Related News

Crédit Agricole and Demica unveil SCF platform for Asia Pacific

IFC joins Taulia as supply chain finance funder

Dollar alternatives not a major illicit finance threat, US says

Oil trading scheme netted vast sums for Iran’s Revolutionary Guard: US prosecutors

UK to toughen sanctions regime with new enforcement unit

As Russia’s state-owned banks tighten their hold over the country’s banking sector by increasing their market share through acquisitions, Rebecca Spong speaks to Olga Strekalova at VTB Bank about the new opportunities opening up for trade finance.

The state-owned banks VTB Bank and Sberbank have long dominated the Russian banking market, holding around 50% of the country’s retail and corporate banking sector.

For private banks, efficient management teams have resolved most capital and provisioning issues, so they are strongly returning to the market.”

They now have ambitions to expand their reach, eyeing up new acquisitions among the private sector banks.

VTB Bank acquired TransCreditBank in October 2010, and then, in late February, acquired 46.48% of Bank of Moscow, the fifth biggest bank by assets in Russia. The state bank also acquired 25% plus one share in Bank of Moscow’s insurance arm, Capital Insurance group.

Sberbank is also expanding and is set to buy out the privately-owned investment bank Troika Dialog, buying a stake from Troika’s shareholders led by the bank’s founder Ruben Vardanian, as well securing the 36.4% stake that Standard Bank had acquired in 2009.

New client base

These acquisitions will help VTB’s trade finance team gain access to new clients and increase their business volumes, notes Olga Strekalova, director, trade finance and forfaiting at VTB Bank, to GTR.

Armed with a strong capital base, there is a lot of pressure on the state banks to improve their return on equity (ROE).

“So new business, especially fee-based, is to be intensively generated to improve it [ROE]. Buying other banks is one of the ways to use the capital and improve ratios. Additionally, acquisitions allow state banks to step into new markets by getting new customers, including regional players and providing wider range of services and products,” she explains.

In terms of VTB’s competition; it presently remains limited. The private Russian banks are still mending their balance sheets, and unable to offer the same loan terms and pricing as the state banks.

“Some private banks, on the other hand, have much lower capital ratio and limited ability to further lend to their customer base. Having wider access to international markets and better risk profiles, a capital rich acquisitive state bank can bring more lending capacity to the table and, very importantly, a wider mix of products to cross-sell,” she observes.

Keeping busy

From VTB’s perspective the Russian trade finance market has been a lucrative business in the past year. Figures for 2010 suggest that volumes have returned to pre-crisis levels.

“On the overall trade finance portfolio for 2010, it reached US$3bn while in 2008 we closed at the level of just over US$4bn,” Strekalova explains.

When compared to the first quarter of 2010, Q1 2011 seems equally promising, with Strekalova telling GTR that there has been growth on both the financial institutions (FI) (up 30%) and corporate side (up 25%) of
the business.

Russian companies, once starved of credit in the crisis, now want to reinstate their credit lines with VTB and be able to discount their letters of credit.

“We also see more funded deals settled in roubles, which is an important trend in the CIS region,” she notes.

In Q1, VTB has managed to double sales of trade finance products in the CIS/Russian market.

VTB is keen to push further into the CIS region with Strekalova noting that opportunities in Belarus, Ukraine, and even Kazakhstan, are quite attractive from the risk return point of view.

Most foreign banks still only have established credit lines for the top 20 Russian banks, with lines for the smaller banks being mainly available when backed by the EBRD, IFC or a larger Russian bank, via an irrevocable reimbursement undertaking (IRU), for instance.

The bank has also launched a number of new products; innovations that the Russian private sector has yet to catch up with.
In May 2010, VTB opened its first unsecured import letter of credit in Chinese reminimbi (Rmb), with Bank of China acting as the nominated bank. VTB is now able to offer settlements in Rmb for customers throughout Russia, thereby removing the currency risk from converting roubles to US dollars to yuan in trade transactions.

Risk perceptions

Strekalova is also optimistic that the perceptions of Russian risk are improving across the banking sector:
“What we are seeing at the moment is growing tenors not only for the state-owned entities but also smaller commercial banks.”

She remarks that VTB is now able to get five-year tenors and most commercial banks can get tenors of two or three years. Yet just a year ago, tenors of just 12 or 18 months were available.

Pricing on Russian risk has also decreased quite rapidly: between the second half of 2010 and the first quarter of 2011 there was a significant drop (almost by half) on unfunded deals.

The biggest Russian names now get 40 plus basis points for 12-month transactions, which is almost pre-crisis level pricing.
Yet it is unlikely pricing will fall any lower, with Strekalova noting: “for the time being, the level highlighted is kind of a fine balance between our perception of a fair price and foreign FIs’ Basel III capital calculation.

“The current market will hardly digest any lower margin unless the deal is relationship driven.”

It is hard to discern a useful trend in the pricing on funded deals as foreign banks’ pricing calculations are based on their divergent liquidity costs rather than just their assessment of Russian risk, and this has created a wide range of margins on funded transactions.

The state to pull back?

Although the state banks presently reign supreme over the Russian banking sector, Strekalova tells GTR that the state will ultimately reduce its involvement. “So state banks [will be] treated more as commercial banks focused on the results and improvement of all ratios. Healthy return on equity is becoming very important.”

The Russian government already started its privatisation programme at the beginning of this year, selling a 10% stake of VTB in February. The sale of government stakes in Sberbank is set to begin later this year.

Some private banks are beginning to make noises in the market. Strekalova observes: “As for private banks, efficient management teams have resolved most capital and provisioning issues, so they are strongly returning to the market.

“Competitors, apart from the subsidiaries of foreign FIs, the names I have in mind are Alfa, Promsvyazbank, Uraksib and Nomos. They may still see increased funding costs for longer maturities, but for short tenors, [they] can be quite aggressive.” GTR

Foreign banks cut Russian retail branches

Anumber of foreign institutions are moving out of the Russian retail market, preferring to concentrate efforts in other markets and on the Russian corporate banking sector.

HSBC is the latest bank to withdraw from the market after opening its first branches in 2009, revealing its decision at the end of April 2011.

The news follows a similar announcement made by Barclays in February to abandon the Russian retail business, despite having bought the local Russian bank Expobank in 2008.

Both institutions have issued statements explaining that the greatest opportunities in Russia remain in corporate banking.

Last year Rabobank has even asked Russia’s central bank to annul its licence for its local unit, as it had decided to concentrate its endeavours on markets such as India and China.

These banks were unable to effectively compete with both the state banks and the foreign banks such as Société Générale, UniCredit, RZB, and Citi that have a more long-term entrenched presence in the Russian retail market.