Banking on the state

Can there be such a thing as a dynamic public sector bank? It sounds like the ultimate oxymoron.

All too typically, state ownership of banks has been a recipe for cronyism and inefficiency. Politicians are wont to press bankers to lend to pet projects or pad their payrolls rather than focus on the bottom line.

This month we look at two banks out to prove that conventional wisdom wrong. In Russia the state is showing itself to be anything but a dead hand at Vneshtorgbank. As Contributor Craig Mellow relates in “Putin’s Banker” (page 42), the authorities have actively promoted the state-owned bank’s swift rise to prominence by facilitating its acquisition of Guta Bank during last year’s banking crisis. The deal vaulted Vneshtorgbank into the No. 2 position in Russian retail banking, behind that other state behemoth, Sberbank. Plans for privatizing the bank by selling a stake to Western investors have fallen into abeyance, however, in keeping with the Kremlin’s current penchant for exercising state control over the economy.

Vneshtorgbank’s ambitious chief executive, Andrei Kostin, wants to take advantage of the state support and grow the bank rapidly, making it Russia’s national champion. He is undercutting commercial rivals to gain a bigger share of the corporate lending market and expanding into consumer areas like credit cards and mortgages. Kostin’s drive may be just what’s needed to spur a shakeout within the country’s fragmented and inefficient banking system.

Germany’s WestLB, by contrast, can no longer rely on state assistance. As Contributor Alison Langley points out in “Going Local” (page 28), WestLB, like all of the country’s public sector Landesbanks, is struggling to redefine itself as it braces for the removal this summer of its state guarantee, which will drive up funding costs. That’s no bad thing -- after all, cheap funding allowed the bank to go on a global lending and principal financing binge that ended up generating billions of euros in losses in recent years. Now CEO Thomas Fischer hopes to find growth closer to home by providing lending and capital markets expertise to the dozens of local savings banks that control WestLB. The strategy may not sound sexy, but it has put the bank back in the black for the first time in three years. If Fischer can maintain the momentum, he may be in position to consolidate Germany’s Landesbanks into a powerful commercial force.