IFC Russian Banking Sector NPL Management: Russia and International Experience November 2009

1. IFC Russian Banking SectorNPL Management: Russia and International ExperienceNovember 2009 This presentation is solely for the use of the client institution and shall be held in strict confidence. This presentation may be distributed only to the client institution's directors, officers and employees on a need-to-know basis, and only for the purpose of evaluating the transaction. No part of this presentation may be circulated, quoted, or reproduced for distribution outside the client's organization without prior written approval from IFC.

2. IFC and the Financial Crisis • Introduction and Background • Response Creating Opportunities 2

3. Three Main Themes for 2010 • NPL and Distressed Asset Solutions • Bank Capitalization • Climate Change / Energy Efficiency • Ongoing business: SME Lending, Trade Finance Creating Opportunities 3

4. IFC and the Financial Crisis IFC is committed to help emerging and frontier countries face the challenges of a global financial crisis of unprecedented proportions IFC’S CORE COMPETENCY IFC’S COMMITTED EQUITY PORTFOLIO Based on fair value as of June 30, 2009 • IFC’s core business is equity investments in the financial sector • These investments are supported by complementary business lines: • Europe and Central Asia (“ECA”): targeted lending facilities (SME and Energy Efficiency), trade finance support • Joint IFI Action Plan: supporting financial sector throughout ECA • Advisory Services: complementary work to improve risk and creating opportunities (e.g. Energy Efficiency lending) FINANCAL SECTOR IFC has a global exposure to the banking sector (more than 45% of IFC’s equity portfolio) and aims to play an active part in stabilizing vulnerable financial systems during this crisis

5. Joint IFI Action Plan IFC, World Bank, MIGA, EBRD, EIB: Joint Plan to Stabilize Banks in CEE Up to Euro 25 billion in joint commitments • European bank losses yet to be recognized in excess of €250 bln (EU-12) plus anticipated capital needs of EU banking groups in CEE/CIS of over €100 bln • IMF/WB: Financial Sector Programs fully disbursed • EIB: Continued long-term debt • MIGA: Guarantees for within-group lending, capital markets • EBRD and IFC: Equity and Debt negotiations closed • ALL: Distressed Asset Programs • LAST STAGE IMPLEMENTATION • IMF/WB: Financial Sector Programs fine-tuned; monitored • EBRD and EIB: Continued long-term debt • MIGA: Guarantees for within-group lending, capital markets • IFC: Focus on Equity-based packages, with trade. • MODERATE IMPLEMENTATION • IMF/WB: Initial Financial Sector Programs Agreed • EBRD and EIB: Senior debt, liquidity support • IFC: Trade Lines/ liquidity support • RAPID IMPLEMENTATION FINANCAL SECTOR • Financial Sector Stabilization • IFI Capital support; Distressed assets • IMF/WB Support, Liquidity Interventions & Trade

6. Russia Macro Background:A Dangerous Neighbourhood Crisis centred on Central and Eastern Europe Significant structural / current account ‘imbalances’ Roughly: Russia / China export (dollar returns) CEE / Southern Europe consumes Mundell’s Impossible Trinity:impossible to have simultaneously i) an open economy, ii) fixed exchange rates, and iii) independent monetary policy From China to the United Kingdom, few countries with free floats Arguably only: Ukraine, U.K., Poland, Czech, Hungary, non-Euro Scandinavia, Turkey Many countries with limited fiscal capacity, no ‘counter-cyclical’ policy feasible Russia a major exception Changes likely… Waiting for / hoping for “Immaculate Recovery”

7. Russian Banking Sector: Crisis Situation Russian government capital / liquidity support to banking sector has been massive – and successful Real risk of banking sector “collapse” averted and avoided… However, banking sector / real economy problems not yet resolved NPLs and distressed assets stabilizing at high level Extent of problems in “restructured” loans not clear, but likely high Credit deterioration will continue to put pressure on bank balance sheets, as writedowns and loan loss provisions rise over the next few years Source: October 2009 IMF Global Financial Stability Report Source: October 2009 IMF Global Financial Stability Report

8. Russian Banking Sector: Issues “Paradox of thrift” – real economy and bank solvency will not improve until growth resumes – which will require substantial additional capital – because of this many sectors are underserved Regional banks: significant deposit-takers and intermediaries on local markets, many with minimum efficient scale Experience of “local” deposit runs Concentration of risks/assets in state-owned banks (incl bailed-out banks)

9. IFC Financial Markets: Crisis Response NPL / Distressed Assets No doubt that distressed assets / NPLs will continue to grow Peaking in 2010? “Peak” NPLs: a measure of nominal risk, not losses “Average temperature at the hospital” not a good indicator True NPLs: uncertain repayment profiles (“restructuring”) “Extend and pretend” “Bad bank” solution Recognise, resolve, rehabilitate >>> ‘good banks’ the goal How likely without government/regulatory leadership? IFC Approach Approach will differ by country No single ‘bad bank’, rather bad asset solutions NPL resolution most attractive when economy/lending start to grow BUT: this may be too late to maximise recoveries Investments in ‘bad debt infrastructure’ – asset management co. Investments in pools of assets / SPVs

10. NPL Resolution: International Experience Two Primary Models for NPL Management: usually called “Swedish” and “Chinese” … plus the “Zombie” solution Goal is similar, difference is distributive: who takes the losses? “Swedish”: regulators require write-downs, investors contribute capital, bad assets spun off into “bad banks” Ultimate goal is good banks – ‘bad banks’ are run down quickly Government may be ‘capital of last resort’ – if investors unwilling/unable May require losses/write downs for lenders “Chinese” Solution Government purchases bad assets at nominal, ‘bad bank’ assets sold at market price Government is effectively re-capitalizing … may only work where banks are state-owned N.B.: ‘Chinese’ not an accurate name – governments have been bailing out banks for centuries Key Distinction: System-wide … or Bank-by-Bank? May be driven by structure of banking sector, depth of crisis, extent of government involvement “Zombie” Banks (The Japanese approach)? Wait for banks to recover through earnings, no required write-down of assets Problem: no incentive to become ‘good bank’, no/delayed economic recovery

11. NPL Resolution: Comparisons to Russia In first phase of crisis, government response similar to those in other countries with strong fiscal position: Urgent and massive effort to avoid collapse of banking system Massive liquidity support, government bail-outs / sanatsiya of failing banks Government capital injections into ‘systemic’ banks World-wide, government subsidies to banking sector not transparent “Hidden recapitalization” Centralized ‘bad asset’ solution unlikely Second phase: Extent of ‘second wave’ problems unclear Historically, NPL peak is a trailing indicator 12-18 months after peak of crisis External factors (commodity prices) – to date – positive effect on economy Government now focussing on lending to “real sector” Availability of / priority for Bank Capitalization programs currently lower Capital needs still enormous, sources of capital undefined Underlying belief / hope for “immaculate recovery” (непорочное экономическое восстановление) Danger: NPLs decline in value over time

12. Equity is a residual of: • Assets – Liabilities • If assets are of uncertain value, “equity” – and hence capital adequacy - are unknown • “Bad Bank” – Transforming a Zombie Bank into a Good Bank • Problem is uncertainty of valuation of ‘bad’ assets • May mean that existing bank is insolvent, or undercapitalized, or just subject to market risk • “Good” Assets • Debt Liabilities • “Good” Assets • Debt Liabilities • “Bad” or “Toxic” Assets • “Bad” or “Toxic” Assets • (Equity?) • Equity? • Because of the potential shortfall, lack of market trust, resulting in: • Either loss of funding (requiring disposal of assets) or simply much higher cost of funding • Regulatory sanctions may be applied if not fixed • Bank needs to be cleaned of its toxic assets

13. Actual sale price will determine need for new equity (if any) • New equity can be raised separately, contributed by existing owners, or ‘granted’ to investors in BB (for paying ‘over’ value of bad assets • Good bank should have reduced cost of funding • Recovery over certain levels, other arrangements possible • But: will lower sale price of assets • Various hybrid combinations possible, incl convertible debt, warrants, etc • New Cash • “Bad” or “Toxic” Assets • Investors may purchase or require (in addition to bad assets): • Some good asssets • Equity • Warrants • Some other debt • Other deal elements can resolve pricing differences • Investors purchase ‘bad’ assets for cash, creating: • “Good” bank • “Good” Assets • Debt Liabilities • New Cash • Debt Liabilities • “Bad” bank (AMC) • “Bad” or “Toxic” Assets • New debt? • “Good” Assets • “Bad” or “Toxic” Assets • Equity • Equity? • Old Equity • New Equity

14. Loans • Investors • Portfolio • Servicer • Bank • AMC • Payment • Sub-agreement (?) • fees • Fees • Servicing • Agreement • Funding Outright Sale

15. Lessons in Portfolio Selection • There needs to be a selection process of NPLs to compose a portfolio for disposal to make it attractive and valuable for the buyer: try matching the buyer’s needs and preferences. • This portfolio of loans needs to have to the extent possible: • Diversification: e.g. industry, geography, type of borrower (corporate/SME/retail/mortgages), type of collateral, foreign/local currency denomination, etc. • Granularity: not too very large nor too very small exposures • Vintages: not too “old” loans • Security: loans with some good collateral (some buyers prefer real estate) • May need to group some more attractive assets (e.g. sub-performing loans) with NPLs in order to dispose them all.

16. What is the Buyer Looking for? • Receive a satisfactory return on the assets (NPLs)---a function of the price paid. • Good servicing platform in place. • Good data and historical performance on collections and liquidation. • Diversified portfolio of loans---sectors, geography, granularity, types of collateral, currency denomination, types of assets. • Buyer looks for asset risk and to avoid other risks---past portfolio risk, reps & warranties, seller’s risk. • If the NPL portfolio produces some cash flow then it is easier to finance.

17. Key Impediments for Transferring “Bad” Loans • Inadequate data and information in loan files • Banks want to transfer only “very bad” loans • Inadequate provisions---low NPL coverage ratio • Weak or mis-valued collateral • High expectations about loan recovery • High price expectations

18. 4. IFC’s Value Addition • IFC’s Value Addition • IFC’s Global Reach Creating Opportunities 18

19. IFC’s Value Addition Seasoned investment team Investment expertise and proven track record in equity investing in financial markets in IFC client countries, including sourcing, negotiating, structuring, monitoring, and exiting investments IFC’s track record (since inception) All industries: over 1,800 equity investments Aggregate realized and unrealized real gross US dollar IRR of 23.1% and real value to real cost ratio of 1.73 times Financial services industry: over 490 equity investments Aggregate realized and unrealized real gross US dollar IRR of 27.9% and real value to real cost ratio of 1.97 times IFC’s global expertise in the financial sector & local presence: 100 field offices in 81 countries Hands-on approach Ability and capacity to “applying global standards locally” Strategic guidance to portfolio banks include, for example: Stabilizing operations Improving risk management and NPL resolution Re-initiating growth through MSME lending

20. IFC Advisory Services: Global Knowledge Sharing • IFC Advisory Services: Best in Class reputation in region • IFC track record in Advisory in Russia/ECA: • Russia Leasing Development, Primary Mortgage Market Development, Energy Efficiency Finance, Banking Corporate Governance and Risk Advisory, Crisis Response • Benefits to IFC client base … and throughout sector • IFC AS model: direct engagements with broad client base • Sharing knowledge throughout sector • Russian banks want to be leaders by global standards • Advisory Services supports global ambitions on local and regional markets Creating Opportunities 20

21. IFC’s Global Reach 100+ country and regional offices worldwide

22. IFC’s Local Knowledge IFC’s global reach is complemented by its deep local knowledge. • As of September 30, 2009 Russia represented IFC’s second largest country exposure with a committed balance of US$2,281 million. • Active relationships with more than two dozen banks and financial institutions • 10 GTFP issuing banks - 2.5X growth in trade finance in FY2009, 2X FYTD (annualized) • Milestone transactions • First mortgage securitization • Ruble bond issues (partial guarantees) • Close to $1 billion in ruble financing • $500 mln syndication in 2008 • Investments in over six regional banks • Over $1.8 billion in investments in FM sector to date • Current committed portfolio $876 million • Financial sector approximately 40% of IFC commitments outstanding • Successful equity investments/exits: Absolut Bank, Russian Standard Bank