Diversification by banks away from industry and into retail indicates Russia’s growing banking prowess.

The continued growth of the Russian economy, real gross domestic product (GDP) increasing by 6.7% in 2006, has continued to underpin expansion in the banking system and increase the demand for banking services. Real GDP is predicted to increase by a similar amount in 2007 so the good times are likely to continue.

The current credit crisis in the West is unlikely to have a significant impact on Russian banks, although those banks specialising in consumer finance that rely on the international money markets to fund the shortfall between loans and deposits may come under some pressure. Diversification by banks away from more traditional markets, such as industry, large and small, into retail banking is another indication of the strengthening of the system and a shift in the banks’ focus away from more opportunistic forms of banking.

For our Top 50 Russian banks, aggregate pre-tax profit grew by 40.1% to $12.486bn, aggregate assets grew 59.1% to $408.3bn and aggregate Tier 1 capital rose 49.8% to $45.4bn.

The majority state-owned Sberbank continues to dominate the listing, accounting for 24.5% of the Top 50 aggregate Tier 1 capital, 32.2% of the aggregate assets and 33.2% of the aggregate pre-tax profit. According to a recent report on the sector by the ratings agency Moody’s, Sberbank holds about 25% of the total banking sector assets. Since at the end of 2006 the sector comprised some 1143 banks, this both emphasises Sberbank’s dominance and reflects the lack of scale of the remaining institutions.

Of the top five banks by assets, two are majority state-owned (Sberbank and VTB-Bank) and another two, Gazprombank and Bank of Moscow, are ultimately state-controlled. These four banks, according to Moody’s, control 38% of the banking system assets. A fifth state entity, Vnesheconombank, is making its last appearance in our listing as in the early part of 2007 it transitioned to a state corporation which will act as a pure development bank.

Our listing this year contains six majority or wholly foreign-owned banks. ZAO Raiffeisenbank has integrated Impexbank, its 2006 acquisition, which disappears from our listing, while Banque SG Vostok, following the acquisitions detailed last year, reappears in the Top 50. Acquisitions by foreign banks continue with Scandinavia’s Nordea taking a controlling interest in Orgresbank at the end of 2006 and KBC of Belgium finalising the acquisition of a 95% stake in Absolut Bank in August this year.

Financial nationalism

The undeveloped nature of the retail banking sector is the main attraction for foreign investors with retail loans/GDP standing at 7.7% and retail deposits/ GDP at 14.2%, according to Moody’s, which is well below the average for central and eastern European countries. However, there is a risk that there may be a reaction against the acquisition of banks by foreign investors should this be deemed to be getting out of hand although such action could impede Russia’s World Trade Organization entry negotiations.

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