INTERVIEW: Otkritie Financial, the Charles Schwab of Russia

By bne IntelliNews January 19, 2011

Ben Aris in Moscow -

International investors might be wary of the Russian stock market, but not the Russians, who have proven to be savvy investors when it comes to the wild ride that Russian stocks often provide.

Otkritie Financial Corporation wants to become the Charles Schwab of Russia. It is early days yet, but since the onset of the global crisis in 2008 asset managers say that retail investors have increasingly abandoned mutual funds (known as PIFs in Russian) in favour of setting up private accounts with Micex to trade equities themselves; Micex reports that it now has over 400,000 individual accounts.

Otkritie hopes to cash in on this trend by providing discount brokerage services and a platform for Russian day-traders or those who want to invest their money directly into the stock market. But like most things with Otkritie, it will be a slow and steady build: today, the company has some 20,000 personal trading accounts and 20 offices, compared with Charles Schwab's 8m accounts serviced by 300 offices.

Now the bank wants to pick up the pace a bit and after Russian state-owned banking giant VTB Group bought a 19.9% stake in March 2009 for $150m as part of a "strategic alliance," it has the means to do so. "We were growing arithmetically, but now we want to grow geometrically," says Vadim Belyaev, Otkritie's CEO in an exclusive interview with bne. "We see VTB as a competitor, but I am not sure they see us as one; we are very different sizes and we have a much more focused strategy."

Expanding abroad

The first new direction the bank wants to take is to diversify its client base into international markets and build on its equity sales and trading business, which previously was exclusively focused on Russian clients.

Flush with fresh capital, Otkritie went hunting for staff that could take it into international markets by poaching most of Renaissance Capital's equity research team in October: Tom Mundy, Berthold Maier, Richard Beston, Vinay Ruparelia and head of equity trading, Sunil Joshi, left for Otkritie, which is paying top dollar for the team.

Otkritie also recruited Pavel Averkiev as vice president of equity sales, who previously worked as a director of marketing at Prosperity Capital Management, Russia's biggest portfolio investor, and Wermuth Asset Management, another veteran Russian fund. In all, the bank plans to hire 90 new people to bring the total to 400.

Headhunters in Moscow say the aggressive new hires have single-handedly pushed remuneration for bankers back up almost all the way to pre-crisis levels and once again experienced A-list traders and sales people are in short supply in the Russian capital.

At the same time, the bank has been expanding its traditional banking business and bought three small banks and merged them into the parent bank. "The resulting bank has a retail focus that we will develop over the next five years and we are specifically targeting small and medium-sized enterprises (SMEs)," says Belyaev. "But the more general plan is to find corporate clients and offer them the full range of services, including leveraging the investment banking services to existing corporate clients to earn extra profits."

SMEs have become the watchword for most bankers in Russia these days. In the 1990s, everyone chased after Russia's blue chips that controlled access to the oil and raw material export revenues. However, with over 1,000 banks in the game, margins have been compressed to the point where this business is hardly profitable for smaller banks any more. SMEs with their smaller volumes but much larger margins have become the touchstone for most banking expansion strategies.

Otkritie's advantage is that thanks to its acquisition of Petrovsky Bank in St Petersburg, it has an extremely well developed retail network in Russia's northern capital with over 240 offices in the city. "This is one of the biggest urban office networks in Russia; it is one of the largest network in St Petersburg," says Belyaev. "We literally have a branch on almost every corner of the city."

Capturing St Petersburg, the second largest city in all of Europe, has given the bank a very solid foundation to build on, as regional expansion is another touchstone of banking strategy these days. Together with the bank's 110 offices in Moscow and another 60 in other Russian regions, Otkritie has built up a strong branch network not far off the 800 offices that the other leading commercial banks like Rosbank command. (Sberbank is in a league of its own with some 25,000 branches across the whole country.) "Following the mergers, we are in the process of rationalising the network, but the plan is to continue to expand selectively in various regions," says Belyaev.

He insists that his bank has no ambition to take on the leading commercial banks at their own game. The bank hopes to compete on the quality and range of its services, not in how many boots it can put on the ground. "Clearly, we need a network to get the initial deposits, but the goal is to change the way people think and teach them about the benefits of a diversity of products," says Belyaev, adding that already the brokerage and commercial banking services are contributing about half each to the bank's bottom line.

Finally, the bank is developing an asset management business and is in the market to buy an insurance company, as eventually both these business are expected to grow fast despite being extremely underdeveloped at the moment. "Our asset management business is very small, but it should exist to complete the range of services we offer," says Belyaev. "But we know how to wait and we have already been working a long time. The point is to be ready, so when things grow faster we will not be a start up, but able to scale up."

Belyaev says that a bank like Otkritie's future is tied to the future of Russia and the success that the government has in pushing through reforms. In fact, Otkritie's investments are an investment into this future, as without the growth of SMEs his bank will struggle to grow. "We see that there are a few huge corporate in the raw materials sector that are comfortable, but to get real economic growth we need to see the SME sector develop," says Belyaev. "Until the SMEs develop, we can't have real economic growth."

INTERVIEW: Otkritie Financial, the Charles Schwab of Russia

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