Ben Aris in Berlin -

Russian banks have jumped feet first into the securitisation business where loans to consumers are repackaged into reduced-risk bonds and sold off to international investors. This year Russia saw the volume of these securities reach 10-figure sums as Russian banks are forced to tap the international capital markets to finance the consumer-borrowing binge in the country.

The volume of securitisations has grown exponentially over the last 18 months. A handful of deals in 2005 got the ball rolling when a few pioneering banks raised $300m-400m by securitising their hard currency credit card receipts and retail credit portfolios, selling the bonds on to international investors before ploughing the money back into the market in the form of more loans.

The ice broken, the business really took off this year after the first ruble-denominated credit portfolios were securitised. By the start of December a total of 11 transactions had been completed, generating $2.5bn worth of deals. Russian banks need the money, but foreign investors, mainly Europeans, want exposure to the booming retail sector almost as much.

"I am getting calls on a daily basis from Russian banks that want to get involved in securitisation," Daniel Mumzhui, head of structured products team at Moody's, said at an Adam Smith conference on Russian banking last week. "But a lot of this is also driven by investor demand. There is a growing base of investors that are interested in buying Russian securitised bonds."

The pioneers

The middle-tier Soyuz bank (owned by aluminium tsar Oleg Deripaska) broke new ground last year with the securitisation of dollar-denominated car loans made to Russian consumers; the resulting bonds won a significantly better rating than the bank itself, lowering its cost of borrowing.

Soyuz was soon followed by the bank considered the main force behind Russia's consumer credit boom, Russian Standard Bank (Russky Standart), which pulled off the first securitisation of ruble-denominated consumer loans. More recently, Russian Standard organised the first ruble-denominated car loan securitisation.

"Russian Standard bank has become a regular issuer of debt and we are committed to introducing new sources of debt and new types of asset class to finance the growth of the bank's main activities," said Russian Standard's Leonid Zolotaev at the same conference.

Zolotaev says the bank has already mandated the securitisation of its ruble-denominated credit card receipts that will come to market in the New Year; credit card lending is now the fastest growing segment of retail lending, overtaking unsecured personal loans in volume for the first time over the first six months of this year. And Russian Standard will add mortgages to the list later next year.

So far all the securitisations have involved consumer credit in some form, but the big innovation this year was the passage in July of amendments that created mortgage-backed securities (MBS), which the experts believe will be a $10bn business within a few years.

Russia's second biggest bank VTB was quick to follow up with the first $500m securitisation of mortgages and the most recent deal was an issue from Gazprombank subsidiary Sovintradebank, which issued an offshore MBS.

And the supply of MBS should only increase. Russians have already been borrowing money from banks to buy houses, but without the new laws, banks couldn't take the houses as collateral; these loans have been little more than unsecured credits. However, recent amendments have created true mortgages for the first time where the ownership of houses and apartments can be used as collateral. With a decent asset to back these loans, banks are expected to dramatically increase the amount of money they lend to home buyers and in 2006 true mortgage borrowing overtook unsecured borrowing for house purchases for the first time.

The drivers of growth

Moody's Mumzhui says Russia is unusual in that there is already a wide array of securitisation asset classes on offer, whereas other emerging markets tend to develop only one product – like credit card receipts – before moving on to the next.

The rapid development of Russian securitisation is a reflection of the lack of international banks in the Russian banking sector. International banks dominate in Central Europe after the sector was largely sold off in the 1990s and so the local subsidiaries have little problem raising cheap capital from their parents to refinance their credit portfolios.

By contrast, in Russia there are about 50 international banks registered, but collectively they account for only 14.4% of the total assets of the banking sector, leaving most of the running to the Russian banks, which have limited access to capital.

"We think that the Russian banks are interested in securitisation because they are interested in the liquidity. In Russia we have an expanding retail market which needs funding and we have a relatively low savings rate," said Tim Nicholle, deputy head of structured finance for UniCredit Group.

"The difference between what people on the street are saving and what they are borrowing has to come from somewhere. And that's where we come in; the international capital markets are providing the liquidity," he said.

With no sign of a slowdown in consumer borrowing, and more and more banks launching plans to refinance their consumer loans portfolio via securitisation, the only question about next year's growth is whether it will be fast or very fast.

"What will the volumes next year be – $4bn or $6bn?" Nicholle asks. "So far we have had no problem in raising up to $500m on the European markets – the typical size of transactions are $300m-500m – but if we get over $1bn, and this will come, then it may be necessary to have a strategy to tap the US markets too."

Nicholle estimates the volumes will reach $3bn-4bn, while the more optimistic Zolotaev from Russian Standard and Mumzhui from Moody's estimate volumes of $5bn-6bn in 2007. However, these estimates are based only the officially reported figures.

"In our estimates of volumes for this year we don’t include private transactions so we estimated that there is another $2bn-3bn of activity happen below the radar screen," says Nicholle.

However, securitisations aren't a panacea to Russian banks' shortage of capital. They are expensive beasts to organise and while the special purpose vehicle that are set up to hold the assets that foreign investors buy is supposed to act as a firewall between the originating bank and the actual loans, if a bank goes bust, then the portfolio of debt will be untouchable by creditors. This arrangement has never been tested in Russia and fixing all these problems comes at a high cost.

"Although the costs are attractive in terms of the margins that investors demand, there are a lot of other costs involved," says Nicholle. "Not all the costs can be defined from the start. There is no free lunch. The risks in the business don't just disappear because some guys wave a magic wand and create an [special purpose vehicle]. The risks are still there and someone still has them – most of the time it is the originator."

Soyuz bank's ground-breaking securitisation was small, a $50m issue, but the bond received a considerably higher rating than the bank itself could command and so significantly reduced its borrowing costs. However, Soyuz CEO Stuart Lawson warns that the cost of putting the deal together was high, so there is no point doing a one-off securitisation; better to create a structure that can be used reused.

However, foreign investor appetite for Russian retail loan paper seems insatiable at the moment. Nicholle says they are asking two questions: are we going to get our money back? And how much does it cost?

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