Financial News
Jason Corcoran in Moscow
01 June 2009
The state is thought to be using the crisis to tighten its grip on the country’s energy industry
The recent spurt in acquisition activity in Russia’s oil and gas sector underlines the power state-controlled entities enjoy in dealmaking.
Industry analysts claim the Kremlin is using the economic crisis to exert greater control over oil and gas assets, sometimes at the expense of foreign-owned and independent energy companies.
Thomas Beck, director of corporate finance at KPMG in Russia, said that recent deals had largely been driven by the Government and realism on pricing by both sellers and buyers.
He said: “There has certainly been an uptick in M&A activity during the second quarter so far. A lot of this is in the very early stages and, where we have seen deals, most of them have been Government-driven. This modest recovery should continue at the same pace until the end of the year when we should see some improvement in the real economy.”
Last week, mid-sized oil company Sibir Energy agreed to a takeover offer from Gazprom Neft in the state’s first big play for the assets of indebted tycoons. Gazprom Neft, the oil arm of state energy company Gazprom, had previously seen off a rival bid for an initial 16% stake in Sibir by Anglo-Russian joint venture TNK-BP. A source familiar with the situation said: “TNK-BP was either naive or called it badly. The Kremlin may have given the nod to Gazprom which is something TNK-BP would have struggled to get.”
Credit Suisse had started an accelerated bookbuild of Sibir’s shares, offering 430p a share on behalf of TNK-BP, but was trumped after Renaissance Capital intervened and offered investors 500p a share on behalf of Gazprom Neft.
Andrew Cornwaithe, co-head of investment banking at Renaissance, said: “Our structure to counter TNK-BP’s offer on a first-come first-served basis proved to be an attractive one for shareholders. In two and a half hours, we had achieved our client Gazprom Neft’s objective in acquiring a sizeable minority position in Sibir.”
Gazprom Neft has since amassed a 27.5% stake in Sibir, which stopped trading in February after it became known that Shalva Chigirinsky, one of the firm’s major private shareholders, owed the company $325m (€230m).
Gazprom is now expected to acquire an additional 23.3% stake which is owned by businessman Igor Kesayev and has been held as collateral by state lender Sberbank.
Gazprom Neft has shown an acquisitive streak in recent years, most recently by taking stakes in Russian oil producers Slavneft and Tomskneft. Its 50% stake in Tomskneft in December 2007, for example, accounted for 11% of its total oil production in 2008 and prevented a year-on-year decline in production.
Gazprom also gained control of Serbia’s national oil monopoly NIS in December last year, and has formed alliances with European energy firms to build two pipelines to pump Russian gas to northern and central Europe, bypassing Ukraine.
Analysts said the completion on May 22 of a $2.5bn deal by conglomerate Sistema to acquire six oil production, refining and marketing companies in the Bashkortostan region of Russia had all the hallmarks of a Government-sanctioned deal.
Pavel Sorokin, an oil analyst at UniCredit in Moscow, said: “If you look at Sistema’s loan conditions, they don’t have to pay interest to the state for two years. They are primarily involved in telecoms and I can see them selling the assets on to state-controlled Rosneft.”
Sorokin said independent oil and gas producers could compete better for assets in western Europe and in the neighbourhood of the Commonwealth of Independent States than at home. Novatek and Lukoil are looking to do deals domestically and overseas but even these come within the Government’s sphere of influence.
Independent oil company Lukoil recently considered a bid for Spanish energy firm Repsol and last year added a joint venture with Italian refiner ERG to other European assets. On a trip to Spain, Russian President Dmitry Medvedev criticised the reaction in Spain to a possible bid from Lukoil. He said claims that the proposal would endanger Spain’s security were based on “stereotypes” and contradicted “the idea of a united Europe”.
The board of gas producer Novatek last week approved the purchase of a 51% stake in the Yamal Liquefied Natural Gas (LNG) project in east Siberia for $650m.
Yamal was previously thought to belong entirely to Gazprombank, although Novatek said it had acquired the stakes from three companies related to Volga Resources, which is reportedly controlled by Gennady Timchenko, a prominent businessman with close links to Russian Prime Minister Vladimir Putin.
Oleg Maximov, a senior oil and gas analyst at private investment bank Troika Dialog, said: “Volga Resources is a circa 5% shareholder in Novatek. Whatever the case, such a large field could only have been transacted with Gazprom’s blessing.”
Timchenko, who also has a major stake in Gunvor, the largest trader of Russian crude oil and products, is thought to have a stake of about 5% in Novatek as he seeks to diversify his businesses. Russian daily newspaper Kommersant said the sale of Yamal would enable him to double his stake in Novatek to about 10%.
Investment banks are beginning to capitalise on the M&A activity. Deutsche Bank has recently hired William Donovan, former head of M&A for oil and gas at Goldman Sachs, while UBS has tapped Maxim Moshkov from US hedge fund giant Farallon Capital Management to run the bank’s oil and gas research team. Citigroup and Nomura are also understood to be adding to their energy research teams in Moscow.
The Kremlin is assembling a unit to advise on foreign mergers and acquisitions in the energy sector and this month hired Natasha Tsukanova, head of investment banking at JP Morgan in Russia.
The purchase of 21.2% of Hungarian oil and gas company MOL for $1.9bn in March by Surgutneftegas indicated Russia’s appetite for foreign downstream assets in the west. Surgut, which has close links to the Kremlin, has long been seen as the most conservative Russian energy company, quietly hoarding a cash pile of around $23bn.
Showing posts with label mergers and acquisitions. Show all posts
Showing posts with label mergers and acquisitions. Show all posts
Monday, 8 June 2009
Sunday, 22 February 2009
Russian M&A expected to rise amid crisis
Financial News
Jason Corcoran in Moscow
19 February 2009
The economic crisis is starting to trigger mergers and acquisitions in Russia and could lead to the formation of new national champions, according to a report by Italian bank UniCredit.
Recent deal activity has seen the takeover of London-listed, Russia-focused Imperial Energy by India's state-run energy giant ONGC.
Other deals in the offing include the bid by Polyus Gold, Russia's largest gold producer, for KazakhGold, and Russian gold producer Peter Hambro's proposed all share acquisition of iron ore producer Aircom.
The report from UniCredit said: "We expect the trend to continue, likely expanding to larger companies, as the correction of commodity prices and lack of financing should stimulate companies to search for synergies in alliances with rivals and repair balance sheets."
Steven Dashevsky, head of equities at UniCredit in Moscow, said: "Clearly we can see a lot of appetite for M&A for mid-cap deals. They are becoming more affordable and more digestible. The next step is the super-mergers. "
The report dismissed the much touted creation of the Russian equivalent of BHP Billiton from six diverse companies – Norilsk Nickel, Metalloinvest, Evraz, Mechel, Uralkali and VSMPO-Avisma – as highly unlikely, given its complexity and the lack of potential synergies.
Instead, UniCredit said it saw super-mergers among two or three Russian companies as more feasible.
The report said the combination of energy giants Surgutneftegaz-Rosneft and miners Rusal-Norilsk Nickel are the most likely candidates to form new national champions. It said it believed Surgutneftegaz's $20bn cash stockpile may prove too attractive for debt-laden Rosneft to pass up this year, while the crisis may prompt the state to tighten its control of the oil sector, which remains the key to securing budget financing and political influence in Russia.
Several Russian metals billionaires, hit hard by the credit crunch, have proposed merging their firms in various schemes that would allow the state to part-own a diversified miner in exchange for absorbing most of the owners' debts.
As for Rusal and Norilsk Nickel, UniCredit believes the threat of nationalisation due to high debt levels and increasing interest from other industrial groups such as Metalloinvest might compel the owners to merge the assets later this year.
The bank said the potential mergers of Sistema's fixed line and mobile subsidiaries MTS and Comstar, along with steel-maker Mechel and coalminer Belon, are the most reaslistic due to their simpler structure and operational synergies.
The financial strain on Sibir Energy's key shareholders raises the chances of an alliance with an oil major. UniCredit regards Gazprom Neft as the primary candidate.
Jason Corcoran in Moscow
19 February 2009
The economic crisis is starting to trigger mergers and acquisitions in Russia and could lead to the formation of new national champions, according to a report by Italian bank UniCredit.
Recent deal activity has seen the takeover of London-listed, Russia-focused Imperial Energy by India's state-run energy giant ONGC.
Other deals in the offing include the bid by Polyus Gold, Russia's largest gold producer, for KazakhGold, and Russian gold producer Peter Hambro's proposed all share acquisition of iron ore producer Aircom.
The report from UniCredit said: "We expect the trend to continue, likely expanding to larger companies, as the correction of commodity prices and lack of financing should stimulate companies to search for synergies in alliances with rivals and repair balance sheets."
Steven Dashevsky, head of equities at UniCredit in Moscow, said: "Clearly we can see a lot of appetite for M&A for mid-cap deals. They are becoming more affordable and more digestible. The next step is the super-mergers. "
The report dismissed the much touted creation of the Russian equivalent of BHP Billiton from six diverse companies – Norilsk Nickel, Metalloinvest, Evraz, Mechel, Uralkali and VSMPO-Avisma – as highly unlikely, given its complexity and the lack of potential synergies.
Instead, UniCredit said it saw super-mergers among two or three Russian companies as more feasible.
The report said the combination of energy giants Surgutneftegaz-Rosneft and miners Rusal-Norilsk Nickel are the most likely candidates to form new national champions. It said it believed Surgutneftegaz's $20bn cash stockpile may prove too attractive for debt-laden Rosneft to pass up this year, while the crisis may prompt the state to tighten its control of the oil sector, which remains the key to securing budget financing and political influence in Russia.
Several Russian metals billionaires, hit hard by the credit crunch, have proposed merging their firms in various schemes that would allow the state to part-own a diversified miner in exchange for absorbing most of the owners' debts.
As for Rusal and Norilsk Nickel, UniCredit believes the threat of nationalisation due to high debt levels and increasing interest from other industrial groups such as Metalloinvest might compel the owners to merge the assets later this year.
The bank said the potential mergers of Sistema's fixed line and mobile subsidiaries MTS and Comstar, along with steel-maker Mechel and coalminer Belon, are the most reaslistic due to their simpler structure and operational synergies.
The financial strain on Sibir Energy's key shareholders raises the chances of an alliance with an oil major. UniCredit regards Gazprom Neft as the primary candidate.
Sunday, 25 January 2009
Merrill Lynch leads Russian M&A in 2008
Business New Europe
Jason Corcoran in Moscow
January 23, 2009
Merrill Lynch has ousted JP Morgan Chase to take the crown as leading adviser to Russian merger and acquisitions in 2008.
US bank JP Morgan narrowly beat its Wall Street rival in 2007 due to its involvement in announced deals worth $40.8bn, compared with Merrill's $39.2bn. However, last year Merrill nudged ahead through advising on 14 deals worth $24bn compared with JP Morgan's 12 transactions worth $19.6bn, according to statistics prepared for bne by data provider Thomson Reuters.
During the year, Merrill's most notable deals included advising steelmaker Severstal on its $775m acquisition of US steel products manufacturer Esmark, as well as Rusal, the world's largest aluminium producer, on its taking a 25% holding in domestic rival Norilsk Nickel.
Overall, fees generated from M&A were well down last year, with Merrill Lynch earning $40.7m, compared with $58m in 2007. JP Morgan's fee income from Russian deals more than halved to $37.6m, from $78m a year ago.
Merrill Lynch is one of the few investment banks operating in Russia that is yet to cut its staffing levels. The bank has 83 staff based in Moscow and has several vacancies it is seeking to fill when the market stabilises. "We have made a lot of money in M&A and fixed income in the past year, and the business is not yet a high cost one," says one senior source. "In fact, we got lucky that we were gradually building up the brokerage business when the banking crisis struck."
Responsibility for the business lies with Riccardo Orcel, head of investment banking for Central and Eastern Europe and the Middle East and Africa, but the business is fronted in Moscow by American Bernie Sucher, head of global markets in Russia. Sergei Aleksashenko, the chairman of Russian business, quit in April last year following a dispute over the running of the operation, but sources indicated his position would not be refilled.
Harsh times
Overall, investment banks operating in Russia have been hit by a 40% slump in M&A activity with little sign of recovery until the middle of 2009.
The volumes of M&A deals tumbled by almost 40% in the three months to November 2008, according to Russian data provider Merger.ru. Some 258 transactions were completed worth $13.7bn, down by 40% from $22.6bn for the same period a year earlier. Volumes were hurt when big deals were pulled, including planned acquisitions by electricity utility OGK-1, supermarket chain Lenta and steelmaker Novolipetsk.
Russian deal activity had been growing steadily for several years until the banking crisis hit Russia in September. In the second quarter of 2008, M&A volumes were up 80% to $57bn from $31.5bn in the same period a year earlier. But from January through November, the M&A market declined by 7% to $102bn, compared with $110bn in the corresponding period of last year.
The communications sector was the most popular for deals, generating 20% of all M&A deals between September and November worth $2.7bn. The financial sector was next with 18.5% of volumes worth $2.5bn.
Russian broker Renaissance Capital was again the leading bookrunner in equity issuance for 2008 with a market share of 18% from four IPOs worth $452m. Morgan Stanley came second with three mandates worth $320 in a market where dealflow had dried up by end of the second quarter. The largest deal was a $1bn rights offering by London-listed Russian retailer X5 on April 22. Citigroup and Goldman Sachs were joint bookrunners and the underwriter was Russian broker Alfa Capital.
In debt capital markets, US bank Citigroup triumphed over Deutsche Bank with a market share of 12.4% generated from six issues worth $2.75bn. The German bank registered a market share of 10.6% from five issues worth $2.36bn, while the Royal Bank of Scotland was not too far behind with a 10.4% share from 10 issues worth $2.3bn.
http://businessneweurope.eu/storyf1423/Merrill_Lynch_leads_Russian_MA_in_2008
Jason Corcoran in Moscow
January 23, 2009
Merrill Lynch has ousted JP Morgan Chase to take the crown as leading adviser to Russian merger and acquisitions in 2008.
US bank JP Morgan narrowly beat its Wall Street rival in 2007 due to its involvement in announced deals worth $40.8bn, compared with Merrill's $39.2bn. However, last year Merrill nudged ahead through advising on 14 deals worth $24bn compared with JP Morgan's 12 transactions worth $19.6bn, according to statistics prepared for bne by data provider Thomson Reuters.
During the year, Merrill's most notable deals included advising steelmaker Severstal on its $775m acquisition of US steel products manufacturer Esmark, as well as Rusal, the world's largest aluminium producer, on its taking a 25% holding in domestic rival Norilsk Nickel.
Overall, fees generated from M&A were well down last year, with Merrill Lynch earning $40.7m, compared with $58m in 2007. JP Morgan's fee income from Russian deals more than halved to $37.6m, from $78m a year ago.
Merrill Lynch is one of the few investment banks operating in Russia that is yet to cut its staffing levels. The bank has 83 staff based in Moscow and has several vacancies it is seeking to fill when the market stabilises. "We have made a lot of money in M&A and fixed income in the past year, and the business is not yet a high cost one," says one senior source. "In fact, we got lucky that we were gradually building up the brokerage business when the banking crisis struck."
Responsibility for the business lies with Riccardo Orcel, head of investment banking for Central and Eastern Europe and the Middle East and Africa, but the business is fronted in Moscow by American Bernie Sucher, head of global markets in Russia. Sergei Aleksashenko, the chairman of Russian business, quit in April last year following a dispute over the running of the operation, but sources indicated his position would not be refilled.
Harsh times
Overall, investment banks operating in Russia have been hit by a 40% slump in M&A activity with little sign of recovery until the middle of 2009.
The volumes of M&A deals tumbled by almost 40% in the three months to November 2008, according to Russian data provider Merger.ru. Some 258 transactions were completed worth $13.7bn, down by 40% from $22.6bn for the same period a year earlier. Volumes were hurt when big deals were pulled, including planned acquisitions by electricity utility OGK-1, supermarket chain Lenta and steelmaker Novolipetsk.
Russian deal activity had been growing steadily for several years until the banking crisis hit Russia in September. In the second quarter of 2008, M&A volumes were up 80% to $57bn from $31.5bn in the same period a year earlier. But from January through November, the M&A market declined by 7% to $102bn, compared with $110bn in the corresponding period of last year.
The communications sector was the most popular for deals, generating 20% of all M&A deals between September and November worth $2.7bn. The financial sector was next with 18.5% of volumes worth $2.5bn.
Russian broker Renaissance Capital was again the leading bookrunner in equity issuance for 2008 with a market share of 18% from four IPOs worth $452m. Morgan Stanley came second with three mandates worth $320 in a market where dealflow had dried up by end of the second quarter. The largest deal was a $1bn rights offering by London-listed Russian retailer X5 on April 22. Citigroup and Goldman Sachs were joint bookrunners and the underwriter was Russian broker Alfa Capital.
In debt capital markets, US bank Citigroup triumphed over Deutsche Bank with a market share of 12.4% generated from six issues worth $2.75bn. The German bank registered a market share of 10.6% from five issues worth $2.36bn, while the Royal Bank of Scotland was not too far behind with a 10.4% share from 10 issues worth $2.3bn.
http://businessneweurope.eu/storyf1423/Merrill_Lynch_leads_Russian_MA_in_2008
Tuesday, 31 July 2007
Domestic loans frenzy attracts foreign buyers
Financial News: Focus on Russia
Jason Corcoran
30 July 2007
Booming demand for credit brings in multi-nationals
A consumer lending frenzy has gripped Russia with the resulting boom in mortgages, credit cards and consumer loans fuelling a mergers and acquisitions scramble in financial services.
Consumer lending had shot up to $80bn (€58bn) by the end of last year, from $20bn in 2004, according to Alfa Bank. Advertisements for “fast and easy credit” and “credit in 20 minutes” are plastered over Moscow’s Metro and in the city’s newspapers.
Mortgages total 0.9% of Russian’s GDP and other housing loans represent 1.4%. Moscow brokerage Aton Capital estimates 100 million Russians have never taken any kind of loan.
Foreign banks are keen to tap into this growing market and are snapping up medium and small-sized domestic banks.
This month, French financial group Société Générale, which had acquired a 20% stake in Rosbank, filed a request to exercise an option worth $1.7bn to take control of the Russia’s second largest retail bank. The deal is expected to be made at a record-high premium, with a price-to-equity ratio of 5.9.
Belgian bank KBC is set to pay $983m to acquire a 95% stake in second-tier mortgage bank Absolut Bank. The transaction is expected to close in the third quarter.
Other western banks building stakes in local banks include America’s Morgan Stanley, Austria’s Raiffeisen, Belgium’s Dexia, Germany’s Commerzbank, Nordic’s Nordea, Hungary’s OTP and Czech Republic’s PPF Group.
David Nangle, a banking analyst at Renaissance, said: “Following recent deals involving Raiffeisen, SG, OTP and some others, we firmly believe that the Russian banking market is now fair game for foreign bank investors, both from local banks’ willingness to allow foreign partners and international banks’ increasing appetite for Russian banking assets.”
President Vladimir Putin signed a law at the end of last year that put foreign investors on the same footing as Russians and allowed them to purchase of up to 20% in Russian banks without the approval of the central bank. Previously, foreign investors had to obtain regulatory approval for any level of ownership.
Of the multi-national finance companies, Citi is the most firmly established, having set up consumer banking in Russia in 2002. It serves more than 400,000 retail and 1,500 corporate clients from 60 local branches.
HSBC’s Russian subsidiary has received a licence to provide retail banking and is expected to have a limited network operating by the end of this year. HSBC chairman Stephen Green has said the sector in Russia is “crying out for good quality service from international competitors”.
Germany’s Deutsche Bank is considering adding consumer lending to its existing operations in corporate and investment banking and UK bank Barclays is due to open a Moscow office with 200 staff.
Rustam Botashev, a banking analyst at Aton, said he regarded Russia’s banking sector as the most attractive in the Commonwealth of Independent States because it has low levels of penetration, the country’s population is large and it has strong economic growth.
He said: “Untapped demand for retail banking services in Russia has attracted multi-national financial corporations to the country. These foreign banks are often in better positions than their Russian counterparts, thanks to cheap funding and strong expertise.”
Foreign ownership of Russian banks is set to rise from 12% to 18% by the end of this year, the Central Bank said. However, not all Russian banks are selling to foreign strategic investors.
The larger ones, including Troika, Alfa and MDM, are considering flotations, while recent IPOs by state-controlled Sberbank and VTB have increased the Russian banking industry’s capital by 25%.
The three state-controlled banks still have a strong hold over the market. Sberbank has a 50% share of retail deposits.
The remainder of the industry is highly fragmented said analysts. They say domestic banks would have to merge or be acquired by a larger company to fight off increased competition.
And, according to Aton, with the exception of VTB, most domestic banks face serious competition from foreign banks.
Its report said: “There are few Russian banks able to serve as a consolidator and therefore help the industry compete effectively against foreign institutions, which continue to strengthen their presence.
Russian banks lack access to cheap funding and have far less integration and retail banking expertise than their international counterparts.”
The insurance and asset management sectors have also attracted interest from foreign companies, although not to the same extent as retail banking.
In April, Germany’s Allianz took overall control of its insurance and fund management joint venture Rosno from its Russian partner Sistema.
Level of defaults causes concern
Unprecedented growth in the retail banking sector has highlighted some deficiencies. This month, US rating agency Fitch said a high degree fragmentation, high loan growth rates and a lack of regulation were sources of weakness in Russia’s financial industry.
James Watson, senior director in Fitch’s Institutions group, said: “Rapid growth of lending is a concern, although this is mitigated by moderate penetration and a supportive credit environment.
“Asset quality is generally sound, supported by the buoyant economy, but impairment is increasing in unsecured retail portfolios as loan books season.”
Russian independent agency RusRatings estimates that the total volume of overdue retail loans could be about 75.5bn roubles ($3bn), triple the 2006 figure.
Richard Hainsworth, chief executive of RusRatings, said some banks have been charging interest rates of more than 50% on consumer loans and this had led to a high number of defaults.
He said: “Russian banks advertise a nominal interest rate, as low as 10%, while effectively charging more than 50%. The remaining payments are for a wide variety of extra costs, such as a charge for opening the account, taking money from the account to pay for goods and insurance cover.”
Warning signs of a potential consumer credit bubble have been flagged in the Russian press.
Business daily newspaper Kommersant recently reported that Russian debtors were defaulting on approximately 35% of outstanding loans.
Yet Stephen Jennings, head of Renaissance Capital, which has its own consumer banking arm, said there was little to fear as credit penetration and household debt were low. He said: “I would be a thousand times more worried about debt in the good old USA than I would be in Russia.
“It’s an immature market, so that means you will have players who take on credit exposure that they don’t understand and that the market doesn’t understand.”
However, Jennings said only 4% or 5% of Renaissance’s debtors were defaulting on loans.
Belgium-Dutch group Fortis has a fund management alliance with KIT of St Petersburg and UniCredit subsidiary Pioneer Investments has announced its return to Russia after six years away.
Jason Corcoran
30 July 2007
Booming demand for credit brings in multi-nationals
A consumer lending frenzy has gripped Russia with the resulting boom in mortgages, credit cards and consumer loans fuelling a mergers and acquisitions scramble in financial services.
Consumer lending had shot up to $80bn (€58bn) by the end of last year, from $20bn in 2004, according to Alfa Bank. Advertisements for “fast and easy credit” and “credit in 20 minutes” are plastered over Moscow’s Metro and in the city’s newspapers.
Mortgages total 0.9% of Russian’s GDP and other housing loans represent 1.4%. Moscow brokerage Aton Capital estimates 100 million Russians have never taken any kind of loan.
Foreign banks are keen to tap into this growing market and are snapping up medium and small-sized domestic banks.
This month, French financial group Société Générale, which had acquired a 20% stake in Rosbank, filed a request to exercise an option worth $1.7bn to take control of the Russia’s second largest retail bank. The deal is expected to be made at a record-high premium, with a price-to-equity ratio of 5.9.
Belgian bank KBC is set to pay $983m to acquire a 95% stake in second-tier mortgage bank Absolut Bank. The transaction is expected to close in the third quarter.
Other western banks building stakes in local banks include America’s Morgan Stanley, Austria’s Raiffeisen, Belgium’s Dexia, Germany’s Commerzbank, Nordic’s Nordea, Hungary’s OTP and Czech Republic’s PPF Group.
David Nangle, a banking analyst at Renaissance, said: “Following recent deals involving Raiffeisen, SG, OTP and some others, we firmly believe that the Russian banking market is now fair game for foreign bank investors, both from local banks’ willingness to allow foreign partners and international banks’ increasing appetite for Russian banking assets.”
President Vladimir Putin signed a law at the end of last year that put foreign investors on the same footing as Russians and allowed them to purchase of up to 20% in Russian banks without the approval of the central bank. Previously, foreign investors had to obtain regulatory approval for any level of ownership.
Of the multi-national finance companies, Citi is the most firmly established, having set up consumer banking in Russia in 2002. It serves more than 400,000 retail and 1,500 corporate clients from 60 local branches.
HSBC’s Russian subsidiary has received a licence to provide retail banking and is expected to have a limited network operating by the end of this year. HSBC chairman Stephen Green has said the sector in Russia is “crying out for good quality service from international competitors”.
Germany’s Deutsche Bank is considering adding consumer lending to its existing operations in corporate and investment banking and UK bank Barclays is due to open a Moscow office with 200 staff.
Rustam Botashev, a banking analyst at Aton, said he regarded Russia’s banking sector as the most attractive in the Commonwealth of Independent States because it has low levels of penetration, the country’s population is large and it has strong economic growth.
He said: “Untapped demand for retail banking services in Russia has attracted multi-national financial corporations to the country. These foreign banks are often in better positions than their Russian counterparts, thanks to cheap funding and strong expertise.”
Foreign ownership of Russian banks is set to rise from 12% to 18% by the end of this year, the Central Bank said. However, not all Russian banks are selling to foreign strategic investors.
The larger ones, including Troika, Alfa and MDM, are considering flotations, while recent IPOs by state-controlled Sberbank and VTB have increased the Russian banking industry’s capital by 25%.
The three state-controlled banks still have a strong hold over the market. Sberbank has a 50% share of retail deposits.
The remainder of the industry is highly fragmented said analysts. They say domestic banks would have to merge or be acquired by a larger company to fight off increased competition.
And, according to Aton, with the exception of VTB, most domestic banks face serious competition from foreign banks.
Its report said: “There are few Russian banks able to serve as a consolidator and therefore help the industry compete effectively against foreign institutions, which continue to strengthen their presence.
Russian banks lack access to cheap funding and have far less integration and retail banking expertise than their international counterparts.”
The insurance and asset management sectors have also attracted interest from foreign companies, although not to the same extent as retail banking.
In April, Germany’s Allianz took overall control of its insurance and fund management joint venture Rosno from its Russian partner Sistema.
Level of defaults causes concern
Unprecedented growth in the retail banking sector has highlighted some deficiencies. This month, US rating agency Fitch said a high degree fragmentation, high loan growth rates and a lack of regulation were sources of weakness in Russia’s financial industry.
James Watson, senior director in Fitch’s Institutions group, said: “Rapid growth of lending is a concern, although this is mitigated by moderate penetration and a supportive credit environment.
“Asset quality is generally sound, supported by the buoyant economy, but impairment is increasing in unsecured retail portfolios as loan books season.”
Russian independent agency RusRatings estimates that the total volume of overdue retail loans could be about 75.5bn roubles ($3bn), triple the 2006 figure.
Richard Hainsworth, chief executive of RusRatings, said some banks have been charging interest rates of more than 50% on consumer loans and this had led to a high number of defaults.
He said: “Russian banks advertise a nominal interest rate, as low as 10%, while effectively charging more than 50%. The remaining payments are for a wide variety of extra costs, such as a charge for opening the account, taking money from the account to pay for goods and insurance cover.”
Warning signs of a potential consumer credit bubble have been flagged in the Russian press.
Business daily newspaper Kommersant recently reported that Russian debtors were defaulting on approximately 35% of outstanding loans.
Yet Stephen Jennings, head of Renaissance Capital, which has its own consumer banking arm, said there was little to fear as credit penetration and household debt were low. He said: “I would be a thousand times more worried about debt in the good old USA than I would be in Russia.
“It’s an immature market, so that means you will have players who take on credit exposure that they don’t understand and that the market doesn’t understand.”
However, Jennings said only 4% or 5% of Renaissance’s debtors were defaulting on loans.
Belgium-Dutch group Fortis has a fund management alliance with KIT of St Petersburg and UniCredit subsidiary Pioneer Investments has announced its return to Russia after six years away.
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