Moscow-based BFI financial consultancy, Andrei Sedin, said 350 bank mergers had been charted over the past three years, most of them small deals. He said bureaucratic hurdles and lack of bank transparency had prevented much merger and acquisition activity, but Central Bank moves to make commercial banks adopt international accounting standards could encourage hostile takeovers.

"In Russia, because of a dearth of information about competitors, you risked stumbling on hidden liabilities [of a target bank] in a hostile takeover," he said. "The risks are not so high with friendly deals. But the potential for hostile takeovers will appear as transparency improves."

Analysts say higher capitalization requirements by the Central Bank could also force small banks to merge. Banks have been ordered to boost their minimum share capital to at least 5 million euros ($4.4 million) by 2005 to facilitate their growth.

Deputy Central Bank head Georgy Luntovsky said the bank did not expect merger and acquisition activity to increase and would only regulate, not encourage, the process. But he said regulations should be simpler. "The merger and acquisition procedures need to be simplified, and I think that will be done in the nearest future," Luntovsky said.