Ben Aris in Moscow -

Promsvyazbank, one of Russia's largest privately-owned banks, said October 3 that it's looking to raise around $400m from its international IPO, taking advantage of a window of opportunity for would-be Russian equity issuers that has opened up after remaining tightly shut for most of the last four years.

Less than a week after Russian state-owned retail banking titan Sberbank sold $5.2bn worth of shares to international investors, PSB said on September 24 it would revive a plan to list in London that was abandoned in 2008. The announcement October 3 said that in a two-step process PSB would float up to 30m Global Depositary Receipts (with one GDR representing 7,500 ordinary shares) on the London Stock Exchange at $10-12 per GDR, including existing shares owned by main owner Promsvyaz Capital, followed by the issuance of new ordinary shares through a closed subscription. It set the price at between $13.33 to $16.00 per 10,000 ordinary shares. At the indicative price range, the bank said the offering would raise between $345m and $414m.

Artem Konstandyan, president of PSB, tells bne in an exclusive interview that the money raised in the IPO will be used to shore up the bank's capital and give it "some more firepower to continue our growth."

Owned by the deeply Orthodox Ananyev brothers, who are easily recognised by their full beards, PSB is one of Russia's most successful privately-owned banks and is growing fast.

The brothers got their start in telecommunications by building a fibre optic network in Moscow in the days before mobile phones and the fixed-line network simply didn't work. However, the bank has branched out since then and specialises in catering to Russia's profitable medium-sized companies that are a little too small for the huge state-owned banks to bother with, and has been adding other services since the crisis. "We reached our current position in corporate banking before the crisis and were already in the top 10 in terms of deposits and loans. We deal with mainly medium-sized companies and our loan book is one of the most diversified in the country," says Artem Konstandyan, president of PSB, in an exclusive interview with bne.

Maybe the best way to sum up the bank's strategy is: quality not quantity. Rather than capturing as big a market share as possible, PSB has always gone the extra mile to find customers it can treat more like partners, and zero in on the most profitable businesses in the sector. "Two things have characterised the last 10 years of business: factoring and trade finance. We are the biggest factoring bank in Russia after VTB and we are in the top two to three for trade finance," says Konstandyan. "Trade finance is amongst the most profitable of all the corporate banking businesses. We focus not on the volume of business, but finding the most lucrative business and remain selective in choosing customers."

PSB already issues some 6% of all letters of credit written in Russia and services a huge one in five, says Konstandian. Sberbank was the bank's only serious rival, but after its sister bank VTB bought Transcreditbank from the state-owned rail monopolist Russian Railways, and combined the two's trade finance businesses, it is now challenging PSB in terms of the size of its trade finance business.

Rethink

The crisis hurt PSB like everyone else and forced the bank to rethink its retail strategy. Since then, it has grown fast and plans to continue to double the network of 300 branches in the next years. "We are in more than 50 regions, but the plan is to further penetrate in the most economically interesting regions of Russia. We have already disposed of the less effective branches and opened a 'lite' format that is low cost and more efficient to run," says Konstandyan.

PSB prides itself on its high quality service and efficiency to bring in retail clients, as well as the general growth in the market, but it has also been very innovative in its marketing. For example, when world heavy weight boxing champion Vladimir Klitschko came to Moscow in September for the first time, every PSB had its logo splashed across the canvas of the ring and was featured on all the billboards announcing the much anticipated fight.

However, by far the most effective marketing ruse was a co-branding of PSB's credit cards with popular computer game "Angry Birds," that was launched in May together with Internet Retail Solution (IRSOL), the official distributor and agent of the game developer Rovio in Russia. In the first half of this year, PSB enjoyed the fastest growing deposits rate of any bank in Russia, says Konstandian. "It got lots and lots of attention," says Konstandyan. "We were surprised as it was more than we could have hoped for a marketing exercise. Even the Washington Post wrote about it."

Today, retail accounts for about 12% of loan book, small business the same amount, and all the rest is corporate loans. However, the plan is to increase the former two and reduce corporate lending's share to about half the loan book. More than 90% of PSB revenues come from fees and commissions, while the lending is almost entirely funded from the banks' retail and corporate deposits.

Main attraction

Judging from the success of Sberbank's September IPO in London, PSB's listing should be well received on many levels.

The Russian banking sector has proven to be one of the most attractive for international portfolio investors looking for a way to get some exposure to the ongoing rise of the country's middle class. And as a mid-sized bank, PSB will replace another Russian bank Nomos that will have exited the market by the end of this year much to the chagrin of its investors, following its much vaulted IPO only a year earlier; investors who bought and held at the IPO will lose some 10% of their money as a result of the delisting.

Despite the 900-plus banks operating in Russia, the number of listed banks can be counted on two hands: either they are giants like Sberbank and VTB, or very small like Vozhredenie bank (aka V-bank) or Bank St Petersburg. PSB will slot into the middle ground where big gains can be made.

Still, this is not to say that PSB doesn't have work to do. The main problem is the bank made a 13.5% return on equity in the first half of this year, which is in the middle of the market and well below Sberbank's impressive 26.1%. Furthermore, Uralsib analysts say the retail business is loss-making at the moment and the capital adequacy ratio is close to the Central Bank of Russia's minimum of 10%, however none of these problems are thought to be serious.

Uralsib put the bank's valuation at $2.3bn and the brothers are reportedly holding out for a price/book ratio of 1.1x, which is low for Russia and compared with the bank acquisition boom at the beginning of the last decade, but more than the 0.6-0.9x that most of Russia's banks were currently trading at in September. "PSB will probably attract attention as a private bank with roughly the same liquidity as Nomos and an LSE listing. However, pricing will be crucial, as existing shareholders are unlikely to agree to a valuation below 2012E P/BV of 1.0," says Natalia Berezina from Uralsib. "This suggests that PSB's upside could be limited after the placement."

PSB 2.0

However, the bank's long-term appeal is the growth it could put in if its plans come together.

First, despite the economic malaise spreading into Russia from western Europe, retail banking is flourishing on the back of perennially rising incomes. "Consumption in Russia maybe slowing somewhat, but retail lending is still very strong," says Konstandyan. "By the end of this year, we expect to see significant lending rise and expect fast growth for several more years."

Then there is the makeover going on in the bank itself. Konstandian is optimistic after he launched the "PSB 2.0" reform programme in 2011: middle managers from the bank's 11,000 employees were invited to an "innovation forum" and given carte blanche to dream up initiatives to improve the operating efficiency of the bank, which were then implemented. "A good example was we have all the customer files on paper, but all this was moved over to electronic records, especially the corporate and retail customers. We have already saved over RUB400m and cut the 162 tonnes of paper we used to use by 80%," says Konstandyan (although the bank still has to send reports to the central bank on paper).

Internal reporting was reduced by half, the credit approval procedure was streamlined, and customers were segmented to better serve their needs and which sub-groups were the most profitable, among other things. More radically, the bank has centralised all the back office operating of all its branches in a Moscow headquarters plus eight regional hubs, thank to heavy investment into IT, which Konstandian says has saved the bank dozens of millions of dollars in overheads. What Konstandian is talking about here is tackling some of Russia's most fundamental problems: bad management, low productivity, a paper-pushing mentality and the Soviet-era legacy issue that middle-rank employees have little incentive to care about what they do at work.

The next stage will be to build out the bank's internet platform. "We have the best internet platform on the market where we can do 100% our transactions online and the next stage is to add mobile banking services so you can bank on your phone. This will come in the autumn."

Analysts are confident that PSB will be able to deliver on most of its promises. "We expect PSB's 2013-14 return on equity to be 16-17%, placing it between Nomos and VTB. We expect it to be able to expand its loan book by around 18% this year and 15% in both 2013 and 2014, with its increased focus on retail and SME," says Berezina.

After this, everything will depend on what happens to the country as a whole. If Russia returns to strong growth again, then investments in the banking sector remain one of the best places to enjoy the ride.