Russian banks still far from attractive

Foreign investors remain reluctant to invest in Russia's banking sector, which they still see as being fraught with risk despite rapid growth and long-awaited reforms, analysts say.

Local banks are only now beginning to reap the benefits of radical restructuring instituted after Russia's 1998 financial meltdown.

The number of deposits and loans has doubled over the past two years, while consumer credit and homeowner loans, which barely existed in Russia several years ago, are beginning to develop.

With people in Russia's main cities stashing an estimated $21 billion under their mattresses, the banking sector still has huge potential for expansion.

And last November, Russia's central bank finally lifted restrictions banning foreign financial institutions from owning more than 12 percent of outstanding stock of Russian banks.

Yet all that has so far had remarkably little impact on foreign investors' interest in the Russian banking sector.

Far from skyrocketing, foreign ownership of Russian banks has stayed below 10 percent overall, with little chance of that changing soon, industry insiders say.

"The level of foreign capital in the sector will remain stable," said Allen Hirst, president of the Russian branch of U.S. Citibank.

Sergei Leontiev, president of Probusinessbank, agreed.

He explained that while large Russian banks were likely to buy out smaller regional institutions in the near future, no major purchases by foreign banks should be expected.

Contrary to Poland, Hungary or the Czech Republic - whose local banking sectors were swept up by foreign investors following privatization - Russia does not have a large retail banking network up for grabs, Hirst said.

Nor is the country about to reap the benefits of entering the European Union, like many Central and Eastern European countries, he added.

"There simply isn't the same appetite for investing in Russia."

The banking sector remains dominated by state-owned Sberbank, Russia's largest financial institution, which holds 40 percent of all deposits and nearly 70 percent of private deposits.

The main reason for foreigners' lack of enthusiasm is the perceived high level of risk attached to Russian banks, analysts say.

"Seventy-five percent of the loans granted to companies by Russian banks, representing $43 billion, still entail a high level of risk," the Standard and Poor's rating agency noted in a recent study.

What's more, many Russian banks have close ties to oil majors and large corporations, and their financial health is often directly linked to international oil and raw material prices.

While Russian banks have made genuine efforts to reform, they are still a long way from adopting international standards and practices, said Yekaterina Trifimova, who co-authored the Standard and Poor's study.

"Much still needs to be done before (the sector) embraces international banking practices, or even East European practices," she said.

The main foreign banks active on Russia's retail and corporate banking markets are Citibank, Austria's Raiffeisenbank, and Moscow Bank, controlled by Germany's HypoVereinsbank. ING Bank, Dresdner Bank and Credit Suisse First Boston are only active on Russia's financial markets.