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RUSSIA

Banking on a Bright Future

If the experts are right when they say that a stable banking sector is the key factor in a country’s potential for economic growth, then Russia’s future is looking bright.

The growth in providing credit and the stabilization of margins coupled with the restructuring of bad loans produced record net profits for Russia’s banks of US $26 billion in 2011— nearly double the 2010 figure and three times higher than in 2009. The combination of regulatory reform and the global financial crises saw the number of profitable Russian banks decline from a peak of 1,286 in 2003 to a total of just 881 in the first quarter of this year. But in a textbook demonstration of the Darwinian law of natural selection, the financial institutions still standing are stronger than ever before. As in many Western economies, most of the banking capital in Russia is concentrated within a half dozen major banks, including Sberbank, which alone accounts for almost 40% of the country’s total commercial banking profits. But far from being a cause for complacency, Sberbank’s CEO Herman Gref sees the risks in his organization’s dominant position. “We have more than a 30% share in active crediting operations and more than 50% of passive ones within Russia,” he acknowledges, “but with over 70 million clients it is going to be extremely difficult to grow our market share domestically. We still have to expand, which is why we need external markets. This is going to take years, but we have already opened up representative offices in a number of countries.” By virtue of its size and its historic connection with government — the Central Bank of Russia retains a majority shareholding in the Company — Sberbank has traditionally been one of the first banks that foreign investors looking for opportunities in the Russian Federation have tended to turn to for advice and guidance. That can no longer be taken for granted. While the government’s rolling reform program has seen many of the small financial institutions disappear, it has also helped create a level playing field for a growing number of new banks that can offer specialized boutique services and in-depth local and regional knowledge.

Emblematic of this new breed of bank that is actively targeting foreign investment is metals magnate Mikhail Prokhorov’sInternational Financial Club (IFC) that was established in 2008. “As our name suggests we have deliberately positioned ourselves as a ‘club,’” says Chairperson Oksana Lifar, who outlines the bank’s areas of expertise: “We plan to develop classic corporate finance, to grow the complex structured deals portfolio with higher return and moderate risk levels, to develop private banking, offer operations on the financial markets, and are targeting regional expansion. We believe that once foreign clients work with us they will realize that they need our products and services.”

With Russian Prime Minister Medvedev calling on both the government and Central Bank to reduce state control of banks like Sberbank to under 50%, the playing field will only get fairer and the competition fiercer, a development that Gref is happy to embrace. “We are glad that there is competition and we think it’s great that customers have a choice. Not everyone should select us and we don’t deal with every kind of client. People should only select us if we can prove that we are the most reliable.” If a stable banking system is one of the key factors to economic growth, then the freedom to chose a banking partner that meets an investor’s particular needs is surely another. And investors in Russia are going to be spoiled for choice.

International Financial Club

Since the start of the new millennium, the GDP per capita of the average Russian citizen has, according to the IMF, more than tripled, from US$6,800 to $21,400.

The ranks of the Russian super-rich have also swollen exponentially; between 2010 and 2011 alone, the number of Russian billionaires almost doubled, from 62 to 101, on the back of a recovery in raw material prices and the Russian stock market. Back in 2008, one of these billionaires decided to establish a bank that would not just look after its clients but also help both corporate and federal Russia steer their way through the financial crisis that was engulfing the global economy. That man was metals magnate Mikhail Prokhorov. Having acquired APR Bank from Russia’s News and Advertising Agencies Group, he assembled a group of like-minded businessmen and women to create the International Financial Club (IFC). The name was deliberately and appropriately chosen, according to Oksana Lifar, who has been with the IFC since the early days and who was last year appointed Chairperson of its Executive Board. “We positioned ourselves as a VIP club from the very beginning,” she explains, “and we get very close to our clients and provide tailor-made solutions to their needs. We are very fast in making decisions, which benefits them greatly.” In just three years since inception, the bank became one of the top 100 Russian banks in terms of asset size and own capital amount. This is, according to Lifar, just the beginning. “IFC Bank is now growing corporate finance operations and its complex structured deals portfolio, developing private banking operations in the financial markets, and planning to expand its presence in the Russian regions.” She and her colleagues are now looking for overseas investors who share their dream of capitalizing on the massive opportunities that Russia has to offer. “We are very interested in attracting foreign clients entering the Russian market, and once they work with us they will see that they need not only our products and services, but that we fulfill all the criteria of an ideal partner.” To any investors mind, this is a club well worth joining.