Ben Aris in Berlin -
"Banking is like being a gambler at the moment. There are no serious projections of what is going to happen next. We haven't really changed our strategy because of the crisis; the only strategy you can have is to get to the end of the year and still be standing."
Sergei Leontiev, president of Probusinessbank, finds himself in an uncomfortable position. Unlike most of his peers, Leontiev saw the crisis coming and reorganised its funding two years ago, successfully switching from tapping international loans to drawing in domestic deposits, so the collapse of the global capital markets had no direct affect on the bank's business. Probusinessbank is now well funded. Leontiev's big problem is finding something to do with all his cash.
"At the lower end of the business scale, the economy is still partly frozen. The problem is not the banks, the lack of loans. The problem is the lack of consumption. We can't grow quickly as we can't find small businesses or entrepreneurs who need money. The market is completely dead and consumption is very low - sales volumes have fallen 10-fold or 100-fold. No one is expanding so no one is even thinking of taking a loan," he says.
Set up in the 1990s in anticipation of the rapid growth of small- and medium-sized enterprises (SMEs), the bank rode the wave of economic growth and has morphed into a financial group that caters to all the needs of these businesses.
Leontiev says that while retail sales were holding up reasonable well in the first two months of this year, a big chunk of those sales were Russians buying fridges and tellies as a hedge against more devaluation of the ruble. "The people want to protect their money, but they don't trust the ruble, they don't trust the dollar, so they buy things like washing machines," he says. "We see regional markets closing and they are not going to open again soon."
However, the pain is not uniformly spread and the non-performing loans (NPLs) vary widely from region to region and from sector to sector. "Small business are in the most trouble, however, the same happened in 1998 and small business was also the first to recover," says Leontiev. "But NPLs amongst the retail clients are not high - up a little bit, but not much. However, where the problems are worst are in the regions with a single big company that dominates the local economy. Once these big factories stop working, this immediately impacts the small businesses in the region. In regions where the local economy is more balanced the problems are much less."
The bigger they are...
Smaller banks are actually doing better than the large state-owned banks, argues Leontiev, despite the latter's access to the state's reserves. Russia has over 1,100 banks, but only 50 can count on money from the central bank or the unsecured loans being distributed by the state-owned Vnesheconombank (VEB). Leontiev argues that the smaller banks have carved out high-margin niches for themselves and so have some leeway to absorb the rising bad debt levels. However, the big banks have mostly gone after mass market punters using much thinner margins - a strategy that is now coming back to bite them.
"The smaller banks have not got any of the bailout loans, but very few of them have gone bust. But if NPLs rise to 8-10%, it will destroy the major banks," says Leontiev. "The consumer finance retail banks are in a stronger position, as they have margins of 40-50% and can cope with NPLs of 10-15%, thanks to their margins. However, the traditional retail banks are in a worse position, as they have much lower margins. The result is it is some banks that had the most aggressive expansion policy in the retail segment are now in the most trouble."
Smaller banks get away with their fat margins, as consumers taking out, say, a $1,000 loan think less about the annual percentage rate and more about whether they can meet the monthly instalments. The bigger the loan, the more attention customers pay to the interest rate and so the thinner the margins. Leontiev argues that almost all of Russia's top-10 banks have fallen into this trap and would collapse if the state were not standing behind them
Indeed, Yulia Tsepliaeva, chief economist at Bank of America-Merrill Lynch, caused a small panic on March 27 by claiming that a 10th of Sberbank's loans have already gone bad, way over the official 2% or so the bank claims to have. If the hole in Sberbank's balance sheet is really that big, then the state would be forced to step in with hundreds of billions of dollars, which Tsepliaeva says could trigger a renewed attack on the ruble by currency speculators.
Leontiev criticises the state's rescue plans and talk of using the crisis to consolidate the banking sector as ignoring the realities of the market. "We don't need a top-down restructuring of the banking sector, as this would only be for the benefit of the oligarchs. We should have a bottom-up restructuring and consolidation of the banking sector, as the small banks are small, but many of them are doing real business. With valuations of one-times book, this is a good time to be buying small banks if you have the cash," he says.
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