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The 1998 banking and financial crisis had
a big effect on Russian economic development.
How did the banking sector recover from this and
what would be your assessment of the current state
of the Russian banking system?
I spoke a lot about the current state of the
Russian banking sector during my recent visit
to Washington for the U.S.-Russia Business Council
where I have the honor to be a member of the Board.
The most essential thing is that the banking sector
in Russia has definitely recovered after the tremendous
crisis experienced in 1998 and this can be well
observed in all segments of the banking sector
in Russia. There is fierce competition now even
in the retail sector where Sberbank is traditionally
the leader and plays the dominant role.
The banks here are actively expanding their corporate
and retail business, lending and operations with
bank cards. All segments of the banking market
are developing very rapidly which results in a
foreseeable comparative decrease in our share
of the market. After the crisis, Sberbank had
a tremendously high share but now it is more realistic.
It does not mean that we have retreated, we envisaged
that our share was going to reduce.
The Central Bank of Russia and Sberbank in fact
saved the Russian banking system during the crisis.
I can say without exaggeration that because there
are two nationwide settlement systems, one in
the CBR and one with us, a lot of people were
saved from loss of their money during the crisis.
Thanks to its traditionally positive approach
to private depositors and to other banks, Sberbank
had a decisive stabilizing effect on the retail
business in Russia - not only in banking but in
the retail market as a whole. If it had been otherwise,
the consequences would have been much worse than
they were in Argentina, for example.
If you take the figures for inflow of private
deposits, they have been steadily increasing and
we witness very substantial growth. We have enlarged
our credit portfolio six-fold in comparison to
the end of 1998 and, over the last few years lending
to private borrowers and SMEs has been growing
at the rate two times higher than the general
credit portfolio increase. That gives a good boost
to the whole economy: people grow more confident
in their future, they are satisfied with the political
stability so they start borrowing money, which
is not a very common thing to do in Russia, especially
in the consumer market. There were some consumer
credit schemes in Soviet times but they were outside
of the typical consumer behavior. We are encouraged
by this fact and it makes us quite confident that
the future of the Russian economy will not depend
solely on oil prices.
You mentioned that there are two important
factors in banking. Could you indicate the significance
of both to your profit margins and development?
Just to get an idea of how we are viewed from
outside, I got the reaction in the US and, you
know, unprejudiced information about the Russian
banking system seems to be rather an exotic thing
there and in particular when it concerns Sberbank.
Our net profits, according to IAS, were about
700 million dollars last year; this year they
will be substantially higher. We generate more
than half of our earnings from lending to the
corporate sector. About 93% of our credit portfolio
is composed of corporate loans and we are developing
the private lending sector but the volumes are
still rather modest in comparison to corporate
lending. The general credit portfolio is about
17 billion dollars: 1.5 billion dollars to private
borrowers and more or less the same amount to
SMEs which is roughly 40 % of the total credit
market in Russia.
A very important part of strategy is, of course,
due repayment. You must have very strict standards
and guidelines to deal with the problems raised
by this issue?
Exactly. Law enforcement is one of the hardest
problems inherited from the period of transition
in Russia. There were numerous efforts made by
all kinds of institutions, ministries and by the
bank itself to improve law enforcement, to collect
payments and so on.
Regarding our credit portfolio, the share of poorly
performing loans is not higher than 1.7% and for
private borrowers it is less than 1% which meets
the strictest international standards. We are
very glad that last year we retained our auditor's
appraisal to substantial improvement of our credit
policy. That was a very good evaluation of our
efforts.
KYC policy was introduced in the bank throughout
the whole territory over which we operate: in
our branches, sub-branches and agencies. We are
very strict when it comes to selecting new borrowers
and this brings good results. During the crisis
that was one of the biggest issues for all the
banks, and not only ours.
Could you indicate to our readers how Sberbank
can facilitate foreign investments in the Russian
economy and participation in projects with Russian
companies?
A good figure for Red Herring would be that Sberbank
services about ten billion USD worth of foreign
trade turnover between Russia and other countries.
Unfortunately, the share of US companies is unacceptably
low, accounting for about 7% of import and 5%
of export. This was also a considerable issue
to discuss with our American colleagues. Over
the last few years Sberbank has progressed from
a fully state controlled savings institution to
a universal joint-stock commercial bank which
plays a significant role in foreign trade financing
and in improving the investment climate in our
country. After the crisis, hardly any foreign
bank or investor was brave enough to start again;
in the best cases, investors continued what they
had begun before.
Our investment portfolio is worth about two billion
USD: mostly long-term credits and project financing
in various branches of industry. Not to mention
oil and gas (it is quite clear that's where there
is the fiercest competition among foreign banks),
we are also engaged in metallurgy, telecommunications,
ship building, aerospace, agriculture and the
food industry. The main criteria is the feasibility
of the project. We started with rather short term
credits of about three years and are now considering
five to seven year projects. Mostly we do that
by ourselves due to the fact that other Russian
banks are not as strong in their funding. In some
cases, we have succeeded in signing agreements
with our foreign counterparts, such as USEximbank,
the AKA Consortium in Germany and some other partners
in Europe.
Unfortunately, the terms and conditions provided
for such credits under foreign schemes are sometimes
not quite competitive and we have to substitute
such facilities with our own money. But this readiness
of institutions to guarantee investment credits
from abroad is quite important for Russia in principle.
We already have working agreements with some financial
institutions from G7 countries and as an example
I can mention a program regarding a significant
space satellite project undertaken jointly with
Sumitomo Corporation of Japan. This business is
developing and I think in the coming year there
will be more examples of such joint activities.
Will you also have to diversify your revenues?
We are ready to share risks with other foreign
creditors identified by proper evaluation of the
project and so we would be set to diversify the
revenues as well, you are quite right.
You are a very ambitious bank, not only in
Russia and the CIS but also abroad. How far do
you intend to develop these plans?
We are the only bank in Russia which has a five
year strategy, which is openly displayed on our
website; you can see the targets and figures for
the coming years.
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I do not think that
we plan enlarging our network abroad and currently
we have no branches or outlets outside the Russian
Federation. There are enough things to do here,
with more than 20 000 branches and sub-branches
at different levels of our four-tier system of administration.
We work in eleven time zones which is quite a challenge
for our settlement system. There are only two hours
a day when none of our offices is operational.
As for establishing our physical presence abroad,
we find enough capacity and promise in foreign trade
activity and foreign financial activity through
the existing channels. We do not consider opening
representative offices the most urgent thing to
do. Besides opening branches abroad happens to be
extremely time and effort consuming. In the US,
everybody speaks of the necessity of more open Russian
financial markets but I have not heard of any Russian
bank succeeding in opening a branch in the US. I
know a few who have been trying to do that for seven
years already.
You mentioned your vast network in Russia. In
this vast network, banking, finance, telecommunications
and IT come together and you said there are only
two hours a day when you are not really open. How
do you use the latest technologies to take advantage
of this situation?
One of the most exciting events in our corporate
life was the recent completion of the internal reform
of the bank. We reduced the number of our regional
head-offices, or regional banks as we call them.
Their number was the same, or nearly the same, as
the number of subjects in the Russian Federation.
The map of the bank was more or less similar to
the administrative map of the country! It was not
the best arrangement because of the influence which
local governments could have on regional banks'
decision making.
We have succeeded in enlarging these regional head
offices and decreasing their number by linking them
to economic regions, not the administrative ones.
Our regional head-offices are responsible for developing
business in their area of operation, with more authority
than they used to have. Now they have greater mandate
to issue big credits without applying to the central
head office. They have limits of competency, of
course. This system requires an extremely complicated
and reliable IT base that calls for huge investments
because the bank was in rather poor shape about
seven years ago.
Before finalizing the development of the IT structure
we had to reform our administrative structure. There
was no point in keeping branches with no future.
We have closed about 16,000 over the last six years
when it used to be a 36,000 branch network. Besides,
we had to resolve the premises ownership issue and
to substitute the rented facilities by buying and
enlarging office premises of the bank, our main
asset. Seven years ago about 30% of the premises
belonged to the bank, now about 76%. Otherwise we
were dependent on rent prices and so on. It is always
tempting for big cities like Moscow every year to
fill gaps in the city's budget by raising rental
prices.
Nowadays we are facing the challenge of selecting
the most advanced IT solutions. There are currently
no ready made systems for banks which have to work
in eleven time zones, an enormously big territory
with very remote units. It requires additional channels
for telecommunications, both traditional and satellite
and a vast number of employees.
We are buying the best solutions from the best known
IT vendors but mostly the bank is developing the
software itself as well as advanced versions of
this software. The bulk of our investment for the
coming years would be channeled to IT. We are very
cautious with electronic banking due to very high
skills of Russian hackers while the issues of security
of payments are most essential for us. We actually
have projects ready to start tomorrow, but we prefer
to check that we are really prepared for that. We
prefer to double-check everything.
We had quite an interesting meeting with Steve Balmer
of Microsoft during his recent visit to Moscow.
We have been in touch with experts from Microsoft
for a number of years. Our bank was one of the pioneers
to sign an agreement with Microsoft on only licensed
copies in the banking business and they have seen
the progress which we achieved over these last five
years.
What have been the major managerial problems
that you have run into while managing Sberbank?
The most recent one is that to meet the growing
demand in private lending, we need greater numbers
of skilled credit offices. It is necessary to retrain
people and to recruit new ones. It is one of the
toughest issues, not only for Moscow but for other
big towns and cities as well.
Another managerial problem that we are constantly
facing is poaching. Our foreign competitors, or
banks with foreign capital target the best of our
staff and sometimes their proposals, are absolutely
irresistible. Being a Russian bank, we certainly
have to face the realities in this country and find
the right balance of the wage level which becomes
an issue for us sometimes. If we raise the level
of salaries too hastily, we will come under severe
criticism. On the other hand we do not want to become
a financial school of well trained personnel for
foreign banks in Russia. It is quite easy to benefit
from training here for five years and then walk
off.
As for general managerial issues, you should know
of the essential importance of team work. One cannot
control everything single handed so we have to work
as a team and such team spirit is very much treasured
here in Sberbank.
Sberbank has a five year strategy. What is your
personal vision for Sberbank, perhaps even beyond
the five year perspective?
Big banks have numerous problems. On the one hand
we cannot but be pleased with our financial statements.
On the other hand, if you take into consideration
the 204,000 employees that the bank has and the
250 million private and 1.5 million corporate accounts
that the bank operates, there is ample scope for
different situations every day which have to be
handled correctly. We have positive and negative
heritage from the old times, so my personal goal
is to leave the bad things in the past and to meet
the future with only the good things preserved.
Soon the bank will pass the 161 years old mark,
so our traditions go very far back in time and we
should not forget them. We have overcome all the
difficulties in the history of this country. An
individualized approach and the best possible service
to the client are the goals to be achieved in the
short term perspective. Otherwise, with the competition
growing the volumes of accumulated money alone are
no guarantee of success.
The bank, despite its size, has to be very flexible
and responsive to the demands of the clients, which
are becoming more and more selective and sophisticated.
What would be your final message to those who
are going to read this report?
Somebody once said that different people expect
different things from Russia. Those who expect something
bad, will get what they are waiting for. Those who
expect something good, deserve good results. We
are quite sure that despite the numerous problems
faced there are good things to be done in Russia
and you can do good business here. Sberbank is a
reliable and very skilled partner to do business
with in Russia. So as to be a bit more convincing
on this point, as a footnote, I can state that the
share of foreign capital in the Russian banking
system is 5.3%. It decreased after the crisis and
has not gone up since. In Sberbank, we have a 15%
share of foreign capital - three times as high as
the rest of the banking system.
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