Ben Aris in Moscow -
bne chats to Michel Perhirin, CEO of leading Russian commercial bank MDM, on the progress in his restructuring plans to remake the bank from a Russian bank that was successful in the 1990s to one that would be recognisable to any international banker.
When it comes to change, Michel Perhirin knows what he's talking about. He has been running banks in Russia since the early 1990s and has already been through at least three financial crises and two wars.
A doyen of Russian banking, Profil magazine named him as the 12th most influential banker in Russia this year and the top foreign banker in Russia. Perhirin earned his spurs by creating Russia's hugely successful Raiffeisen franchise, but took over the helm at MDM at the start of 2006 after reportedly arguing with his former Austrian employer over the bank's long-term strategy.
After accepting an offer from MDM owners Andrei Popov and Andrei Melnichenko, his job was to launch a wholesale restructuring of the bank. However, Perhirin was the most visible part of a grand plan cooked up by Popov and Melnichenko to keep up with the seismic changes shaking Russia's business climate.
Once Perhirin was on board, Melnichenko and Popov decided to divide their assets in the middle of December of 2006 with Popov walking off with 90% of MDM Bank and the remaining 10% going to Martin Andersson, a member of the strategic committee of the bank. Melnichenko left the bank he had founded to concentrate all his efforts on the MDM industrial group of companies.
In July, Popov and Andersson sold a 5% stake to the World Bank's IFC arm for $184m and another 10% to Olivant, a specialist advisory and investment firm, which has an option on another 5% over the next six years. The IFC deal started speculation that the owners were getting ready to sell, but Perhirin says somewhat euphemistically that bringing in the IFC was another step in the owners' long-term strategy to remake MDM from a Russian bank that was successful in the 1990s to one that would be recognisable to any international banker. That the IFC gives MDM access to longer-term and lower-cost financing is a bonus.
"The Bank's main owner has invited three shareholders. IFC has come with its own standards and we will be following them," says Perhirin. "MDM, a Russian privately owned bank, is striving to build a traditional banking business fully transparent for its clients, stakeholders and staff. This is what I came here to work for. This is what the owners want and they invited me to lead the achievement of this task. At no stage I have been pushing the idea on them."
MDM owner Popov told bne in 2006 in his first-ever interview that he is terrified of being labelled an oligarch and insisted he's only interested in building up a long-term business. Unusually for a Russian businessman, he has voluntarily brought in two independent and Western businessmen as partners; the bank certainly didn't need the money they paid for their shares.
"The distribution of capital within four shareholders gives the bank a very well-balanced ownership structure in terms of competence, experiences and vision and leads to always well-balanced decisions," says Perhirin.
MDM was one of the big winners from the financial storm that swept though Russia on August 17, 1998. Overnight, the bank stepped up a tier to fill the shoes of the oligarch-owned household names that collapsed in the crisis.
More recently, things have become difficult as other banks, like UralSib, merged their way past MDM. The bank was starting to slowly lose out in the face of the rising competition. "We've had 15 years of empiric growth and that has caused its own structural problems. This would have had to be addressed at some stage. The bank did it over the last 20 months with active participation of the board including the new shareholders. Today, most of the restructuring has been achieved and the bank has placed itself in a very favourable position to face competition," says Perhirin.
Now the big foreign banks are moving in, competition will only get stiffer; the CBR said in October that foreign bank's share of total bank assets passed 22%, more than double its level in 1998.
MDM's answer has been to target Russia's medium-sized companies with turnover of between $12m and $500m, which are responsible for most of Russia's growth, but still offer attractive margins. "The medium-sized companies are the ideal target, as we need the margins and also to diversify the risk," says Perhirin.
After nearly two years at the helm, Perhirin's stewardship is already starting to pay dividends. The bank's net profit more than doubled over the first half of 2007 to RUB2.7bn, up from RUB1.3bn over the same period the year before, according to its international standard accounts. The bank's return on equity was about 20% by the start of November, which Perhirin wants to raise to 30% in the near future, but maybe the most impressive statistic is that Perhirin has brought the banks cost/income ratio down to about 40% - very low by Russian standards where 60% is more common.
This represents a big change in the mindset of Russian banks, which all used to chase the same oil companies simply because that was where the cash was. They typically shied away from the medium-sized companies, as they were so opaque that bankers literally had to follow the business from day to day to have some idea of the risks. "The opacity is significantly decreasing. The further you go out into the regions the more you will find banks pressuring companies to be more transparent and the companies have no choice but do it as they need access to loans; the more open they are the less they have to pay for their money. They all understand that now," says Perhirin.
Perhirin practises what he preaches and MDM was ranked as Russia's most transparent bank by Standard & Poor's for the second year running in October. Rankings like these used to be meaningless, but as risk returns to emerging markets and investors start differentiating between clients, they are going to become more important. Thanks to its good reputation, plus a healthy dash of prudence, MDM has been largely unaffected by the US subprime debacle.
"Funding our operations is not a problem for us whatsoever. The challenge has been keeping the balance sheets growing by 60% a year to keep your market position. The hopefully temporary slowdown created by the Western banking crisis is somehow propitious for market participants to think change and future. This is not a crisis for us but a return to normalcy, as the pace of growth over the last few years has been extraordinary. Now interest rates are rising and bankers have to be more and more selective about who they lend to and pay attention to the risks is nothing more than normal banking practice," says Perhirin.
Still, as a major dislocation is possible if one of the US' big banks or hedge funds goes bust, MDM has been taking no chances. The shareholders parked $1.4bn in offshore accounts earlier this year, which is enough to cover its funding needs through to June 2008. Perhirin says he is open to acquisitions, but rules out an IPO for the foreseeable future, as that nest egg negates the need to raise capital. "We are open to anything that will help the bank expand more quickly, but nothing is changing in the market yet," say Perhirin. "But there will be no IPO for the foreseeable future. Why do we need to IPO with capital of $1.5bn in the bank?"
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