Report Summary
Most Important Issue: Growth To Accelerate The Russian economy continues to impress, expanding by 7.9% y-o-y in the first quarter. While the energy sector remains a key component growth was actually strongest in the manufacturing and construction sectors. We believe this trend will continue over the long term, with new capital investments in infrastructure as outlined in the 2008-2011 budget plan, as well as increased private consumption driving the economy through to 2011. Our key concern remains inflation. While the latest figure shows consumer price growth coming in below the 8% end-year government target, large money supply growth and increases in fiscal spending point to added inflationary pressures going forward.
We have raised our forecast for end-2007 inflation to 8.2%. That said, we maintain our view that the long-term disinflationary trend remains in play. As such, we are keeping our forecast for steady declines in price growth to 5.4% y-o-y by end-2011. Not only do we expect GDP growth to moderate through our forecast period, but we do expect the Net Central Bank of Russia (CBR) to eventually allow for steady appreciation of the ruble. Against the dollar, we expect the ruble to gain over 7% to RUB23.20/US$
The favourable economic environment is discussed at length later in this report.
The Commercial Banking Sector The commercial banking sectors of 59 countries are surveyed by BMI. Of these, Russia is notable because of its rapid growth during 2006 in assets (46.1% in Russian ruble terms), loans (47.2%) and deposits (41.7%). According to these three measures, Russia ranks third, fifth and second respectively of the countries surveyed.
Russia is undeniably an attractive country for world-class investment banks with substantial capital bases and the ability to lay off risks by carrying out business globally. It is not difficult to find companies in the energy and telecommunications sectors that would rate as being large organisations in the rest of the world and that might wish to reduce their overall cost of capital by tapping global financial markets.
It is probably also fair to say that at least one of the domestic private-sector banks will be able to flourish through providing niche services to Russia's (numerically small) groups of high net-worth individuals and mass affluent individuals. However, none of the private-sector banks would rank as even a mediumsized institution in most developed countries: this is a point often overlooked by proponents of banking opportunities in Russia. Moreover, the demographics of Russia, and the huge challenges faced by any owner/operator of a small business in the country, mean that it is much harder to argue the case that a truly substantial retail customer base will emerge.
Russia Commercial Banking Report Q3 2007 Business Monitor International Ltd Page 12 Furthermore, it is difficult to identify attractive acquisition opportunities for foreign banks that have ambitions in Russia. Most banks are tiny, captive institutions serving particular local entrepreneurs. It may be that a deal can be struck with the owners and managers of Alfa Bank, MDM, Rosbank or Uralsib; however, none of these are large institutions, even in a Russian context. However, it is equally likely that, under certain circumstances, one of the foreign banks that have already established businesses in Russia could be persuaded to sell. For banks with global aspirations, Russia is more like Mexico than China. Ultimately, the size of the market opportunity and the challenges of doing business (which are different in Russia to those confronting Mexican bankers) are such that it is not a country in which one has to have an operation on the ground.
Sberbank is an anomaly in world terms. Aside from the public sector banks in India and Brazil, it is difficult to find institutions anywhere that are as large, and that clearly have a competitive advantage in their ability to attract deposits, yet which are not obviously being transformed into more normal commercial banks. In part because of their need to attract foreign capital, and in part because of official policies to develop the financial sector, China's four big state-owned banks - all of which are vastly larger than Sberbank - have undertaken initial public offerings (IPOs) or have plans (if long-term ones) to do so. As yet, there are no signs that the Russian government has similar intentions for Sberbank.
Sberbank is relatively huge, and because of this, deposits account for a relatively large portion - 58.8% at the end of November 2006 as opposed to 60.7% a year earlier - of the liabilities side of the Russian commercial banks' collective balance sheet. The implication of this is that the Russian banks are more vulnerable than are their counterparts in other countries to anything that might cause a major run on deposits. Given that the banking system also includes players like Gazprombank and Petrocommerce - which exist primarily to serve particular and gigantic corporate clients - swings in deposits are potentially quite large: a key question, but one to which we do not yet have an answer, is the extent to which deposits from Gazprom and Lukoil are being on-lent to non-bank customers who are unrelated.
Conversely, it is difficult to see what might cause a run on deposits in the short term. Quite apart from the healthy current account and budget deficit, the banks have amazingly little exposure to Russian government debt.
Notably there have recently been large capital inflows to Russia and these are partly responsible for upward pressures on the ruble. CBR Chairman Sergei Ignatyev estimated that over the first five months of 2007 net capital inflows exceeded US$60bn. This was due to inflows relating to the auction of Yukos assets and foreign borrowing by banking giants Sberbank and VTB. This figure dwarfs the US$41.6bn recorded in 2006 and the minute US$900mn seen in 2005.
Press Reports The Russian and international press have generally concentrated on two themes recently. The first is the growth story; banks are growing by way of strategic investment, mergers and IPOs in order to keep pace with the frantic level of growth in the sector. The entry of foreign players is particularly significant.
The second theme is the nagging worry about where all this will end. Can the economy and the banking sector maintain the pace of growth without hitting capacity constraints that result in a 'hard landing'. An article in London's Financial Times on April 24 quoted Hans-Joerg Rudloff, chairman of Barclays Capital, the investment-banking arm of Barclays, as saying that Russia's financial boom will come to a painful end 'in the near future'.
Other commentators disagree and predict a satisfactory outcome while still acknowledging the risks inherent in the Russian economy.
Contents
Executive Summary
Key Issues
Changes To Q307's Commercial Banking Forecast
Russia Commercial Banking SWOT
Latest Developments - Q307
International Context
Lending Trends And External Accounts
Total Assets, Loans And Deposits
Year-On-Year Growth Rates
Per Capita Deposits
Macroeconomic Trends And Developments
Economics: BMI Core Scenario
Politics: BMI Core Scenario
Business Environment:
Economic Activity
Industry Forecast Scenario
Comment On Forecasts
Comment On Trends
Banks' Bond Portfolios
Competitive Landscape
Market Protagonists
Methodology
“Russia Commercial Banking Report Q3 2007” is available from Report Buyer. For more information go to: http://www.reportbuyer.com/
Piribo Product ID: BMI00484
