Crisis Forces Banks To Sweeten Offers

One only has to look over Standard & Poor's ratings list of commercial banks operating in Russia to see that lately life for them has been no slice of apple pie. Even some of the largest retail lenders have seen their outlooks cut and deposits wane, forcing banks to be creative ?€” and unusually lavish ?€” to keep customers' cash on their books.

After a round of ratings cuts earlier this month, six of the 10 largest banks in Russia by net assets now have a negative outlook, including subsidiaries of major European lenders Raiffeisen and UniCredit.

"We have a negative outlook on many banks, but the ones most at risk are those with short-term debt that is difficult to refinance and exposure to sectors considered risky, such as construction and retail," said Yevgeny Tarzimanov, an analyst at S&P in Moscow.

Poor Outlook
Commercial banks with a negative rating from Standard & Poor's
#	Bank	Size by assets	Net assets (thousands rubles)*	S&P Rating**
1	Gazprombank	2	877,898,361	BBB-/Negative/A-3
2	Alfa Bank	5	577,747,942	BB/Negative/B
3	Raiffeisenbank	6	457,593,642	BBB+/Negative/A-2
4	UniCredit Bank	7	436,565,836	BBB+/Negative/A-2
5	VTB-24	8	432,439,621	BBB+/Negative/A-2
6	UralSib	10	401,255,627	BB-/Negative/B
7	Promsvyazbank	11	371,694,318	BB-/Negative/B
8	MDM Bank	12	303,172,654	BB/Negative/B
9	Petrocommerz	15	177,453,057	B+/Negative/B
10	Russky Standart Bank	17	166,776,919	BB-/Negative/B
11	Bank Vozrozhdenie	23	132,570,386	BB-/Negative/B
12	Binbank	38	63,392,571	B/Negative/C
13	Renaissance Capital	41	56,931,088	B-/Negative/C
14	CentroCredit Bank	83	20,185,494	B-/Negative/C
15	Sozgorbank	93	15,058,148	B-/Negative/C
*As of July 1, 2008
**As of October 31, 2008
Source: Standard & Poor's, Interfax, Banki.ru

As if the shutting of debt markets were not enough, clients have taken more than 10 percent of funds out of the country's private banks over the past six weeks, Tarzimanov said. The outflow makes it more difficult to maintain capital ratios, service existing debt and attract new financing, all of which are needed for banks to keep lending and create more revenue.

Mikhail Zadornov, chief executive of VTB retail unit VTB-24, said Thursday that households pulled 1.5 percent of deposits from banks in September and warned that the figure would be even higher in October.

The commercial bank model depends on having money to create money. With profits dropping because of securities-trading losses and a shortage of financing, banks are freezing lending, raising interest rates and cutting expenses to stay afloat.

"Although many banks have not officially announced their plans to reduce personnel," Tarzimanov said, "this is going to happen in an environment where banks are unlikely to see any growth for the next year."

In what would have been seen as an act of madness just a few months ago, banks are now offering very high rates on deposits to stop their individual and corporate clients from leaving.

Russky Standart Bank has introduced a new program called Srochny, or Urgent, which offers interest rates as high as 14.5 percent on ruble deposits of more than 100,000 locked for six months and as high as 11.5 percent for dollar deposits. Interest can be paid as often as every month.

Russky Standart on Oct. 24 successfully bought out 96 percent of its series eight bond obligations, totaling 4.8 billion rubles ($181 million), after investors asked for their money to be returned early. But its obligations in circulation have been trading at low prices in an indication that investors are concerned about the bank's outlook.

And in a situation where corporate credit may come due sooner than expected, it is as important as ever for banks to convince their clients to stay put. Binbank went even further, introducing a new program called Yubileiny, or Anniversary, which offers clients 15 percent on three-year deposits of more than 1 million rubles, as well as a chance to win a new Ford Focus.

Alfa Bank has launched an offer called the "Autumn Marathon," valid through Dec. 31, which offers a 10.8 percent rate on ruble deposits above 50,000 locked for six months and 11 percent for 12 months. Clients can secure 8.5 percent and 8 percent on dollar and euro deposits, respectively, with minimum amounts of 2,000 in either currency. There is no commission for withdrawal of funds after the lock-in period is over.

UralSib surprised clients by allowing them to receive the interest on their deposits upfront, with a minimum deposit of only 10,000 rubles and interest rates as high as 11 percent for three-year deposits of more than 5 million rubles.

Still, if a bank is seen as unreliable, enormous rates and flashy giveaways may not keep clients from pulling out their money. As a result, many lenders are emphasizing their reputation by connecting themselves with people deemed reliable. Alfa Bank, for example, now features a photo of Prime Minister Vladimir Putin visiting with bank president Pyotr Aven at a branch in Novosibirsk in its branches and on its web site. According to the bank's web site, Putin "noted with satisfaction the dynamic style of work at Alfa Bank branches and, among other things, the presence of high-tech products such as Internet banking."