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The Russian Banking Sector: Assessing the Growth
Michel Perhirin, CEO, MDM Bank
Regional Cooperation Forum
GENEVA, 9-10 JULY 2006
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Macroeconomic Overview
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Overview: Russian Economy
Stable economy The latest forecasts show Russian GDP
to surpass 1,000 bln USD by 2007
The inflation forecast is 8.5% for 2006
Foreign currency reserves have reached $247.2 bln by end of June 2006 and are expected to increase further
There has been an increase in the payment surplus for current operations
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Overview: Russia is Closing to Top 10 by GDPRussia’s rapid and sustainable growth has brought the country onto the list of leading World economies
The Russian Federation
has the 14th highest GDP
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A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1
RussiaChina Mexico India Brazil Ukraine
Poland Kazakhstan
Moody's
A A- BBB+ BBB BBB- BB+ BB BB- B+
RussiaChina Poland Kazakhstan India Brazil Ukraine
Mexico
S&P
A A- BBB+ BBB BBB- BB+ BB BB- B+
China Poland Russia India Brazil
Kazakhstan Ukraine
Mexico
Fitch
International agencies recognize the success of the Russian economy; the country has solid Sovereign ratings.
Overview: Sovereign Ratings
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Overview: FDI InflowForeign Direct Investment inflow is constantly increasing due to improved economic and political conditions
FDI & Portfolio investment share are gradually increasing
Location sites considered for new investment or expansion (% of citations for each country)
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Banking Sector Development
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Russian Banking System: Infrastructure Credit system participant quality is gradually improving – the number of credit institutions is decreasing mostly due to “dead” bank exclusion from the market
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Russian Banking System: Concentration & Growth
Results
The Russian banking system grew strongly in 2005:
– Assets increased by 36.6% (2004: 27.4%)
– Capital increased by 31.2% (2004: 16.2%)
– Profit increased by 47.3% (2004: 38.6%)
2005: ROE 24.2 % (2004: 20.3 %)
2005: return on lending assets 3.2 % (2004: 2.9 %)
The top 30 largest banks experienced the highest growth level (2005: Assets increased by 48%)
Dynamics of the Russian banking system
June 2006 % of total% GDP US$ bln % of total% GDP US$ bln % of total % GDP US$ bln
Top 20 Banks 66% 20% 162 66% 15% 116 63% 31% 248 20-200 Banks 26% 8% 63 24% 5% 42 28% 14% 109 Other Banks 9% 3% 22 11% 2% 19 10% 5% 39
Total Loans Total Customer Accounts Total Assets
Source: Central Bank
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Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
Russia Alfa bank Ak Bars Bank MBRD Rosbank Bank Zenit
MDM FG MDM Bank Promsvyazbank JSC Impexbank
Nomos Bank Russian Standard Petrokommerce
Moody's
BBB BBB- BB+ BB BB- B+ B B- CCC+
Russia Alfa Bank Bank of Khanty-
Mansiysk Uralsib B.I.N. Bank Bank Soyuz
Promsvyazbank HCFB
MDM Bank MDM FG Surgutneftegasbank
Russian Standard Petrocommerce
S&P
Rosbank TransCredit-
Bank
BBB BBB- BB+ BB BB- B+ B B- CCC+
Russia Alfa Bank MBRD BIN Bank
MDM Bank MDM FG Nomos-Bank
International Bank of Saint Petersburg
Ak Bars Bank Promsvyazbank
Bank Zenit Trust Bank
Fitch
Rosbank
Uralsib
Credit Rating Comparison for Russian Private BanksThe leading Russian Banks are highly rated by International Agencies
Source: Cbonds, Moody’s, S&P, Fitch
Caa
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US$ mlnAssets Loans Deposits Capital Profit before Tax
Sberbank 95 853 70 248 77 182 10 808 907Vneshtorgbank 24 048 11 431 9 160 4 406 158Gasprombank 17 204 7 826 9 781 1 630 241Bank of Moscow 9 329 6 336 7 687 828 46Uralsib 8 539 4 861 5 021 1 575 274Alfa Bank 8 473 6 678 5 768 1 031 65Rosbank 7 569 4 342 5 677 844 20Raiffeisenbank 5 821 3 387 3 107 571 55International Moscow Bank 5 715 3 204 3 628 568 45MDM Bank ** 4 781 3 095 2 335 767 81Promstroybank SPb 4 561 2 770 3 307 469 37Promsviazbank 4 311 2 674 2 807 341 48Citibank 3 841 1 416 2 459 378 0Petrocommerce 3 087 1 973 2 043 454 55
MDM Bank, % of the top 14 2.35% 2.38% 1.67% 3.11% 3.99%
MDM among Top Russian Banks
Top Russian Banks as of 1Q 2006 *
* Estimate, based on Russian Accounting Standards
** Excluding subsidiaries
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Russian Banking System: Foreign Banks in RussiaForeign owned banks are increasing their presence in Russia in terms of assets and number thus establishing a new level of competition
Key factors
The number of foreign-controlled banks in the Russian banking system*, as of April 2006, reached 55. (52 in 2005; 42 in 2004)
The assets of foreign-controlled banks increased by 49.3% (2004: 29.9%) and equity (capital) by 56.4 % (2004: 36.7%)
Non-resident-controlled banks’ share in the banking system's assets grew from 7.6% in 2004 to 8.3% in 2005 and in equity (capital) from 7.8% to 9.3%
Private deposits in non-resident-controlled banks increased in 2005 by 60.0% (2004: 71.9%)
*With more than 50% share
Russian top 30 banks asset structure
Source: Central Bank, as of January 1, 2006
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Russian banking system: Mergers & AcquisitionsIncreasing M&A activities in past two years
Foreign banks
BSGV DeltaCredit
GE Consumer Finance Deltabank
Hansabank Kvest
RaiffeisenBank Impexbank
EBRD portfolio investment: 13 local banks (2005: 7 banks)
Societe Generale Rosbank (10%)
OTP Bank Investsberbank
Benchmark valuation multiples
Top Russian banks Rosbank OVK VTB Guta Bank; PSB (SPb) Nikoil Avtobank;Uralsib
Mid-market local banks
Promsvyazbank Rostpromstroibank
Petro-Aero Bank Ruskobank; Inkassbank
Sibacadembank Uralvneshtorgbank; Mezhtorgbank; Dalvneshtorgbank; Zheldorbank
VEFK MDM Bank St. Petersburg
Three Major
Acquisition Groups
Assets, mln. USD
Change y-o-y, %
Capital, mln. USD
BV multiple
Rosbank 6 933 48 709 4 PSB 4 827 61 501 1 Impexbank 1 883 43 192 3 Bank of Moscow 7 662 49 963 3 Investsberbank 832 311 87 3.7 International Moscow Bank 5 479 57 602 2.3
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Banking sector: Investor Friendly?
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Banking Sector: State Policy requires further development
Insufficient Banking Sector
contribution to economic
growth
Excessive Costs
associated with the
Banking Sector
Low level of creditors’
rights protection
The Legal base For a competitive
environment is not fully developed
Bankruptcy procedures needs
moretransparency
The Banking System still needs to
deal with a number of problems
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Banking Sector: Striving for Improvement
Improve legislation
Improve Banking regulation and supervision
Develop the Banking sector infrastructure
ARB (679 banks), «Russia» (350), MICA* (67) and other organizations take an active part in the State policy implementation
Rapprochement of the State and Bank interests
Proactive stance toward public authorities’ initiatives
Banking society members’ balance of interests
Investment attractiveness increase in the external markets
The State pledges to make
the following improvements:
Russian Banks exert every effort to increase the Sector’s
investment attractiveness
Both the State Authorities and Russian Banks must combine efforts to bring the Sector in correspondence with high international standards
*MICA – Moscow International Currency Association
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Banking Sector: Application of Western Quality
Standards
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Russian Bank
Clients
Vendors
Media
Community
Execs.
Managers
Lineemployees
Competitors
Western standards of quality
Share-holders
Regulators
Russian banking system: Stakeholders & Western standards
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Path of Change
Current State
Western standards of quality in Russian banking services
Western standards in banking services in Russia: Drivers & BlockersDrivers:• Strong competition• Increase in FDI• High growth levels• Increased ratings• High liquidity• Low interest rates
Blockers:• Banking system weaknesses • High fragmentation of Russian banking system• Dominance of state-owned banks• Significant number of small banks• Slow implementation of reforms • Risks level remain substantial
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Product offering: banks are closer to western standardsStill missing sophisticated product lines, Russian banks are closing the gap in product offering moving from “boutique” to mass standardized products
Process organization
•Cash management•Loan products•Liquidity management• Investment banking
Corporate clients
•Payments•Plastic cards•Loan products•Savings products
Retail clients
•Wealth management
Private banking
Variety of services
•Standardized procedures
Processes
•Demand analysis•Relationship management
Client insight
•Multifunctional core systems and CRM
IT
Support platform
•Widening distribution network:
•Branches•Mini-offices
Offices
• Internet banking• Internet trading•Phone banking•Call centres
Virtual
•Agents networks
Third party
Sales channels
•Credit bureaus
Risk management
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Banking in Russia: The FutureOver the years several key measures were implemented to improve and increase the importance of the banking system in Russia.
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Basel II WTO
Creditbureaus Free capital
movement
Simplification of
M&A rules Regulatory capital
increase
Risk-oriented banking
supervision Inflation targeting
Obligatory deposit
insurance schemePension system im
provement
Recent and anticipated changes in the Russian Banking sector
Banking system growth will continue
Four distinct groups will remain on the market.
–State-owned banks
–Largest private banks
–Regional banks
–Foreign banks
Conditions for FDI attraction will improve
Transparency in lending institutions' operations will increase
Foreign banks will continue steady growth
Dominance of state-owned banks will remain
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Outline: MDM
Outline
High international credit ratings
Leading bank in corporate governance practices in Russia (S&P CG Ratio:6.0)
One of the four largest privately owned Russian financial institutions
Universal bank: retail, corporate, investment and private banking
Close to 1 million retail clients
Over 70,000 corporate clients with over 2,000 medium & large active clients
Numerous awards from financial magazines
Key Highlights
Moody's Fitch S&P
Ba2 / stable BB- / stable B+ / positive
As of March 31, 2006 (IFRS), MDM FG:
– Assets: US$ 5,752 mln
– Equity: US$ 963 mln
– Net profit for 1Q 2006: US$ 43 mln
– ROAE (annualized): 20%
– Cost / income: avg.50%
– Staff: 5,396
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