Press Clippings

The banking system in Russia is heading for a shakeout, but reforms are lagging behind schedule. Meanwhile, Alfa-Bank is moving ahead with its own plans o create a modern international bank.

Russia's economy may be emerging from the freezer, but the country's banking system is still anemic when compared with other European financial sectors. The old habits of inefficient state control still prevail, as more than 1,300 banks scramble for bits of an underdeveloped market. Only 125 of these institutions have as much as $100 million in capital.

Russians themselves have so little confidence in their banking system that they keep an estimated $30 billion tucked under their mattresses rather than put it in the hands of local bankers. Perhaps $200 billion more has left the country as flight capital.

But for Alex Knaster, the Moscowborn CEO of Russia's largest private bank, Alfa-Bank, this just shows the magnitude of the growth opportunity for modern financial services in the country today. “Much has been done to reform the economy since 1998, and the results can be seen in improved trade and GDP performance,” he says, “but the banking system is lagging behind. Savings and lending are onetenth of what they should be in a developed country. Yet a bank that has the right strategy and execution can still do well in Russia."

Alfa's Growth Track

He clearly puts Alfa-Bank in the “do well” category, and the numbers back up his evaluation. Over the past three years Alfa's deposits have increased fivefold, to $2 billion, and the loan book has increased by a factor of seven, to $1.5 billion. Commission income has tripled,and profits (prebonus,after taxes) rose from $70 million in 1999 to $115 million in 2001 even while the bank was spending $25 million a year in information technology and process improvements. Total assets stand at $2.5 billion.

Knaster is using some of the lessons learned while he was president and CEO of the Credit Suisse First Boston operation in Moscow during 1995-1998 to position Alfa-Bank for eventual leadership in almost every segment of commercial and investment banking activity in Russia and Ukraine. Part of that strategy involves investing heavily in systems, personnel, and training now that the market moves toward reform even at the expense of some short-term profits.

Although Alfa-Bank is still overshadowed in size by the state's Sberbank which has 20,000 branches nationwide and retains a virtual monopoly on Russian savings deposits Alfa ranks in the “top five” of nearly every line of banking services in the domestic market. In credit card issuance Alfa is already the leader."We aim to be in the top three in all categories,” Knaster says. “Leaders are successful in all market conditions."

That expansion also includes an international presence. Besides 80 branches in Russia,Alfa has two offices in Ukraine (with 10 more next year), four in Kazakhstan, and operations in the Netherlands, London, and New York. “With the growth in our branch network, we are targeting the midmarket corporate segment businesses with $10-30 million a year in turnover and 300-1,000 employees,” Knaster says. “We're also creating a modern retail banking business that will be able to serve private clients with a large number of small branches. We are working with consultants such as McKinsey and Accenture on an expansion plan that will start rolling out in 2003. For us 2004 will be the big year for growth."

Until then, Alfa-Bank is likely to remain a privately held company, owned entirely by Russia's Alfa Group conglomerate and the bank's own management."Before we go public, we have to get the bank to the next level,” Knaster says. “That will take a couple of more years, as we build our staff, our reputation, and our access to capital. At that point we might look at selling a stake in the bank to a foreign institution and then do an IPO."