Russia’s economy is buoyant but there remain many improvements to be made to the banking system.

Five years on from the devastating financial crisis in Russia, the

Russian banking system appears to have rebuilt its commercial and

financial base. Concerns still exist, however, about the continuing

viability and creditworthiness of a sector in which reform, where it

has occurred, has been slow to be implemented and even slower to be

enforced. The Russian economy is buoyant, having achieved a 4.3% growth

in GDP in 2002, and is on track to achieve a 7.0% GDP growth in 2003.

This has been achieved largely on the back of high energy prices and

increased competitiveness generated by the post-crisis rouble

devaluation, and the Russian banking sector has ridden the economic

wave. However, there are concerns that the contribution of the

manufacturing sector to GDP growth is diminishing while that of the

service sector is increasing rapidly – which may affect the

sustainability of such a level of growth.

Rating agency Moody’s upgrade of Russia earlier this year to investment

grade (Baa3) – which other rating agencies regarded as “premature” –

has provided a further fillip to the economy and to the banks, as it

will facilitate access to cheaper credit and provide increased backing

to bond issues.

Rise in assets

According to Central Bank of Russia (CBR) statistics, 1329 credit

institutions were licensed at the end of 2002 (2001: 1319) to conduct

banking transactions in Russia, of which 1282 (2001: 1276) are banks.

Total assets of the sector were Rbs4143.4bn ($130.4bn) compared with

Rbs3155.9bn at end-2001.

The system continues to be dominated by Sberbank (which is 61% owned by

the CBR), and hence the state, with the remaining 39% – the so-called

free-float – being widely held by investors. The bank is listed on the

Russian stock exchange (RTS) and is the only actively traded Russian

bank stock. At year-end 2002 it had a 40% market share in total

deposits, more than two-thirds of retail deposits and a 30% share of

corporate lending. It remains the sole network bank in Russia, with

1162 branches and 18,980 sub-branches.

As there are 3326 branches of operating credit institutions in Russia,

according to the CBR, this implies a branch-to-bank ratio of less than

two for the rest of the system, a situation unchanged from last year.

However, as margins from corporate banking are eroding, banks need to

diversify lending portfolios away from the top industrial companies and

to tap into servicing the needs of the burgeoning Russian middle class

by providing retail services. To do this, however, requires a network

of branches to provide customer access.

Alfa Bank has led the way with the development of its network of Alfa

Express branches in Moscow, which it plans to expand from the current

14 to 70 by the end of 2004. Network growth by acquisition is the path

followed by Rosbank, which earlier this year acquired Pervoye OVK with

its 350 branches – bringing Rosbank’s total network to almost 500.

Avtobank-Nikoil announced on November 3 that its parent, Nikoil

Financial Group, is pursuing a due diligence study of Ural Siberian

Bank (UralSibsbank) with a view to merging the two in 2004. This would

produce probably the second-largest branch network after that of

Sberbank of more than 500.

Sberbank in command

In our Top 50 Russian banks listing, Sberbank commands 37.6% of the Top

50’s total assets, 28.7% of the total Tier 1 capital and 33.6% of the

aggregate profits, followed by Vneshtorgbank with 8.0%, 15.8% and 15.0%

respectively. The Top 50 aggregate assets represent just under 70% of

the total Russian banking assets.

The number of foreign-owned banks appearing in our Top 50 this year has

decreased by one, with ING Bank (Eurasia) (40th last year) dropping out

of the Top 50, leaving Citibank (12th); ZAO Raifffeisenbank Austria

(16th); International Moscow Bank, a Russian bank owned by a consortium

of foreign banks of which HypoVereinsbank is the largest individual

shareholder, at 19th; Deutsche Bank (33rd); ABN Amro (39th); Dresdner

Bank (45th); and Mosnarbank, the Russian subsidiary of the

UK-incorporated Moscow Narodny Bank, at 50th.

According to the CBR, there were 28 100% foreign-owned credit

institutions licensed to conduct banking transactions, with a further

11 with 50%-100% foreign participation.

The underlying problems of the Russian banking sector still remain

however; namely, intragroup lending to members of financial-industrial

groups; significant concentrations of business with single clients;

weak and tardy implementation of regulatory policy; lack of

transparency both in reporting practices and in bank ownership; and the

continuing dominance of the state-owned Sberbank, and to a lesser

extent, Vneshtorgbank. On the plus side, however, is the development of

retail banking and the further growth of the embryo mortgage banking

sector, which will perhaps mitigate the reliance on the corporate

sector.

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