Competition in the St Petersburg banking market is heating up, with local banks starting to feel the pressure from the international majors that have been pouring substantial amounts of capital into the city. French bank Société Générale, Austrian bank Raiffeisen and US bank Citibank are some of the global players that are making an aggressive pitch for the corporate, as well as the fast-growing consumer, market.

The foreign majors are bringing unheard of muscle to the St Petersburg market in a way that has signalled a wake-up call for the local banks. “Russian banks will have to make more loan capital available to their customers and offer them more attractive deals,” says a government official. “Citibank has the resources and ability to grant a loan in two to three hours. A customer seeking a loan at one of our banks might have to wait two or three days for his money. Our banks also lack experience in credit scoring and they cannot absorb the sort of losses that wouldn’t ruffle a feather at Citi or Raiffeisen, for example.


“Clearly there is pressure on the local banks that have come under threat from the foreign entrants. Many of them are perceived as takeover candidates. Perhaps a third are pygmies by international standards and they would not be missed, but we still want to promote a strong domestic banking industry,” says the official.

The cost of capital is a major issue for Russian banks in general: the official estimates that raising capital costs the local banks about 10%, roughly twice the rate at which foreign banks can obtain funding.

Ambitious projects

Foreign banks have been mobilising their resources to finance some of the city’s ambitious development projects. Raiffeisen’s parent company RZB Group, for instance, with the European Bank for Reconstruction and Development, extended a €65m loan in June to build a state-of-the-art shopping complex, with the aim of attracting high-quality international retailers to St Petersburg. The complex will be developed by French company Vinci Construction Grands Projets.

Following Raiffeisen’s recent $550m takeover of Impexbank, it has become the seventh-largest lender in the country. By taking a position in the market through acquisition, rather than organic growth, Raiffeisen says it has saved itself four years’ work.

Sergei Donskoi, a banking analyst at Troika Dialog, says the move was logical: the foreign lender had to work hard to push its brand in the regions. “In many places in Russia, Raiffeisen is an unknown name,” he says. “People know few bank names – mainly Sberbank and Vneshtorgbank.”

Raiffeisen has put St Petersburg high on its agenda for expansion in the Russian market. In June, it announced the opening of two new offices in St Petersburg, focusing heavily on the booming residential mortgage business.

Growth through acquisition is a route likely to be followed by other foreign players. “Perhaps the real aim of every private bank in Russia, bar one or two, is to sell out to foreigners at a fancy price,” says one foreign banker in St Petersburg. “Impex went for almost three times its book value, and now sellers of the bigger private banks are going to be arguing for four times or more.”

Sell-out prophecy

That prophecy was fulfilled in June when Rosbank, Russia’s ninth-biggest lender, sold a 10% stake to Société Générale for $317m, four times book value. According to Rosbank’s official statement, the French banking group has the option to increase its stake to 20%. Having opted for the transaction with Société Générale, Rosbank dropped its plans for an initial public offering and called off its scheduled London shares listing.

“The transaction with Société Générale has increased not only Rosbank’s credibility, it has also been a vote of confidence to the whole banking system of Russia – a signal of the political and banking stability in Russia given by foreign investors,” says German Aliyev, Rosbank’s deputy chief executive.

Sweden’s SEB acquired local St Petersburg player PetroEnergo Bank for SKr600m ($84m) and there are strong rumours that other foreign banks, mainly HSBC and Standard Chartered, are seeking a foothold in this vibrant market, possibly through acquisition.

Good location

“More international banks are recognising the opportunities of doing business in this region,” says Ruslan Belyaev, Citi’s director of corporate and investment banking in St Petersburg. “They understand the need to be close to their large corporate customers. This trend has been quite visible over the past four to five years. As for ourselves, we have found this a very congenial place to do business. All the doors are open and one can get in to see the governor or officials at the central bank.”

Mr Belyaev says that helping the bank’s multinational customers to find their way through the maze of Russian currency control legislation is an important part of the business. “This requires a large amount of paperwork in the pre- and post-transaction stages,” he says. “The devil is in the detail and regulations are frequently changing. In our advisory capacity, we are able to draw a client’s attention to the pitfalls.

“We also do a lot of financing and, apart from our multinational clients, we are moving into financing of local companies that recognise the advantages of using the international markets. Our treasury is working very actively to promote hedging instruments for these corporates and help them to understand dealing with risk.”

Citi has been making an aggressive push for business from St Petersburg’s burgeoning middle and upper middle class. Its main consumer business branch in St Petersburg is the US giant’s largest in Europe, reflecting the bank’s ambition in this segment of the market. “We are offering the full range of consumer products, from cards and personal loans to wealth management and a wide option of investment products and offshore business,” says Andrei Karyakin, who runs the bank’s consumer business in St Petersburg.

Citi has been expanding rapidly in the city in the past few years. It now has nine branch offices and plans to have 15 by the end of the year, with plans for further expansion next year.

“One of the drivers of growth is the fact that St Petersburg is Europe’s fourth-largest city by population, with a heavy concentration of business and industry that is helping to develop a more affluent consumer,” says Mr Karyakin. “If you want to be in the banking business in Russia, you have to be in St Petersburg. It is also important to be able to offer your customers first-rate service because people are becoming more banking sophisticated and demanding. We set ourselves apart by giving personalised advice and assigning our customers a personal relationship manager.”

Citi has lowered the threshold for private banking clients considerably. It is prepared to provide a relationship manager for St Petersburg customers with liquid assets of as little as $10,000, compared with the $100,000 to $500,000 benchmark set by most of its competitors.

“There is greater demand for personalised products and services here than in Moscow, and borrowers are showing a high level of solvency,” says Mr Karyakin. “We have responded to market demands by offering innovative services, such as 24-hour telephone banking. Others will undoubtedly follow in our footsteps, but we enjoy the advantage of having been the first to place these products in the market.”

Struggle ahead

Local Russian banks will undoubtedly struggle to retain market share, faced with the vast resources and sophistication that foreign banks can muster. Viktor Titov, vice-president of the Association of Banks of the North-West, says he is fully aware that capitalisation is a problem for the banks and that this has translated into a relatively low rate of efficiency. “But it is important to bear in mind that the Russian banking system in its present form is only 15 years old,” he emphasises.

“We believe the government, which has accumulated large financial resources thanks to record oil prices, should inject some capital into the banking system. Most of the banks are focusing on the retail side of the business in order to build up their capital base and, as a consequence, the corporate sector is developing at a slower pace.”

Lending boom

Mr Titov regards the boom in mortgage lending as one of the ways forward for the banks. “This is becoming a dynamic area of business but it is important for the banks to understand the risks involved in this activity. The business is still in its infancy and there is a lack of infrastructure, in terms of credit scoring, brokers and insurers.”

Nevertheless, the number of mortgages granted to St Petersburg home buyers is set to double this year, as growing competition and falling interest rates force banks to offer their customers new and more attractive loans. Last year, local banks sold 5000 mortgages valued at about $208.9m. Local bank Sberbank Rossii was the biggest lender, with 1514 loans. Industrial and Construction Bank took second place with 473 loans, City Mortgage Bank, Delta Credit, Raiffeisen and Vneshtorgbank (now VTB) were the other big players in this segment of the market.

Igor Zhigunov, head of City Mortgage Bank in St Petersburg, says that last year the average size of a mortgage varied between $30,000 and $35,000, compared with about $30,000 in 2004. He adds that the increase in national gold and monetary reserves, growth in real income and higher levels of investment into fixed capital were the key factors in the growth of mortgage lending.

Tatiana Khobotova, mortgage and consumer lending department head at VTB, is optimistic about the outlook for mortgage lending in the near term. “This year, we expect the volume of mortgages granted to St Petersburg customers to quadruple,” she says. “This estimate is based on recent experience, as last year the volume of mortgages granted by VTB grew 3.5 times.”

Lora Fainzilberg, managing director of operations at St Petersburg’s Delta Credit, says that in 2005 Russia experienced high growth in mortgage lending, which was reflected in increasing competition, a fall in interest rates and the introduction of new, more attractive mortgage schemes. “Last year, we doubled our mortgage portfolio, with 2300 loans with a total value of about $113m. Banks are increasingly focused on mortgages and have begun to introduce new and more flexible deals for their customers,” she says.

Alexander Ivanov, director of AKB Rus-Bank in St Petersburg, says that doubling the volume of mortgages in the city is an achievable target. Rus-Bank signed an agreement with City Mortgage Bank last year to co-operate in mortgage lending. And this year, it launched a joint programme with the St Petersburg Agency for Mortgage Lending. “Our branch is planning to issue some $2.8m in mortgages by the end of this year,” Mr Ivanov says.

Locals join the fray

Most local banks have expanded their mortgage and consumer lending portfolios. Alexander Kirillovykh, chairman of St Petersburg bank Baltinvest, says his bank adopted a shift in strategy last year to make a bigger push for the consumer market (previously, it was focused primarily on the corporate sector). This strategy has been supported by the expansion of the bank’s branch network in the city: four new offices are due to open by the end of the year, bringing the St Petersburg network to 11 branches.

Baltinvest is also making an aggressive pitch for the car loan market, which is growing thanks to the arrival of major foreign manufacturers setting up assembly plants in the city. “The auto loans portfolio has been expanding by $2m-$3m a month this year,” says Mr Kirillovykh. “We are also actively engaged in the home loan market. Since we launched our first mortgage product this year, lending has increased by $2m per month, a figure we expect to see reach a rate of $7m monthly by the end of the year.”

So far, non-performing loans have been held at 0.5% of the loan book, a level that Mr Kirillovykh considers manageable and that he expects to remain stable in the near term, allowing the bank to pursue a policy of expansion in the consumer loan sector.

“Auto loans and mortgages now account for roughly 10%-15% of our business,” he says. “We would expect to see this grow to up to 30% by the end of the year and perhaps as high as 40% in 2007.”

The bank’s level of bad debts compares favourably with the regional average of 2% for consumer lending, a figure that the authorities consider an uncomfortable level. “This represents a 100% increase from last year and at the current rate, it could go as high as 4% next year,” says a government banking official. “If it reaches 5%, we will have a full-blown crisis on our hands.”

Russian competitors

Dmitry Oliyunin, deputy chairman of state-owned VTB, which is headquartered in St Petersburg, acknowledges the pressure from foreign banks but he says that the main competition is coming from large domestic and regional players. “We have been focusing our strategy on developing a more competitive business model,” he says. “For instance, while in the past a customer had to apply for a car loan through one of our city branches, these facilities are now available directly at the dealer’s showroom.”

According to Mr Oliyunin, one of VTB’s competitive edges vis-à-vis foreign entrants is shorter lines of communication. “We have fast communication channels with all our executive offices and this enables us to take quick decisions,” he says. “We are also the undisputed leader in the local small and medium-sized enterprise market, with about a 30% market share.”

VTB has helped to set in motion a trend that could prove to be a key factor in confronting much larger foreign as well as domestic competitors. The bank, Russia’s second largest, last year agreed a merger with Promstroibank (PSB) to create a new entity with assets of about Rbs770bn ($28.8bn). The deal, which is expected to obtain final approval before the end of the year, cost VTB $577m and the two banks are now in the process of merging their product lines and IT platforms. “The task now is to integrate the two banks and ensure that we preserve our competitive advantages in the market ahead of next year’s planned IPO,” says Mr Oliyunin.

For the moment, there are no plans for any dramatic expansion of the branch network. VTB operates 52 branches across Russia, of which 29 are in St Petersburg and the Leningrad Oblast. “We feel this is the right size for servicing our consumer and corporate customers,” he says. “We are looking forward to launching the newly merged bank, which we believe will be a formidable player in the local market.”