Capital raising is this year’s priority for Russian banks, as they struggle to meet booming demand generated by greater personal and corporate incomes. More banks are expected to start trading shares publicly or bring in investment by western or domestic partners.
The more banks that come to the market with IPOs the better, Michel Perhirin, chief executive officer of MDM Bank, tells Emerging Markets. “The growth of the banking system – close to 40% annually – and the need for capital mean that banking organizations are obliged to look at expanding their permanent resources.”
Perhirin, a pioneer of western banking in Moscow who took Societe Generale into Russia in 1993 and Raiffeisen in 1996, and took over at the helm of MDM last year, adds: “To succeed in an IPO, a bank has to work thoroughly to adjust its structures, to harmonize them to the model investors expect. This is not easy.”
Capital adequacy is becoming a priority for Russian banks because “many of them cannot internally generate sufficient capital to support their rapid balance sheet growth”, Dmitry Dmitriev, banking analyst at Deutsche UFG, says.
Last year the leading Russian banks opted for subordinated borrowings: those from Sberbank, Vneshtorgbank, Promstroibank, Bank of Moscow and Alfa totalled $2.7 billion. But this is only a temporary solution, Dmitriev warns – firstly, because under both Russian regulations and the Basel Capital Accord, such tier 2 capital may not exceed half of tier 1; and secondly, because subordinated issues and loans are “only realistic for banks with excellent credit quality”.
“The sector needs capital badly,” Dmitriev argues in a recent report. In view of the expected sector growth, and banks’ attractive multiples, there will be a new supply of capital markets deals from the sector – all the more so since the Russian authorities are encouraging such deals.
Powerful demand for personal loans, mortgages and other retail financial services is a key driver. Post-soviet Russia has never had it so good, and the retail loan market has been growing by 90% annually since 2003.
Western players including Citigroup and SG, as well as Russian banks that have previously concentrated on corporate lending, are committing resources to entering
the retail market. Perhirin says that MDM, which has traditionally been “very strong in investment banking”, will consider “adding more pillars to sustain profitability and growth, including retail, and extensive use of our large regional network”.
A recent analysis of the retail market by RusRating, the specialist banking analysts, concludes that it will continue to grow “at least in the medium term”, but also warns that overdue client obligations are increasing, particularly at banks that specialize in retail lending.
Retail loan volumes have surpassed one trillion roubles and are approaching 20% of the banking sector’s aggregate portfolio, RusRating says. The volume of demand and overdraft loans, mostly extended via plastic cards, swelled by 375% in 2005. Overdue client obligations rose by 277%, to more than 20 billion roubles.
Is too much credit available to retail borrowers? Yes, Perhirin says. “As a banker you must always think of fraud and risk of giving easy access to loans. You pay cash for your mistakes!”