General Findings

1. General Findings 26 March 2009

2. - National Development Bank- Development Bank of Namibia- Development Bank of Mauritius

3. How were the ratings assigned? • Based on Support • Standalone ratings

4. Support > Long-term IDR assigned based on Long-term IDR of the sovereign • High levels of support from sovereign factored into Long-term IDR • Higher rated sovereign’s supported higher IDRs • Highest IDR rating assigned did not imply strongest bank • Factors impacting the assessment of support • Ownership structures • Support letters • Access to capital/callable capital • Ability to call capital promptly • Role the bank plays – key developmental role/government initiative • Legislation/Act of Parliament • Past history of support/assumption of previous DFI assets • Government funding and government guaranteed funding • Size relative to commercial banking sector – re bailout

5. Standalone ratings • Modus operandi to provide development finance • Banks assumed to be taking on higher risk • Profit maximisation is not key/rather sustainable financial performance • Pre-provision profits sufficient to cover risk costs and support growth • Corporate Governance/Risk Management assessment • Corporate Governance • Improvements required to ensure a strong and independent board • Board experience • Key executive appointments to the board • Balance between executive/non-executive directors • Not formally regulated • Related party lending

6. Financial performance • Weak levels of financial performance • Profit maximisation not an objective • Given the development focus would expect low levels of profitability • Sustainable profitability • Suspended interest included in revenues • Loans provided at concessionary/subsidised rates • Interest margins low • Given narrow margins overall levels of profitability sensitive to funding changes • Inadequate provisioning for NPLs • Impairment provisioning insufficient to cover suspended interest • High cost to income ratios • Benign economic environment

7. Risk Management>Risk management requires attention - key committees do not exist - key risk management absent from committees - segregation of duties in certain institutions unclear - additional committees recommended (large exposures)- concentrations in credit risk by sector, obligor - enhancement of further policies>Credit risk perceived be significant Source: Fitch survey

8. Credit Risk • High levels of inherent credit risk • High levels of loans in arrears • Limited monitoring of loans • Inconsistent reporting of NPLs • Coverage ratios for NPLs considered to be low • Given the operational risks, coverage ratios could be even lower • Unseasoned loan book • Long-tenured facilities

9. Market Risk > Unsophisticated risk systems > Unable to measure interest rate risk > Foreign exchange risk considered low > Market risk arising from equity and property investments high

10. Other Assets • Significant property investments • Material revaluation reserves supporting shareholder funds • Valuation issues • Market risk implications • Extent of “Free Capital” • Equity investments • Valuation issues • Market risk implications • Extent of “Free Capital”

11. Operational Risk • Operational systems considered to be weak • Difficulty in determining ownership of key functions and responsibilities • Operational risk considered to be high as a result of basic procedures and controls for loan monitoring

12. Funding • Absence of a ALCO Committee and or treasury department • Certain institutions benefit from government/government guaranteed funding • Funding franchises perceived to be underdeveloped and in some instances untested • Most institutions are not deposit taking or an unregulated deposit taker • Funding is largely wholesale based

13. Liquidity • Low levels of liquidity • Refinancing risk • No evidence of stress testing • No evidence of back-up lines • Funding franchise • Ability to access Central Bank funding

14. Capitalisation • Contrasting levels of capitalisation • Degree of “free capital” • High level of unreserved NPLs • Quality of earnings and sustainability • Dividend payments

15. Global trends How Far through the Crisis are we? The Greatest Challenges Facing Banks

16. Diagnosis: Business Models in the Spotlight Pressure on domestic profitability Refocus on domestic markets and traditional business model Financial innovation and international expansion Overheating in credit markets Strong credit growth in domestic and emerging markets

17. Symptoms: The Greatest Challenges Facing Banks C: Capital raising required A: Asset quality deterioration, exposures to Emerging Markets M: Management E: Earnings’ weakness L: Liquidity and funding pressures

18. Asset Quality – Peak to Trough Impaired Loans Source: National authorities, Fitch estimates

19. Funding Availability Four stages • Bank systemic crisis • Mistrust/counterparty risk • Hoarding liquidity for fear of own position • Hoarding with some lending to supported banks • Usage of the central bank liquidity facilities continues (ECB, SLS) • Government guaranteed debt programmes continue to emerge • The most unpredictable part of the financial crisis is behind us.

20. Profitability Takes a Turn for the Worst • Profitability, the first buffer and pressures are mounting… • Reduced appetite for lending • Pressure on net interest margins • Fee and commission income highly correlated to economic cycle • Rising impairment charges

21. Capital Raised, More Required? Total capital raised by European banks in ’08 & ‘09 Top 10 European capital raisers Source: Bloomberg, as at 9 March 2009

22. Deleveraging – Limited Alternatives • Banks’ Preferred Option – Change Mix of Assets/Risk Weighted Assets… …but takes time since quick fixes such as financial engineering no longer acceptable • Banks’ Less Desirable Option – Raise Capital... …even though shareholders have conceded some dilution, earnings prospects are worse and some have been burnt by bail outs • Banks’ Least Desirable Option – Selling Assets… …non-core asset sales and not renewing maturing lending is unlikely to be sufficient

23. Outlook for Banks • Real economy impact growing • Recession in many developed economies and impact on emerging markets • Fear of deflation (and even depression) • Higher credit risk costs for most banks • Earnings for most banks are likely to be under pressure, until 2010 or beyond! • Capital is under pressure, the bar is heightened, capital is being raised • Central banks are still providing much of the market liquidity • Shrinkage of off-balance sheet business (ABCP conduits, SIVs) • Deleveraging slow and painful

24. The Changed WorldGlobal Rating Stock

25. Enhancements to credit quality • Sovereign ratings • Perceptions of support • Government guaranteed funding • Sustainable financial performance • Corporate governance and risk management improvements • Asset quality • Adequate provisioning • Levels of capitalisation • Funding franchises • Liquidity

26. Enhancements to credit quality • Multilateral banks • Preferred creditor status, example African Development Bank • SADC banks do not benefit from this and therefore in weaker position given their target market • ADB has significant callable capital • Shareholding of sovereign’s with AA and AAA ratings • significant driver of rating uplift for ADB • In the absence of a regulatory environment has a negative impact on ratings • Generally credit concentrations higher than commercial banks which leads to lower ratings

27. Conclusion Questions

28. Your contact at Fitch Anthony Walker Telephone +27 11 380 0912 Senior Director anthony.walker@fitchratings.com Financial Institutions