Russian bank roulette
Shares in the bigger Russian banks are spiking on the belief of further consolidation and privatisation in the sector, writes Richard Hemming
In the past year, Russian President Dmitry Medvedev has spoken of his ambitions to turn Moscow into a global financial centre rivalling New York, London and Hong Kong. In the wake of a perceived global clampdown on pay and bonuses, as well as increasing capital requirements, he has said that those banks that were struggling in their home markets might find Moscow a friendlier place from which to operate. Institutional investors have mixed reactions about the potential for above average returns from Russian banks, which still number over 1,000. But, all agree that the sector is maturing, consolidating and privatising, and that there are opportunities among the bigger operators, which are slowly becoming more sophisticated. Meanwhile, the highest profile players have been performing extremely well.
Shares in the biggest, Sberbank, appreciated over 40% in the past six months (over three years it is still down 24%); the second biggest, VTB, has climbed 25% over the same period (and is only 9% down over three years). Both are majority-owned by the Russian government, which is in the process of privatising its stakes.
Gennady Sukhanov, chief analyst at TKB BNP Paribas Investment Partners, believes that there is value in the sector, but adds that this does not include the majority of ‘captive banks’ that serve only a small number of interests (including owners and employees). Excluding these, and focusing on the largest 50 or so ‘real’ banks, Sukhanov identifies half a dozen opportunities that are listed and have enough liquidity for institutions to invest.
“We like the banking sector because of its exposure to domestic demand and growth in disposable income,” he says. “Our investable universe includes Sberbank, VTB and a few smaller banks that are not liquid, like the Bank of Moscow and the Bank of St Petersburg.”
The big factor in Russian banks’ favour is that, while other countries were going through major credit booms, Russia was not. Retail loans only commenced about five years ago and only in 2010 have domestic credit card services been launched. Now things are picking up - Russian banks’ mortgage loan approvals grew 100%, year-on-year, during Q1 2010 - and the banks have fewer bad debts on their books.
“Through turbulent times the ratio [of credit available] has been slowly increasing,” says Sukhanov. “In 2005, we witnessed double-digit growth in retail and corporate loans, but it’s still at a low level, and total bank loans-to-GDP is less than 50%.” The UK’s aggregate domestic debt (excluding loans to non-UK residents) is 3.8-times GDP, according to McKinsey Global.
The state has played a big part in assisting the smaller, more vulnerable banks. Many large banks like VTB were used to ‘insure’ smaller lenders during the 2008-09 crisis and have increased their assets. The government poured more than RUB1trn (€24.2bn) into the banking system during the financial crisis, drawing on its considerable oil wealth reserve fund to stabilise the financial sector. One of the biggest beneficiaries was Sberbank, which has close to a 50% market share of retail deposits. “The fact that some banks are majority-owned by the government has not been a worry,” says Dimitri Kryukov, a senior portfolio manager with Verno Capital. “On the contrary, in the turbulence of 2008 and 2009 the government acted as a guarantor, which was a big positive for stability.”
Consolidation and privatisation are big factors driving the share prices in the bigger banks.
“State and private banks like MDM Bank and Alpha Bank are buying regional businesses because scale is increasingly important, especially if you are looking to the retail market,” says Ivan Ivanchenko, a senior analyst with VTB Capital. He points to Sberbank with its broad regional network. There have been reports that Sberbank might want to purchase an investment bank, possibly Troika Dialog or Renaissance Capital; and VTB’s purchase of Transcreditbank was announced at the start of October.
Analysts believe that consolidation will continue, albeit at the slow pace of about 5% a year, despite a measure from Russia’s finance ministry to raise the minimum capital requirements for banks to RUB1bn being delayed until after the ‘stabilisation’ of the financial sector. (In any case, the requirement rose to RUB90m on 1 January, and is due to be doubled from 1 January 2012). One of the aims of the measure was to reduce the number of banks to 500, identified by Finance Minister Alexei Kudrin as the optimal number for stability.
Adding to the upward pressure on share prices is the intended privatisation of state companies, including major banks. In November, Russia’s economic development minister Elvira Nabiullina said the government expects to raise RUB1tn from 10 assets - including Sberbank and VTB - by 2013.
Some are less sanguine about the industry. Jerome Booth, head of research at Ashmore Investment Management, draws attention to the riskiness for minority investors in majority state-owned entities. “There was a World Bank programme to spend $1bn (€756mn) on restructuring them in the wake of the crisis in 1998, but it never happened.” The fact that oil companies and large banks are mainly state-owned because of their national importance should be a warning for private investors, he suggests. Ashmore’s portfolio does contain some of the bigger banks, but Booth sees better value in other sectors that benefit from increasing disposable income. “The Russian play is oil, but you wouldn’t necessarily go through banks or oil companies, but rather other companies that benefit from consumption,” he argues. “As an equity investor you might buy mobile phone or gas companies.”
But what about Medvedev’s global finance pretensions? “It won’t happen in the near future because the government has not established the legal groundwork,” says Verno Capital’s Kryukov. Sukhanov agrees, pointing to the large number of financial exchanges in Russia. “The problem for Russian exchanges is that the local currency is the rouble and some laws are not complete,” he says. “You cannot trade complex instruments such as eurobonds, depository receipts and CDS. The market for local equities is quite liquid, but even this is split between Moscow and London.”
Understandably, those working for the exchanges are more optimistic. Andrey Salaschenko, a director of RTS Stock Exchange, says: “Today we have built an effective derivatives market - in the world’s top 10 according to the FIA survey. We should develop the equity market as well because it is one of the major driving forces of the financial market.” He does concede that liquidity needs to improve, and notes that ambitions about being a global centre will be dealt a blow if the current round of privatisations planned by the ministry of economic development is conducted through the London Stock Exchange rather than domestic venues, as is being considered.
Wherever these privatisations occur, investors are still gambling on rising Russian bank share prices, influenced by the belief that the state will resist the temptation to demand overvalued prices that might jeopardise the sale of other state assets. Russians are a lot of things, but short-sighted is not one of them.