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Foreign Banks in Russia

Agency WPS
Banking and stock exchange. Finance. Economics (Russia)
August 19, 2004, Thursday

The article has been published about performance of foreign banks in
Russia

Although the Russian law doesn’t prohibit foreign banks from being
present in the Russian market in the form of branches, it is
practically impossible to get permission of the CB. The last branch
of a foreign bank – Armenian Anelik – had to re-register into the
subsidiary Russian bank last year under the order of the CB. As a
result, foreign banks can work in Russia only in the form of Russian
companies. They are either subsidiaries of large western banks as
Citibank or Raiffeisenbank, or are founded by a few shareholders as
KMB-bank. Its shareholders are the EBRD, Soros Fund, German Company
of Investments and Development and the Triodos-Doen fund
(Netherlands). All these banks are fully owned by foreigners.
However, structure of ownership can be mixed. In the International
Moscow Bank, German Hipo Vereinsbank owns a 43% stake, Finnish Nordea
Bank – 22%, EBRD – 10%, and 22% are controlled by the Bank of Russia.
20% are owned by the French BCEN-Eurobank (the CB controls some 80%
of its shares) and 2% are owned by Sberbank (the CB has a 63% stake
in it).

Advantage of subsidiaries of large foreign banks is that any decision
takes much less time to be coordinated: there is only one shareholder
– mother company. This is especially important when the bank faces
difficulties. Thus, during the 1998 crisis, practically all banks,
including foreign ones, faced problems with capitalization.
“Subsidiaries of foreign banks, unlike Russian credit organizations,
were not embarrassed to show their losses,” comments Mikhail
Matovnikov, deputy director of the rating agency Moody’s-Interfax.
“However, mother companies didn’t leave them in trouble. They
allocated funds quite quickly, so problem with capital of subsidiary
banks was resolved in the first – maximum second quarter of 1999.”

For example, losses incurred by Raiffeisenbank, amounted to over 1.5
billion not denominated rubles, however, capital increased again very
quickly. “Large foreign banks value their name,” believes Mr.
Chetverikov, director of the rating agency NAUFOR. “And if a bank
faces serious problems, the mother company is very likely to allocate
enough resources at low interest to cover bank’s liabilities and
restore efficiency.”

Russian foreign banks with mixed structure have also overcome crisis.
However, it took them much longer to restore capital: all
shareholders should gather, coordinate who will contribute what
amount to the bank (as a rule, proportionally to number of shares).
Additionally, some bank owners can wish to sell their stake, which
will also take time. As a result, procedure can take a year, and
this, for example, was the case with the IMB, which found itself on
the verge of bankruptcy during the crisis. However, in a year, it
managed to restore its capital through contributions of shareholders.

Banks with more than one shareholder are more independent from their
owners because their general meetings are held seldom and only on
important strategic issues. Indeed, it would be strange to gather all
owners to approve routine decisions of top management. Very often
banks with mixed structure of ownership are created by foreign credit
institutions, which want to be present in the market of a different
country, but they don’t want to found their own subsidiary. In this
case, a foreign company has a representative on the bank’s board of
directors, it can influence policy of a credit organization and
invest into enterprises that are located at the territory of the
country.

Some foreign banks pursue aggressive strategy. Beginning with 1999,
they started to actively develop the Russian market – first of all,
subsidiaries of large western banks. Thus, for example,
Raiffeisenbank was one of the first western banks to deal with retail
– for example, work with private clients (before the crisis, foreign
banks practically didn’t work with retail clients in Russia).
“Raiffeisenbank had to be the first to develop this niche because it
didn’t have its guaranteed “bread,” as, for example, Citibank,”
explains Mikhail Matovnikov. “That is because there are quite few
Austrian companies in Russia. So, first, it had to actively establish
cooperation with Russian companies and then develop retail.” Thus,
the bank assumed increased risks, but it could justify its existence
in Russia.

Currently, Raiffeisenbank has 10 additional offices in Moscow and a
branch in St. Petersburg. According to results of last year, the bank
ranks 12th among all Russian banks by size of assets. Within last
year, credit portfolio added 38% and volume of loans granted to
private clients in 2003 increased more than five times and beat $142
million. Raiffeisenbank has become one of the first foreign banks to
announce expansion into the regions. In autumn of this year, a branch
will be opened in Yekaterinburg and then – in Nizhny Novgorod and
Samara. According to Michel Perhirin, chairman of Raiffeisenbank
board, by June 2006, the bank will open at least 10 regional
branches. “Local employees will work at departments servicing local
clients. And we will work not only with largest and private clients,
but will also service medium size companies and small business.”

Similar strategy of universalization is favored by Citibank and the
IMB. These banks are in fact major competitors of Raiffeisenbank
among foreign banks. French bank Societe Generale Vostok expressed
its intention to develop all sides of banking business, including
retail.

As for differences of business of foreign subsidiaries and their
mother companies, Mr. Chetverikov believes difference is drastic.
According to him, in the West, large banks are horizontally
integrated companies. One brand unites various business subdivisions,
which don’t have a common budget. For example, one works with private
clients and the other works with corporate clients. “Representatives
of each block are members of the board of directors and report
performance results to chairman Mr. Chetverikov,” explains Mr.
Chetverikov. “This is a more flexible management structure, it has
its budget and its strategy. It organizes people.” And practically
all Russian banks and subsidiaries of foreign banks are vertically
integrated companies. “In such companies everybody is concerned that
his budget is not cut within the total budget and it complicates
work,” believes Mr. Chetverikov.

Some banks, which have come to Russia, don’t try to become universal:
their objective is to take up certain niche in the market. The
brightest example of a credit organization that implements a certain
mission is KMB-bank. It has already funded over 105,000 projects to a
total sum of $890 million. “In our development, we made major
emphasis on regional expansion,” said Ms. Cherkasova, director of the
business department at KMB-bank. “Most foreign banks are currently
operating in Moscow region only, while our bank works in 22 regions.”

Another foreign bank to choose a narrow strategy is Home Credit and
Finance Bank (HCFB). It was founded in February 2002 by acquiring a
controlling stake in Tekhnopolis Russian bank. The major participant
is Czech Home Credit Finance (a member of the international group of
companies PPF), which owns over 99% stake in the bank’s charter
capital. Major trend of work of HCFB is consumer express credits.
Missionary credit organizations are also Delta-credit bank. It deals
with mortgage crediting and last week it replaced shareholders of
Delta-bank, which, like KMB specializes in small and medium business.

A considerable part of foreign banks pursue passive policy. For
example, Turkish Finansbank and Garanti Bank do nothing else apart
from servicing Turkish construction and trading companies (for
example, Ramstor chain). The Bank of China services Chinese
entrepreneurs and tourists who come to Russia. Such banks are
secretive and shut-in. For example, management of the Bank of China
flatly declined to talk with F, without giving any reasons for
refusal. And if we go to the office of the Bank of China, which is
located in one of Moscow business centers, all information is in
Chinese only, which shuts out Russian clients. “The bank hasn’t at
all grown during the time of its operation in our country,” comments
Mr. Chetverikov. “And we have rather few Chinese enterprises, the
major function of the bank is to simplify the process of tourists’
money transfers.”

As for the Japanese Michinoku Bank, its position in the Russian
banking sector is not clear either. “The bank announced that it would
work with private clients as well, but it is difficult yet to talk
about its success in the Russian market,” explained Mikhail
Matovnikov. “And if we take into account that economic relations with
Japan are quite peculiar because of Kuril islands problem, servicing
of Japanese companies operating in Russia is very limited.”

Such institutions assume a wait-and-see attitude. “They observe the
Russian banking market and wait for conditions to be more favorable
for them,” says Mr. Chetverikov. “Their shareholders can afford to
have an unprofitable bank in Russia.”

With a long-term view, banks with foreign capital have a considerable
advantage before Russian credit organizations – they can afford to
work without a profit and even be unprofitable for a few years. This
was the case with practically all subsidiaries of foreign banks,
including Raiffeisenbank and Citibank. If the mother company is
interested in business development in a specific market, it will fund
its subsidiary bank, taking into account prospects of its development
and not immediate result. At the same time, the bank will
systematically train its employees, introduce technologies and
develop infrastructure. Russian banks have no “mother” to help with
cheap foreign funding and give its “daughter company” advice on what
kind of business is more promising. “In our country, we found a bank
and want profit this year,” says Mr. Matovnikov. “Western owners give
their subsidiary in Russia 5 or even 10 years to develop their bank
without demanding profit. Profit will come later, the bank should win
its market share first.” As a result, foreign banks can assume a more
fundamental approach while they develop their business. Additionally,
subsidiary banks come with known and well-advertised name.

Despite all possible advantages, sometimes, foreign banks offer their
services on conditions comparable with Russian banks. For example,
terms on express loans at HCFB and Russian Standard Bank and Pervoe
O.V.K. are very similar, although HCFB could have come up with a more
attractive offer for clients thanks to cheap foreign money. The
foreign bank declined to comment on this situation. However, experts
believe that the bank doesn’t slash interest rates because its
network and infrastructure are not developed yet. And if the bank
improves crediting conditions, it won’t cope with inflow of clients.
However, when it reaches certain development level, for example in
regions, tough price wars can start. However, in any case, the bank
is first of all focused on profit and will take into account high
risks of such crediting. Thus, drastic reduction in rates is not
likely to take place.

Since recently the Russian Standard has something to oppose to HCFB.
Currently, a 50% stake in Russian Standard is owned by Cetelem – a
subsidiary structure of the French BNP-Paribas. The French bank has a
Russian subsidiary, but its business is badly developed. BNP-Paribas
explained that the group tried to develop business in retail banking,
but failed and now, with Russian Standard, such possibilities
emerged. Experts suggest that Russian Standard will continue working
under its name, which is “widely recognized in Russia.”

According to experts, Russian banks won’t be able to seriously crowd
Russian banks. Competition is mostly possible in servicing private
clients and small business because large companies are taken already.
“Presence in the region is not profitable for banks and most foreign
banks don’t have branches even in large Russian cities,” says Mr.
Mamontov, president of the MICEX. “And large corporations have their
own “pocket” banks.”

According to Michel Perhirin from Raiffeisenbank, after entering the
WTO, Russia won’t lose sovereignty in the banking system as it was
the case in Eastern Europe (WTO members can’t limit access of foreign
companies to their territory). “Corporate clients of many Russian
banks will be served there because they are loyal to their owners.
And it is not easy for foreigners to buy ready networks – there are
few offers, the banking system is strongly segmented.”

Additionally, share of foreign capital in the Russian banking system
doesn’t increase – it stays within 5-6% and now it is shrinking,
experts say. Back in November 2002, the CB abolished the quote for
participation of foreign capital in the Russian banking system (it
amounted to 12%) because it decided that limitation makes no sense.

Varosian Antranik:
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