Post on 21-Dec-2015
1
Strategy for Competing in Russia’s Banking Market
Oleg Tumanov,Deputy CEOAlfa Bank, Moscow
London, December 2003
2
Contents1 Russian banking sector: general overview
2 Corporate segment
3 Retail segment
4 Investment banking
3Corporate Loans/GDP
Stages of bStages of bankankinging bbusinessusiness d developmentevelopment
Source: McKinsey Analysis
GD
P p
er
cap
ita
Beginning Formal regulation Inexperienced clients
Growth More experienced clients Healthy demand for
traditional commercial products
Maturity Experienced clients Demand for investment
bank products
Bulgaria
CroatiaPoland
Ukraine
AlbaniaRussia
Czech Hungary
Romania
Greece
5-8 years
Spain
Russian banking sector: general overview
4
Comparison of Russian and international banks
Russian banking sector: general overview
Source: PWC Selective research
0
5
10
15
20
25
30
%
Return on Capital
0
1
2
3
4
Return on Assets
RussiaHungary Czech
Av. Europe SwitzerlandUSA
RussiaHungary Czech
Av. Europe SwitzerlandUSA
% 3,8
1,40,8 0,62
0,27
1,13
30
2114,7 13,7 12,55
8
0
5
10
15
20
25
30
раз
Asset/Capital Ratio
RussiaHungaryCzechAv. EuropeSwitzerlandUSA7,7
1416
21,7
8
28
11
Return on assets and capital is still higher in Russia
Asset/capital ratio in Russia is smaller
5
Situation Complicates on the Financial Markets
Competition is increasing in all segments
Competitors’ effectiveness is growing
Margins and profitability are decreasing
Customers are becoming more demanding
Risks and volatility are on the increase
Better access to funding
Russian banking sector: general overview
6
Russian banking sector: general overview
Sources: Alfa Bank statistics, CBR
Competition is increasing
Development of branch network is a priorityDevelopment of branch network is a priority
Societe Generale, Citibank, and Raiffeisen are investing in networks
Intesa announced opening of subsidary
In 2003 M&A activity involved the largest private Russian banks
•M&A in banking sectorM&A in banking sector•MDM banking group – $3.6 bln assets
•NIKoil-UralSib group – $3.5 bln assets
•Rosbank-OVK – $3.2 bln assets
•Trust-Menatep – $2.5 bln bank assets
•MNR-Eurofinance – $0.9 bln assets
•Zenit group – $1.8 bln (expected)
•M&A in banking sectorM&A in banking sector•MDM banking group – $3.6 bln assets
•NIKoil-UralSib group – $3.5 bln assets
•Rosbank-OVK – $3.2 bln assets
•Trust-Menatep – $2.5 bln bank assets
•MNR-Eurofinance – $0.9 bln assets
•Zenit group – $1.8 bln (expected)
•Foreign bank penetrationForeign bank penetration•Raiffeisen to set regional network in ‘04
•Citibank plans 20-30 branches in ‘04
•Soc.Gen. plans 26 branches in ‘05
•Foreign bank penetrationForeign bank penetration•Raiffeisen to set regional network in ‘04
•Citibank plans 20-30 branches in ‘04
•Soc.Gen. plans 26 branches in ‘05
0
100
200
300
400
500
Rosbank VTB Bank ofM oscow
Citibank Raiffeisen
Nb. of branches
Branches, Jan 2003 Branches, Jan 2004
7
0
1
2
3
4
5
6
7
8
1997 1998 1999 2000 2001 2002
Banks with Western participation : Corporate Deposits Market Share, %
0.0
0.5
1.0
1.5
2.0
2.5
1997 1998 1999 2000 2001 2002
Banks with Western participation: Retail Deposits Market Share, %
Growth Rates of Loans to Russian Borrowers
-10
10
30
50
70
90
2000 2001 2002
Russian banksBanks withwestern capital
%
Source: «Banking on Russia» conference, London, 19-21.05.03
Western Banks Expand to the Russian Market
Russian banking sector: general overview
Banks with Western participation increase market share
Banks with Western participation increase market share
8
Russian banking sector: general overview
Sources: Alfa Bank statistics, CBR, McKinsey
Loan spread is still high, but margins are declining
Spread on corporate loans and depositsSpread on corporate loans and deposits 7.5% loan spread in
Russia is still high
Under pressure from an international decline in rates, banking loan rates are down
Lower margins pressured banks to develop client base
0 20 40 60 80 100
W estern Europe
Poland
Croatia
Bulgaria
Russia
Loans Other
Net banking revenue by product, % Loan spread, %
1.3
2.7
2.8
8.4
7.5
0%
5%
10%
15%
20%
25%
10.01.99 10.01.00 10.01.01 10.01.02 10.01.03
Rates on $-denominated loans to corporate clients
Rates on $-denominated corporate deposits
9
Increasing Requirements for Banking Business Effectiveness
Cost of being in business
Lowering Margins
Source: «Expert» magazine
Source: Alfa – Bank estimation
Growth if USD prices on the main business-supporting factors
100
110
120
130
140
2001 2002 2003
%
Staff costs Rent and Maintenance
Energy PR and Advertis ing
Growth if USD prices on the main business-supporting factors
100
110
120
130
140
2001 2002 2003
%
Staff costs Rent and Maintenance
Energy PR and Advertis ing
2Q‘01
1Q‘01
3Q‘01
4Q‘01
1Q‘02
2Q‘02
3Q‘02
4Q‘02
RUR loans – RUR deposits
USD loans – USD deposits16
14
12
10
8
6
percent points
Russian banking sector: general overview
10
Russian Financial Market
Market GrowthMarket Growth + ++ + ++
CompetitionCompetition high average very very(growing) high high
MarginMargin//Profitability Profitability high average high low (falling) (falling)
VolatilityVolatility//RiskRisk high low very high average
Source: Alfa Bank
CorporateCorporate RetailRetail InvestmentInvestment InsuranceInsurance
Russian banking sector: general overview
11
Which business to develop?Which business to develop?
Source: Alfa Bank
Russian banking sector: general overview
InvestInvest
Asset Management
Retail
Investment
Insurance Corporate
SupportSupport
LowLow Current statusCurrent status HighHigh
LowLow
Growth Growth potentialpotential
HighHigh
12
Option 1: Russia has 7,800 SMEs
Sources: McKinsey, BCG presentation
Company distribution by sector
Corporate segment
Only 470 companies with annual revenues > $100 mln
Natural resourcesHeavy industry
Trade and services
Transport and communications
Others
7,800 companies in Russia have revenues $5-100 mln a year
Half of these companies are involved in trade and services
7,800 companies in Russia have revenues $5-100 mln a year
Half of these companies are involved in trade and services
400,000
16,000
250
28,000
700
1
7,800
470
8
5 m ajor EUm arkets
CEE Russ ia
MNC's (>5,000)
Large (100-5,000)
Mid-s ized (5-100)
13
Option 1: Why are banks not in a rush?
Source: Development Center (poll of top-20 banks)Note:* the figures used in the charts represent the poll participants’ assessments of the relative importance of available answers
What hinders lending to SMEs?*
Corporate segment
4
3.29
2.86
2.43
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Lack of attractiveborrowers
High level of risks Lack of financialresources
Lack of instrumentsto invest
4.5
3.67
2.52.33
1.67
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Non-transparentaccounting
Inability to provideloan collateral
High cost of creditanalysis
Inability to controllending risks
Lack of credithistory
What constrains your activity?*
High risk in the real sector constrains lending to SMEs
Low transparency is a key obstacle for loans to SMEs
High risk in the real sector constrains lending to SMEs
Low transparency is a key obstacle for loans to SMEs
14
Retail segment
Sources: Alfa Bank estimates, BIS, CBR
Option 2: Targeting the retail segment
Retail loans and deposits by country
Comparison with Poland on loans per capita sets value of retail market at $40 bln vs. current $4 bln
Comparison with Poland on loans/GDP sets this value at $20 bln
Loan growth to come from: Mortgages – just $200 mln now Auto loans – could potentially total $7 bln vs. $0.7 bln today
0%
10%
20%
30%
40%
50%
CzechRepublic
Croatia Hungary Poland Romania Russia
Retail deposits, % GDP Retail loans, % GDP
3,114
477279 253
12240
1,000
2,000
3,000
4,000
Germ any CzechRepublic
Hungary Poland Russ ia Rom ania
Retail loans per capita, $
Share of cars sold via loans70%
8%
0%
20%
40%
60%
80%
Germany Russia
15
Retail segment
Sources: CBR, polls by IRG
Option 2: Targeting the retail segment
“Has your family ever taken credit?”
Polls indicate 89% of Russia’s population has never taken out a loan
Retail loans are twice as expensive as corporate loans
Retail lending attractive
12%
4% 5%
79%
9%
2% 0%
89%
0%
20%
40%
60%
80%
100%
Yes, once Yes, twice Yes, threetimes and
more
Never
Moscow Total Russian
17.0%
13.6%
17.8%19.0%
10.3% 10.2%9.0%
10.5%
0%
4%
8%
12%
16%
20%
3 months-6months 6 months -1 year 1-3 years Above 3 years
Private individuals Enterprises
Rates on retail lending are attractive
16
Investment banking
Source: Alfa Bank statistics
Option 3: New market instruments for $12 bln
Underwriting is shared between Alfa Bank, Trust, MDM, Rosbank and Raiffeisen
Current markets may expand by $9 bln
New instruments will demand up to $3 bln
•New marketsNew marketsMortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 blnSecuritization of retail lending portfolio – may amount to $1-2 bln over several yearsDerivatives papers – forwards, options, futures – may increase by several times from $50 mln
•New marketsNew marketsMortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 blnSecuritization of retail lending portfolio – may amount to $1-2 bln over several yearsDerivatives papers – forwards, options, futures – may increase by several times from $50 mln
•Current markets to increaseCurrent markets to increaseRuble corporate bonds –from $5 bln tо $10-12 bln.Currency corporate bonds –from $0,8 bln tо $2 blnCredit notes –market size may increase to $0,5-$0,7 bln
•Current markets to increaseCurrent markets to increaseRuble corporate bonds –from $5 bln tо $10-12 bln.Currency corporate bonds –from $0,8 bln tо $2 blnCredit notes –market size may increase to $0,5-$0,7 bln
17
Investment banking
Sources: Alfa Bank statistics, RTS, Goskomstat, KMPG
Option 3: M&A market of $5 bln in 1H03
Only 5 IPOs took place from 2000 and 25 are coming
M&A market is driven by asset consolidation
Commercial banks account for 63% of Alfa Bank revenues
•M&A in 2002-2003M&A in 2002-2003
M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002
212 deals are reported in 1H03 versus 291 in 2002
•M&A in 2002-2003M&A in 2002-2003
M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002
212 deals are reported in 1H03 versus 291 in 2002
Corporate Finance
6%FX
10%
Securities21%
Commercial Bank63%
Net revenue contribution, Alfa Bank 2002
Equity market at 67%, concentrated on oil
12%
40%
17%
17%
67%
8%
25%
0%
20%
40%
60%
80%
100%
M CAP GDP
Manufacturing Services Other Industries Oil & Gas