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. Last Updated: 07/27/2016

Investment Banks Show Evolution

Russia's leading commercial banks are reshaping their investment banking operations, absorbing these formerly independent branches in a bid for control and greater efficiency.

The trend, exemplified by bank majors such as Inkombank and Menatep bank, is indicative of a nascent banking sector in the process of self-discovery, torn between the U.S. model of segregation and the European design of the "universal bank," analysts said.

While the European model appears to be the one most often selected, one analyst said Russia will likely end up with a mix between the two.

"There will only be room for a few strong and independent investment banks in Russia," said Alexander Tsapin, vice president of Pioneer Investments.

Most investment operations "will remain closely linked to their mother institutions," Tsapin said, adding that it could take as long as 15 years for the Russian banking system to crystallize.

"Russian banks still have to make up their minds," he said. "The system has not yet matured."

What is clear is that a number of Russian commercial banks are reviewing their investment tactics after an initial flirt with the Anglo-Saxon model of independent investment operations.

Inkombank, Russia's fourth largest bank, recently restructured its securities and corporate finance operations, withdrawing the freedom formerly enjoyed by its investment bank, Inkom-Capital.

"Inkom-Capital, which was created as a separate subsidiary, has been transformed back into a subdivision of the bank," an Inkombank spokesman said.

Although the name Inkom-Capital remains, the subsidiary has been merged with the bank's own investment division "to consolidate the bank's investment activities and adapt to the changed market conditions," the spokesman said.

Inkom-Capital "had quite an independent-minded management" which sought increased room for maneuvering, said Boris Sinegubko, a banking analyst with the Brunswick Brokerage.

This independent streak became painfully obvious to Inkombank officials when Inkom-Capital managers made known their desire to break from the bank and maintain separate shareholding, said one analyst, who asked not to be identified.

"But Inkombank management put its foot down, because it wanted Inkom-Capital to work with corporate finance projects" for the bank's industrial holdings, the analyst said.

Inkombank holds controlling stakes in a number of Russian companies, including the Babayev candy factory in Moscow and Sameko, a Samara-based aluminum company.

Meanwhile, Alliance-Menatep, the investment banking arm of Menatep bank, has also cut back on its activities and transferred the bulk of its operations back to the bank, said Yury Milner, head of Menatep's investment division.

Milner described the transfer of investment banking and asset management activities to the parent institutions as "a general trend" in Russian banking. Such restructuring allows banks to consolidate their operations and economize on resources, he said.

Menatep holds a controlling stake in Yukos, Russia's second largest oil company, and major stakes in more than 30 other industrial companies.

The dominant position of the commercial banks, however, does not apply to all sectors of Russia's financial markets. While debt trading is kept under the umbrella of the commercial banks, equity trading has managed to maintain its independent niche.

"The Russian equity market has so far developed largely in accordance with the U.S. model, dominated by investment banks, while the T-bill market is closer to the continental model, where [universal] banks dominate," said Sinegubko,

Those who support splitting investment banking activities apart from retail and corporate lending operations argue that the division minimizes risks and increases efficiency.

This division has been maintained by other Russian banks, including Alfa-Bank and the financial group surrounding Uneximbank, the analysts said.

"Uneximbank has quite a strict division of tasks inside the group," said Andrei Yashchenko of United City Bank.

Uneximbank placed its sister institution, the International Financial Company, or MFK, in charge of the group's investment banking activities last year, a bank official said.