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12 September 2011

Russian Federation: Aggressive state giants drive out western banks

Despite the economic slowdown in 2008-9, the payment cards business in Russia has continued to expand and to fulfil its potential, with cards per capita reaching 0.9. Initially driven by pri­vate banks like Alfa Bank, the state-owned Sberbank and VTB have taken up the chal­lenge in the last three years.

In his review of 2010, Sberbank CEO German Gref described cards as "one of the top priority development areas of 2010" and noted that with 51.4 million cards in circulation, up from 39.8 million in 2009, "Sberbank is the number-one issuer of bank cards in Europe."

Though the national figures lag a year behind those from individual banks, Sberbank's recent growth spurt appears to give it a market share in cards in line with its overall retail market share of about one-third, while also accounting for 27% of the national ATM network.

With VTB, Sberbank represents close to half of Russian banking system assets. Like Sberbank, VTB has been expanding aggressively over the past 12 months, (t is close to obtaining control of Bank of Moscow, previously run by the now-sacked mayor of Moscow, and is lifting its stake in the state railways-owned TransCredit Bank from 43% to 100%.

VTB's retail arm, VTB24, will bulk up its operations through its parent's M&A activ­ity. With 5,000 ATMs at end-2010, VTB has announced plans for a further 450 in 2011. Integration of the networks of Bank of Moscow and TransCredit Bank, with 1,800 and 2,200 ATMs respectively, will lift VTB24's total ATM network to close to 10,000 by end-2011 and its card base from 7 million to about 12 million.

Expansionary drive

The expansionary drive by Sberbank and VTB, which has included a focus on cus­tomer deposits, is usually cited as the reason for the withdrawal of several leading foreign banks, who have been faced with leaner margins and generally sub-scale operations. Barclays, HSBC and Santander have pulled out of the Russian retail banking market in the last six months, while BNP Paribas has folded its retail business into a joint venture with Sberbank. According to Russian media reports, GE Money and Handelsbanken are also considering withdrawal from Russia.

But several important foreign banks have said they are staying on. Citibank, which bought most of HSBC's Russian retail opera­tions, says it continues to pursue a strategy of becoming the leading bank for the afflu­ent middle classes, and describes Russia as "a priority market."   

Likewise, Societe Generale has consoli­dated all its Russian interests into BSGV -Banque Societe Generaie Vostok - in which it owns 81.5%. With RUB1 trillion ($35 billion) in assets, BSGV is now the biggest foreign-controlled banking group in Russia. Others who appear committed to their Russian business include UniCredit, Raiffeisen and OTP of Hungary.

As well as their burgeoning Russian oper­ations, Sberbank and VTB are looking to expand in the CIS and in Eastern Europe. VTB already has a substantial retail banking network embracing Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan and Ukraine, while Sberbank has expanded into Belarus and Kazakhstan. Both appear to be inter­ested in buying banks in eastern Europe if the right opportunity arises.

Sberbank has in the past promoted its proprietary, smart card-based Sbercard as a national interbank payments system, with a goal of 50 million Sbercard cards by 2010 stated in 2006 but never achieved. However, the concept of an all-purpose electronic 'citizen card' remains in play through the UEC (Universal Electronic Card) consortium, led by Sberbank, but also including the regional banks UralSib and AK Bars.

The citizen card would serve as an iD card and would include some payment functions. Sberbank said in late 2010 that it had invest­ed $20 million in developing UEC, and might spend up to $150 million through to 2015.

At the St Petersburg international eco­nomic forum in June, UEC said it had signed an agreement to cooperate with MasterCard to implement the objectives of the project.

In contrast to western Europe, Russian banks can expect a supportive regulatory and political backdrop over the next five years. Government strategy calls for the banks to play an active role in modernising the economy and improving the quality and efficiency of their services.

The state also expects to reduce its shareholding in Sberbank and VTB over the next five years. The aim is for the com­bined assets of Russian banks to reach around 90% of GDP by 2015, comparec with 75% currently. 

Payments Cards and Mobile, July | August 2011