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Brief overview of the retail banking products in Russia .

Brief overview of the retail banking products in Russia . Macroeconomic summary. The base case scenario for Russian economic development is favorable, as GDP and personal consumption growth will be the main drivers of the Russian market through 2010:

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Brief overview of the retail banking products in Russia .

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  1. Brief overview of the retail banking products in Russia.

  2. Macroeconomic summary • The base case scenario for Russian economic development is favorable, as GDP and personal consumption growth will be the main drivers of the Russian market through 2010: • Real GDP will grow at 5% a year, while ruble purchasing power increases to the Eastern European average, yielding a nominal GDP growth of approximately 12% a year • Economic growth will be aided by continuing political stability, although prospects for controlling the business affairs of Russia’s largest companies remain likely • A number of other economic and social risks exist, potentially threatening the base case scenario; however, the probability of the most disruptive events, such as changes in political direction, is low • The development of the country’s regions will remain to be highly uneven, although the gap between Moscow and the other regions will continue to narrow: • Ten most developed regions (out of 89) of Russia produce more than 50% of GDP • Moscow, the most developed region, occupies a 21% share of the country’s GDP and 29% in retail turnover, while its population stands at about 7% of Russia; as a result, there is a very large gap in incomes and quality of life between Moscow and the regions • However, in the next few years, the wealth gap be slowly narrowing due to strong economic growth in the regions

  3. Banking sector summary • Russian banking sector is growing rapidly • The assets grew by 32% on average over the last 5 years • The share of assets in GDP accounted for almost 44.4% in 2005, compared to 33.9% in 2000 • Bank are actively developing retail business • The volume of attracted private deposits grew by 44% over the last 5 years and accounted for 29% of all liabilities in 2005 compared to 20% in 2000 • The retail loans grew by 92% annually over the last 5 years, compared to 40% annual growth of corporate loans • A number of acquisitions in the field of retail banking has happened recently • Sberbank (major state bank) is the undisputable leader of the retail loan market with 52% market share in private deposits and 44% market share in retail loans; Sberbank possesses the widest branch network in Russia (6000+ offices and 13000+ cash offices) 3 Source: Deloitte

  4. Retail banking products summary • The private deposits market accounted for USD 98 billions in 2005 and will grow by 27% annually to reach USD 329 billions in 2010; however the private deposits do not serve as a revenue stream for most banks • The interest rates for 1+ year savings accounts usually compose 6-10% for RUR deposits and 5-8% for USD/EUR accounts, which together with very high cost of branch network development makes it unprofitable to focus on deposits attraction • The retail lending business accounted for USD 41 billions in 2005 with more than 70% of the portfolio issued as personal (cash) loans • The second largest segment of the market were auto loans which accounted for 11% of the whole market, while mortgages reached only 10.7% by the end of 2005 • POS loans account for 7.3% of the whole portfolio and credit card loans are very small by far • Mortgage loans and credit cards market are forecasted to gain the highest growth over the next 5 years (55% and 45% accordingly), while personal loans market will grow at “modest” 26% annually 4 Source: Deloitte

  5. Summary of existing opportunities for Client in the retail banking sector • Erased 5 Source: Deloitte

  6. Contents • Russia‘s macroeconomics and the banking sector • Retail banking market • Deposits • Loans • Auto loans • Credit cards • Mortgage • POS loans • Personal loans • Summary 6

  7. Contents • Russia‘s macroeconomics and the banking sector • Retail banking market • Deposits • Loans • Auto loans • Credit cards • Mortgage • POS loans • Personal loans • Summary 7

  8. Russia is in the Top 10 of the world’s economies Largest Economies Worldwide, GDP by PPP, USD bln, 2005 8

  9. The Russian population is decreasing and aging Total population on Russia, mln Average age, number of years Source: State Statistics Committee 9

  10. Employment structure in Russia is stable, but the unemployment rate is still higher than developed countries Employment structure Comments • A controlled and low unemployment rate increases confidence in the future and overall macroeconomic stability • In 2004the unemployment rate was: • in Russia – 8.3%, in the United Kingdom – 4.7%, in the United States – 5.5% • In Russia, a reduction in unemployment rate is one of the objectives of current government policy % of total population Unemployed Labour force Employed Not of working age/retired/ disabled/other Unemployment rate, % 11.8 13.2 12.6 9.8 8.9 8.7 8.1 8.3 Source: State Statistics Committee 10

  11. GDP growth exceeds expectations 7 years after the financial crisis in 1998 • Sustained high commodity prices • Positive effect of the devaluation of the national currency in 1998 and 1999 on local production • Strong domestic demand and favorable external environment • Increase in productivity in many sectors of the economy • Benefits of gradual reforms and relative fiscal prudence • Development of foreign trade • Direct investment incentives and small and medium business development GDP, USD bln Factors Nominal GDP at market exchange rate Real GDP 1998 = 100 CAGR = 7% CAGR = 26% Source: Economist Intelligence Unit 11

  12. Trade surplus continues to grow steadily, fueled by growing exports of natural resources, primarily oil and gas Russian economy is still highly dependent on the oil industry Structure of export Other International trade, $ bln Chemicals Machinery Trade balance Oil, fuel & gas Export Metals 122 Correlation between Russia’s GDP and Oil Prices 39 Import GDP $ bln Oil Price Source: Economist Intelligence Unit, Bloomberg 12

  13. Government gradually curbs consumer price inflation and continuously improves the performance of the federal budget Average consumer price inflation, % Federal budget balance, USD bln Primary balance1) Federal Budget Balance 5.8% 3.1% 5.8% 2.4% 9.4% 7.5% USD bln 2001 2003 2005 - Expenditures - Revenues 1) Percent of GDP Sources: Economist Intelligence Unit, Ministry of Finance 13

  14. State ownership is decreasing, but the government keeps stakes in important industrial companies Government owns a smaller share of enterprises . . . . . . but maintains stake in those with 57% of industrial output Share in industrial output, % Share in total number of enterprises, % Privatized with remaining state stake Privatized with remaining state stake Private Private State State Examples Gazprom #1 gas producer Lukoil #1 oil producer RAO UES Electrical monopoly Sberbank #1 bank RZD Railway monopoly Sviazinvest #1 telecoms holding Transneft Oil pipeline monopoly Aeroflot #1 airline Source: State Statistics Committee 14

  15. The growth of GDP stimulates the improvement of living standards and increase in private consumption GDP per capita, USD Growth of private consumption, fueled by growing incomes At market exchange rates At PPP (purchasing power parity) Private consumption, USD blnat current market prices Personal disposable income, USD bln Personal disposable income CAGR = 9% Private consumption CAGR = 26% Rate of savings (% of personal disposable income) 29 29 33 31 32 Source: Economist Intelligence Unit 15

  16. Russian retail market shows fast growth fueled by growth in private consumption Retail turnover, USD billion CAGR = 22% - Non-food CAGR = 23% CAGR = 21% - Food Source: State Statistics Committee 16

  17. In the mid-term the Russian economy will maintain its growth (1) Forecast of GDP, USD bln Factors Nominal GDP at market exchange rates Real GDP 1998=100 • Further economic reforms focused on doubling the GDP by 2010, curbing inflation and increasing the “quality of life” • High oil prices and stable demand for natural resources • Prospective entry of Russia into the WTO, increase in foreign trade turnover, access to new trade markets CAGR = 3% CAGR =12 % Source: Deloitte forecast 17

  18. In the mid-term the Russian economy will maintain its growth (2) International trade, USD bln Average consumer price inflation, % Export Import Source: Deloitte forecast 18

  19. In the mid-term the Russian economy will maintain its growth (3) GDP per capita, USD Private consumption At market exchange rates At PPP (purchasing power parity) Private consumption, USD blnat current market prices Personal disposable income, USD bln Personal disposable income Private consumption CAGR = 8% CAGR = 11% • GDP growth will stimulate further growth of private consumption Source: Deloitte forecast 19

  20. President Putin’s two terms have been marked by political stability and consolidation of power • After over six years in power, Vladimir Putin has effectively succeeded in consolidating power, establishing a working majority in the legislature, reining in regional authorities, gaining control of major media outlets, and putting pressure on the largest businesses • The major political risks of the 90’s era - Communist resurgence, the emergence of nationalist extremists, and widespread political chaos—have been replaced with continuing stability coupled with concerns over the Kremlin’s apparent authoritarian proclivities • President Putin and his primary economic advisors have repeatedly voiced their support for the free market and their intention to improve Russia’s business climate; real accomplishments to date, however, have been limited to passage of a new tax code, the plans to reform Russia’s “natural monopolies” and reduction of the housing and utility subsidies 20

  21. President Putin’s two terms was marked by political stability and consolidation of power (II) • Significant concerns regarding the impact of politics on Russia’s economic development persist, including: • A Kremlin policy shift resulting in a greatly increased role of the state in the economy • Politically-motivated prosecution of selected significant private enterprizes (Yukos) • Continued widespread bureaucracy and administrative barriers, hindering business start-ups and complicating foreign investment • Lack of structural reforms in the areas of banking, natural monopolies, customs, legal system • Failure to increase transparency and improve corporate governance, increasing investment risk • Nevertheless, our base macroeconomic scenario assumes that political stability will provide the basis for sustainable, if moderate, growth and strengthening of the ruble through 2008 21

  22. A number of risks could threaten base case scenario in the mid-term Risk Potential Consequences Impact Probability Medium Medium Medium High Sustained, severe fall in oil prices (below $25/barrel) Macro policy shift and continued poor business climate discourages investment Lack of improvement in or worsening of regulatory environment Shift of political power to parties with opposition to continuing market reforms GDP performance below forecast; a threat to government ability to fulfill budgeted programs Hampered middle class development; GDP performance below forecast; no significant increase in budget revenues Growth of capital outflow, reduced investments by private sector, other negative impacts on business climate Nationalization of key enterprizes, crackdown on a number of private enterprizes; major capital flight, mass-scale pulling out of foreign investors, other negative impacts on business climate Low Medium Medium Very low 22

  23. Russian Federation consists of 7 Federal Districts (FD) North-Western FD Ural FD Far Eastern FD 10% of total population 10% of GDP Income/head1) =$285 9% of total population 15% of GDP Income/head =$308 5% of total population 5% of GDP Income/head =$288 Central FD 26% of total population 34% of GDP Income/head =$366 Saint-Petersburg Moscow Nigniy Novgorod Perm Ekaterinburg Rostov-na-Donu Kazan Ufa Samara Chelyabinsk Volgograd Omsk Novosibirsk Siberian FD Southern FD Privolzhskiy FD 14% of total population 11% of GDP Income/head =$220 16% of total population 8% of GDP Income/head =$178 21% of total population 17% of GDP Income/head =$202 Capital of the country 1) Average Monthly, USD Source: State Statistics Committee Cities with the population of >1 mln people 23

  24. Ten most developed regions produce more than 50% of GDP Top 10 regions in terms of the level of economic development and investment attractiveness Hanti-Mansiisk Saint-Petersburg Moscow and Moscow region Krasnodar Kazan Ufa Samara Ekaterinburg Krasnoyarsk Source: State Statistics Committee, Ministry of economic development and trade 24

  25. Moscow plays major role in the Russian economy Contribution of Moscow into selected macroeconomic indexes, 2004 Share of other regions Share of Moscow Personal income (USD 460 bln) Retail trade (USD 190 bln) GDP (USD 590 bln) Total number of population (145 mln people) Source: State Statistics Committee 25

  26. The development of the banking sector in Russia can be divided into 3 stages Formation of the banking sector until the crisis of 1998 Active development of commercial banks Development of retail banking business • Independent banks appeared on the basis of state banks and as parts of large holding companies • Most banks acted as “pocket banks” serving the parent companies and were mainly involved in short-term investment activities using cheap funding from the parent companies • The retail lending business started to emerge, however it was largely wiped out as a result of the economic crisis of 1998 • After the shock therapy of the economic crisis banks developed in a more balanced way; however, most banks were still deeply integrated with large companies • The trust of the public in the banking system had been gradually restored after the economic crisis of 1998 • Banks with large payroll* customers base started to provide personal loans to their existing clients • First POS loan products appear on the market • Banks accelerated to develop branch networks to serve general population • The variety of retail loan products appears on the market • Fast development of POS, auto and personal loans, slow uptake of mortgage loans 1991-1998 1998-2001 2001-present *In Russia employers that pay salaries via wire transfers provide employees with accounts in the bank of employer’s choice as a common practice 26 • Source: Deloitte

  27. The assets of the Russian banking sector grew by 32% in the last 5 years, however there is still a great potential for growth Growth of the Russian banking sector Assets as share in GDP in selected countries, 2005 Assets as share of GDP, % 32% Assets, USD billions Comment: the share of assets in GDP remained almost stable over the last 3 years because of the significant decrease of USD to RUR ratio 27 • Source: CBR, Economist Intelligence Unit

  28. More than 85% of banking assets are accumulated in the Central Federal District of Russia North-Western FD Ural FD Far Eastern FD Central FD • Comment Moscow is the business and financial center of the country which is reflected in the strong concentration of assets Privolzhskiy FD Southern FD Siberian FD 28 • Source: CBR, Rosstat, Deloitte

  29. The Russian banking sector is represented by more than 1200 banks, however, it is relatively consolidated in terms of assets Number of banks in some countries Share of top 5 banks in total banking assets 1200+ 29 • Source: CBR, press clips, Deloitte

  30. The level of consolidation of the banking assets had no major changes over the past few years Share of total assets per group of banks • Comments • 201+ • Consolidation process in the sector was constrained by: • The lack of regulatory actions of the Central Bank of Russia • Overall immaturity of the banking system with a large number of banks acting as “pocket” banks to large enterprises • However the consolidation process may start soon: • A few notable acquisitions have already taken place • Recent actions of the regulator (introduction of the deposit insurance system, establishment of the new requirements to the banks’ capital, etc) and general move towards the development of retail business will force the consolidation process • 51-200 • 21-50 • 6-20 • 1-5 30 • Source: CBR, Deloitte

  31. 5 of the Top 10 largest banks in Russia are owned by the State • Top 10 Russian banks by assets, billion USD, 2005 Total: 49.90% 31 • Source: RBC, CBR

  32. The share of foreign capital in the banking sector is small, compared to other developing markets • Comments • Share of foreign capital in total banking capital in selected countries • Foreign banks are not allowed to open barnches in Russia, so the only way to enter the market is to set up a new bank with foreign capital or purchase an existing bank • The share of foreign capital in Russian banking sector was restricted until 2002, however, the restriction did not actually work as it was never fully used by foreign banks • The actual reasons behind the low share of foreign capital in the sector were: • Importance of “grey” schemes led to deep integration of Russian banks into the corporate sector, making it impossible for foreign banks to gain big corporate clients • Relatively high perceived risks (e.g. crisis of 1998) • Lack of privatization of major state banks • Nevertheless, foreign banks are already a notable part of the industry: • There are 30+ banks with 100% foreign capital in Russia • 10 of them are among the Top 40 banks in Russia 32 • Source: CBR, Economist Intelligence Unit

  33. The share of loans in the assets of the banking sector has significantly increased in the past few years • Comments • Assets structure CAGR • The increased share of loans indicates the growing maturity of the banking sector: • Apart from serving parent companies and making gains from securities and other assets, banks start gaining interest earnings • We believe this trend to continue in the foreseeable future; the share of loans in the total assets of the banking system will reach over 50% in 3 years 27% Interbank loans 44% Other 27% Securities 17% Cash and accounts in CB 45% Retail and corporate loans 33 • Source: CBR, Deloitte

  34. Retail loans still account for a smaller share of the total loans portfolio, however, they grow at a very high rate Retail and corporate loans, billion USD • Comments CAGR • Corporate loans market becomes less attractive for banks: • Large corporate clients start borrowing directly in the capital market through fixed income borrowings or abroad, gaining lower rates • High competition for the remaining corporate borrowers also puts downward pressure on interest rates • As a result, banks strive to develop retail business, which still offers relatively high rates 92% Retail loans Corporate loans 40% 34 • Source: CBR, Deloitte

  35. The share of personal deposits in liabilities increased in the past few years CAGR • Structure of liabilities • Comments 30% Securities • The trust of the public in the banking system continues to restore after the economic crisis of 1998 • The number of people having bank accounts significantly increased in the past few years • Favorable economic situation stimulates personal savings while high inflation rate forces people to deposit money with banks 32% Bank deposits 44% Individuals deposits 27% Other 31% Corporate deposits 35 • Source: CBR

  36. Contents • Russia‘s banking sector • Retail banking market • Deposits • Loans • Auto loans • Credit cards • Mortgage • POS loans • Personal loans • Summary 36

  37. The market of personal deposits consists of three major segments Personal deposits Total $98 bln, 2005 12% 30% 58% Share in all deposits Savings accounts Current accounts Short-term deposits (<1 year) Long-term deposits (1+ years) Range of interest rates* *The range of interest rates is given on the basis of major retail banks’ offers 37 Source: Deloitte

  38. Personal deposits – key points • The current accounts market consists largely of pension and salary accounts of state-paid employees (mostly served by state banks) and payroll accounts of private companies • Deposits business does not provide direct revenue streams to the bank; however, its key advantage lies in the banks’ ability to invest the attracted funds and being able to cross-sell to the acquired customer base 38 Source: Deloitte

  39. Personal deposits have increased by more than 5 times since 2000, with long-term deposits being the major growth driver Growth of personal deposits, USD bln CAGR • Comments 30% • The main factors of the impressive growth of long-term deposits are: • Significant increase of private savings • People’s effort to fight the effect of high inflation rate, which motivates them to deposit savings with banks instead of keeping cash at home • Current accounts grow mostly because of increasing pensions/state paid salaries and number of employees who receive their salaries directly into bank accounts Current accounts 21% <1 year term deposits 99% 1+ year term deposits 39 Source: CBR

  40. Moscow is leading the market in terms of personal deposits value Personal deposits market value in the selected cities, USD bln Personal deposits per head, USD Local market leaders • Sberbank • Vneshtorgbank • Bank of Moscow 3,198 • Sberbank • Industrial Construction Bank • VTB / Baltiyskiy Bank 1,346 • Sberbank • Gazbank • Autovazbank / Bank Solidarnost 921 • Sberbank • Sarovbiznesbank / Nizhegorodpromstroybank • NBD-Bank 686 • AK Bars • Sberbank • Tatfondbank / Devon-kredit 656 40 Source: FAS, RBC, expert estimates, Deloitte

  41. Sberbank dominates personal deposits market with over 50% market share Top10 banks by volume of personal deposits, USD billion Market share • Comments • Main reasons behind Sberbank’s market leadership are: • Accumulating pension and state-paid salary accounts • Having state guarantees, even with lower interest rates • Possessing the largest branch network in the country supported by a well-known brand • However, according to official statistics, Sberbank gradually loses its market share in favor of other banks • We expect the share of Sberbank to continue to decline as the confidence in other banks will grow due to the development of the deposit insurance system Total: 66.6% 41 Source: RBC, CBR, press clips

  42. The deposit terms of major players considerably vary, so there is a room for differentiation Demand deposits < 1 year term > 1 year term Interest rate/currency Minimum deposit Interest rate/currency Minimum deposit Interest rate/currency Minimum deposit 42 Source: Bank’s data

  43. The personal deposits market in Russia will grow by 27% annually and will reach $329 blnin 2010 Personal deposits per head as a function of GDP at PPP per head Forecast of the personal deposits market value, USD bln Deposits per capita, USD CAGR 27% GDP per capita at PPP, USD 43 Source: EIU, Deloitte

  44. Personal deposits – conclusions • Further growth of personal deposits will be supported by growth of incomes, continuing development of the retail banking and actions of the regulator, such as development of the deposit insurance system; however the market may be negatively affected by competition from the mutual funds • New business opportunities in the current accounts market are very limited • The pension/state paid salary accounts are monopolized by Sberbank and a few other banks, mainly of State ownership • All large payroll clients are already served by competitors and the chances to compete here are very low • The only opportunity to compete is presented by the new payroll clients coming into the market which are mostly small and medium enterprises; however existing players with well-developed branch network will have a significant advantage in this market • Savings account market will not be able to generate significant direct incomes for a retail bank; however it can be an effective instrument in attracting large customer base for other retail products • The overall cost of funding through attracting term-deposits (interest rates, costs for branch network development, etc) is significantly higher than in the case of using other available sources of funding (interbank, fixed income borrowing, parent company loans, etc) • At the same time, taking into account great potential of the personal deposits market, offering well-balanced deposit products in addition to loan products is a right way to acquire additional customers and pursue cross-selling opportunities 44 Source: Deloitte

  45. Contents • Russia‘s banking sector • Retail banking market • Deposits • Loans • Auto loans • Credit cards • Mortgage • POS loans • Personal loans • Summary 45

  46. The retail loans portfolio* consists of five major segments Retail loans Total $41 bln, 2005 Share in total retail portfolio 71.0% 7.3% 11.0% 10.7% N/A** Advanced retail loan products Special purpose loan products Auto loans POS loans Mortgages Personal loans Credit cards • Non-special purpose loans provided in cash or in the form of overdrafts • Loans provided directly at the retail POS level (point of sale) to finance a purchase • Special purpose loans provided for car purchases • Special purpose loans provided for real estate purchases • Revolving line of credit provided through credit card *Outstanding loans **It is not possible to correctly estimate the credit card loans portfolio at the moment, however, it is very small 46 Source: Deloitte

  47. The retail loans volume grew two-fold annually over the last 3 years, however the overall penetration remains low by international benchmarks The growth of retail loans portfolio, USD bln Retail loans to GDP, %, 2004 (Russia 2005) 109% 47 Source: CBR, Deloitte

  48. The retail lending market in Russia has entered the 3rd wave of development POS loans POS loans Mortgages Maturity Personal loans Auto loans Auto loans Active development POS loans Mortgages Personal loans Personal loans Credit cards POS loans Auto loans Credit cards “Infancy” Personal loans Mortgages Degree of development of the product Wave 1 Wave 2 Wave 3 Wave 4 2000-2001 2001-2003 2003-present ??? 48 Source: Deloitte

  49. The range of interest rates for different retail loans varies significantly, which reflects the implied risks Nominal interest rates* Credit risk level Market risk level The longer the period, the higher the risk level *The range of interest rates is given on the basis of major retail banks’ offers 49 Source: Deloitte

  50. Moscow leads in terms of retail loans penetration Retail loans portfolio by region, USD bln Retail loans per head, USD Share of all retail loans, % Local market leaders 596 15.1% • Sberbank • Russian Standard Bank • Rosbank 354 3.9% • Sberbank • Industrial Commercial Bank 409 1.2% • Sberbank • Promek-bank • VTB • Sberbank • NBD-bank • Sarovbiznesbank /AKB Soyuz 291 1.0% 266 0.7% • Sberbank • AK Bars 50 • Source: CBR, FAS, expert estimates, Deloitte

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