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The Russian Banking Sector: Assessing the Growth Michel Perhirin, CEO, MDM Bank Regional Cooperation Forum GENEVA, 9-10 JULY 2006 1 Macroeconomic Overview 2 Overview: Russian Economy Stable economy The latest forecasts show Russian GDP to surpass 1,000 bln USD by 2007 The inflation forecast is 8.5% for 2006 Foreign currency reserves have reached $247.2 bln by end of June 2006 and are expected to increase further There has been an increase in the payment surplus for current operations 33 Overview: Russia is Closing to Top 10 by GDP Russia’s rapid and sustainable growth has brought the country onto the list of leading World economies The Russian Federation has the 14th highest GDP 4 Overview: Sovereign Ratings International agencies recognize the success of the Russian economy; the country has solid Sovereign ratings. A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 Brazil Ukraine B+ Russia China Mexico Poland India Kazakhstan Moody's A A- BBB+ BBB BBB- BB+ BB BB- Kazakhstan India Brazil Ukraine BB+ BB Russia China Poland Mexico S&P A China A- BBB+ BBB Poland Russia BBB- India BB- Brazil Ukraine Kazakhstan Mexico Fitch 5 B+ Overview: FDI Inflow Foreign Direct Investment inflow is constantly increasing due to improved economic and political conditions Location sites considered for new investment or expansion (% of citations for each country) FDI & Portfolio investment share are gradually increasing 6 Banking Sector Development 7 Russian Banking System: Infrastructure Credit system participant quality is gradually improving – the number of credit institutions is decreasing mostly due to “dead” bank exclusion from the market 8 Russian Banking System: Concentration & Growth Results The Russian banking system grew strongly in 2005: – Assets increased by 36.6% (2004: 27.4%) – Capital increased by 31.2% (2004: 16.2%) – Profit increased by 47.3% (2004: 38.6%) 2005: ROE 24.2 % (2004: 20.3 %) 2005: return on lending assets 3.2 % (2004: 2.9 %) Source: Central Bank The top 30 largest banks experienced the highest growth level (2005: Assets increased by 48%) June 2006 Dynamics of the Russian banking system Total Loans Total Customer Accounts Total Assets % of total% GDP US$ bln % of total% GDP US$ bln % of total % GDP US$ bln Top 20 Banks 20-200 Banks Other Banks 66% 26% 9% 20% 8% 3% 162 63 22 66% 24% 11% 9 15% 5% 2% 116 42 19 63% 28% 10% 31% 14% 5% 248 109 39 Credit Rating Comparison for Russian Private Banks The leading Russian Banks are highly rated by International Agencies Baa2 Baa3 Ba1 Russia Ba2 Ba3 B1 Alfa bank Ak Bars Bank Rosbank MBRD Bank Zenit JSC Impexbank Russian Standard Promsvyazbank Nomos Bank Petrokommerce BB BB- B+ Alfa Bank Bank of KhantyMansiysk MDM FG MDM Bank Moody's BBB BBB- BB+ Russia MDM Bank MDM FG S&P Russian Standard BBB BBB- BB+ BB BB- Russia Fitch B2 B3 Caa B B- CCC+ Uralsib Promsvyazbank B.I.N. Bank HCFB Surgutneftegasbank Petrocommerce Rosbank TransCreditBank B+ B B- Alfa Bank MBRD Ak Bars Bank Nomos-Bank Promsvyazbank Bank Zenit Rosbank BIN Bank International Bank of Saint Petersburg MDM Bank MDM FG Bank Soyuz CCC+ Trust Bank Uralsib 10 Source: Cbonds, Moody’s, S&P, Fitch MDM among Top Russian Banks Top Russian Banks as of 1Q 2006 * US$ mln Sberbank Vneshtorgbank Gasprombank Bank of Moscow Uralsib Alfa Bank Rosbank Raiffeisenbank International Moscow Bank MDM Bank ** Promstroybank SPb Promsviazbank Citibank Petrocommerce Assets 95 853 24 048 17 204 9 329 8 539 8 473 7 569 5 821 5 715 4 781 4 561 4 311 3 841 3 087 MDM Bank, % of the top 14 2.35% Loans Deposits 70 248 77 182 11 431 9 160 7 826 9 781 6 336 7 687 4 861 5 021 6 678 5 768 4 342 5 677 3 387 3 107 3 204 3 628 3 095 2 335 2 770 3 307 2 674 2 807 1 416 2 459 1 973 2 043 2.38% * Estimate, based on Russian Accounting Standards ** Excluding subsidiaries 11 1.67% Capital Profit before Tax 10 808 907 4 406 158 1 630 241 828 46 1 575 274 1 031 65 844 20 571 55 568 45 767 81 469 37 341 48 378 0 454 55 3.11% 3.99% Russian Banking System: Foreign Banks in Russia Foreign owned banks are increasing their presence in Russia in terms of assets and number thus establishing a new level of competition Key factors Russian top 30 banks asset structure The number of foreign-controlled banks in the Russian banking system*, as of April 2006, reached 55. (52 in 2005; 42 in 2004) Source: Central Bank, as of January 1, 2006 The assets of foreign-controlled banks increased by 49.3% (2004: 29.9%) and equity (capital) by 56.4 % (2004: 36.7%) Non-resident-controlled banks’ share in the banking system's assets grew from 7.6% in 2004 to 8.3% in 2005 and in equity (capital) from 7.8% to 9.3% Private deposits in non-resident- controlled banks increased in 2005 by 60.0% (2004: 71.9%) *With more than 50% share 12 Russian banking system: Mergers & Acquisitions Increasing M&A activities in past two years Benchmark valuation multiples Top Russian banks Rosbank PSB Impexbank Bank of Moscow Investsberbank International Moscow Bank Rosbank OVK VTB Guta Bank; PSB (SPb) Nikoil Avtobank;Uralsib Foreign banks BSGV DeltaCredit Assets, Change y- Capital, BV mln. USD o-y, % mln. USD multiple 6 933 48 709 4 4 827 61 501 1 1 883 43 192 3 7 662 49 963 3 832 311 87 3.7 5 479 57 602 2.3 Three Major Acquisition Groups Mid-market local banks GE Consumer Finance Deltabank Promsvyazbank Rostpromstroibank Hansabank Kvest Petro-Aero Bank Ruskobank; Inkassbank RaiffeisenBank Impexbank Sibacadembank Uralvneshtorgbank; EBRD portfolio investment: 13 local banks (2005: 7 banks) Mezhtorgbank; Dalvneshtorgbank; Zheldorbank Societe Generale Rosbank (10%) VEFK MDM Bank St. Petersburg OTP Bank Investsberbank 13 Banking sector: Investor Friendly? 14 Banking Sector: State Policy requires further development The Legal base For a competitive environment is not fully developed Excessive Costs associated with the Banking Sector The Banking System still needs to deal with a number of problems Low level of creditors’ rights protection Insufficient Banking Sector contribution to economic growth Bankruptcy procedures needs more transparency 15 Banking Sector: Striving for Improvement Both the State Authorities and Russian Banks must combine efforts to bring the Sector in correspondence with high international standards Russian Banks exert every effort to increase the Sector’s investment attractiveness The State pledges to make the following improvements: Improve legislation Improve Banking regulation and supervision Develop the Banking sector infrastructure ARB (679 banks), «Russia» (350), MICA* (67) and other organizations take an active part in the State policy implementation Rapprochement of the State and Bank interests Proactive stance toward public authorities’ initiatives Banking society members’ balance of interests Investment attractiveness increase in the external markets *MICA – Moscow International Currency Association 16 Banking Sector: Application of Western Quality Standards 17 Russian banking system: Stakeholders & Western standards Execs. Vendors Western standards of quality Clients Shareholders Russian Bank Managers Media Line employees Community Competitors 18 Regulators Western standards in banking services in Russia: Drivers & Blockers Western standards of quality in Russian banking services Drivers: • Strong competition • Increase in FDI • High growth levels • Increased ratings • High liquidity • Low interest rates Blockers: • Banking system weaknesses • High fragmentation of Russian banking system • Dominance of state-owned banks • Significant number of small banks • Slow implementation of reforms • Risks level remain substantial Current State 19 Product offering: banks are closer to western standards Still missing sophisticated product lines, Russian banks are closing the gap in product offering moving from “boutique” to mass standardized products Process Variety of services organization Corporate clients • Cash management • Loan products • Liquidity management • Investment banking Retail clients • Payments • Plastic cards • Loan products • Savings products Private banking • Wealth management Support platform Processes • Standardized procedures Client insight • Demand analysis • Relationship management IT • Multifunctional core systems and CRM Risk management • Credit bureaus 20 Sales channels Offices • Widening distribution network: •Branches •Mini-offices Virtual • Internet banking • Internet trading • Phone banking • Call centres Third party • Agents networks Banking in Russia: The Future Over the years several key measures were implemented to improve and increase the importance of the banking system in Russia. Banking system growth will continue ? Four distinct groups will remain on the market. Ba – State-owned banks – Largest private banks sel Cr bur edit eau s – Regional banks Sim – Foreign banks Conditions for FDI attraction will improve Transparency in lending institutions' operations will increase Foreign banks will continue steady growth Dominance of state-owned banks will Ris pli M& ficatio Ar ule n of s k -o rie sup nted erv ban isio kin g n Ob liga ins ura tory d nce epo sch sit em e II O WT ta l api nt c e Fre veme mo ta l api c ry lato ease u g r Re inc ta r n o i at Infl s ion s n Pe yst e ing get em rov p m mi ent Recent and anticipated changes in the Russian Banking sector remain 21 Outline: MDM Outline Key Highlights High international credit ratings As of March 31, 2006 (IFRS), MDM FG: Moody's Fitch S&P Ba2 / stable BB- / stable B+ / positive Leading bank in corporate governance practices in Russia (S&P CG Ratio:6.0) One of the four largest privately owned Russian financial institutions Universal bank: retail, corporate, investment and private banking Close to 1 million retail clients Over 70,000 corporate clients with over 2,000 medium & large active clients Numerous awards from financial magazines 22 – Assets: US$ 5,752 mln – Equity: US$ 963 mln – Net profit for 1Q 2006: US$ 43 mln – ROAE (annualized): 20% – Cost / income: avg.50% – Staff: 5,396