Investing in the Russian banking sector

Round Table and Presentation of“How to Invest in Russia“

The AEB Finance and Investments Committee

Philippe DELPAL

Global Head of Retail Banking in Russia

CEO of CETELEM in Russia

December 14th, 2007

BNP PARIBAS in Russia

2002 2004 2005 2006 20072003

Retail BankingConsumer FinanceFleet

ManagementCorporate & Investment Banking

Present in Russia since 1974 through Rep. office and since 2002 through subsidiary

Corporate & Investment BankingInternational Retail & Financial Services Asset Management & Services

• Cetelem #1 in

continental

Europe

•Top 3 in Europe in leasing

• Plans: In 5 years – 100 branches in Russia

• Strong investment banking franchise

• Leader in creditor insurance worldwide

3

What could bring BNPP to Russian banking business?

Bringing expertise in retail banking BNP Paribas Group: over 5500 branches worldwide, including around 1800 branches

in 28 fast-growing countries Modern bank technology and risk management skills Model Branch in line with the best European standards

Differentiating BNPP from other competitors: genuine focus on the customer

Ensuring secure and high-quality banking services Excellence in customer relationship

Attractive Bank products and services: All types of financing (working capital, overdraft, investment financing, etc.) Trade Finance products (export-import financing, LC, LG, documentary collections) Dedicated teams in charge of international groups: Turkish, Italian and Ukrainian

desks Supplier/Distributor finance programs Foreign Exchange; Deposits; Domestic and International settlements; Cash

Management Plastic cards products (payroll solutions, corporate credit cards)

Banks with Foreign Capital in Russia: Facts and Figures

Share of foreign ownership in Russian banks' combined charter capital rose to 24.9%24.9% as of October 1 2007, whereas only two years ago the same indicator hardly reached 10.8% (April, 2006)

Some reasons for further growth:Some reasons for further growth:

In August 2007, the Bank of Russia issued authorizations to buy over 20% in a few Russian banks from the Top-100 to several foreign credit institutions not yet present in Russia.

The number of credit institutions, 100% owned by non-residents, increased to 5858 banks out of 1,165 Russian banking institutions. The volume of foreign investments in the charter capital of Russian banks reached RUR 139,455 RUR 139,455 million.

61

20 21 23

2732

33

41

4852

58

-

10

20

30

40

50

60

70

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

+85%

Number of banks with 100% foreign capital

136130

126123

128132

136

153

188

199

100

120

140

160

180

200

220

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

+46%

Number of banks with foreign capital

510

22

41

86

150

2002 2003 2004 2005 2006 2007e

119154

203

245

327

438

2002 2003 2004 2005 2006 2007e

Level of lifeLevel of life of Russian citizens is growing – by 10% annually

GDPGDP growth in 2006 – 6.7% against 2005. This year the growth will exceed 7% (Q3 – 7.6%) as per expert estimations

UnemploymentUnemployment rate: 7.2 - 7.6% in 2006 – no changes in the past 2 years

Growth of banking services use - 63% in 2007 vs. 57% in 2005 with a constant positive trend

The reduction of credit and business risks

131163

218289

552

714

2002 2003 2004 2005 2006 2007e

CONSUMERS – Income p/m, 2002-2007 (US$)

RETAILERS – Sales Volume, 2002-2007 (US$ bln)

CONSUMER LOANS – Volume Growth,

2002-2007 (US$ bln)

Why there is a growing interest of foreign institutions in the Russian banking system

All 3 of the main inter-dependent players of the Russian market – Consumers, Retailers and Retail Banks - have been developing at the same pace for the last 6 years (2002 – 2007)

Most intensive growth through M&A: Recent transactions

MOST “VENDIBLE” BANKS

SBERBANK SPO USD 8.8 bn

VTB IPO USD 8 bn

ABSOLUT BANK By KBC, 92.5% USD 1 bn

Rosbank By Societe Generale, 20%-1 USD 634 mln

IMPEXBANK By Raiffeisen International USD 550 mln

Investsberbank By OTP Bank, 96.4% USD 477 mln

International Moscow Bank By HVB Group (UniCredit), 100% USD 395 mln

Orgresbank By Nordea, 85.7% USD 313.7 mln

City Mortgage Bank By Morgan Stanley, 100% USD 200 mln

Probusinessbank Sold 34.5% to portfolio investors USD 122 mln

Volume of deals in the banking sector grew by 147% to $4,8bl in 2006. The year of 2007 appears to exceed this performance with 15 deals $2,5bl$2,5bl already announced in the first six months of 2007.

2007 may become a year of the expansion of large players to provinces and the consolidationconsolidation of small banks.

3.83.8

6.06.0

2.92.9

3.83.8

3.83.8

Drivers for growth of the foreign capital proportion

Bank acquisition

Need for additional capital Changes in regulation

Increasing competition Increased foreign interest

Expansion into the regions Entry into WTO

Growth prospectsExpansion into other business segments

Entry on the Russian market: organic growth vs. M&A

PROS CONS

ORGANIC

M&A

Lower risk while business expansion and diversification

Focus on internal resources No necessity to aggregate

significant capital up to a certain period of time

Longer development process Huge investments to be done for

realization of certain stages, eg. development of a regional network

Limited opportunities for business portfolio diversification

Less possibilities to use up-to-date banking technologies due to lack of knowledge and experience in a banking institute

Synergy effect from costs decrease Diversification of business portfolio Rapid profitable development and

strategic goals achievement Strengthening of market position Financial access and new

technologies Customer database extension Geographical availability

Huge investments realized as a lump-sum payment

Possible ratings drop of a bank-acquirer

Difficulties in the post integration process: organizational, business, etc.

Human resources factor

Entry strategy

Mergers and Acquisitions

Green field

Partnership

Combination

Merger Integration: The day after syndrome…

Most of M&A fail to deliver shareholder value, due to:

Lack of structured strategic planning prior to transaction Lack of planning and preparation for post-integration period Complex integration of two businesses Shortage of financial and human resources Difficulties in dealing with different organizational cultures Difficulties in overcoming the cultural issues Difficulties in implementing of new HR strategy and organization structure Difficulties in integrating IT and reporting systems Risk of losing customers Retention and selection of the management team

strategy transaction integration

Nevertheless, the Market Share of Foreign Players will Increase in the Next 2-3 Years: Few Pretenders

Merrill Lynch has acquired about 10%

of the Trust Banking Group.

HapoalimMay buy a Russian bank worth

$200 million to do primarily mortgage loans

Getin HoldingFocus on a bank with a

banking license, IT license and system for

reporting to the Russian CB

Industrial & Commercial Bank of China

Has just received a license to open a bank in Russia

Bank of TokyoMitsubishi

Got a CBR license and plans to buy

a Top 10 Russian bank

OTP (Hungary)Acquired Investsberbank in 2006

and plans to buy one or several

regional banks

Provident FinancialInvestment of 10 mln pounds for

Buying a small local bank in one of the Russian’s

remote regions

Barclays capitalOpened an office in Moscow

in 2007may buy a small domestic

lender

HSBCObtained a general license in 2007.

Experts believe that will acquire a Russian bank

Nordea Bank FinlandDevelopment of its retail

banking, acquisition of a bank with

a strong presence in Moscow and St-Petersburg

Deutsche Bank AG

Acquisition of a bank or building up its own acquired in

February 2006 UFG Bank, a leading investment

bank

Conclusion

In spite of optimistic potential in market volumes, Banks on the Russian market will have to face several serious challenges within next several years:

Funding issuesLiquidity tightening will cause cost of funding to grow influencing local and small foreign banks with limited access to cheap cash resources

Narrow profit margins

Decrease in interest rates due to changed legislation and increased customer awareness will cause decline in margins, putting banks financial performance under pressure

Growing need for regional network

Necessity to quickly develop regional infrastructure in line with retailer development in the regions, will force banks into considering M&A dealsconsidering M&A deals with regional banks, as development of own structure takes significant amount of time

International expertise

These challenges will be much easier to face for large multinational banking groups that will allow them to take leading position on the market due to modern IT solutions and high service level standards

Philippe DELPALGlobal Head of Retail Banking in Russia, BNP Paribas Group

CEO of CETELEM in Russia

Tel: +7 495 660-91-83

E-mail: philippe.delpal@cetelem.ru

Web: www.cetelem.ru; www.bnpparibas.ru

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