Ben Aris in Kyiv -
What words do you associate with the banking industry? Probably dour, musty, solid and conservative. Now consider what they do: sell things. Financial services, to be exact. There's a clash here: you can't sell well if your product and presentation is boring. So top-20 Ukrainian financial holding VAB Group has decided to tackle this mismatch and apply ideas from flogging fast-moving consumer goods to the stolid world of finance. In July, VAB will open in the heart of Kyiv what CEO Peter Baron describes as the banking sector's answer to the Apple Store.
The fresh approach starts with the structure of the group. Rather than set up a universal bank with various subdivisions catering to the different niches, VAB Group is actually a collection of nine companies that sell different kinds of financial services to its customers.
The retail bank, with over 170 branches, is the flagship and targets retail consumers and small- and medium-sized enterprises. The bank has had an SME focus since the start. As one of the first banks to introduce IFRS standard accounts in 1995, it was a pioneer of the European Bank of Reconstruction and Development's (EBRD) highly successful SME lending programme. Amongst the other businesses is a leasing subsidiary that is already the largest amongst those catering to the SMEs in Ukraine, as well as asset management, brokerage, reinsurance and consumer finance subsidiaries. The pension fund already enjoys a 40% market share and the reinsurance company is partners with Vienna Insurance Group, one of the three biggest insurance companies in Europe.
"We don't focus on big deals, but concentrate on the SMEs where the volumes are smaller but the margins higher," says Baron.
Between two worlds
VAB has placed itself in the middle between the growing number of foreign-owned banks operating in Ukraine and the biggest of the domestic banks that are battling to hang onto their market share.
The family of Ukrainian businessman Sergei Maximov bought the bank 15 years ago (then called VA Bank) and began building it up as a consumer- and SME-orientated operation. Since then, the Maximov family brought in TBIF Financial Services as a strategic partner, which has a half share. TBIF is registered in the Netherlands, but is made up of Israeli investors. The group is focused on retail banking across the region and is already present in Russia, Romania, Bulgaria and Slovakia, in addition to Ukraine.
TBIF is ultimately owned by Kardan, which was incorporated in May 2003 and invests in real estate, financial services and infrastructure. Kardan's shares are listed on Euronext in Amsterdam and on the Tel Aviv Stock Exchange in Israel. TBIF has been an active partner in developing VAB. It gives VAB direct access to the international capital markets and the shareholders recently made a capital injection. Following its registration with the central bank, total capital of the bank will increase by $50m.
Baron says thanks to its partners, VAB gets the best of both worlds: it meets all the international standards of banking and has access to its partner's know-how, but is as nimble and sensitive to changes in the market conditions as a local bank. For instance, Standard & Poor's rated VAB as the fourth most transparent bank in the Ukrainian market in 2007 - a surprising result considering there are now over 20 foreign-owned banks in Ukraine and VAB beats most of them in terms of good corporate governance. "Our unique selling point is that we don't need as much time to make decisions as the international banks here and we can implement our plans very quickly because of the shareholder structure. At the same time we have all the international know how thanks to our shareholders," says Baron.
Baron is clearly excited about the new flagship branch that will be opened in the middle of the Kreschatik, Kyiv's main thoroughfare in July. "This new branch will be the banking equivalent to an Apple Store and a completely different experience from regular banking," says Baron, who will not say how much VAB has spent on the branch. "It will be the first 24-hours-a-day bank in Ukraine and is more of a statement than just another outlet."
Less of a place to cash checks and more of a financial "experience" to sells services, the idea for the branch came from the unusual make up of the bank's staff. Baron himself is only 27 years old, but already has nine years of banking experience in the CIS under his belt. He studied for a business BA in London and later went to work for First OVK bank in Russia, a leading retail bank and the rump of SBS Agro, which collapsed in the 1998 financial crisis. This job included a stint in Macedonia, before he finally quit and came to Ukraine to work for VAB (after he married into the Maximov family).
The other members of staff have equally colourful backgrounds. The management is decidedly international, but the staff comes not from Western Europe, but other leading banks and companies in the region. Several managers don't even have banking backgrounds, but cut their teeth in the fast moving consumer goods (FMCG) sectors and have learnt the banking business on the hop. "We have merged the retail concept with a traditional banking model," says Baron. "The FMCG managers bring fresh ideas to the business, which we have made use of in our strategy."
The key to this summer's re-launch of VAB was a new image. Baron hired Allen International, a well-known design agency, in February 2006; the same company redid Aval Bank's image after it was bought by Raiffeisen International in 2005.
The heavy investment in the bank's slick new brand and the shiny new logo can be seen all over Kyiv and paid dividends very fast: the bank's name recognition shot up from 18% to 47% in under a year and is now just short of market leader Ukrsibbank's image recognition of 68%.
All this activity has come at a cost and the bank's income to cost ratio is 85.3%, which is high, even by local standards. But as most of the investment into the makeover has been completed, costs are expected to fall sharply this year to about 68%, says Baron. The bank has no plans to open new branches this year.
VAB is typical in that it is exclusively focusing on the domestic market. Russian banks have been expanding across the region as Russians are having a hard time dropping their imperialistic tendencies. Kazakh and Georgian banks are also moving out, simply because their home markets are so small. And international banks are moving in because of Ukraine's large population. Ukraine is the second-largest country in the CIS in terms of population with 46m citizens, which is why most local banks focus only on expanding their market share at home.
However, looking at the experience of Central Europe, many of the leading banks will probably sell out eventually. The name of the game in the next few years is to build up as big a franchise as possible so they can command as big a premium if they sell.
Baron says VAB Group is keeping its options open for the meantime: "Currently, thanks to our strategic partners we have no problems with capital. We can raise debt on international markets pretty easily although our main borrowing at the moment is from the domestic market. An IPO in two years is possible, but for us the key is to maintain the growth rates.
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