State's role in Russian bank sector continues to grow

By bne IntelliNews May 3, 2011

Ben Aris in Moscow -

Already the second biggest bank in the country, Russian state-owned VTB Bank has improved its position further by taking over the Bank of Moscow, in a deal which some worry takes the state's share of Russia's banking sector to too high a level, but others say is part of a welcome bout of consolidation.

On April 27, VTB said it has no plans to increase the 46.48% stake in Bank of Moscow it acquired in February for a reputed $3.5bn, but has moved to consolidate its hold over the lender by installing VTB executive Mikhail Kuzovlyov as the bank's chief after a Moscow court in April removed the previous president and major shareholder Andrei Borodin from his position.

Bank of Moscow, Russia's fifth largest commercial bank, was set up in the mid-1990s as the pocket bank for Moscow's City government. However, following the ousting of Moscow mayor Yuri Luzhkov at the end of September the bank's future was thrown into uncertainty and the Kremlin made its move in November, with Deputy Prime Minister and Finance Minister Alexei Kudrin announcing that VTB was interested in buying the bank. The state bank's VTB-24 retail operation is already a leader in providing consumer credits and mortgages, but adding Bank of Moscow 500-plus branches would put VTB into a league of its own behind its sister Sberbank, which has the lion's share of Russia's retail banking business.

However, the deal didn't go smoothly. At first the Bank of Moscow's management said they were willing to sell their 20.3% to VTB, but things got ugly when they bought a legal case in March to try to block VTB's purchase of a small stake in the bank from the US investment bank Goldman Sachs and then announced a rival bid for the City of Moscow's stake in the bank. Borodin then found himself implicated in a $440m corruption investigation into the dodgy loans made to a property company controlled by Luzhkov's wife and the richest woman in Russia, Elena Baturina. When he was called in for questioning in April, he fled to London and checked into hospital for treatment. A week later he agreed to sell his stake at what analysts report was below market rates. "It is clear what actually happened," one banking source tells bne. "The old management were not happy with being pushed out of the bank and were holding out for a high price for their stake - a price VTB was not prepared to pay. So the management tried to play hardball, but bit off more than they could chew."

Mission creep

The VTB takeover significantly increases the state's share of the country's banking sector and follows on the heels of Sberbank's takeover of Russia's leading investment bank Troika Dialog in February. Both banks have become noticeably more aggressive in building up their business following the economic crisis. Several foreign banks have already pulled out because of the growing competition; the latest was HSBC, which announced on April 26 it was abandoning a two-year drive to build up a retail operation in Russia.

According to Oleg Vyugin, CEO of the private MDM Bank and former head of the Federal Financial Markets Service, state banks are preventing the growth of private banks, which thanks to their quango-like status enjoy access to significantly lower borrowing costs than the privately owned banks. "The recession was tougher for foreign banks that have only operated on the Russian market for a few years than for foreign banks that had established themselves in the early 2000s during the period of rapid economic growth. Latecomer banks were hit hardest by the recession as they failed to sufficiently increase market share to weather the crisis," says Seija Lainela, an analyst with the Bank of Finland.

The Kremlin says that the increase in its share of the banking sector is temporary and that it is powerless to prevent it. "Technically, [the Bank of Moscow] deal has increased the state's share in the banking sector, but the plan is to sell the state's shares in [VTB and Sberbank] and increase the competition in the sector. The other side of the coin is the state can't restrict Sberbank's place in the market, as how can we say to the minority shareholders there is a cap on the bank's ability to compete?" Arkady Dvorkovich, economics aide to president Dmitry Medvedev, said in a recent interview with bne.

Indeed, the state has been busily selling shares in both banks. VTB raised $8bn with an IPO in May 2007 by selling a 22.5% stake and sold another 10% in February raising another $3bn. The state has said that it wants to sell another 10% as soon as possible. Likewise, the government owns 60.25% of Sberbank and shortly after the purchase of Troika Dialog, Russia's National Banking Council signed off on a decision to sell another 7.58% to the public, probably later this year.

Some investors are happy to see both banks growing in size and power. "On the one hand, the state is making it more difficult for private banks to operate, but on the other we are starting to see the beginning of badly needed consolidation in the banking sector. Taking over banks that are clearly not run on commercial lines but for the benefit of their owners is, all said and done, a good thing," argues Roland Nash, chief investment officer at Verno Capital.

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