Raiffeisen Bank International CEO Herbert Stepic on the modernization of Russia’s financial sector

Herbert Stepic, CEO of Raiffeisen Bank International (RBI), is widely recognized as one of the leading banking figures in Central and Eastern Europe. He has spent the better part of four decades building up Raiffeisen's presence in the region, having joined the precursor of today's Raiffeisen Zentralbank Osterreich (RZB) in 1973. He served as both RZB's deputy chairman (from 1995) and as the CEO of Raiffeisen International Bank-Holding (from 2001), the holding company that controlled RZB's banking subsidiaries in CEE, until RBI was founded in October 2010 through the merger of Raiffeisen International with RZB's spin-off principal business areas. Stepic's success in steering the fortunes of a banking group that is active in 17 CEE markets - in which it services 15 million customers - has been recognized with several banking and management awards, including European Manager of the Year 2007 by the European Business Press. Raiffeisen has been present in Russia since 1989, and its Russian subsidiary ZAO Raiffeisenbank is firmly established as one of the country's top 10 banks. In this interview, Stepic discusses the current state of Russia's financial sector, the impact of the government's anti-crisis measures, and the sector's prospects in the context of the country's modernization agenda.

1. Can you give an overview of Raiffeisenbank’s business and presence in Russia?

Raiffeisen has been operating a bank in Russia since 1996 but actually first entered the Russian market by opening a representative office in Moscow in 1989. In 2006, we purchased Russia's IMPEXBANK and successfully merged it with our Russian subsidiary Raiffeisenbank Austria. The legal merger between the two was completed in November 2007.

Today, our subsidiary ZAO Raiffeisenbank ranks as the ninth-largest bank in Russia in terms of assets, the sixth-largest on the basis of retail deposits and the eighth-largest with regard to consumer lending volumes. Raiffeisenbank's nearly 8,500 employees service more than 1.8 million customers through 199 business outlets located across Russia. ZAO Raiffeisenbank is a universal bank that provides a full range of services to both retail and corporate customers. Those services include offerings for the affluent and private banking segments, as well as for small enterprises, corporate banking, treasury departments, investment banking, financial institutions and the public sector.

2. Russia was hit particularly severely by the financial crisis. What impact did the crisis have on the Russian banking system? And what is your assessment of government’s measures to address it?

After the pre-crisis era's turbo-charged annual lending growth of roughly 40 percent, during the crisis, Russian banks typically faced liquidity pressures and challenges to their funding position and asset quality. However, it is worth noting that Russia's Top 10 banks did not experience serious solvency problems and that those small- and medium-sized banks that did fail were seized up by government structures or other banks.

The Russian authorities were quick and effective in their response to the crisis. They stabilized the situation in the banking sector by supplying equity capital to state-owned banks, providing both state-owned banks and the largest privately-owned banking sector players with 400 billion rubles in lower tier two subordinated loans and substantially enhancing the banks' access to Central Bank funding. The government also ensured that the resolution of those failed mid-sized banks that had been nationalized was conducted in an orderly manner.

As a result of the Russian authorities' convincing steps, retail depositors quickly regained confidence in the country's banking sector. Both the amount and duration of deposit outflows from the sector was limited --- and retail deposits actually grew by nearly 27 percent in 2009. In addition, the government's measures ensured that banks were able to maintain lending volumes and help their clients withstand the crisis. Looking at the Russian banking sector as a whole, we feel that its current loan loss reserves are sufficient to cover expected losses, especially taking into account the sector's strong capitalization.

3. What are, in your view, the main challenges regarding the modernization of Russia’s banking sector and, in particular, its consolidation?

Russia's banking sector is actually rather consolidated. As of the end of September 2010, the Top 10 and Top 100 banks out of the more than 1,000 institutions holding a general banking license in Russia held some 55 and 83 percent of the sector's total assets, respectively. The big question is what to do with the roughly 900 small banks, many of which produce no added value for customers. Based on total banking assets, Russia's state-owned banks collectively now have a market share of more than 50 percent. To modernize the banking sector, the government intends to limit its presence in the financial industry. As a consequence, the government currently has plans to sell large -- but non-controlling – stakes in VTB and, potentially, Sberbank – the two largest banks in Russia.

The Central Bank of Russia has contributed a great deal to the sector's modernization. It has done so by enhancing banks' access to the Central Bank's liquidity and by promoting consolidation in the sector's lower segment through increasing minimum capital requirements and revoking licenses when appropriate. I am convinced that the Central Bank will continue to firmly implement this approach.

Of course, there is room for additional improvements. The transition to IFRS [International Financial Reporting Standards] accounting will allow the Central Bank to monitor the financial health of banks and complex banking groups rather than simply their compliance with formal prudential ratios. Regarding the banking sector's general market infrastructure, the key areas that still need to be tackled are reforming the legal system, enhancing property and creditors rights, strengthening the bankruptcy code and introducing a Federation-wide credit bureau.

4. Russian authorities have recently undertaken a series of reforms of the financial sector, such as the creation of a unified clearing system and a law banning insider trading, with a view to making Moscow a leading international financial center. Do you consider this plan realistic? What is needed, in your opinion, for it to succeed?

The financial markets in Russia are developing very rapidly and the country's stock market is already the largest in Eastern Europe. So, certain fundamentals for making Moscow a regional financial center that can compete with other strong players in this field -- Warsaw, for example – clearly exist. With this in mind, the near-term objective should be to attract medium-sized companies from Eastern Europe and, more realistically, from the former Soviet Union to the Moscow stock exchange.

5. More generally, the Russian government has dramatically stepped up its efforts to attract foreign capital to foster the country’s economic modernization. What do you think are the main priorities it should follow to attract more foreign investors?

The implementation of structural reforms is an essential precondition in order to attract long-term foreign investors to non-extractive industries and to Russia's financial sector, in particular. These reforms should aim at ensuring consistent legal enforcement, an effective judicial system, a transparent tax system and the reduction of administrative barriers.