KIT Finance takes dealmaker approach to Russian banking

By bne IntelliNews November 12, 2007

Ben Aris in Moscow -

It doesn't look much from the outside - a modest glass revolving door tucked in between an art gallery and the Ministry of defence buildings on Znemenka, a stone's throw from the Kremlin. But behind the rather staid Soviet façade, the offices of KIT Finance are slick - as in Wall Street slick.

Plenty of Russian banks have spent heavily on their offices, but most have either a predilection for Tsarist-era grandeur or have moved into the nice, but functional, modern buildings like Riverside Towers on the banks of the Moskva.

KIT Finance is maybe the fastest growing and most successful of the half dozen up-and-coming Russian investment banks. Originally founded in 1992 in St Petersburg, the bank didn't really begin to flourish until it was bought out by Alexander Vinokurov in 2001, who owns 63% of the bank.

Having studied banking, Vinokurov came up through the local St Petersburg banks before striking out on his own. Starting with a mere $5m in assets, Vinokurov has built up the bank's six divisions over the last six years to the point where he now employs 1,500 people in a bank with a capitalisation of $660m and assets of $4.5bn. KIT Finance earned $245m in net profits in 2006 and the $140m it brought in over the first half of this year means it's on course to increase its profits by half again this year.

Nearly all of Russia's banks are doing well thanks to the blistering economic growth, but KIT has drawn ahead because it has taken a dealmaker approach to banking rather than just rely on the meat and potatoes of lending and fees that most of Russia's banks make their money from.

The lights are low and the plush carpet means everyone glides around silently. The office of vice president Sergie Grechishkin is a modern and minimal glass-fronted affair, which allows you to look down the length of the room to the trading desks at the other end of the floor where the bank's dealers are hard at work making money. Although the bank has a decent-sized retail operation with a relatively big branch network, the whole bank feels more like an investment bank than anything else. Certainly, it is best know for the deals that are done as part of the group for a few big customers.

In June, KIT put a representative on the board of long-distance telecom operator Rostelecom. In July, it was mentioned as a possible buyer or television station O2TV, although the bank wouldn't confirm the reports. In October, it was also reported to be involved with industrial holding Sistema to restructure Svyazinvest, the state-controlled fixed-line provider that could end with KIT taking an 18% stake in the company that currently belongs to Comstar. Rostelecom also has a significant stake in Svyazinvest.

Part of the KIT group is also a major shareholder in Russian power assets, including: power supply company Sibur-Energo, electric power transmission company Elemash-Energo, controlling stakes in electric power transmission company PROTEP and heat supply company Teploset Invest, and 29.8% of voting shares in the Belgorod Electric Power Sales Company.

In all these deals, KIT is acting on the behalf of a Russian oligarch - or oligarchs unknown and Grechishkin won't say who. However, the point is that these deals have lifted the banking group into the major league where it has been dealing with the elite of Russian business and government.

Trading up

When KIT started out it was a niche player, targeting a more sophisticated Russian client. The original name of the bank was Webinvest, because anything to do with the internet was considered "cool," says Grechishkin. More recently, the bank has been going through a low-key re-branding that began in 2005, but has kept its technology-inspired bent: KIT stands for Creative Innovative Technologies.

The use of English in the name has caused some confusion. English-speaking analysts have been calling the bank CIT Finance, which also happens to be the same name as a US bank. Indeed, during the recent liquidity crisis, an analyst in the US marked down KIT's rating as he confused the two banks.

Although the plan is to broaden the bank's appeal, KIT's early days as a web-based enterprise is still reflected in today's clientele: among the first successful services that KIT offered was an online brokerage for a handful of Russian day traders.

"We still have several thousand customers using the online brokerage and they are very active traders. They buy or sell shares on average three times a day and have anything from a few thousand dollars in their portfolio to several million dollars. Most of these customers make their living from trading," says Grechishkin. "The online brokerage is tailored to the real specialists, but we want to take a more mass-market approach. There are more products in the market and as the market gets more stable, more regular Russians will turn to the equity market. It should grow quickly as risk taking in Russia is higher as people have seen such large fluctuations in their personal wealth."

That means Russia's middle class who are, if not as savvy as the day traders, certainly aware of the world of investment and its benefits. One of the bank's six divisions is a "product factory" that churns out financial products the bank can sell to punters. However, Grechishkin balks at the use of the word "product."

"The idea is not to produce 'products' but better to provide our customers with solutions to that cater to their financial needs," says Grechishkin, who cut his teeth at the US investment banks JPMorgan and Merrill Lynch.

Among the services that KIT has rolled out is a range of 22 mutual funds (known as PIFs in Russian). KIT has already collected an impressive $1.3bn, making it one of the biggest players in this nascent market - analysts estimate that Russians will have about $16bn in PIFs by the end of this year.

But asset management is still a relatively small business in comparison to the $1 trillion capitalisation of the Russian stock market. Rather than making massive returns from this business, KIT is more interested in laying a place at the table for when the cake is shared out later. This is why it went into a 50-50 joint venture with the Dutch fund manager Fortis earlier this year.

"We used to run [the asset management] business on our own, but were looking for a partner. Fortis was also looking for a partner and after we had both looked at several alternatives, we decided to go into business together," says Grechishkin. "Asset management is a global business and Russians want to buy Merrill Lynch's luxury index, while foreigners want exposure to Russia's fast growth story - it is a natural partnership."

The joint venture also comes with some icing in the form of management skills and technology that Grechishkin believes will be needed in the future when this business becomes a mainstream product. The two companies maintain separate offices, personnel etc, and their cooperation is largely in cross-selling each others' products using the bank's 54 retail branches. In keeping with its investment bank mentality, KIT is treating the whole mutual business as a huge learning exercise.

"We have an open architecture," says Grechishkin. "We sell the funds of Renaissance Capital, Troika Dialog and other banks via our network. If their products are better than ours, it makes sense to sell them and take the margin. In the meantime, we learn what they are doing better. Currently we are targeting the more sophisticated Russian investors, but the sales of the international funds are not spectacular - it is more a question of being ready for when the market gets more sophisticated."

The one place where retail customers are learning fastest is in the property market. According to some estimates, up to 70% of purchases in the Moscow property market in the last years are speculative, although others put the number in the low teens.

KIT has established itself as one of the three biggest mortgage lenders in Russia, but typically for the bank it came to mortgage, not because it thought apartment sales was a good business, but because as investment bankers it wanted something to securitize. "We had already done some securitizing of leasing products, but mortgages were an obvious place to start. In one and half years, we had built this up to be the third-largest lender after VTB and Sberbank," says Grechishkin.

The bank offers 20 different mortgage products, which Grechishkin says has largely been unaffected by this summer's sub-prime crisis. "There has been some slowdown and everyone is cautious, but nothing significant. Everyone is cautious but I think that in the first quarter of next year things will be back to normal," believes Grechishkin.

The table is now set and if Moscow's analysts are right, then 2008 could be a banner year for Russian businessmen and bankers alike. KIT has been growing fast, but despite Grechishkin's best efforts to avoid the word, the bank wants to expand "aggressively." To raise a war chest to pay for growth KIT was about to mandate some international banks to organise a $1bn IPO slated for the last quarter of 2008, including a $200m-300m GDR programme. The money would be used to continue the organic growth or possibility buy a retail bank.

"We plan to float in Russia and a [Global Depositary Receipt] issue on the London Stock Exchange," Vinokurov said at a press conference in October, adding the bank's owners were prepared for a scenario whereby investors could get more than 50% of KIT's shares. "Most probably, we will float more than a blocking stake. The main thing here is to raise an amount sufficient for the bank's further development."

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KIT Finance takes dealmaker approach to Russian banking

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