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High street goldmine

Russian banks that used to primarily focus on large corporate customers are now looking at the retail business as a key element of their market strategies.
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The rate of retail banking development is an important indicator of a healthy national banking system able to efficiently translate household savings into loans and investment in the manufacturing sector of the economy.

Over the last few years, Russia has seen a combination of favourable factors pushing forward its retail banking business. These include a high rate of national economic growth impacted by a favourable foreign economic situation and a higher domestic demand, improved legal framework and further progress of the reforms; increasing popular trust in the administration and a more stable social and economic situation nationwide.

In 2003, household income grew by 14.5% in real terms, a record high rate over the last decade.

For the Russian banking system, the past year has seen further dynamic growth in the retail sector. Aggregate household deposits with Russian banks increased almost 1.5 times to reach a record 1,500bn roubles ($52bn). And over the last two years, retail deposits posted a more than 2.2-time increase.

Long-term deposits

Russian banks are increasing their funding sources by raising household savings with a faster increase in long-term deposits (maturing within one year or more). In the past year, the long-term deposits by private individuals were growing almost twice as fast as total individual deposits. By early 2004, individual deposits of one-year or longer accounted for almost 45% of the total individual deposits.

Last year also saw a new trend – a drastic shift from deposits denominated in foreign currencies in favour of rouble-denominated deposits. As from 2003, rouble-denominated deposits increased by 66% with a mere 17% increase of deposits denominated in foreign currencies.

As a result, by the beginning of the year, rouble-denominated deposits already exceeded 60% of total balances in individual accounts with Russian banks. That should be attributed to both stronger confidence in thedomestic legal tender and a sharp fall (19% in real terms) of the dollar against Russia’s national currency.

Bank savings are growing faster than current spending, which is further evidence of a restored trust by the population in domestic banks undermined by the Russian financial turmoil of the 1990s.

At present, the retail banking boom has created an entirely new business environment compelling commercial banks to radically adjust their business strategies. In 2003, the added deposits from private individuals accounted for almost 40% of the added aggregate liability of the Russian banking system as a whole. As a result, individual savings have now exceeded 33% of the aggregate liabilities and are the banks’ largest liability item.

Most major Russian banks that used to primarily focus on large corporate customers are now looking at the retail business as a key element of their market strategies. Such a strategic shift is intensifying the competition on the retail banking market, which remains largely monopolised.

By early 2004, a major player such as the Savings Bank of Russia controlled about 64% of total households’ deposits, while its close competitors controlled from 2% to 2.5% of the market at most. The enforcement of the Law on Individual Bank Deposit Insurance, enacted in the late 2003, is likely to significantly de-monopolise the market, thus creating a level playing field for the government-owned and commercial banks, and promoting the household savings growth.

Room for growth

The development outlook for the Russian banking market links its further growth to a broader range of retail products, more active cross-marketing, improved service quality, use of cutting-edge banking technologies, and a larger regional affiliate network.

Bank cards appear to be the product in the highest demand on the Russian retail market. In 2003, the number of cards issued by Russian banks increased by almost 75%. Out of nearly 24 million bank cards in circulation by early 2004, about 66% were issued under the arrangement of international payment systems, primarily Visa International and EuroPay International/MasterCard.

Russian banks are continuously broadening the range of services available to card holders and developing appropriate acquiring facilities. Card transactions in 2003 increased almost sixfold and exceeded 1.2 billion in number.

Cash machines

The number of automated teller machines increased by nearly 60% to about 10,000, and the merchant acquiring network amounted to nearly 50,000 sales terminals.

Retail lending has been rapidly increasing over the last several years. The amount of mortgage and consumer loans made in 2003 alone doubled reaching 300bn roubles. Bank loans to private individuals amount to nearly 20% of funds raised from households and exceed 10% of the aggregate loan portfolio of the Russian banking system.

Banks view loans to private individuals as the most promising line of retail business development, which stimulates an ever-increasing offer of lending products. The credit bureau system in Russia would facilitate lending procedures and ensure lower interest rates.

According to Vneshtorgbank experts, the current level of retail banking business remains underdeveloped in Russia, which is reflective of the specific national socioeconomic situation. The market capabilities of various banking services are fairly high, and it is the importance of this market that makes its stability and sustained growth synonymous with the stability and success of the entire national banking system.

Distribution channels

And nowadays, establishing appropriate channels for the retail distribution of banking products and services is becoming a top priority. Drawing on European expertise, Russian banks are able to develop concurrently both conventional and telebanking services.

These include telephone and internet banking, ATMs that enable a large spectrum of services, mini-branches providing highly automated services, and specialised express-lending offices located most conveniently to thepublic.

By implementing its strategy aimed at upgrading to a European-class universal banking institution with a broad branch network, Vneshtorgbank has firmly joined the leaders of the Russian retail banking market.

In 2003, having developed a broad range of deposit products, Vneshtorgbank succeeded to increase deposits raised from individual customers by 1.7 times to 26.8bn roubles. The dynamic retail expansion enabled the bank to increase its individual deposit share to 1.8% and firmly rank it as fourth in the Russian banking system according to this indicator.

This article was contributed by Vneshtorgbank

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