Ben Aris reports on a bank determined to be the leading innovator in the fast-growing Russian market.
Since Russia’s Trust Investment Bank (TIB) was set up it has gone in the opposite direction to everyone else. It went into the Russian banking business in 1999, when many Russian banks were going bust. It set out to be “Russia’s first pure investment bank” when it seemed that most companies were simply trying to salvage something from the wreckage of the Russian economy after the 1998 financial crisis.
But with hindsight its timing was perfect. While the likes of the World Bank and IMF predicted hyperinflation and prolonged contraction, Russian entrepreneurs only saw costs cut to a quarter by devaluation and the overnight departure of their main competitors. The economy blossomed and Russian firms were soon thirsty for investment capital to maintain breakneck growth rates.
Ilia Yurov, the CEO and chairman of TIB, says the bank’s success has been built on its ability to innovate in times of change. In April it followed up its first blush of success with its latest new idea: TIB has launched Russia’s first ever financial brand.
Demand yet to appear
Nearly all of Russia’s banks describe themselves as universal banks and have developed their business in reaction to the heart-wrenching changes of the past 10 years. TIB is unusual in that it was set up, and continues to develop, in anticipation of a demand for products and services that have yet to appear.
There was very little demand for investment banking services in 1999 but TIB was able to step nimbly into what has turned into one of the fastest-growing segments of the Russian financial market – corporate rouble bonds.
Majority owned by the Menatep Group (which also owns the poster boy for change, Russia’s largest oil company Yukos), TIB won the tender to lead manage utilities monopoly United Energy System’s one-year Rb3bn bond ($100m) in 1999. They were among the very first rouble bonds issued, but demand was slight and only four domestic investors bothered to bid.
But with an economy growing at an average rate of 6.5% a year, by the time TIB won the tender to issue a second UES one-and-half year rouble bond of Rb5bn, competition in the business was doubling every year and 26 Russian investors competed for the paper.
Rouble bonds have been one of the few solutions to the mis-match between banks and their much larger corporate clients: bank assets have been growing by about 30% a year but remain too small to satisfy the needs of customers. Bonds are a convenient way for companies to tap into the pool of liquidity without having to organise strings of loans or complicated (and poorly regulated) syndicated loans.
TIB has become a market leader. According to the National Depository Company – which handles clearing and settlement on MICEX, the main bond bourse – TIB handles 40% of all fixed income instruments transactions.
The bank may be well established in its niche, but the management believe that Russia’s very success is creating a threat to TIB’s business. “The international banks will certainly increase their operations here,” says Mr Yurov. “Their first idea will be to offer services to the leading 50 Russian companies – our core customers – who are already trans-nationals, and the local banks will lose a big chunk of their business. The only way to compete is to go down a tier.”
Re-orientating towards a broader market is not just a defensive parry but also makes good business sense. For most of the past four years, all attention has been focused on the companies of Russia’s “oligarchs” – largely export-oriented oil and metal producers – but the economy recovery has bred a new race of “mini-garchs” who run companies catering directly to the consumer.
“We have about 50 core customers – nearly all of Russia’s leading blue-chip companies – but we need to extend our reach and want to reach the next tier of leading 500 companies,” says Mr Yurov.
TIB is betting that it has the timing right again. Again it is developing new products such as corporate finance, IPOs and the like for which there is still only a small demand.
Again TIB’s timing looks good. Over the last 18 months Russia saw its first two “real” IPOs, but both were small by international standards. However, by May 25 companies had announced their intention to offer shares for sale over the next two years and more are bound to follow.
London hiring
Determined to grab their customers early, TIB hired London-based Interbrew to survey financial brands in Russia last year, who found there are none. Mr Yurov says setting up the first ever brand is a perfect opportunity for TIB to sell itself as Russia’s leading innovative bank. In April TIB launched the first of a two-phase advertising campaign pushing the message that TIB is the best partner in the fast moving Russian market. It openly shared its research with its competitors.
“After all, that is the whole point of the campaign – to show our customers that we are the leading innovator on the market, that we are the ones who are having the new ideas and bringing them to fruition,” says Oleg Ivanov, TIB’s marketing director, who put the campaign together. “If other people copy our idea then that will only reinforce our own campaign.”