The Covid-19 crisis will accelerate consolidation in the Russian banking sector by creating M&A opportunities, the co-founder of the country’s third-largest privately owned lender tells Euromoney.
Sergey Khotimskiy, who set up Sovcombank in 2001 with his brother Dmitry, says the sector will take a “significant hit” from the pandemic.
“We expect the net profit of the banking industry in Russia to be 50% lower in 2020 and 2021 than last year,” he says. “We also see growth at around zero this year.”
While he believes most local lenders will survive the crisis, Khotimskiy says it will likely prompt shareholders in less-profitable banks to look for an exit.
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Sergey Khotimskiy, |
“There will be some smaller bank failures, but these days even medium-sized banks in Russia are quite strong,” he says. “However, there are several players that have strong balance sheets but are struggling in terms of their business model and failing to achieve good returns on equity.”
That could create an opportunity for Sovcombank, which has a track record of snapping up unwanted assets after crises, often from foreign shareholders.
During the past decade, the bank has acquired the Russian banking assets of General Electric, Nordea Bank, Garanti Bank and India’s ICICI Bank, as well as auto lender Metcombank and – most recently – Moscow-based SME specialist Rosevrobank.
Khotimskiy says further acquisitions are on the cards – although likely not until next year.
“I am 95% certain that we won’t do any significant M&A deals this year,” he says.
“When a bad economic situation evolves, it takes a certain number of quarters for players to realise where they are – for buyers to see that an asset is not totally collapsing and for shareholders who are in a weaker position to understand that they don’t have a clear strategy.”
He adds: “We believe the chances of finding something very attractive next year are very high.”
Trend reversal
According to Khotimskiy, however, where Sovcombank stands to benefit most from the Covid-19 crisis is through a potential change in the perception of the risks associated with privately owned Russian banks.
The sector has lost ground to state-controlled rivals in recent years due to the closure of hundreds of weaker lenders by central bank governor Elvira Nabiullina, the nationalization in 2017 of three of the largest private-sector players and the ever-increasing dominance of public-sector giant Sberbank.
This trend could be reversed if leading privately owned banks come through the current crisis unscathed, says Khotimskiy.
“If the sector continues to function effectively and there are no bankruptcies or nationalizations, and it becomes clear that privately owned banks are as stable as state-owned banks even in this volatile environment, that will have very positive long-term consequences,” he says.
“Investors and customers will realize that strong privately owned banks have a future in Russia and that it’s not all about the state sector. That will attract capital to the sector and create the conditions for privatizations, and longer term the share of privately owned banks in the market will grow.”
[The priority is to] try to win the hearts of the stronger customers. Banks have to protect their margins and their business, and that means keeping their best clients
– Sergey Khotimskiy, Sovcombank
Russian policymakers’ insistence that state-owned banks continue to pay dividends during the Covid-19 crisis could also work to the advantage of private-sector lenders, adds Khotimskiy.
“If the government maintains its position, which it will likely do because it needs the money to finance support for businesses, then the market share of state-owned banks will not grow as fast due to constraints on capital,” he says. “That will be a chance for the privately owned part of the industry to grow.”
Khotimskiy is tipping lending growth to return in Russia next year, driven initially by the corporate segment. He notes that Sovcombank, which focuses on larger companies and has avoided cyclical industries such as hospitality and airlines, is already seeing demand for credit from corporate clients.
“Stronger companies are looking to take advantage of opportunities created by the difficulties of weaker competitors to increase market share and secure their supply chains by creating larger inventories,” he says.
On the retail side, the picture is less rosy – although again Sovcombank’s focus in recent years on secured lending should make it more resilient than rivals, which have been handing out ever-longer-dated unsecured consumer loans.
State support for retail clients has so far been relatively limited. Only smaller borrowers that can prove they have lost more than 30% of their income due to the Covid-19 crisis are eligible for automatic debt payment holidays.
Own measures
Russian banks have therefore introduced their own measures to help clients affected by the crisis – which in Sovcombank’s case means interest waivers rather than payment deferrals, says Khotimskiy.
“We are saying to clients, ‘We won’t charge you any interest, but we want you to find some way to continue making small payments during this period. That will show us your commitment and then, when everything is over and you have your job and your income back, your debt will be lower’,” he says.
Khotimskiy adds that the bank wants to protect its more vulnerable clients – but says the priority is to “try to win the hearts of the stronger customers”.
“Banks have to protect their margins and their business, and that means keeping their best clients,” he says.
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