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. Last Updated: 07/27/2016

Banks Out of Reach for Foreigners

VedomostiInternational Bank of Moscow is controlled by Italy's UniCredito, but foreigners have trouble acquiring Russian banks.
Foreign banks have an appetite for acquisitions in Russia, but with desirable banks reluctant to sell and a plethora of unattractive smaller banks, a big sellout as seen in Poland, Hungary or Ukraine looks unlikely.

There is plenty of evidence that foreign banks are circling the booming sector, which could enjoy years of record growth before Russians have as many bank accounts, car loans and mortgages as their counterparts in other emerging markets.

Italy's UniCredito said last month that it expected Russian consumers to triple borrowing over the next three years, but buyers wanting some of that growth are faced with as many as 1,200 banks, only about 30 of which are considered suitable.

Kirill Minovalov, owner of Avangard, one of the few Russian banks considered ripe for acquisition, said: "I get offers all the time. If not every week, then every month. Often, offers come from large Western investment banks, which do not hide that they are acting for foreign buyers."

This year, Austria's Raiffeisen and Hungary's OTP Bank bought mid-size banks, and France's Societe Generale bought 10 percent in Russia's No. 3 private bank Rosbank.

But still, the Central Bank said, foreigners controlled only 11 percent of the banking sector's assets as of Jan. 1, compared with 70 percent in Eastern Europe, and bankers see that rising to about 20 percent in a few years.

"The trick is how to get in, when to get in, and how to get in safely. These issues will mean that there may be less activity than the market has rumors for at the moment," said Stuart Lawson, board chairman at Soyuz Bank.

Bankers say owners of attractive banks are reluctant to sell because they think the prices are low and likely to rise.

Eight of the world's top 20 banks already have a presence in Russia, with Citibank running a subsidiary and UniCredito controlling Moscow International Bank.

"All large global banks that wanted to be here are already here. ... To buy a new bank means taking financial, operational and cultural risks. Team change takes a lot of time and money," said Central Bank First Deputy Chairman Andrei Kozlov. "It seems there won't be a rush to buy Russian banks."

Large banks are usually interested in controlling stakes, while minority stakes are tempting only for portfolio investors like U.S. Firebird or the banking fund of Sweden's East Capital.

"I do not think Russia will follow the path of Poland or Hungary, where only a couple of local players stayed afloat while everything else was bought out by foreigners," said Absolut Bank deputy chairman Dmitry Ivlyushin.

On top of all that, foreigners need government permission to buy shares in Russian banks, and several officials have expressed worries over the vulnerability of the sector.

A ban on foreign banks' branches has also become a stumbling block in Russia's negotiations over World Trade Organization entry talks.

On the flip side, bankers say large banks like Sberbank and Vneshtorgbank, both of which are state controlled, may themselves be looking for acquisition targets in the West.

"Look at Russian banks' growth. Large financial institutions such as Sberbank or VTB are ready for it [foreign acquisitions] now," said Ivlyushin.

Ukraine, whose market is dwarfed by Russia's but is keen to attract foreign investment, has witnessed a boom in banking takeovers, with nine deals expected to be completed this year, compared with seven in Russia.

Weak corporate governance can also be a problem. "Often, banks embark on a stormy venture into retail banking without proper risk management or sufficient capital, in order to sell the business before problems with bad loans and badly managed branches reach critical mass," said Tatyana Bogdanovich, board chairman of Russian International Bank.