MARCH 17, 2011

GLOBAL BANKING

SPECIAL COMMENT

Russian Banks: Mergers and Acquisitions Will Strengthen the Banking Sector
Summary Opinion
Throughout 2010, the Russian banking system experienced a surge in mergers and acquisitions 1 (M&A) and according to the Central Bank of Russia (CBR), the level of M&A in 2011 could outstrip that of 2010.2 Moodys considers this to be credit positive because the Russian banking system will benefit from increased economies of scale and a reduction in the number of very small, fundamentally weak banks within the system. The conditions are in place for M&A activity to gain momentum in Russia. Banks have the means to finance deals, evidenced by a high share of liquid assets and increased access to debt financing. Many banks also have excess capital which they are looking to utilise. Lower M&A valuations following the crisis, combined with accelerating credit growth also stimulate M&A demand. In addition to market-driven factors, M&A activity will be fostered by increased minimum capital requirements from currently RUB90 million to RUB180 million in January 2012, since this provides smaller institutions with the incentive to merge with (or acquire) other banks in order to jointly meet the higher requirements. Regulators have also paved the way for more M&A, by easing the administrative requirements for bank mergers in 2010. M&A activity had already gained pace in 2010 across all banking segments: both government-owned and private banks, Moscow-based as well as regional banks, and domestic and foreign-owned institutions. There were 24 M&A deals in 2010 compared to 12 in 2009. Going forward, we expect that many deals will take place between sister or partner banks as a part of internal consolidation strategies. However, given favourable conditions, we will also see more deals between non-group banks that carry the potential to create a stronger mid-layer of financial institutions.

Table of Contents: SUMMARY OPINION 1 EMPIRICAL EVIDENCE AND CONSEQUENCES OF CONSOLIDATION 2 WHY THE PACE OF CONSOLIDATION WILL QUICKEN 5 MOODYS RELATED RESEARCH 9 APPENDIX 1 10

Analyst Contacts:
MOSCOW 7.495.228.6060

Katrin Robeck 7.495.228.6092 Analyst Katrin.Robeck@moodys.com Victoria Voronina 7.495.228.6060 Associate Analyst Victoria.Voronina@moodys.com Yaroslav Sovgyra 7.495.228.6076 Vice President Senior Credit Officer Yaroslav.Sovgyra@moodys.com Eugene Tarzimanov 7.495.228.6051 Vice President Senior Analyst Eugene.Tarzimanov@moodys.com LONDON 44.20.7772.5454

Yves Lemay 44.20.7772.5512 Managing Director Banking Yves.Lemay@moodys.com

Acquisition is defined as the purchase of one company by another. The target company continues to operate under its own name. Merger is defined as takeover of one company by another when the buyer swallows the business and the target company ceases to exist. Stated by Mikhail Sukhov, Director of the Central Banks Department of Licensing and Financial Rehabilitation of Lending Organisations on 9 November 2010.

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In particular, consolidation among the larger private banks will yield benefits from scale and geographical coverage, and will create players that might be better able to compete with the large statecontrolled banks that control 50% of banking assets. Concentration at the top will nevertheless remain strong, as large banks such as Bank VTB are also actively acquiring new assets. The expected continued dominance of the state banks is positive for their creditors, but will likely remain a credit-negative factor for creditors of privately-owned banks, whose franchise development will remain restricted by their inability to compete head-on against the state banks. We also note that M&A activity is only one of many factors that will drive the credit profiles of Russian banks in the near term 3. While M&A can have a significant impact on the credit profile of involved banks (especially smaller entities being acquired), increased M&A activity will unlikely change the structure of the Russian banking system given the strong market position of the government-controlled banks. Therefore, the overall market-wide credit implications will be relatively modest, although they contribute to our overall stable outlook for the Russian banking system in the near term.

Empirical Evidence and Consequences of Consolidation

The Russian banking system is concentrated at the top, but very fragmented at the bottom as only five government-controlled banks control half of the market in terms of assets, while over 950 banks4 banks are competing for the remaining 50% (see Exhibit 1). Although organic growth remains an option, depending on the price of acquisition, we see scope for M&A both for similarly profiled banks in different geographies as well as banks with complementing profiles. The credit implications which are summarised above, are discussed in more detail in this section, and evidence of growing M&A activity is provided.
EXHIBIT 1

Asset Concentration in the Russian Banking System

6.1 13.4
Top 5 (% total assets) 6 - 20

11.8

48.2

25 - 50 51 - 200 >201

20.5

Source: CBR Note: The top five banks in the Russian banking system: Sberbank, Bank VTB, Gazprombank, Russian Agricultural Bank and Bank of Moscow .

For a discussion of the key factors that are expected to drive Russian banks credit profiles over the 12-18 months please see Banking System Outlook Russia, published October 2010. According to the CBR, as of 1 January 2011, 955 banks were licensed to conduct banking operations in Russia.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

GLOBAL BANKING

We consider that the credit implications from increased M&A activity are positive overall. The Russian banking system will gain from increased economies of scale and a reduced number of very small fundamentally weak banks in the system, whilst a stronger layer of mid-sized banks will improve competitive dynamics. This is despite reinforced concentrations at the top end of the banking system, where large players such as VTB are actively acquiring new assets. Exhibit 2 shows how M&A activity has gained traction in 2010.
EXHIBIT 2

Number of M&A deals in Russia in 2007-2010

Number of M&A deals (left axis) Number of bailouts (left axis) Combined assets of merged entities % of total system assets (right axis)

25 20 15 10 5 0 2007

25% 20% 15%

11 12 7 5

24 10% 5% 0%

2008

2009

2010

Source: CBR Note: Chart only includes completed deals per year. 2008 data includes eleven deals that were bailouts of troubled banks during the crisis. Combined assets are assets of the buyer as of the reporting date (end of quarter) following completion of the deal.

Gains from economies of scale credit positive A banks size matters, as improved critical mass enables merged institutions to benefit from long-term economies of scale. Mergers help to increase the geographic reach of branch networks and customer bases and in many cases provide cross-selling opportunities to the increased customer population (i.e., one entitys various products can be offered to other entitys customers). M&A are often connected with efficiency gains through mutual benefits from (i) existing experienced staff i.e. staff with specialised expertise can be utilised across a broader organisation; (ii) enhanced infrastructure; (iii) removing excess staff capacity through consolidation; and (iv) a higher potential for improved profitability through enhanced client access and cross-selling.

Large private-sector institutions may also be better able to attract new high-calibre staff and invest in better technology, such as risk-management infrastructure. The gains can come from several sources; in addition to potentially improved profitability and efficiency, this may also lead to improved risk management and underwriting standards that, in turn, will help banks to better manage unanticipated shocks. For instance, Intesa Sanpaolos recent consolidation of its Russian subsidiaries Banca Intesa (previously KMB Bank) and ZAO Banca Intesa will bring about improvements from economies of scale. The combined bank benefited from both KMB Bank's high-yielding, but more risky, SME portfolio and Banca Intesa's well-performing, albeit lower-margin, corporate loan book. The reorganisation enabled the bank to use the experience of both institutions, introduce better diversification to the merged bank's income streams, while also bolstering its financial fundamentals. In our view, the consolidation also bodes well for the merged bank's market-franchise development.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

GLOBAL BANKING

French bank Societe Generales ongoing consolidation of its Russian subsidiaries will also yield improvements in scale. In early 2011, Rosbank (ranked 11th in terms of assets in Russia), the Russian unit of Societe Generale, acquired 100% of shares in two other Russian Societe Generale subsidiaries DeltaCredit and Rusfinance Bank in order to consolidate its assets in Russia. In addition, there are plans to merge Rosbank with Bank Societe General Vostok (ranked 30th). 5
More (and stronger) large to mid-sized players credit positive for the system While Russias banking sector is concentrated at the top, at the bottom it has a large layer of small and weak banks. Most of these weaker banks are unable to compete with the state-controlled institutions, although a stronger layer of mid-sized banks could improve competitive dynamics.

Increased M&A activity will likely create more of these stronger second-tier banks and could mostly come into effect through mergers between the larger private banks (i.e., the top six to 30 in terms of assets). A prominent example for M&A activity among these second-tier banks was Nomos Banks (ranked15th in terms of assets) acquisition of Khanty-Mansiysky Bank (BKhM) last year. BKhM is the 22nd largest bank in Russia, with a dominant position in the region of Khanty Mansiysk. In many cases, the benefits of M&A will not materialise in the short-term, but instead offer enhanced long-term opportunities. For instance, Promsvyazbank recently completed the consolidation of three regional banks. The acquisitions did not lead to an immediate increase in the banks market share; however, they equipped Promsvyazbank with a larger regional branch network paving the way for further regional franchise development and growth. Similarly, Alfa-Banks acquisition of Severnaya Kazna did not lead to a boost in the buyers market share, with the latter only accounting for 0.01% of Russian banking assets. However, Severnaya Kazna is a regional bank with strong coverage in its home region and its acquisition has thus boosted Alfa-Banks geographic reach.
Top-players gain further market shares credit negative for the privately-owned banks Government-owned Bank VTB (the 2nd largest bank in terms of assets) has recently demonstrated acquisition appetite. In 2010, VTB signed a deal to acquire Transcreditbank (ranked 13th by assets)6 and all of Transcreditbanks Russian subsidiaries including leasing, factoring and investment businesses. In February 2011, VTB has also bought a 46.5% stake in Bank of Moscow (ranked 5th by assets), and publicly announced its intention to buy the rest of the shares.

The expected continued dominance of the state banks is positive for their creditors, but will likely remain a credit-negative factor for creditors of privately-owned banks, whose franchise development will remain restricted by their inability to compete head-on against the state banks. No private bank in Russia accounted for more than 2% of system assets, while almost 99% of private banks had negligible market shares of less than 1%. Competition in Russia has historically been distorted by the dominance of the five large governmentcontrolled banks that control nearly 50% of banking system assets. In retail deposits, the banks combined share is approximately 60%. This is constraining the franchise development of private-sector banks, a situation that is likely to deteriorate as state banks are looking for large acquisitions. The government-controlled banks benefit from ongoing state support, have leading positions in the bestperforming economic sectors (oil and gas, exports, defence) and have large deposits from state-owned enterprises. State banks also benefit from their large capital bases, which allow them to provide large
5 6

Rankings within the Russian bank system, size of assets relative to total assets. At the time of writing this report, the acquisition was in process with VTB having bought 40% of Transcreditbank.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

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loans to key companies. They also have significant pricing power on loans and deposits, because of their large size.
Caveat Not every bank benefits from M&A We note that for some institutions, M&A can be credit-negative. Large banks can increase their scale by acquiring smaller players, but absorbing smaller or weaker institutions, or two institutions with substantially differing corporate cultures, could dilute otherwise sound financial fundamentals, such as capitalisation, asset quality and liquidity.

One example was the merger of MDM Bank and URSA Bank in 2008-2009. In our view, the credit profile of the post-merger institution was ultimately weaker than that of the pre-merger MDM bank (the stronger of the two merging entities) because the potential of synergies that had been expected initially from this transaction was eventually not fully achieved (albeit partly due to the hostile operating environment during the crisis). This was despite the post-merger banks larger franchise that is underpinned by the complementary business models of the two merged banks. In many cases, however, acquired banks are too small to affect financial indicators. Although Transcreditbank bank ranked 13th in terms of assets when VTB acquired it, Transcreditbank accounted for 9% of VTBs assets only, and so did not offer a significant enough scale to positively affect VTBs credit profile.

Why the Pace of Consolidation Will Quicken

Recent developments indicate that M&A activity with accelerate further. These developments are driven both by the markets and by regulatory changes.
Increased minimum capital requirements The CBR is gradually increasing minimum capital requirements. As of January 2010, the minimum capital that a bank should hold is RUB90 million ($3 million), which will double to RUB180 million in 2012. Looking at current capital levels, 191 banks (whose share in total capital of the banking system is 5.1%) do not meet the RUB180 million benchmark and will either need to raise capital or merge with another institution in early 2012. This will trigger consolidation among the smaller institutions that may otherwise not be able to meet the new requirements. Banks with insufficient capital that are unable to merge with another institution or raise sufficient capital by 1 January 2012 may be transformed into non-bank credit institutions, or may eventually face license withdrawal.7 Lower valuations The market corrections that occurred during the crisis led to lower valuations of Russian financial institutions. Although the value of Russian banking assets has been recovering since the height of the crisis, it remains below pre-crisis level which is stimulating M&A demand. Russian banks were sold at price-to-book-value multiples of 3x to 4x before the crisis 8. This seems to have declined to around 1.5x to 2x, based on a number of completed and recently-announced transactions.

Similar trends are observed as per other M&A valuation approaches. Profitability metrics that are used under the income approach remain low compared with pre-crisis levels. In Exhibit 3 we gauge Russian
7 8

Moodys does not rate any Russian institution with capital lower than RUB120 million. Bokov, V. and Vernikov, A. (2008) Possible impact of corporate governance profile on a Russian bank valuation. (Economics Working Papers 95). Centre for the Study of Economic and Social Change in Europe, SSEES, UCL: London, UK.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

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banks profitability over time using return-on-equity (RoE) and return-on-assets (RoA) which declined substantially during 2008 and 2009. Profitability metrics have improved in 2010 and will likely continue to strengthen during 2011 9. However, they are unlikely to reach the levels of the pre-crisis boom years (i.e. pre 2008). Lower than pre-crisis valuations, combined with improving profitability growth potential, further contribute to M&A demand. Other input factors that are used in valuations such as the value of tangible assets (value-of-assets approach) have also declined following the market corrections during the crisis in particular falling real estate prices.
EXHIBIT 3

RoE/ RoA of the Russian banking system over time (%)

ROA (right axis) 30 25 20 15 1.5 10 5 0 2005 2006 2007 2008 2009 2010 2011E 1.0 0.5 0.0 ROE (left axis) 3.5 3.0 2.5 2.0

Source: CBR Note: ROA for 2011 is Moodys estimate

Banks have the means to finance deals Many Russian banks are looking to utilise their excess capital, as they have emerged from the crisis with strong capital buffers. To boost their RoE, they are looking to use their capital for new acquisitions.

The Russian banking system is well capitalised, with a system-wide capital adequacy ratio (CAR) of 18.4% and a Tier 1 ratio of 12.0% as of Q3 2010 (see Exhibit 4). Going forward, we consider that capital levels will remain adequate in the 16%-18% range by mid-2011, because we anticipate low growth in high-risk assets and only moderate growth in problem loans10. Furthermore, retained earnings will likely increase, supporting banks capitalisation. While many small banks have CARs on the verge of the 10% minimum requirement, many mid-sized and larger banks capitalisation offers them the means to finance M&A.

9 10

See also Russian Banks: Sound Profitability likely to be restored in 2011, published in February 2011. See also Banking System Outlook Russia, published October 2010.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

GLOBAL BANKING

EXHIBIT 4

Russian banks capital ratios

Tier 1 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009 Q3 2010 Total CAR Minumum CAR ratio

Source: CBR

In addition, significant cash and equivalents have accrued on banks balance sheets. Exhibit 5 shows that the banks liquid assets (cash, interbank, and securities) steadily increased throughout the crisis, accounting for 25.3% at year-end 2010, as banks strengthened their liquidity buffers. The mix of liquid assets is now shifting, as banks have started to increase their fixed-income portfolios in search of higher yield. Nevertheless, we believe that the current availability of liquid assets to Russian banks provides more opportunities to finance deals than the aggressive loan growth strategies and lower share of liquid assets respectively that Russian banks pursued before the beginning of the global financial crisis.
EXHIBIT 5

Liquid assets % total assets

30% 25% 20% 15% 10% 5% 0% 2007 1Q2008 2Q2008 3Q2008 2008 1Q2009 2Q2009 3Q2009 2009 1Q2010 2Q2010 3Q2010 2010 Cash assets Accounts with the Central Bank Correspondent accounts with other banks Securities

Source: CBS

In addition, Russian banks access to debt financing has increased (see Exhibit 6). Due to low interest rates, Russian banks are actively issuing Eurobonds as well as domestic bonds, allowing new debt issuance to exceed pre-crisis levels. 11 For instance, the volume of outstanding domestic-bank bonds increased by more than 50% from 2008, to around US$25 billion in 2010. The large pipeline of planned bond issuances by Russian banks will underpin future issuance growth; the pipeline of new domestic bonds likely to be placed by Russian financial institutions in 2011 is very large (around
11

For more information see Russian Banks: Supporting Growth of Domestic Bond Market by Acting as Issuers and Investors, published February 2011.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

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RUB720 billion, or US$24 billion).12 We also expect Eurobond issuance in 2011 to exceed the 2010 volume.
EXHIBIT 6

Increased access to debt financing: Russian banks quarterly issuance of domestic bonds
120 100 80

RUR billion

60 40 20 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010

Source: Cbonds

Partial privatisation of government-controlled banks The Russian governments plans to partly privatise state-owned banks may contribute to M&A activity when state-owned shares are sold to private banks. The government aims to bring the private sector back to the fore, after state control of the economy rose as high as 60% during the global financial crisis.

In February 2011, the Russian government sold a 10% stake in Bank VTB via the open market. In addition, the government also plans to sell a 10% stake in Sberbank and 25% in Russian Agricultural Bank. The governments current stakes in those banks are listed in Exhibit 7.
EXHIBIT 7

Current government stake

Maximum stake to be sold

Stake sold already

Sberbank Bank VTB Russian Agricultural Bank

60.3% 75.5% 100.0%

10% 25% 25%

-10% (February 2011) --

Eased administrative conditions for bank mergers The administrative conditions for M&A have recently been eased. Credit institutions that intend to merge need approval from the Antimonopoly Commission if their joint assets (as of the balance-sheet date before the bid to merge) exceed RUB33 billion (US$1 billion). Previously, this threshold was RUB24 billion (US$0.8 billion). 13 Although a small gesture, such measures could encourage mergers of small players in the market.

12 13

According to cbonds.info (www.cbonds.ru) Resolution No. 335 dated 30 May 2007 on "On the Determination of the size of Assets of Credit Organisations for the Purpose of Anti-monopoly Control. The text of the updated resolution (No. 385 as of 1 June 2010) was published on 7 June 2010. See also Bank of Russia Instruction No. 109-I, dated January 14, 2004, On the Procedure for Taking the Decision by the Bank of Russia on the State Registration of Credit Institutions and on the Issue of Licenses to Conduct Banking Operations and Bank of Russia Regulation No. 230-P, dated June 4, 2003, On the Reorganisation of Credit Institutions by Merger and Acquisition.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

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Moodys Related Research

Banking rating methodologies:

Bank Financial Strength Ratings: Global Methodology, February 2007 (102151) Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology, March 2007 (102639)

Research on Russian banks: Banking System Outlook Russia, October 2010 (127578)

Russian Banks: Sound Profitability likely to be restored in 2011, February 2011 (130867) Russian Banks: Supporting Growth of Domestic Bond Market by Acting as Issuers and Investors, February 2011 (130825)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

GLOBAL BANKING

Appendix 1
Overview of Recent M&A Deals in Russia
Buyers Rank by Assets Local Currency Total Assets Deposit (RUB million) Rating Sellers Rank by Assets Type of Deal Combined Assets (RUB million)

Buyer

Seller

2011 VTB 2010 VTB Promsvyazbank 2 10 3.712.949 463.505 Baa1 Ba2 Transcredit Nizhniy Novgorod Volgoprombank Yarsotsbank Uralsib Nomos-Bank Rossiya Rus'-Bank OTP Bank Vostochny 12 15 38 37 40 56 364.300 281.104 98.328 97.767 89.190 56.725 Ba3 Ba3 NR B2 Ba1 B2 Uralsib-Yug Bank Stroyvestbank Khanty-Mansiysky Bank Gazenergoprombank Rus'-Bank-Ural Donskoy Narodniy Bank Kamabank Rostpromstroybank City Mortgage Bank Santander Consumer Bank (345) Banca Intesa (KMB) Otkrytie Novikombank Commetsbank Eurasia Asiattsko-Tihookeansky Bank Mezhtopenergobank Evrasbank Russkiy Ipotechniy Bank 2009 Rosbank Transcreditbank MDM Bank (URSA Bank) Vostochny SMP Rusnarbank Rostpromstroybank 10 14 25 81 97 303 366 478.762 237.947 152.860 32.170 25.234 4.194 3.004 Baa3 Ba1 Ba2 B2 B3 NR NR Tsentralnoe OVK Superbank MDM-Bank (Moscow) Dvizhenie Etalonbank MBTS-Bank Beldorbank Yuzhniy Region NA Merger 575 13 523 366 611 Merger Merger Merger 51.407 45.492 5.049 4.353 Merger Merger 436.629 241.617 379.238 54 72 76 94 109 129 283 510 60.772 45.002 42.448 28.902 21.126 18.185 5.520 1.815 Baa3 NR B2 NR NR NR NR NR ZAO Bank Intesa Bank Petrovsky (from Nomos) IB Otkrytie Lada-Kredit Dresdner bank Kolyma-Bank Kamchatprombank Alemar Interkommerts Baltsotskombank 13 Acquisition 356 Merger 297 Merger 253 Merger 95 Merger 374 Merger 25 Acquisition 31 Merger 316 Merger 355 Merger 347 Merger 312 Merger 394 Acquisition 345 Acquisition 188 Merger 75 Merger 106 Merger 279 Acquisition 213 Merger 358 Merger 406 Merger 201 Merger 204 Merger 924 Merger 2.950 31.251 20.258 109.039 48.700 39.203 91.978 68.029 438.251 355.296 228.082 84.938 92.000 470.441 3.939.673 2 3.939.673 Baa1 Bank of Moscow 5 Acquisition

162 Merger

717 Merger

10

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

GLOBAL BANKING

Overview of Recent M&A Deals in Russia

Buyers Rank by Assets Local Currency Total Assets Deposit (RUB million) Rating Sellers Rank by Assets Type of Deal Combined Assets (RUB million)

Buyer

Seller

Miraf-Bank

791

507

NR

Peterburg-Invest Chitapromstroybank Yugo-Vostok Metrakombank

910 279

Merger Merger 828 663.264 443.688 172.771 101.036 83.645 74.638 58.402 62.967 16.426 12.938

372 Merger 308 Merger 67 Acquisition 229 41 Acquisition Acquisition 259 Merger 112 Acquisition 145 Merger

2008 Alfa-Bank Promsvyazbank Svyaz-Bank Gazenergoprombank MBRR Trust (Trust National Bank) National Reserve Bank Probusinessbank Sarovbusinessbank Solidarnost' Investbank 6 12 20 37 32 51 64 68 126 199 343 602.691 399.461 153.085 82.919 82.621 61.298 46.223 42.951 16.855 8.332 3.477 Ba1 Ba2 NR NR B1 NR B2 NR NR NR NR Severnaya Kazna Yarsotsbank Russian Industrial Bank Sobinbank Dalkombank Trust Investment Bank Rossiysky Kapital Gazenergobank Bank24.ru Nizhegorodpromstroybank Potentsial Grankombank Voronezhprombank Konversbank FK Otkrytie VEB NA NA NR NA ZAO Russian Development Bank Svyaz-Bank Globex Prominvestbank 2007 Raiffaisenbank Etalonbank Energotransbank Stroyvestbank 7 158 254 332 312.273 8.900 4.208 2.857 Baa3 NR NR NR Impexbank Mass Media Bank JSC "Narodniy Fond" Volgoinvestbank Dorozhnik Tyumenprofbank Dzerjinsky Eurasia Zheldorbank (was renamed to Etalonbank)
Source: Moodys, CBR and Interfax Note: All information on assets in this table is as of YE 2010 as per CBR. Combined assets are assets of the buyer as of the reporting date (end of quarter) following completion of the deal.

107 Acquisition 238 Acquisition 179 Acquisition 151 Acquisition 302 Acquisition 314 127 20 35 Merger Merger Acquisition Acquisition 440 Merger

22.642

96 Acquisition

485 Acquisition 33 NA 553 894 NA 938 NA 181 Merger Merger Merger Merger Merger Merger Merger Merger

NA 413.239 10.858 4.228

536 Merger

NA

NA

NR

Etalonbank

8.649

11

MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR

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Report Number: 131131

Authors Katrin Robeck Victoria Voronina

Production Associate Amanda Ealla

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Any publication into Australia of this document is by MOODYS affiliate, Moodys Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODYS that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act 2001. Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moodys Japan K.K. (MJKK) are MJKKs current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, MIS in the foregoing statements shall be deemed to be replaced with MJKK. MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moodys Overseas Holdings Inc., a wholly-owned subsidiary of MCO. This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

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MARCH 17, 2011

SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTOR