2. Operating Environment of the Group
Mostly the Group conducts its business in the Russian Federation, Turkey, CIS region (Ukraine, Belarus, Kazakhstan), Austria, Switzerland and other countries of Central and Eastern Europe.
The Russian Federation
The most part of the Group operations are conducted in the Russian Federation. Russian economy saw a significant slow-down in 2012 with the quarterly growth rates decelerating from 4.9% in 1Q12 to 2.2% in 4Q12. Such dynamic was driven by a combination of both internal and external factors, with the turbulent global markets and declining domestic investment activity being among the key drivers.
Of the key GDP components, consumption was the only one significantly contributing to the growth, while all other factors made a very limited contribution to GDP growth. In such an environment Russian banking system saw a decline in demand for corporate loans with the annual growth figure falling from 26% in 2011 to 12.7% in 2012. Among other factors that contributed to slower lending growth was a rapid development of the local bond market and the favorable conditions in external debt capital markets, which both allowed major Russian corporate borrowers to source significant amounts of debt financing outside of the traditional loan market.
At the same time, the strong consumption patterns in the Russian economy revealed themselves in a continuing rapid expansion of the retail lending market, with the aggregate volume of loans to individuals increasing 39,4% year-on-year in 2012. Towards the second half of the year Russian regulators started paying an increased attention to the retail lending market developments, announcing the plans to introduce regulations aimed at more carefully managing the risks, associated with such market expansion.
On the funding side, Russian banking system saw a slow-down in deposit inflows in 2012. Both the Central Bank of Russian Federation (CBR) and Ministry of Finance maintained their liquidity supporting activities in 2012, covering banks’ need in the periods of heightened liquidity deficit. Throughout 2012 CBR repos remained the key source of liquidity for Russian banks, which has become a new norm given the shift towards floating exchange rate and inflation targeting policy. Given the importance of liquidity creation mechanisms under floating exchange rate regime, the CBR has announced some plans to further expand refinancing system in 2013.
Turkey
Significant part of the Group’s operations were conducted in Turkey following the acquisition of DenizBank in September 2012. The macro-prudential measures mainly applied by the Central Bank of Turkey in 2012 yielded the intended results, decreasing Turkey’s twin imbalances: internal (inflation) and more importantly external (current account deficit). Inflation and Current Account Deficit to GDP ratio were down to 6.2% and 6.1% in 2012, respectively, from 10.4% and 9.9% a year ago. As a result of this policy success and the achievement of soft landing in 2012, Fitch increased Turkey’s sovereign rating to investment grade. Due to the macro-prudential measures taken, the economic growth has eased to 3% in 2012 from 8.5% a year ago. At the same time the authorities have enough ammunition to stimulate the economic activity through fiscal and monetary policies when needed.
Other jurisdictions
In addition to Russia and Turkey the Group conducts operations in CIS (Ukraine, Belarus, Kazakhstan), CEU countries (Austria, Czech Republic, Slovakia, Bosnia and Herzogovina, Slovenia, Serbia, Hungary, Croatia), Switzerland and some other countries. Tough economic and liquidity situation in many jurisdictions led to decrease or insignificant growth of GDP followed by shrinking in consumption as well as in investment activities. The primary targets of the local regulators were support of monetary stability, management of GDP deficit and inflation level regulation. In 2012 economy of the Republic Belarus remained hyperinflatory.