Sberbank_Investment_Banking_Strategy

MASTER OF BUSINESS ADMINISTRATION Assignment Mark Sheet Student ID Number Cohort: November 2010 Assignment: Strategic Management II (Part 2) Date Received: Marker: Comments and suggestions for improvement: Mark obtained Question 1 Question 2 Question 3 Question 4 OVERALL MARK Marker's signature: Please note: The above marks are provisional and subject to ratification by the MBA External Board. Assignment: Strategic Management II (Part 2) I certify that all the material in this paper which is not my own work has been identified and acknowledged and that no material is included for which a degree has been previously conferred upon me. Please sign: Please print: Student ID Number: Kingston University Business School STRATEGIC MANAGEMENT II (PART 2): BSM 510 SBERBANK INVESTMENT BANKING STRATEGY Assignment Prepared by: ID Number 0854498 Word count: 3066 Moscow, March 2010 CONTENTS EXECUTIVE SUMMARY 4 1. Context 5 1.1. Overview of Sberbank strategy 5 1.2. Investment banking 5 1.3. «Rich picture» of IB operations and implications for Sberbank 6 2. Eliciting and Evaluating Strategy 8 2.1 Choosing approach to investment banking development strategy 8 2.2 Implementation of the key strategies 9 2.3 Sberbank core competences/capabilities 11 3. Strategic commentary 12 3.1 Possible advantages 13 3.2 Possible difficulties 14 3.3 Alternative solution 14 Conclusion 15 Annex 1 16 Annex 2 16 Annex 3 17 Annex 4 17 References 18 EXECUTIVE SUMMARY Sberbank is a leading financial institution in Russia. Currently it’s undergoing a significant change. Strengthening the market position of Sberbank, particularly in the corporate business, client-oriented model, development of international operations require the bank to offer world-class investment banking services to clients. Despite being a leader in commercial banking, Sberbank position in investment banking is currently far from being a leader. This report gives a rich picture of investment banking operations at Sberbank: clients, actors, processes, competitive environment, trends. It looks at choosing strategic approach based on different frameworks: resource-based, positioning, high velocity and complex eco-system. The key strategies include: • Changing market position • Developing core competences • Adopting a client-oriented business model Implementation of these strategies so far had a limited success due to: 1. Path dependances 2. Reputation 3. Structural ineffectiveness 4. Lack of motivation 5. Local specialization. Since the development of investment banking is on the top of the agenda, Sberbank will have to choose between 2 agressive strategies – acqusition of an existing rival or agressive investment in organic growth (mainly in the working force). Money invested doesn't guarantee the result with 2 major problems to be adressed – path dependances and cultural fit between companies. 1. Context 1.1 Overview of Sberbank strategy Sberbank is the dominant player in the Russsian banking sector with a 169 year history. It is considered to be well positioned for a sustainable growth in the current environment. The key elements of the Strategy include (Annex 1): • Development of a client-oriented model to service individual and corporate clients of the Bank. • Technological upgrade of the Bank and processes industrialization. • Radical increase of the Bank’s operational efficiency, based on up-to-date technologies, management and overall optimization through bank-wide implementation of Sberbank Production System/BPS based on Lean/Toyota Production System. • Development of international operations, primarily in the CIS countries. From the above data we can notice that development of investment banking operations was not highlighted in 2009 as one the top goals in the coming years. However the realised strategy can differ substntially from the planned strategy. Strengthening the market position of Sberbank, particularly in the corporate business, client-oriented model, development of international operations require the bank to offer world-class investment banking services to clients. According to the latest information (both public and internal) development of investment banking operations is one of the top strategic goals now. 1.2 Investment Banking (IB) Simply put investment banks … invest. They purchase securities from the issuers and resell them to the public. They also trade securities on capital markets (Michel Fleuriet, 2008). An investment bank is a financial institution that assists corporations and governments to raise capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions and derivatives, and provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Whereas commercial banks serve as intermediaries between customers who save money and customers who borrow it, investment banks facilitate companies’ direct access to the capital markets (Michel Fleuriet, 2008). In Russia core IB activities are: • Corporate finance (including capital market operations, mergers and acquisitions) • Sales and trading (including market-making) • Research • Asset management • Wealth management In the Russian Federation there is no legal division between commercial and investment banks. While most of the banks are universal, the investment banking services are provided mainly by the largest players and also by specialized institutions. The majority of medium- to small-sized banks are not involved in IB. As a commercial bank Sberbank is a true leader of the Russian banking system (Annex 2). The league table of the Russian domestic bond arrangers (one of the key IB area in the Russian market) has different leaders though the largest universal banks are also present there (Annex 3). 1.3 «Rich picture» of IB operations and implications for Sberbank Sberbank has a strong team of traditional bankers particularly in the treasury and corporate departments, however they are mostly involved in proprietary operations while the client investment business is very fragile. IB process: "sell side" - trading securities for cash or for other securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., IPO, underwriting, research, etc.) Investment bank – professional intermediary which is good in either buy or sell side of the process, or in both, which is not committing its own funds into the transactions (ideal situation). "buy side" - dealing with private equity funds, pension funds, mutual funds, hedge funds, proprietary trading desks and the investing public (who consume the products and services of the sell-side in order to maximize their return on investment). Porters 5 forces (Annex 4) Major Trends There are several forces pushing Sberbank to start full-scale IB services: 1. Implications of the financial crisis. Pure investment banks are no longer able to compete with universal banking institutions for financial strength reasons. Even in the US the largest investment banks – Goldman Sachs and Morgan Stanley chose to become universal banks in order to get the support from the state. 2. Success of a major competitor. Russia 2nd largest bank – VTB- after several years of losses and several hundreed millions USD spent became a leader in the russian IB business which is quite sound in the other emerging markets. VTB group now generates 1/3 of its profits from IB. Sberbank traditionally monitors the activities of VTB very closely. 3. Market growth potential. According to Reuters report IB market may increase in 2011 by 1/3. Generally speaking, financial services penetration level in Russia is lower then in other emerging economies which offers a unique growth potential. 4. Leadership in corporate lending. Corporate lending customers represent a major source of customers on the «sell side». Sberbank is an undisputed leader in the corporate lending in Russia, which provides an opportunity for IB development. 2. Eliciting and Evaluating Strategy 2.1 Choosing approach to investment banking development strategy As mentioned development of IB operations represents an integral part of the overal strategy of Sberbank in the coming years. According to Paula Jarzabkowsky and David C. Wilson, four basic approaches can be applied to developing an applicable strategy depending on the contextual conditions. Source: Jarzabkowski, P. & Wilson, D. (2006). ‘Actionable Strategy Knowledge: A Practice Perspective’, European Management Journal, 24(5): 348-367 1. Resource-based view . The basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's disposal. Those resources are valuable, rare, inimitable and organized. Traditionally the success of Sberbank in the Russian market has been supported by a number of resources which possess the mentioned characters. Those resources are: • Branch network (19,000 branches & 300 million individual accounts) • Work-force (over 240,000 employees) • Strong government support (Central Bank owns 57.6% of charter capital) • Liabilities structure (62 % comes from individuals deposits) However this resource-based approach to strategy gets more and more difficult to apply in the financial services sector and particularly in IB. The environment in this environment is characterized by high velocity and knowledge intensity. 2. Positioning framework can be applied to development of strategy in retail or corporate banking, as Sberbank represents a natural monopoly in certain regions for historic positioning reason. In the IB market geographic positioning does not play that big role, and Sberbank is not among the leaders currently. There are entry barriers in this market (high cost of entry) but Sberbank financially is stronger then its competitors. 3. High velocity approach is probably the most appropriate for developing IB strategy in the current Russian marketplace. In order to win a share in this market Sberbank needs to be sufficiently flexible to be able to make rapid decisions. This is part of a new client-oriented business model of Sberbank. Increasing speed in decision-making, facilitating experimentation and designing a flexible organization makes a rapid reconfiguration of resources possible (P. Jarzabkowski, D. Wilson 2006). 4. The complex eco systems framework can be applied to developing strategy of the overall russian economy and Sberbank as an important part of it. The key strategies for Sberbank in the IB are the following: 1. Changing market position. Sberbank is an undisputed leader in retail banking and the biggest corporate lender. Its resources are bigger then those of its competitors. Using the positioning and capacity-building school Sberbank plans to use the extrapolate the existing strengths into new products and markets including IB. Considering the possible economy of scale Sberbank is able to increase the profitability of the current operations by offering new products to the already existing clients. 2. Developing core competences. The core competence which needs to be strategically developed is the speed of decision-making and ability to rapidly reconfigure resources. Each day is different in the capital markets, therefore Sberbank cannot depend on the old frameworks. 3. Adopting a client-oriented business model. Sberbank has always enjoyed the leading role in the Russian banking system which led to the necessity for the clients to adopt the methods and models suggested by the bank instead of the bank adopting its processes to the client needs. In the high velocity environment this approach will finally make Sberbank loose its existing positions. Moreover, development of new businesses, IB in particular is impossible without client orientation. 2.2 Implementation of the key strategies There are basically 3 major ways to develop IB at Sberbank: 1. Evolutionary development of IB business using the existing resources. 2. Major aquisition of talent from competitors since the team of professionals is the most valued asset in IB. 3. Aquisition of an existing market leader including the team, operations, licences etc. This report will look at strengths and weaknesses of each strategic option in Part 3. As of November 2010 Sberbank continues to develop IB operations internally but a talk of a major aquisition of some competitor is in the air. Implementation of the key starategies mentioned above had rather limited success so far due to the following: 1. Path dependancies. Sberbank doesn't start IB from zero point, it incorporates IB in the exisitng framework of banking operations. Certain elements of IB have been functioning at Sberbank for several years. There are rules, regulations (internal and external), methodology which is part of the game. Introducing a new product or technology is a difficult task – its time consuming, plus when the new product is finally ready it may be quite different from what was originally designed and it may lack certain important features. Other market participants do not have such a big laggage to deal with. Solving this problem is the key to development of new core competences. 2. Reputation. Sberbank reputation is a strong asset in mass retail and corporate banking, however in the IB world which is about tailor-made client-orinted business solutions, Sberbank is only known for its deep pockets and state support. 3. Structural ineffectiveness. Currently the IB operations are developed within the corporate, international and treasury departments. International and local experience support the idea to separate an investment division of a bank as a separate legal entity. This wil help to create «chinese walls» between the departments and not to mix the propraetary operations of the bank with the client flows. It is important not only from a regulatory perspektive but also for the sake of effectiveness – only a separate division can be motivated to be more customer-oriented. Creation of a separate legal entity also helps to resolve the path dependances issues. 4. Lack of motivation. Commercial and investment banks traditionally have different levels of personnel motivation. In the high velocity IB environment motivation is one of the most important success factors, it is considered to be one of the reasons for the financial crisis. Sberbank is in the process of developing new motivation programmes, it is crucial for the employment of the customer-oriented model. 5. Local presence. Sberbank is a local Russian bank, its only starting to develop international presence. Considering the global character of the economy, sophisticated IB clients from Russia and abroad are interested in getting high quality services worldwide. On the other hand, for the less sophisticated clients deep in the Russian regions Sberbank is always welcome with new products. 2.3 Sberbank core competences/capabilities A core competency is a specific factor that a business sees as being central to the way it, or its employees, works. It fulfills two key criteria: • It is not easy for competitors to imitate • It can be leveraged widely to many products and markets. Sberbank core competences/capabilities which can be applied to the IB business are: Size of balance sheet State support Branch network Leadership in corporate business mainly lending Credit rating Currently the major areas where these capabilities can be applied in IB are: 1. Debt capital markets operations – issuing bonds in the domestic and international markets in favour fo major clients. 2. IPO including «peoples IPO» when the shares are sold to the general public. 3. Operations with non-performing loans, bad debts, collateral management etc. Balance sheet size helps Sberbank to be a leader in uderwriting the new bonds issues. According to CBONDS information agency, for the 1st 3 quarters in 2010 Sberbank is only 12th in arrangers rating, but it is 4th in the underwriters rating. The difference between arrangers and underwriters is that underwriters commit themselve to buying a certain portion of the new issue in case they are not able to sell it to the clients. Due to the size of balance sheet and capital base, Sberbank can attract those issuers which are looking for a guaranteed result. With the state support Sberbank can attract certain special clients. In July, 2010 Sberbank was a co-lead manager for the debut eurobonds issue fo the Republic of Belarus. This issue was a big success in the international market with the volume of 1 bln USD. Branch network enabled Sberbank to participate in large IPOs where the shares were sold to the general public. In July, 2006 Rosneft accomplished a landmark USD 10.7 bln. IPO. During the IPO, more than 150,000 Russians invested over USD 750 mln. in aggregate, Sberbank was doing this part of the offering through its branch network. Sberbank is the largest corporate lender in Russia. Large corporate borrowers are interested in receiving IB services together with lending to get synegy, that represents huge potential client base. One of the biggest corporate clients of Sberbank is Rusal – the world's largest aluminium producer. In september 2010 it extended a 4,5 bln USD loan to Rusal. And Sberbank was among the underwriters of Rusal IPO in Honkong earlier in the year. Sberbank is among the highest credit rated Russian borrowers – Baa1 from Moody's and BBB from Fitch. Sberbank gets financing of its operations in the capital markets at better terms then those of its Russian competitors. The above core capabilities are difficult to imitate and offer customer value, however they are not among the traditional competencies of an investment bank. Those are: • Individual customer approach • Wide range of products available • Financial innovation • Effective sales force • Highly competent staff The above competences still need to be developed at Sberbank. Or purchased in the market. 3. Strategic commentary RBC-Daily speculated that in October, 2010 Sberbank is to acquire Troika Dialog in two stages by 2012. At the first stage, the bank might buy 32-33% of shares (half of the partners' stake) as early as next week for USD 450-500mn. At the second stage, in 2012, Sberbank will get control over the company, with Standard Bank retaining its stake (36%). According to RBC-Daily, Troika is valued at 1.5-1.6x book. There has been no official confirmation of the report. Meanwhile, according to RBC Daily, Onexim and Renaissance Investment Bank approached Sberbank with an offer of 50 percent minus one share in Renaissance. Yet, as a source in Sberbank indicated, “This option is now off the table.” Sberbank officially denied the reports. 3.1. Possible advantages As mentioned in this report, organic growth of IB business has some drawbacks for Sberbank with path dependances being the mojor issue. Therefore acquisition of an existing rival represents a clear opportunity. The advantages of this move for Sberbank are: 1. The new structure is independant from Sberbank system, therefore it doesn't have to adopt to existing rules and procedures. It is definately more client-oriented, it has the relevant IB core competences. 2. The acquizition target is a market leader in IB in Russia, so Sberbank has a chance to improve its market position. 3. Exploiting IB expertise and client base of the target company together with corporate banking experience and client base of Sberbank can create synergy effect. 4. Time required for such acquizition is less then for organic development, so the bank may exploit the market opportunities very soon. Acquisition target company (like Troika or Renaissance) also gets some merits from the allience: 1. Increased financial strength. 2. Huge potential client base. 3. Government support to the projects. 4. Possibility to monetise the existing market share. It is worth mentioning that independant investment banks in Russia since the start of financial crisis in 2008 are considered to be financially in difficult situation despite the market growth, therefore their price has droped significantly. There is a rather limited competition between Sberbank and target companies as, generally speaking, they operate in different sectors and compete in just few products which are not core for Sberbank currently. 3.2 Possible difficulties Despite the high strategic fit between the companies and possible synergies, the success of such allience is a big question. The major problem is a cultural fit between the companies. Sberbank is a very centralised, highly formal organisation, state-controlled. Its style is about structures and systems, all the operations are strictly controled and managed in hierarchy. The target companies are less formal and decentralised, very client-oriented. Their style is based on shared values, peronal creativity and imagination, expert power. The structure is less hierarchical. Strategic fit High Sberbank + (') Optimal situation Low No synergies Low High Cultural fit In this respect there exists a risk that after the takeover the target company may loose the most valuable asset – its team of professional investment bankers. Without the human resources those companies have much smaller potential. Examples of such failures exist in Russia. Deutsche Bank acquired UFG and Unicredit acquired Aton, both companies were top investment companies at the time of merger and both companies currently lost their market share. The main reason is that acquiring companies failed to keep the acquired teams of market professionals. 3.3 Alternative solution Sberbank's main competotor – VTB – chose another strategy. They abnnounced the start of investment banking arm in April, 2008 – just before the finanical crisis. Instead of buying an exisiting investment bank which were more expensive in 2008 then now, VTB started building IB business from scratch and invested heavily in its workforce (initial investments – around 500 mln USD). In 2010 VTB is a true leader in Rissian IB, a strong competitor to world names at least in the CIS and Eastern Europe. According to the CEO of VTB-Capital, the reasons for success are : • Choosing the right business model • Fast building a team of world-class professionals; • Using a platform of VTB – Russia's 2nd largest bank as a basis for development. This option of agressive development exists for Sberbank. It requires strong commitment of the top-management. Path dependance issue needs to be adressed too. But financially this way is less expensive hten buying an existing company and trying to maintain its team afterwards. Conclusion Sberbank is a leader in the Russian banking system. But its positions in the IB league tables are much weaker. The reason is that it has been developing IB strategy on resource-based view which is not 100 percent working in the high velocity environment. Since the development of IB is on the top of the agenda, Sberbank will have to choose between 2 agressive strategies – acqusition of an existing rival or agressive investment in organic growth (mainly in the working force). Money invested doesn't guarantee the result with 2 major problems to be adressed – path dependances and cultural fit between companies. Annex 1. Sberbank’s goals and aspirations by the year 2014: Source: Sberbank: 2009-2014 strategy highlights Annex 2. Annex 3. League table for the Russian domestic bond arrangers. # Investment bank Volume, mln. RUR Number of issuers Issues placed 1 VTB Capital 124,833 16 31 2 Troika Dialog Investment Company 85,583 17 26 3 MosFinAgency 61,997 1 5 4 Raiffeisen Bank 47,816 11 13 5 TKB Capital 37,870 15 21 6 Gazprombank 37,300 8 10 7 ROSBANK 24,838 8 12 8 Citibank 23,547 4 7 9 Renaissance Capital 20,982 4 4 10 FK Uralsib 19,700 6 8 11 Bank Zenit 18,500 3 5 12 Sberbank 15,850 8 12 Source: Cbonds agency, 01.01.2010-30.09.2010 Annex 4. Power of suppliers «Sell side» clients have a significant power in any IB transaction and it takes quite a serious effort to get them involved. However as soon as the mandate is signed (ususally its exclusive for 1 to just few institutions) the clients ability to influence the terms of the transaction is limited. Power of buyers «Buy side» clients of investment banks are very price sensitive as in the liquid financial markets its very easy to switch between the counterparts. Therefore investment banks are looking to do more non-standard transactions (size, risk profile, leverage etc) where the buyers have less power. Substitutes The main substitute of IB is traditional banking. The client may choose to take a loan instead of issuing a bond etc. However commercial banks have stronger regulation and they are not always able to meet the clients demands. Potential for new entry New entry potential is limited as developing a new IB name is quite costly. However in certain «niche» markets new entry is much easier. Competition IB market in Russia and in the world is quite competitive. The main groups of players in Russia are: • Large state-controlled banking institutions which are already operating successfull IB business blocks (VTB) or are in the active phase of developing IB business (Sberbank, Gazprombank) • Local branches of international investment banks • Large private commercial banks (Alfa-Bank, Zenit Bank, Uralsib) • Local specialized investment banks (Troika Dialogue, Reneissance Capital) References 1. CBONDS Investment Banks league tables: 01.01.2010 – 30.06.2010 [WWW] available from: http://www.cbonds.ru/ [Accessed on 01 November 2010] 2. Central Bank of Russia (2010) Review of the Banking Sector of the Russian Federation N96 October 2010 [WWW] available from: http://www.cbr.ru/ [Accessed on 25 October 2010] 3. Fleuriet M. (2008) Investment banking explained. The McGraw-Hill Companies. 4. Jarzabkowski, P. & Wilson, D. (2006). ‘Actionable Strategy Knowledge: A Practice Perspective’, European Management Journal, 24(5): 348-367 5. RBC Daily “Sberbank will take over Troyka”, 01.10.2010 6. Sberbank: 2009-2014 strategy highlights, Analyst/investor presentation, December 2008 7. ‘Sberbank: investor presentation. September 2010.’ [WWW] available from: http://www.sberbank.ru/ [Accessed on 15 November 2010] 8. Teece, D., Pisano, G., and Shuen, A. (1997) ‘Dynamic Capabilities and Strategic Management’, Strategic Management Journal 9. ‘VTB Capital: an investment banking breakthrough’ [WWW] available from: http://www.vtb.ru/ [Accessed on 20 November 2010]