Strategy for Competing in Russia’s Banking Market

1

Strategy for Competing in Russia’s Banking Market

Oleg Tumanov,Deputy CEOAlfa Bank, Moscow

London, December 2003

2

Contents1 Russian banking sector: general overview

2 Corporate segment

3 Retail segment

4 Investment banking

3Corporate Loans/GDP

Stages of bStages of bankankinging bbusinessusiness d developmentevelopment

Source: McKinsey Analysis

GD

P p

er

cap

ita

Beginning Formal regulation Inexperienced clients

Growth More experienced clients Healthy demand for

traditional commercial products

Maturity Experienced clients Demand for investment

bank products

Bulgaria

CroatiaPoland

Ukraine

AlbaniaRussia

Czech Hungary

Romania

Greece

5-8 years

Spain

Russian banking sector: general overview

4

Comparison of Russian and international banks


Source: PWC Selective research

0

5

10

15

20

25

30

%

Return on Capital

0

1

2

3

4

Return on Assets

RussiaHungary Czech

Av. Europe SwitzerlandUSA

RussiaHungary Czech

Av. Europe SwitzerlandUSA

% 3,8

1,40,8 0,62

0,27

1,13

30

2114,7 13,7 12,55

8

0

5

10

15

20

25

30

раз

Asset/Capital Ratio

RussiaHungaryCzechAv. EuropeSwitzerlandUSA7,7

1416

21,7

8

28

11

Return on assets and capital is still higher in Russia

Asset/capital ratio in Russia is smaller

5

Situation Complicates on the Financial Markets

Competition is increasing in all segments

Competitors’ effectiveness is growing

Margins and profitability are decreasing

Customers are becoming more demanding

Risks and volatility are on the increase

Better access to funding


6


Sources: Alfa Bank statistics, CBR

Competition is increasing

Development of branch network is a priorityDevelopment of branch network is a priority

Societe Generale, Citibank, and Raiffeisen are investing in networks

Intesa announced opening of subsidary

In 2003 M&A activity involved the largest private Russian banks

•M&A in banking sectorM&A in banking sector•MDM banking group – $3.6 bln assets

•NIKoil-UralSib group – $3.5 bln assets

•Rosbank-OVK – $3.2 bln assets

•Trust-Menatep – $2.5 bln bank assets

•MNR-Eurofinance – $0.9 bln assets

•Zenit group – $1.8 bln (expected)

•M&A in banking sectorM&A in banking sector•MDM banking group – $3.6 bln assets

•NIKoil-UralSib group – $3.5 bln assets

•Rosbank-OVK – $3.2 bln assets

•Trust-Menatep – $2.5 bln bank assets

•MNR-Eurofinance – $0.9 bln assets

•Zenit group – $1.8 bln (expected)

•Foreign bank penetrationForeign bank penetration•Raiffeisen to set regional network in ‘04

•Citibank plans 20-30 branches in ‘04

•Soc.Gen. plans 26 branches in ‘05

•Foreign bank penetrationForeign bank penetration•Raiffeisen to set regional network in ‘04

•Citibank plans 20-30 branches in ‘04

•Soc.Gen. plans 26 branches in ‘05

0

100

200

300

400

500

Rosbank VTB Bank ofM oscow

Citibank Raiffeisen

Nb. of branches

Branches, Jan 2003 Branches, Jan 2004

7

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002

Banks with Western participation : Corporate Deposits Market Share, %

0.0

0.5

1.0

1.5

2.0

2.5

1997 1998 1999 2000 2001 2002

Banks with Western participation: Retail Deposits Market Share, %

Growth Rates of Loans to Russian Borrowers

-10

10

30

50

70

90

2000 2001 2002

Russian banksBanks withwestern capital

%

Source: «Banking on Russia» conference, London, 19-21.05.03

Western Banks Expand to the Russian Market


Banks with Western participation increase market share

Banks with Western participation increase market share

8


Sources: Alfa Bank statistics, CBR, McKinsey

Loan spread is still high, but margins are declining

Spread on corporate loans and depositsSpread on corporate loans and deposits 7.5% loan spread in

Russia is still high

Under pressure from an international decline in rates, banking loan rates are down

Lower margins pressured banks to develop client base

0 20 40 60 80 100

W estern Europe

Poland

Croatia

Bulgaria

Russia

Loans Other

Net banking revenue by product, % Loan spread, %

1.3

2.7

2.8

8.4

7.5

0%

5%

10%

15%

20%

25%

10.01.99 10.01.00 10.01.01 10.01.02 10.01.03

Rates on $-denominated loans to corporate clients

Rates on $-denominated corporate deposits

9

Increasing Requirements for Banking Business Effectiveness

Cost of being in business

Lowering Margins

Source: «Expert» magazine

Source: Alfa – Bank estimation

Growth if USD prices on the main business-supporting factors

100

110

120

130

140

2001 2002 2003

%

Staff costs Rent and Maintenance

Energy PR and Advertis ing

Growth if USD prices on the main business-supporting factors

100

110

120

130

140

2001 2002 2003

%

Staff costs Rent and Maintenance

Energy PR and Advertis ing

2Q‘01

1Q‘01

3Q‘01

4Q‘01

1Q‘02

2Q‘02

3Q‘02

4Q‘02

RUR loans – RUR deposits

USD loans – USD deposits16

14

12

10

8

6

percent points


10

Russian Financial Market

Market GrowthMarket Growth + ++ + ++

CompetitionCompetition high average very very(growing) high high

MarginMargin//Profitability Profitability high average high low (falling) (falling)

VolatilityVolatility//RiskRisk high low very high average

Source: Alfa Bank

CorporateCorporate RetailRetail InvestmentInvestment InsuranceInsurance


11

Which business to develop?Which business to develop?

Source: Alfa Bank


InvestInvest

Asset Management

Retail

Investment

Insurance Corporate

SupportSupport

LowLow Current statusCurrent status HighHigh

LowLow

Growth Growth potentialpotential

HighHigh

12

Option 1: Russia has 7,800 SMEs

Sources: McKinsey, BCG presentation

Company distribution by sector

Corporate segment

Only 470 companies with annual revenues > $100 mln

Natural resourcesHeavy industry

Trade and services

Transport and communications

Others

7,800 companies in Russia have revenues $5-100 mln a year

Half of these companies are involved in trade and services

7,800 companies in Russia have revenues $5-100 mln a year

Half of these companies are involved in trade and services

400,000

16,000

250

28,000

700

1

7,800

470

8

5 m ajor EUm arkets

CEE Russ ia

MNC's (>5,000)

Large (100-5,000)

Mid-s ized (5-100)

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Option 1: Why are banks not in a rush?

Source: Development Center (poll of top-20 banks)Note:* the figures used in the charts represent the poll participants’ assessments of the relative importance of available answers

What hinders lending to SMEs?*

Corporate segment

4

3.29

2.86

2.43

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Lack of attractiveborrowers

High level of risks Lack of financialresources

Lack of instrumentsto invest

4.5

3.67

2.52.33

1.67

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Non-transparentaccounting

Inability to provideloan collateral

High cost of creditanalysis

Inability to controllending risks

Lack of credithistory

What constrains your activity?*

High risk in the real sector constrains lending to SMEs

Low transparency is a key obstacle for loans to SMEs

High risk in the real sector constrains lending to SMEs

Low transparency is a key obstacle for loans to SMEs

14

Retail segment

Sources: Alfa Bank estimates, BIS, CBR

Option 2: Targeting the retail segment

Retail loans and deposits by country

Comparison with Poland on loans per capita sets value of retail market at $40 bln vs. current $4 bln

Comparison with Poland on loans/GDP sets this value at $20 bln

Loan growth to come from: Mortgages – just $200 mln now Auto loans – could potentially total $7 bln vs. $0.7 bln today

0%

10%

20%

30%

40%

50%

CzechRepublic

Croatia Hungary Poland Romania Russia

Retail deposits, % GDP Retail loans, % GDP

3,114

477279 253

12240

1,000

2,000

3,000

4,000

Germ any CzechRepublic

Hungary Poland Russ ia Rom ania

Retail loans per capita, $

Share of cars sold via loans70%

8%

0%

20%

40%

60%

80%

Germany Russia

15

Retail segment

Sources: CBR, polls by IRG

Option 2: Targeting the retail segment

“Has your family ever taken credit?”

Polls indicate 89% of Russia’s population has never taken out a loan

Retail loans are twice as expensive as corporate loans

Retail lending attractive

12%

4% 5%

79%

9%

2% 0%

89%

0%

20%

40%

60%

80%

100%

Yes, once Yes, twice Yes, threetimes and

more

Never

Moscow Total Russian

17.0%

13.6%

17.8%19.0%

10.3% 10.2%9.0%

10.5%

0%

4%

8%

12%

16%

20%

3 months-6months 6 months -1 year 1-3 years Above 3 years

Private individuals Enterprises

Rates on retail lending are attractive

16

Investment banking

Source: Alfa Bank statistics

Option 3: New market instruments for $12 bln

Underwriting is shared between Alfa Bank, Trust, MDM, Rosbank and Raiffeisen

Current markets may expand by $9 bln

New instruments will demand up to $3 bln

•New marketsNew marketsMortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 blnSecuritization of retail lending portfolio – may amount to $1-2 bln over several yearsDerivatives papers – forwards, options, futures – may increase by several times from $50 mln

•New marketsNew marketsMortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 blnSecuritization of retail lending portfolio – may amount to $1-2 bln over several yearsDerivatives papers – forwards, options, futures – may increase by several times from $50 mln

•Current markets to increaseCurrent markets to increaseRuble corporate bonds –from $5 bln tо $10-12 bln.Currency corporate bonds –from $0,8 bln tо $2 blnCredit notes –market size may increase to $0,5-$0,7 bln

•Current markets to increaseCurrent markets to increaseRuble corporate bonds –from $5 bln tо $10-12 bln.Currency corporate bonds –from $0,8 bln tо $2 blnCredit notes –market size may increase to $0,5-$0,7 bln

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Investment banking

Sources: Alfa Bank statistics, RTS, Goskomstat, KMPG

Option 3: M&A market of $5 bln in 1H03

Only 5 IPOs took place from 2000 and 25 are coming

M&A market is driven by asset consolidation

Commercial banks account for 63% of Alfa Bank revenues

•M&A in 2002-2003M&A in 2002-2003

M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002

212 deals are reported in 1H03 versus 291 in 2002

•M&A in 2002-2003M&A in 2002-2003

M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002

212 deals are reported in 1H03 versus 291 in 2002

Corporate Finance

6%FX

10%

Securities21%

Commercial Bank63%

Net revenue contribution, Alfa Bank 2002

Equity market at 67%, concentrated on oil

12%

40%

17%

17%

67%

8%

25%

0%

20%

40%

60%

80%

100%

M CAP GDP

Manufacturing Services Other Industries Oil & Gas

Strategy for Competing in Russia’s Banking Market

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