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Raiffeisen Capital & Investment - CEE Banking Sector Report, Russia: CEE's leading growth market, Nov 30, 2011.

Russia: CEE's leading growth market

In absolute and relative terms

Russian banks have done their post-crisis homework well. The country's banks have fully provisioned the cyclical increase in NPLs largely out of operating earnings. Although equity remained untouched in most cases, many players took a cautious stance and beefed up their capital buffers, using contributions from shareholders and RUB 900 bn in subordinated government loans. The system enjoyed a strong inflow of retail deposits during the past three years,

which were used to repay wholesale funding or were invested in fixed income securities.

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The credit cycle started to turn in Russia at the beginning of 2010, with the sector recording 12.1% growth in corporate lending and 14.3% in retail in 2010. In H1 2011, growth rates accelerated to 7.5% and 11.5%, respectively. Competition has intensified in recent years, largely driven by the state-owned and the largest privately-owned banks. In corporate banking, this led to the relaxation of underwriting standards,especially with regard to the pricing of loans, and banks are experiencing strong pressure on margins as a result. VTB's foray into investment banking and Sberbank's upcoming acquisition of Troika Dialog are also reshaping the competitive landscape in this segment. In retail, point-of-sale (POS) and cash loans seem to be everyone's darling. Although several M&A deals were rumoured, none of them has materialised. Sberbank, which is believed to be interested in this segment, decided to develop this business in a joint venture with Cetelem. Elsewhere, Nomos Bank acquired a 51.3% stake in Bank Khanty-Mansiysk, a leading player in that region. VTB purchased 75% of Transcreditbank from Russian Railways and has already completed the ill-advised acquisition of the controlling stake in Bank of Moscow by the end of Q3 2011. Another example of the riskiness of bank M&A in Russia is provided by the integration challenges at MDM Bank, which merged with URSA Bank at the peak of financial crisis. Several international banks, among them Barclays and HSBC, announced their intention to close retail operations in Russia. Raiffeisen remains the second-largest foreign player in the country after UniCredit, but will probably slip to the third place as and when SocGen completes the consolidation of all its businesses in Russia.

The market infrastructure improved a great deal in terms of banks' access to the central bank's liquidity. However, the consolidation of the fragmented bottom of the sector has decelerated, as only 12 players left the market (on a net basis) in H1 2011, down from the 46 that exited in 2010. What is more important, the ability of the regulator to supervise large and complex institutions can be called into question, as shown by large-scale fraud cases uncovered at International Industrial Bank and Bank of Moscow, both of which belong to Russia's thirty largest lenders.


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Publication:Russian Banks and Brokers Reports
Geographic Code:4EXRU
Date:Dec 1, 2011
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