Ben Aris in Moscow -
Sibacadembank (SAB) used to boast it was the biggest bank east of the Ural Mountains, but now the Novosibirsk-based bank can also claim to be the most attractive acquisition target in Russia.
SAB is growing at "phenomenal" rate, say analysts, even by today's heady standards and, together with its owner, epitomises the last century of Russian history.
The biggest shareholder is Igor Kim, a mathematics child prodigy whose Korean grandfather was deported to Kazakhstan during the Stalinist terror. And based in the empty wasteland of Siberia, SAB has is already emerging as a poster boy for the next chapter of Russia's return as a world power. SAB has left its larger peers to scrap over the richer markets in Moscow and St Petersburg, while it concentrates on its home market in the Asian part of the Russian landmass.
Double and merger
SAB first hit the radar screen about two years ago when the European Bank of Reconstruction and Development (EBRD) decided to buy a 25% blocking stake in the bank. Since then its expansion in its core markets in Siberia and Russia's Far East has been nothing but explosive. Troika Dialog calls the bank's growth profile "phenomenal, even by the current inflated levels of the Russian banking sector."
The bank's total assets rose from $100m at the end of 2001 to $1.1bn by January this year and then added another $600m in just the last six months.
SAB has come from nowhere to rank as the 27th largest bank in Russia by assets, despite having almost no presence in Moscow or indeed any of the big towns west of the Ural Mountains - formally the eastern edge of Europe - where 80% of the Russian population live.
It emerged from a series of mergers, beginning on the eve of the 1998 financial crisis; now it is just about to merge again, this time with the biggest of its acquisitions to date, UralVneshtorgbank (UVTB). The combined bank will be re-branded as Ursa Bank and the international advertising agency BBDO has been hired to carry out the job. BBDO just set up a re-branding division in Russia as the retail business continues to swell and SAB is amongst its very first clients.
"It is a very interesting project as SAB has 6,000 workers and UVTB has 3,000. According to Russian standards the merged bank will become one of the country's biggest," Kim told bne in an interview. "At the end of the process there will not just be a bigger SAB, but it is important to merge the potential of the two management teams to reach critical mass and create something new."
Medals and rockets
The story began with Kim's paternal grandfather, a Korean born in Russia's Far East, who found himself on the wrong side of the line after the Communists took power and closed the border.
The unlucky man was then caught up in Stalin's Terror and deported along with hundreds of thousands of other Koreans to Kazakhstan in 1937, then a region of the Soviet Union. Both Kim's father and mother were born in a small village in the Almaty region populated almost exclusively by Koreans who were dumped there by the deportation trains.
The family moved to Russia's Far East while Kim was still a toddler to look for work and settled in Sovietskaya Galen, a small port near Khabarovsk on the Pacific Ocean.
Kim excelled at school and it quickly became clear he was a mathematics prodigy. After he won a gold medal in the mathematics Olympiad - bright Soviet schoolchildren regularly competed in academic competitions - the shy young boy in glasses was paid the highest honour the Soviet government could bestow on a schoolboy - an invitation to attend a special school in Akademgorod, an entire city that was dedicated to training the finest minds in the Soviet Union and the nerve centre of the Soviet military-industrial complex.
"Those were amongst the happiest days of my life," says the jovial Kim, reminiscing about school days in his modest Moscow office. "We were living a big romantic ideal and studying in a community of very creative and intelligent people. Everyone was very interesting and very intelligent. It was also very tough training for the brain and I have never been challenged since like I was challenged there."
After school Kim enrolled at the Novosibirsk University to study physics and was on the path to becoming one of the Soviet Union's top nuclear scientists. Except the Soviet Union collapsed in 1991, leaving the institutes without money and the scientists without jobs.
Bust banks and Siberia
SAB is headquartered in Novosibirsk in the mineral-rich West Siberian region and is the end-product of a series of mergers brought off by Kim. All three of SAB's main shareholders graduated from Novosibirsk University's physics faculty, but it was Kim who led them into banking.
Among other things, Kim had spent some time studying mathematical economics at Novosibirsk, the science of modelling economies, which got him a job at Rossisky Narodny Bank (Russian People's Bank) in 1994 where he was later joined by his two friends Alexander Taranov and Andrei Bekarev. A small local bank, Rossisky Narodny Bank only began to grow fast after it was made an authorised bank of Western Siberian Railway Company, the same year as Kim joined.
The railway deposited its budget money in the bank, which provided a source of funds to finance the bank's business and it began to flourish. The same was not true for the Siberian branch of the bank for the Academy of Sciences, Sibacadembank, which was set up in 1990 and whose managers turned to Kim for help the same year.
"The managers of SAB came to us to help them save the bank, which had very large bad debts and was facing bankruptcy," says Kim. "We came to SAB, which was a lot bigger than Rossisky Narodny Bank, as crisis managers, but ended up as owners after we took over all the obligations of the bank and paid them off."
It took four years to turn SAB around, but Kim put it back into profit and eventually the two banks merged only a month before the double whammy of the Russian government's default on its debt and the ruble devaluation struck on August 17, 1998. It was the best possible thing that could have happened to SAB.
"During the crisis we received a 1,000 new corporate clients and the bank grew eight-fold in one year. So many people were coming to the bank it was almost impossible to cope with the influx: during the worst of the crisis we had 300 corporate customers open accounts in a single day," says Kim. "By the end of it we emerged as the biggest bank in Novosibirsk."
Over the next four years Kim's banks grew fast and he bought several more in Siberia and Russia's Far East, such as Kuzbass Transport Bank, which merged with SAB in 2001. The biggest acquisition in this period was UralVneshtorgbank (UVTB) headquartered in Yekaterinburg, which will be merged with SAB by the end of this year.
With a solid base in Siberia, the bank launched the second plank of its growth strategy in 2002 - integration with the international financial markets. SAB was quickly admitted to the EBRD's loan programme for small and medium-sized enterprises, then graduated to the trade finance support scheme, until finally the EBRD bought a 25% stake in SAB in December 2004.
Banks in business
SAB is a universal bank, but Kim was quick to spot the potential of retail banking and he built up the consumer finance business so that SAB is now second only to the state-owned behemoth Sberbank in the retail business east of the Urals with 1.3m customers.
If the mortgage business is included (the bank is in the process of securitising its mortgage loans so they will disappear from the balance sheet), then the loan portfolio is split 43% corporate/57% individuals, as of the end of the first half of this year. Personal loans account for 70% of the retail lending followed by mortgages at 15% and car loans at 8%.
The bank has 10 regional branch offices and 178 points of sale (POS), which already makes SAB a top-10 bank in terms of its distribution network. And the bank intends to open 60-70 new POS a year over the next two years, mostly in the smaller cities where the only competition is Sberbank.
But the bank's strength is constant innovation. This year's new product will be leasing into which the bank has sunk $500m, including $300m dedicated to leasing real estate, which is expected to earn $100m-120m in 2006.
Kim says that the bank will also stray over the traditional banking boundaries with his plans for project finance; rather than simply lend money to growing companies, the bank will take a large equity stake as an active investor in the best projects.
"If we are going to do this kind of business then the quality of our risk management is crucial," says Kim.
But the bank's biggest advantage is its focus on its home regions in the Urals, Siberia, the Volga delta and Russia's Far East; with 10% of the Siberian market and about 3-4% of the Urals market, SAB has been cutting into the market like a hot knife into butter. Compared to Moscow, where the competition is already cutthroat, the regional markets are only just starting to take off, but Kim ascribes most of SAB's fast growth to the quality of the team management.
"Banking is a people business and people mean a lot to us," says Kim. "We have an excellent team which despite being young are hard working and very ambitious. We want to become an international recognised bank and brand."
IPO on the horizon
As a small bank, SAB's growth was organic, but since it emerged onto the national scene life has got easier. The bank has been leveraging its increasingly good name with a string of bond issues to finance more growth. The latest was a $300m, 5-year Eurobond that was issued at the start of November. Initially the bank was intending to issue $200m, but investor demand was so high it increased the final offer to $300m with a coupon rate of 8.3%.
With the bank's stock trading at a 20% discount to its larger peers and an implied price-to-book ratio of about 3.3, according to Troika Dialog, SAB's shares look cheap; especially since Kim expects the bank's equity and assets to double two more times in the next two years.
International banks circling the Russian bank sector looking for take over targets and SAB must be one of the most attractive assets on offer, but Kim says he has no plans to sell out just yet.
SAB was intending to sell a 12% stake to Germany's Dresdner Bank in April, but the deal was called off at the last moment. The shares were eventually sold to individual portfolio investors this summer with South Africa's Standard Bank as the bookrunner instead. Kim won't say why SAB killed the Dresdner deal, but there was no problem in placing shares amongst financial portfolio investors, which raised $81m in July.
His decision is typical for the owners of Russian banks at the moment: with such fast growth rates the majority of bank owners are reluctant to sell majority stakes, but as the capital-adequacy ratio of the Russian banking sector is falling by about 1% a year because of the exponential growth of lending, many of Russia's fast growing banks are willing to sell minority stakes to raise fresh capital.
"We were interested in inviting foreign portfolio investors to participate in the bank's authorised capital, as we are already very actively cooperating with the capital markets," says Kim.
Kim has no immediate plans to sell to a strategic investor, but wants to IPO the bank once capital passes $1bn, from the $350m it will be after the merger with UVTB is completed in the next couple of months. The IPO could happen in 2008 or 2009, he says.
"I have a principle: plan and achieve that plan. Our plan is to IPO, but I can't say precisely which month or year, as it will also depend on market conditions. But we will have an IPO in the next few years," says Kim. "We plan to repeat our growth of last year and this year where the capital and assets both doubled in both years."
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