THE RUSSIAN BANKING SYSTEM

THE RUSSIAN BANKING SYSTEM

15th BACEE Country and Bank Conference

14-16 November 2006, Budapest

http://www.cia.gov/cia/publications/factbook/flags/rs-flag.html

Russian banks’ major indicators (end-period)

0

2000

4000

6000

8000

10000

12000

14000

98 99 00 01 02 03 04 05 H1'06

Total Assets

Equity

Loans



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5

10

15

20

25

30

35

40

45

50

98 99 00 01 02 03 04 05

Total Assets

Equity

Loans

Penetration (in % of GDP), end of period



0

200

400

600

800

1000

1200

1400

1600

Existing with licence Liquidated Subject to liquidation

Existing banks vs. Liquidated banks (31.08.2006)



Name Registration's place Equity T.A.

Licence as of 1/11 2006

Deposit insurance

1 Kontinental Republic of Dagestan 1611 2339 Y N

2 Magaramkent Republic of Dagestan 2738 3513 Y Y

3 Surskkombank Sursk, Ulyanovsk reg. 1884 4724 Y Y

4 Karabudakhkentskiy (Kaspiy) Republic of Dagestan 2808 5283 Y N

5 Koshehablbank Republic of Agideya 1080 5723 Y Y

6 Lend-Bank St. Petersburg -47 5984 N N

7 Derbentinvestbank Republic of Dagestan 3925 6433 N N

8 Geobank Moscow 3414 6796 Y Y

9 Archekas Kemerovo reg. 909 8856 N N

10 Informbiznesbank Republic of Dagestan 10812 11022 Y N

The smallest Russian banks as of 31.12.2005

3 of these banks were closed during the last 11 months, 7 survived, 4 out of 10 accepted to the deposit insurance system



Russian banks: different licence types (end of period)

0

200

400

600

800

1000

1200

1400

Number of banks withv alid licence

Banks with licence toattract personal deposits

Banks with FX licence

Banks with generallicence

Even in the ”elite group” there are more than 300 banks

> 850 banks join the deposit insurance system in the first round



Total assets

45,1%

16,5%

11,7%

15,7%

10,7% 0,3%

Top-5 Banks, incl. Sberbank

Banks 6-20

Banks 21-50

Banks 51-200

Banks 201-1000

Banks 1001-

Market share of different groups of banks/1

44.5%

19.2%

11.6%

15.3%

9.2%0.2%

01.01.05



31.07.06

Capital

0,8%18,2%

20,1%

12,6%15,9%

32,4%


01.01.05

35.6%

19.0%11.5%

18.5%

14.8%0.6%

Top5 Banks

Banks 6-20

Banks 21-50

Banks 51-200

Banks 201-1000

Total 1001-

31.07.06



5.6%10.2%

17.9%

17.3%16.2%

14.7%

18.0%

Group1: less than 3 M RUR

Group2: 3-10 M RUR

Group3: 10-30 M RUR

Group4: 30-60 M RUR

Group5: 60-150 M RUR

Group6: 150-300 M RUR

Group7: ov er 300 M RUR

4.5%8.5%

16.5%

16.9%18.1%

16.3%

19.4%

3.7%

7.6%

15.1%

16.2%

18.7%

17.3%

21.4%

31.12.2004 31.12.2005

31.08.2006Total:1,229 Total:1,253

Total:1,211

Market share of different groups in total number of banks/1(classified by authorised capital)

At the end of August 2006 about one-fifth of Russian banks had registered authorised capital over RUR 300 M



Loans

48,9%

16,7%

10,3%

14,6%

9,3% 0,2% Top-5 Banks, incl.Sberbank

Banks 6-20

Banks 21-50

Banks 51-200

Banks 201-1000

Banks 1001-


45.8%

20.0%

11.0%

14.8%

8.3% 0.1%

01.01.05

31.07.06



Personal deposits

59,6%

9,6%

6,9%

9,9%

7,7%

0,2%

6,1%

Sberbank

Banks 2-5

Banks 6-20

Banks 21-50

Banks 51-200

Banks 201-1000

Banks 1001-


62.0%11.2%

8.0%

11.0%

7.8%0.0%

0.0%

01.01.05

31.07.2006



Sberbank is a banking system itself. The rest is very fragmented,

ripe for consolidation.

Options:• Closure of a number of very small banks• M&A in all groups through creation of banking groups,

amalgamation and takeovers.

Limitations: fragmented ownership structure, vested interest

Drivers of consolidation: decrease of profitability from core

operations, high supervisory costs (incl. IFRS), high IT costs. M&A:

Nikoil/Uralsib, Rosbank OVK, VTB/Guta, etc.



Overweight of Sberbank: share in private deposits

Sberbank’s share slightly decreases over time, but jumps back after each crisis

1 January 2004

37,3%

62,7%

Sberbank

Other >1300banks

1 January 2005

59.6%

40.4%

54.0%

46.0%

Sberbank

Other >1200

1 January 2006



0

500

1000

1500

2000

2500

3000

3500

03/0

406

/04

09/0

412

/04

09/0

512

/05

03/0

606

/06

09/0

6

Total

Sberbank

Russian banks: Branches/1

Russia overbanked, underbranchedMost of Sberbank’s branches closed down were replaced by other banks’ new branches



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2000

4000

6000

8000

10000

12000

14000

16000

18000

05/06 07/06 09/06

Additional off ices: All otherbanks

Additional off ices: Sberbank

Cash points: All otherbanksCash points: Sberbank

Russian banks: additional offices and cash points



Average number of branches per bank groups by size (w/o Sberbank)

41

28

13.5

40.8 0.3

05

1015202530354045

No 2-5 No 6-20 No 21-50 No 51-200

No 201-1000

No 1001-

Russian banks: Branches/2

(as of 31 July 2006)

Most Russian banks have no branches at all (except for HQ)

Russian banks - branches

28.0%

5.1%

13.1%12.6%

19.2%

20.0%2.0% Sberbank

Other Top-5 banks

No 6-20

No 21-50

No 51-200

No 201-1000

No 1001-



Banking reform in Russia: key initiatives

• Individual deposit insurance system (in place from mid-2005)• IFRS • Adjustments in, and reenforcement of key regulatory measures – i.e., capital,

liquidity, loan loss provisioning • Credit bureaus • Legal basis for mortgage lending and mortgage refinancing



Deposit Insurance System

Highlights:• 100% coverage of deposits up to RUR 100,000 (approximately $3,000), 90% another

RUR 200,000 • Government guarantee to Sberbank depositors abolished in Oct. 2004• Quarterly insurance premiums of 0.15% of retail deposits• At the end of 2005, 930 banks are members

Effects on the banking system:• Increased stability of retail deposit base• A more level playing field between Sberbank and other banks• Funding costs unlikely to rise

•Major concerns• Quality of bank supervision still weak• Large number of marginal banks remain



2004 market turbulence: major reasons

• Low level of confidence in Russian banks by households and corporates • Shallow and fragmented interbank market• Mismatch between shorter-term liabilities and longer-term assets• Drop in securities prices since mid-April• Tougher supervision – greater commitment of regulators to end improper banking

practices• Expectations of a drastic clean-up of the banking industry on the threshold of the

deposit protection system



Problems with large number of small banks

• Supervisory risk (small banks may be supervised less efficiently than ”systemically important banks”)

• Fragmentation of markets, distorted movement of capital/funds within the region and throughout with efficiency, product range

• Expensive IT/risk management solutions not accessible to smaller banks• Compliance risk

Why smaller banks are needed in Russia?

• Geographical and political reasons (subjects of Federation, distances, vast area to be covered)

• Better knowledge of local conditions/clients• Funds more unlikely to leave the regions



Foreign investments low, but growing

• 42 bank controlled by foreigners (stake over 50%), 48 fully foreign-owned• Growth of direct investments focusing on retail banking, mortgages

• GE Consumer Finance buys consumer bank, Delta Bank• BNP’s attempt to acquire a stake in consumer-oriented Russian Standard Bank

fails• Foreign investors’ impact on industry structure still limited



Russian banks: Foreign ownership (end of period), number of banks

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20

40

60

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120

140

160

Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Jun 06

100%

50-99,9%

20-50%

1-20%

up to 1%

In most banks with foreign participation, non-residents have no controlling interest. ”Foreign” may mean repatriated Russian capital

Foreign banks not authorised to open branches in Russia



Top-12 Russian banks by Net Assets (unaudited RAS data, June 2006)

Source: BanksRate.Ru

0 500 1000 1500 2000 2500 3000

Promstroybank

Russian Standard

Raiffeisenbank

UralSib

Bank of Moscow

VTB



Top-13-20 Russian banks by Net Assets (unaudited RAS data, June 2006)


0 20 40 60 80 100 120 140

Bank Zenit

VTB-24

Petrocommerce

Mezhprombank

Nomos

Citibank

Promsvyaz

Rosselkhozbank



Loans by currency and borrowers

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1000

2000

3000

4000

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6000

7000

2002 2003 2004 2005 2006 July

Corporate loans in FX

Private loans in FX

Corporate loans in RUR

Private loans in RUR

Loan expansion in all market segments

Hottest segment: private loans (+42.7% in FX, +35.1% in RUR)



Top-10 Russian banks by corporate loans (unaudited RAS data, June 2006)


0 200 400 600 800 1000 1200 1400 1600

MDM-Bank

Promsvyazbank

Raiffeisenbank

IMB

Uralsib

Bank of Moscow

Alfa-Bank

Gazprombank

VTB

Sberbank



Top-11-20 Russian banks by corporate loans (unaudited RAS data, June 2006)


0 10 20 30 40 50 60 70 80

Zenit

Globex

BIN

AK Bars

Petrocommerce

Nomos

Rosbank

Promstroybank SPB

Rosselkhozbank

Mezhprombank



Deposits (end of year, bn RUR)

0500

100015002000250030003500400045005000

2002 2003 12/2004 12/2005 07/2006

Corporate in FX

Private in FX

Corporate in RUR

Private in RUR

In 2005, client deposits grow by 36.2% compared to 38.4% in 2004. 36.7% in 2003.

Both corporate and private deposits decline in FX. Corporate deposits in RUR increase by 56,6%, private deposits by 23.3%. Individual deposits account for 75.8% of total.



Deposits by maturity

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500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2002 2003 12/2004 12/2005 07/2006

Corporate deposits

ov er 1 year

Priv ate deposits ov er

1 year

Corporate deposits up

to 1 year

Priv ate deposits up to

1 year

Demand deposits of

corporates

Priv ate demand

deposits

Improving structure: more than half of the deposits are over 1 year, but only few banks have access to this source of funding



Refinancing rate (%)

0

40

80

120

160

11.1

1.199

7-1.

02.1

998

2.02

.199

8-16

.02.

1998

17.0

2.199

8-1.

03.1

998

2.03

.199

8-15

.03.

1998

16.0

3.199

8-18

.05.

1998

19.0

5.199

8-26

.05.

1998

27.0

5.199

8-4.

06.1

998

5.06

.199

8-28

.06.

1998

29.0

6.199

8-23

.07.

1998

24.0

7.199

8-9.

06.1

999

10.0

6.199

9-23

.01.

2000

24.0

1.200

0-6.

03.2

000

7.03

.200

0-20

.03.

2000

21.0

3.200

0-9.

07.2

000

10.0

7.200

0-3.

11.2

000

4.11

.200

0-8.

04.2

002

9.04

.200

2-6.

08.2

002

7.08

.200

2-16

.02.

2003

17.0

2.200

3-20

.06.

2003

21.0

6.200

3-14

.01.

2004

15.0

1.200

4-14

.06.

2004

15.0

6.200

4-25

.12.

2005

26.1

2.200

5-25

.06.

2006

26.0

6.200

6-22

.10.

2006

23.1

0.200

6-

Lowest refinancing rate in the history of CBR



Net profit for the year (bn RUR)

0

40

80

120

160

200

240

280

2000 2001 2002 2003 2004 2005 2006 H1Share of loss-making banks (%)

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006H1

Profitability



Alternative distribution channels:Bank cards - Number of cards issued ('000)

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1020

3040

5060

70

2001 2002 2003 2004 2005Q1

2005Q2

2005Q3

2005Q4

2006Q1

2006Q2



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3500

4000

2003 2004 2005 2006(projected)

Payment for goods andservices

Cash withdrawals

Total value of operations with individuals’ bank cards (bn RUR)



Russian banks’ growth perspectives 2004-2009 (MoF and ARB forecasts)

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10

20

30

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60

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80

90

Equity/GDP Loans/GDP T.A./GDP

2004

2009 (Min Fin f.)

2009 (ARB f.)



Trend in improving creditworthiness continues, but challenges remain

• Positive macroeconomic environment likely to continue• High growth potential from currently low level of intermediation• Growth lower in 2004 than in 2003, but still high• Consolidation likely to accelerate

Market pressures and opportunities

• Retail segment• Mortgages• Leasing• Investment banking



2005-2006 ”hot market” tendencies in retail

• 2005: consumer finance, car loans

• 2006 H1: mortgages, credit card-related loans– Sberbank’s share down from 80% to 60% in mortgages (with 3.7 bn out

of 6.2 bn USD)– Total mortgage market increases by 220% to USD 6.2 bn– Growth rate of car loans down to 33%– Uncovered retail loans grow by 20%, express-loans by 11%– Nonperforming express loans’ share increases from 1.9% to 2.9%

(official CRB data). Rus Rating estimates NPL at 28%



THE RUSSIAN BANKING SYSTEM

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