Yevgeny Bernshtam is first deputy chairman of Alfa Bank. He spoke to Banking in Russia about his organization and the banking sector in the country today.

BANKING IN RUSSIA: As deputy chairman of one of the few banks that provide retail banking services in Russia, can you tell us about the situation in the sector today?

Yevgeny Bernshtam: Retail banking can be divided into two parts, depending on the clients being served: private individuals or small- and medium-sized businesses. For two years, we have held second place in terms of private individuals, after Sberbank, which, of course, has a big lead.

Our market share among private individuals is 1.75 percent. But individual deposits are just one part of retail banking. The segment also includes the important plastic card service. We have issued more than 200,000 cards, 190,000 of which belong to the international payment networks Visa and MasterCard. We have 14 percent of the Russian acquiring business, which makes us the market leader. What's more, under Western classifications, small companies are also part of the retail segment. We serve a significant number of such companies – they're trading companies, restaurants, cafes and various companies working in the "life-support" sector. It's important for them to have access to a bank with many branches.

BiR: How many major banks do you think Russia needs?

YB: Today, there are maybe 15 or 20 major banks in Russia like Sberbank or Alfa that can handle finances on a nationwide scale. Everything else is really nothing more than cash desks. It's possible to call them non-bank crediting organizations and put limitations on their licenses. In many small companies, especially in the regions, there is simply not the necessary understanding of what the banking business is about. Everybody wants to have something like his own treasury, which acts like an independent bank. When it comes down to it, these are just cash desks within bigger companies, where bags of money are turned into cash, and that is harmful to everyone.

BiR: Some believe that retail banking in Russia is a big headache without big profits.

YB: Your question, evidently, refers specifically to working with private individuals. They use a limited number of products. We have divided them into six groups. The first two, deposits and payments, are the simplest and will be in demand no matter what the economic situation may be. Then there are the products that depend on economic conditions – loans to individuals, credit cards, assets management and insurance policies. If the economy picks up, if there is real growth, then that will naturally reflect on taxpayers, or, in other words, on our clients. That way, we get a fairly wide range of products. The simplest products will be in demand and in use in any economic conditions. And the more complex ones will depend on the economy.

BiR: So, objectively, retail banking is economically interesting to bankers?

YB: Retail banking is very interesting. That's exactly why we recently became the first in Russia to develop a comprehensive approach to building a retail business, based on Western standards. There are three points: the number and spectrum of products, information technology and the branch network. In the next year or two we will build some 100 new branches in Moscow, as a pilot project. They will be small spaces, working as front offices, working in direct contact with clients. Everything else will be concentrated and hidden away in the central office, thanks to the newest technologies. Some branches will work 24 hours a day, seven days a week. The second phase is aimed at cities with at least a million people, such as St. Petersburg, Samara, Nizhny Novgorod, Yekaterinburg, Rostov and Novosibirsk. And the third phase is to take in the entire territory of Russia, but that is already talking about a decade down the road.

BiR: Is it an expensive project?

YB: We expect that the pilot project in Moscow will demand about $30 million.

BiR: Will that come from Alfa Bank's own funds?

YB: Exclusively.

BiR: You speak very convincingly about retail banking. But a few months ago Alfa Bank President Peter Aven told us that Alfa is getting into retail banking largely because the bank will be sold off, and a developed retail business will increase its value.

YB: Retail banking will certainly increase our capitalization, but it is also a profitable business, if you take it together with all of our other business segments. Today, one-third of the bank's deposits come from retail banking. Furthermore, the resources brought into the bank by retail clients can be extended as credits to major companies. Accordingly, the primary profit from retail banking, which can be counted in money, is the income made between the attraction and placement of these resources. Secondly, we recently tallied the figures from our card business and were pleasantly surprised. It turns out that on its own, not as a service but as a developed business, it brings us up to $10 million of net profit a year.

BiR: At any rate, what Aven said about preparations for a sale – how pertinent is that? Especially given the recent rumors about the proposed sale price.

YB: That's a question for the shareholders. I don't own the bank. But we're not about to sell the bank tomorrow. Everything will depend on many factors. Purely theoretically, just on the basis of technical infrastructure, quality of management, range of functions, mentality and style of work, Alfa Bank has no equals. If any outside investor is going to look for potential contacts in the banking business in Russia, it will turn to Alfa first.

BiR: Are you talking about Western investors?

YB: There is no one else to talk about.

BiR: How serious of a problem is the bank's indebtedness?

YB: At the present time, Alfa has no outstanding debts to Western creditors. There are outstanding private questions between Alfa and Russian banks, but we are owed considerably more than we owe to others. And there are no questions about external debt. Moreover we are the only ones who paid our creditors in full and on time.

BiR: I'm not talking about overdue loans so much as about debts that haven't yet come due. Specifically, the ARCO credit.

YB: The ARCO credit has been extended by mutual agreement. And it wasn't our initiative. The agency, which was charged by the government with resurrecting the banking system in the regions where it had collapsed after the crisis, came to us because ARCO couldn't do it, whereas we had a lot of experience and ability. But we invested much more of our own resources. So, on ARCO's money we opened 14 branches, but overall we opened 36 branches in the same period, investing our own money in the rest. And in those branches are agents acting on behalf of the government. But we can pay at any time.

BiR: Are you looking at another Eurobond issue?

YB: We have a successful track record in this field. And in the future we will certainly go back onto the external debt market. We have good, stable ratings, a stable financial situation – under those circumstances, there is no reason not to take cheap funds under better conditions than those available in Russia, in order to invest in the Russian economy. So we are very intently working on this question.

BiR: You have already talked about investing in the economy several times. But the general opinion is that lending is catastrophically underdeveloped in the Russian banking system for a whole range of objective reasons that make it unattractive.

YB: Crediting can be looked at, first of all, as a way to make money, and secondly –what's most important for us – from the point of view that in lending we are facilitating the development of all business relations with the enterprise. It's the beginning of our cooperation, with the subsequent expansion of our contacts and, directly, the sale of our products to the enterprise. We sell transfers, conversions, salary systems and settlement. For small- and medium-sized businesses, the sums involved are substantially different from those involved in lending to major businesses, but here too we are moving forward – evaluating risks, projects and guarantees. There are practically no defaults.

BiR: It's good that there are practically no defaults. But many are worried that if, after banking reform is through, there will no longer be any small- or medium-sized banks for whom a small- or medium-sized business could be an important client, then major banks won't take their needs into account.

YB: That's not really the case. Major clients quickly bring money into the bank and quickly take it out. Small enterprises are less mobile and create what in banking jargon we call a "pillow" – a large amount of deposits, commissions and percentages. That's all very interesting for a bank. We really will develop that.

As far as a special relationship between a small bank and a small business, that's a scourge of the banking business. The practice of making decisions based on friendly relationships or the significance of a client needs to die out. These relationships must be formalized, so that there can be no place for emotions and personal relationships between Ivan Ivanovich and Pyotr Petrovich.

There must be a system that evaluates formal criteria to decide whether a loan can be given or not. For major businesses, that requires a different methodology – specifically, expert evaluations. But in either case, technical, formal criteria must prevail over personal evaluations. As for the idea that major banks won't serve small businesses, that's absurd. Activities with different groups of clients go on in parallel. There is a section dealing with major business, one dealing with mid-sized and regional businesses, and one dealing with retail banking. But the future is with the major banks. because they can offer a larger number of products, higher quality and normal techniques.