Russia readies biggest banking IPO since 2013

Otkritie Bank, Russia’s fifth-biggest lender by capital, may sell shares to investors next year in what would be the biggest Russian offering by a Russian bank for about eight years - since TCS Group in 2013, writes Louis Auge.

Otkritie has been owned by Bank of Russia since 2017 and may go public next spring, with a preliminary plan to sell a stake of 15-20%. Would investors buy into a lender overseen by the one of the world’s best central bank governors?

Otkritie was the first and largest of a number of banks taken over by the regulator in 2017-2018 as part of a campaign to kick out what Bank of Russia Governor Elvira Nabiullina called unscrupulous bank owners who took high risks including financing pet projects without a sufficient capital cushion. The Bank of Russia guaranteed all of Otkritie’ liabilities and recapitalised it to support the many healthy parts of the business, while ring-fencing problematic assets. Eventually, the healthy parts of other, smaller banks such as B&N Bank and Promsvyazbank were merged into Otkritie, which was the strongest player and operates under a widely-known and reputable brand.

The measures formed part of the financial rehabilitation mechanism that Nabiullina had introduced shortly before the rescue of Otkritie. Her goal was not only to protect millions of Otkritie’s clients, but also to show that the regulator could be a more effective manager of troubled lenders than private investors. Some of these investors – including the previous owners of Otkritie – had misused cheap funds borrowed to bail out smaller lenders to further their own interests, and the process had dragged on for many years.

While some critics claimed the regulator should not be managing banks, Nabiullina’s response was that central bank ownership was temporary and that Otkritie would be re-privatised once its financial rehabilitation was complete. Nabiullina chose Mikhail Zadornov – a highly reputable banker and former finance minister – as Otkritie’s new CEO. Before Otkritie, Zadornov had been head of the retail business at VTB, Russia’s second largest lender.

The central bank announced the completion of Otkritie’s rehabilitation in July 2019, after a little under two years. Problem assets were removed from the bank’s balance sheet to be managed separately by Bank Trust, a special institution established by the Central Bank to hold such assets as part of the regulator’s clean-up of the Russian financial system. Otkritie also sold some non-core assets through the market.

What is left is a well-capitalised financial conglomerate with a diversified business that in addition to banking includes an insurance unit, brokerage company, pension funds and a number of fast-growing digital startups.

Zadornov’s team has made Otkritie work like never before. In the last three years, Otkritie has been growing faster than any other bank in Russia’s top ten. Even more impressively, this growth has been  healthy and profitable. In the first nine months of 2021, the bank doubled net income year-on-year to RUB 58.7 billion – the highest in its recent history. At the same time, asset quality remained among the highest on the market, with NPLs of less than 3% of the total portfolio.  

Unlike some competitors pursuing a trendy ecosystem model, Zadornov and his team believe that clients value Otkritie as a financial services specialist. The bank has not been tempted to enter capital intensive businesses like carsharing or e-commerce.

At the same time Otkritie is far from aiming to be just a traditional financial institution.

Zadornov has optimised the bank’s branch network and moved clients to remote channels, hiring hundreds of IT professionals and allowing many employees to work from home. Otkritie has also been developing in-house digital projects like Tochka – a top online bank for small businesses – and Bankavto, a marketplace for car owners.  

Under a strategy update earlier this year, Otkritie aims to leverage its digital business model to continue growing faster than the market. This means scaling the business primarily by increasing cross sales between units as well as by adding more third-party partners, which Otkritie can integrate quickly through its OpenAPI. This should help the lender achieve its annual net income target of at least RUB 100 billion by 2023. Another strategic goal is to be among the market leaders by return on equity (RoE), a key measure of efficiency, with an RoE of at least 15% by 2023, Zadornov said in September interview.

The financial sector has been a key driver of Russia’s stock market, and given the lack of publicly-traded names in the sector Otkritie’s expected IPO may be warmly welcomed by investors as a rare opportunity to gain access to a transparent and fast growing institution. The last internationally marketed banking IPO from Russia dates back to 2013, when TCS Group – better known to its customers and many fans worldwide alike simply as Tinkoff – sold shares worth more than USD 1 billion on the London Stock Exchange. Tinkoff’s share price has grown fivefold since then, and in 2021 alone has gone from about USD 34 apiece to more than USD 80.

The potential for Otkritie looks significant. Even after impressive growth in recent years, Russia is still underpenetrated with financial services compared to some developed markets. This holds true across all of the group’s businesses, from banking to insurance and from retail investor brokerage services to asset management. At the same time, the Russian financial market is technologically advanced, which has been a significant factor supporting its outperformance during the COVID-19 pandemic. The central bank reported in October that total banking sector profits for the first nine months of 2021 totalled RUB 1.9 trillion – more than the whole of 2020 – as loan quality improved more quickly than expected while fee income continued to grow due to the increasing share of non-cash payments and an explosion in retail investor activity. Local ratings firm ACRA, which is headed by a former central banker, expects profits next year to reach at least RUB 2.5 trillion.

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