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Banking Matters: Mixing vodka and lending in Russia

14 Сентября 2007

International Herald Tribune
By Karina Robinson


MOSCOW: Business consultants at McKinsey were aghast when a Russian entrepreneur, Roustam Tariko, told them he wanted to call his new bank — for which they had drawn up the plans — the same as his vodka brand, Russian Standard.

He overruled them and Russian Standard Bank, created in 2000, is now among the top three most profitable banks in Russia and the largest specialized consumer finance bank, according to the credit rating agency Standard & Poor’s.

“The vodka business is an excellent business and the credit business is brilliant,” said Al Breach, a Moscow-based economist and strategist for Russia at UBS.
Market research commissioned by Tariko at the time showed that Russians trusted the vodka brand enough to borrow from a bank with the same name — highlighting the differences between consumers in Russia and in developed markets, where alcohol and banking are never mentioned in the same breath.

However, the Russian banking system is evolving into that of a developed market, albeit in a turbulent fashion, as evidenced by the assassination last September of a top central bank official, Andrei Kozlov, who was cracking down on banks suspected of money laundering.

With the Russian economy booming, consumer credit is set to continue growing at high rates. This is the ninth year of average annual growth in gross domestic product of 7 percent; UBS forecasts growth of between 7 percent and 8 percent annually over the next 10 years.

Total retail credit represents only 10 percent of GDP, which gives a good idea of the potential of the Russian market, Breach said. In many developed countries it is over 100 percent.

Russian Standard’s two main lines of business are credit cards, where it says it has close to two-thirds of the market, and consumer loans given out in shops, where it has a market share of about 40 percent. It pioneered efficient credit scoring in Russia, meaning that it took only 15 minutes for loans to be extended to customers eyeing up home appliances and other products in shops.

“The market was empty,” said Dmitry Levin, chief executive of Russian Standard Bank. In 2000, foreign banks were still smarting from their losses in the 1998 Russian crisis, state banks like Sberbank took a week to make loans for even a small amount of money, and most banks were more intent on gathering deposits than lending.
The banking environment has now changed and analysts are expecting the bank’s dominant market shares to erode as competition heats up. Just as indicative of the development of the banking system is an investigation by the financial authorities in August which resulted in Russian Standard — and its competitors — being told to end the practice of hidden charges on loans, which they piled up on top of the advertised interest rate.

Tariko, who owns close to 100 percent of the bank, insists the decision will actually be advantageous to his bank.

“I believe the market for consumer lending will become more professional, more transparent, rates will go down and there will be less risky products,” he said. “I am expecting consolidation pretty quickly as smaller operators will exit the business. All these things will be beneficial for Russian Standard.”

That may be putting a positive spin on the chief executive’s estimated 5 percentage point drop in the bank’s net interest margin, to 31 percent for full year 2007, compared with the first six months of the year. Levin said that from January the bank had already eliminated fees and commissions from credit cards, which represent 60 percent of its balance sheet. Of the 40 percent of the balance sheet made up of consumer loans, half of these already had no commissions because Russian Standard had anticipated the development of the market.

The bank is facing a second major challenge with its business model for securing financing. Sixty-five percent of Russian Standard’s funds comes from international capital markets, which are laboring under a major credit crunch.

Levin believes that concerns about the bank’s exposure are misplaced because the higher cost of funding for the year, which he estimates at between 100 and 200 basis points, will be offset by the drop in the cost of the bank’s hedging. It hedges 100 percent of its foreign currency borrowings, he says, and the cost of hedging has fallen dramatically from 1 percent last year to between 0.1 percent and 0.2 percent this year.

The bank is looking to change its funding mix so that by 2011 deposits, which are generally a cheaper and more reliable funding method than the international capital markets, will be 25 percent of the total, up from the current 5 percent. But on the negative side, that means higher costs from having to run more branches.

However Russian Standard is launching a host of retail loan products to take advantage of a larger branch network, with the hope that it can replicate its success in consumer loans and credit cards.

It has also just set up a private banking arm called — naturally — Imperia, after Russian Standard Vodka’s top of the range vodka brand.