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Russian banks bet on efficiency, forget growth

February 4, 2010

MOSCOW – Russia’s leading banks are pinning their hopes on improving efficiency and cutting costs, rather than winning market share, as credit-worthy borrowers remain scarce, key players said on Thursday.

Russian banks had expanded aggressively while the economy boomed on the back of sky-rocketing oil prices, until the global financial crisis hit them hard last year causing bad loans to snowball.

“The banks are suffering a lack of quality demand from borrowers. It has been a borrower’s market in recent months,” Anton Karamzin, chief financial officer (CFO) at state-run Sberbank (SBER03.MM), Russia’s No.1 lender, told Troika Dialog’s Russia Forum, the first major investment conference of the year. “Now Sberbank’s risk appetite is a choice between moderate and conservative depending on how the economy feels.”

Sberbank and VTB (VTBR.MM) both hope to increase earnings substantially this year as the recovery encourages retail lending, but the central bank does not expect the sector to show huge profits.

State-run VTB, which has made losses in five consecutives quarters, said its new strategy is to focus on efficiency.

“Growth was very important for us to capture market share, to become relevant to largest clients. Post-crisis the focus of our strategy changes to efficient growth, not the growth of market share,” Herbert Moos, VTB’s CFO said.

Russian banks’ lending portfolio may grow by 20 percent in 2010, the central bank forecasts, but the growth prospects are still seen too fragile to believe in and look modest compared with the economic boom years when the sector used to increase assets by more than 50 percent a year.

“Before the crisis, banks competed on who takes more risks on the balance sheet. Nobody wants to live that way now. The banks now want to take only quality risks,” Oleg Vyugin, a chairman of the board of Russia’s second-largest private bank MDM said.

At the same time, banking services penetration is still extremely low and many people prefer to keep their cash under mattresses rather than in banks.

“The situation stabilises, but the question is what comes next. Banks need to find the way to be sustainably profitable without excessive sector growth,” Nick Tesseyman, a director at European Bank for Reconstruction and Development [EBRD.UL] said.


Banks are expected to gradually cut lending rates, as the central bank’s key refinancing rate has been already cut by 425 basis points since April 2009 to 8.75 percent to help restart the economy.

But the bankers say their margins are under pressure as the borrowers want cheaper loans while the funding costs remain high with capital and debt markets still unstable.

“The strong competition on who can cut costs to the minimum level begins,” German Gref, Sberbank’s chief executive officer, told the Troika forum.

Bankers say diversification and new products are the main instruments to resist declining margins and show the profits the shareholders want to see.

“We will focus on proper capital allocation across our businesses. The idea is not to compete on price but rather on the quality and quantity of our products,” VTB’s Moos said. (Reporting by Dmitry Sergeyev; Editing by Erica Billingham).


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