1

CONSOLIDATION:

THE SPEED MATTERS

2

The trends – consolidation has been approaching

Local funds were not enough for supporting economic growth External borrowing was not available to many local banks Expansion in the retail segment required significant investment Mortgages demanded cheap long-term funding Competition with foreign banks increased rapidly

3

Concentration of assets

1.01.07

42,4

20,5

12,1

24,9

1-5 6-20 21-50 51-further

1.10.08

43,3

21,4

13,8

21,5

1-5 6-20 21-50 51-further

With the exclusion of several success stories, the Russian TOP50 used to improve their positions

slowly but steadily

During the same period state-owned banks

increased their share from 46.6% to 49.6%

4

Autumn: painful reaction

Confidence crisis in the banking sector in September Bank runs in October Increased losses due to bad public market performance Increasing share of NPLs due to corporate defaults Depreciation of rouble Non-payment crisis in non-financial corporate sector Worsening of labor market conditions

5

Funds: aggregates dynamics

The personal deposit growth rate is declining rapidly. From 1 January 2008 they have increased by only RUR390 bln. Even the acceleration in the growth rate of corporate

funds in 2H 2008 is mostly explained by state activity.

01020304050607080

1.0

1.0

7

1.0

4.0

7

1.0

7.0

7

1.1

0.0

7

1.0

1.0

8

1.0

4.0

8

1.0

7.0

8

1.1

0.0

8

%

Personal deposits growth rate (YoY) Corporate funds growth rate (YoY)

6

Funds: a closer look at corporate sector deposits

Decomposition of deposit growth in October: Minfin + RUR217 bln;State-owned entities + RUR4 bln; Private sector – RUR15 bln

Since 01.01.2008 private corporate deposits have increased by only RUR524 bln

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

01

.08

02

.08

03

.08

04

.08

05

.08

06

.08

07

.08

08

.08

09

.08

10

.08

11

.08

RU

R, t

rln

Private sector deposits Minfin deposits+state-owned legal entities

7

Banking sector – October’s figures

Personal deposits decreased by 5.9% MoM (less than 20% YoY) Corporate funds decreased by approx 1% only, but mostly due to

state activity 10-month accumulated profit of the banking sector decreased by

3.3% Corporate NPLs increased by 31% and reached 1.5% of loans issued Personal NPLs increased by 2.1% and reached 3.2% of loans issued Cash funds increased by 31%, which used to happen in December

only Correspondent accounts with non-resident banks increased by 41%

and approached US$20 bln (RUR532 bln) Asset growth of 3.5% was mostly assured by Minfin and CBR funds

placed during the month: banks got RUR1075 (4.3% of assets) from these sources

CONDITIONS IN THE BANKING SECTOR ARE BECOMING VERY UNFAVORABLE

8

LIABILITIES: TOP5 and the others

Although even in the TOP5 the total amount of individual deposits decreased by 3% MoM, they managed to achieve asset growth by 4.8% MoM and improve their positions.

%  October 2008 September 2008

Refinance with the CBR 28.9 45.6

Non-financial sector current accounts

41.4 36.5

Deposits of legal entities 50.1 48.0

Personal deposits 57.5 55.7

Total liabilities 45.1 44.5

9

Loans – deceleration is already here

We expect the currently slowly declining growth rate of corporate and personal loans to decrease substantially over coming months; with the lack of local and foreign funds the pace of growth will fall to 20-30% in nominal terms at best

0102030405060708090

01

.01

.07

1.0

4.0

7

1.0

7.0

7

1.1

0.0

7

1.0

1.0

8

1.0

4.0

8

1.0

7.0

8

1.1

0.0

8

%

Personal loans growth rate (YoY) Corporate loans growth rate (YoY)

10

Banking sector is ready

The group of 50-100 biggest banks has been improving their positions since 2H 2007 and in the new conditions they are better positioned than the others

Assets growth is decelerating as resource base is diminishing Government support is increasing – most of the banks now can’t live

without CBR refinancing Non-performing loans are increasing and the situation will be

worsening as the number of corporate defaults tends to increase Profits are decreasing and many constant loss-makers may appear

among banks

THE TOUGHT TIMES ARE HERE ALREADY – AWAITING CONSOLIDATIONALL IS IN THE HANDS OF MONETARY AUTHORITIES THE ONLY QUESTION LEFT: WHAT SPEED WILL BE PROPOSED?

11

Speed

Enforcement:

The Bank of Russia now may affect the speed on the consolidation process substantially

More than 350 small banks may be eliminated by simply increasing capital requirement to EUR5 mln

Tenths of the bigger ones may be forced to merger by tougher refinancing conditions

Lack of funding and thus future prospects will leave owners of the most of the others no choice but to sell their business

Parachute:

Refinance conditions acceptable for TOP100-200 banks, but CBR mostly provides short-term liquidity

Licenses are being revoked only from banks with serious breaches Facilitation of mergers in the banking sector through legislation and

CBR financing

12

30-50

WE GET SEVERAL MORE NATIONAL CHAMPIONS BUT LOSE EFFICIENCY AND COMPETION

There are 5-10 banks constituting most of the assets in the system The other 20-40 play a supportive role, trying to concentrate in the

niches, but being “universal” in their nature Every bank is very important – no bankruptcies to prevent the failure

of the system Banks have a lot of “bad” assets on their books The government supports the banking sector constantly through

funds placement The sector in not quick to react and the pace of development is slow,

although there is no significant decrease in growth rates during the process of consolidation

Sector capacity to adapt to the external shocks is low

13

300-400

300-400 banks may survive The TOP100-200 are mostly universal commercial banks, with TOP30-

50 with 50% of all the assets Most of the others are concentrated in the niches – private banking,

investment banking (depends on the regulations), different kind of corporate services

After a period of adaptation which will be reflected in slow growth rates, high NPLs and big losses the system will begin developing very quickly

The speed of adaptation to the external shocks and the efficiency of operation are very high

Bankruptcies (especially beyond TOP200) may take place, but do not result in the failure of the system

THE TOUGHT TIMES ARE HERE ALREADY – AWAITING CONSOLIDATION

14

THANK YOU!

Most of the estimates are done basing on the TRUST Banking Sector Navigator, which is available at www.trust.ru