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. Last Updated: 07/27/2016

Foreign Lenders Tying the Knot

Itar-TassClients visiting a bank in Moscow. Foreigners' share in the banking sector, currently at 11 percent, is unlikely to top 20 percent by the end of next year.
At first glance, it appears to be a foreign-bank bonanza. Austrian Raiffeisen Bank and Hungarian banking giant OTP snapped up second-tier banks Impexbank and Investsberbank, respectively, earlier this year. Societe Generale bought 10 percent of Rosbank, and Commerzbank is planning to buy 15 percent of Promsvyazbank, pending official approval this fall.

On top of all that, the market now is abuzz with talk that British banking giant HSBC will finally announce the launch of its retail banking business by year's end.

Foreign banks are expanding at an unprecedented clip as they try to take advantage of skyrocketing retail lending, which is fueled by continuing real-income growth. But high entry costs and the murkiness of the country's banking system are keeping foreign lenders from stepping up their shopping sprees. That means foreigners' share in the sector -- currently at 11 percent -- is unlikely to top 20 percent by the end of next year. About 40 percent is still controlled by the state.

"You are not going to see any rapid growth in the share of foreign banks," said James Watson, director of financial institutions at Fitch Ratings.

Some global banking heavyweights, including HSBC and even the world's largest insurer, AIG, have not rushed into developing local retail banking, despite the sector's strong forecasts.

Personal loans will grow at an average of 42 percent per year, while corporate loans will grow 21 percent per year from 2006 to 2010, according to research by MDM Bank.

HSBC's 70-some Russia-based staff are currently only involved in institutional investment banking. A bank spokesman in London said Wednesday that he could not comment on the bank's plans in Russia.

AIG operates as an insurer but is in talks with Russian regulators regarding opening a bank, Interfax reported Wednesday, citing an unidentified official familiar with the situation.

The fragmented market, its lack of transparency and the high asking prices for larger private banks, of which there are few, are persuading more conservative foreign lenders to view buying into Russian banks with caution.

"There are over 1,200 banks in Russia, but only about 200 of them are really in the banking business," said Natalya Orlova, finance sector analyst at Alfa Bank.

Very small regional players and the so-called pocket banks, created for the sole purpose of servicing one particular business group, still make up most of the country's banking sector.

"There are not a lot of banks with a 1 percent market share out there to be bought," Watson said.

Foreign Banks' Acquisitions in 2006
February  -- Austria's Raiffeisen becomes the largest foreign lender in the country when it buys Impexbank, owned by Russia's 13th-richest man, Boris Ivanishvili, and his partner, Vitaly Malkin, for $550 million. Through the acquisition, Raiffeisen gets an additional 190 branches and 350 consumer outlets in 45 cities around the country.
June -- Societe Generale buys 10 percent of Vladimir Potanin and Mikhail Prokhorov's Rosbank for $317 million after the Russian bank opts to take a single foreign partner instead of holding a planned IPO.
July  -- Hungary's OTP buys 96.4 percent of the consumer-centered Investsberbank for $477 million. 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.
August  -- Germany's Commerzbank buys 15 percent of Promsvyazbank. The Moscow-based bank, controlled by brothers Dmitry and Alexei Ananyev, has more than 110 branches and offices.
-- MT

With many of the larger banks under state control -- including the top three lenders, Sberbank, Vneshtorgbank and Gazprombank -- few well-developed banks are attractive for foreign acquisition.

The state is not expected to cede control of the banks it controls any time soon, even though it has indicated it was looking to reduce its stakes in Sberbank and in Vneshtorgbank, or VTB, to 50 percent plus one share. VTB is 99.9 percent state-controlled, while the Central Bank holds 61 percent of Sberbank's total capital and 63.76 percent of its common shares.

"WTO negotiations are a good indication of this" lack of desire to give up control, Orlova said.

One of the key issues that has stalled negotiations with the United States for Russia's accession to the World Trade Organization is permission for foreign banks to have direct access to the Russian market. Foreign banks are only allowed to operate through subsidiaries, and Russian negotiators have stressed their unwillingness to budge on this issue.

Control over the banking sector remains an important macroeconomic lever for the government, Orlova said.

During the mini-banking crisis of 2004, state intervention played a positive role in preventing the situation from spinning out of control, said Alex Kantarovich, co-head of research at MDM Bank.

The state is firmly entrenched in the sector, and the number of private banks ripe for acquisition is low. Foreign lenders look for banks with a wide network of branches and a developed retail lending business to tap Russia's banking boom. No more than 30 banks fit this description, analysts said.

Suspicion from both buyers and sellers, as well as high asking prices from Russian bank owners, are containing the expansion of foreign lenders.

"Russia is a difficult market for foreigners," Kantarovich said.

Russia's Top 30 Banks
 BankAssets ($bln)Profit before taxes ($mln)*
4Bank of Moscow11.3129
5Alfa Bank9.779
9International Moscow Bank6.3104
12Russky Standart5.0262
18Ak Bars3.130
19Vneshtorgbank 243.022
23ING Bank Eurasia2.219
26Khanty-Mansiisky Bank2.015
Ruble figures converted into dollars
*Latest figures available
Source: Interfax Center for Economic Analysis

He said foreign equity participation in Russian banking would reach 25 percent to 35 percent by 2011, far below the 60 percent to 70 percent share in Eastern Europe, where the market is "less suspicious of foreigners."

"It's not easy to find a sufficiently transparent bank to make shareholders comfortable with an acquisition," said Vladlen Kuznetsov, a banking analyst with Moody's rating agency.

Banking remains one of Russia's least transparent sectors, according to the Standard & Poor's annual transparency and disclosure surveys. Part of the reason is that a vast majority of banks, with a notable exception of state-run behemoth Sberbank, are privately held, so they are not required to reveal as much information as listed companies.

Also, banks' expansion of their client base hinges on opaque personal relationships, making the process difficult for foreign bankers to analyze and understand. "A step-by-step entrance is a way to minimize risks," Kuznetsov said.

Given the market's insufficient transparency, foreign banks are opting to buy minority stakes, with an eye toward increasing their share should the partnership prove a success, he said.

Germany's Commerzbank said in a recent statement that a "step-by-step increase to a majority position is being examined." The bank, which is buying an initial 15 percent stake in No. 14 Promsvyazbank, declined to elaborate.

France's Societe Generale in June bought a 10 percent stake in Rosbank, Russia's No. 7 bank by assets, for $317 million, with an option to increase the stake to 20 percent.

"We used to say a couple of years ago that the risks were too high," Watson, of Fitch, said of the banking sector. "Now, the high multiples being asked by sellers are also a sticking point for many transactions."

In July, Hungary-based OTP's $477 million purchase of Investsberbank valued Russia's retail lender at four times its book value at the end of 2005, according to Orlova's estimates.

Austria's Raiffeisen forked over $550 million for Impexbank in February, in a deal that Raiffeisen CEO Herbert Stepic called "one of the rare occasions where there was love at first sight."

While Russian banks stand to gain from Western strategy and technology, Orlova said, they are not starved for capital. Many banks are controlled by industrial groups that serve as the banks' "lenders of last resort," she said.

As the market develops, more global banks will come to Russia.

In the near term, "large domestic banks should be able to maintain their dominant position despite increasing competition from foreign entrants, such as Citibank, Raiffeisen and SocGen," MDM Bank said in a recent report.