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Corporate loans, bln RUB Retail loans, bln RUB 7 6 6 5 01.01.01.01.2 2 01.01.01.01.105 Corporate Retail banks Full-service Corporate banks Retail banks Full-service banks banks banks Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 62. Corporate and retail loans granted by the 500 largest Russian banks, by banking specialization, bln RUB Dynamics of overdue accounts were heterogeneous as indicator of the quality of credit portfolio in terms of banking specialization in 2010. The quality of portfolio of loans to nonfinancial institutions improved visibly in the group of corporate banks in 2010, as evidenced by a smaller share, a decrease from 5.8 to 4.5%, of overdue accounts in the corporate credit portfolio as of January 1, 2011.

A share of overdue loans in the corporate portfolio of full-service commercial banks remained the same: 6.1% as of 2010 year-end against 6.2% as of the beginning of the previous year. The group of full-service commercial banks showed no improvement in the quality of credit portfolio servicing in the field of retail lending: a share of overdue accounts also increased from 5.3 to 5.5%.

In retail banks, a share of overdue accounts decreased from 10 to 9.2% in 2010, thus maintaining the highest level in the banking system.

The structure of residues of provisions for impairment losses on loans corresponded to a large extent to the foregoing data on a share of overdue accounts in the credit portfolio of the groups of banks. For example, the group of full-service commercial banks showed the highest growth, 11.2%, in such provisions in 2010. It should be noted that the December decrease, nearly RUB 20 bln, in the provisions of Sberbank one of the principal players in the group of full-service commercial banks slightly improved the final dynamics of provisions in this group. The group of corporate banks showed a 9.1% growth in provisions in 2010, while retail banks, which had the highest provisions-to-overdue-accounts ratio, increased residues of provisions by 7.5%, thereby showing the lowest result in terms of banking specialization among the groups of banks (Fig. 63).

RUSSIAN ECONOMY IN trends and outlooks 1 200 +7,5% 1 100 1 000 +11,2% 900 800 +9,1% 700 corporate banks 600 full-service commercial banks 500 retail banks (right-side scale) 400 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 63. Dynamics of provisions for impairment losses on loans at the 500 largest Russian banks, by banking specialization, bln RUB Full-service commercial banks were found to be leading borrowers in terms of growth in deposits in 2010, mostly through a steady growth of deposits at Sberbank of Russia OJSC. It is the replenishment of the deposits which were opened at high recession-driven interest rates for a period of more than one year that became the key growth factor in retail borrowings. In 2010, volumes of deposits at full-service commercial banks totaled RUB 1,388 bln (+ 27% against 2009). Corporate banks increased their corporate borrowings portfolio by 20% (+ RUB 1,050 bln). The largest banks, namely VTB Bank and Gazprombank, were responsible for the lions share of growth, and growth in assets on current corporate accounts had an average effect of nearly 40% on total growth in borrowings from non-financial institutions accounted (Fig. 64) in 2010.

Corporate borrowings, bln RUB Retail borrowings, bln RUB 6 6 01.01.01.01.5 185 5 01.01.01.01.3 3 2 1 216 Corporate banks Retail banks Full-service Corporate Retail banks Full-service banks banks banks Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 64. Corporate and retail borrowings by the 500 the largest Russian banks, by banking specialization, bln RUB Section 3.

Financial Markets and Financial Institutes A combination of a much less intensive growth in costs incurred on creation of the provisions and a steady growth in volumes of loans in the corporate and retail banking sectors increased considerably financial performance of the banks in 2010. As of 2010 year-end, the group of full-service commercial banks, which earned a total of RUB 299 bln, was ranked number one in terms of accumulated profit. Corporate banks, which managed to earn a total of RUB 207 bln in 2010, were ranked number two in terms of annual financial performance.

The group of retail banks earned a total of RUB 53 bln in the preceding year.

By type of ownership The maximum interest which the owner holds in the charter capital or equity of a bank as of July 1, 2010 was used as the factor for recognizing the bank as pertaining to a certain type of ownership (private, public or foreign). We aggregated the data on the banks on the basis of the information specified in forms 101 and 102 of mandatory reports posted on the website of the Central Bank of Russia.

12 000 18 11 9 17 10 17 17 8 16 6 000 16 15 3 15 4 15 3 2 14 Corporate banks Foreign banks Public banks (right-side scale) 0 14 Jan-10 Apr-10 Jul-10 Oct-10 Jan-Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 65. Assets of the 500 largest Russian banks, by type of owner, bln RUB The following ratio by type of ownership was observed within the 500 largest Russian banks by January 1, 2011 (in terms of asset size): banks in which the state holds an interest (including Sberbank of Russia OJSC) accounted for 53.7% (against 54.3% in the preceding year), foreign banks for 12% (the same as of January 1, 2010), and private banks for 34.3% (against 33.7% in the preceding year). The foregoing statistics show that private banks were more active than public and foreign banks in 2010. However, state-held capital kept prevailing over private and foreign banks across the entire system, mostly because of Sberbank, VTB Bank, Gazprombank. Dynamics of assets at the 500 largest Russian banks in 2010 by type of ownership is shown in Fig. 65. As of 2010 year-end, private banks increased their assets most rapidly, with an annual growth rate of 18%. In 2010, Alfa Bank, the largest Russian private bank increased its assets by RUB 226 bln or 34%; TransCreditBank reported a 53% growth in its assets by a total of RUB 134 bln, the assets of NOMOS-BANK increased by RUB 92 bln.

RUSSIAN ECONOMY IN trends and outlooks Foreign banks were ranked number two in terms of intensive growth in assets (by 16% ) in 2010, which was 1 p.p. above the overall growth in the assets across the entire banking system of the Russian Federation. UniCtredit Bank (a 31% growth in assets, + 164 bln RUB), Citibank (+ 30%, + 59 bln RUB), ING Bank (Eurasia) (+ 42%, + 37 bln RUB), Nordea Bank ( + 22%, + 35 bln RUB) contributed most to the growth in the assets at foreign banks in Russia in 2010. A 21% growth in the assets of Sberbank (RUB 1,617 bln), 28% at VTB24, and 5% at VTB Bank should be highlighted among the backbone banks in which the state holds an interest.

Competition between banks for reliable corporate got stronger in the year that followed the post-recession year. It was the interest rates that became the key argument in this struggle.

Specific features of the Russian banking system, which include high concentration of inexpensive resources at public banks, effected the growth structure in the field of corporate lending in 2010. Public banks kept leading in terms of growth in corporate loans in 2010: a growth of RUB 856 bln against RUB 589 bln at private banks and a mere RUB 157 bln at foreign banks. It is noteworthy that private Russian banks remained to be leaders in terms of growth rates of corporate loans through increase in the number of sales of credit products in the SME segment. In turn, foreign banks were most active in retail lending. According to the official reports published by banks, the portfolio of loans which private Russian banks granted to non-financial institutions in 2010 increased by 16% to reach RUB 4,319 bln. Banks in which foreign companies hold an interest, increased their retail credit portfolio by 17%, from RUB 684 bln to RUB 801 bln (Fig. 66).

Retail loans, bln RUB Corporate loans, bln RUB 1 01.01.8 1 7 422 01.01.01.01.01.01.1 1 4 3 1 1 Private banks Public banks Foreign banks Private banks Public banks Foreign banks Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 66. Corporate and retail credit portfolios at the 500 the largest Russian banks, by type of owner, bln RUB The interbank loans market became one of the top-priority investment goals among foreign banks in 2010. For example, in the group of foreign banks, 37% of the biggest growth in the assets at UniCtredit Bank was gained through transactions related to lending to financial institutions. In the same year, WestLB Vostok Banks portfolio of loans to other banks increased by RUB 30,5 bln, while Citibank added RUB 10 bln to its interbank credit portfolio.

In 2010, private Russian banks were found to be most effective in terms of improved quality of credit portfolio. A share of overdue accounts reduced in both corporate and retail credit Section 3.

Financial Markets and Financial Institutes portfolios of private banks in the same year. The most relevant quantum jump was reported in the corporate portfolio of the banks in this group. A share of overdue accounts in this group decreased from the historical maximum reported late in 2009, from 8.7 to 5.2%. We are reminded that it was the private banks that happened to face most of the issue of large-scale, negative revaluation of companies loan collaterals and had to launch a large-scale loan restructuring campaign. Even now private banks maintain the maximum level of provisions to cover overdue accounts in the banking system of Russia. For reference, the value of the foregoing coverage ratio for private banks as of January 1, 2011 was 195%, whereas for public banks it was equal to 169%, and 167% for foreign banks. A share of overdue loans in the retail portfolio at private banks decreased by 0.8 p.p in 2010. As of 2010 year-end, foreign banks reduced a share of overdue accounts in the corporate portfolio by 1.6 p.p. At the two largest foreign banks specializing in corporate lending UniCredit Bank and Raiffeisen Bank a share of overdue accounts decreased from 5 to 3% and from 7.5 to 5.5%, respectively. On the other hand, public banks reported growth in a share of overdue accounts in both corporate and retail portfolios in 2010. Sberbank and VTB, the two largest state-owned banks, had a substantial share overdue loans in the loans to non-financial institutions. In year-end, a share of overdue accounts was 5.8 and 7.8%, respectively (Fig. 67).

A share of overdue loans in the Share of overdue loans to corporate credit portfolio, % individuals in retail credit portfolio, % 01.01.8,7% 01.01.01.01.6,5% 10,3%9,5% 9,4%9,7% 5,2% 4,6%5,0% 4,9% 01.01.5,9% 3,6% Private banks Public banks Foreign banks Private banks Public banks Foreign banks Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 67. A share of overdue accounts in the corporate and retail credit portfolios at the 500 largest Russian banks, by type of owner, % In general, dynamics and intensity of growth in provisions for impairment losses on loans corresponded to a trend towards changes in a share of overdue accounts. Year-end provisions increased much faster in the group of public banks, by 17%, against 4.3% in the group of foreign banks, and a mere 2.4% in the group of private banks. It should be noted, that in December 2010 the provisions at Sberbank of Russia decreased considerably by nearly RUB 20 bln in, which slightly improved annual dynamics of provisions in the public banking sector.

Following is a breakdown of the groups of banks by type of ownership as of 2010 yearend: public banks accounted for 63% (RUB 353 bln, of which RUB 225 bln was earned by Sberbank) of the total profit of the 500 largest banks, private Russian banks accounted for 20% and foreign banks for 17% of the total profit.

RUSSIAN ECONOMY IN trends and outlooks Hence the following basic trends emerged in terms of type of ownership in 2010:

1) public banks were least aggressive in increasing their credit portfolios while kept accounting for the biggest share of overdue accounts in the banking system. Most of the profit accumulated in the banking sector was concentrated in this sector owing to large volumes and relatively inexpensive liabilities in this sector ;

2) private banks intensively developed corporate lending and managed to improve considerably the quality of assets as of 2010 year-end. High level of allocation of loans in this group could allow additional profit to be generated from decrease in provisions under ongoing trend towards improvement of borrowers solvency ;

3) foreign banks still accounted for a smaller share in terms of assets. Return of foreign capital to the Russian Federation under a favorable macroeconomic scenario in 2011could encourage inflow of inexpensive liabilities from parent companies located abroad and, as a consequence, further increase in foreign banks market share. The level of overdue accounts under retail loans in this group remained beyond the market average. The end of excessive liquidity period in the banking system could provide extra benefits to foreign banks actively crediting in interbank loan market. The created provisions for impairment losses on loans are unlikely to undergo an additional, substantial reduction at foreign banks, because the provision coverage ratio was the lowest in this group of banks against public and private banks.

3.10. The Market of Municipal and Sub-Federal Borrowings 3.10.1. The dynamics of market development In 2010, the consolidated regional budget and budgets of territorial public extra-budgetary funds had a deficit in the amount of RUR 99.3 billion (0.22% of the GDP). As compared to the year 2009, the amount of the deficit of the consolidated regional budget decreased by 75% of the GDP. In 2009, the deficit of those budgets amounted to RUR 329.3 billion (0.84% of the GDP).

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