Graham Stack in Moscow -
While Russia's top tier investment banks are making headlines with Chelski-esque recruitment and multi-million salaries, second tier setups quietly play their own game.
Moscow's investment banks have separated into two very different leagues that however peacefully coexist. There is an upper bracket comprising global brands such as UBS, Deutsche Bank and Unicredit, alongside their Russian competitors such as Renaissance Capital and Troika.
Then there are the rest: investment banks often run by their founder-owners, such as Veles Capital, IFK Metropol, Brokerkreditservis, Otkrytie, Trust Investment, that are growing rapidly, but not sufficiently to narrow the gap.
"They're definitely not catching up with the big guys," says Evgenny Tarzimanov of Standard & Poor's, "and the gap is probably widening."
Investment banks' business is often difficult to compare, but the clearest indication of the gulf between first and second class is on the labour market.
Russian and Western media have recently been full of stories about the soaring salaries paid by Moscow's investment banks, numerated in millions of dollars.
"Young people under 30 are arriving without any real experience and starting on $2m a year," a VTB insider commented to business daily Vedomosti in July.
VTB's own recruitment policy made headlines in April when the newly launched investment bank division of Russia's second biggest bank wielded a blank chequebook to 'steal' a large part of Deutsche Bank's staff.
This is where the second tier banks opt out.
Small is beautiful
"There are two different leagues on the labour market," says Troika Bank's Olga Veselova. "Top tier investment banks pay at least twofold compared to second tier."
Top tier banks are either owned by globally-active banks such as Deutsche Bank or UBS, or, in the case of Russia's homebred Renaissance Capital and Troika, they compete directly with them - and recruit internationally. The top tier is part of the global banking market.
"Top tier banks recruit from other top tier banks or from abroad, not from second and third tier banks," says Veselova.
Renaissance Capital and Troika are currently extremely aggressive on the labour market, "paying crazy dollars for the people they want," says Tarzimanov. "The second tier banks are far more cost conscious."
"We are not trying to recruit 'stars'," admits Marina Mironova, human resources head of second tier Veles Capital. "Our priority is not the publicity a candidate brings, but real experience, willingness to take responsibility, his achievements."
While the stars stick firmly to the first tier firmament, questions are already being asked about whether their mouthwatering wage deals are justified: both in the case of the Russian banks trying to compete with global giants such as UBS and Deutsche Bank despite limited resources, and the global names exposed to the credit crisis.
The other drawback to the big investment banks' Chelski-esque recruitment is high personnel turnover creating instability, such as in the case of Deutsche Bank.
Second tier banks, on the other hand, says Tarzimanov, "boast stable teams, often with owner management, low personnel turnover and long track records."
Renaissance Capital head Aleksandr Pertsovsky explained to Vedomosti July 10 the chasm opening between first and second tiers as a result of the rapid growth of the Russian market was combined with its inefficiency.
"It doesn't necessarily mean that number one automatically takes ten times more than number two, but an inefficient market means that distribution of revenue is skewed," said Pertsovsky. "I don't want to assess the competition, but look at the top ten according to Thomson, Bloomberg or Dealogic - only the global banks and Renaissance."
In this context, it is not surprising that the second tier banks pursue very different business models.
For a start, according to Tarzimanov, much of their trading is proprietary trading with their own positions. Three quarters of Renaissance Capital business, on the other hand, is client-driven.
In addition, says Troika's Veselova, 2nd tier investment banks serve predominantly Russian clients, whereas around 50% of clients of first tier banks are foreign."
Second tier banks make a virtue out of being small by offering customised services. "They are more flexible: can go for smaller deals that big banks wont do, for a fee, for instance, of $1m," says Tarzimanov.
"When the client enters our company," says Veles Capital's CEO Alexey Gnedovsky, "he will be met by a top manager, not the client manager. And this is not only a psychological advantage. A top manager can offer products or special conditions tailored for each client. We are in a position to develop and offer individual investment strategies."
Flexibility means that smaller setups explore second and third tier stocks and even non-listed stocks. "There are many successful companies in Russia with sales over than $15m that are not traded yet. It is possible to buy these shares with 50-90% discount to fair value," says Andrey Lee, head of Veles strategic investment department. Tarzimanov names real estate as a particularly attractive sector to smaller investment banks.
And second tier banks also seek out niches. Mikhail Slipenchuk's IFK Metropol, for instance, burst through to lead the M&A market by a number of deals in 2007, as a result of working closely with the new companies spinning off from electricity monopoly RAO EES. Veles, on the other hand, has never conducted an IPO, but is a leader on the Russian promissory note market.
However, such specialization brings with it increased risk. "Second tier banks are threatened by weak risk management, lack of diversification, coupled with low shareholder equity," argues Tarzimanov. The larger the share of proprietary trading, the greater the exposure to the volatility of the Russian stock market.
Troika's Veselova also points to increased competition within the second tier, as banks such as Bank of Moscow, Nomos and Gazprombank spin off their treasury arms as brokerage and investment operations, often with bank customers as client base. KIT Finance is thought to be planning the same move.
Despite increased competition, no one expects much of a wave of M&A in the second tier soon, in contrast to the entry of global majors to Russia's first tier. Merril Lynch's acquisition of 10% of Trust Investment Bank in November 2007 "was an exception rather than a rule," says Veselova. Rumours, however, are swirling that Mikhail Slipenchuk, 100% owner and head of IFK Metropol, is looking to sell a stake, but the bank has said nothing official.
According to Tarzimanov, the majority of owner-managers still characteristic of second tier setups are simply not interested in selling: "They see huge growth potential ahead in Russia, and they love their businesses."
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