RETAIL BANKING IN RUSSIA DIFFERENT LOANS- DIFFERENT RISKS JUNE 2007

Richard Hainsworth, General Director of RusRating
Victoria Belozerova, RusRating banking analyst

• The retail market is not yet saturated and can accommodate new banks.

• Interest margins on rouble retail loans fell from 16% in the beginning of 2006 to 10% in the first quarter of 2007, but remains 4% higher than for other loans.

• The top ten banks hold 63% of the total volume of retail loans.

• Credit cards, auto loans and mortgages are the fastest growing segments.

• Official data on overdue loans is becoming less informative because banks are working with collection agencies.

• The total volume of overdue retail loans, including data from collection agencies, is about 75.5bn roubles.

• Overdue auto loans are growing faster than the market.

• The profitability of the retail portfolios is about 23-50%. Commission profits exceed interest rate profits for a number of banks.

• Express-credits will be the most affected by the disclosure of effective rates in retail loans.

Interest margins on rouble retail loans fell from the beginning of 2006 but remains higher than for other loans. This decline is due to the higher cost of resources and a general fall in interest rates. The retail loan market grew by 75% from the beginning of 2006. Auto loans, credit cards and mortgages were the fastest growing segments. Among the banks with the largest loan portfolios are those that entered the retail loan market in 2006, which shows the market has a large capacity and is not saturated. Taking into account data from collecting agencies and the volumes of overdue debts reported by the banks, RusRating estimate that the total volume of overdue retail loans could be about 75.5bn roubles, which is triple the amount of 2006.

In this report we analyze retail market trends, non-repayment risks and loan portfolio profitability for different banks.

Market leaders by volume of retail loans

The share of retail loans in the loan portfolios is increasing at a stable rate and was over 24% in the first quarter of 2007. The growing retail loan market with its high margins is extremely attractive to Russian banks. Virtually every major universal financial institution in the country is actively building up its retail loan book and positioning itself as a potential market leader. This report identifies the leading players in each segment of the market.

Overdue retail loans by market segment

Non-repayment risks differ significantly by market segment due to the different approaches by banks to evaluating borrowers and insuring risk. The highest profits are in express-loans where non-repayment risks are also the highest. Most of this profit is due to commission fees. The Central Bank's requirement to disclose effective rates will affect the express-loans (and credit cards) market the most.

Non-repayment risks for auto loans are lower and vary by bank. Nevertheless, the volume of bad auto loans is growing faster than the market, which confirms RusRating's forecast of a rise in overdue loans as the market develops and repayment dates approach.

Risks in mortgage financing are minimal. The banks covered in the report are primarily new market players since 2006. Growth in overdue mortgage loans is expected to be no more than 1-1.5% in the medium-term with the current stable general economic conditions.

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