October 9, 2015 / 1:00 PM / 2 years ago

Foreign banks to stick out Russia crisis for lucrative margins

ВРЕМЯ ЧТЕНИЯ 6 МИНУТ

MOSCOW, Oct 9 (Reuters) - Russia's economic crisis may be pushing foreign banks to trim their exposure, but the country's capacity to generate hefty earnings means it is likely to be a priority market for many in future years.

Although dominated by lenders such as state-controlled Sberbank and VTB, Russia's banking sector has several large, established, foreign players, such as Italy's UniCredit, Austria's Raiffeisen Bank International (RBI), France's Societe Generale, and Citigroup of the United States.

All arrived following the collapse of the Soviet Union and they are now under pressure as the Russian economy slumps in the wake of an oil price slide and Western sanctions over the Ukraine conflict.

But bankers and analysts point to the disproportionately large share of group profit RBI and UniCredit make in Russia as evidence of why it can still be a lucrative place to do business.

"Russia is a market with high margins. Foreign banks are able to pay relatively small amounts on their deposits and charge much higher rates on their loans," said Tom Adshead, chief operating officer at Macro Advisory in Moscow.

At a time Western banks are finding it tougher to increase returns in their home markets due to persistently low interest rates and stiffer regulation, earnings in Russia have become an important contributor to bottom lines for some.

For example, RBI earned about 55 percent of its 326 million euro ($371 million) first-half net profit in Russia, despite only having about 11 percent of its assets in the country.

Russia accounted for 12 percent of UniCredit's 1 billion euro first-half profit even though it only has about 2 percent of its assets in the country.

RBI's net interest margin in the first half was 5.6 percent in Russia, whereas for Poland, where it has a similar amount of assets, its margin was just 1.9 percent.

"If banks can manage their risks well, they can make good money here," Adshead said.

Citi has a return on assets (ROA) of about 2.5 percent in Russia compared with an ROA of 1 percent for the bank as a whole, although Russia's contribution to its overall earnings is slight given its far greater assets elsewhere.

Other banks, however, have found Russia harder to crack as a succession of crises has left them with exposure to huge losses.

Several foreign investment banks rushed to close their operations during Russia's 1998 financial crisis only to reopen them later, while Spain's Santander and Britain's Barclays pulled out of Russian retail banking in the wake of the global financial crisis that started a decade later.

Testing Times

Foreign banks' commitment to Russia has been further tested since the economic slump accelerated. The oil price slide has put Russia's budget under strain and the central bank does not expect the economy to grow again until 2017.

The downturn means many domestic lenders are nursing heavy losses as consumers and companies find it harder to repay loans. Overdue retail loans rose to 7.9 percent of the total as of Sept. 1, central bank data showed.

Anton Lopatin, a director at Fitch Ratings, said foreign banks were in "wait-and-see mode".

Nordic lender Nordea Bank is a case in point.

It froze and then scaled back retail lending in Russia earlier this year, while RBI's subsidiary suspended loans for new cars and announced plans to close 21 branches in 2015.

Societe Generale, which is more exposed than UniCredit and Citi to retail lending, recorded a 136 million euro first-half loss in Russia, though its local divisions contributed over 10 percent of group profit as recently as 2013.

Dmitry Olyunin, chief executive of SocGen's Rosbank, said his bank would cut about 15 percent of its staff in 2015 and had closed about 120 offices in the last 18 months.

"We want to make the cost of our business more manageable," he said, in comments sent by Rosbank's press service. "Our aim is at least not to increase nominal expenses during the next three years."

UniCredit's Russian business said it had optimised its branch network in 2014 but now had no plans to cut the number of branches, while Citi said it had no plans to cut staff.

"Russia continues to be an important piece of the global economy," said Marc Luet, Citi's head of Russia and Central and Eastern Europe.

Competitive Advantages

Analysts say foreign banks have been insulated from some of the worst fallout from the crisis thanks to their moderate risk appetite in Russia.

Their share of bad loans is below average while their reputation as being low risk means Russians trust them with their deposits, even when domestic banks sometimes offer better rates of interest.

Unlike banks focused on investment banking, some of which have retreated from Russia as fees from deal making have collapsed, banks with large retail and corporate operations have merely trimmed their local presence.

Retail lending at UniCredit, RBI, SocGen and Citi fell by an average of 10 percent in Russia in the first eight months of the year, though corporate lending rose at three of the four banks, Fitch data show.

Foreign banks are also helped by having access to cheap foreign currency funding, which means they are able to win business lending in dollars and euros to large Russian firms.

Sergey Voronenko, associate director at Standard & Poor's ratings agency, said: "This means they still have room for manoeuvre". ($1 = 0.8798 euros) (Additional reporting by Shadia Nasralla in Vienna, Maya Nikolaeva in Paris, David Henry in New York and Francesca Landini in Milan; editing by David Clarke)

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