1 Strategy for Competing in Russia’s Banking Market Oleg Tumanov, Deputy CEO Alfa Bank, Moscow London, December 2003

2 Contents 1Russian banking sector: general overview 2Corporate segment 3Retail segment 4Investment banking

3 Corporate Loans/GDP Stages of banking business development Source: McKinsey Analysis GDP per capita Beginning Formal regulation Inexperienced clients Growth More experienced clients Healthy demand for traditional commercial products Maturity Experienced clients Demand for investment bank products Bulgaria Croatia Poland Ukraine Albania Russia Czech Hungary Romania Greece 5-8 years Spain Russian banking sector: general overview

4 Comparison of Russian and international banks Russian banking sector: general overview Source: PWC Selective research % Return on Capital Return on Assets Russia Hungary Czech Av. Europe Switzerland USA Russia Hungary Czech Av. Europe Switzerland USA % 3,83,8 1,41,4 0,8 0,62 0,27 1, ,7 13,7 12, раз Asset/Capital Ratio Russia Hungary Czech Av. Europe Switzerland USA 7, ,  Return on assets and capital is still higher in Russia  Asset/capital ratio in Russia is smaller

5 Situation Complicates on the Financial Markets  Competition is increasing in all segments  Competitors’ effectiveness is growing  Margins and profitability are decreasing  Customers are becoming more demanding  Risks and volatility are on the increase  Better access to funding Russian banking sector: general overview

6 Sources: Alfa Bank statistics, CBR Competition is increasing Development of branch network is a priority  Societe Generale, Citibank, and Raiffeisen are investing in networks  Intesa announced opening of subsidary  In 2003 M&A activity involved the largest private Russian banks M&A in banking sectorM&A in banking sector MDM banking group – $3.6 bln assets NIKoil-UralSib group – $3.5 bln assets Rosbank-OVK – $3.2 bln assets Trust-Menatep – $2.5 bln bank assets MNR-Eurofinance – $0.9 bln assets Zenit group – $1.8 bln (expected) M&A in banking sectorM&A in banking sector MDM banking group – $3.6 bln assets NIKoil-UralSib group – $3.5 bln assets Rosbank-OVK – $3.2 bln assets Trust-Menatep – $2.5 bln bank assets MNR-Eurofinance – $0.9 bln assets Zenit group – $1.8 bln (expected) Foreign bank penetrationForeign bank penetration Raiffeisen to set regional network in ‘04 Citibank plans branches in ‘04 Soc.Gen. plans 26 branches in ‘05 Foreign bank penetrationForeign bank penetration Raiffeisen to set regional network in ‘04 Citibank plans branches in ‘04 Soc.Gen. plans 26 branches in ‘05

Banks with Western participation : Corporate Deposits Market Share, % Banks with Western participation: Retail Deposits Market Share, % Growth Rates of Loans to Russian Borrowers Russian banks Banks with western capital % Source: «Banking on Russia» conference, London, Western Banks Expand to the Russian Market Russian banking sector: general overview  Banks with Western participation increase market share

8 Russian banking sector: general overview Sources: Alfa Bank statistics, CBR, McKinsey Loan spread is still high, but margins are declining Spread on corporate loans and deposits  7.5% loan spread in Russia is still high  Under pressure from an international decline in rates, banking loan rates are down  Lower margins pressured banks to develop client base Net banking revenue by product, % Loan spread, % 0% 5% 10% 15% 20% 25% Rates on $-denominated loans to corporate clients Rates on $-denominated corporate deposits

9 Increasing Requirements for Banking Business Effectiveness  Cost of being in business  Lowering Margins Source: «Expert» magazine Source: Alfa – Bank estimation 2Q ‘01 1Q ‘01 3Q ‘01 4Q ‘01 1Q ‘02 2Q ‘02 3Q ‘02 4Q ‘02 RUR loans – RUR deposits USD loans – USD deposits percent points Russian banking sector: general overview

10 Russian Financial Market Market Growth Market Growth Competition Competition highaverage very very (growing) high high Margin/Profitability Margin/Profitability highaverage high low (falling)(falling) Volatility/Risk Volatility/Risk highlow very highaverage Source: Alfa Bank Corporate Retail Investment Insurance Russian banking sector: general overview

11 Which business to develop? Source: Alfa Bank Russian banking sector: general overview Invest Asset Management Retail Investment Insurance Corporate Support Low Current status High Low Growth potential High

12 Option 1: Russia has 7,800 SMEs Sources: McKinsey, BCG presentation Company distribution by sector Corporate segment Only 470 companies with annual revenues > $100 mln  7,800 companies in Russia have revenues $5-100 mln a year  Half of these companies are involved in trade and services  7,800 companies in Russia have revenues $5-100 mln a year  Half of these companies are involved in trade and services

13 Option 1: Why are banks not in a rush? Source: Development Center (poll of top-20 banks) Note:* the figures used in the charts represent the poll participants’ assessments of the relative importance of available answers What hinders lending to SMEs?* Corporate segment What constrains your activity?*  High risk in the real sector constrains lending to SMEs  Low transparency is a key obstacle for loans to SMEs  High risk in the real sector constrains lending to SMEs  Low transparency is a key obstacle for loans to SMEs

14 Retail segment Sources: Alfa Bank estimates, BIS, CBR Option 2: Targeting the retail segment Retail loans and deposits by country  Comparison with Poland on loans per capita sets value of retail market at $40 bln vs. current $4 bln  Comparison with Poland on loans/GDP sets this value at $20 bln  Loan growth to come from:  Mortgages – just $200 mln now  Auto loans – could potentially total $7 bln vs. $0.7 bln today Retail loans per capita, $ Share of cars sold via loans

15 Retail segment Sources: CBR, polls by IRG Option 2: Targeting the retail segment “Has your family ever taken credit?”  Polls indicate 89% of Russia’s population has never taken out a loan  Retail loans are twice as expensive as corporate loans Retail lending attractive Rates on retail lending are attractive

16 Investment banking Source: Alfa Bank statistics Option 3: New market instruments for $12 bln  Underwriting is shared between Alfa Bank, Trust, MDM, Rosbank and Raiffeisen  Current markets may expand by $9 bln  New instruments will demand up to $3 bln New marketsNew markets  Mortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 bln  Securitization of retail lending portfolio – may amount to $1-2 bln over several years  Derivatives papers – forwards, options, futures – may increase by several times from $50 mln New marketsNew markets  Mortgage bonds – half of the $70 mln DeltaCredit portfolio was sold through a private deal; potential market may amount to $0,3-$0,4 bln  Securitization of retail lending portfolio – may amount to $1-2 bln over several years  Derivatives papers – forwards, options, futures – may increase by several times from $50 mln Current markets to increaseCurrent markets to increase  Ruble corporate bonds –from $5 bln tо $10-12 bln.  Currency corporate bonds –from $0,8 bln tо $2 bln  Credit notes –market size may increase to $0,5-$0,7 bln Current markets to increaseCurrent markets to increase  Ruble corporate bonds –from $5 bln tо $10-12 bln.  Currency corporate bonds –from $0,8 bln tо $2 bln  Credit notes –market size may increase to $0,5-$0,7 bln

17 Investment banking Sources: Alfa Bank statistics, RTS, Goskomstat, KMPG Option 3: M&A market of $5 bln in 1H03  Only 5 IPOs took place from 2000 and 25 are coming  M&A market is driven by asset consolidation  Commercial banks account for 63% of Alfa Bank revenues M&A in M&A in  M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002  212 deals are reported in 1H03 versus 291 in 2002 M&A in M&A in  M&A accounted to $4.9 bln in 1H03 versus $4.5 bln in 2002  212 deals are reported in 1H03 versus 291 in 2002 Net revenue contribution, Alfa Bank 2002 Equity market at 67%, concentrated on oil