Ben Aris in Berlin -
Russian top commercial bank Promsvyazbank, partly owned by Germany's Commerzbank, is amongst the most profitable banks in the country. First Vice-President Artem Konstandyan talks to bne about the bank's business and prospects for the sector as a whole.
Promsvyazbank (PSB) used to be amongst the most profitable banks in Russia, specialising in mid-sized companies - what is the situation now?
PSB's strategy has not changed, although our bank has adapted its product mix and credit underwriting criteria to the new realities of the financial crisis. But the focus on the profitability of banking operations has always been there, and now we have increased risk premium in lending (driven by an anticipated growth in default rates), and also boosted fees and commissions.
PSB expects fairly good net profit results for 2008. Certainly, it could have been even higher if there wasn't the need to build additional reserves for credit impairment, attributable to a sharp general deterioration of the operating environment. As the economy slows down, we expect the loan loss provisioning to be the main negative profit-and-loss driver over the short term.
How have your deposits been affected by the crisis?
Looking back at the past months, we can say that October 2008 was the most difficult month for Russian banks, as many corporate clients, faced with scarce bank credit, had to withdraw funds from bank accounts to finance their working capital needs. Thankfully, the Russian monetary authorities promptly announced and implemented a number of measures to support the banking sector, including provision of additional liquidity, lowering mandatory reserve requirements, and raising the limit on deposit insurance. These had an immediate positive effect at least on the largest Russian banks, PSB included.
PSB experienced a 6% outflow of individual deposits and a 10% outflow of corporate deposits in October, with current accounts affected more relative to term deposits. In the beginning of November, the trend in mass retail deposits reversed, with an inflow registered both in the bank's Moscow and regional offices, while VIP individual deposits remained in the negative. Corporate deposits also increased in November.
The positive trend in November was reinforced in December, and PSB reported a 10% overall growth in corporate deposits and a 2% growth in individual deposits for the fourth quarter of 2008.
How has your business changed? Are you making loans to companies?
We are issuing credit to both companies and retail clients, however, we have changed our product offering as following:
• In corporate banking, we largely restricted our product offering to factoring, letters of credit and guarantees; collateral requirements have been newly introduced for such credit products as overdrafts and guarantees, and increased for existing credit exposures;
• In retail banking, we focus on customers with good credit histories at PSB; nowadays the key retail products include deposits, credit card loans and consumer loans within loyalty programmes. Also here, collateral requirements have been increased and credit-underwriting criteria for new clients tightened considerably. We have stopped providing new auto loans, because they require long-term financing and cannot be securitized under the current market conditions; accordingly, we will close those outlets that specialised on this product;
• We have revised our network expansion strategy, focusing on increasing efficiency of existing outlets;
• We have become more active in the area of M&A, private banking and state finance.
There is a lot of concern at the moment that the quality of assets with banks is going to decay in the coming months - do you see this as a problem?
We believe this is the key problem for all banks, including PSB. It has the potential to adversely affect not only the profitability, but also the capitalization of banks. The economic slowdown brings about a revision of business plans used by the corporate borrowers when they obtained financing from banks - previous sales targets are no longer achievable. To address the problem, PSB tightened lending underwriting criteria for retail and corporate borrowers, increased the monitoring frequency of existing borrowers and introduced new lower-risk and higher-margin products for the clients. Among our corporate borrowers are large Russian companies that could count on state support measures in case of emergency.
You recently rescued Nizhny Novgorod and Yarsotsbank. Are you looking at more acquisitions? Banks are very cheap now.
Within PSB's corporate strategy, we have been continuously searching for attractive regional acquisition targets for more than a year. It is true that the pricing has become much more attractive now, as many regional players are facing liquidity problems. However, to become an attractive acquisition target for PSB, a bank also needs to have a reasonably diversified and profitable non-captive banking operation, complemented by notable market shares in its home region. As part of the measures adopted by the Russian government to support the banking system at the time of crisis, the Deposit Insurance Agency provides financial assistance to those banks which acquire troubled credit institutions, consequently PSB has received such assistance from the Deposit Insurance Agency in adequate volume. But at the moment we are not planning to take any active steps in this area.
Are you going to recapitalise the bank? In September, you said plans for a share issue were still on - are they still on? And the plans for an IPO?
The share issue was completed in the end of 2008. The equity of the bank was increased by RUB4bn. The share issue was distributed among the existing shareholders (Ananiev brothers and Commerzbank) pro rata. Upon completion of the share issue, PSB has applied to [Russia's national development bank] VEB for a subordinated loan. Earlier in August and September, PSB received two subordinated loans from the parent company for total amount of $110m. An IPO is not an option for 2009.
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