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After 2014 talks about international assets of Russian business has nearly ceased – sanctions have put an end to the activity of many domestic players abroad. Sberbank, although it has reduced its assets in recent years, still operates in 12 countries in Europe and CIS.  How does the Russian giant compete in foreign markets, what is the development strategy in the countries of presence, why was the Turkish DenizBank sold, and how does Sberbank work in Ukraine?

Timur Kozintsev, the new Head of Sberbank International, told Vugar Aliyev, partner of KPMG, about all this.

 

Timur, Sberbank's assets abroad have more than 3 times decreased since 2009. Tell me what is the reason? What portion of the business has gone for objective reasons, what portion because of geopolitical issues?

International business is an indicator of real economic relations between countries and reflects the logic of trends in the world. In 2012 Sberbank International was actively expanding into foreign markets - we came to Turkey and Europe, and compared to 2009, at that time the assets of subsidiaries grew significantly.

Then sanctions were imposed on Russia, which automatically resulted in, among other things, operational consequences: we were unable to raise funds for more than 30 days in currency, with restrictions on making payments in dollars and euros, and a ban on paying dividends in some countries (Turkey and Ukraine). In addition, local regulation has become more stringent.

We were forced to adapt and work in a changed geopolitical and economic environment, and to date our assets abroad have actually decreased by 2/3: from $68 billion to $23 billion. These figures were, of course, influenced by the largest DenizBank deal, which you know was closed last year.

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You are the new head of the international block of Sberbank. What is the Group's strategy and vision for further transformation of this business today? What tasks has management set for you? Is this a target by revenue, by market share?

Sberbank International is now represented in 12 countries in Europe and the CIS. We work in Austria with a branch in Germany, Czech Republic, Hungary, Serbia, Slovenia, Croatia, BiH and Banja Luka. In the CIS - Kazakhstan, Belarus and Ukraine.

Our strategy is primarily based on local specifics and assessment of the strengths of the presence markets. We consciously abandoned the goal expressed in the growth in volumes and rankings. Long-term financial stability is more important to us: cost-to-income, 100% coverage of all expenses with non-interest income. We closely monitor the daily growth rate of active clients (the so-called "first-choice bank") and market share in strategic segments through locomotive products. The task is to use the best practices of Sberbank in selling non-financial products and to improve the quality of service as a whole. It is planned to develop a wide range of partnerships with both local players and companies of the entire Sberbank ecosystem.

I recently visited with the team our countries of presence, and we identified the key industries that we believe represent the highest potential. Based on the experience of Russian Sberbank, we plan to develop first of all the products most frequently demanded by clients, literally every day. These include food delivery, mobility (transport), logistics, entertainment and shopping. We are currently in the process of developing a strategy for each of these areas, and the first applications are ready.

In addition, we continue to see the potential for growth in the foreign trade turnover of our countries, so this topic is constantly the focus of our attention. We are looking for new forms of synergy between the banks of our group, including through the use of elements of the Sberbank platform. For example, in Kazakhstan we have implemented the “Statement and reference” service in a mobile application on a single platform of the Group with local adaptation. Another example: Sberbank's subsidiary BI.Zone has entered the local market - they are successfully engaged in preventing fraudulent transactions with our clients’ funds.

Sberbank International is now represented in 12 countries in Europe and the CIS. We work in Austria with a branch in Germany, Czech Republic, Hungary, Serbia, Slovenia, Croatia, BiH and Banja Luka. In the CIS - Kazakhstan, Belarus and Ukraine.

What is your current position in the countries of presence?

In the CIS markets - Kazakhstan and Belarus - we have strong market positions of the largest banks with a market share of 8% in Kazakhstan and 6% in Belarus. Here, our task is to become leaders in modern and efficient services for clients, primarily through the growth of business in digital channels.

Sberbank Kazakhstan in general is the most efficient among the universal banks of this country with ROE = 33%, CIR = 30%. We rank second in terms of loans with a 10% share. We have one of the best applications in the local market, we have a very good growth rate of the customer base – 40% in 2 years, which means that clients show great interest in our services.

Among the second tier banks (the first tier includes the National Bank of Kazakhstan) we are the third in terms of assets, and the quality of our assets is the best on the market (NPL 90 + = 5.2%). But we still see the potential for growth in this country, for example, by building and developing an ecosystem. This may include the use of the Group's current products and the conclusion of new local partnerships.

In the European market we are represented in the format of medium universal banks, which occupy from 1% to 7% of the market. Initially, we invested in this market with large-scale development plans, but as I said, they were adjusted after the imposition of sanctions. The environment is characterized by a high level of competition and significant regulatory requirements. In addition, we were recognized as a systemically important bank, and this led to additional requirements, including in terms of reporting to the ECB. In addition, capital requirements have increased significantly. Nevertheless, our European banks remain steadily profitable and competitive, especially in the niche of consumer lending.

We are now focused on operating efficiency growth, primarily by focusing on our target segments - retail and small businesses, which give a higher margin. Plus, we keep an eye on costs and cost/income decline.

In terms of prospects, we highly appreciate the potential of the digital banking format and are already seeing the results of the pilot project in Germany. It is about end-to-end online maintenance of individuals. Currently, clients have access to deposits, savings accounts and consumer loans. I would like to point out that we have some of the best client travel and time to yes indicators in the market: clients spend on average about 13 minutes on filing applications and a maximum of 8 minutes on obtaining approval, and our share of NPL is less than 0.3%, all of which allows us to compete successfully in this field. Next year we have plans to expand the range of banking services. In addition, at the end of March we launched online sales of loan insurance in Germany. Today, one in four clients buy such insurance - this shows that we have correctly guessed the needs of the market.

 

What is the share of business today in the CIS countries, and what is the share of business in European countries? What share of revenues are currently generated by foreign subsidiaries? What is the ambition in relation to this indicator?

Sberbank International's foreign subsidiaries currently account for approximately 5% of Sberbank's assets. Sberbank Europe accounts for about 65% of this volume, and it is no secret that the European market is highly competitive, with low margin and, accordingly, the share in income is significantly lower. Here we see the prospect of increasing the share of non-interest income and commissions, especially in terms of cross-border operations. Plus, we assume that through digital transformation in Europe we will be able to compete at a high level in the region.

In Kazakhstan, we have the most profitable bank in the Group, which is one of the most promising markets in terms of capacity and growth rates for us.

 

Let's go back to selling the Turkish subsidiary to Emirates NBD. You worked in Turkey for many years. What did not work with DenizBank? What did you manage to do?

Turkey is one of the most promising economies in the world. It is a non-commodity market, and the economy is mainly driven by developed small-scale entrepreneurship. When we visited this country, the situation was very favorable, but then geopolitical intervention took place, and we were in fact held captive: deterioration of the economic situation in the country, depreciation of the national currency. It has become more difficult for the bank to attract funds on international markets - all this has reduced the attractiveness of the Turkish region for us. Plus nobody wanted to work with Turkish banks. As a result, a difficult decision to sell was taken. In my opinion, DenizBank was and remains a good asset, it is one of the top banks in the country in terms of efficiency.

I can say with confidence that our expectations from acquiring DenizBank in 2012 were met by 100%. We set the goal of entering the counter-cyclical market, diversifying the business, and building up the client base. We managed to do this, and we are proud of the results achieved: during the bank's ownership its assets grew almost 4 times, the number of retail clients - by 86%, the growth of the network of branches was 20%. In 2019 the bank earned 3.2 times more operating income and net profit than in 2012. DenizBank has also achieved significant success in the implementation of innovative technologies in the banking sector, has been repeatedly recognized as the world's most innovative bank, and has taken leading positions in financing the agro-industrial sector, tourism business, servicing clients of retirement age and other areas. I am confident that colleagues from Emirates NBD will retain the vector for DenizBank development.

Tell us more about Sberbank in Ukraine. What is the situation? Are you currently negotiating the sale of this asset?

The situation is rather difficult, and sanctions seriously limit our ability to support as a shareholder. However, there is a strong team, the bank is profitable and works steadily. Today we are completely liquid, which means that if necessary we will fully settle with clients. And in Ukraine we have more than 120,000 active clients (with operations at least once a month) and 100 branches. The Bank technologically meets modern requirements, and all conditions for the growth of the client base are maintained.

 

How do you build relationships with regulators in other countries? Do you feel that the "Russian factor" complicates this interaction or not?

We have a constructive relationship with regulators in all countries of our presence. I recognize that it cannot be otherwise. We always pay attention to the initiatives of national banks. Our boards of directors have been formed with the participation of reputable representatives of the industry in the countries, and the quality of our work is highly appreciated by regulators. Evidence of this is a 0.5% reduction in capital requirements from 1 January 2020, for example.

I believe that there is no point in identifying any "factor of Russia." We are not engaged in politics, we are doing business and we are proceeding from the current situation in the countries of our presence.

In Europe, for example, there are significant restrictions on the exchange of personal data, which has a significant impact on business development. I believe if there were intergovernmental agreements that would allow such data exchange, it would be much easier to work.

 

What are the plans to expand the geography, are there any plans to purchase new assets? Do you plan to develop Islamic banking within Sberbank International?

We all see what is happening in the world today. I do not rule out that you and I will be living in a relatively new world after the recession is over. Now it is difficult to make plans and assessments, everything will depend on what measures each country will take to reduce the spread of the disease.

In any case, our main task now is to ensure the smooth operation of our business. We monitor the situation 24 hours a day.

In response to the question, at the moment we are focused on the development of current markets of presence, while constantly looking for new growth zones for ourselves. Given the fact that the whole world is actively going "digital" today, we do not rule out the possibility of entering new markets, for example, in digital format.

In terms of the development of Islamic Banking, we believe it may be promising, but currently we do not plan to actively develop it in the countries of our presence.

We have a constructive relationship with regulators in all countries of our presence. I recognize that it cannot be otherwise. We always pay attention to the initiatives of national banks.