Unsecured trade or Finnish banks’ operation in Russia
Date: 04.08.2009
Unsecured trade or Finnish banks’ operation in Russia
Geographical proximity of Russia and Finland resulted in the fact that Russia became the main foreign trade partner of Finland in 2008. Bilateral trade within the given period totaled 26 billion dollars. Provided with these facts, it would be logical to assume there is financial infrastructure of the Finnish origin in Russia: banks, insurance companies, leasing companies created to satisfy the needs of the Finnish companies. But what is the reality concerning the Finnish banks’ expansion on the territory of the Russian Federation?
As for the regulation of foreign banks’ operation in Russia, today foreign banks are allowed to operate on the territory of the country in the form of affiliated companies and subdivisions. Creation of an affiliated company is preceded by the establishment of a lending institution - Russian legal entity with foreign investments contribution. The size of these investments is not limited and can be up to 100 %. The main difference from the national credit institutions is that there are non-residents among the founders and the funds of the non-residents (partially or to the full extent) provide the source of the authorized capital. The representative branch has no right to be engaged in commercial activity and speaks on behalf of the represented lending institution, the name of which is specified in the representative branch establishment authorization.
As of January, 1, 2009, 221 credit institutions with non-residential contribution possess the license for bank operations. Out of which 76 organizations are represented by 100 % non-residential contribution to authorized capital.
To clarify the situation connected with the Finnish banks’ expansion on the territory of the Russian Federation, it is necessary to understand, which banks operate on the territory of Finland. The Finnish bank system is headed by the state bank – the Bank of Finland, which manages the monetary policy of Finland and is included in the European System of the Central Banks (ESCB) and in the Eurosystem. Apart from the central bank there are also commercial banks in the country. The main characteristic of the Finnish bank system is the fact that there is a small amount of large national commercial banks (4 banks account for about 85 % of the whole bank market). Those are:
- Nordea Bank Finland
- Pohjola Bank, also known as OKO Bank
- Sampo Bank
- Aktia Bank
Another distinctive feature of the Finnish bank system is the well defined presence of the foreign banking capital, in particular of the Scandinavian. Foreign banks possess about 50 % of the share capital in the Finnish banks. So, Nordea Bank is the Finnish banking arm of the Nordea Group, and Sampo Bank is a subdivision of the Danske Bank.
Nordea Bank has been present in Russia since 1989, since the moment of the establishment of the Moscow International Bank - the oldest Russian bank with the foreign investments, created jointly by Russian and foreign banks. In 2006 26 % of shares are sold to the UniCredit group. Even though this share was bringing good profit, the sale was stipulated by the fact that it did not meet the strategic needs of the company. Nordea Bank tried to gain a majority holding of the Moscow International bank. But it did not succeed, gave this idea up and sold its share holding in order to purchase other strategic assets.
Nordea Bank chose the М&A way to stay on the Russian market. It is necessary to mention that this way is typical for this bank: in the period 1985-2009 the company had 103 transactions on purchase of shares of other companies, out of which more than a half accounted for the full acquisition of the other enterprises. This way was also typical for the entry to the Baltic region market.
In 2006 Nordea Bank Finland acquired 7 % shares of “OrgresBank”, and in 2009 became the single proprietor of “OrgresBank”, having purchased the remaining share from the European bank of reconstruction and development. And in June, 2009 shareholders of “OrgresBank” at the annual general assembly made a decision to change the name of the lending institution for “Nordea Bank”. Respective alterations will be introduced to the Bank Charter. This bank is one of the 30 largest Russian banks and is rated ААА (rus) on a national scale as estimated by the Fitch institution.
Another Finnish bank Sampo Bank following the Nordea Bank also chose the way of M&A to enter the Russian market. Sampo in 2006 purchased a small St. Petersburg bank “Profibank”. As well as in the case with Nordea, purchase was preceded with purchases of banks in the Baltic region. The main difference is that a very small bank was acquired (at the moment of purchase - # 1171 in the list of Russian banks). However the bank is situated in Saint Petersburg close to Finland. Management believes that due to the location it will be easier to develop business and attract corporate clients from Finland and other Scandinavian countries. The reason for purchasing a bank, instead of establishing a new one from the green field, could be bureaucratic problems. In this case the purpose was probably not the image of the bank, not the client base, etc. but simply already existing set of licenses, allowing the bank to operate on the territory of the Russian Federation.
Since Sampo Bank is a part of the Danske Bank, “Profibank” was renamed and has the name Danske Bank since July, 31, 2007. It is necessary to mention that the bank is developing in a pretty fast way and occupies the 304th place by net assets in 2009 according to the RBC rating, having gone up 106 places within a year. In the opinion of bankir.ru, it is on the 19th place among the banks of Saint Petersburg. According to the Fitch rating institution, the bank received AAA (rus) rating on a national scale.
It is necessary to mention, that the bank has only one office in Saint Petersburg. The website of the organization does not have a full Russian version which makes us conclude that Sampo does not actively develop this sector and is not especially interested in attracting Russian clients.
Finnish company OKO Bank on the contrary did not purchase any existing Russian bank, it opened a representative office in Saint Petersburg focused only on its corporate clients. This conclusion is drawn from the fact that there is no Russian website of the bank, and the official website does not have a Russian version either. However this bank founded a JSC “ОКО Capital East”, which provides consulting services for corporate clients in the field of M&A transactions and structural financing in Russia. Most of the clients are Scandinavian companies which are going to invest in Russia. The company was opened in Moscow and has an office in St. Petersburg.
However in 2007 “ОКО Capital East” was sold to the Swedish bank Swedbank. This step contradicts the corporate strategy 2010 which includes expansion in the Baltic and Russia market.
Bank Actia is not represented in Russia, it has not conducted any M&A transactions in its history.
Thus, we can conclude that at the moment there are 3 Finnish banks operating in the Russian Federation. Two of them entered the Russian market through M&A. The third one (OKO Bank) chose to open a small representative office in Saint Petersburg, focusing only on the existing corporate clients and not aspiring to attract new Russian ones. Nordea and Sampo seriously decided to enter Russian market. Nordea acquired an already pretty successful bank, whereas Sampo decided to develop a medium-sized financial institution. As for Saint Petersburg, Sampo Bank is the only bank, which stated a purpose of developing financial infrastructure to service unprecedented trade volumes between Russia and Finland. But the bank does not actively attract new Russian clients. Nordea Bank operates mainly in Moscow. But it has three offices in the Northern capital and provides a full spectrum of services for participants of the international trading operations and is also the authorized bank of the Federal customs service of the Russian Federation.
It turns out that only one Finnish bank is not only interested in financing the Russian - Finnish trade relations (as Sampo), but also has a necessary infrastructure for this purpose (offices) and offers a full spectrum of services of this kind. But initially it is not a St. Petersburg bank, but a Moscow bank of Nordea group.
Situation with the Russian banks in Finland is even worse. “International bank of Saint Petersburg” had experience in entering the Finnish market. In 2000 it opened a representative office in Helsinki. The bank intended to further develop its operations in the region and to turn the representative office into a branch. However the regulators refused several attempts of the bank, and the representative office was closed.
It is necessary to mention, that in 2007 Memorandum of Understanding between the Central Bank of the Russian Federation (Bank of Russia) and Rahoitustarkastus (the Finnish Financial Supervision Authority, FIN-FSA) concerning co-operation in banking supervision was signed. Besides the cooperation in the field of supervision this document also implies information disclosure about a potential new lending institution and promotes the licensing process. If everything is all right in the company, it will be an additional positive argument to its benefit.
However this document did not lead to a greater integration of the Russian banks in Finland, or Finnish banks in Russia, and it should be considered as an alert in the current situation.
As for financial results of the Finnish banks for the 1st quarter of the present year, those are not very optimistic
Source: Bank of Finland
All financial institutions operating in Finland show reduction of profit upon the results of the 1st quarter 2009. As for bank operations situation with Sampo seems to be the worst. This Danske Group representative in Finland almost ceased to bring surplus. Nordea also faces significant difficulties with the bank operation in Finland (profit before taxation decreased by 55 %). But ОКО Bank with its growth of profit before taxation by 112 % practically rescues the whole OP-Pohjola Group from decrease in profit. Bank operation of Aktia Group is also not bad, it increased profit by 42 %. It is necessary to mention that in April, 2009 Moody's rating institution lowered the rating of the Finnish bank system to “negative”.
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