The procession of western banks into the Russian market has only just begun, the chief executive of Belgian-based KBC bank told Emerging Markets after the group acquired Absolut Bank.
“About 13% of the Russian banking sector is in the hands of foreign shareholders. Compared to most other countries in central and eastern Europe that’s relatively low”, said CEO Andre Bergen.
“I hear in the market that a number of western institutions are looking to invest in Russia. Prices are not excessive, considering that rapid growth will continue for years to come.”
KBC has agreed with the shareholders of Absolut, a Moscow-based universal bank, to acquire 92.5% of the shares in a deal that values the bank at E61 million, 3.8 times its book value. Absolut has an emphasis on SME lending, especially to the construction sector.
If the owners of Russian banks don’t sell up, they may decide to conduct initial public offerings, some market participants believe. Svetlana Klochko, head of financial institutions at Citigroup Moscow, told Emerging Markets: “There are still a dozen Russian banks that foreign players are looking at. Ultimately it will depend on how the current owners view the market. Another possibility is that we will see more IPOs.”
The success last week of the IPO by state-controlled VTB, Russia’s second largest bank – whose Global Depositary Receipts opened 8.4% above the initial price in London – will encourage others. VTB chairman Andrei Kostin said the bank had seen strong institutional demand from all regions as well as “significant demand” from Russian retail investors.
A strategic partnership was announced on Thursday between Amsterdam-based consumer finance specialists PPF Group and Nomos Bank, one of Russia’s leading privately-owned corporate lenders. They aim to establish a universal bank in Russia.
Nikolai Dobrinov, Nomos chairman, said: “The partnership will allow us to create one of the largest universal banking groups in Russia, with net asset value in excess of $6 billion.”
Credit quality is at the centre of investors’ thoughts, since retail lending has ballooned in Russia over the last year, with millions of people taking point-of-sale loans car loans – and now mortgages – for the first time.
Consumer finance is so new in Russia that most borrowers have no credit profile, and expanding so rapidly that – although most banks have fairly robust systems in place – no-one knows what rates of default or non-payment to expect.
Bergen at KBC said: “The big danger with such a high-growth economy is slackening credit standards. We have looked at this very carefully – and we have been there before, in eastern Europe.”
Loan-value relationships will be different from those in a western economy, Bergen pointed out, and in the mortgage market it will be “critical” to look at the assumed value of the property, which tend to be overstated in emerging markets.