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. Last Updated: 07/27/2016

Sberbank Sues to Silence Its Critics

VedomostiVadim Kleiner, director of research for Hermitage Capital, a Moscow-based fund with $900 million under management.
Editor's note: This is the first of two stories examining the lending practices of state-owned savings bank Sberbank.

Sberbank is acting as if it has something to hide.

The state-owned bank, which holds nearly 800 billion rubles of the population's savings, or 73 percent of all personal accounts, is trying to silence its critics, which is making those critics even more critical and suspicious.

In particular, the bank has taken the unusual and, bankers and market players say, alarming step of suing one of its two independent board members for doing exactly what minority shareholders elected them to do -- keep an eye on the shop.

On Monday, in what is being billed as a serious step back for corporate transparency in Russia, the Moscow Arbitration Court will begin hearing a defamation case brought by Sberbank against Vadim Kleiner, director of research for Hermitage Capital, a Moscow-based fund with $900 million under management.

Kleiner's crime, apparently, is blowing the whistle on what he claims is a series of financial malpractice by the bank's management, leading to a dangerously high concentration of risk and the destruction of shareholder value.

Specifically, Kleiner is being sued for a PowerPoint presentation originally given at a banking conference in London. The presentation raises a number of uncomfortable questions regarding Sberbank's lending activities, including lending to the nation's most powerful financial industrial groups at rates far below the market rate; lending $160 million to its managers and other parties related to management; an overweight cost structure; a high concentration of credit risk; and a yawning liquidity mismatch.

What Sberbank wants is not more money. It wants Kleiner to publish a retraction. It also wants a retraction from Vedomosti, a sister publication of The Moscow Times, and another newspaper, Vremya Novostei, for publishing Kleiner's remarks.

Few believe that Sberbank has a chance of winning these suits, but analysts, investors and international financial institutions say the stand-off goes to the heart of what's wrong with Russia's murky banking sector: the dominance over the system by state-owned banks that enjoy huge government-granted advantages over their competitors and leeway to set their own rules.

"This is a symptom of bigger problems in the system: the lack of supervision and the virtual monopoly of Sberbank," said Christof R?hl, chief economist at the World Bank in Moscow.

Analysts say the case to muzzle Kleiner via the courts instead of hearing his concerns at board meetings marks a new low for corporate governance at Sberbank.

"It is highly inappropriate for a publicly listed company to muffle an independent director and then take him to court for what he is supposed to do," said Richard Hainsworth, director of RusRating, an independent bank rating agency.

Kleiner says he was denied an opportunity to raise with the board an analysis conducted by Hermitage that was based on the bank's own financial reports. That analysis concluded that Sberbank was losing $1.2 billion in pre-tax profits via questionable practices. Only after being rebuffed a second time did Kleiner go public, and even after his presentation made waves, Sberbank refused to hear him, pointing out that even Hermitage itself issued a disclaimer on the figures.

But Kleiner says that's not the point. He just wanted his questions answered: "Real issues are supposed to be discussed at board meetings, but at Sberbank that's not the case."

"Management is behaving as if they own the bank and as if independent directors can't even ask questions," said William Browder, Kleiner's boss. "There could not be a more fundamental failing in their approach to corporate governance."

Even some officials at the Central Bank, which owns 64 percent of Sberbank (the rest is traded on the market, with foreigners owning about 18 percent) are raising their eyebrows.

"This is not a perfect situation," said Alexander Simanovsky, head of banking regulation and supervision at the Central Bank. "Independent directors should be raising questions. But in this case the court will make the final decision."

A spokesman for Sberbank, Alexander Golovanov, said the bank could not comment on Hermitage's allegations while the court hearings were pending. "The court will decide who is right and who is wrong," he said. "Until then, no one at the bank is going to comment on this."

In copies of the suits obtained by The Moscow Times, Sberbank says the newspapers, in citing Kleiner, "promulgated certain allegations that are false and misleading and impair the business reputation of the Savings Bank of Russia."

Browder said the suits against the newspapers "appeared to be an attempt to scare the press into not saying a word."

But, analysts say, Hermitage's allegations merely raise questions about issues long seen as problems for the bank, and that these questions are already priced into its stock, which currently values the company at $5.1 billion.

"Is Sberbank destroying shareholder value? The answer is yes," said Tim McCutcheon, banking analyst at Aton brokerage. "It doesn't take a genius to see that it's not using its assets optimally."

"Call me a wacky optimist, but the Central Bank knows that Sberbank is a screw-up," he said. "The trouble is that there are a lot of vested interests tied up with the bank's operations and there are limits to what it can do."

In its sweeping analysis of the bank's operations, Hermitage concluded that Sberbank has been providing billions of rubles in loans to Gazprom, LUKoil, UES, Russian Aluminum and several other powerful companies at below market rates, while simultaneously using its privilege as the only retail bank on the market with deposits guaranteed by the government to offer depositors interest rates below the rate of inflation. Hermitage calls this a "subsidy to the oligarchs" paid for by the population.

Analysts say this practice is one vested interest the elite will not gladly give up.

Citing market data published in Kommersant in June of last year, Hermitage say Sberbank has been lending at a 7.3 percent discount to the average rates offered by other leading commercial banks, leading to lost pre-tax profits of up to $780 million.

Sberbank, however, in its law suit claims this allegation is "detractive, false and misleading" and that the bank's lending policies have not had a negative impact on its net profit, which nearly doubled to around $1 billion in the first nine months of 2002.

Analysts say it's difficult to confirm Hermitage's calculations because of the lack of information published by the bank. What is clear, however, is that the bank's rates are the cheapest around.

"It is a well-established fact that Sberbank lends at rates below the market level," said Hainsworth. "But the trouble is it's not very easy to calculate a weighted average lending rate because Sberbank simply does not provide enough information."

Sberbank is also unhappy with Hermitage's assessment that the bank was not doing enough to cut costs, especially its bloated payroll. With 200,000 employees, Sberbank has about 35 percent less staff than Citigroup, the world's largest bank with assets of more than $1 trillion at the end of 2001, some 40 times more than Sberbank's.

Hermitage said that a reduction in staff at the bank would have increased profits by an estimated $350 million.

In its lawsuit, Sberbank claims that Hermitage's allegations of over-staffing suggest that the bank is "acting unreasonably and in bad faith and that the number of personnel currently maintained by the Savings Bank of Russia is economically unsound." It says this allegation is "false and misleading, as it is not supported by valid economic data."

Kleiner, however, counters with this question: "Why did Sberbank management decide to hire an additional 8,000 employees last year alone, a number larger than the entire staff at Russia's second largest bank, Vneshtorgbank?"