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Partial Russian bank privatizations expected, but not before 2019


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Partial Russian bank privatizations expected, but not before 2019

Russia's efforts to raise more money for its public purse could involve the government privatizing at least part of its banking sector holdings, currently running at nearly 60% of assets. But local analysts believe the Kremlin might be wary of selling bank stocks any time soon, fearing blowback from sanctions and a wider slowdown in emerging market equities.

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As international sanctions make access to global bond markets expensive for Russia, and unpopular reforms such as raising the pension age and hiking taxes lead to a popular outcry, the government has fewer steps it can take to fund the spending commitments President Vladimir Putin made during the 2018 election campaign.

Tough times for emerging markets

Elena Tsareva, a bank analyst at brokerage BCS Prime in Moscow, said the Kremlin is aware of the need for bank privatizations. However, she does not foresee any deals happening soon. "Definitely not this quarter and perhaps not this year. To make a proper deal with international investors, you need better markets to get more favorable multiples. It is possible to have the placement domestic-only, but this [would] not be a proper privatization.

"It is hard to expect a huge privatization to take place in the short term as the markets are tough both for emerging markets and Russia," she said.

Data from the central bank shows 58.5% of banking assets in the country are under direct public ownership, with a further 12.2% in restructuring, largely on regulatory orders.

Investors in majority state-owned PAO Sberbank of Russia, the largest bank in the country, have seen their total returns from market price gains, dividends and share buybacks grow 162.9% since 2016. Those investing in VTB Bank (PJSC), which is the second-largest bank and is also controlled by the state, have lost 14.4%, data compiled by S&P Global Market Intelligence shows. Sanctions prevent VTB and Sberbank from raising capital in Western markets, but foreign investors have access to the banks through specialized funds.

The dominance of the state has had a negative impact on competition in Russia's banking sector, Tsareva said. "Decreased state ownership should intensify competition and it is good for the sector," she said. But this should be coupled with stricter regulatory controls in light of cases such as that of Otkritie Financial Corp. Bank, a private-sector bank that needed state bailouts. Otkritie's collapse cost the central bank billions of rubles. The regulator has said it would sell a stake in the company around 2021.

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Keeping control

The likeliest candidates to be partially sold are VTB and Otkritie, with the state still maintaining control, but "Sberbank looks also to be on the list," Tsareva said.

Deputy Finance Minister Alexei Moiseev said in June that Russia could sell some of its stake in Sberbank to raise funds for Putin's 2024 economic plan but would not give up control in the lender.

The Russian central bank owns 52.32% of Sberbank voting shares. But it also holds some preference shares that could theoretically be sold without the state losing control over the bank. CEO Herman Gref stated previously that the state should reduce its holding in Russian banks and that there is no need for it to hold a controlling stake in Sberbank.

Even if privatizations were to start trickling through, foreign institutional investors or rival banks are unlikely to be allowed controlling stakes, said Andrey Movchan, an economic analyst at think tank Carnegie Moscow Center, who expects political control over the large banks to continue even through private owners.

"I do not think Russia will dare selling any currently state-owned bank into truly independent hands," he said.

"They just experienced a catastrophe in [the] private bank segment and they neither understand the reasons behind that, nor know how to regulate a private banking sector to its benefit."

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See a section dedicated to financial highlights for your bank: Search for the company in the top search box and go to the "Financial Highlights" section, housed under the Templated Financials on the left-hand panel. Here is an example for PAO Sberbank of Russia.

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