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Number of banks involved in GKO-OFZ transactions has had wide fluctuations throughout the year. Thus in December 2001, turnover for that particular instrument surfaced in balances of 378 banks, in September the figure rose to 384 and in November it dropped to 285. In absolute terms, cumulative turnover of all existing Russian banks has had somewhat different dynamics. In December 2002, the turnover amounted to RR51.4 billion, by September it declined to RR31.2 billion and in November it rose again to RR54 billion, the latter change, perhaps, being a reflection of a general vibrancy experienced by the secondary market in the last quarter of 2002. Sberbank participation in that market, on the other hand, was fairly stable throughout the analyzed period.

In general, GKO-OFZ market elicited only a lackluster interest and monthly turnover values on corresponding accounts (calculated as sum of sales and purchases per month) were lower than account balances. For comparison, in pre-crises months of 1998, turnover value exceeded account balances by 2-3 times. In November 2001, ratio of turnover to balances was 54.8% (87% if Sberbank figures are excluded). Whereas in November of 2002 the same ratio stood at 153% (283% exclusive of the data on Sberbank).

GKO-OFZ trading takes place on 8 Russian trading floors, with MICEX in the lead.

Most of participants in the market for secondary trading of the government ruble bonds are banks. At MICEX more than 90% of the dealers represent various banks.

The following is a detailed account of banks, major participants of GKO-OFZ market.

Data for this analysis is based in MICEX-compiled lists, which include market dealers with largest trading volumes for secondary transactions, which includes both the operations dealers undertake for themselves and on behalf of their clients. Thus for November 2001 and 2002, the list included 22 banks. Data for the market behemoth, Sberbank were clearly outliers and therefore excluded for the purpose of avoiding distorted average values.

November 2002 cumulative turnover for banks, leading participants in the market for ruble denominated government securities at MICEX (excluding Sberbank), amounted to INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru 52.3% of the total cumulative turnover for GKO-OFZ operations of all existing banks (excluding Sberbank), a 1.5 times increase over its November 2001 level.

In absolute terms, both the turnover and balances on government ruble-denominated bonds accounts at leading banks were on the rise during the year, although at a varied pace.

Thus, turnover growth was rising at almost twice the pace of balances growth.

Between November 2001 and November 2002 the turnover value for GKO-OFZ operations rose by 44.6% (from RR10.6 billion to RR15.6 billion in current prices), whereas, balances on these accounts in the same period grew by only 21.3% (from RR10.9 billion to RR13.8 billion). Thus the ratio of turnover to account balances on transactions for government ruble debt at largest banks had an annual increase from 97.6% to 116.4%.

The situation is reverse for average mid-size Russian banks, where (excluding Sberbank) turnover values for government debt operations remain below the balances on these accounts, with the ratio falling from 91% to 87% in the last year.

In general, the proportion of government ruble-denominated securities to other assets is higher at banks with leading positions at MICEX than the industry average (1.9% vs. 1% in December 2001 and 1.8% vs. 1.3% in December 2002).

In contrast to 2001, a rift between a strategy for government ruble bonds pursued by banks- MICEX leaders and average Russian banks grew larger in 2002. From December to a year later, trading volumes of government ruble-denominated bonds for MICEXs leading players, in absolute terms, rose by 21% (from RR10.9 billion to RR13.2 billion). The same figure in the analogous period for all Russian banks (Sberbank and ARCO-managed banks excluded) stood at only 3% (from RR32.7 billion to RR33.7 billion).

Similarly, average value of assets at a leading MICEX bank-participant, as of November 2002 stood at RR34.4 billion a considerable difference over RR2 billion, estimated asset value of an average bank in the same period.

Contrary to dismissals that low participation in markets for government rubledenominated bonds is nothing but a sign of the instruments low returns, profit margins for banks, MICEXs largest participants provide no such evidence. For the past 11 months of 2002, banks with large positions on MICEX posted significantly higher profits than an average Russian bank, with ratio of returns on assets for the former standing 4.4% against an average banks ratio of 2.9%.

Government Foreign Currency Denominated Bonds Largest portfolios of government foreign currency-denominated (FCD) debt belong to Sberbank and Vneshtorgbank, which as of December 2002, accounted for 70% of all FCD bonds at Russian banks. From the start of the year, their share declined by 3.2 percentage points.

To get other banks views on the attractiveness of FCD debt instruments, lets compare absolute values of FCD bonds in US dollars and their proportion to banks other assets. Until November 2002 (please see Graph 4), the cumulative portfolio of FCD bonds was expanding in parallel to their price increases (due to the lack of investment indexes on OVVZ and Russian Eurobonds, we chose Fed-30, the largest volume bond in circulation as our price indicator). Data on proportions of FCD bonds to banks other assets appears more complex and does not easily lead to unambiguous conclusions.

RUSSIAN ECONOMY in trends and outlooks . . / % USD bln % 3.01 6.01 9.01 12.01 3.02 6.02 9.02 11. as of the end of the month Fig. 4. Government FCD Bonds in Russian Banks Portfolio (except Sberbank, Vneshtorgbank), 2000-By December 2002, the number of banks with holdings in FCD bonds has declined from a January high of 237 down to 208. Considering that the total number of banks with licenses for this sort of activity is 1000, the current number of participants appears very small.

Oddly enough even the incredibly favorable price dynamics for the product in 2001-2002 has failed to amend that situation.

On average, for banks with holdings in FCD bonds, the latter share in proportion to banks other assets is 9.2%. In addition, there are 20 banks, in which FCD bonds take up in excess of 15% of their total assets. Below is a more detailed analysis of banks with leading positions in holdings of FCD securities. Since Vneshtorgbank and Sberbank figures are clear statistical outliers in that batch, their data will be excluded from this analysis. With the two giants out of the picture, the average proportion of government FCD securities holdings to banks total assets is 49%.

To be included in the analysis banks had to satisfy the following criteria:

as of December 2002, share of government FDC bonds in a banks total assets was above the industrys average (average value calculation excluded Vneshtorgbank and Sberbank);

in the period from December 2001 to November 2002, a bank had non-zero balances on its account for FCD bonds operations, and was actively engaged in transactions for FDC bonds, i.e. reported non-zero turnover values on that account.

Overall 51 banks satisfied the above criteria and were chosen for the analysis. To begin with, the concentration in the group turned out to be very high. Thus just 4 top banks held a half of the groups entire FCD bond holdings, while 20 top banks covered 90%.

Let us now compare data on this select group of FCD debt leaders against average Russian banks. First we have to note that only large banks are currently engaged in an active trading of FCD bonds. The average value of total assets for the select group, as of December 2002 was RR9.6 billion, while the average Russian bank analogue stood at only RR1.9 billion. Proportion of FCD bonds to overall assets for the select group of banks amounted to 11.2%, which exceeded the industrys average value by 3.7 times. Surprisingly enough, the INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru select groups figure has not increased much during the year even despite higher market valuations of the product.

During 11 months of the past year, prices for most issues of OVVZ and Russian Eurobonds were rising faster than their share in banks portfolios. Thus, prices for OVVZ in that period, depending on the issue rose within the range of 9.2 to 39.5%, and Eurobond prices changed within the range of 2.7 to 39.2%, also depending on the issue.

In addition, the select group of banks has a higher than the industry average of foreigncurrency deposits from corporate clients, however there is no statistically valid relationship between the amount of a banks foreign currency deposits and value of its government FCD bond holdings.

As to profitability, for 11 months of 2002 the select group of banks ratio of returns on assets did exceed the industrys average, but fairly insignificantly (2.6% vs. 2.4%).

Curiously enough, banks in this particular group of the most active FCD bond-players appeared to have smaller capitalization than their more average counterparts, with the ratio of balance capital to assets for the former group at 11.8% vs. industry average of 18.5% (although these particular figures for two groups are not quite comparable due to large difference in asset values). Having said that, both groups are showing a tendency for a decrease in the ratio of balance capital to assets. For select group of banks, assets growth, in 11 months of 2002, was outpacing that of capital balance by a factor of 1.5 (32.3% vs. 21.3%). Average banks gap in growth was smaller and for the same period assets grew by 25.3%, while balance capital at 22%.

Table Some Balance-sheet Statistics for Banks with Leading Positions in FCD Bond Holdings (in % terms of total assets; end of month data; exclusive of Sberbank and Vneshtorgbank) Banks with High Share of Average Banks* Balance Statistics to Assets (in %) FCD Bonds Dec 01 Dec 02 Dec 01 Dec Assets in Foreign Currency 40,8 38,7 51,7 49,Funds in Banking Sector 39,4 34,5 37,1 31,Including those in foreign currency 19,0 15,3 20,5 14,(FC) NBS Loans 44,0 47,8 39,0 42,Including those in FC 16,3 18,6 17,3 20,Bonds and securities 6,5 8,9 15,4 18,Incl. Those in FC 3,6 4,1 11,9 12,Government Bonds 4,2 4,4 12,5 13,Incl. Those in FC 3,1 3,0 11,1 11,Funds of Non-Resident Banks 6,7 7,5 8,6 9,Accounts of non-financial clients 27,6 25,1 27,9 27,Incl. Those in FC 5,1 5,6 6,6 6,Deposits 21,5 21,9 27,5 28,Incl. Those in FC 14,7 13,8 20,9 20,Corporate Deposits 12,8 10,1 19,5 16,Incl. Those in FC 9,3 6,7 15,5 13,Individual deposits 8,7 11,8 8,0 12,Incl. Those in FC 5,5 7,2 5,5 6, RUSSIAN ECONOMY in trends and outlooks Banks with High Share of Average Banks* Balance Statistics to Assets (in %) FCD Bonds Dec 01 Dec 02 Dec 01 Dec Balance Capital 19,0 18,5 12,8 11,Profit 2,0 2,4 1,9 2,For reference:

The average size of assets of the 1,5 1,9 7,2 9,banks of the sample, as Rb.bln.

*All existing banks, except Sberbank, Vneshtrogbank and ARCO-managed banks.

Source: STI&K consultancy Private individuals Deposits The year of 2002 made up for a lively year in this segment of banking services. If in the aftermath of the 1998 crisis, number of private deposits was slashed by a half (excluding Sberbank) and by the of 1999 fell to a measly 5.6% of banks liabilities, then by the end of 2001 the number recovered to 8.4% and by October 2002 has grown further to 10.9%. If we consider only banks that purposefully attracted individual deposits, the numbers become respectively 8.6% for the end of 2001 and 11.3% for October 2002. in constant prices, for months of 2002, a total value of individual deposits attracted by banks (excluding Sberbank) grew by 39% (a bit lower than 42.4% growth achieved in 2001). In general, from the end of 2000, private deposits grew faster than banks assets (please see Graph 5). The above facts all point to a conclusion that banks slowly but surely are restoring back to the pre-crisis individual deposits level.

Against this dynamic picture seen at most commercial banks, Sberbank deposit growth of only 18,7% appears rather modest. In fact, Sberbanks share on that segment of banking services has been contracting throughout the year and by October fell to 69.8% from a high of 73.5% it enjoyed at the start of the year (excluding funds linked to debit card accounts).

At the same time, the decline was rather smooth (please see Graph 6). In other words, cuts in interest rates, which Sberbank undertook on both ruble and foreign currency accounts, had no discernable effect on its customers.

Sberbank aside, about 8% of all private deposits is at Alfa-Bank, another 5.6% is at Moskva Bank, which on the past 3 quarters managed to practically double the number of its private deposits.

% -1 individual deposits FOR THE ECONOMY IN TRNSITION http://www.iet.ru 2 - bank assets Source: STI&K consultancy Fig. 5. Asset vs. Deposit Growth in Constant Terms, excl. Sberbank (% change over previous quarter) % Source: STI&K consultancy Fig.6. The 2002 Sberbanks Share in Total Number of Private Deposits Individual deposits are playing an even bigger role for regional banks (please see Table 15).

There, deposits from individuals in the banks liabilities make up twice the analogous figure at Moscow banks, and more than 90% of regional banks are actively pursuing private deposits while in Moscow that number is only 83%. However, since banks are heavily represented in Moscow, as of September 2002 Moscow-based banks accounted for 63.5% of all deposits in the country.

Table Individual Deposits Share in Banks Total Liabilities (as %)* Moscow Banks Regional Banks Average Banks (excl. Sberbank) Jan00 Jan01 Jan02 Oct02 Jan00 Jan01 Jan02 Oct02 Jan00 Jan01 Jan02 OctIndividual 4,7 4,7 7,0 9,2 9,6 9,2 13,6 18,0 5,8 5,8 8,6 11,Deposits Incl. In FC 3,7 3,7 5,4 7,2 4,2 3,8 5,6 7,4 3,8 3,7 5,5 7,Incl. In Rubles 1,0 1,0 1,6 2,0 5,4 5,4 8,0 10,6 2,0 2,1 3,1 4,Reference:

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