10/13/08
Russian retail and corporate banking revenue to rise to US$70 billion by 2012

Report highlights opportunities and risks for foreign banks

London, 13 October 2008 - With recent political and financial turmoil in Russia it has not been a reassuring few months for banks seeking to do business in this politically complicated country. However, for foreign banks that are able to navigate the risks there is a significant opportunity for success – and banks should establish footholds now whilst the uncertainty is at its height. This is the key recommendation of a new study by the global management consultancy Booz & Company, which is the first in a series of reports on the Russian banking market.

The report, Dipping into the Bear’s Honey Pot – Opportunities and Risks in the Russian Banking Market, notes that the Russian banking market is growing much more quickly than those of its neighbours, and is concentrated at the top with a few large players. State-controlled banks comprise 39% of the market, private banks 44% and foreign banks 17%. However the majority of the market is very fragmented, with most of the 1,200 banks having a market share of less than 1%. Consolidation is therefore inevitable, and there has already been a 15% decrease in the number of banks since 2003. Many of the smaller private banks will not survive, and Booz & Company estimates that there will be fewer than 1,000 banks within a few years.

State-owned banks have better access to state funding and are already taking an active role in the consolidation of the market; we do expect their share to further increase to 40-42% by 2012. The share of foreign banks is also likely to rise to 20-22%.

There are certain parts of the Russian market that present opportunities for foreign banks:

  • Retail and private banking revenues could triple to US$36 billion in 2012 from US$12 billion in 2007. The best option for foreign banks would be to go after the affluent and mass-affluent segments in key industrial and commercial regions.
  • Commercial and corporate banking revenues could rise 14% to US$34 billion in 2012 from US$17.5 billion in 2007. While lending will be the main driver there will also be increased revenue from transaction banking services, including cash management and trade services.
  • Investment banking and capital markets is the trickiest segment but there are positives – M&A has been strong, as have foreign exchange cash flows and trading operations. However Booz & Company recommends that foreign banks tread carefully in this sector until the political picture becomes clearer and the Russian equities market becomes less volatile.

“We can view the risks of operating in Russia through a number of lenses – political, regulatory, operational, economic and financial,” says Thorsten Liebert, principal at Booz & Company. “In early 2008 we would have focused on the regulatory and operational risks; however, given recent events, the political and financial risks are now the most relevant. There has been much debate as to whether a new cold war is developing. Political blocks are definitely forming and it is likely that Austrian and Hungarian banks will not encounter obstacles in Russia, but others might.”

As well as the political risks, foreign banks are likely to face challenges in the areas of operational and regulatory risks. “It can take up to two years for a foreign bank to receive a licence, and the regulatory environment requires careful monitoring,” says Tanvir Hanif, principal at Booz & Company. “Operationally, there are also challenges. Russia does not have a strong service culture and finding qualified staff is difficult. Foreign banks will need to lean on the strength of their brands to attract and retain staff.”

The report contains lessons learned from the 1998 economic crisis and shows that banks that took a riskier approach and stayed the course, such as Raiffeisenbank, did suffer some short-term pain, but ended up with stronger market positions.

As Steffen Leistner, partner and head of Booz & Company Russia, notes: “We do not believe that foreign banks can become market leaders within the current environment, but there are still opportunities. Foreign banks will need to have focused strategies, target specific segments, and be prepared to manage the ongoing risks. To be successful, foreign banks will have to take a position they can sustain through the political cycle, leverage their internal capabilities and make their moves with a clear-eyed view of what can go wrong.”