THE PHENOMONAL EXPANSION OF CONSUMER FINANCE IN THE RUSSIAN FEDERATION: GET READY FOR A FAST RIDE!
How would you like the prospect of your business growing dozens or even hundreds of percent per annum? One of the few places to experience such growth is to be found in the consumer finance sector in the Russian Federation. The total volume of credit granted to Russian consumers has doubled in each of the last two years, and at the end of 2004 it totalled RUB 616.5 billion (£11.8 billion) - a figure provided by the Central Bank of Russia.
Despite such phenomenal growth, the Russian consumer finance market is still in its infancy and its potential is enormous. The broad market statistics would appear to support this statement: the ratio of household debt and Russian GDP, for example, was as low as 3.7% at the beginning of 2005, compared to 9% – 20% in CEE countries, such as the Czech Republic and Poland, and even as high as 70.5 % in the United Kingdom.
Home Credit & Finance Bank (HCFB), which is a part of the Czech financial group PPF, is a prime example of a company benefiting from the significant growth in the Russian consumer finance market. During 2004, the bank succeeded in increasing the amount of principal granted to its retail customers by more than 4.2 times to RUB 28.5 billion. HCFB, which specializes in point-of-sale loans, only entered the Russian market in July 2002. Home Credit was the first bank to launch its consumer finance operations in Russia with 100%foreign capital. Despite the tough competition among banks operating in consumer finance and from institutions with longer track records, HCFB gained an astonishing 33.5 % share of the POS loan market by the middle of 2005. The bank is also closing the gap on the market leader - Russian Standard Bank - which controlled 39% of the POS loans market in the same period. It is interesting to note that the market shares of the two banks stood at 41% for RSB and 23% for HCFB at the beginning of 2004.
A key driver of the growth in loans granted by HCFB owes much to the bank's success in developing and expanding its distribution network across Russia. The number of partner-retailers which offer HCFB's loan products grew from fewer than 3,500 outlets in 2003 to over 12,700 as of 1st July, 2005. The bank expects this figure to reach 15,000 by the end of the year.
Notwithstanding the extraordinary market opportunity for consumer finance in Russia itself, the country also serves as a geographic and strategic gateway to other territories. After Russia, the Home Credit Group plans to expand its consumer loan activities in Ukraine and in Kazakhstan by the end of the year. These two countries alone have almost 65 million inhabitants combined. To accelerate its plans for these new markets, Home Credit will continue to co-operate with those retail chains that sell Home Credit's products in Russia and which are also active in Ukraine and Kazakhstan. And it is clear that entering the Kazakhstani and Ukrainian markets will not signify the end of Home Credit's expansion plans.
How is such major expansion being funded? Typically, consumer finance companies fund their expansion through the bond markets and that is certainly the case of HCFB. In the past year, HCFB established itself as an important player in both the domestic and international debt capital markets. The bank has placed on the domestic market one issue of RUB 1.5 billion and two bonds of RUB 3 billion which attracted strong demand from Russian and international investors. In addition, HCFB has also placed two eurobonds, both within the first half of 2005. The first issue of USD 150 million took place in January 2005 and investors from 15 countries oversubscribed the issue by 1.5 times. The second issue in June of this year was nearly twice oversubscribed and the funding size was increased from a target of USD 250 million to USD 275 million to meet the demand from investors.
HCFB has further plans for expansion in this rapidly evolving consumer finance market in Russia and will actively tap the capital markets to fund its growth strategy. The outlook for growth is extremely positive and the market continues to be relatively untapped. According to recent market research data from the Business Vision agency, more than 70% of consumers in Russia require flexible credit products. Furthermore, analysts at Ernst & Young expect a 20-30% increase in home appliance purchases on credit next year and anticipate further growth of other consumer finance services in Russia.
This outlook represents a major investment opportunity for investors.