RUSSIA: Banking onaBright Future

Fortune Magazine #13


Banking onaBright Future

Ifthe experts are right when they say that astable banking sector isthe key factor inacountrys potential for economic growth, then Russias future islooking bright.

The growth inproviding credit and the stabilization ofmargins coupled with the restructuring ofbad loans produced record net profits for Russias banks ofUS $26 billion in2011 nearly double the 2010 figure and three times higher than in2009. The combination ofregulatory reform and the global financial crises saw the number ofprofitable Russian banks decline from apeak of1,286 in2003 toatotal ofjust 881 inthe first quarter ofthis year. But inatextbook demonstration ofthe Darwinian law ofnatural selection, the financial institutions still standing are stronger than ever before. Asinmany Western economies, most ofthe banking capital inRussia isconcentrated within ahalf dozen major banks, including Sberbank, which alone accounts for almost 40% ofthe countrys total commercial banking profits. But far from being acause for complacency, Sberbanks CEO Herman Gref sees the risks inhis organizations dominant position. Wehave more than a30% share inactive crediting operations and more than 50% ofpassive ones within Russia, heacknowledges, but with over 70million clients itisgoing tobeextremely difficult togrow our market share domestically. Westill have toexpand, which iswhy weneed external markets. This isgoing totake years, but wehave already opened uprepresentative offices inanumber ofcountries. Byvirtue ofits size and its historic connection with government the Central Bank ofRussia retains amajority shareholding inthe Company Sberbank has traditionally been one ofthe first banks that foreign investors looking for opportunities inthe Russian Federation have tended toturn tofor advice and guidance. That can nolonger betaken for granted. While the governments rolling reform program has seen many ofthe small financial institutions disappear, ithas also helped create alevel playing field for agrowing number ofnew banks that can offer specialized boutique services and in-depth local and regional knowledge.

Emblematic ofthis new breed ofbank that isactively targeting foreign investment ismetals magnate Mikhail ProkhorovsInternational Financial Club (IFC) that was established in2008. Asour name suggests wehave deliberately positioned ourselves asa club, says Chairperson Oksana Lifar, who outlines the banks areas ofexpertise: Weplan todevelop classic corporate finance, togrow the complex structured deals portfolio with higher return and moderate risk levels, todevelop private banking, offer operations onthe financial markets, and are targeting regional expansion. Webelieve that once foreign clients work withus they will realize that they need our products and services.

With Russian Prime Minister Medvedev calling onboth the government and Central Bank toreduce state control ofbanks like Sberbank tounder 50%, the playing field will only get fairer and the competition fiercer, adevelopment that Gref ishappy toembrace. Weare glad that there iscompetition and wethink its great that customers have achoice. Not everyone should selectus and wedont deal with every kind ofclient. People should only selectus ifwecan prove that weare the most reliable. Ifastable banking system isone ofthe key factors toeconomic growth, then the freedom tochose abanking partner that meets aninvestors particular needs issurely another. And investors inRussia are going tobespoiled for choice.

International Financial Club

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

The ranks ofthe Russian super-rich have also swollen exponentially; between 2010 and 2011alone, the number ofRussian billionaires almost doubled, from 62to101, onthe back ofarecovery inraw material prices and the Russian stock market. Back in2008, one ofthese billionaires decided toestablish abank 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 Russias News and Advertising Agencies Group, heassembled agroup oflike-minded businessmen and women tocreate the International Financial Club (IFC). The name was deliberately and appropriately chosen, according toOksana Lifar, who has been with the IFC since the early days and who was last year appointed Chairperson ofits Executive Board. We positioned ourselves asaVIP club from the very beginning, she explains, and weget very close toour clients and provide tailor-made solutions totheir needs. Weare very fast inmaking decisions, which benefits them greatly. Injust three years since inception, the bank became one ofthe top 100 Russian banks interms ofasset size and own capital amount. Thisis, according toLifar, just the beginning. IFC Bank isnow growing corporate finance operations and its complex structured deals portfolio, developing private banking operations inthe financial markets, and planning toexpand its presence inthe Russian regions. She and her colleagues are now looking for overseas investors who share their dream ofcapitalizing onthe massive opportunities that Russia has tooffer. Weare very interested inattracting foreign clients entering the Russian market, and once they work withus they will see that they need not only our products and services, but that wefulfill all the criteria ofanideal partner. Toany investors mind, this isaclub well worth joining.