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September’s Government Reshuffle has Implications for the Banking Sector
Perhaps no other domestic brand is as ubiquitous and recognizable as that of Sberbank, the Savings Bank of the Russian Federation. With more than 20,000 branches throughout the country, the state-controlled giant serves more than 1 million corporate and some 250 million retail accounts, enjoying a near-complete monopoly as a banking services provider in small to medium-sized villages and townships, and the farther east you travel, the more this is the case.
Sberbank is the largest universal commercial bank in Eastern Europe with assets totaling over 4.8 trillion rubles ($175 billion), or more than 25 percent of Russia’s overall banking assets. It focuses on retail lending, issuing mortgages and general purpose loans. A list of the bank’s competitive advantages could fill this magazine and require myriad superlatives. Until recently, however, the same held true for its drawbacks.
Sberbank was notorious for its lack of transparency, substandard customer service, and the kind of exaggerated self-confidence that comes with being massive and indispensable—the bane of large state-controlled corporations, which hedge themselves against market competition by cultivating their dependence on the government.
After the collapse of the Soviet Union, Sberbank was just that, an unwieldy state-owned leviathan that had inherited a countrywide branch network from its Soviet namesake along with its huge bureaucratic apparatus and countless social obligations.
The tumultuous 1990s saw a proliferation of private banking institutions, but the public’s initial enthusiasm for alternative venues of investment was short-lived. Although they offered higher returns on deposits than Sberbank, private banks often were too unstable to cope with the uncertainties of the transition period. Millions of Russians fell victim to outright scams—most notoriously the MMM pyramid scheme of the early 1990s, one of the largest such scams in history wherein millions of investors lost more than $1 billion and dozens of heavily invested Russians committed suicide after the fund’s collapse.
Sberbank, meanwhile, was the only bank in Russia that benefited from the government guarantee on deposits. Eventually consumers chose stability over profits, and despite its low interest rate on deposits that often failed to keep up with inflation, Sberbank came to be regarded as the country’s most secure financial institution. Sberbank still dominates the retail deposit segment, its market share in customer accounts estimated at more than 50 percent.
Thanks to its solid deposit base, the bank enjoys a stable funding position. Many banks in Russia and the CIS, in particular those that rely on issuing securities for growth, were hit by the ripple effect emanating from the U.S. sub-prime mortgage crisis. Some even had to temporarily cease lending operations. Sberbank, thanks to its high liquidity, emerged unscathed. It could even be argued that the bank marginally benefited from the crisis, attracting new clients who sought a stable and reliable banking institution.
Over the past few years, the bank has shown significant operational improvements. Already possessing a lion’s share of the market in both deposits and loans, it has continued to demonstrate strong growth and has become more cost-efficient. Moreover, following its secondary share placement in spring 2007, Sberbank has become more investor-friendly, hosting regular conference calls with financial performance updates and improving both the layout and content selection of its Web site.
On Oct. 8, President Vladimir Putin named Andrei Kazmin the new head of Russia’s postal service, whose network of branches is twice the size of Sberbank’s. Kazmin, who headed Sberbank for 11 years, is widely credited with having masterminded the transformation of the unwieldy Soviet-era institution into a competitive modern corporation. Under Kazmin, Sberbank’s market capitalization grew a staggering 107 times over to $95.7 billion as of Nov. 1, 2007, second only to Gazprom.
In the wake of the news of Kazmin’s imminent departure, Sberbank’s supervisory board recommended German Gref, Russia’s former Minister of Economic Development and Trade, as the bank’s new president and CEO. His candidacy was formally approved at a shareholders meeting on November 28 when 99 percent of shareholders voting in favor of Gref.
An advocate of liberal economic reforms, Gref highlighted the consumer lending segment as the bank’s top priority. Among other strategic priorities, Gref emphasized stability and risk management. “A large bank is a conservative bank,” Gref said. “If a bank holds more than 50 percent of private individuals’ savings nationally, it must be highly reliable. So there must be a focus on financial stability and a proper balance of its credit portfolio in terms of risks.” Gref also said the bank would focus on loans to small businesses, promoting greater transparency and developing modern services such as online banking. Gref’s emphasis on increased transparency is particularly welcome. Although there has been marked progress on the timely issuance of press releases and regular financial reporting, there is still room for improvement.
One of the new areas for Sberbank’s development highlighted by Gref was international expansion. “Our main objective is to expand into international markets,” he said. “Above all, I am referring to the CIS countries.” At present, Sberbank’s international reach includes a subsidiary in Kazakhstan, which serves the bank’s local corporate clients, and Ukraine’s NRB bank. After a failed attempt earlier this year, Sberbank finally obtained the local regulator’s permission to purchase NRB on the same day the bank’s shareholders confirmed Gref’s candidacy to replace Kazmin.
Alex Kantarovich, head of Russian equities research at JPMorgan, was unperturbed by the reshuffle. “We regard Andrei Kazmin as a capable technocrat who managed to steer Sberbank into being a highly profitable and well-run operation. Replacing him with an outsider and particularly a politician could be perceived as a risky move. Whether or not Gref is the right man for the job remains to be seen, however, given his positive image of a liberal economist friendly to the capital markets, the appointment should benefit Sberbank and would likely be welcomed by investors.”
Whether Kazmin’s resignation and the departure of Alla Aleshkina, Kazmin’s wife and his first deputy at Sberbank, will be followed by the departure of Sberbank’s top management remains to be seen. Gref himself has made it clear that he does not plan to implement significant changes to the management team and, according to various sources, Bella Zlatkis, a deputy CEO, will remain in her position under the new president.
Meanwhile, at the post office
Kuzmin’s new home, the Russian postal service, employs some 415,000 people and has more that 40,000 offices across the country. Every year, the postal service processes approximately 1.5 billion letters, 38 million parcels, and 200 million money transfers. Putin has entrusted Kazmin with the daunting task of modernizing the organization. Unlike Sberbank, which has undergone a drastic infrastructural overhaul in the past decade, the postal service has done little to make its operations more efficient and its brand more attractive. Completely government-owned, its services are notoriously irregular. Communications Minister Leonid Reiman has claimed that it takes from three to seven days for a letter to get from one regional center to another, but it is not uncommon for local mail to travel for weeks across the city of Moscow.
The idea of transforming the post office into a “post bank” has been voiced by government officials on a number of occasions. If the post office starts offering banking services to the population, perhaps in collaboration with commercial banks, its profitability may significantly improve. So far the post office’s financial operations were largely limited to disbursing pensions and other social payments, which accounted for no more than 5 percent of its revenue. In the future, however, in addition to offering more “technologically advanced” financial services, such as money transfers and tax payments, the company may eventually tap into the booming consumer lending sector, potentially becoming a “financial supermarket” of unprecedented proportions.
Kazmin possesses all the necessary prerequisites for the new job, being perhaps an ideal candidate for the task of transforming a cumbersome monopoly into a more dynamic business structure capable of providing basic banking services to the population. In an interview with Russia Today, Richard Hainsworth, the head of RusRating agency said “the post office in Russia is not serving the nation very well. It’s over-bureaucratic, too many people, too many disjointed functions. I think Kazmin has a great opportunity to transform it into more modern institution.” Aleshkina will, reportedly, be joining her husband, heading the banking arm of the Russian post. Given their combined experience, there is high likelihood that the transformation will be a successful one.
Your Money and Your Mail
By Anatoly Gorev
Special to Russia Profile
Stepping down after a successful run at Sberbank, Andrei Kazmin has taken on the massive task of revitalizing the Russian post and creating a post office bank. PochtaBank will operate in the Russian Post’s 40,000 local post offices. The post office will function as a banking institution and compete on equal footing with, not only to private banks, but also Sberbank itself. This development has been discussed on many occasions over the past few years. However, no serious steps toward the realization of this idea were taken until the fall of 2007, when the rearrangements in the management of Sberbank and the management of Russian Post were announced. Igor Syrtsov, who had headed the Russian Post since 2003, has already left the job in preparation for the arrival of Kazmin, who served as chairman of Sberbank for nearly 10 years. His goal is to get the PochtaBank operating sometime in the next year.
Experts say there are still a lot of questions as to the effect PochtaBank could have on the market. For example, Anatoly Vegerin, first deputy head of the Bank of Savings and Credit, is not confident of the prospects of the financial supermarket model based on post offices. The analysts at Rosbank suppose that, in the medium-term perspective, PochtaBank could take up a rather serious position in the field of servicing private clients, primarily people with lower-than-average incomes. PochtaBank will have offices in small villages where even Sberbank can’t reach. However, in the short term, Kazmin will be consumed with improving the Russian Post. Today, the Russian Post barely makes ends meet. In 2006, the enterprise lost 2.8 billion rubles ($114 million), and its expenses that same year exceeded revenue by 4 percent. Additionally, as representatives of commercial banks emphasize, there is obviously a very low level of professional training of Russian Post personnel and a lack of any clear financial motivation for staffing. Based on these criteria alone, PochtaBank will start out in an inferior position to both privately owned financial and credit institutions and Sberbank.
Most observers, however, believe that Kazmin will be able to lead Russian Post out of its financial crisis. According to Dmitry Vechkanov, deputy director of Rosbank’s retail banking department, Kazmin could use his name to attract foreign investments in the PochtaBank. But it remains doubtful that he will succeed in turning the Russian Post first into a bank, and then into a real competitor for Sberbank in the near future.
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