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Strategy for Competing in Russia’s Banking Market

Strategy for Competing in Russia’s Banking Market. Oleg Tumanov, Deputy CEO Alfa Bank, Moscow. London, December 2003. Contents. Growth More experienced clients Healthy demand for traditional commercial products. Beginning Formal regulation Inexperienced clients. Maturity

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Strategy for Competing in Russia’s Banking Market

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  1. Strategy for Competing in Russia’s Banking Market Oleg Tumanov, Deputy CEO Alfa Bank, Moscow London, December 2003

  2. Contents

  3. Growth • More experienced clients • Healthy demand for traditional commercial products Beginning • Formal regulation • Inexperiencedclients Maturity • Experienced clients • Demand for investment bank products Spain 5-8 years Greece Czech Hungary Croatia Poland Russia Bulgaria Albania Ukraine Romania Russian banking sector: general overview Stages of bankingbusiness development GDP per capita Source: McKinsey Analysis Corporate Loans/GDP

  4. Asset/Capital Ratio 30 25 Russia 20 Hungary раз 28 15 Czech 21,7 10 16 Av. Europe 14 11 7,7 5 Switzerland 0 USA 8 Russian banking sector: general overview Comparison of Russian and international banks Return on Assets Return on Capital 4 30 25 3 20 % 3,8 30 2 % 15 21 10 14,7 13,7 1 12,55 1,4 1,13 5 8 0,8 0,62 0,27 0 0 Russia Av. Europe Switzerland Russia Av. Europe Switzerland Czech Hungary USA Czech Hungary USA • Return on assets and capital is still higher in Russia • Asset/capital ratio in Russia is smaller Source: PWC Selective research

  5. Russian banking sector: general overview Situation Complicates on the Financial Markets

  6. Russian banking sector: general overview Competition is increasing • M&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 penetration • Raiffeisen to set regional network in‘04 • Citibank plans 20-30 branches in ‘04 • Soc.Gen.plans 26 branches in‘05 Development 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 Sources: Alfa Bank statistics, CBR

  7. Banks with Western participation : Corporate Deposits Market Share, % 8 7 6 5 4 Banks with Western participation: Retail Deposits Market Share, % 3 2 1 0 1997 1998 1999 2000 2001 2002 Growth Rates of Loans to Russian Borrowers 2.5 % Russian banks 2.0 90 Banks with western capital 70 1.5 50 1.0 30 0.5 10 2000 2001 2002 -10 0.0 1997 1998 1999 2000 2001 2002 Russian banking sector: general overview Western Banks Expand to the Russian Market • Banks with Western participation increase market share Source: «Banking on Russia» conference, London, 19-21.05.03

  8. Russian banking sector: general overview Loan spread is still high, but margins are declining Net banking revenue by product, % Loan spread, % Spread 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 25% Rates on $-denominated loans to corporate clients 20% 15% 10% Rates on $-denominated corporate deposits 5% 0% 10.01.03 10.01.02 10.01.01 10.01.99 10.01.00 Sources: Alfa Bank statistics, CBR, McKinsey

  9. Lowering Margins RUR loans – RUR deposits USD loans – USD deposits 16 14 12 • Cost of beingin business 10 8 1Q ‘01 2Q ‘01 3Q ‘01 4Q ‘01 1Q ‘02 2Q ‘02 3Q ‘02 4Q ‘02 6 percent points Source: «Expert» magazine Source: Alfa – Bank estimation Russian banking sector: general overview Increasing Requirements for Banking Business Effectiveness

  10. Russian banking sector: general overview Russian Financial Market Investment Corporate Insurance Retail Market Growth+ ++ + ++ Competition highaverageveryvery (growing) highhigh Margin/Profitability highaveragehighlow (falling)(falling) Volatility/Riskhighlowvery high average Source: Alfa Bank

  11. Russian banking sector: general overview Which business to develop? Invest High Retail AssetManagement Corporate Insurance Growth potential Investment Support Low LowCurrent statusHigh Source: Alfa Bank

  12. Corporate segment Option 1: Russia has 7,800 SMEs • 7,800 companies in Russia have revenues $5-100 mln a year • Half of these companies are involved in trade and services Only 470 companies with annual revenues > $100 mln Company distribution by sector Sources: McKinsey, BCG presentation

  13. Corporate segment Option 1: Why are banks not in a rush? What constrains your activity?* • High risk in the real sector constrains lending to SMEs • Low transparency is a key obstacle for loans to SMEs What hinders lending to SMEs?* 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

  14. Retail segment Option 2: Targeting the retail segment Retail loans per capita, $ • 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 Retail loans and deposits by country Share of cars sold via loans Sources: Alfa Bank estimates, BIS, CBR

  15. Rates on retail lending are attractive Retail segment Option 2: Targeting the retail segment “Has your family ever taken credit?” Retail lending attractive • Polls indicate 89% of Russia’s population has never taken out a loan • Retail loans are twice as expensive as corporate loans Sources: CBR, polls by IRG

  16. Investment banking 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 • Current markets to increase • Ruble corporate bonds –from $5blntо $10-12 bln. • Currency corporate bonds –from$0,8 blntо $2 bln • Credit notes –market size may increase to $0,5-$0,7 bln • New markets • Mortgage bonds – half of the $70 mlnDeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 bln • Securitization of retail lending portfolio – may amount to$1-2 blnover several years • Derivatives papers – forwards, options, futures – may increase by several times from $50 mln Source: Alfa Bank statistics

  17. Investment banking Option 3: M&A market of $5 bln in 1H03 Equity market at 67%, concentrated on oil • M&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 Net revenue contribution, Alfa Bank 2002 • 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 Sources: Alfa Bank statistics, RTS, Goskomstat, KMPG

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