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. Last Updated: 07/27/2016

Hungary Joins Race for Banks

Hungarian banking giant OTP swallowed up Investsberbank on Monday, the latest in a string of foreign advances in Russia's booming banking sector.

OTP Bank said it would purchase 96.4 percent of the consumer-centered Investsberbank Group for $477 million.

Though not as visible as its larger rivals in Moscow, Investsberbank runs a network of 78 branches throughout the country and extends credit to consumers via 2,500 sales desks spread across shopping centers everywhere from Kaliningrad to Kamchatka.

"It fits the latest pattern: Foreign banks targeting Russian banks with wide geographic branch networks and a broad franchise, especially in retail lending," said Vladlen Kuznetsov, a banking analyst with Moody's Investors Service.

As well as Investsberbank, the Investsberbank Group includes its recent merger partners, Novorossiisk-based Promfinservicebank and Omsk-based Omskpromstroibank.

"In every banking mind, the name of this bank is closely associated with the consumer market," said Natalya Orlova, an analyst at Alfa Bank. In this respect, Investsberbank is similar to Russky Standart and Home Credit, she said.

OTP is also known for its strength in retail lending, and the former Hungarian state savings bank -- analogous to Russia's Sberbank -- controls 24 percent of the assets in the Hungarian banking system, as well as 47 percent of the country's mortgage lending, according to a report from Standard & Poor's. Its shares gained 3 percent Monday in trading in Budapest, giving the bank a market value of $8.3 billion.

"OTP's expertise lies in retail banking, and that's where they can transfer their know-how to foreign subsidiaries in the most profitable way," S&P analyst Annette Ess said in an e-mailed statement.

But Ess said Monday's costly foray into Russia represented the riskiest move the Hungarian bank had made during its recent fit of aggressive expansion in Eastern Europe.

"We view with caution an expansion into countries with higher economic and industry risks than in Hungary, less-developed corporate governance and worse information disclosure," she said.

Analysts identified Novorossiisk businessman Alexander Ponomarenko as the largest shareholder in Investsberbank. The bank's web site says he owns almost 20 percent of the shares directly, but news reports say he may control up to 75 percent or more of its shares.

Investsberbank is not affiliated with Sberbank, the state-controlled giant, but has probably benefited from consumers who associate the similar-sounding brand names.

A spokeswoman for Investsberbank said that in addition to its banking assets, the group held about 67 percent of the shares in the Novorossiisk Commercial Sea Port. But the spokeswoman said the port would not be transferred to OTP because the shares were only "nominally owned" by Investsberbank. She declined to elaborate in an e-mail message.

Earlier this year, President Vladimir Putin signed an order classifying the Novorossiisk port -- a major gateway for Black Sea oil exports -- as a strategic enterprise that would not be subject to complete privatization. The state owns about 20 percent of the port's shares, according to news reports.

Banking experts said the complicated ownership of Investsberbank, as well as the presence of a seaport, would have made it especially difficult for the bank to pursue an IPO.

Instead, the bank started wooing potential buyers, and analysts said several foreign banks and at least one large Russian bank were among the bidders.

Orlova said the $477 million deal valued Investsberbank at about four times its book value at the end of 2005, a premium price for a financial institution. She estimated the bank's fair value at $400 million using discounted cash flow analysis.

Partly because of the Central Bank's tough rules for Russian banks holding IPOs, analysts expect more direct deals with foreign banks in the near future: either outright acquisitions of second-tier banks, as in the case of Investsberbank, or the purchase of minority stakes in bigger banks, such as Rosbank, which sold 10 percent to Societe Generale last month.

The Investsberbank purchase is the largest foreign deal since Austria's Raiffeisen Bank bought Impexbank for $550 million.

The growing interest in the Russian financial sector means banks' controlling shareholders hold most of the cards and can choose to deal with potential foreign partners on their own terms.

"With the Russian market, it's more of a question about when to sell, not when to buy, because the time to buy is already here," Orlova said.