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Financial understatement
Standard & Poor's assessed the transparency of Russian banks
The average transparency indicator of the Russian banking sector increased this year compared to last year by 4% and reached 52%. This is stated in the annual study of the Standard & Poor's corporate governance rating service. As before, the incentive to increase transparency is the need to raise capital on world markets. The absence of this motive immediately reduces the amount of information in the reports of credit institutions. Analysts do not consider low transparency a serious problem for the banking system, however, Western practice shows that the most successful market participants adhere to an open policy. Achieving a high level of transparency is a long process, determined not only by economic, but also by mental factors, experts say.“The overall level of transparency and openness of information in the Russian banking sector continues to improve, but it should be noted that individual banks are inconsistent in meeting disclosure standards,” said the report, released yesterday with the characteristic title “The Uneasy Move Forward.” S&P assessed the transparency and information disclosure practices of the 30 largest Russian banks using data from public sources.
“The most transparent banks have achieved some stable level of information disclosure that meets regulatory requirements and generally satisfies international investors,” the study authors note. The average disclosure rate was 52% versus 48% in 2006. The group of leaders still includes MDM Bank and Alfa Bank. Binbank dropped out of the top three, reducing its transparency indicator by 7% and giving way to VTB. The disclosure rate of these banks exceeded 65%.
In the shareholder-oriented information segment, the transparency index increased by 10% and reached 42%. “29 banks out of 30 improved their scores. More and more banks are striving to achieve a level of information transparency acceptable for an IPO, say S&P analysts. “At the same time, there are a number of opaque areas, which include, in particular, related party transactions and remuneration of senior management and members of boards of directors.” “We believe that improvements in information disclosure practices are due to the fact that an increasing number of banks are raising capital on international markets,” said Svetlana Borodina, director of corporate governance ratings at Standard & Poor's. -- Banks do not always manage to maintain the same level of disclosure from year to year. For example, when issuing Eurobonds, they publish mandatory prospectuses, which describe their business in detail, disclose information about beneficial owners, IFRS reporting, information on directors’ remuneration, but after the placement of bonds they cease to adhere to high standards of information disclosure.”
“For most banks that do not raise capital abroad, there are more costs and risks in disclosing information than benefits,” says Alexander Golovtsov, head of the analytical research directorate at Uralsib Management Company. -- Certain funds are spent on publishing information, and competitors can use this information. To exchange information with partners, banks maintain correspondent relationships, and it is not necessary to transmit this data to the entire market or disseminate it through the media.” Low transparency, Mr. Golovtsov believes, is not a problem at all for the Russian banking system.
His opinion is also supported by the head of the analytical department of the Bank of Moscow, Kirill Tremasov: “The liquidity crisis has revealed that Western banks also have problems with transparency. Politicians and business representatives have said that European banks should be more transparent, but I have not noticed that anyone has begun to listen to them. The degree of information disclosure is adjusted automatically. If banks felt that more transparency was needed to maintain stability, they would increase it.”
However, Standard & Poor's analyst Oleg Shvyrkov believes that the lack of transparency of the banking system limits confidence in it and the ability to attract capital. “The rapidly growing sector requires significant borrowing,” he emphasizes. -- Recently, a number of banks, including Zenit, KIT Finance and Ak Bars, have announced their intention to conduct an IPO. If a bank brings to the market not only bonds, but also shares, then the requirements for transparency increase significantly.”
Any disclosure of information incurs certain costs for banks, and, of course, other things being equal, it is more convenient not to disclose it, argues Mr. Shvyrkov. However, world practice shows that the strategy of high transparency is bearing fruit. According to last year's S&P study of the ten largest foreign banks, their degree of transparency is 70-90%, and the average is 79%. Thus, the average level of transparency of foreign banks is 27% higher than the similar Russian indicator.
According to Mr. Golovtsov, legislative incentives for information disclosure would be beneficial to investors, since it would be easier for them to navigate the market. But this would cause certain difficulties for the banks themselves. The banking sector actively works with private clients, the analyst continues, and a private depositor is also an investor in the bank. “Of course, most individuals both in Russia and in the West are not familiar with the financial statements of banks,” says Mr. Shvyrkov. - However, they should have this opportunity. Then any expert will be able to assess the condition of the credit institution and point out its pros and cons to its clients.”
“In general, the level of business transparency is determined by the culture of its conduct in each country, which can be expressed in business customs,” summarizes Nomos Bank analyst Alexander Mitus. -- Since the Russian economy and banking system are still too young, this culture can develop. More recently, “white” salaries and taxes have been introduced. Public disclosure of information on one's own initiative is apparently one of the next steps in the development of the system. Legislative requirements, healthy competition, and the formation of public opinion can serve as an incentive, but it is worth noting that this is a difficult and lengthy process.”