A Renaissance in Retail Banking

Local and foreign banks are courting Russia's middle class

Russia has done a lot to nurture a consumer-oriented, free-market economy out of the ruins of communism. But one crucial gear of capitalism is still missing -- a thriving network of private retail banks. A single, Soviet-era, state-run institution, Sberbank, still dominates the retail landscape, and post-Soviet inroads by private banks were wiped out in the financial crisis of 1998 -- along with many Russians' savings.

Now that is finally changing. With Russia's economy clocking steady growth, private banks, both local and foreign, are making a big push to expand their retail business. "Closer than you think!" shout colorful posters at metro stations in central Moscow, advertising new branches of Alfa Bank Express nearby.

Dozens of outlets of Alfa Bank and other banks are opening around Moscow and other cities, featuring services not offered by Sberbank, such as 24-hour banking and unsecured personal loans. "The country has reached the point that we can develop a profitable business serving middle-class clients," says Didier Alix of France's Société Générale, which plans to open a retail branch in Moscow this fall and five more by yearend.

The expansion is timed to coincide with the expected passage in the next few months of a law that extends bank deposit insurance to private accounts. The pending legislation would guarantee 100% of deposits up to $620 and 75% of deposits up to $3,720. Until now, only Sberbank accounts have been protected, which has helped it keep a lock on 68% of all retail deposits, or about $26 billion.

But even without the new law, deposits at private banks have been growing. Total retail bank deposits in Russia have mushroomed to $40.1 billion, more than double the amount in 2001. At the same time, Sberbank's market share has dropped from 75% in 2000 to 68% today, and brokerage Troika Dialog forecasts it falling to 63% by 2005. The most aggressive local player in the retail market is Alfa, though rivals such as Rosbank and MDM Bank are also expanding. "Corporate banking is showing signs of depressed margins and high competition," says Maciej Lebkowski, head of retail at Alfa.

A growing number of foreign banks are also wading into the market. In addition to SG, the U.S.'s Citibank and Austria's Raiffeisen Bank have big plans for Russia. Apart from building branches, they're offering services new to Russians, such as online banking and security alerts to prevent unauthorized transactions. Raiffeisen boasts a six-branch network and has three more in the works. Citibank, the world's largest retail bank, opened its first branch in Moscow last December. "Only 33% of savings is estimated to be in the banking sector, so there's a huge opportunity to bring new customers to the industry," says Nandan Mer, head of Citibank's local retail unit.

Private retail banks sprouted up across most of Eastern Europe soon after the demise of communism more than a decade ago, but the industry has been much slower to take hold in Russia. Many banks created after the collapse of communism were designed to finance the dealmaking of the new oligarchs, or to make a quick buck from speculation. Banks also have to overcome deep distrust among ordinary Russians that was only exacerbated by the disaster of 1998.

But credit-hungry consumers seem willing to forgive and forget. Russian Standard, the first local bank to specialize in consumer loans, has extended $410 million in loans since it was set up in 1999. Raiffeisen has $90 million in retail loans. Rising incomes and consumer demand have led to a surge in car loans and mortgages. Outstanding loans to retail clients hit $6.45 billion in June 2003, up from just $1.02 billion in 2000, according to Russia's central bank. "Russians are changing their mentality, and are now quite happy to consider taking a loan," says Alexander Koloshenko, Raiffeisen's head of retail operations.

Such loans are a high-profit business. Koloshenko notes the margin on a retail loan in Russia is typically around double that on an equivalent loan in Western Europe. Average interest rates on ruble deposits are little more than 5%, while rates on retail loans average around 20%. But the big challenge for newcomers is distribution, especially for foreign banks with few brick-and-mortar outlets. Citibank, with only one branch (a second is under construction), is relying on telephone and Internet banking, a network of automated-teller machines at BP gas stations around the capital, and alliances with local retailers. Still, "it will be extremely hard to compete with us," says Alfa's Lebkowski.

That remains to be seen. But what's clear is that as Russia's economy stabilizes and memories of 1998 fade, middle-class Russians are increasingly turning to private banks to stash their cash.

By Jason Bush in Moscow, with Carol Matlack in Paris

— With assistance by Carol Matlack

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