Page 32 - IFR Opportunities in Russian capital markets

CHAPTER02
ifrintelligence reports/Opportunities in: Russian Capital Markets
In May 2004, the CBR exercised the newly-enacted anti-money laundering laws to withdraw the licence of Sodbiznesbank – the first time any bank licence had ever been withdrawn.
Bankers were spooked. A blacklist quickly circulated of small and medium-sized banks that market participants thought the CBR was about to close down, which caused the interbank market to collapse as bigger banks cut off smaller banks. As small banks have few resources of their own, they depend on borrowing on the interbank market for their liquidity to fund what transactions they do, and dozens of small banks quickly found themselves in real trouble.
Things got worse when professional rivals took advantage of the panic to attack their rivals and spurious newspaper reports that Alfa Bank, one of Russia's top five commercial banks, was in trouble started a run on deposits, forcing the owners to fly in US$800m in cash to shore up confidence in the bank.
The CBR acted quickly and restored confidence within a few weeks and the only real casualty was the top 20 Guta bank, which was taken over by state-owned VTB, Russia's second largest bank (named Vneshtorgbank at the time).
Indeed the Kremlin took advantage of the crisis to bolster VTB's position: instead of bailing out wobbly banks directly, the CBR chose to grant VTB a US$800m loan which it used to buy up loan portfolios of troubled banks and so increase its position in the market, as well as launching its retail operations with the acquisition of Guta Bank's extensive branch network.
Deposit insurance
The 2004 mini-crisis turned out to be a useful slap on the wrist for Russia's bank sector. It did little real damage, but galvanised both the Kremlin and the Duma into action, while bolstering both Ignatyev's reputation and the CBR's authority.
Following 2004, the CBR will act to close down banks that break the rules on a monthly basis. Bankers routinely ignored CBR instructions in the past; as long as their pro forma documents were in order there were few consequences. Now, if the CBR orders a change, bankers take it seriously. This change in environment has also contributed to the decision by many bank owners to sell out.
The mini-crisis pushed the Duma into rushing through the deposit insurance laws in December 2004. These are the cornerstone of the CBR's plans to restore confidence in the bank sector from consumers who have been robbed of their life savings three times since 1991 by bank crises.
Personal savings have been rising steadily over the last seven years, from 7.6% of GDP in 1999 to 12.8% at the end of 2006, but this still represents a low savings rate as Russians remain wary of the banking sector.
All of Russia's 1,400 banks (at the end of 2006) were forced to re-apply for their general licence if they wanted to offer services to retail customers. In effect, the entire sector was re-licensed. Analysts were hoping the CBR would take the opportunity to close down hundreds of banks, as Russia is clearly over-banked.
They say that Russia only needs about 300 banks and the 1,000 smallest banks account for about 5% of the total banking assets, while the five largest banks (three of which are controlled by the state) control 43.8% of total assets as of the end of 2006. The 20 biggest banks account for 73.8% of total assets and the 50 largest banks hold just under 90% of all bank assets.
Afraid of moving too quickly and causing a systematic meltdown of the sector, in the end the CBR let just under 1,000 banks into the deposit insurance system from the total of 1,400.
Sector consolidation
But the re-licensing was not a failure. The CBR forced banks applying for the scheme to declare their beneficial owners. The result was a bank system that looked very similar, but the CBR managed to significantly increase the transparency of the sector – to the regulators at least – and increase its authority as a regulator; over the following year the CBR withdrew the licences of over 50 banks as it slowly cracked down on malfeasants.
At the same time, the sector has been consolidating on its own. While banking capital as a proportion of GDP has remained steady at about 45% for the last two years, the actual capital of banks has grown by over 30% on average. The biggest banks are growing even faster – the capital of a few leading banks doubled last year. The upshot is that assets are becoming more and more concentrated in the leading banks.
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