Ben Aris in Moscow -
Investors were shocked when Russky Standart walked away from a landmark deal to sell a 47% stake to BNP Paribas for $300m. Yet just two years later, as Russia's leading provider of consumer credit, the bank could be worth $6bn. bne talks to Dmitri Levin, the chairman of Russky Standart.
The owner of Russky Standart, Roustam Tariko, must be feeling pleased with himself. Tariko all but created the consumer finance business in Russia when he set up the bank in 1999 and was a pioneer again when he negotiated an $800m deal to sell out to BNP Paribas in the summer of 2004, kicking off a string of acquisitions of Russian banks by foreign players looking to tap into Russia's booming banking business.
But Tariko, who got his start in business importing Kinder Surprise eggs in the early 1990s, got cold feet and pulled the plug at the last moment.
At the time it looked like a crazy decision. Tariko had built the bank up from nothing since it made its first loan in 1999 and the multiple of 3.5 times book value was more than double the price similar banks in Central Europe fetched during the 1990s.
As it turned out, though, it was the right call. Tariko had to agree to a ban on offering the bank for sale again as part of the deal, which expires in November, but only two years later a second bidder would have to pay at least 10 times more for Russky Standart if another deal is struck.
The most profitable bank in Russia
The bank reported assets of just over $1bn by the end of 2004 and assets have grown since then. Profits more than doubled over the first six months of this year to RUR6.6bn ($246m), making it as profitable as its giant rival Vneshtorgbank (VTB), which reported an 80% increase in profits to RUR3.3bn ($175) over the first three months of this year.
"With this kind of growth we have become the most profitable bank in Russia," claims Dmitri Levin, the chairman of Russky Standart.
"By the end of the first half of this year we think the bank is worth $6bn," says Levin.
By comparison, at the end of September the state-owned VTB was worth $11.6bn, according to VTB Deputy Chairman Akinshin though analysts say this valuation was made artificially low, assuming a book value multiple of only two, as part of a deal to buy out Promstroibank in St Petersburg.
And Russky Standart's earnings growth shows no sign of slowing, despite the consumer lending business becoming more crowded. The $246m that the bank earned in the first six months of this year is more than it earned in all of 2005. Russky Standart now returns a whopping 90% on equity at the moment.
Russky Standart's performance is made all the more remarkable by the fact that offering unsecured loans has become a less attractive business over the past year. The early entrants into the business have already picked all the cherries and the volume of bad apples is starting to rise.
Russky Standart's main rival, Czech-owned Home Credit, ran into trouble at the start of this year when bad debt skyrocketed to reach $11m for 2005. The bank had to increase its provisioning ratio from 12.9% in the beginning of 2006 to 15.6% in the middle of this year, and its assets decreased by 7% over the first half of this year to $1.4bn even as those of nearly every other bank in Russia rose. In August, Home Credit repackaged the bad debts and sold them to investors in the first deal of this kind in Russia.
Rising bad debt is a sector-wide problem and the Russian finance ministry warned recently that non-performing loans in the consumer-lending sector are rising by 9% a month while overall lending is climbing by 5%.
Despite its aggressive expansion policy, Russky Standart is a market leader here too with below-average rises in non-performing loans, which were up half a percentage point last year to only 4.1% of the total loans portfolio as of June -- well below the sector average.
"This increase is partly a result of increased lending in particularly risky market segments like purchase of mobile phones and it is small amount of money to pay for the growth in market share and volumes we have enjoyed," says Levin.
True credit cards
The long queues in front of the Russky Standart kiosks at large supermarkets are a familiar sight as Saturday shoppers line up for instant credit. However, in the last two years the bank has been pioneering another new product proper credit cards.
While the number of VISA cards issued by Russian banks (both debit and true credit cards) was up nearly a half by the middle of this year to 26.7m cards, almost all of these are debit cards that draw on current accounts.
Russky Standart has taken a different tack and ignored the debit card market entirely, going straight for true credit cards. With more than 10m cards in circulation, the bank already controls 70% of the credit card market and last year the $3.5bn worth of credit-card revenue outstripped its consumer loans for the first time, which reached $2.3bn. The revenue from credits cards is continuing to double every year and shows no sign of slowing.
"The performance of the credit cards has substantially outperformed that of consumer loans, although they will win back some ground in the second half of the year the traditional high season for borrowing," says Levin.
Russky Standart got a clear lead in the profitable consumer lending business and seems to have pulled off the same trick again. Other banks are now turning to credit card lending and at the end of September even Russia's retail colossus Sberbank lumbered into this business, announcing it would launch true credit cards in the New Year.
Levin says that Russky Standart will strive to keep its leading position with new innovations, but its options are running out, as there are not many untouched products left to introduce.
The bank began to make car loans last year and has watched the portfolio of credits grow from $90m in 2005 to $400m by the middle of this year. Next up are mortgages, which are widely expected to take off over the next few years. Russky Standart will begin a pilot scheme at the end of this year before focusing the power of its 320 regional offices on the task of selling mortgage across the country.
With both these products, Russky Standart is late to the game rather than early, but Tariko has built up the bank to a size that means being "first" is no longer so important, but being "better" is.
Secret of success
When Russky Standart first sprang to prominence in 2001 most bankers wrote it off as a mayfly that survived on inflated interest rates (Russky Standart charged an effective APR of at least 50% in the early days) and would fade away once the other banks took up the baton and began to compete head on.
The competition duly arrived, but none has been able to budge Russky Standart from its spot as best consumer finance bank in Russia. So, what is the secret of the bank's success? Good advice, it seems.
Tariko hit on the idea of a consumer bank after a trip to the Czech Republic where he stumbled across Home Credit's operation and decided Russia needed the same thing. But rather than set up the bank and learn on the job, he simply went out and hired the consultancy McKinsey & Company to write the business plan and implement it.
Since then the relationship with McKinsey has deepened. Russky Standart spends millions on advice every year for a biannual health check by the consultants and the business plan is reassessed at the start of each financial year.
"We work very closely with McKinsey," says Levin. "Russia is experiencing the same kind of development that has been seen in other countries so if is useful to know what is coming."
In September, Tariko went a step further and appointed several top McKinsey consultants to senior positions in the bank, including Eberhard von Loehneysen who took over as CEO and has been Russky Standart's main advisor since the start.
The quality of the management is reflected in the bank's ability to borrow. Over the last seven years the bank has become a familiar name in international debt markets. Russky Standart closed its second Eurobond issue at the start of September. The issue was two times over subscribed, allowing the bank to raise $400m.
The bank typically issues two Eurobonds a year to finance new lending, but in August it pioneered a new form of financing with Russia's first securitisation of ruble loan receipts, selling off Euro300m of debt through a special purposes vehicle. Later this year the bank plans to sell assets securitized by its car and credit card receipts worth an estimated $200m each.
"The key to securitisations is to structure the product so you can get a decent rating and our issue achieved a rating on a par with Russia's sovereign rating significantly better than that of the bank," says Levin.
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