‘Russia must address fundamentals’

Do the Russian authorities and banking professionals share the same vision for strategic development of the banking system? Promsvyazbank (PSB) President Artem Konstandian discusses the development of privately owned banks in Russia


In a nutshell, the vision of the Russian government for future development of the national banking sector may be summarised as follows: Russian banks must become bigger and stronger. Having fought the liquidity crisis throughout 2009 and dealt with the fight’s consequences throughout 2010, in the coming several years, Russian banks will be addressing fundamental challenges. Last April, the government jointly with the Bank of Russia published the Banking Sector Development Strategy for 2011-2015. How will the strategy be implemented and how is the national banking sector expected to evolve in the coming five years?

To begin with, credit institutions will be required to hold at least RUB300m in equity capital. Secondly, banks will need to grow their assets, while stepping up loan issuance at the same time. At the beginning of 2011, total bank assets as percentage of GDP were 76 percent. Total capital of the Russian banks was 10.6 percent of GDP, while loans to retail customers and non-financial organisations stood at 40.8 percent. By 2016, however, bank assets are expected to reach 90 percent of GDP, while capital and loans should grow to 14 -15 percent and 55 -60 percent of GDP, respectively. Thirdly, and apart from capital growth, adequate coverage of the Russian banks’ risk exposure by capital is stated as another important condition for development of the banking sector and improvement of the banks’ stability.

In itself, the aim of the regulator to make the system as stable as possible is totally understandable and absolutely legitimate. However, results of the pursuit of the banks’ financial stability may turn out to be exactly the reverse. According to rating agency projections, the average capital adequacy ratio of the Russian banks may drop from 18.1 percent to 15 percent as early as in 2011. While Russia is seeking to implement Basel II and Basel III standards, a number of Russian standards are already tighter than those adopted in the Basel accords. At the same time, a requirement to further increase provisions may force banks to fold their customer programs, which they have just unfrozen after the crisis. This time, however, they would do so because of declining margins, which make their business unprofitable, and not due to financial problems.

As opposed to a state-owned bank, a private bank is above all a commercial entity, a business, even though it also unquestionably has a social function. The main objective of a private bank is profit generation. In other words, a banker is obliged to perform the constant balancing act between business profitability and, at the same time, its competitiveness. Of course, this is true not only for the banking community and not only for Russia but nowhere else is this line more pronounced than in our country. It is not surprising then that bankers were totally dumbfounded by the emergence of a draft law envisioning an unprecedentedly high risk ratio for provisioning in case of insufficient loan security. The proposed ratio would equal 1.5, while any mortgage contract with initial payment below 20 percent would be deemed as insufficiently secured. Fortunately, the initiative fell through. Only government-owned banks were not concerned about the potential change in provision requirements, as their shareholder would supply them with any necessary funding. Midsize and smaller banks however, especially regional banks, faced two alternatives: shut down or sell to a stronger nationwide player.

So, what needs to be done to ensure a smooth development of the banking sector? First and foremost, the government has to create conditions for fair competition among banks, and the first steps in this direction have already been made. The government announced a plan to privatise state-owned banks and reduce its shareholding in such banks to a blocking stake. And while remaining government participation will still leave state-owned banks in an advantageous position from the financial flexibility and maneuverability point of view, market relations are expected to become more balanced, while competition for the customer, despite its intensification, more understandable. However, this will not happen overnight: the process is expected to stretch at least until 2015.

Development strategy
It must be said though that banks are currently not folding their credit products but, to the contrary, are actively developing them. Credit quality of both potential retail and corporate customers has been progressively recovering, which marks the return to profitability of lending operations. PSB is no exception. We are resolved to increase our loan portfolio. 2010 results showed that we are on the right development path. PSB posted IFRS net profit of RUB2.5bn, of which RUB1.9bn was generated in the second half of the year. At the same time, our loan portfolio was up 19.5 percent, significantly outperforming the market with its 12.5 percent average growth. The strong results confirm a solid competitive position of our bank. We intend to pursue further growth of our portfolio in both retail and corporate segments, by offering our customers a fine-tuned business interaction process, high service quality, a broad range of products and services, as well as simplicity and convenience. Corporate business remains our key focal area and will continue to generate the bulk of PSB loan portfolio. In corporate business we intend to maintain our leadership in both lending to and funding from corporate customers. With approximately a 25 percent market share, PSB ranks first in the factoring market, and intends to maintain its leadership in the years to come. The same is valid for our market shares in international financing and standard credit products. In addition, we are aiming to build a stable and diversified (through stronger commission revenue) revenue base.

In the retail segment, lending activity will mainly be driven by general-purpose loans and credit cards, as envisioned in our 2011 development strategy. In addition, PSB resumed mortgage lending. Our target total 2011 retail loan portfolio is RUB50bn, while we are aiming to become a Top 10 bank in terms of retail lending volume by 2013. The share of retail business in the total PSB loan portfolio is expected to reach 25 percent by 2013.

In today’s rapidly evolving high-tech world, ambitious goals may be achieved only through innovation. Introduction of the best and newest technologies is therefore one of the key strategic priorities at PSB. To this end, we have been developing a business process enabling us to identify, assess and introduce innovative products, services and technologies system-wide.

We also maintain our strategic goal for 2015, which remained unchanged even amid the global economic crisis. Our goal is to become Russia’s #1 privately owned bank. However, as opposed to several years ago, when we focused essentially on asset value as the key leadership criterion, we now rather target superior market value of our business, its capitalisation. Clearly, this would require a market valuation of PSB’s business. We receive many interesting proposals from potential investors and consider them thoroughly, taking into account attractiveness of both pricing and expertise, which new shareholders would be able to bring in. Our existing shareholders are open to negotiations on further diversification of PSB ownership structure, although such diversification is not a burning priority.

To conclude, I would like to say that we are optimistic about the future. A well though-out progressive strengthening of the Russian banks should eventually make the entire financial system stronger. PSB current market position is stable, as reflected in our actual results, with a positive development outlook. And our solid strategy creates all the necessary prerequisites for achieving our goals.