INTERVIEW: SDM Bank counts its conservatism as its strength

By bne IntelliNews April 27, 2009

Ben Aris in Moscow -

The planned purchase of Russia's SDM Bank by the Israeli financial powerhouse Hapoalim was amongst the first victims of the global crisis. The two banks worked together for more than a decade and half, and after this long courtship decided to finally tie the knot in July, with Hapoalim offering to pay $111m for a 78% stake with an option to buy the rest after two years. Then the crisis struck.

"Hapoalim stopped the deal, as they didn't get the permission of the central bank [of Israel] to close the deal," says Anatoly Landsman, SDM's chairman. "We understood that Hapoalim's position was significantly associated with their internal problems, whereas the position of the Bank of Israel was based on the negative reminiscence of its governor about the Russian crisis in 1998."

But Landsman hints that the Israeli central bank's decision might have come at the prompting of Hapoalim, which would have been obliged to pay a large retraction fee if it had broken off the deal on its own, but doesn't have to pay anything if it can't get permission for the deal. Who knows? No one is sure what really happened.

Good match

It would have been a match made in heaven. Over the last few years, banks have been the hot M&A item. For international banks or private equity firms on the prowl for stakes in second-tier banks in the CIS, one name kept coming up: SDM Bank. A small Moscow-based bank, SDM has stood out amongst the 1,000-odd small and medium-sized banks as amongst the most attractive acquisition targets in Russia.

There is nothing particularly special about the bank. It is based in Moscow's suburbs and specialises in catering to the needs of medium-sized businesses, but not much more. However, it is the very mundane nature of its business that makes it so appealing. "We are very conservative," says Landsman. "The point is to be a solid bank and not just a big bank. We only have the deposits of our customers and no money from the international or domestic capital market. But this meant that during the recent crisis we didn't have to turn to the Central Bank of Russia for help or loans, although we were included in the list of banks eligible for help."

Some investors passed the bank by, as it didn't seem to be cashing in on the double-digit growth of the financial services sector. All bankers claim to be conservative, but few Russian bankers were able to avoid the temptation to chase growth while the sector was booming. Western bankers have filled hotel rooms for several years dishing out easy credit to all-comers. Likewise, raising money in the ruble bond market, awash with cash, was so easy that Renaissance Capital's chief economist, Alexei Moisseev, likened the boom to the bubble at the start of the millennium. Even amongst the truly conservative Russian bankers who eschewed these easy sources of funding, few were able to resist the temptation of retail banking and invested heavily into branches or express loan businesses.

Landsman did none of these things. Instead he concentrated on building up his relations with medium-sized business and catering to all their banking needs - but not much more. The bank does some retail banking, providing payroll services to a total of 100,000 employees working for his clients, but while most banks have used payroll as a platform from which to launch a retail businesses, Landsman never went beyond the simple payroll function. "All our retail clients have debit cards, but we never offered them loans. Many banks have handed out many retail loans and now they have many headaches," says Landsman.

Where SDM has worked hard is making sure it has a wide base of customers and making sure they are happy: no one customer has more than 1% of the bank's liabilities. So why be so cautious when everyone around you is making money hand over fist? "Already, at the start of 2007, it was clear that our economy was overheating, plus the ruble was very strong, so some sort of internal crisis was becoming increasingly likely. Still, I didn't expect it to take on global proportions," says Landsman.

When push came to shove in October last year, all this work paid off, as while companies and customers fled from their banks, SDM saw a relatively mild outflow. "We saw a 15% outflow in October and November," says Landsman, "but thanks to our conservative policy, we didn't really have any real problems in this period so it didn't affect us too badly."

Who else in Russia can say that? Not many.

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