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Strategy for Competing in Russia’s Banking Market Oleg Tumanov, Deputy CEO Alfa Bank, Moscow Strategy for Competing in Russia’s Banking Market Oleg Tumanov, Deputy CEO Alfa Bank, Moscow London, December 2003 1

Contents 1 Russian banking sector: general overview 2 Corporate segment 3 Retail segment 4 Contents 1 Russian banking sector: general overview 2 Corporate segment 3 Retail segment 4 Investment banking 2

Russian banking sector: general overview Stages of banking business development GDP per capita Beginning Russian banking sector: general overview Stages of banking business development GDP per capita Beginning n Formal regulation n Inexperienced clients Growth More experienced clients n Healthy demand for traditional commercial products n Maturity n n Experienced clients Demand for investment bank products Spain 5 -8 years Greece Czech Poland Russia Albania Romania Source: Mc. Kinsey Analysis Hungary Croatia Bulgaria Ukraine Corporate Loans/GDP 3

Russian banking sector: general overview Comparison of Russian and international banks Return on Assets Russian banking sector: general overview Comparison of Russian and international banks Return on Assets Return on Capital 4 30 25 3 % 2 1 20 3, 8 % 15 30 10 1, 4 0 0, 8 Russia Hungary 0, 62 21 5 1, 13 0, 27 14, 7 13, 7 12, 55 8 0 Av. Europe Czech Switzerland USA Russia Hungary Av. Europe Czech Switzerland USA Asset/Capital Ratio 30 25 раз 20 28 15 10 5 7, 7 14 16 21, 7 11 0 Source: PWC Selective research Russia Hungary Czech Av. Europe Switzerland USA Ø Return on assets and capital is still higher in Russia Ø Asset/capital ratio in Russia is smaller 8 4

Russian banking sector: general overview Situation Complicates on the Financial Markets §Competition is increasing Russian banking sector: general overview Situation Complicates on the Financial Markets §Competition is increasing in all segments §Competitors’ effectiveness is growing §Margins and profitability are decreasing §Customers are becoming more demanding §Risks and volatility are on the increase §Better access to funding 5

Russian banking sector: general overview Competition is increasing • M&A in banking sector • Russian banking sector: general overview Competition is increasing • M&A in banking sector • MDM banking group – $3. 6 bln assets • NIKoil-Ural. Sib group – $3. 5 bln assets • Rosbank-OVK – $3. 2 bln assets • Trust-Menatep – $2. 5 bln bank assets • MNR-Eurofinance – $0. 9 bln assets • Zenit group – $1. 8 bln (expected) • Foreign bank penetration • Raiffeisen to set regional network in ‘ 04 • Citibank plans 20 -30 branches in ‘ 04 • Soc. Gen. plans 26 branches in ‘ 05 Development of branch network is a priority Ø Societe Generale, Citibank, and Raiffeisen are investing in networks Ø Intesa announced opening of subsidary Ø In 2003 M&A activity involved the largest private Russian banks Sources: Alfa Bank statistics, CBR 6

Russian banking sector: general overview Western Banks Expand to the Russian Market Banks with Russian banking sector: general overview Western Banks Expand to the Russian Market Banks with Western participation : Corporate Deposits Market Share, % ØBanks with Western participation increase market share 8 7 6 5 Banks with Western participation: Retail Deposits Market Share, % 4 3 2 1 2. 5 0 1997 1998 1999 2000 2001 2002 2. 0 Growth Rates of Loans to Russian Borrowers 1. 5 % 90 Russian banks Banks with western capital 70 50 1. 0 0. 5 30 0. 0 10 -10 2001 2002 Source: «Banking on Russia» conference, London, 19 -21. 05. 03 1997 1998 1999 2000 2001 2002 7

Russian banking sector: general overview Loan spread is still high, but margins are declining Russian banking sector: general overview Loan spread is still high, but margins are declining Net banking revenue by product, % 25% Loan spread, % Spread on corporate loans and deposits Rates on $-denominated loans to corporate clients 20% 15% 10% 5% 0% 10. 01. 99 Rates on $-denominated corporate deposits 10. 01. 00 10. 01 Sources: Alfa Bank statistics, CBR, Mc. Kinsey 10. 01. 02 10. 01. 03 Ø 7. 5% loan spread in Russia is still high Ø Under pressure from an international decline in rates, banking loan rates are down Ø Lower margins pressured banks to develop client base 8

Russian banking sector: general overview Increasing Requirements for Banking Business Effectiveness ØLowering Margins RUR Russian banking sector: general overview Increasing Requirements for Banking Business Effectiveness ØLowering Margins RUR loans – RUR deposits USD loans – USD deposits 16 14 12 ØCost of being in business 10 8 6 1 Q 2 Q ‘ 01 3 Q ‘ 01 4 Q ‘ 01 1 Q ‘ 02 2 Q ‘ 02 3 Q ‘ 02 4 Q ‘ 02 percent points Source: «Expert» magazine Source: Alfa – Bank estimation 9

Russian banking sector: general overview Russian Financial Market Corporate Retail Investment + ++ + Russian banking sector: general overview Russian Financial Market Corporate Retail Investment + ++ + Market Growth Insurance ++ Competition high average (growing) very high Margin/Profitability high (falling) average (falling) high low Volatility/Risk high low very high average Source: Alfa Bank 10

Russian banking sector: general overview Which business to develop? Invest High Retail Asset Management Russian banking sector: general overview Which business to develop? Invest High Retail Asset Management Corporate Insurance Investment Support Low Source: Alfa Bank Current status Growth potential Low High 11

Corporate segment Option 1: Russia has 7, 800 SMEs Only 470 companies with annual Corporate segment Option 1: Russia has 7, 800 SMEs Only 470 companies with annual revenues > $100 mln Ø 7, 800 companies in Russia have revenues $5 -100 mln a year ØHalf of these companies are involved in trade and services Company distribution by sector Sources: Mc. Kinsey, BCG presentation 12

Corporate segment Option 1: Why are banks not in a rush? What constrains your Corporate segment Option 1: Why are banks not in a rush? What constrains your activity? * ØHigh risk in the real sector constrains lending to SMEs ØLow transparency is a key obstacle for loans to SMEs What hinders lending to SMEs? * Source: Development Center (poll of top-20 banks) Note: * the figures used in the charts represent the poll participants’ assessments of the relative importance of available answers 13

Retail segment Option 2: Targeting the retail segment Retail loans per capita, $ Ø Retail segment Option 2: Targeting the retail segment Retail loans per capita, $ Ø Comparison with Poland on loans per capita sets value of retail market at $40 bln vs. current $4 bln Ø Comparison with Poland on loans/GDP sets this value at $20 bln Ø q q Retail loans and deposits by country Loan growth to come from: Mortgages – just $200 mln now Auto loans – could potentially total $7 bln vs. $0. 7 bln today Share of cars sold via loans Sources: Alfa Bank estimates, BIS, CBR 14

Retail segment Option 2: Targeting the retail segment “Has your family ever taken credit? Retail segment Option 2: Targeting the retail segment “Has your family ever taken credit? ” Rates on. Retail lending attractive retail are attractive Ø Polls indicate 89% of Russia’s population has never taken out a loan Ø Retail loans are twice as expensive as corporate loans Sources: CBR, polls by IRG 15

Investment banking Option 3: New market instruments for $12 bln • Current markets to Investment banking Option 3: New market instruments for $12 bln • Current markets to increase q. Ruble corporate bonds –from $5 bln tо $10 -12 bln. q. Currency corporate bonds –from $0, 8 bln tо $2 bln q. Credit notes –market size may increase to $0, 5 -$0, 7 bln Ø Underwriting is shared between Alfa Bank, Trust, MDM, Rosbank and Raiffeisen Ø Current markets may expand by $9 bln Ø New instruments will demand up to $3 bln • New markets q. Mortgage bonds – half of the $70 mln Delta. Credit portfolio was sold through a private deal; potential market may amount to $0, 3 -$0, 4 bln q. Securitization of retail lending portfolio – may amount to $1 -2 bln over several years q. Derivatives papers – forwards, options, futures – may increase by several times from $50 mln Source: Alfa Bank statistics 16

Investment banking Option 3: M&A market of $5 bln in 1 H 03 Equity Investment banking Option 3: M&A market of $5 bln in 1 H 03 Equity market at 67%, concentrated on oil • M&A in 2002 -2003 q. M&A accounted to $4. 9 bln in 1 H 03 versus $4. 5 bln in 2002 q 212 deals are reported in 1 H 03 versus 291 in 2002 Net revenue contribution, Alfa Bank 2002 Ø Only 5 IPOs took place from 2000 and 25 are coming Ø M&A market is driven by asset consolidation Ø Commercial banks account for 63% of Alfa Bank revenues Sources: Alfa Bank statistics, RTS, Goskomstat, KMPG 17