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. Last Updated: 07/27/2016

Mini-Crisis Forces Banks to Evolve

A banking mini-crisis has scared off household depositors and private banks will have to fight to win back clients by offering a better range of retail services, analysts say.

Some $2 billion in household funds has left private banks in Russia since the crisis began in late April, Alfa Bank analyst Natalya Orlova estimates.

In that time, eight banks have closed, a top-25 bank has been forced into a merger and a run on deposits made Alfa Bank, Russia's largest private bank, turn to shareholders for a bailout. The crisis has now subsided.

"Most money that ran away from banks ended up under the mattress," said Alexei Yazykov, a banking analyst at Aton brokerage.

Depositors have turned most of the funds into cash dollars, the traditional safe haven of households, still haunted by memories of a 1998 financial crisis that wiped out much of their savings.

Russians switched $1.2 billion worth of savings into dollars in June alone -- the highest monthly figure since 1999, Central Bank figures show.

So great is Russians' distrust of the financial system that even seemingly obvious beneficiaries of the crisis -- state-owned and foreign banks -- did not see a rise in inflows from retail depositors during the turmoil.

"The main beneficiary was the mattress bank -- people withdrew cash hard currency and are keeping it at home," Andrei Kazmin, CEO of Russia's biggest state-owned bank, Sberbank, told Itogi magazine in an interview.

Some of the money found its way into consumer spending, pushing July retail price inflation to 0.9 percent -- unusually high for this time of year.

"Banks cannot seriously increase their interest rates on deposits to lure households back because margins in the industry are already low," Yazykov said.

But he said banks had scope to expand their services, wooing depositors by cross-selling other products -- a practice that is virtually nonexistent in Russia.

Credit cards are not yet common and mortgage loans only accounted for 1 percent of deals done on the multi-billion-dollar property market last year.

Orlova said the timing of the return of funds to banks would depend on how clearly the Central Bank set out its strategy for reforming some 1,300 banks.

The vetting of lenders for a planned deposit insurance scheme will be key to this process, with those failing to make the grade likely to have to close or merge.

"If the Central Bank bankrupts 100 banks and says that the rest are safe -- that's one scenario," Orlova said.

"If we keep learning from the papers that this or that bank has had its license revoked, that's another scenario. In this case, the money is most likely to stay under the mattress."