KIT Finance back from the dead

By bne IntelliNews September 26, 2011

Ben Aris in Moscow -

It was a close call. Two days after Lehman Brothers filed for Chapter 11 on September 15, 2008, the financial tsunami broke on Russian shores and the up-and-coming commercial bank KIT Finance collapsed. Bankers held their breath waiting to see if the bankruptcy would spark a repeat of 1998, when the entire top tier of the Russian banking sector was wiped out in a few days.

It didn't happen. Within hours, asset management company Leader, owned by Gazfond, the pension fund of Gazprom, stepped in and said it would acquire a controlling stake in KIT. Leader's offer to bail out KIT stopped the fear spreading at the crucial juncture, but eventually it was the state-owned Russian Railways (RZD) that bailed the bank out with loans backed by the Russian Deposit Insurance Agency (DIA).

Fast forward to 2011. While Europe is again facing calls to recapitalise its banks in anticipation of a Greek sovereign default, which the markets seem to assume is now inevitable, not only is KIT back on its feet, it is flourishing.

Andrey Degtyarev, the bank's new CEO, says that by October it will have paid back all its bailout loans - three years ahead of schedule. The bank ran up a total of RUB60bn in bailout loans, but it went into the crisis with a significant stakes in state-owned diamond monopolist Alrosa and VTB Bank's retail arm VTB24, part of which it sold in August for about RUB20bn. Degtyev says the plan is to sell the remaining stakes this October, which should clear its debts completely. "The plan is to pay off our debts by the end of the year, as the debt terms prevent us from doing some types of business," says Andrey Degtyarev, sitting in the bank's modest but modern offices on Bolshoi Nikitskaya in the heart of Moscow. "Then we have a growth strategy to 2014. Closer to this date and according to results owners will decide - if they still develop our bank or they try to sell it. In any case, after we pay off our loans then the bank will be a more interesting prospect. "

After a nasty two years, Russian banks are bouncing back. According to the central bank, retail loans for the sector were up 19% in August on year and there was also a sharp acceleration of corporate lending, up 13%, both of which are underpinning Russia's relatively robust economic growth.

Good old days

KIT was typical of the Russian banks that flourished in the boom years. A successful St Petersburg-based bank, KIT moved to Moscow at the start of the last decade and began to launch business after business. The sector's assets were growing by 40-50% and all banking segments were making money. KIT launched an online brokerage for day traders, tied up with Holland's Fortis to offer international funds to Russian retail investors, and rolled out a rapidly expanding mortgage business. There were even plans for a $1bn IPO in 2008, which would have made KIT the first private Russian bank to list on international exchanges (an honour that has since gone to Nomos Bank, which floated earlier this year).

Today's KIT looks very different. It has been shorn of all its businesses except the private and corporate banking functions, and sold off its large St Petersburg branch network to concentrate on servicing the needs of small and medium-sized enterprises (SMEs). "We don't plan to go back to the retail business. Now we concentrate on complicated deals for medium-sized companies: things like project finance, M&A deals and loans. If we are involved in a management or leveraged buyout, then sometimes we take a stake in the most interesting deals," says Andrey Degtyarev. "KIT is now somewhere between a corporate and an investment bank."

The niche is an obvious one, says Degtyarev, because after state-owned retail giant Sberbank bought investment bank Troika Dialog, Russia's investment bank business is dominated by a dwindling number of giants. As such, Russia's legions of fast growing middleweight companies are struggling to find investment banking services. "The big banks won't work with SMEs because the risks are higher and that limits the number of deals you can do," says Degtyarev. "But that's our advantage: we do fewer deals, but we have excellent risk management and get very close to the deal - taking seats on the board etc - to control these risks properly."

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