Russia Commercial Banking Report Q2 2008

In March 2008, we updated all data for the 59 countries surveyed with official figures, sourced from central banks and regulators. In most cases, we were able to find data that pertained to the end of 2007: in almost all other cases, the data pertains to September 30 2007. As a result, the insights that we derive on particular countries are based on consistently sourced information that is far more current than it had been previously.

Although we gather data for countries such as the US, Japan, Australia and the eurozone, the vast majority of the 59 countries whose banking industries we survey are, or are generally seen as being, emerging markets. For all the widely publicised problems of large banks in developed countries, in the wake of the subprime banking crisis in the US, 2007 was an extremely good year for the banking sectors of the emerging markets. In local currency terms, the median growth in assets was 21% (in Brazil). The median rates of growth in loans to non-bank customers and in deposits were 22% (in India) and 18% (in Morocco). In some countries - and not just those enjoying oil booms - the figures were spectacular. In Ukraine, for instance, assets and deposits rose by 76% and 62% respectively. Loans grew by more than one-third in Bulgaria, Estonia, Latvia, Lithuania, Romania, Russia, Serbia, Slovenia, Peru, Bahrain, Iran and Nigeria. Deposits also rose by more than one-third in most of these countries.

In absolute terms, Russia's banking sector enjoyed strong growth through the year to December 31 2007.

In local currency terms, total assets, total loans and total deposits increased by 44%, 51% and 42% respectively. The loan/deposit, loan/asset and loan/GDP ratios all rose.

Relative to other countries surveyed by BMI, Russia's achievements are very impressive. Of the 59 countries surveyed, Russia ranks sixth in terms of both local currency asset growth and local currency loan growth and fifth in terms of local currency deposit growth. Russia's rankings in terms of its loan/deposit, loan/asset and loan/GDP ratios are 13th, 10th and 45th respectively. In a country with per capita GDP of US$9,091, deposits per capita are just US$3,091 or so.

In Q108, we envisaged that total assets, total loans and total deposits would rise by 35%, 31% and 30% annually through the 2007-2012 forecast period. Now, and using an improved forecasting method, we are looking for slightly lower growth rates of 26%, 28% and 25% respectively.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

Russia's CBBER is 65.0. In the context of the Central and Eastern Europe (CEE) region, this means it is a fairly attractive country; the CBBERs are only higher in each Greece and Hungry. Moreover, the ratings score for the market structure - the most important component of the assessment of the limits to potential returns - is 71.9. This is significantly higher than any other score in the region (the next highest is Turkey on 65.6).

In line with trends developing through the first half of 2007 and into 2008, we continue to believe that investments and private consumption will increasingly become the major factors driving growth, with the construction, manufacturing and retail trade sectors likely to outperform going forward.