Ben Aris in Moscow -

Unless you live in Moscow and are in the retail business, you probably haven't heard of Moskovsky Kreditni Bank (Credit Bank of Moscow, in English). But you will do soon. A top-20 Russian bank, MKB is joining the increasingly long line of Russian companies that want to IPO on London's stock exchange.

A string of banks have sold shares in the last couple of years and more are expected to throw their hat into the ring as Russia's IPO momentum continues to build.

Nomos Bank got the ball rolling with the first ever IPO of a Russian commercial bank in April 2011. The state-owned retail giant Sberbank followed up with a $5.1bn secondary public offering in September 2012. Mid-tier Promsyvazbank tried, and failed, to get an IPO away last year (though says it will have another crack when the market improves). And more recently Tinkoff Credit Systems (TCS), Russia's leading online bank, raised an astronomical $1.1bn with an IPO in London in October last year. MKB could well be next.

"We are contemplating an IPO, but have not decided on specific timing or plans," MKB's CEO, Vladimir Chubar, tells bne in an exclusive interview. "It depends on if the market improves, as the current valuation levels for Russian banks are not necessarily attractive. We are still growing, we have one of the lowest cost/income ratios and the return on equity of about 18-20% is one of the best in the sector. We feel like we are still quite a young bank and will wait for the right window of opportunity to open."

Shopaholic Russia

Banks are very appealing to global portfolio investors who want some hard-to-get direct exposure to Russia's burgeoning middle class. MKB could have been tailor made for these investors: the bank has seen its ranking rise from 56th largest Russian bank by assets in 2008 to 13th, thanks to its dominance in servicing Russia's leading retail and distribution companies.

Set up in 1992 during Russia's "wild-cat" banking phase, when anyone with a pocket full of dollars could open a bank, it was bought by businessman Roman Avdeev in 1994.

Avdeev made his fortune from selling computer equipment through kiosks, the prefab booths that used to crowd the pavements across Russia in the first brush with consumerism. Kiosks sold everything from cigarettes and beer, through to flowers and food, to car parts and theatre tickets. The former mayor Yuri Luzhkov swept these kiosks off the streets about a decade ago as retail became more organized, but Avdeev moved with the times, riding the wave of Russia's exploding consumerism, and MKB became the go-to bank for retailers.

Quite apart from Avdeev's own experience in the business, the bank has a firm grip on the business today thanks to its extensive 200-strong fleet of armoured cars, second only to Sberbank's.

Understandably, Russian retailers and distributors get extremely nervous about having to ship large amounts of small denominations in what remains a fairly lawless city, so the bank's excellent reputation and decades of experience is a key selling point.

MKB's cash-handling business is the backbone of its retail offering (it also offers risk-management tools based on the cash flows that flow through MKB's hands to help the clients avoid trouble), but its business only really took off after the 2008 financial crisis. "We actually went into the crisis in good shape, and Avdeev injected more capital. More importantly, the post-crisis landscape was much clearer and we took the opportunity to grow the business quickly," says Chubar, who says the bank picked up new clients from different segments after the crisis started.

At the same time, the slower pace of growth - Russia's bank sector assets grew by about 19% in 2013 against the 40-50% they were growing pre-crisis - means other banks have abandoned their costly cash-handling services and subcontracted the business out to MKB instead; the bank now services 30 other banks. "Credit and debit card use is growing, but Russia remains primarily a cash economy. Our cash handling network is number two in Moscow, right after Sberbank," says Chubar.

Today, the cash-handling business contributes 20% of the bank's fee income and is up six-fold since 2010, although the bank only opened two new branches last year. Retail lending - one of the main business lines driving MKB's growth - has also expanded three-fold.

And the bank has not ignored the rest of the retail banking businesses. MKB has some 60 branches in Moscow city and the surrounding region. It launched retail loans in 2003 about two years after pioneer Russky Standart showed everyone else the way. But unlike the majority of consumer credit specialists, MBK has been more conservative, focusing on high quality, low risk borrowers. "We like to know our customers. Only one in five of the applications for a loan by people that walk off the street are approved," says Chubar.

Express cash loans have been one of the few really profitable businesses for Russia's banking sector in the last couple of years, growing at over 40% a year until the increasingly worried Central Bank of Russia (CBR) tightened the rules last year to slow the growth. But most banks have focused on point-of-sale lending where a bank sets up a booth in a big retailer. As MKB was already servicing retailers at a corporate level, it concentrates instead on not only doing the company's payroll, but also offers credits and other bank services to the company's employees.

The quality of the bank's retail lending is also improved by MKB operating Russia's largest payment terminal network - a sort of ATM in reverse that can be found in most stores and malls. These machines accept payments for mobile phone services, internet providers etc., so in effect collects valuable data on retail customers. "About one in two borrowers are in our system thanks to the terminals, which gives us some insight into the payment history and means we can target lending," says Chubar.

Not-so bad loans

The upshot is the share of non-performing consumer loans (NPLs) in MKB's portfolio have remained around 1% of the total, while NPLs for the rest of the banking sector began to rise at an alarming rate last year as Russians became over-extended for the first time.

Likewise, funding has been hard to find for most banks, which has cut into their capital - the average capital adequacy ratio for the Russian banking sector has fallen from over 20% in the boom years to about 13.5% last year. But thanks to a capital injection and ready access to the local and international bond markets, MKB has maintained a capital adequacy ratio of about 18%. Currently, the bank has 11 ruble bonds outstanding and three Eurobonds, including an issue last year with a single-digit coupon rate - a feat that only Sberbank has been able to match.

MKB also moved into car loans early and quickly became the third largest lender in Russia. But the attraction of this business has paled in recent years thanks to an increasing number of specialist banks set up by the leading car manufacturers. More recently, MBK has refocused on mortgage lending, which took off after the 2008 crisis and can be offered as an addition service to the existing customer base. Today, 60% of its retail portfolio is made up of consumer credits, 20% from car loans and the same amount from mortgage lending.

A further attraction for investors is that the bank has worked to improve transparency and meet international standards of corporate governance. Adveev owns 85% of the bank, but in 2012 MKB brought in the World Bank's International Finance Corporation (IFC) and the European Bank for Reconstruction & Development (EBRD), which both bought a 7.5% stake each. "Taking in high-quality investors like the IFC and EBRD is a central part of our strategy to offer the best in the way of corporate governance and transparency," says Chubar. "In addition, we have five independent directors on the board, produce quarterly IFRS accounts and so on."

And for most Russian business that is still a novelty.