Russia's MDM bank plans to boost its loan portfolio by 20-25 percent this year and may sell a minority stake to financial investors as growth in bad loans slows down, the bank's chairman said.

Moscow-based MDM completed a merger on Monday with Ursa bank, the biggest private bank in Siberia, amid a consolidation trend sparked in the sector by the global financial crisis.

Investors and analysts say bigger banks have a better chance of sailing smoothly through the turbulence, and after the merger, MDM's capital of more than 70 billion roubles ($2.22 billion) will put it in a strong position to outlast its peers.

The right way now is to look at financial investors and only then to increase the free float. We do not rule out selling a minority stake to funds, depending on our need for fresh capital, MDM chairman Oleg Vyugin told Reuters in an interview.

But as of today this need is not so big, he said, adding that there are no talks going on with potential investors.

MDM, with a capital adequacy ratio of 17 percent, will unlikely seek state funds, which are seen by many Russian banks as a last resort for getting through the crisis.

The economy is struggling with its first contraction in a decade and rising provisions against bad loans are eating into bank profits and capital.

We can create additional provisions for more than 90 billion roubles. So it is unlikely we will need fresh capital urgently. We are therefore not looking at the possibility of state support... This source is the last on the agenda, Vyugin said.

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Russia's government has allocated 460 billion roubles to inject into banks' capital in 2009-2010 to help them withstand rising bad loans and to kick start lending to the real economy.

MDM sees now as the right time to boost lending as the growth of provisions within the bank slow down and the client base has been purged of unreliable clients.

We should move to the tactics of growth. Now we know better who is the right client to deal with, so we plan for our credit portfolio to increase by 20-25 percent by the end of the year from current levels, Vyugin said.

Earlier this year its loan book contracted as the bank shifted to a more conservative lending policy.

Loans to corporates now make up 60 percent of MDM's total loan portfolio, but that is likely to change as the bank seeks to expand its position on the retail lending market.

The retail banking business is our priority, so we plan retail loans to increase to 60 percent of our loan portfolio, Vyugin said.

MDM sees strength in the retail banking business as the key factor to surviving the crisis, which has effectively closed global credit markets to the Russian banks.

Now everybody understands that retail deposits are the most solid source of funding, so the bank that is proactive in retail is able to find funding there, Vyugin said.

(Reporting by Dmitry Sergeyev; Editing by David Cowell)

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