Ben Aris in Moscow -

The gold rush into Russia's retail banking market has come to an end after Barclays Bank announced it plans to sell its high street bank, while reports say that HSBC is also looking to exit the country.

HSBC and Barclays Bank would be just two of the most high profile foreign banks that have given up on Russia. With a population of more than 142m people, but a very low banking penetration - only one in four Russians have any sort of bank account at all, according to some surveys - the retail banking business was doubling in size every two years prior to the global economic crisis, leading to a stampede by international banks into the market from about 2004, which sent prices for banking acquisitions through the roof.

Barclays paid top dollar for Expobank, based in Russia's Far East, in March 2008 for $745m (€531m) at the very top of the banking boom, valuing the bank at a whopping 3x book value. Over the next few years, Barclays rapidly rolled out a retail offering across the country. But in the middle of February, the bank announced it was seeking a buyer for its retail business and would focus solely on investment banking. "The people in London realize that they paid stupid money for these banks. There was a rush into Eastern Europe, but now they are willing to write off a big loss. It seems to me to be a very emotional decision," says Sergei Nazarov, head of Renaissance Asset Managers financial institutions fund.

A week later, HSBC was also reportedly pulling the plug on its retail operations just two years after announcing ambitious growth plans, although the bank is insisting it "remains committed" to its business in Russia. "No decision has been made to exit one of our businesses in Russia," the bank said in an e-mailed statement to Bloomberg on February 21.

HSBC doubled its Russian unit's capitalization in the midst of the crisis and former CEO Stuart Lawson said the bank was, "targeting high net worth individuals as the cornerstone of its growth strategy." The bank launched what it called a "world-class retail offering" in June 2009, opening four branches in Moscow and one in St Petersburg as the starting point in an ambitious $200m expansion plan. However, a year later, Lawson left the company in what one banking source at HSBC described as an "acrimonious disagreement over strategy."

The possible exit of the two British banks comes after a string of smaller banks have given up on the Russian market. Holland's Rabobank surrendered its Russian retail license last year. Spain's Santander sold its Russian business to local player Orient Express in December. And both Belgium's KBC Group and Swedbank, the biggest Baltic lender, have also cut back their Russian operations in the last year, citing stiff competition as the cause.

Too big to beat

The reasons for the whittling down of the number of foreign players are multiple. The crisis has obviously depressed earnings and saw the number of non-performing loans soar. At the same time, almost all of Russia's banks slashed interest rates as the crisis receded in an effort to rebuild their deposit bases, reducing the profit margins for everyone in the sector. Finally, the relentless expansion of the two state-owned giants of the sector - Sberbank and VTB Bank - means competition has become increasingly tough.

Founded in the Soviet era, Sberbank is a monster with about 20,000 branches nationwide and accounts for 27% of Russian banking assets and 26% of banking capital. VTB's retail business, VTB-24, has more than 530 offices. Most of the bigger private retail banks have at best a few hundred branches, mostly concentrated in Russia's biggest cities. "Shrinking margins and growing competition means the days of easy money are over," says Roland Nash, chief investment officer of Verno Capital. "Those banks that have not built up sufficient bulk in the last few years are going to be pushed of the Russian market or bought up by the stronger players."

However, a few foreign banks have succeed in gaining a toehold in Russia; foreign banks cumulatively account for just over a quarter of the sector's total assets as of January this year.

France's Societe Generale has probably been the most successful after it bought a string of banks as well as launching a greenfield retail operation of its own over the last decade. The bank has almost 3m clients and its consumer unit posted a €13m profit in the fourth quarter of 2010, following a loss of €58m a year earlier, according to the bank's website. The bank predicts Russia will be the biggest contributor to it international retail earnings by 2015.