M&As will strengthen Russian banking sector

Moody's Investors Service believes that merger and acquisition (M&A) activity in the Russian banking system gained traction in 2010, a trend that is likely to accelerate in 2011.
"Moody's considers this to be credit positive because the Russian banking system will benefit from increased economies of scale and a reduction in the number of very small, fundamentally weak banks within the system," explained Eugene Tarzimanov, a Moody's senior analyst.
M&A activity had already gained pace in 2010 across all banking segments: both government-owned and private banks, Moscow-based as well as regional banks and domestic/foreign-owned institutions. Going forward, many deals will take place between sister or partner banks as a part of internal consolidation strategies. However, given favourable conditions, Moody's also expects to see more inter-group deals that carry the potential to create a stronger mid-layer of banks.
"The conditions are in place for M&A activity to gain momentum in Russia. Banks have the means to finance deals, evidenced by a high share of liquid assets and increased access to debt financing. Many banks also have excess capital which they are looking to utilise. Lower M&A valuations following the crisis, combined with accelerating credit growth also stimulate M&A demand," noteed Tarzimanov.
In addition to market-driven factors, M&A activity will be fostered by increased minimum capital requirements from currently RUB90 mln to RUB180 mln in January 2012, since this provides smaller institutions with the incentive to merge with (or acquire) other banks in order to jointly meet the higher requirements. Regulators have also paved the way for more M&A, by easing the administrative requirements for bank mergers in 2010.
In particular, consolidation among the larger private banks will yield benefits from scale and geographical coverage, and will create players that might be better able to compete with the large state-controlled banks that control 50% of banking assets. Concentration at the top will nevertheless remain strong, as large banks such as Bank VTB are also actively acquiring new assets.
The expected continued dominance of the state banks is positive for their creditors, but will likely remain a credit-negative factor for creditors of privately-owned banks, whose franchise development will remain restricted by their inability to compete head-on against the state banks.
M&A activity is only one of many factors that will drive the credit profiles of Russian banks in the near term. "While M&A can have a significant impact on the credit profile of involved banks, increased M&A activity will unlikely change the structure of the Russian banking system given the strong market position of the government-controlled banks. Therefore, the overall market-wide credit implications will be relatively modest, although they contribute to our overall stable outlook for the Russian banking system in the near term," concludeed Tarzimanov.