By Ben Aris -

UralSib has come from nowhere to become the biggest privately owned commercial bank in Russia after a series of mergers helped create one of the most diversified profiles of any Russian financial institution.

Banks with roots in Russia's 88 regions are starting to do especially well in the burgeoning banking sector, as the fastest growth has moved out of the twin capitals of Moscow and St Petersburg. These banks are now cashing in on their geographical reach.

UralSib is result of mergers between three big banks, but the original UralSib started life as Bashkreditbank, which dominated the oil-rich region of Bashkortostan just north of the Mongolian border. It was one of a handful of regional success stories prior to the 1998 financial crisis.

Like many mid-sized banks, the financial meltdown was a blessing in disguise, as it allowed it to step up a tier to become a leader in the sector literally overnight. Bashkreditbank extended its lead over its peers by realising early on the potential of the retail sector and re-branded as UralSib at the end of the 1990s, at least four years before the bulk of its peers began to target the man on the street as a source of business.

As the bank sector started to boom from 2000, UralSib was brought into a banking group controlled by Nikolai Tsvetkov, the owner of Moscow-based investment bank Nikoil and added to leading Moscow-based retail bank Avtobank to form the biggest privately owned bank group in Russia with total assets of $8.3bn and equity of $1.45bn as of the end of last year.

Tsvetkov remains the driving force behind the group and is a big stakeholder, but the ultimate shareholder structure remains unclear. The similarity in the names of Nikoil and oil company Lukoil are not without cause: the bank's 2004 Eurobond documents showed that Lukoil Chairman Vagit Alekperov was the majority shareholder in Nikoil before the mergers. Today the bank will only say that UralSib Financial Corporation owns 90% of the bank group, without naming the beneficial owners of the holding company.

Diversification through merging

UralSib was always going to be a major player on the Russian bank scene. It was the eleventh largest bank in Russia and the biggest bank not based in Moscow prior to the merger with Nikoil and Avtobank. But it is in the top slot amongst the commercial banks today thanks to the most ambitious set of mergers in Russia's banking history that brought three major banks together under one roof.

"After the crisis in 1998 Bashkreditbank understood it wouldn't survive if it remained in one region," says Alexander Dementiev, UralSib's deputy chairman.

Tsvetkov also was jolted into action by the crisis and concluded the best way to protect against future crises was to build a bank with as diversified lines of business as possible, so no matter which direction the economy went, the bank would always have some profitable businesses to concentrate on.

For example, last year was an exceptionally good year for securities trading, which accounted for a large chunk of the bank's bottom line, after the leading RTS index almost doubled. Following a sharp correction in the global equity markets in May, this year securities did a lot less well, but the retail banking division continues to flourish. Today the bank is present in 74 of Russia's 88 regions, with Moscow, Siberia and Bashkortisan being the most important.

"Retail is a profitable business, but it is a risky one. We are very concerned by proper risk management, which is why UralSib leads the commercial banks in terms of equity, but is only in second or third in terms of assets - we keep a healthy reserve to deal with problems," says Dementiev. "Tsvetkov wanted to create a universal bank, a one-stop shop for all our clients, both retail and corporate, as a fully fledged financial group."

Bank merges are difficult enough to pull off, but they are especially thin on the ground in Russia thanks to the Byzantine regulations imposed by the Central bank of Russia. Typically for the handful of significant Russian mergers brought off so far, the businesses were already brought together long before the paperwork was completed.

"All the different banks in the group have different business lines. It is both our strength and the source of our problems," says Dementiev. "None of the banks competed so there were no conflicting interests."

More consolidation in the Russian bank sector is on the cards, but UralSib says having been amongst the pioneers, it is now time to cash in on the strong market position that these mergers bought.

"We are not planning more mergers or acquisitions, but the odd purchase of a bank may happen," says Dementiev. "The plan is to continue growing from here organically."

Regional expansion

The strategy now is to hold on to the bank's share of the lucrative Moscow market andf at the same time expand fast in selected regions where the biggest growth potential is now.

"We are targeting regions where our range of products - leasing, mortgages, personal loans - are in demand. This means regions with an emerging middleclass and mid-cap companies," says Dementiev. "The trouble is everyone is targeting the same group, so how do you appeal to the hearts and wallets of these customers?"

Dementiev argues that UralSib is in a uniquely strong position to beat off the competition. He identifies three key areas where banks in Russia must be strong and goes onto say that most banks expanding into the regions fall down on at least one of these criteria.

There are three kinds of bank in Russia: state-owned banks, regional banks and foreign-owned banks," says Dementiev. "And they have to have three things to compete in the regions: local knowledge, capital and a range of attractive products."

Sberbank stands head-and-shoulders above other Russian banks in terms of capital and with a 20,000 strong branch network it also has an intimate knowledge all the regions of Russia. But as a Soviet-era dinosaur it has been very slow to develop new products and its shoddy service is the stuff of legend

The other big state-owned bank is VTB, which scores as well in terms of capital and is better than Sberbank in its product range, but VTB only went into retail banking in August last year with a Moscow-based branch network.

The foreign-owned banks are also well capitalised and have innovative products, but obviously lack local knowledge.

Finally, the regional banks give UralSib a run for its money in terms of local knowledge and the best are developing products, but Dementiev says they are limited both by their lack of capital and geographical reach.

Dementiev says UralSib has several years of organic growth ahead of it as it fulfils on its potential, but he expects it will eventually have to tie up with international investors.

"The bank is currently well capitalised and we have aggressive growth plans, but in the future we understand that we will need to IPO if we are going to continue to grow," says Dementiev. "There are definite plans to IPO, but definitely not in the immediate future."