Nicholas Watson -

The days when Western lenders, fresh into Russia's nascent retail lending market, chucked the client some money for some undefined purpose in return for an extortionate amount of interest are fading.

The retail lending market grew at a pace that continues to make bankers from around the world salivate, but the overall share of personal loans fell significantly for the first time over the first half of 2006, according to recent figures.

The total value of retail loans is still rising - and rising fast. In the first half of this year Russians borrowed $56bn, up from $41bn at the end of 2005 and just $22bn at the end of 2004, according to RBC rating, company accounts and bank reports.

This kind of growth is consistent with the rate at which the overall banking sector in Russia has developed. Between 2000 and 2005, banking assets swelled by 325%, from $76bn to $316bn, and over the first six months of this year increased by a further 14%.

"This growth has been fuelled by two fundamental factors: first, the vast capital inflow stemming from the sky-high oil prices has encouraged more commercial banking activity; second, confidence in Russia's banking system, which was shattered by the financial crisis of 1998, is now returning," says Troika Dialog.

Despite the explosive growth, Russia's banking sector is still relatively small compared with its neighbors to the west and has lots of growing room. As of the end of 2005, the ratio of private deposits to GDP was around 13% versus an average of 22% for emerging European peers. Likewise, the average Russian is also relatively unburdened by debt compared with his Western counterpart, a situation that is changing rapidly as interest rates in Russia fall.

However, while the overall level of borrowing continues to rise, what has changed dramatically in the last six months is the way that Russians borrow.

Pick and choose

According to the latest figures, the share of personal loans within overall retail lending fell to 60% at the end of the first half of this year, down from the 70-75% in 2004 and 2005 when the market was still in its infancy.

"The retail lending market underwent substantial changes in the first half, mainly in the form of increased specialization," says Natalia Orlova, an analyst at Alfa Bank.

Where are borrowers going? The largest increase in the first half of this year has been in the credit card segment, which grew from $1bn at the end of 2005 to $4bn in July 2006, an increase of some 300%.

This growth has come at the expense of the consumer finance segment as key market players such as Russky Standart shift their focus to credit cards (to read more about how Russky Standart now controls 78% of the credit card market click here).

That's not to say the consumer finance has come to standstill. Like auto loans, this segment put in more modest growth in the first six months of this year, some 50% compared with the 33% growth in auto loans.

Perhaps the biggest surprise, and for the Kremlin, a welcome one given it wants to see a third of Russians owning their own homes by the end of this decade, was in mortgages. The mortgage market was worth some $6.2bn at the end of the first six months of the year, more than double the $3.2bn at the end of 2005.

Credit cards have turned out to be this year's hot new consumer finance product, but mortgages are going to be the next big thing. Already the line-up of market leaders is changing as all of Russia's leading banks jockey for position in what analysts say will become a $50bn-100bn business in a matter of years.

The giant national savings bank Sberbank, which just six months ago controlled 80% of this market with a $2.5bn portfolio, has been the biggest loser as the more nimble commercial banks begin to sink their teeth into its heels: Sberbank lost a a big chunk of its market share over the last six months and now controls only 60% of the mortgage market with a $3.7bn portfolio. The growing portfolios of VTB, Raiffeisen and UralSib caused most of Sberbank's losses but smaller banks like Absolut bank, also successfully entered the fray.

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