Orient Express Bank building from the bottom up

By bne IntelliNews December 19, 2012

Ben Aris in Moscow -

In the highly competitive Russian retail banking market, Orient Express Bank (OEB) has pulled off a neat trick. It has found a huge niche that is largely unoccupied and become one of the fastest growing banks in the country at a time when most of the foreign banks that bought into the market are pulling out because competition is so stiff. How did OEB do it? By going into the regions and concentrating on the small cities and towns that the other Moscow-oriented banks have ignored.

"We are strong in the smaller cities where there is less competition and we have been building from the bottom upwards over the last six years," says Sergei Vlasov, founder and CEO of OEB in an exclusive interview with bne. "We already cover over 1,300 cities in all the regions of Russia and we are more likely to be found in a village than in a big city."

Building from the bottom up is an obvious strategy given that everyone else has built from the top down, but it is not an easy one to pull off. The cost of setting up in every single one of Russia's 83 regions and catering to markets where both the number of people and the average incomes are an order of magnitude less than in Russia's biggest cities means OEB has had to focus on efficiency, as well as charge significantly more for its services than the leading urban banks.

Russia's twin capitals of Moscow and St Petersburg have attracted the most attention. The two biggest cities in Europe with a combined population of over 16m, they are together bigger than most Central European countries and average incomes are several times higher than in Russia's far-flung regions. But by the same logic there are almost no banks other than the state-owned retail giant Sberbank in those same regions. "In most regions there is only us and Sberbank and we share the market 60/40," says the ebullient Vlasov, who goes on to rattle of a string of Russian regions where the bank works that probably only known to the players of the board game "Risk" in the West. "We started in the east where the competition is much less: in the Far East, Kamchatka, Kalmykia, Sakhalin, Primorie, Yakutiya, Siberia and later moved into the North-West regions. Moscow was added quite quickly, but more as a source of deposits than of business.

"We have been growing very fast, but the bank's business has grown faster than the capital. We have reinvested all the profits, but we needed to find partners to maintain our expansion," says Vlasov. "We have another three years of fast growth ahead of us until we start to reach maturity, but we can still more than double in size."

Vlasov is no newbie to the retail business. He cut his teeth as the manager of 1stOVK, a legendary bank that was the retail arm of Yeltsin-era commercial banking giant SBS Agro, which collapsed in the 1998 crisis. Rosbank, which belonged to oligarchs Vladimir Potanin and Mikhail Prokhorov, took 1stOVK over and brought Vlasov in as manager in 2003, where he built a post-crisis retail juggernaut, before the whole group was eventually sold to Societe Generale in 2007.

While like almost everyone else in the consumer credit game the bank is present in all of the 35 Russians cities with populations over 500,000 people, the bulk of its 700-odd branches are in cities of 100,000 or less, with 60 branches in cities with 30,000 people or less.

Put another way, the bank is already present in all the big cities, but has only penetrated a third of the cities of 50,000-100,000 and only 8% of Russia's cities with 30,000 or less people. Even if the richest Russian markets of Moscow and St Petersburg are saturated with banking services, OEB has only just started to cut into the much larger market made up of small cities and towns in the region and is on its own in most of these places.

All this activity has led to some impressive growth figures. Since 2008, the loan portfolio had grown from RUB24.2bn ($1bn) to RUB147.1bn ($4.9bn) by the end of the first half of this year - a cumulative growth rate of 67.4%. At the same time, deposits have grown even faster as the locals move their savings out of the staid behemoth Sberbank and into the shiny and user-friendly branches of OEB that have opened in their home towns. Deposits have grown from RUB18.5bn ($771m) to RUB134.3bn ($4.47bn) - or a compound average growth rate of 76.3% - over the same period.

The boon of having a niche to yourself is fast growth can be managed without compromising on the quality of the lending. The non-performing loan ratio to total loans was 5.7% in 2008 and is now only 6.8% as of July this year, or RUB10bn, which is on a par with the sector as a whole. However, thanks to the premiums that OEB can charge, its equity has grown at an annualised rate of 56% over the last five years and its return on equity by a whopping 34% as of the end of 2011, which is not only one of the best in Russia but seventh best of the world's top 1,000 banks, based on the results of The Banker's annual ranking, says Vlasov.

Investor interest piqued

The bank's boasts of being number one in auto-loans, where OEB has sewn up the second-hand car loan market, and having the third largest retail network in Russia (if you include points of sale in addition to branches) has piqued the interest of investors. OEB already counts Baring Vostok Capital Partners as a shareholder, Russia's most successful private equity fund that owns 30% of the bank, but recently added Russia Partners, another top flight Russia-dedicated fund, which bought a 6.9% stake for $160m at the end of October.

Amongst its other shareholders the bank counts the World Bank's commercial arm, the IFC, which owns 13.9%, and Igor Kim, the wunderkind of Russian regional banking that was behind Ursa bank, which was eventually merged with commercial bank leader MDM Bank.

The extra capital will be used to continue expanding its loan portfolio next year: at the end of the first half of this year there was still a RUB13bn ($430m) gap between the loan and deposits portfolios that needed financing. Indeed, Vlasov says the bank will probably be back in the market in the new year to raise even more capital. "We have been growing very fast, but the bank's business has grown faster than the capital. We have reinvested all the profits, but we needed to find partners to maintain our expansion," says Vlasov. "We have another three years of fast growth ahead of us until we start to reach maturity, but we can still more than double in size."

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