Presentation 9 th Annual Russian Economic Forum London , 23 – 25 April 2006

1. MARKET REVIEWSales and Purchases, Mergers and Acquisitionsof Russian Banks. Tendencies. Prices. Price factors. Time constraints. Presentation 9th Annual Russian Economic Forum London, 23 – 25 April 2006

2. WHALES GROUPSince 1999specializing in sales and purchases, mergers and acquisitions, setting up of banks, and research in this field in Russia. Market Review Sales and Purchases, Mergers and Acquisitions of Russian Banks Published annually in early September after deals in the year under review have been completed.

3. METHODOLOGY Sale and purchase transactions are latent, the price and terms of a deal can be found out only from "inside" the transaction. For this reason the Review is based on expert opinions of the specialists, involved in the follow-through of these transactions, on interviews of bank buyers and bankers, tied up with these transactions, and their appraisal of impact on the price of a bank, on insiders' information as well as on the information made public.

4. “A new bank” is a bank registered less than 3 years ago. Its specific features are that its founders/shareholders have no right to alienate their stakes/shares, therefore transactions involve stakes/shares of the founders, and such a bank can receive a license for transactions with private individuals (enter the Deposit Insurance System) not earlier than 2 years after its registration.. “An old bank” is a bank registered more than 3 years ago. As a rule, old banks are all licensed for business with private individuals. Although some of these banks were not admitted to the Deposit Insurance System and lost their right for transactions with private individuals. NOTES

5. NOTES • Here we discuss sale of the bank license, that is the right for banking transactions. The cost of assets in a transaction is evaluated separately and, by agreement of the parties, is either reimbursed by the buyer or the assets are deducted by the seller. This includes, as a rule, restructuring of a credit portfolio. • By saying that the banks are sold, we mean, of course, the sale of shares or stocks of a bank or those of its partners/shareholders/ founders/founders’ partners etc.

6. A revolution on the bank market, anticipated for so long, burst out at last in January 2005 • Early 2005 has seen an all-high demand for banks – members of the Deposit Insurance System (DIS). The revolution as always produced the results contrary to what had been expected. Bank prices, instead of falling all the way down as has been predicted for about 7 years now, have sky-rocketed. Banks – members of the DIS, were put up for sale at prices, up to 90% higher than a fair price, and they were gone in an instant. • There are three main reasons for this: • An unprecedented influx of petrodollars; • December epidemic of rejections in registration of new banks; • An avalanche of denials to enter the DIS [1] . «Those admitted» put on airs and get expensive. [1]A member of the DIS is eligible for a license to operate with private individuals.

7. Who and why was denied admittance? What to do? Are there any chances to keep the license for the next few years? Is life worth living after the 4th rejection? Refused admittance to the DIS, or “Eats Shoots & Leaves”.

8. Banks buy banks • The market has seen a change in typical buyers of a bank – in 2002 a bank was mostly purchased with the aim to invest money of an industrial and financial group, and sometimes funds of the State budget, with a view, first of all, to control them, and deriving a profit came next. The second purpose by occurrence was a purchase of the license by a team of managers, who have broken away from a bank with a part of its business. In the third place were purchases by what was called in the 90s a "financial company", which in reality was an uncertain number of legal entities set up to render, as a matter of fact, banking services for the purpose to evade restrictions, imposed on banking operations. • "Buyer-2003" was a big Russian bank, a “second-class” foreign bank, and an industrial and financial group with a team of managers (or vice versa), going into this narrow niche with the aim to profit by this investment.

9. Banks buy banks • Small-sized • Medium • Of the world’s first 10 • Abrupt changes on the market brought new buyers – first of all, banks and bank groups, including several financial tycoons of the world. • Foreign investors, seeking an entry to the Russian banking market, can be conditionally subdivided into the following groups: European American Asian

10. For whom is life difficult in Russia? • Most difficult – for an American tycoon. It is likely that it would be willing to step over the constraints, but it cannot do so – its shareholders are a great many ordinary Americans, and for this reason the risk level that its management can take is limited by law. This buyer would choose to stay away from this market than take the risks. • Even if the amount of the risk, meaning likely compensations to be paid in case of claims, imposed penalties and the like, is negligible compared to its capital, the tycoon considers the risks to its reputation as most unwanted. • Semi-shadow operations of a Russian bank to conform with the rates can be considered money laundering. It is fatal to let yourself be mixed up in these operations. And with all this going on, the tycoon is well aware that as soon as this acquisition is made public, the bank will be “scrutinised” both by regulators and potential claimants.

11. A clean Russian bank • Please try and formulate in definite terms what “a clear bank” is. • Something out of the ordinary are Russian banks, which have not used crediting even once for taking money out of the country. The bigger a bank is, the greater is the number of corruption-mongers it has to upkeep for its own existence and - even more so – development. This leads to grey and black schemes of withdrawing customers’ money and “holes” under the disguise of secured credits. • It is complicated to discover a hole in a big bank during a check-up. Banks have set up ‘sound’ companies, which balance sheets show assets for credit guarantees. • Deals are concluded, in which the buyer understands that a hole in the bank to be purchased is small compared to its assets, and thinks of the long-term business with assets, sufficient to “service” it, as bankers say.

12. A clean Russian bank • It is also worthy of note that sellers are not keen either to be audited Western-style and face a very likely termination of the deal because they do not meet the requirements of a foreign investor. They understand that a Russian buyer will have a different view of the operations, the deal has more chances to be concluded and that will happen many times quicker. • On top of that, a big Western buyer is unable to pay a deposit, which is a must in most transactions if a would-be buyer is to participate in a check-up of the bank. Although, it could suggest to sign a contract with an obligation to pay damages for recession from the contract, but, first of all, this is not quite the same thing, and, secondly, this will take from one to three months.

13. It is of interest that without exception all buyers – foreign banks state their requirements to a target bank as follows: «The bank and its sellers must not be involved in trading armaments, drugs of abuse and other black-market deals, and have nothing to do with the criminal cases». This is a usual requirement from a Russian buyer. A bank with demerits like these can hardly be sold. It is even more curious that the world biggest banks of the top 10 want to buy “core and shell” only, that is “bare license” of a bank, admitted to DIS, saying it is impossible for them to face the risks of the Russian banking business. Possibly that was the reason why all deals with foreigners involved till now only European middle-level banks. A clean Russian bank

14. A clean Russian bank • Asian buyers carry on this business in a most enigmatic way: after several years of communication with some of them you may find yourself in the same position as when it all started, without a clear idea about what they want. Face to face with one more Russian target bank, they crawl back frightened and in a few months emerge again, with no signs at all that their requirements to the merger target have changed in any way. And because to insist, as you would do with Americans and Europeans, is absolutely out of the question when you deal with such a delicate matter as Asia, you remain somewhat in the dark about what in particular frightens off Asian banks.

15. What are the chances that the bank will be purchased for short-term use? Can you safeguard yourself against such a sale? • The only safeguard is to overstep the limits of the lowest price category. Although, deals of this kind are concluded mostly with “refusniks” (banks not admitted into DIS), preferably those based in Moscow. • We know deals, which were not even put on paper: verbal understanding with the management in view of pending license withdrawal made it possible to complete transactions required by the buyer. • If actively involved in laundering, a bank could be afloat for about three months. An incredible amount of petrodollars in the treasury cries for laundering schemes and the demand is so high that black-market players are ready to pay USD 2 million for a Moscow-based “refusnik” to be used for only two months.

16. What are the chances that the bank will be purchased for short-term use? Who and what for will be called to account? • Formally, responsibility lies with immediate directors, but remembering Yukos case, nobody will have the audacity to proclaim this. Khodorkovsky was made responsible as an informal organiser for the business of organisations, of which existence he was almost unaware. That is why it is impossible to maintain that those figuring in a case will not be branded in a statement of charge as “an organised-crime gang in a conspiracy…”.

17. Pyramid of Deals • The base of the Pyramid represents deals with licenses only, which make up the majority.The demand for lower-price-category licenses of banks, which are DIS members, is the highest.Among those not admitted higher-rated are those banks which have not applied for DIS membership, although the Central Bank rates do not distinguish in any way these banks from “refusniks” in their rights and possibilities.

18. Pyramid of Deals • In these transactions a loan portfolio, other assets, as well as authorised capital actually available, are viewed as weak points. These take more time and resources for their assessment, lead to a higher risk of cancellation of the deal in case of differencies in assessment, and increase the buyer’s costs. • As banks with a small number of clients – below 10,000 – cannot be viewed as a business worth buying, for those banks, which are in the gap between a bare license and the banking business, there is almost no demand. They will have to wait until there are no more offers on the market from the lowest price category, and only then will they able to fit into this niche.

19. How to sell a banking business? • Demand for banking businesses comes from medium-sized and big Russian banks, as well as from foreign banks. • How is the structure of assets and liabilities evaluated in a deal?

20. Difference in evaluation of assets by the Central Bank and investors. • Although the Central Bank declares that in a check-up of a bank the economic substance of a transaction has priority over its form, a buyer’s approach to the bank evaluation and check-up remains different. The Central Back has no recourse to management accounts and openness of the management. • Basic methods to evaluate the bank’s financial situation are comparative analysis of the bank’s financial performance and expert assessments based on additional information from the bank management. • For analysis purposes we do not adhere to the Central Bank rules of drawing up bank reports. Based on the same principle, as well as the principle of materiality, we do not seek absolute accuracy of figures and intentionally use approximate values, which do not result in any misrepresentations in the balance sheet and the statement of income and losses in the period under review and which do not have any material effect on assessment of the bank’s financial situation.

21. Intellectual capital of a bank In what way do you assess the quality of management, the level of corporate management, and the price of the intellectual capital as the aggregate of the knowledge of the whole staff of an organisation, making it competitive? • The quality of management and the personnel are assessed by the buyer in the course of the bank audit. In most cases the sale itself means that control goes over to a more dynamic and potentially more successful team of managers, which implies a mismatch in personnel, working styles of the seller and the buyer personnel. As a rule, no more than 20% of the previous managerial staff stay after one year after sale. This percentage is confirmed both by Russian and foreign buyers. • Part of the intellectual capital is also an organisational structure, i.e. an artificially created form to manage the use of knowledge. The complexity of such assessment is evident – the intellectual capital is a form of "the knowledge of the past", which cannot be evaluated in quantity and which transfer to the buyer can be guaranteed.

22. It is known that a market price is determined by the motivation of a typical seller and buyer. An investment price depends on individual requirements of an investor to an object of investment. In this market it is practically impossible to determine the price by calculating the costs. Two methods prevail here: comparative (market) method and revenue method – an estimate of the future profit-making potential (loss of profits during down-time of the buyer’s project also comes here). Investment and market price of a banking business.Methods of bank pricing.

23. General tendencies, influencing the transaction climate and the height of the barrier on the way to the market of banking services in Russia • Shrinking number of active banks, market expansion and stronger competition only became more pronounced in 2005. Consolidation made competition fiercer, but it is still smoothed out by the growing money supply. The capacity of the market for sales and purchases, mergers and acquisitions is ever growing. The total market value of transactions is increasing.

24. General tendencies, influencing the transaction climate and the height of the barrier on the way to the market of banking services in Russia • We can affirm that in principle all banks not owned by the State can be bought – some of them just consider the sale as a long-term outlook and to this end they build up assets, increase the volume of their business and effectiveness of technological processes, improve personnel and management standards, change over to Western accounting standards, go to the country’s regions, and get involved in mergers and acquisitions of Moscow and regional businesses. • But even they are prepared to consider a sale at any stage of their development, as they understand that by increasing the value they limit the circle of would-be buyers. • For a big foreign bank this bank target will be tiny anyway, and will not let it accomplish its true objectives. This buyer is prepared to pay only for the ready entity and for the time saved on entering the new market. At the same time it is not ready to take reputation risks, and no Russian seller can guarantee this. Therefore, almost no transactions are concluded with foreign buyers, in spite of both parties being eager to do this.

25. General tendencies, influencing the transaction climate and the height of the barrier on the way to the market of banking services in Russia • World tycoons (those of the first ten) have been considering an entry to the Russian market for about a year and a half. To all appearance, they will be there within half a year. In about one year they will come to an active stage of their activity. • One can suppose that this will bring about a fundamental change to the Russian market. The tycoons' resources are so vast and cheap that they could be dumping on the market for years until they squeeze out their main competitors. This will take about five more years after which the banking market in Moscow will remind the banking market of Eastern Europe. • Primarily this will affect consumer credits and big borrowers. Russian banks will have their niches in regions, mostly in those which are not large and rich, as well as offer corporate services to meet specific needs of Russian legal entities. • An influx of petrodollars will still keep pocket banks afloat for some time.

26. General tendencies, influencing the transaction climate and the height of the barrier on the way to the market of banking services in Russia • Stronger competition will probably promote consolidation and this will lead to growing number of transactions on the banking market.

27. LICENSE PRICE MOVEMENT 2001-2006

28. TIME AND MONEY

29. SPRINT- 2005 • The shortest time in which a bank was bought in 2005 was: (this time is the period between the date of the first negotiations between the buyer and the seller and the date when the signing rights of the new CEO are confirmed by the Accounts Centre of the Russian Central Bank and includes completion of all procedures, registration, and approvals of purchase and sale transactions) • An old bank in Moscow – 6 months • A regional bank – 8 months

30. DATABASE of banks on sale (over 130 banks), • REVIEW of sales and puchases of Russian banks, • procedures, timing, applications for sale or purchase and more atwww.whales.ru ON SALE - 22 banks of the top 100 in capital • BANK VALUATION – on demand fron a buyer or seller • e-mail: buybank@whales.ru • +7 495 411 9476