This Russian Banking Star May Be Fading
Peter Derby has been riding high. Last year, the 37-year-old chairman of Russia's Dialog Bank was named "a global leader of tomorrow" by the World Economic Forum in Davos. Then, he was feted as "Businessperson of the Year" by the American Chamber of Commerce in Russia. To top it off, he became a multimillionaire on Dec. 31--pocketing some $40 million by selling his investment bank, Troika Dialog, to the Bank of Moscow. Not bad for the American-born grandson of a Russian shipping magnate who fled the Bolshevik Revolution.
But Derby's winning streak may be ending. His Dialog Bank is facing a rough stretch. After scoring a record 70% return on equity in 1996--more than double the Russian industry average--its profits are falling as competition heats up and income from high-yielding Russian Treasury bills is falling. Profits slipped 74% last year, to $6 million, on assets of $250 million. Rivals from Citibank to Russia's Inkombank are homing in on Dialog's main business. For years, the bank prospered by charging high fees for services to Western business clients who didn't trust Russian banks. Says Paul J. Asel, senior vice-president at the U.S.-Russia Investment Fund: "The Russian banking industry is becoming increasingly competitive. That's raising the bar for Dialog."
Derby faces a daunting challenge. He must radically restructure Dialog or risk being swallowed by a faster, richer rival. Consolidation is sweeping Russia's crowded, undercapitalized banking industry, and only the nimblest will survive. Moreover, Derby is under pressure just when his bank is suffering from management turnover. In recent months, eight of the bank's 16 Western employees have departed, some complaining about Derby's management style. One has filed a lawsuit in Russian court claiming partial nonpayment of wages. Derby denies that charge and argues that only two of the eight employees who left were senior managers. "We don't consider there is management upheaval," he says.
Indeed, sitting in the wood-paneled conference room in the bank's marble headquarters in central Moscow, the young banker exudes confidence. "We're taking solid steps to achieve a long period of success. We don't see it as a 100-yard dash, but as a marathon," he says. Beyond offering foreign exchange, payment services, and government debt-trading services to multinationals, Dialog aims to plunge into investment banking, lending, and insurance.
Derby's goal is to preserve Dialog's independence. He already claims to have turned down buyout offers from two of Russia's biggest banks. He plans to finance Dialog's new lending programs with the bank's profits. But Derby is also talking to Western companies about partnerships in services such as insurance or government-bond trading. When emerging markets pick up, he hopes to raise capital by launching a merchant-banking fund or issuing a Eurobond. And he may try to sell some of Dialog's equity to portfolio investors.
To do that, Derby hopes to cash in on his reputation. He is one of the most visible American entrepreneurs in Russia. Raised in Queens, N.Y., in a community of emigres, he learned about Russian history and values at his grandmother's knee. With financial backing from Chicago commodities trader Joe Ritchie and seven years of banking experience at Chase Manhattan Bank and National Westminster usa in New York, Derby helped launch Dialog in 1989 just as Mikhail Gorbachev's perestroika reforms took root. A financial conservative, Derby was careful not to lend to shaky Russian enterprises or buy their stock. He focused on servicing Western clients and putting the bank's money into Russian Treasury bills.
But Derby's conservatism may also have held Dialog back. The bank sat on the sidelines last year while Russian competitors such as sbs-Agro raised capital on the Eurobond market, where rates were much cheaper than inside Russia. Now, just when Dialog would like to expand its capital base for lending, rates on emerging-market paper are up as a result of the Asian crisis. Many investors have lost their taste for Russian bank debt, which risks being downgraded, along with government debt. Meanwhile, Dialog has no Western parent or partner from which it can borrow. One banker figures Dialog's cost of capital is 50% higher than that of rivals such as abn Amro Holding.
"AUTOCRATIC." Derby's management style may also have hindered growth. Like many entrepreneurs, he is a hands-on manager. He calls his style "mbwa," for "management by walking around." Some former expatriate employees call it "autocratic." Derby bristles at that suggestion. "I give expatriates direction the first few days, then leave them on their own," he says. But Derby's take-charge style may be becoming less effective as Dialog grows, banking analysts say.
Clearly, making money in Russian banking will be much harder in the next few years than in the past. While it has enough capital now, Dialog needs a larger asset base and a more sophisticated management system to play with the big boys. Derby wants to go it alone. But he's not slamming the door on potential suitors. "We have to look at all the options," he says. If he gets a good enough offer, Derby says he might sell Dialog just as he did his investment bank. The next few years will tell whether Derby is an astute businessman or someone who just happened to be in the right place at the right time.