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RussiaCommercial BankingReport Q2 2009 ISSN: 1747-8707

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Russia Commercial Banking Report Q2 2009 Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: May 2009

Russia Commercial Banking Report Q2 2009

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary .........................................................................................................................................5

Table: Latest Actual Data (RUBbn)....................................................................................................................................................................... 5 Table: Latest Actual Data (US$bn)........................................................................................................................................................................ 5 Table: Latest key Indicators At November 2008 .................................................................................................................................................... 5 Table: Annual Growth Rate Projections, 2009-2013 (%) ...................................................................................................................................... 6 Table: Ranking Out Of 46 Countries Reviewed In 2009 ........................................................................................................................................ 6 Table: Projected Levels, 2008-2013 (RUBbn) ....................................................................................................................................................... 6 Table: Projected Levels (US$bn) ........................................................................................................................................................................... 7

Overview – Commercial Banking Sector Of Russia .....................................................................................8

SWOT Analysis...............................................................................................................................................10

Russia Commercial Banking SWOT..................................................................................................................................................................... 10 Russia Political SWOT......................................................................................................................................................................................... 11 Russia Economic SWOT ...................................................................................................................................................................................... 11 Russia Business SWOT ........................................................................................................................................................................................ 12

Commercial Banking Business Environment Rating .................................................................................13

Table: Russia’s Commercial Banking Business Environment Ratings................................................................................................................. 13 Commercial Banking Business Environment Rating Analysis.............................................................................................................................. 14 Table: Central And Eastern Europe Commercial Banking Business Environment Ratings ................................................................................. 16 Commercial Banking Business Environment Rating Methodology ...................................................................................................................... 16

Global Outlook................................................................................................................................................18

Regional Outlook............................................................................................................................................20

Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios, End 2008.......................................................................................... 20 Table: Anticipated Developments In 2009 ........................................................................................................................................................... 21 Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2007 And 2008 (US$bn) ...................................................................... 22 Table: Comparison Of Per Capita Deposits, End 2008 (US$)............................................................................................................................. 23 Table: Interbank Rates And Bond Yields ............................................................................................................................................................. 24

Commercial Bank Sector Outlook ................................................................................................................25

Central And Eastern Europe Overview ........................................................................................................26

Macroeconomic Activity ...................................................................................................................................................................................... 28 Table: Russia - Economic Activity, 2005-2013 .................................................................................................................................................... 34 Exchange Rate Policy .......................................................................................................................................................................................... 34 External Debt....................................................................................................................................................................................................... 36 Fiscal Policy........................................................................................................................................................................................................ 37

Market Structure.............................................................................................................................................40

Protagonists......................................................................................................................................................................................................... 40 Table: Protagonists In Russia’s Commercial Banking Sector.............................................................................................................................. 40 Definition Of The Commercial Banking Universe................................................................................................................................................ 41 List Of Banks ....................................................................................................................................................................................................... 41 Table: Russia’s 10 largest banks ......................................................................................................................................................................... 41

Company Profiles...........................................................................................................................................42



Sberbank.............................................................................................................................................................................................................. 42 Key Statistics for Sberbank, 2003-Q308 (RUB) ................................................................................................................................................... 42 VTB...................................................................................................................................................................................................................... 43 Key Statistics for VTB, 2003-Q308 (RUB) ........................................................................................................................................................... 43 Alfa Bank ............................................................................................................................................................................................................. 44 Gazprom Bank ..................................................................................................................................................................................................... 45 Unicredit Bank..................................................................................................................................................................................................... 46 Raiffeisen Bank .................................................................................................................................................................................................... 47 Promsvyazbank.................................................................................................................................................................................................... 48 Bank of Moscow................................................................................................................................................................................................... 49 Key Statistics for Bank of Moscow, 2003-Q308 (RUB)........................................................................................................................................ 49

Methodology ...................................................................................................................................................50

Basis Of Projections ............................................................................................................................................................................................ 51 Commercial Bank Business Environment Rating................................................................................................................................................. 51 Table: Commercial Banking Business Environment Indicators And Rationale.................................................................................................... 53 Table: Weighting Of Indicators ........................................................................................................................................................................... 54



Executive Summary

Table: Latest Actual Data (RUBbn)

Date Total

assets Client loans

Bond portfolio Other

Liabilities and

capital Capital Client

deposits Other

December 2007 18,059.8 12,828.7 1,101.9 4,129.2 18,059.8 2,739.9 10,529.3 4,129.2

December 2008 26,160.0 17,392.8 1,192.6 7,574.7 26,160.0 3,299.2 12,946.0 7,574.7

Change, % 45 36 8 83 45 20 23 83

Source: BMI, Central banks, Regulators

Table: Latest Actual Data (US$bn)

Date Total

assets Client loans

Bond portfoli

o Other

Liabilities and capital Capital

Client deposit

s Other

December 2007 734.1 521.5 44.8 167.9 734.1 111.4 428.0 167.9

December 2008 889.7 591.5 40.6 257.6 889.7 112.2 440.3 257.6

Change, % 21 13 -9 53 21 1 3 53


Table: Latest key Indicators At November 2008

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio GDP per capita,

US$ Deposits per

capita, US$

134.35% 66.49% 41.87% 8,537 3,105

Falling Falling Rising




Table: Annual Growth Rate Projections, 2009-2013 (%)

Assets Loans Deposits

Annual Growth Rate 17 17 19

CAGR 13 12 17

Ranking 5 5 3


Table: Ranking Out Of 46 Countries Reviewed In 2009

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio

7 11 35

Local currency asset growth Local currency loan growth Local currency deposit growth

13 11 3


Table: Projected Levels, 2008-2013 (RUBbn)

December

2008 December

2009f December

2010f December

2011f December

2012f December

2013f

Total assets 26,160.02 27,991.22 30,790.35 35,101.00 41,068.16 48,049.75

Client loans 17,392.80 18,610.29 20,285.22 22,719.44 26,354.55 30,834.83

Client deposits 12,946.03 14,887.93 17,270.00 20,205.90 23,842.97 28,373.13

f = BMI forecast. Source: BMI, Central banks, Regulators



Table: Projected Levels (US$bn)

December

2008 December

2009f December

2010f December

2011f December

2012f December

2013f

Total assets 889.71 736.61 867.33 1,032.38 1,233.28 1,501.55

Client loans 591.54 489.74 571.41 668.22 791.43 963.59

Client deposits 440.30 391.79 486.48 594.29 716.00 886.66

f = BMI forecast. Source: BMI, Central banks, Regulators



Overview – Commercial Banking Sector Of Russia

In Q209 BMI is making a number of changes which we hope will substantially improve the impact and

value of our reports on the commercial banking sectors of various countries.

Since we introduced the commercial banking reports in mid-2004, we have sought to generate insights by

combining information from a number of sources. We have collated data pertinent to entire commercial

banking sectors that have been published by central banks, regulators and/or trade associations. We have

collated basic information concerning individual market participants. We have also considered BMI’s

current views on the economic outlook for the country in question. Many aspects have been – and

continue to be – brought together in a systematic way through our proprietary Commercial Bank Business

Environment Ratings (CBBER), which facilitate cross-country comparisons. The key changes in Q209 –

and what they mean for readers – are as follows:

Comprehensively Upgraded Database

We have now incorporated as much data as we can for 2008. We have also considered the size of total

bank assets, client loans, capital and client deposits in relation to the overall economy, as well as in

absolute terms. We have calculated figures in local currency terms, US dollar terms and euro terms. We

have extended our forecast horizon out to 2013. We have also improved the coverage of historical data in

this report. Our complete dataset is available for download from BMI’s website.

Concise Analysis Of The Sector

The structural strengths, weaknesses, opportunities and threats (SWOT) of commercial banking do not

usually change much from quarter to quarter. Nevertheless, they need to be explained in some detail –

even if only so that they may provide a context for the rest of the report. We have re-examined and (in

most cases) substantially extended the SWOT analysis. Much more than previously, the SWOT analysis

represents an ‘at a glance’ overview of what really matters for the overall commercial banking sector.

Broader And Deeper International Context

For a long time – before the global financial crisis reached a critical phase in mid-September 2008 –

commercial banking was inherently international in nature. In other words, it was a rare commercial

banking sector indeed that was totally isolated from cross-border influences. However, international

influences have become even more important than before as a result of the crisis. In response to this, we

have extended the range of countries whose commercial banking sectors we consider each quarter by 11;

Bahrain, Jordan, Kazakhstan, Kenya, Kuwait, Oman, Pakistan, Qatar, the UK, the US and Vietnam are

now analysed. Our reports also include new Global and Regional Outlooks.



Deeper Economic Analysis

We include more extensive coverage of BMI’s views of the economic outlook for each country. We also

include a section that deals with monetary and exchange rate policy.

Clearer Identification Of Protagonists

We now look more closely at the mandates of central banks, regulators and trade associations.

Clearer Definition Of The Commercial Banking Universe

We now include a specific definition of the universe of commercial banks in each country. In most cases,

we also include a comprehensive list of identifiable institutions (the main exception to this is the US,

where we confine the list to the 50 largest banks in terms of deposits). By defining the commercial

banking universe, and listing a greater number of active institutions in each country, we hope that our

reports are of much greater value to other researchers.

New Company Profiles

In Q209 we have sought to include 10 brief profiles of leading banks in each of the countries that we

cover. We will add additional profiles in coming months. Wherever possible, we have tried to quantify

the total assets, client loans, bond portfolio, client deposits and capital of each institution. Eventually, it

should be possible for us to profile most – or indeed all – of the banks that are active in the countries that

we follow.

Naturally, we will continue to improve the structure and content of the reports over time. The extended

Commercial Banking SWOT Analysis below summarises what we see as the key issues in this report.



SWOT Analysis

Russia Commercial Banking SWOT

Strengths Russia’s banking system is large in absolute terms – giving potential for economies of scale

There has been a general trend towards increased participation by foreigners and improved governance and regulation

Even with diminished prices for energy, Russia’s massive hydrocarbon producers are large users of banking services

Weaknesses The ludicrously large numbers of banks suggests that many institutions are essentially captives – set up to facilitate movement of funds across borders or for other purposes

Sberbank is overwhelmingly the dominant institution in terms of deposits and branch network

Opportunities Provided that the authorities continue towards reform and modernisation of the financial sector, there should be substantial opportunities for Western banks to introduce new products to Russia’s growing middle classes

Threats Multi-national banks appear to have made less progress in Russia than in other large emerging markets. Challenges are many. Given the problems that many global banks face with the worldwide financial crisis, it is possible that some will decide that Russia is not a market that they have to be in and the processes of innovation and reform will stagnate



Russia Political SWOT

Strengths We expect Russian government policy under President Dmitry Medvedev to remain stable and consistent with the previous administration led by Vladimir Putin

Weaknesses A lack of transparency in decision-making, including high levels of behind-the-scenes activity by various power groups, makes for a large element of unpredictability in domestic politics

The high degree of political authority in the presidency poses a risk to further institutional development in the non-executive sector

Opportunities President Medvedev has expressed a more compromising tone on foreign policy matters and has suggested a new emphasis on the development of civil society

Tight energy markets increase Russia’s foreign policy options, especially as regards consumer states

Threats Russia’s moves to increase its regional dominance in the energy sector risk a further deterioration in relations with the Western-leaning countries of the ‘Near Abroad’

Persistent frozen conflicts with separatist regions in Georgia and Moldova threaten to undermine Russia’s foreign relations with key trading partners

Russia Economic SWOT

Strengths Stability has increased dramatically since the late 1990s financial and economic crisis, as the economy has rebounded on the back of high commodity prices and the rouble’s 1998-99 devaluation. The greatly improved situation has resulted in upgrades to investment grade status by all the main international credit rating agencies

The use of windfall oil revenues to pay down external debt and build up a stabilisation fund will help safeguard public finances as oil prices fall and foreign investment dries up

Weaknesses The economy’s dependence on the oil sector makes it particularly vulnerable to a sustained decline in energy prices

The deterioration of Soviet-era infrastructure is a constraint to private sector activity, especially outside major cities

Opportunities A revitalisation of the structural reform agenda, including support for small and medium-sized businesses, restructuring of the banking sector, administrative reform to tackle red tape and corruption, and a revamp of the ‘natural monopolies’, would go a long way towards developing the non-oil economy and improving long-term growth prospects

A US$1trn public-private investment plan over the long-term will substantially modernise Russia’s transport, communications, electricity and utilities infrastructure

Threats The Russian economy is in a state of transition, from twin current and fiscal surpluses to deficits. With this will come new challenges to macroeconomic stability



Russia Business SWOT

Strengths The post-1998-crisis economic rebound, combined with significant reductions in personal and corporate income tax rates, has made Russia a much more attractive place to do business

Efforts to win membership of the World Trade Organisation (WTO) have received new momentum and could be rewarded in 2009

Weaknesses The operating environment remains hazardous on a number of fronts, with many foreign investors put off by poor legal safeguards, high levels of bureaucracy and corruption, and the Kremlin’s apparently politically motivated campaign against foreign oil firms

Opportunities Despite Russia’s poor investment image in the West, the benefits of its immense natural resources wealth and large and rapidly growing domestic market are significant incentives for potential foreign direct investors

The government has made fighting corruption a key priority and we expect sweeping legislative changes to significantly enhance the capacity of corruption-fighting institutions in the medium term

Threats State influence over business is on the rise. Most recently foreign operators in the energy sector such have come under pressure to allow greater involvement by state-owned firms in their projects. Nevertheless, the worst-case scenario of a reversal of the 1990s privatisations appears unlikely

Given the very low confidence in the domestic banking industry, the central bank’s efforts to restructure the sector could destabilise it further

The credit crunch has impacted Russian money markets significantly resulting in refinancing problems for corporates having to roll over short-term external debt



Commercial Banking Business Environment Rating

Table: Russia’s Commercial Banking Business Environment Ratings

Limits of potential returns Data Score, out of 10 Ratings score, out of 100

Total assets, end 2008 (est.) US$889.7mn 7 Market Structure 73

Growth in total assets, 2008-2013 US$611.8mn 7

Growth in client loans, 2008-2013 US$372.1mn 8

Per-capita GDP, 2008 US$9,964 7 Country Structure 60

Tax 3

GDP volatility 9

Financial infrastructure 5

Risks to realisation of returns

Regulatory framework and development 7 Market Risk 67

Regulatory framework and competitive landscape 7

Moody’s rating for local currency deposits 6.0 6

Long-term financial risk 7 Country Risk 64

Long-term external risk 8

Long-term policy continuity 8

Legal framework 4

Bureaucracy 5

Commercial banking business environment rating 67.0

Source: BMI



Commercial Banking Business Environment Rating Analysis

In our commercial banking business environment ratings universe of 45 mainly emerging market states, it

is little surprise that the US and UK come in first and second place respectively with scores of 88.0 and

82.0. Of crucial importance to both scores is the very high ranking in the crucial Limits of potential

returns, Market structure sub-category, which accounts for 42% of the overall score. The two countries

are ranked first and second in this category as well. This sub-category captures the size of the sector, and

the potential for assets and loans to grow in US dollar terms. While both systems have been buffeted by

the global credit crunch and will not post stellar growth numbers in percentage terms for the foreseeable

future, the sheer size of the US and UK’s financial systems means that there is massive potential for

deposits, assets and client loans to rise. In addition, the generally solid institutional framework – which

looks set to be augmented with new post-credit crunch regulations – will continue to provide a firm basis

for the sector.

Asia Rising

Beyond the Anglo-Saxon economies, the highest ranking economies are in Asia. South Korea (76.7),

Singapore (72.9) and Taiwan (72.6) occupy spots three to five. There are, though, countervailing trends in

place in these three market leaders. While Singapore leads the world globally in the Risks to realisation of

returns, Country risk sub-category’, with a score of 84.0, South Korea and Taiwan both have a score of

64.0, ranking them at 17. This is a function of Singapore’s high score on key elements of BMI’s

economic, political and business environment risk ratings, which measure the risks to policy continuity.

In contrast, the small size of the Singaporean economy and banking sector is a major factor limiting the

potential for expansion, especially in a world of lower liquidity and risk appetite. South Korea and

Taiwan, however, have large domestic economies to provide the deposit base necessary to fund credit

growth.

Elsewhere in Asia, we note that China (overall score 70.8) ranks seventh overall. As the world’s third

biggest economy – and still an emerging state at that – it is little surprise that the scope for asset growth in

China is huge. This has allowed the country to be ranked fourth in the Limits of potential returns category

(74.0), and post the highest Limits of potential returns, Market structure sub-category score, at 90.0.

What is preventing China from rising any higher is its poor performance in the Limits of potential returns,

Country structure sub-category, at 50.0 (37th), and the Risk to realisation of returns category, at 63.4

(23rd). Of particular concern to BMI is the potential for a systemic collapse of the local system, where

much lending is still state directed and risk management is still embryonic. In addition, despite the size of

the whole economy, per capita GDP still remains low. We forecast US$3,024 for 2009, with significant

income inequalities. This severely limits the ability of financial institutions to sell premium products in

the local markets, and also means that average deposit levels are still very low.



Emerging Europe, Limited Opportunities

The emerging European states are posting surprisingly mediocre ratings outturns. We have outlined at

length in recent months the potential for a systemic crisis in the region transmitted through the major

Western European banks removing credit and capital from Central and Eastern Europe. These risks are

exacerbated by the deep recessions we see in the Baltics, Bulgaria, Russia and Turkey, and the risks of

further currency crises that could create even greater economic dislocations, as the massive economic

asymmetries that have built up in the region unwind. When taken in tandem with the relatively small size

of the local economies and the rapid banking sector expansion seen in recent years, it is little surprise that

the highest rated emerging European state is regional heavyweight Russia, at 67.1 (14th globally), and that

the top ‘new’ EU member is the Czech Republic, at 64.5 (18th). Coming close to the bottom of both the

regional and global peers groups are Latvia (39.0, 43rd) and Ukraine (43.0, 40th), which have both been

forced to tap the IMF and EU for emergency funds.

MENA Below Par

Five of the nine countries in the Middle East and North Africa (MENA) region are in the bottom third of

our 45 rated states, with only the UAE truly shining (71.0, 6th). This is a result of the massive decline in

oil prices, which has resulted in a slump in liquidity in both oil producing states and those which have

benefited from an influx of hydrocarbon revenues seeking higher returns. Of particular concern is that

while some progress has been made on putting the region’s financial infrastructure on a more sustainable

footing in recent years, it is still far too dependant upon oil revenues, and there are few drivers of either

economic or commercial banking growth outside of the natural resources sector. Indeed, it is particularly

worrying that the not one MENA state has broken in to the top 10 states in the Limits of total returns,

Market structure sub-category. The best performers are the UAE and Iran (joint 13th place in this

category), and even with the growth of Islamic banking products, the boom years are over. We expect

much more moderate growth in the financial space over the forecast period, to 2013.

Opportunities In Africa

While Africa remains one of the most ‘under-banked’ regions in the world – and hence one of the most

insulated from the global credit crunch – the commercial banking business environment ratings still

reflect the major problems in operating in even the region’s largest economies. Even with South Africa’s

overall 70.4 rating score putting it in 8th place globally, this masks its stellar performance on the limits of

total return (scoring 74.0, ranked 4th), and its poor risks to potential return performance (62.1, 24th). The

country’s main weaknesses, in common with Kenya and Nigeria are bureaucracy, external economic risk,

and financial market risk, all of which deter potential investors from engaging more forcefully in the local

market.

Diffuse Latin Performance

Again, in Latin America, the ratings do not tell one particular story, with a widely diffuse regional picture

developing. Perhaps the most interesting story is among the worst performers, which include Argentina



(49.0, 37th), Colombia (43.7, 40th) and Venezuela (36.0, 45th). All three economies face difficult times

over the coming years, having been fiscally imprudent. The latter two (especially Venezuela) have

benefited significantly from the oil boom, which has now come to an end. There is little to be optimistic

about in any part of the ratings for these countries, and we anticipate a much weaker performance than in

Brazil (68.9, 12th), Chile (66.6, 16th) or even Mexico (65.5, 18th). Of particular note is Brazil’s crucial

Limits of potential return, Market structure sub-category rating of 80.0 (4th globally) and Chile’s

reasonably solid 80.0 Risks to realisation of returns, Market structure rank of 8th.

Table: Central And Eastern Europe Commercial Banking Business Environment Ratings

Limits of potential returns Risks to realisation of returns

Market

structure Country

structure Market risks Country risks Rating Ranking

Greece 70.0 72.5 83.3 54.0 69.4 1

Russia 73.3 60.0 66.7 64.0 67.1 2

Czech Republic 60.0 70.0 80.0 56.0 64.5 3

Poland 60.0 72.5 73.3 48.0 62.9 4

Turkey 70.0 57.5 70.0 38.0 60.7 5

Slovakia 40.0 80.0 83.3 58.0 59.6 6

Romania 50.0 57.5 73.3 52.0 55.3 7

Hungary 46.7 62.5 70.0 52.0 54.9 8

Slovenia 20.0 82.5 60.0 66.0 50.6 9

Kazakhstan 23.3 70.0 53.3 68.0 48.0 10

Ukraine 46.7 37.5 53.3 36.0 43.0 11

Latvia 10.0 62.5 60.0 56.0 39.0 12

United Kingdom 90.0 70.0 100.0 70.0 82.0

United States 90.0 85.0 100.0 80.0 88.0

Scores out of 100, with 100 the highest. Source: BMI

Commercial Banking Business Environment Rating Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),

a measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries and between the inputs to the CBBER and the Insurance Business Environment

Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings



calculated by BMI for all the other industries on which it reports, the CBBER takes into account the

limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former

and 30% to the latter.

The evaluation of the limits of potential returns includes market elements that are specific to the banking

industry of the country in question and elements that relate to that country in general. Within the 70% of

the CBBER that takes into account the limits of potential returns, the market elements have a 60%

weighting and the country elements have a 40% weighting. The evaluation of the risks to the achievement

of returns also includes banking elements and country elements (specifically, BMI’s assessment of long-

term country risk). However, within the 30% of the CBBER that take into account the risks, these

elements are weighted 40% and 60%, respectively.

Further details on how we calculate the CBBER are provided at the end of this report. In general, though,

three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements

of the limits of potential returns are by far the most heavily weighted of the four elements. They account

for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higher

than the country elements of the limits of potential returns, it usually implies that the banking sector is

(very) large and/or developed relative to the general wealth, stability and financial infrastructure in the

country. Conversely, if the market elements are significantly lower than the country elements, it usually

means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and

financial infrastructure in the country. Third, within the risks to the realisation of potential returns, the

market elements (i.e. how regulations affect the development of the sector, how regulations affect

competition within it, and Moody’s Investor Services’ ratings for local currency deposits) can be

markedly different from BMI’s long-term risk rating.



Global Outlook

BMI’s view on the future of the global banking sector is evolving quickly, alongside the panoply of

rescue plans being introduced by national governments and central banks. As the global financial crisis

continues to play out, it is not inconceivable that many major global banks are technically insolvent, with

impaired assets weighing heavily on their balance sheets. However, with the support of official entities,

including central banks and national treasuries, it is more likely than not that the major banks that have

survived the crisis so far will make it in the end. While we would have thought it likely a few months ago

that many major banks would be nationalised, we are now increasingly convinced that governments have

absolutely no desire completely to wipe out shareholders and subsume megabanks. This is as much about

political expediency – few leaders want to be associated with government takeover of national icons when

it can be avoided – as it is about ensuring that the banking sector has some scope to get back on its feet in

a few years by banks remaining listed on the stock market and retaining a private-sector influence. Short

of nationalisation, we believe that governments and central banks will do whatever it takes to keep banks

afloat, whether via capital injections, troubled asset relief plans or debt guarantees.

Having avoided the total meltdown of the global financial system, monetary and financial authorities will

attempt to impose new regulations in order to stave off future crises. The upshot is that deleveraging and

risk aversion is likely to be more of a structural than a cyclical phenomenon, and the free-wheeling

lending practices of the past few years are going to be replaced by tight regulation and greater

transparency. This means that for most banking sectors worldwide, loan-to-deposit and loan-to-asset

ratios are likely to decline, with lower loan growth over the next few years. These trends are reflected in

our forecasts, particularly for the more mature national banking sectors.

So for the surviving banks, and even for bystanders, there are obviously significant concerns over what

form global banking will take. There have been calls from the public and from national authorities for

increased oversight and regulation for the financial sector as a result of the gravity of the current

economic downturn and the perception that it originated from irresponsible lending practices. Several

questions over the future regulation of the banking sector have yet to be answered.

Transparency

Financial institutions have been accused of a lack of transparency, which has exacerbated the lack of trust

that investors have in banks, in turn making it difficult to raise capital. This is especially the case as some

assets, including derivative instruments and illiquid ‘toxic’ securities, are extremely difficult to value

fairly, and it is unclear who is holding what.

Bank Capital

How much capital is enough? Pro-cyclicality has been at the heart of the problem. When times are good,



and asset prices increase, lending is expanded, and capital looks adequate, but the opposite occurs when

times are bad, creating a self-perpetuating downward spiral. Off-balance sheet lending in special purpose

vehicles has made capital adequacy ratios more difficult to gauge. While a full reworking of the Basel II

criteria appears unlikely at this stage, there may well be a move toward greater transparency, closer

monitoring of risky positions, and regulatory measures against the pro-cyclical nature of capital positions.

Compensation

Banking compensation will come under increasing scrutiny, particularly for institutions that accept public

financing. Here, regulators and bank boardrooms alike will have to strike a delicate balance between

appropriate compensation for long-term (versus short-term) performance on the one hand, and placing

artificial limits on compensation that would deter skilled workers from entering the sector on the other.

Accounting Practices

The jury is still out on the mark-to-market standard of accounting for assets on banks’ balance sheets.

Some banks have complained that mark-to-market puts too much pressure on their capital bases at

precisely the time when capital is difficult to raise. But the crucial counter-argument is that banks would

have reduced their risk exposure in a more responsible manner if they had accurately and assiduously

marked-to-market in the first place and consistently throughout the economic cycle, rather than waiting

for markets to sour.

Global Policing

While it is clear that domestic regulators have fallen asleep at the switch, we believe regulation will also

take more of a global guise in the future, as banks’ international activities increase. Basel II is a good start

for standardising capital requirements, but given the increasing levels of country-to-country lending, there

is likely to be a call for a stronger and more effective regulatory body to corral the activities of large

international financial institutions. This may be difficult to achieve, however, as it would be hard to

imagine major banks in developing markets accepting the same standards as in, say, Western Europe.

Despite these potential developments, there remains considerable promise for the global banking sector.

Although they may now be subject to increased scrutiny and regulation, most commercial banks and

depository institutions were not involved in many of the worst practices that brought the banking world

into the current crisis. Many banks that dabbled in exotic products will gravitate back toward bread-and-

butter lending practices and maintaining stronger deposit bases. And we believe that emerging markets

retain considerable promise, particularly where they have underdeveloped banking sectors and large

populations with middle-class potential. This is reflected in our forecasts for continued deposit and loan

growth for several emerging states’ banking sectors. As such, the global banking sector will almost

certainly emerge from the current crisis in a different form, but with continued growth potential over the

long term.



Regional Outlook

Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios, End 2008

Loan/ deposit ratio, % Rank Trend

Loan/ asset

ratio, % Rank Trend

Loan/ GDP

ratio, % Rank Trend

Czech Republic 82.5 29 Rising 49.9 34 Rising 52.6 28 Rising

Greece 89.3 26 Falling 51.7 31 Falling 84.6 15 Rising

Hungary 139.3 6 Rising 52.7 30 Falling 67.5 20 Rising

Kazakhstan 208.8 2 Falling 76.6 4 Rising 63.1 21 Falling

Latvia 229.1 1 Rising 59.8 17 Rising 100.1 9 Rising

Poland 108.6 14 Rising 59.3 19 Rising 50.8 29 Rising

Romania 78.5 32 Rising 62.9 14 Falling 47.2 31 Rising

Russia 134.3 7 Rising 66.5 11 Falling 41.9 33 Rising

Slovakia 81.5 30 Falling 45.0 37 Rising 46.4 32 Rising

Slovenia 160.5 5 Rising 69.2 8 Rising 90.0 12 Rising

Turkey 67.3 41 Rising 43.8 40 Rising 28.5 38 Rising

Ukraine 182.4 3 Rising 84.9 1 Rising 78.9 17 Rising

United Kingdom 95.2 21 Rising 58.7 21 Rising 319.3 1 Rising

United States 87.2 27 Falling 56.9 23 Falling 55.2 26 Falling

Source: Central banks, regulators, BMI



Table: Anticipated Developments In 2009

Loan/deposit

ratio, % Trend Loan growth,

US$bn

Deposit growth, US$bn

Residual, US$bn

Czech Republic 83.3 Rising -25.2 -31.5 6.3

Greece 87.6 Falling -12.2 -8.2 -4.0

Hungary 124.9 Falling -16.8 -5.5 -11.3

Kazakhstan 202.2 Falling -14.7 -6.1 -8.6

Latvia 185.4 Rising -10.4 -2.8 -7.5

Poland 110.6 Rising -40.8 -41.0 0.2

Romania 77.1 Falling -10.3 -11.5 1.3

Russia 125.0 Rising -101.8 -48.5 -53.3

Slovakia 80.8 Falling 0.7 1.3 -0.6

Slovenia 159.0 Rising -3.6 -1.9 -1.6

Turkey 64.0 Falling -33.6 -38.9 5.2

Ukraine 185.5 Rising -6.0 -4.1 -1.9

United Kingdom 87.6 Falling -731.4 -221.4 -510.1

United States 81.3 Falling -236.3 361.4 -597.7

NB Incorporates estimated economic data and projected banking data. Source: Central banks, regulators, BMI



Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2007 And 2008 (US$bn)

2007 2008

Total

Assets Client Loans

Client Deposits

Total Assets

Client Loans

Client Deposits

Czech Republic 205.1 98.7 128.8 217.5 108.6 131.6

Greece 517.6 267.8 294.4 526.5 272.4 305.2

Hungary 165.1 87.1 67.3 181.5 95.6 68.6

Kazakhstan 98.2 74.6 31.7 104.5 80.1 38.3

Latvia 44.7 25.4 11.4 45.0 26.9 11.7

Poland 304.8 172.1 182.0 414.6 245.7 226.3

Romania 105.3 68.1 87.8 119.9 75.4 96.1

Russia 735.1 522.1 428.6 889.7 591.5 440.3

Slovakia 75.9 33.4 40.7 91.9 41.3 50.7

Slovenia 63.5 41.9 28.9 68.6 47.5 29.6

Turkey 433.9 188.3 282.2 411.7 180.1 267.7

Ukraine 101.7 84.5 58.6 110.8 94.1 51.6

United Kingdom 13,823.1 7,298.7 7,976.9 11,556.6 6,785.6 7,131.2

United States 13,034.1 7,906.5 8,415.3 13,853.2 7,875.9 9,035.7




Table: Comparison Of Per Capita Deposits, End 2008 (US$)

GDP per capita Client deposits Rich 20% client

deposits Poor 80% client

deposits

Czech Republic 19,927 12,709.9 50,840 3,177

Greece 28,774 27,286.9 109,147 6,822

Hungary 14,138 6,852.0 27,408 1,713

Kazakhstan 8,233 2,486.8 9,947 622

Latvia 11,527 5,038.8 20,155 1,260

Poland 12,718 5,947.5 23,790 1,487

Romania 7,463 4,485.0 17,940 1,121

Russia 9,964 3,105.3 12,421 776

Slovakia 16,478 9,376.0 37,504 2,344

Slovenia 25,938 14,547.1 58,188 3,637

Turkey 8,855 3,755.7 15,023 939

Ukraine 2,584 1,117.9 4,472 279

United Kingdom 34,607 116,138.4 464,554 29,035

United States 46,941 29,700.3 118,801 7,425




Table: Interbank Rates And Bond Yields

Current account, % of GDP, 2009f

Budget balance % of GDP, 2009f

Three-month interbank rate,

2008 (%)

Three-month interbank rate, early 2009 (%)

Czech Republic -2.8 0.3 3.60 2.20

Greece -14.5 20.0 2.90 1.60

Hungary -5.2 -2.2 9.60 9.30

Kazakhstan 8.2 -4.3 8.00 12.20

Latvia -15.2 3.0 9.00 9.00

Poland -5.9 -0.6 5.60 4.05

Romania -12.6 -5.2 13.74 13.20

Russia 5.9 4.1 18.13 10.80

Slovakia -4.9 -2.5 2.90 1.60

Slovenia -5.4 -0.1 2.90 1.60

Turkey -5.6 -1.8 16.30 11.20

Ukraine -6.3 -1.2 18.03 18.00

United Kingdom -2.6 4.8 2.3 1.3

United States -4.5 -3.6 1.5 1.5



Commercial Bank Sector Outlook

Russia’s loan to deposit ratio has risen steadily since 2002, from 0.8% to 1.3% in 2008. Loan growth has

been inconsistent, from 31% in 2002 to 47% in 2004, dropping to 34% in 2005, before hitting a high of

50% in 2007, then dropping again to 36% in 2008. Deposit growth has followed a similar pattern, from

24% in 2004 the measure increased steadily to a high of 44% in 2007, before dropping to 23% in 2008. In

2008, loans were ahead of deposits in the five-year compound annual growth rate (CAGR), posting 43%

compared to 33% for deposits.

Looking forward, we expect that the loan-to-deposit ratio will gradually fall to just below 1.1% in 2013.

After a big fall to 7% in 2009, we expect loan growth to gradually increase to 17% by 2013, while the

five-year CAGR in loans should fall steadily to 12% in the same year. There will be little movement in

loans as a percentage of GDP: 42% in 2008 to 41% in 2013.

Meanwhile, deposit growth should slow to 15% in 2009, but gradually recover to 19% in 2013. The five-

year CAGR in deposits should almost halve from 33% in 2008 to 17% in 2013. Deposits will likely

increase as a percentage of GDP from 31% in 2008 to 38% in 2013. Deposits per capita should more than

double, rising from RUR91,303 in 2008 to RUR205,183 in 2013.



Central And Eastern Europe Overview

Emerging Europe, Developing Problems

We remain highly concerned about the outlook for the European banking sector – in both the west and

east of the continent. The Western European state currently in the spotlight is Austria, whose banking

system has foreign lending exposure of US$277bn, equivalent to 76% of GDP, to emerging Europe. This

has attracted considerable media attention in Austria, and the risks posed by worsening credit quality in

emerging Europe have prompted Austrian politicians to look both in Europe and internationally for

financing for its creditors. We believe that international lenders are committed to providing balance of

payments support to most endangered states in the region, but a number of key risks persist.

Is The IMF Enough?

While backing from the IMF and others is available, this may not be enough in itself. Not only is

significant political will required to enact the changes required by the multilaterals, but the

macroeconomic picture in some countries (Ukraine, especially) is becoming exceedingly challenging.

Ratings agency Standard & Poor’s cut Ukraine’s long-term foreign currency rating to CCC+ in late

February 2009 amid concerns that the country’s IMF deal could be at risk. Any sovereign default would

make it exceedingly difficult for banks to continue servicing their debt, and capital controls would in all

likelihood also be erected. This would impair the value of Western investments in the local banking

sectors.

Downgrade Risk

Ratings agency Moody’s has also flagged downside risks to banking sector credit ratings. Not only will

this make fresh borrowing more difficult to attain, but it raises the roll-over risks of the existing debt

piles.

The Foreign Exchange Loans Issue

Foreign currency-denominated loans, especially to the household sector in Central and Eastern Europe are

a major risk. In Poland roughly 60% of all mortgage loans are denominated in Swiss francs. The

zloty/franc exchange rate sank from PLN1.9626/CHF in July 2008 to a low of PLN3.3413/CHF in

February 2009, a decline of 70%. Although the cross-rate has subsequently retraced somewhat, this has

had a major impact upon the creditworthiness of households and their ability to service debts. The danger

is that a rise in non-performing loans (NPLs) will result in foreign-owned units making cash calls on their

parent companies. In turn, capital raising by Western banking groups could well mean that governments

have to inject further capital into their banking sectors. We would imagine that most governments would

be loath to recapitalise their banks only to see the money flow abroad. Among others, the Unicredit,

Raiffeisen and Erste Bank banking groups could prove to be a transmission mechanism through which a

banking crisis is transmitted from one country to another.



But Can The Sovereign Help?

Although perhaps the most extreme case, the default of the Icelandic banks points to the fact that

governments do not automatically have the fiscal or financial resources at their disposal to bail out the

local banking sector. Although Austria – or the UK – is by no means as leveraged as Iceland, there is still

a major risk to government financing and creditworthiness. In the case of a major crisis – perhaps

including one or more states in emerging Europe going into default and placing a moratorium on banking

sector hard currency debt servicing – it is conceivable that the resources of even a medium-sized Western

European state could be severely tested. This is already reflected in the ongoing upward spike in credit

default swap (CDS) spreads in Western Europe. The Austrian 5-year CDS has reached 186.1 basis points

(bps) against an all-time low of 1.4bps in May 2007. This is hardly encouraging for an AAA-rated state,

and points to potential downside ratings ahead.

Watching The Overleveraged Markets

Emerging Europe has the dubious distinction of having the three most heavily leveraged banking systems

in 2008, among the universe of 45 states surveyed by BMI. The loan-deposit ratios, calculated by BMI,

of Latvia (229%), Kazakhstan (208%) and Ukraine (182%) are clearly not sustainable in the long term

and put their local economies very much at risk of a withdrawal of foreign capital. In the case of Ukraine

this has also been swollen by the high levels of foreign borrowing swelling in local currency terms in

tandem with hyrvnia/US dollar downside pressures seen in recent quarters.

We expect that these asymmetries will unwind over our five-year forecast period, so that the ratios will

stand at 115% in Latvia, 182% in Kazakhstan and 134% in Ukraine, by 2013. The declines will coincide

with lower foreign inflows into the sector, deposit growth remaining solid and local currencies regaining

their footing. Indeed, the much more moderate development of Central and Eastern Europe’s financial

sector is also reflected in the CAGR that we forecast. In Ukraine, we forecast a CAGR in total assets of

just 5.7% in 2009-2013, compared to 57.4% in 2004-2008, while in Latvia a slump from 32.0% to -2.0%

is forecast.



Macroeconomic Activity

Risks Of A Systemic Crisis In Russia

BMI View: The capital shortage impacting emerging markets will be acutely felt in Russia and a

systemic crisis has thus far only been avoided through proactive government intervention facilitated by a

large stockpile in foreign currency reserves. That said, the crisis risks will remain through the medium

term. Indeed, the potential for the economy’s external and fiscal dynamics, as well as banking system

stability, to unwind at an accelerated pace will only increase as official foreign exchange reserve stocks

fall further in 2009. Not only under such a scenario do we countenance a protracted and deep recession,

but also the risks of credit events – even among the country’s largest quasi-sovereigns.

BMI’s core scenario for Russia is decidedly bleak with an economic contraction of -4.0% for the full-

year. It is important to stress that even with this well below-consensus forecast, we continue to highlight

downside risks. With Urals oil set to average just under US$43/bbl over the course of the year, the

country’s external and fiscal dynamics are set to worsen considerably. The current account, having posted

large surpluses since 1999, is forecast to fall into deficit by 2010, while the federal budget is expected to

flip from a 4.0% of GDP surplus to a 6.8% shortfall. Even more worrying is the stability of the banking

system, which is likely to deteriorate further as deposit outflows – combined with a steady increase in

non-performing loans – hammer credit growth and further deteriorates liquidity conditions.

While it is already clear that Russia is headed for a recession, these factors suggest to us that the risks of a

systemic crisis are concurrently rising. Importantly, the only reason why the Russian banking system and

corporate sector have not already faced a widespread default scenario akin to 1998 is because of the

government’s liberal injections of capital in to the markets, thereby effectively taking on the short-term

debt refinancing obligations of large swathes of the private sector. This has been facilitated by a

substantial stockpile of foreign exchange reserve capital which peaked at US$758bn in July 2008, not

coincidentally in the same month that oil prices hit their record high.

Since then though, composite Russian reserves made up of central bank reserves, the national wealth fund

and the reserve fund have fallen by close to 15% and state obligations have increased substantially.

Central bank reserves alone have collapsed by 27% as monetary authorities attempt to slow the process of

rouble depreciation while simultaneously injecting liquidity in the bank system. Worryingly, they have

only been partially successful on the latter front. While overnight money market rates have been sustained

near 7%, the same cannot be said for conditions on anything longer dated. The three-month Mosprime

rate is a case in point, having spiked from just under 6% to 22% in less than four months.

What this suggests to us is that the monetary authorities have only limited control of capital market

stability in Russia and as the real macroeconomic effects of collapsing oil prices and global economic

contraction in 2009 play out further, the situation is only likely to continue to worsen.



It is not just monetary conditions either where the government’s ability to protect the economy could face

considerably greater weakening. After posting surpluses for nine straight years, the federal government is

likely to fall deeply into deficit in 2009, and is expected to run through more than half of the capital in its

reserve fund for financing. In addition to maintaining planned capital expenditure projections as a fiscal

stimulus, despite a decline in revenues, the government will likely increase its level of corporate support.

As an example, applications through the fourth quarter to the state development bank VEB for

refinancing aid have far exceeded the initial US$50bn pledged by Moscow. This has prompted the agency

to seek an additional US$34bn in capital injections.

As Government Ammunition Runs Dry, The Crisis Risks Will Rise

Having established that state support will continue to be crucial for the economy, the key question to ask

for Russia is does the government have enough ammunition to ensure banking system and credit market

stability while simultaneously providing the fiscal stimulus necessary to avert a very deep economic

contraction. While BMI’s core scenario is that the answer is ‘yes’ at least through 2009, we caution that

amid the current global market volatility and unprecedented levels of deleveraging, that there are very

real negative risks to this view. We stress that there are multiple inter-related factors which could drive

the economy toward a crisis risk scenario at an accelerated pace.

Energy prices, naturally, are a key variable, and while our forecast is for Brent crude to average

US$50/bbl through 2009, we have also cautioned that a dip to US$20/bbl is by no means out of the

question. A protracted price collapse to these levels would accentuate the negative trends already in play

in Russia including capital outflows, pressures on fiscal revenues, capital expenditure contraction,

industrial output declines and widespread demand destruction.

Confidence in the banking sector too is likely to remain precarious and acceleration in deposit outflows

could spell disaster for the credit markets, even to a greater extent than the liquidity freeze experienced

thus far. While we remain confident that the government will defend the large quasi-sovereign lenders

such as Gazprombank, Sberbank and VTB, the outlook for the small and medium-sized lenders is far

less certain. Already 18 banks have lost their licenses due to a failure to meet capital requirements and we

expect more insolvencies on the horizon. Foreign capital into the banking system has effectively dried up

amid investor risk aversion and spiralling credit spreads and the worsening fiscal situation means that

eventually we believe the government will have to selectively choose which companies to bail out. At this

point, the depositors will be the only remaining anchor for the small and medium-sized banking system,

but already we are beginning to see a loss of confidence among retail depositors. This is especially the

case as investors grow increasingly concerned about the stability of the rouble.

Between August and October, retail deposits in roubles shrunk by 12.1%. While FX deposits concurrently

rose by 14.2%, in nominal terms this still resulted in a drop in aggregate deposits of 7.4%. While we have

yet to see any decline in corporate deposits according to Central Bank of Russia data through to



October, the outlook is certainly weak as cash flows dry up amid the contracting economy and companies

run down deposits to meet short-term obligations.

The deposit situation also reflects wider confidence issues with the local currency, which is facing its

greatest pressures since 1998. While we have factored in a further 10% devaluation from its current levels

at RUB34.81/basket, there are risks of further depreciation going forward, especially in a US$20/bbl oil

scenario. Any weakness for the rouble beyond what we are currently forecasting would significantly

elevate the risks of corporate debt refinancing. Indeed, adding a currency crisis on top of a frozen credit

market and widespread aggregate demand destruction would be devastating for the country’s risk profile

for foreign investors. We have already seen how quickly the situation can unwind in Q408 when the

rouble depreciated by 14.6% (against the dollar-euro basket it is managed against) and the risks will

remain in 2009. Reflecting the marked increase in foreign currency demand, net foreign exchange flows

through authorised banks in the Russian Federation spiked to a record surplus of US$13.3bn in October.

This was almost three times higher than the previous record of US$4.6bn seen in December 1997, just

ahead of the financial crisis in 1998. Over the same period, gross foreign currency receipts by the banking

system more than doubled in month-on-month terms to US$27.8bn.

What The Crisis Would Look Like

At its core, the systemic crisis Russia is facing will be an enlarged version of the capital market ructions

seen in September and October of 2008. Government-led consolidation of the banking system will be a

natural result, but the process of asset writedowns and deleveraging that would be the outcome would

wreck havoc with domestic credit for years to come. To be sure, there would be a significant and

protracted economic contraction and the securities markets would fall further before any recovery in the

long run. At this point, the risks would also spread to the large quasi-sovereign corporates such as

Gazprom and Sberbank. While a comprehensive failure of either of these firms would still be unlikely

owing to political variables, we could yet see a restructuring of their debt obligations as well as

contractions in operations.

Problematically, this crisis would occur in a very different external environment compared to 1998. With

capital market restructuring (including nationalisations of large portions of the financial sector) and

unprecedented deleveraging ongoing in the developed world, the opportunity for Russia to tap external

financing either from private sources, international financial institutions or inter-governmental

organisations will be limited. This will ensure that the recovery from any default crisis (or near miss)

would likely be protracted over a multi-year time horizon.



No Avoiding A Deep Recession

BMI View: We have revised down our 2009 and 2010 Russian growth forecasts to -4.0% and 1.1%,

respectively. Private consumption growth in particular is set to contract markedly this year following on

the heels of the external sector’s downturn in H208. We highlight the prolonged deterioration of domestic

credit conditions alongside large scale capital outflows as reasons to remain very negative the overall

Russian economic outlook. To be sure, despite our very below-consensus growth forecast, we continue to

highlight downside risks and the potential for a much larger crisis scenario.

We expect the Russian economy to contract by a real 4.0% in 2009, with only a marginal recovery to

1.1% growth forecast for 2010. Leading consumption and production indicators have not only further

reinforced the negative outlook we have maintained on the economy since the third quarter but are also

suggesting that the crisis risks we have been highlighting are increasing in likelihood.

According to an initial estimate from the Russian Ministry of Economy, real growth fell to a decade low

of 1.1% in the fourth quarter. Thus far, the primary factor weighing on growth has been the weakening

external environment, with the spike in global risk aversion prompting an unprecedented level of capital

flight. After posting a strong US$41.1bn surplus in the second quarter, net capital flows have inverted,

with a record US$130.5bn deficit in Q408. To put this figure into perspective, this is equivalent to just

under 10% of total GDP in 2008 and more than five times the previous quarterly record outflow.

With foreign investors pulling out, the medium-term outlook for capital expenditures in the country is

decidedly weak and we forecast gross fixed capital formation (GFCF) to contract by a real 5.0% this year.

Already, the industrial sector is showing signs of very serious strain, with output collapsing by 10.3%

y-o-y in December, its highest rate of contraction since 1998.

Problematically, this will weigh significantly on the export sector, which has already shown a sharp

contraction in H208 on the back of the rapid decline in global energy prices since July. Export growth for

full-year 2008 fell to just 0.2% in real terms, the lowest expansion since 1997. Going forward though, we

expect the figure to deteriorate far further as the protracted decline in low commodity prices for primary

exports coincides with output reductions in the secondary sector. Indeed, part of the reason why we

shortened our growth forecast was a revision in our average 2009 oil price target from US$50.00/bbl to

US$43.00/bbl (Brent). Not only are we likely to see a fall in the value of nominal exports, but volumes

are likely to contract too. As a result, we forecast Russian goods exports in nominal value terms in 2009

to decline by 35.0%.

From an aggregate growth perspective, this bodes very poorly for Russia considering that the net trade

surplus accounted for an average 12.8% of GDP in the decade to 2008. Already in 2008, the surplus

contracted by a whopping 43.8% in real terms as import growth remained relatively robust at 17.7%.

Indeed, according to goods trade figures from the Federal State Statistics Service, net exports have



declined by a whopping 81.5% (in nominal terms) between its April record high and the December figure

of US$4.6bn.

The Big Story In 2009 Will Be Private Consumption

Of course, we stress that with the sharp trade surplus contraction in 2008, the base effects will mean that

the deterioration of trade account is expected to slow in 2009. That said, this is by no means reason to be

confident for the position of the overall economy. Indeed, while we forecast the contraction in net trade

surplus to fall from 43.8% to 18.9% this year, this has more to do with import demand as opposed to any

marked improvement in the export sector. One of our core views for 2009 is that the effects of the

external sector slowdown will be much more sharply felt in private consumption, which has thus far held

up relatively well. Indeed, while down, consumer sentiment as measured by the Levada Center’s

confidence index remained at historic highs according to a December survey. Moreover, real retail sales

growth stayed in positive territory through to the end of 2008 even as other emerging European retail

sales indicators fell into negative numbers.

It is important to recognise that the level of consumer leverage in Russia remains at relatively low levels,

so the impact of the credit constriction has had far less immediate effect on the consumer then in other

emerging European economies. Indeed, consumer spending has continued to increase despite the Russian

interbank market having effectively been frozen since September.

Money supply indicators too, indicate that monetary conditions in the country are sharply tightening, even

as production and investment indicators are showing serious strains. Both M2 and M0 money supply

growth has collapsed to levels unseen since 1998 to just 1.7% y-o-y and 2.5%, respectively. Neither

development is a positive indication. The nominal decline in M2 in Q408 reflects the drawdown in

deposits as confidence in the financial system erodes on the back of regional bank failures and elevated

debt refinancing risks throughout the economy. That M0 has also fallen on a nominal basis over the same

period shows a wider lack of confidence in the economy as a whole, reflecting the dollarisation effect that

resulted from the sharp devaluation of the rouble through the third and fourth quarters.

Worryingly from a consumption perspective, is that while these developments have not had a direct

negative impact, the indirect effects are likely to be made evident in 2009. A contraction in the money

supply is just about the last thing that an economy needs at a time of sharply falling external demand and

capital inflows. Indeed, constricting monetary conditions will make it very difficult for the Central Bank

of Russia and/or the government to reverse the negative trends in short-term credit markets, and while

this will not have a massive impact on the consumer directly, it will impact corporate leverage

dramatically and exacerbate the output trends we have already noted.

As output contracts alongside investment reductions, the inevitable outcome will be rising

unemployment, declining real wage growth and shorter hours worked in key sectors. Combined, these



will be the feed-through processes which push private consumption growth into negative territory in

2009. Notably, unemployment spiked to 7.7% in December, up from 6.6% in the previous month. We

forecast the pace of rising joblessness to continue relatively unabated through the first several quarters of

2009, bringing the rate up to 12.0% by end-year. Taking into consideration the combined corporate and

consumer outlook, we forecast private consumption in Russia to contract by 5.0% this year.

Risks To Outlook

Beyond 2009, we expect the economy to begin a steady pace of recovery, though only expect relatively

robust growth to return in 2011, with 2010 growth pencilled in at just 1.1%. While our core scenario

remains for a deep recession, we also retain the systemic crisis risk view for Russia that we first iterated

in October 2008. We stress that with over US$600bn in aggregate central bank and sovereign wealth fund

reserves, the government maintains the ability to contribute to a marked fiscal stimulus, retain solvency at

core quasi-sovereign banks, stabilise the exchange rate in the short term and cover private external debt

refinancing risks this year. That said, we caution that these obligations are likely to exceed reserve

availability should they last into 2010. To be sure, the level of net capital outflows will have to show

some signs of reduction by Q309 for our core scenario to remain in play. That said, should global

deleveraging continue beyond our current assumptions, thus indicative of a sharper global economic

slowdown (which in turn, would result in a more protracted weakness in energy prices than currently

factored for), then the potential for an even sharper unwinding of the Russian economy would grow

significantly.



Table: Russia - Economic Activity, 2005-2013

2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f

Nominal GDP, RUBbn 1 21,625.4 26,903.5 33,113.5 41,540.4 45,136.1 50,385.4 56,310.1 63,097.2 70,072.1

Nominal GDP, US$bn 2 764.40 990.10 1,295.1 1,671.2 1,339.3 1,371.0 1,620.4 1,875.1 2,146.2

Real GDP growth, % change y-o-y 1 6.4 7.7 8.1 5.6 -4.0 1.1 3.5 5.1 4.8

Population, mn 3 143.90 143.20 142.50 141.80 141.10 140.40 139.70 139.00 138.30

Industrial production index, % y-o-y, ave 1 4.6 4.7 9.4 2.7 -5.7 1.5 4.5 4.8 4.3

Unemployment, % of labour force, eop 1 7.1 6.7 6.1 7.7 12.0 12.0 10.0 9.0 8.0

Notes: e = BMI estimates. f = BMI forecasts. Sources: 1 Federal State Statistics Service. 2 Federal State Statistics Service/BMI Calculation; 3 IMF.

Exchange Rate Policy

Rouble To Fall Through RUB41.00/Basket

BMI View: Over the medium term, we expect the Russian rouble to depreciate below its current

RUB41.00/basket floor. Indeed, as balance of payments dynamics continue to deteriorate and significant

reserve drawdowns limit the ability of the central bank to defend the currency, the risks of allowing the

rouble to float will rise.

We remain pessimistic regarding the Russian rouble, with our core macroeconomic forecasts implying

that market pressures will remain to the downside over the medium term. Not only do we expect the

current account surplus to be significantly reduced in 2009 and to fall into deficit in 2010, but a net

capital outflow is likely to continue through at least the first half of this year. A fiscal deficit forecast to

exceed 7% of GDP will further accentuate the worsening external account dynamics, while also expected

to do little to mitigate the fundamental factors driving the Russian economy into a deep recession.

Through H109, we expect a degree of stabilisation in the benchmark rouble exchange rate versus the

dollar-euro basket (US$0.55/EUR0.45) the Central Bank of Russia (CBR) manages it against. By

allowing for an approximate 30% nominal devaluation of RUB/basket from November-January and by

stressing that the CBR would not tolerate any moves below a new trading band floor of

RUB41.00/basket, the CBR has bought itself some space from which depreciatory pressures have eased.



We caution though, that the current extent of devaluation is likely to remain insufficient over the longer

term, especially as we believe that government and consensus forecasts for the economy remain overly

optimistic and therefore the market has not adequately priced in the rouble’s weak fundamental position.

Indeed, while Moscow has mooted the likelihood of a 0.2% real contraction of the economy in 2009 and a

Bloomberg survey published on January 27 gave a median forecast of -0.7%, we forecast the economy to

fall by 4.0%. A further key indicator is the real effective exchange rate (REER), which remains near

multi-year highs. While all key nominal rouble cross rates have collapsed to historic lows, the REER had

only fallen to a 25-month low at end-January. Considering that inflation is forecast to remain in double-

digits through 2009, appreciatory pressures on the REER will remain in play. Therefore, for the rouble to

reflect the worsening relative position of the Russian economy in real terms, further nominal depreciation

has to be expected.

Stark Choices For the Government

Beyond the short term, Moscow is likely to be faced with three key choices with regard its exchange rate

policy. The first option will be to continue the status quo as seen through Q408 and early Q109, namely,

to continue running through foreign exchange reserves in an effort to defend the rouble. Second, the

government could implement capital controls to cut off both foreign investor repatriation of investments

and dollarisation within the domestic economy. The third option will be to allow for a floatation of the

rouble and end the policy of direct currency management.

Flotation Is A Realistic Option

In our view, a combination of the first and third options is the most likely scenario. Certainly, we expect

further currency interventions through at least Q309 and this has been factored into our end-2009 reserve

forecast of US$262.9bn (-40.0% y-o-y). That said, we believe that as CBR FX holdings fall below

US$300bn, the fact that the strategy is not sustainable will be made clear to monetary authorities and

alternative options will be explored. Under the current administration led by President Medvedev and

Prime Minister Vladimir Putin, we do not believe that capital controls will be seriously examined as a

legitimate policy option. Both leaders have consistently expressed their belief in foreign capital

investment as a lynchpin of long-term economic development and we see no reason as to why this would

fundamentally change going forward. This is especially the case as the government is well aware that

instituting capital controls would not alter the fundamental problem of low oil prices and the substantial

reduction in foreign investment that has resulted. Indeed by the very fact that the government opted to

substantially widen the rouble trading band in January, as opposed to clamping down on capital flows, we

have already seen a clear indication as to the exchange rate policy preferences of the current leadership.

This leaves allowing for at least a partial floatation of the rouble as the only likely viable long-term

solution. Of course, we stress that any floatation would still be expected to take place within a controlled

environment. Indeed, it is key to recognise that a floatation of the rouble would not wholly indicate that



the government is shifting immediately away from an exchange rate-targeting regime. Rather, what it

infers is that the previous process of direct interventions would likely be replaced by the use of indirect

monetary policy tools. For example, when the CBR allows for depreciation below the current floor we

would expect this to occur simultaneously with a sharp hike in benchmark policy interest rates. As such,

while a fall below RUB41.00/basket is expected in our core scenario, we caution that another 30%

depreciation is unlikely and more moderate losses against the dollar-euro basket of within 15% should be

expected. In RUB/US$ dollar terms, this would likely translate into a move to RUB40.00/US$.

External Debt

Private Sector Debt To Pose Sovereign Challenges

BMI View: We forecast the nominal level of Russian total external debt to fall in 2009 to US$464.6bn

(34.7% of GDP), reflecting our view for a protracted period of global deleveraging. Nonetheless, we

caution that private sector refinancing risks will remain prevalent going forward. Indeed, we expect that a

substantial portion of the US$141.1bn in principal and interest payments falling due this year will receive

some form of state guarantee.

Russia’s external debt dynamics are expected to worsen in 2009, despite forecast declines in the nominal

level of liabilities. As global deleveraging continues over a protracted period, gross external debt is likely

to fall back below US$500bn to come in at US$464.6bn at end-2009.

Relative to the overall economy (34.7% of GDP) or to exports (113.5%), the size of the external debt

stock appears at first glance of limited cause for concern, especially relative to the average levels seen in

other major emerging European economies. Indeed, by comparison, Turkey at end-2008 had estimated

gross external debt of 39.6%, Poland 74.6%, Kazakhstan 101.6% and Hungary 107.2%. That said, it is

important to focus on the systemic outlook of the global credit market to fully grasp the macroeconomic

risks that are posed by the existing level of debt. While the sovereign position remains sound, with limited

external debt and still high levels of reserves, the private sector is in far worse shape. Of the US$464.6bn

in forecast external debt, 90% of that is constituted by corporate entities. The ratio is similar for the

US$141.1bn and US$91.1bn in aggregate interest payments and principle repayments that fall due in

2009 and 2010, respectively.

Already, in 2008 we saw clear evidence that the Russian corporate sector is facing wide-scale problems in

refinancing its existing debt. At the end of January, companies had made applications totalling US$90bn

for refinancing assistance from state development bank VEB, far in excess of the US$50bn that had been

originally allocated by the government. The underlying problem has been a massive net capital outflow in

excess of US$130bn in Q408. Not only was this reflective of a sharp slowdown in new foreign direct and

portfolio investments but also of deposit outflows and dollarisation within the banking system, as well as



repatriation of existing foreign investments. Problematically, this had the effect of constricting domestic

credit markets and effectively freezing local interbank markets, thereby cutting off almost all market-

based lending channels.

The Sovereign Implications

Going into 2009, we expect the existing tight credit conditions to remain, reflecting our view for a sharp

global economic contraction, deflation in key developed economies and a general ‘flight to safety’ among

capital holders. While the private sector holds the vast majority of Russian external debt, we caution that

protracted corporate refinancing risks will raise serious questions as to the stability of the sovereign. The

systemic nature of the credit constriction means that we expect the government to continue taking on the

liabilities of the private sector, mainly through deep liquidity injections into the capital market and direct

refinancing support akin to the US$50bn VEB refinancing programme. With the Federal government also

forecast to post a 7.4% of GDP deficit in line with falling revenues and a major fiscal economic stimulus,

the sovereign’s debt position is set to worsen considerably.

Already, both S&P and Fitch ratings agencies have downgraded Russia’s long-term issuer default rating

to ‘BBB’ from ‘BBB+’ and we expect further downside revisions going forward. Certainly, a further

downward move to ‘BBB-’ is a realistic probability and there are even risks of a move to below

investment grade. Having long priced in such downgrades, this will not have a direct impact on credit

spreads, but it does reinforce the view that the shift in the Russian credit environment will not be a short-

term phenomenon. Indeed, we believe it will be at least three years before credit conditions fully stabilise

and we do not expect spreads to return to their 2008 lows by 2013.

Fiscal Policy

Expect A Massive Budget Deficit In 2009

BMI View: We expect Russia to post its largest deficit on record (in nominal terms) in 2009, translating

into a forecast 7.4% of GDP shortfall. Falling oil duties and political commitments to maintain spending

will act in concert to flip the budget from an estimated 4.1% of GDP surplus in 2008. In the short term,

the deficit should not pose a substantial financing challenge, with funds likely to be diverted from the

country’s Reserve Fund. That said, beyond 2009, a series of deficits will seriously erode the

government’s ability to cover private sector external debt shortfalls and utilise fiscal policy to stimulate

the economy.

Russia’s fiscal dynamics are expected to worsen considerably in 2009. We have revised our forecasts to

take into account the worsening macroeconomic conditions both domestically and globally, and now

expect a record federal deficit of just over RUB3.0trn or 7.4% of GDP.



Problematically, pressures will be felt on both the revenue and expenditure side. Energy duties are set to

fall considerably amidst falling oil prices. At the same time, the actual output of oil is falling too.

Certainly, the revenue figures from the taxation component are likely to be similarly weak, as the effects

on the real economy of the falling global commodity prices and the financial crisis results in a contraction

of economic output in the early part of 2009. We are forecasting federal government revenues to fall by

47% to RUB4.9trn in 2009, similar to the nominal level seen in 2005.

While revenues are set for a massive decline, the government has made it expressly clear that it intends to

maintain spending to the levels outlined in an original 2009 budget plan which was approved by the

Kremlin in August. Finance Minister Alexei Kudrin stated on television in December 2008 that a deficit

of between RUB1.5-2.5trn could be expected as the government kept to its spending plans, even in light

of a yawning disparity between the budget’s US$95/bbl average 2009 oil price assumption and the

Economy Ministry’s US$41/bbl forecast.

To be sure, we believe that increasingly heightened political and social pressures will make it very

difficult for the government to cut spending programmes, at least in 2009-2010. Unemployment spiked to

7.7% in December last year and is forecast to rise further to 12.0% in 2009. In a clear admission of the

potential social implications, Deputy Minister Mikhail Sukhodolsky of the interior ministry publicly

stated in December that there were an increasing number of protests, especially in the industrial cities

beyond Moscow and St. Petersburg. Certainly, the macroeconomic conditions for elevated political risks

are ripe amid flat economic growth, falling industrial output, rising unemployment and inflation still

forecast to remain above 10.0%.

As a result, Prime Minister Putin and President Medvedev have both been extremely liberal in

establishing spending programmes to bolster the economy ahead of a more marked downturn. Thus far,

US$200bn in varying forms of economic support have been pledged including liquidity injections for the

banking system and short-term debt refinancing programmes for the private sector. Kudrin has also

clearly stated that planned government infrastructure spending, ahead of the 2014 winter Olympics in

Sochi, will remain in place.

Financing Gap To Come From Reserve Fund

We stress that Russia is not an ordinary case and that the government’s substantial reserve holdings will

ensure the deficit does not significantly elevate the public sector’s default risk at a time when credit

conditions are at their worst since the crisis of 1998. Financing will come from the US$132bn Reserve

Fund, set up by the government at the beginning of 2008. However, we caution that there is limited scope

for the fund to provide budgetary support beyond 2009-2010 considering that the deficit is expected to

total just over half of the fund’s capital in 2009 alone.



Indeed, we are concerned that the use of the fund to plug what is likely to become the largest budget gap

(in percentage of GDP terms) since 1997 will have wider financial market and macroeconomic

implications over the long term, as investors price in the elevated risks associated with the depletion of a

key source of stabilisation. Russia’s substantial reserves, both in the form of central bank holdings, the

Reserve Fund and the US$76bn National Wealth Fund are the only reason the country is not in the midst

of a systemic corporate default crisis. That said, as we have long cautioned, the potential risks that those

reserves become drawn down rapidly appear to be playing out, and should the global economy not

recover quickly by 2010, then the crisis risks that Russia is currently staving off will be accentuated

beyond that year.



Market Structure

Protagonists

Table: Protagonists In Russia’s Commercial Banking Sector

Central bank: Central Bank of the Russian Federation (CBRF)/ Bank of Russia

http://www.cbr.ru/eng/

The Central Bank of the Russian Federation (Bank Russia) was founded in 1990 and is governed by the relevant sections of the Constitution of the Russian Federation and the Law on the Central Bank of the Russian Federation of 2002. It is the successor to the State Bank of the USSR. It is responsible for: formulation and execution of monetary policy; note and coin issuance; acting as lender of last resort; regulation of the banking sector; acting as banker to the government; management of international reserves; foreign exchange rules; the payments system, and; research on the economy.

Principal banking regulator: Central Bank of the Russian Federation (CBRF)/ Bank of Russia

http://www.cbr.ru/eng/

Among its other functions, the Bank of Russia is also the regulator and supervisor of the Commercial Banking sector.

Banking trade association: Association of Russian Banks (ARB)

Founded in 1991, the Association of Russian Banks (ARB) now has 756 members, including 581 credit organisations. It represents the collective interests of the banks to the government and to other parties, and conducts training courses.

Source: Official data, Company data



Definition Of The Commercial Banking Universe

As of January 2009, Sberbank accounted for 25% of total assets, 30% of regulatory capital, 52.5% of

retail deposits, 21.4% of corprorate deposits and 30-31% of lending within Russia’s commercial banking

system. Its website suggests that is – or at least was – larger in terms of total assets than the next ten

banks combined.

As of February 2009, the ARB had 756 members, including 580 credit organisations.

We therefore suggest that the 176 members of the ARB who are not credit organisations are a suitable

proxy for the universe of Commercial Banks in Russia. For the time being, we regard the October 2008

ranking of the 10 largest banks in Russia according to the National Banking Journal as a representative

sample of the universe.

List Of Banks

Table: Russia’s 10 largest banks

Sberbank

VTB

Alfa Bank

Gazprom Bank

Unicredit Bank

Raiffeisen Bank

Southwestern VTB Bank

Promsvyaz Bank

Bank of Moscow

National Reserve Bank

Source: BMI



Company Profiles

Sberbank

Overview Sberbank (Savings Bank of the Russian Federation) is the undisputed leader of the Russian banking industry, accounting for over a quarter of national banking assets. Established in 1841, it gained its present status of an open joint-stock company in 1991. The General Licence of Sberbank allows it to operate as a universal commercial bank in every segment of the financial market, providing its customers with the full range of banking services. Sberbank remains the largest bank in Russia and Central and Eastern Europe in terms of Tier I capital and assets. The bank’s total assets in 2005 — RUB2.513bn — exceeded the combined assets of the next 10 largest Russian banks. Sberbank is the leading universal commercial bank in Russia and continues to provide a full range of banking services. Sberbank’s customer base far exceeds that of any other bank in Russia. At the beginning of 2006, the Bank had over 6.5mn retail customers and over 1.4mn corporate clients. The Bank operated 269mn accounts for individuals, an average of 1.9 accounts per person in Russia. Website

http://www.sbrf.ru/en/

Key Statistics Status

Public sector bank

Key Statistics for Sberbank, 2003-Q308 (RUB)

2003 2004 2005 2006 2007 Q108 Q208 Q308

Total Assets 1,477,501 1,920,368 2,513,128 3,466,673 4,928,808 5,231,818 5,604,258 5,814,330

Loans & Mortgages 792,363.6 1,298,006 1,787,288 2,541,617 3,921,546 4,240,651 4,612,362 4,850,411

Total Deposits 1,190,142 na 2,061,108 2,828,824 3,877,620 4,065,662 4,467,295 4,690,584

Total Shareholders’ Equity 134,873.2 151,467 231,068.6 308,524 637,197 666,840 691,164 706,415

Source: Sberbank. na = not available



VTB

Overview The Bank for Foreign Trade (Vneshtorgbank) was established in October 1990 with governmental support to encourage the development of foreign economic transactions of Russian enterprises. It appeared in response to the country’s growing needs for banking institutions capable of satiating the economy with modern financial services. Shortly after its creation, VTB managed to gain a foothold in the Russian banking services market, win international recognition and get the name of one of the country’s most reliable banks with sound financial standing. Presently, the Government of the Russian Federation is a major shareholder of VTB, with a stake of 77.5%. During the Bank’s IPO made in May 2007, 22.5% of VTB shares were placed among Russian and international investors. The total amount of funds raised approximated US$8bn, making VTB’s IPO the world’s largest public offering in 2007. It also proved to be truly public IPO in the history of the Russian stock market, since it resulted in more than 120 thousand Russians becoming VTB shareholders. Website

http://www.vtb.com/rus/web.html?s1=1&l=2


Public sector bank

Key Statistics for VTB, 2003-Q308 (RUB)

2003 2004 2005 2006 2007 Q108 Q208 Q308

Total Assets 11,228 17,810 36,723 52,403 92,609 99,293 108,754 113,064

Loans & Mortgages 4,795 10,169 19,925 29,262 58,549 67,693 75,482 81,749

Total Deposits 4,259 6,024 12,767 19,988 37,098 43,603 44,609 52,575

Total Shareholders’ Equity 2,478 2,709 5,269 6,992 16,501 17,274 17,181 15,629

Source: VTB



Alfa Bank

Overview Alfa-Banking Group is one of Russia’s largest privately owned banking groups in terms of equity, assets, branches, retail deposits and funds under management. Founded in 1990, Alfa-Banking Group offers a wide range of products and operates in all sectors of the financial market, including corporate and retail lending, deposits, payment and account services, foreign exchange operations, cash handling services, custody services, investment banking and other ancillary services to corporate and retail customers. The corporate and retail client base has grown considerably during the last several years – by September 30, 2008 Alfa-Banking Group served about 51,000 corporate and 2.9mn retail customers, while the branch network has been extended to 338 offices across Russia and abroad. In addition to banking, Alfa-Banking Group has FSA, CySEC and FINRA-regulated brokerage subsidiaries, and other companies located in Cyprus, London and New York. During the first six months of 2008 Alfa-Banking Group demonstrated significant growth of its total assets to US$28.9bn, up 27.3% from US$22.7bn at the end of 2007. Net profit after tax grew an unprecedented 129.5% to US$265.3mn, up from US$115.6mn at June 30, 2007, driven largely by growth in core banking revenues combined with effective cost control. Net interest income increased by 69.5% to US$659.4mn from US$389.0mn as at June 30, 2007, while net commission income grew by 70.0% to US$186.2mn from US$109.5mn as at June 30, 2007. At the same time, Alfa-Banking Group’s investment in technology and focus on cost control have been the main drivers of a significant reduction in the cost-to-income ratio to 49.7%, compared to 55.5% at the end of 2007. The Group’s gross loan portfolio grew to US$20.2bn at June 30, 2008, a 31.2% increase compared to US$15.4bn at December 31, 2007. The corporate loan portfolio rose by 31.1% to US$17.7bn, while loans to retail clients increased by 31.6% to US$2.5bn at June 30, 2008. Website http://www.alfabank.com/russia/


Public sector bank



Gazprom Bank

Overview Gazprombank has been successfully operating in the banking market since 1990. Founded by the world’s largest gas producer and exporter Gazprom to provide banking services for gas industry enterprises, since then Gazprombank has become one of the leaders of the banking sector, which key performance indicators place the Bank among the top three banks of Russia. Gazprombank as universal financial institution delivers a wide range of banking and investment services covering about 43,000 corporate and 2mn private clients. Gazprombank invests and lends to companies of major sectors of the economy – oil and petrochemical industry, metallurgy, machine building, nuclear industry, electric power industry, real estate construction, transport, telecommunications and trade. Diversified client base enables a strong growth of a corporate loan portfolio and the retail business shows even a more intensive growth. Despite of a rapid growth of the loan portfolio, efficient risk policy and prudent approach to borrowers allow the Bank to maintain a ratio of problem and non-performing loans at the lowest level among the largest Russian banks. Gazprombank actively develops areas closely related to the investment business. Besides strategic investments to oil-and-gas, petrochemical industries, and media-business, in Russia Gazprombank occupies leading positions in transactions in the capital markets (bonds underwriting, arranging financing for clients), corporate finance advisory and project finance. At present, Gazprombank operates 5 subsidiary and affiliated banks in Russia, Belarus and Armenia, representative offices in China and Mongolia, and also 38 own branches across Russia from Kaliningrad in the west to Khabarovsk in the east. The total number of offices delivering customer friendly high-quality banking and depository services under the single brand name of Gazprombank is close to 450. Steady development and high reliability was rewarded with investment-grade long-term global credit ratings by international rating agencies: Moody’s Investors Service, Standard & Poor’s etc. Gazprombank was twice awarded by The Banker Magazine as The Bank of the Year in Russia in 2001 and 2005. Website

http://www.gazprombank.ru/eng/


Public sector bank



Unicredit Bank

Overview UniCredit Bank is a Russian commercial bank with international capital. It specialises in providing services for corporate and private clients, as well as in corporate financing and treasury operations. Business philosophy of UniCredit Bank derives from its unique position in the Russian banking sector. It was founded under the name of International Moscow Bank in 1989 for the purpose of attracting international finance and experience, and for participating in the modernization of the Russian economy. The origins and history of the IMB point to it as the most Russian of all the foreign banks in Russia and the most foreign of all the Russian banks. That is the source of the UniCredit Bank’s competitive edge. IMB was the first Russian bank to operate on the international financial markets. It also pioneered contacts with foreign government export credit agencies and international finance organizations. Credit lines available to UniCredit Bank from European Bank for Reconstruction and Development (EBRD) and from leading foreign banks are among the largest in Russia. On December 20, 2007 Bank of Russia has issued the General License for banking operations №1 to ZAO UniCredit Bank. Thus the Bank has officially changed its legal name. UniCredit Bank is a Russian commercial bank offering a full range of services. It is listed among the top 10 national banks and finance houses, and its shareholders are made up of a number of well-known international banks. Currently it has a shareholders’ equity of US$796.1mn, while the value of its total assets exceeds US$9.3bn. (as of December 31, 2006). UniCredit Bank has a clientele of more than 365,000 private individuals, 3,500 corporate bodies and 11,000 small and medium enterprises. Over 115 of the 200 largest Russian companies look upon UniCredit Bank (former IMB) as one of their main banking partners. At the end of 2006, the bank’s loan portfolio was assessed at over US$4.1bn. Its network of correspondent banks is one of the largest in Russia and consists of over 1700 banks. More than 300 banks have opened Loro accounts in UniCredit Bank. The bank handles all kinds of payments in all major currencies. UniCredit Bank holds a leading position in the Russian banking system due to the powerful backing of its shareholders. It is guided in its daily business by international commercial practices and standards and by its conservative approach to risk management. Analysis of UniCredit Bank operations conducted by authoritative rating agencies confirms that the bank’s liquidity is well above average for Russian banks. This reflects the Bank’s good reputation, its reliable sources of financing and its significant investment in liquid assets. Website

http://www.unicreditbank.ru/eng/index.wbp


Public sector bank



Raiffeisen Bank

Overview ZAO Raiffeisenbank is a subsidiary of Raiffeisen International Bank-Holding AG.The Bank has been operating in Russia since 1996 and offers a full range of services to retail and corporate customers, both resident and non-resident, in roubles and foreign currencies. The Bank’s activities are supervised by the Moscow territorial department of the Bank of Russia. Raiffeisenbank is the largest foreign-owned bank in Russia, ranking 7th in terms of assets, 5th in terms of private deposits and 6th in consumer lending among top Russian banks based on 1H 2008 results (Interfax-CEA). In 2006 Raiffeisen International Banking Group purchased 100% shares in OAO Impexbank, and in November 2007, the legal merger between Impexbank and Raiffeisenbank Austria was successfully completed. ZAO Raiffeisenbank now operates over 250 branches in 45 regions of Russia, servicing approximately 1 500 000 retail customers, almost 10 000 large corporate clients, and over 46 000 small and medium enterprises from Kalinigrad to Kamchatka. The Bank also operates three subsidiaries: Raiffeisen Capital Asset Management, the Raiffeisen Private Pension Fund, and a Leasing Company, all of which have consistently posted excellent results. Website

http://www.raiffeisen.ru/en/


Private sector bank



Promsvyazbank

Overview PSB is one of the largest private banks in Russia. The Banker magazine ranked PSB 15th in Central and Eastern Europe and 441st in the world in terms of shareholders’ equity as of January 1, 2007. PSB is rated by the three leading international ratings agencies. PSB is one of the leading Russian banks in trade and project finance, factoring, and corporate lending. It has a wide branch network across Russia, a retail branch in Cyprus, and representative offices in China, India, Ukraine and the Kyrgyz Republic. Since November 2006, Commerzbank Auslandsbanken Holding AG, a subsidiary of the second-largest German bank Commerzbank AG, owns 15.32% of PSB. Website

http://eng.psbank.ru/


Private sector bank



Bank of Moscow

Overview The Bank of Moscow is one of the leading universal commercial banks in the Russian Federation ranking number 5 in terms of assets and capital. It is also the 3rd largest deposit taker in the country. As of Q308 the Bank’s assets according to IFRS exceeded RUB713bn, with the total loan portfolio being approximately RUB470bn. The Bank of Moscow was established in 1995 and has since been majority-owned by the city government. Presently the Bank is controlled by the city, which owns 44% directly and 15.4% indirectly, through Capital Insurance Group (List of Bank of Moscow’s major shareholders). Strong client confidence and brand recognition contribute a lot to expansion of customer base in both retail and corporate areas. Currently, The Bank of Moscow provides services to over 105,000 corporate clients and over 9.6mn private customers. Among its corporate clients are major enterprises of various sectors of economy and SMEs. With 395 offices, the Bank’s branch network covers practically all major economic centers of the country from St Petersburg and Kaliningrad in the West to Vladivostok and Yuzhno-Sakhalinsk in the East. As of 1 January 2009, on top of 128 offices in Moscow and the Moscow region, the Bank operated 267 points-of-sale across the country. The Bank also delivers services to individuals at 471 Moscow based postal offices. The Bank owns 5 foreign subsidiary banks: BM Bank (Kiev, Republic of Ukraine), Bank Moscow-Minsk (Minsk, Republic of Belarus), AS Latvijas Biznesa Banka (Riga, Latvia), AS Eesti Krediidipank (Tallinn, Estonia) and Bank of Moscow j.s.c. (Belgrade, Republic of Serbia). The Bank also has a representative office in Frankfurt am Main, Germany.The Bank of Moscow’s Processing Center is certified by Visa International and MasterCard and has a wide network of ATMs (over 1800 units). Website

www.en.mmbank.ru/


Private sector bank

Key Statistics for Bank of Moscow, 2003-Q308 (RUB)

2003 2004 2005 2006 2007 Q108 Q208 Q308

Total Assets 119,824.8 158,836.3 245,769.4 382258.8 528,086.2 na na na

Loans & Mortgages 64,177.1 91,033.51 161,078.5 256042.1 351,622.2 na na na

Total Deposits 86,086.7 116,593.4 168,524.9 259501.1 350,646.2 na na na

Total Shareholders’ Equity 12,884.67 19,473.23 23,703.74 31,969.35 48,595.01 na na na

Source: Bank of Moscow. na = not available



Methodology

BMI’s commercial banking reports seek to provide insights about the operating conditions in and

prospects for commercial banks in each of around 60 (mostly developing) countries. The reports do this

by incorporating the latest information available from official sources such as regulators, international

associations of regulators and trade associations, comparable information from other countries; and

economic and risk data compiled by BMI.

Since Q208, we have been able to incorporate final figures and statistics for 2007 in relation to almost all

the countries that we consider. For some countries, it has been more practical to include data that pertains

to a later date.

The reports focus on total assets, client loans and client deposits. Total assets are analogous to the

combined balance sheet assets of all commercial banks in a particular country. They do not incorporate

the balance sheet of the central bank of the country in question. Client loans are loans to non-bank clients.

They include loans to public sector and state-owned enterprises. However, they generally do not include

loans to governments, government (or non-government) bonds held or loans to central banks. Client

deposits are deposits from the non-bank public. They generally include deposits from public sector and

state-owned enterprises. However, they only include government deposits if these are significant.

We take into account capital items and bond portfolios. The former include shareholders funds, and

subordinated debt that may be counted as capital. The latter includes government and non-government

bonds.

In quantifying the collective balance sheets of a particular country, we assume three equations hold true:

Total assets = total liabilities and capital;

Total assets = client loans + bond portfolio + other assets;

Total liabilities and capital = capital items + client deposits + other liabilities.

In terms of the equations, other assets and other liabilities are balancing items that ensure equations two

and three can be reconciled with equation one. In practice, other assets and other liabilities are analogous

to inter-bank transactions. In some cases, such transactions are generally with foreign banks.

In most countries for which we have compiled figures, building societies/thrifts are an insignificant part

of the banking landscape, and we do not include them in our figures. The US is the main exception to this.



In some cases, total assets and client loans include significant amounts that are owned or that have been

lent to customers in another country. In some cases, client deposits include significant amounts that have

been deposited by residents of another country. Such cross-border business is particularly important in

major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain

countries in Central and Eastern Europe.

Basis Of Projections

In Q208, we made a very substantial change to our methodology for making projections. Previously, we

had assumed that assets, loans and deposits would each continue to grow at particular rates through the

2007-2012 forecast period. This approach had several disadvantages. One was that, in reality, the main

elements of banking systems emphatically do not change at even rates through time. Another was that it

was that the growth achieved in the recent past may be unrepresentative of what is likely to happen in

coming years. Third, it did not automatically recognise that, over the long term, the growth rates of the

various variables should converge with the growth in nominal GDP.

Accordingly, from Q208, we assume that the growth rate, for each of the three variables, varies over time.

The growth rate in 2008 is deemed to be the actual growth rate achieved over the 12 months to the point

in time for which the latest data is available. The growth rate in 2009 is assumed to be a weighted average

– 80% of the actual rate achieved in the previous year and 20% of the long-term nominal rate of growth in

GDP that BMI has projected for the five years to the end of 2013. The growth rate in 2010 is assumed to

be a weighted average where the respective ratios are 60% and 40%. In 2011, the ratios are reversed. In

2012, the ratios are 20% and 80%. In 2013, the three variables are assumed to increase at the annual rate

of growth in nominal GDP over the five years: in effect, 2013 is the only year of the five where the actual

growth of the variables achieved in 2008 has no impact on the projected growth rates.

Commercial Bank Business Environment Rating

In Q108, BMI introduced a new Commercial Banking Business Environment Rating for each of the 60 or

so states we assess. In introducing this rating, our approach has been threefold. First, we have explicitly

aimed to assess the market attractiveness and risks to the predictable realisation of profits in each state,

thereby capturing the operational dangers facing companies operating in this industry globally. Second,

we have, where possible, identified objective indicators that serve as proxies for issues/trends within the

industry to ensure consistent evaluate across states. Finally, we have used BMI’s proprietary Country

Risk Ratings in a nuanced manner to ensure that the ratings accurately capture broader issues that are

relevant to the industry and which may either limit market attractiveness or imperil future returns.

Overall, the new ratings system – which now integrates with those of all 16 industries covered by BMI –

offers an industry-leading insight into the prospects/risks for companies across the globe.



In Q109, we updated all reports so that they incorporated the latest available banking data. In almost all

cases, we were able to include data that pertained to mid or late 2008

Ratings System

Conceptually, the new ratings system divides into two distinct areas:

Limits of potential returns: Evaluation of industry’s size and growth potential in each state, and also

broader industry/state characteristics that may inhibit its development.

Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from

the state’s political/economic profile that call into question the likelihood of anticipated returns being

realised over the assessed time period.

Indicators

The following indicators have been used. Almost all indicators are objectively based.



Table: Commercial Banking Business Environment Indicators And Rationale

Limits of potential returns

Market structure

Estimated total assets, end 2008

Indication of overall sector attractiveness. Large markets are considered more attractive than small ones

Estimated growth in total assets, 2008-2013

Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score

Estimated growth in client loans, 2008-2013 Indication of the scope for expansion in profits through intermediation

Bancassurance potential (BMI’s ratings score for the life insurance segment)

Indication of the scope for expansion in profits through bancassurance and/or other fee earning activities

Country structure

GDP per capita A proxy for wealth. High-income states receive better scores than low-income states

Active population Those aged 16-64 in each state, as a % of total population. A high proportion suggests

that the market is comparatively more attractive

Corporate tax A measure of the general fiscal drag on profits

GDP volatility Standard deviation of growth over seven-year economic cycle. A proxy for economic

stability

Financial infrastructure Measure of the financial sector’s development, a crucial structural characteristic given

the insurance industry’s reliance on risk calculation

Risks to realisation of potential returns

Market risks

Regulatory framework and industry development

Subjective evaluation of de facto/de jure regulations on overall development of the banking sector

Regulatory framework and competitive environment

Subjective evaluation of the impact of the regulatory environment on the competitive landscape

Moody’s rating for local currency deposits External assessment of risk

Country risk From BMI’s Country Risk Ratings (CRR)

Short-term financial risk Rating from CRR, evaluating currency volatility

Short-term external risk Rating from CRR, denoting the state’s vulnerability to externally-induced economic

shock, which tend to be the principal triggers of economic crises

Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of

government policy

Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of

investment can be a key risk in some emerging markets

Bureaucracy Rating from CRR to denote ease of conducting business in the state

Source: BMI



Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-

components equal weight. Consequently, the following weights have been adopted.

Table: Weighting Of Indicators

Component Weighting, %

Limits of potential returns, of which: 70

– Banking market structure 60

– Country structure 40

Risks to realisation of potential returns, of which: 30

– Banking market risks 40

– Country risks 60

Source: BMI

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