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Despite its shortcomings, Russia’s banking sector appears to be stable enough to avoid a systemic crisis, even when faced with a worsening foreign economic environment. Andrey Kostin, CEO of Vneshtorgbank, explains.
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Presently, retail banking appears to be the most attractive and dynamic sector of the Russian banking market. Its rapid development is underpinned by high and sustained economic growth encouraged by current political stability, growing individual income and savings, an increasingly stable rouble, as well as restored confidence of the Russian population in the national banking system and domestic currency.

In 2003, individual time and demand deposits increased by more than 45% to reach RBS1,500bn ($52bn), with Russian rouble-denominated deposits rising from55% to 61%.

In real terms, household deposits have almost doubled compared with the pre-crisis level of 1998, and turned into a major funding source for Russian banks, exceeding corporate deposits.

Consumer loans

Last year was marked by a large-scale involvement of banks in the consumer credit business. Over the period, consumer loans extended to private individual customers have grown almost two-fold and reached RBS300bn ($10bn), and their share of the total lending to the non-finance sector also doubled in amount to 10%.

Consumer loans are presently in the highest demand in the retail banking sector, and development of this business has become top priority for leading Russian banks. In fact, all Russia’s major banks have launched comprehensive consumer lending programs and are increasingly extending their reach to the regions.

Moreover, half of the profits generated by the domestic banks last year stemmed from lending, and merely one third came from securities trading.

Intensified competition on the retail banking market compelled all market players to develop competitive offers, primarily for end consumers. New products and technologies have been promoted, including internet and mobile banking, telebanking (SMS Service), various mobile payment systems, automated offices and credit cards. The competitive environment has also led to lower rates and easier lending procedures.

Comprehensive express-lending programmes are becoming increasingly popular since they rely on credit scoring systems to assess borrowers’ creditworthiness on the spot, and make loan-making more efficient.

The upcoming Law on Credit Bureaus and a National Credit History Bureau should further facilitate lending procedures and bring about lower interest rates. This in turn may lead to increased growth in consumer loans and a boost of retail banking.

Retail banking

In the coming years the domestic banking sector will play a key role in individual financing and Russian economic development. Its upturn will largely be driven by the retail sector development, including consumer and mortgage lending, as well as financing to small and medium-sized businesses.

In addition, the national banking system will increasingly capitalise on the growing real income of the population as a major funding source. And the rapidly growing banking sector will in turn encourage the investment-focused national economic model and ensure a faster rate of investment inflow (20%-22%) compared with the GDP growth rate.

Improving quality

In general, despite all its shortcomings and inherent problems, the Russian banking sector appears to be stable enough to avoid a systemic crisis even when faced with an abruptly worsening foreign economic environment.

The key challenge today is to maintain the current high development rate of the national banking system and significantly improve its quality, to make domestic banks more competitive by increasing capitalisation and building up their resource base.

In 2003, Vneshtorgbank’s development rate, including such top business areas as consumer lending and retail deposits, rose by 60–70%, which is twice as much as average indicators posted by major Russian banks.

Under its recently approved Business Development Strategy, Vneshtorgbank focuses on commanding leadership positions in the consumer lending and mortgage sectors primarily by improving service quality, introducing advanced technologies, and simplifying lending procedures.

For the next two years it plans to increase mortgage loans to $1.5bn, and by 2008, gain an 8% to 10% retail banking market share.

In the near term, the bank is to invest about $200m in retail banking, which among other things will mean implementing innovative technologies and opening new offices.

Once these goals are achieved, Vneshtorgbank will be well positioned to increase its assets fourfold to $25bn or $26bn by 2009.

At the same time, Vneshtorgbank will ensure a 1.5 to 2 times increase in its share on the domestic banking market, as well as its contribution to the aggregate indicators of the national banking system performance.

Andrey Kostin is chairman and CEO of Vneshtorgbank

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