Page 33 - IFR Opportunities in Russian capital markets

CHAPTER02
ifrintelligence reports/Opportunities in: Russian Capital Markets
Analysts say that as the smaller banks start to find it harder and harder to make profits, in the face of the competition from the bigger banks on one hand and more stringent supervision by the CBR on the other, the consolidation of the sector that began in about 2004 will continue and pick up pace in the coming years.
At the same time, the shift towards competition in the market-place to win the business of in- creasingly choosy retail clients is undoing another traditional element in the Russian bank sector – Sberbank's virtual monopoly of the retail business.
The successor to the Soviet Savings Bank, in 1991 Sberbank held about eight out of every 10 rubles on deposit. However, as the commercial banks grow and roll out increasingly attractive products for both consumers and companies, they have steadily been eating into Sberbank's domination (see Figure 2.1). It remains what one banker called, "an 800lb gorilla sitting in the Kremlin's living room", but the power of the bank is diminishing steadily and forcing the Soviet- era behemoth to compete and beef up its own services.
Figure 2.1: Sberbank’s share of the Russian deposit market, 2003–06 (%)
% 70
66.9 65
60
55
50
Source: Deposit Insurance Agency
62.9
1 Jan 2004
59.6
1 Jan 2005
54.1
1 Jan 2006
54.0 53.8
1 Jan 2003
1 Oct 2006
Foreign ownership of Russian banks
With domestic reforms in hand, the Kremlin introduced the second plank of its reform of the financial sector – foreign competition. Putin's administration has been criticised for its "creeping statism" and it is true that the Kremlin took advantage of the mini-crisis in 2004, as mentioned earlier, to bolster VTB's position in the market and gift it with what is now a fast-growing, retail operation.
However, at the same time the restrictions on foreign banks have been significantly eased, the ruble has been made fully convertible and the restrictions on foreign ownership of bank assets have been almost completely removed. It is a strategy the Kremlin is applying to almost every area: build up a state-owned national champion to represent the state's interests in the sector, but bring in foreign competition to ensure these entities have to compete and so are reasonably efficient.
Foreign banks’ share in the capital of the Russian banking sector was capped at 25% of total banking capital in the mid-1990s, but this restriction was removed in 2006 (foreign bank ownership actually never got beyond 15% of total capital).
In December 2006, the government made it even easier for foreign banks to buy their Russian peers by removing the ‘blessed share’ system – analogous to the Kremlin's decision to remove the so-called ring fence around Gazprom's locally traded shares. In both cases these were special rules that restricted foreign ownership of shares.
Under the old rules, foreigners had to get the CBR’s permission to acquire shares in a Russian bank, while Russian residents only needed the CBR's permission when purchasing more than 20% (but had to notify the CBR when acquiring smaller stakes).
Under the new rules, both foreigners and Russians need to inform the CBR if they buy more than 1% of a bank's shares, and seek permission when acquiring a stake larger than 10%.
The changes simplify the investment process for foreigners by shortening the time required to exercise purchase orders and decreasing costs.
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