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The Russian Banking Sector: Assessing the Growth

Michel Perhirin, CEO, MDM Bank

Regional Cooperation Forum

GENEVA, 9-10 JULY 2006

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Macroeconomic Overview

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Overview: Russian Economy

Stable economy The latest forecasts show Russian GDP

to surpass 1,000 bln USD by 2007

The inflation forecast is 8.5% for 2006

Foreign currency reserves have reached $247.2 bln by end of June 2006 and are expected to increase further

There has been an increase in the payment surplus for current operations

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Overview: Russia is Closing to Top 10 by GDPRussia’s rapid and sustainable growth has brought the country onto the list of leading World economies

The Russian Federation

has the 14th highest GDP

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A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1

RussiaChina Mexico India Brazil Ukraine

Poland Kazakhstan

Moody's

A A- BBB+ BBB BBB- BB+ BB BB- B+

RussiaChina Poland Kazakhstan India Brazil Ukraine

Mexico

S&P

A A- BBB+ BBB BBB- BB+ BB BB- B+

China Poland Russia India Brazil

Kazakhstan Ukraine

Mexico

Fitch

International agencies recognize the success of the Russian economy; the country has solid Sovereign ratings.

Overview: Sovereign Ratings

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Overview: FDI InflowForeign Direct Investment inflow is constantly increasing due to improved economic and political conditions

FDI & Portfolio investment share are gradually increasing

Location sites considered for new investment or expansion (% of citations for each country)

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Banking Sector Development

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Russian Banking System: Infrastructure Credit system participant quality is gradually improving – the number of credit institutions is decreasing mostly due to “dead” bank exclusion from the market

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Russian Banking System: Concentration & Growth

Results

The Russian banking system grew strongly in 2005:

– Assets increased by 36.6% (2004: 27.4%)

– Capital increased by 31.2% (2004: 16.2%)

– Profit increased by 47.3% (2004: 38.6%)

2005: ROE 24.2 % (2004: 20.3 %)

2005: return on lending assets 3.2 % (2004: 2.9 %)

The top 30 largest banks experienced the highest growth level (2005: Assets increased by 48%)

Dynamics of the Russian banking system

June 2006 % of total% GDP US$ bln % of total% GDP US$ bln % of total % GDP US$ bln

Top 20 Banks 66% 20% 162 66% 15% 116 63% 31% 248 20-200 Banks 26% 8% 63 24% 5% 42 28% 14% 109 Other Banks 9% 3% 22 11% 2% 19 10% 5% 39

Total Loans Total Customer Accounts Total Assets

Source: Central Bank

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Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3

Russia Alfa bank Ak Bars Bank MBRD Rosbank Bank Zenit

MDM FG MDM Bank Promsvyazbank JSC Impexbank

Nomos Bank Russian Standard Petrokommerce

Moody's

BBB BBB- BB+ BB BB- B+ B B- CCC+

Russia Alfa Bank Bank of Khanty-

Mansiysk Uralsib B.I.N. Bank Bank Soyuz

Promsvyazbank HCFB

MDM Bank MDM FG Surgutneftegasbank

Russian Standard Petrocommerce

S&P

Rosbank TransCredit-

Bank

BBB BBB- BB+ BB BB- B+ B B- CCC+

Russia Alfa Bank MBRD BIN Bank

MDM Bank MDM FG Nomos-Bank

International Bank of Saint Petersburg

Ak Bars Bank Promsvyazbank

Bank Zenit Trust Bank

Fitch

Rosbank

Uralsib

Credit Rating Comparison for Russian Private BanksThe leading Russian Banks are highly rated by International Agencies

Source: Cbonds, Moody’s, S&P, Fitch

Caa

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US$ mlnAssets Loans Deposits Capital Profit before Tax

Sberbank 95 853 70 248 77 182 10 808 907Vneshtorgbank 24 048 11 431 9 160 4 406 158Gasprombank 17 204 7 826 9 781 1 630 241Bank of Moscow 9 329 6 336 7 687 828 46Uralsib 8 539 4 861 5 021 1 575 274Alfa Bank 8 473 6 678 5 768 1 031 65Rosbank 7 569 4 342 5 677 844 20Raiffeisenbank 5 821 3 387 3 107 571 55International Moscow Bank 5 715 3 204 3 628 568 45MDM Bank ** 4 781 3 095 2 335 767 81Promstroybank SPb 4 561 2 770 3 307 469 37Promsviazbank 4 311 2 674 2 807 341 48Citibank 3 841 1 416 2 459 378 0Petrocommerce 3 087 1 973 2 043 454 55

MDM Bank, % of the top 14 2.35% 2.38% 1.67% 3.11% 3.99%

MDM among Top Russian Banks

Top Russian Banks as of 1Q 2006 *

* Estimate, based on Russian Accounting Standards

** Excluding subsidiaries

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Russian Banking System: Foreign Banks in RussiaForeign owned banks are increasing their presence in Russia in terms of assets and number thus establishing a new level of competition

Key factors

The number of foreign-controlled banks in the Russian banking system*, as of April 2006, reached 55. (52 in 2005; 42 in 2004)

The assets of foreign-controlled banks increased by 49.3% (2004: 29.9%) and equity (capital) by 56.4 % (2004: 36.7%)

Non-resident-controlled banks’ share in the banking system's assets grew from 7.6% in 2004 to 8.3% in 2005 and in equity (capital) from 7.8% to 9.3%

Private deposits in non-resident-controlled banks increased in 2005 by 60.0% (2004: 71.9%)

*With more than 50% share

Russian top 30 banks asset structure

Source: Central Bank, as of January 1, 2006

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Russian banking system: Mergers & AcquisitionsIncreasing M&A activities in past two years

Foreign banks

BSGV DeltaCredit

GE Consumer Finance Deltabank

Hansabank Kvest

RaiffeisenBank Impexbank

EBRD portfolio investment: 13 local banks (2005: 7 banks)

Societe Generale Rosbank (10%)

OTP Bank Investsberbank

Benchmark valuation multiples

Top Russian banks Rosbank OVK VTB Guta Bank; PSB (SPb) Nikoil Avtobank;Uralsib

Mid-market local banks

Promsvyazbank Rostpromstroibank

Petro-Aero Bank Ruskobank; Inkassbank

Sibacadembank Uralvneshtorgbank; Mezhtorgbank; Dalvneshtorgbank; Zheldorbank

VEFK MDM Bank St. Petersburg

Three Major

Acquisition Groups

Assets, mln. USD

Change y-o-y, %

Capital, mln. USD

BV multiple

Rosbank 6 933 48 709 4 PSB 4 827 61 501 1 Impexbank 1 883 43 192 3 Bank of Moscow 7 662 49 963 3 Investsberbank 832 311 87 3.7 International Moscow Bank 5 479 57 602 2.3

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Banking sector: Investor Friendly?

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Banking Sector: State Policy requires further development

Insufficient Banking Sector

contribution to economic

growth

Excessive Costs

associated with the

Banking Sector

Low level of creditors’

rights protection

The Legal base For a competitive

environment is not fully developed

Bankruptcy procedures needs

moretransparency

The Banking System still needs to

deal with a number of problems

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Banking Sector: Striving for Improvement

Improve legislation

Improve Banking regulation and supervision

Develop the Banking sector infrastructure

ARB (679 banks), «Russia» (350), MICA* (67) and other organizations take an active part in the State policy implementation

Rapprochement of the State and Bank interests

Proactive stance toward public authorities’ initiatives

Banking society members’ balance of interests

Investment attractiveness increase in the external markets

The State pledges to make

the following improvements:

Russian Banks exert every effort to increase the Sector’s

investment attractiveness

Both the State Authorities and Russian Banks must combine efforts to bring the Sector in correspondence with high international standards

*MICA – Moscow International Currency Association

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Banking Sector: Application of Western Quality

Standards

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Russian Bank

Clients

Vendors

Media

Community

Execs.

Managers

Lineemployees

Competitors

Western standards of quality

Share-holders

Regulators

Russian banking system: Stakeholders & Western standards

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Path of Change

Current State

Western standards of quality in Russian banking services

Western standards in banking services in Russia: Drivers & BlockersDrivers:• Strong competition• Increase in FDI• High growth levels• Increased ratings• High liquidity• Low interest rates

Blockers:• Banking system weaknesses • High fragmentation of Russian banking system• Dominance of state-owned banks• Significant number of small banks• Slow implementation of reforms • Risks level remain substantial

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Product offering: banks are closer to western standardsStill missing sophisticated product lines, Russian banks are closing the gap in product offering moving from “boutique” to mass standardized products

Process organization

•Cash management•Loan products•Liquidity management• Investment banking

Corporate clients

•Payments•Plastic cards•Loan products•Savings products

Retail clients

•Wealth management

Private banking

Variety of services

•Standardized procedures

Processes

•Demand analysis•Relationship management

Client insight

•Multifunctional core systems and CRM

IT

Support platform

•Widening distribution network:

•Branches•Mini-offices

Offices

• Internet banking• Internet trading•Phone banking•Call centres

Virtual

•Agents networks

Third party

Sales channels

•Credit bureaus

Risk management

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Banking in Russia: The FutureOver the years several key measures were implemented to improve and increase the importance of the banking system in Russia.

?

Basel II WTO

Creditbureaus Free capital

movement

Simplification of

M&A rules Regulatory capital

increase

Risk-oriented banking

supervision Inflation targeting

Obligatory deposit

insurance schemePension system im

provement

Recent and anticipated changes in the Russian Banking sector

Banking system growth will continue

Four distinct groups will remain on the market.

–State-owned banks

–Largest private banks

–Regional banks

–Foreign banks

Conditions for FDI attraction will improve

Transparency in lending institutions' operations will increase

Foreign banks will continue steady growth

Dominance of state-owned banks will remain

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Outline: MDM

Outline

High international credit ratings

Leading bank in corporate governance practices in Russia (S&P CG Ratio:6.0)

One of the four largest privately owned Russian financial institutions

Universal bank: retail, corporate, investment and private banking

Close to 1 million retail clients

Over 70,000 corporate clients with over 2,000 medium & large active clients

Numerous awards from financial magazines

Key Highlights

Moody's Fitch S&P

Ba2 / stable BB- / stable B+ / positive

As of March 31, 2006 (IFRS), MDM FG:

– Assets: US$ 5,752 mln

– Equity: US$ 963 mln

– Net profit for 1Q 2006: US$ 43 mln

– ROAE (annualized): 20%

– Cost / income: avg.50%

– Staff: 5,396