Foreigners target Russian mortgage and regional banking

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MOSCOW. (RIA Novosti Anatoly Gorev) - Many Russian banks changed hands in 2006. Buyers were willing to pay three, four, and sometimes five times more than the assets of their targets.

Experts believe this trend will continue in 2007 and even become more pronounced. Both foreign banks already operating in Russia and those only thinking of entering the market are considering such purchases. Major Russian banks, however, are not holding back, unwilling to yield their position and their customers, be it individuals or companies, to newcomers.

The question is which banks can count on the highest demand and, consequently, expect better deals. The lessons of 2006 are quite instructive. Analysis of acquisitions made in the last few months points to two groups of banks emerging as favorites - those specializing in mortgages and, strange as it might seem at first glance, small regional banks with a well-developed "presence" in their region(s).

There is no argument about the first group of banks. Mortgages are now considered one of the most significant long-term trends in the banking business; experts believe that they may become more popular than the current favorite banking product, consumer credit. According to analysts, this year the volume of consumer credit in Russia will grow by a maximum of 13-15%, while the mortgage market may witness growth of 50-70%. Experts say that no other country in the world can now boast such figures, not even the fast-growing banking markets of India and China, where the value of mortgages is also gaining momentum, though not as fast as Russia's.

In this context the growing appetite for mortgage banks is understandable, especially because mortgage banking is a kind of business which is difficult to develop from scratch. It is much easier to buy a specialized financial institution, even if it is showing modest results but has working mortgage programs and some sort of a client base. They can use that base to develop their own mortgage business, not only making new loans but also refinancing existing ones.

Morgan Stanley, a U.S. investment bank, followed this pattern late last year and bought Gorodskoi Ipotechny Bank [City Mortgage Bank]. It is worth noting here that the ratio between the cost of the deal and the bank's assets was 4.9. Such an "overpayment" is not a record in the Russian market. But it is a very high figure, showing the attractiveness of the acquisition for the American company.

Regional banks, above all retail banks, will be in no less demand in 2007, experts believe. Before analyzing the situation in greater detail, it is worth mentioning that the so-called "pocket" banks working with a limited number of corporate clients, or even one such client, have practically no appeal for potential buyers. Strategic investors say that such banks should be viewed as settlement account cash-desks of sorts for major corporations. The level of risks, when buying such banks, is too high, while the returns might be meager, especially if the buyer hopes to develop his or her retail business in the region on the basis of such a "pocket" bank.

Therefore, a regional bank put up for sale should primarily have a well-functioning loan and deposit service for individuals. A second requirement would be a strong position in the region, or, better still, a developed branch network across several regions. Potential investors certainly prefer such banks for a reason. Experts say that in Moscow and St. Petersburg, retail banking growth is gradually slowing down as the market becomes saturated; spheres of influence have already been divided up, and potential for further customer base expansion is limited.

In the provinces, the situation is different. Even in cities with over a million people, Russia's state-controlled Sberbank still accounts for the lion's share of retail banking. This situation may change gradually when other major banks, both Russian and foreign, enter the regional market. However, just as with mortgages, it would not be wise for them to start from scratch, because people living in the provinces are more conservative than in Moscow or St. Petersburg and have more confidence in banks which have been there for a long time, experts maintain.

Consequently, Russia's regional banks will be in growing demand in 2007. The price/assets ratios will probably be even higher than in the Gorodskoi Ipotechny Bank case, since both Russian and international financial giants will compete for regional banks.

The opinions expressed in this article are those of the author and do not necessarily represent those of RIA Novosti.

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