Moodys SC_Russian Banks M&A

8/3/2019 Moodys SC_Russian Banks M&A

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SPECIAL COMMENT

GLOBAL BANKMARCH 17, 2011

Table of Contents:

SUMMARY OPINION 1EMPIRICAL EVIDENCE AND

CONSEQUENCES OFCONSOLIDATION 2WHY THE PACE OF CONSOLIDATIONWILL QUICKEN 5MOODYS RELATED RESEARCH 9APPENDIX 1 10Analyst Contacts:

MOSCOW 7.495.228.6060

Katrin Robeck 7.495.228.6092

Analyst

[email protected] Voronina 7.495.228.6060

Associate Analyst

[email protected]

Yaroslav Sovgyra 7.495.228.6076

Vice President Senior Credit Officer

[email protected]

Eugene Tarzimanov 7.495.228.6051

Vice President Senior Analyst

[email protected]

LONDON 44.20.7772.5454

Yves Lemay 44.20.7772.5512

Managing Director Banking

[email protected]

Russian Banks: Mergers and Acquisitions WillStrengthen the Banking Sector

Summary Opinion

Throughout 2010, the Russian banking system experienced a surge in mergers and

acquisitions1 (M&A) and according to the Central Bank of Russia (CBR), the level of M&Ain 2011 could outstrip that of 2010.2

The conditions are in place for M&A activity to gain momentum in Russia. Banks have themeans to finance deals, evidenced by a high share of liquid assets and increased access to debtfinancing. Many banks also have excess capital which they are looking to utilise. LowerM&A valuations following the crisis, combined with accelerating credit growth alsostimulate M&A demand.

Moodys considers this to be credit positive because theRussian banking system will benefit from increased economies of scale and a reduction in thenumber of very small, fundamentally weak banks within the system.

In addition to market-driven factors, M&A activity will be fostered by increased minimumcapital requirements from currently RUB90 million to RUB180 million in January 2012,since this provides smaller institutions with the incentive to merge with (or acquire) otherbanks in order to jointly meet the higher requirements. Regulators have also paved the wayfor 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: bothgovernment-owned and private banks, Moscow-based as well as regional banks, anddomestic and foreign-owned institutions. There were 24 M&A deals in 2010 compared to12 in 2009. Going forward, we expect that many deals will take place between sister orpartner banks as a part of internal consolidation strategies. However, given favourableconditions, we will also see more deals between non-group banks that carry the potential tocreate a stronger mid-layer of financial institutions.

1 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.2 Stated by Mikhail Sukhov, Director of the Central Banks Department of Licensing and Financial Rehabilitation of Lending Organisations on 9 November 2010.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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2 MARCH 17, 2011 SPECIAL COMMENT: RUSSIAN BANKS: MERGERS AND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTO

In particular, consolidation among the larger private banks will yield benefits from scale andgeographical coverage, and will create players that might be better able to compete with the large state-controlled banks that control 50% of banking assets. Concentration at the top will nevertheless remainstrong, 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 likelyremain 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 ofRussian banks in the near term3

Empirical Evidence and Consequences of Consolidation

. While M&A can have a significant impact on the credit profile ofinvolved banks (especially smaller entities being acquired), increased M&A activity will unlikelychange the structure of the Russian banking system given the strong market position of thegovernment-controlled banks. Therefore, the overall market-wide credit implications will be relativelymodest, although they contribute to our overall stable outlook for the Russian banking system in thenear term.

The Russian banking system is concentrated at the top, but very fragmented at the bottom as only fivegovernment-controlled banks control half of the market in terms of assets, while over 950 banks4

EXHIBIT 1

banks are competing for the remaining 50% (see Exhibit 1). Although organic growth remains anoption, depending on the price of acquisition, we see scope for M&A both for similarly profiled banksin different geographies as well as banks with complementing profiles. The credit implications whichare summarised above, are discussed in more detail in this section, and evidence of growing M&Aactivity is provided.

Asset Concentration in the Russian Banking System

48.2

20.5

11.8

13.4

6.1

Top 5 (% total assets)

6 - 20

25 - 50

51 - 200

>201

Source: CBR

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

3 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 2010.4 According to the CBR, as of 1 January 2011, 955 banks were licensed to conduct banking operationsin Russia.
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578


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We consider that the credit implications from increased M&A activity are positive overall. TheRussian banking system will gain from increased economies of scale and a reduced number of verysmall fundamentally weak banks in the system, whilst a stronger layer of mid-sized banks will improvecompetitive 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

75

12

2411

0%

5%

10%

15%

20%

25%

0

5

10

15

20

25

2007 2008 2009 2010

Number of M&A deals (lef t axis)

Number of bailouts (left axis)

Combin ed assets of merged entities % of total system assets ( right axis)

Source: CBRNote: 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 b uyer 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-termeconomies of scale. Mergers help to increase the geographic reach of branch networks and customerbases 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 connectedwith efficiency gains through mutual benefits from (i) existing experienced staff i.e. staff withspecialised expertise can be utilised across a broader organisation; (ii) enhanced infrastructure; (iii)removing excess staff capacity through consolidation; and (iv) a higher potential for improvedprofitability through enhanced client access and cross-selling.

Large private-sector institutions may also be better able to attract new high-calibre staff and invest inbetter 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 riskmanagement and underwriting standards that, in turn, will help banks to better manage unanticipatedshocks.

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 ofscale. The combined bank benefited from both KMB Bank's high-yielding, but more risky, SMEportfolio and Banca Intesa's well-performing, albeit lower-margin, corporate loan book. Thereorganisation enabled the bank to use the experience of both institutions, introduce betterdiversification 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.


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French bankSociete Generales ongoing consolidation of its Russian subsidiaries will also yieldimprovements in scale. In early 2011, Rosbank (ranked 11th in terms of assets in Russia), the Russianunit ofSociete 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 areplans 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 andweak 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 mostlycome into effect through mergers between the larger private banks (i.e., the top six to 30 in terms ofassets). 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 the22nd 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 enhancedlong-term opportunities. For instance, Promsvyazbank recently completed the consolidation of threeregional 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 forfurther regional franchise development and growth. Similarly, Alfa-Banks acquisition of SevernayaKazna did not lead to a boost in the buyers market share, with the latter only accounting for 0.01% ofRussian banking assets. However, Severnaya Kazna is a regional bank with strong coverage in its homeregion 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 demonstratedacquisition appetite. In 2010, VTB signed a deal to acquire Transcreditbank (ranked 13th by assets)6

The expected continued dominance of the state banks is positive for their creditors, but will likelyremain 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 inRussia accounted for more than 2% of system assets, while almost 99% of private banks had negligiblemarket shares of less than 1%.

and all of Transcreditbanks Russian subsidiaries including leasing, factoring and investmentbusinesses. In February 2011, VTB has also bought a 46.5% stake in Bank of Moscow (ranked 5th byassets), and publicly announced its intention to buy the rest of the shares.

Competition in Russia has historically been distorted by the dominance of the five large government-

controlled banks that control nearly 50% of banking system assets. In retail deposits, the bankscombined share is approximately 60%. This is constraining the franchise development of private-sectobanks, a situation that is likely to deteriorate as state banks are looking for large acquisitions. Thegovernment-controlled banks benefit from ongoing state support, have leading positions in the best-performing economic sectors (oil and gas, exports, defence) and have large deposits from state-ownedenterprises. State banks also benefit from their large capital bases, which allow them to provide large

5 Rankings within the Russian bank system, size of assets relative to total assets.6 At the time of writing this report, the acquis ition was in process with VTB having bought 40% of Transcreditbank.


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loans to key companies. They also have significant pricing power on loans and deposits, because oftheir 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 withsubstantially differing corporate cultures, could dilute otherwise sound financial fundamentals, such ascapitalisation, asset quality and liquidity.

One example was the merger of MDM Bank and URSA Bank in 2008-2009. In our view, the creditprofile 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 expectedinitially from this transaction was eventually not fully achieved (albeit partly due to the hostileoperating environment during the crisis). This was despite the post-merger banks larger franchise thatis 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, Transcreditbankaccounted for 9% of VTBs assets only, and so did not offer a significant enough scale to positivelyaffect VTBs credit profile.

Why the Pace of Consolidation Will Quicken

Recent developments indicate that M&A activity with accelerate further. These developments aredriven 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 millionin 2012. Looking at current capital levels, 191 banks (whose share in total capital of the bankingsystem is 5.1%) do not meet the RUB180 million benchmark and will either need to raise capital ormerge with another institution in early 2012. This will trigger consolidation among the smallerinstitutions that may otherwise not be able to meet the new requirements. Banks with insufficientcapital 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 financialinstitutions. Although the value of Russian banking assets has been recovering since the height of thecrisis, 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 crisis8

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

. This seems to have declined to around 1.5xto 2x, based on a number of completed and recently-announced transactions.

7 Moodys does not rate any Russian institution with capital lower than RUB120 million.8 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.


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banks profitability over time using return-on-equity (RoE) and return-on-assets (RoA) which declinedsubstantially during 2008 and 2009. Profitability metrics have improved in 2010 and will likelycontinue to strengthen during 20119

Other input factors that are used in valuations such as the value of tangible assets (value-of-assetsapproach) have also declined following the market corrections during the crisis in particular fallingreal estate prices.

. However, they are unlikely to reach the levels of the pre-crisisboom years (i.e. pre 2008). Lower than pre-crisis valuations, combined with improving profitabilitygrowth potential, further contribute to M&A demand.

EXHIBIT 3

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

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011E

ROA (right axis) ROE (left axis)

Source: CBRNote: ROA for 2011 i s 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 crisiswith strong capital buffers. To boost their RoE, they are looking to use their capital for newacquisitions.

The Russian banking system is well capitalised, with a system-wide capital adequacy ratio (CAR) of18.4% and a Tier 1 ratio of 12.0% as of Q3 2010 (see Exhibit 4). Going forward, we consider thatcapital levels will remain adequate in the 16%-18%range by mid-2011, because we anticipate lowgrowth in high-risk assets and only moderate growth in problem loans10

9 See also

. Furthermore, retainedearnings will likely increase, supporting banks capitalisation. While many small banks have CARs onthe verge of the 10% minimum requirement, many mid-sized and larger banks capitalisation offersthem the means to finance M&A.

Russian Banks: Sound Profitability likely to be restored in 2011, published in February 2011.10 See also Banking System Outlook Russia, published October 2010.
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127578http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867


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EXHIBIT 4

Russian banks capital ratios

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

2005 2006 2007 2008 2009 Q3 2010

Tier 1 Total CAR Minumum CAR ratio

Source: CBR

In addition, significant cash and equivalents have accrued on banks balance sheets. Exhibit 5 showsthat 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 ofliquid assets is now shifting, as banks have started to increase their fixed-income portfolios in search ofhigher yield. Nevertheless, we believe that the current availability of liquid assets to Russian banksprovides more opportunities to finance deals than the aggressive loan growth strategies and lowershare of liquid assets respectively that Russian banks pursued before the beginning of the globalfinancial crisis.

EXHIBIT 5

Liquid assets % total assets

0%

5%

10%

15%

20%

25%

30%

2007 1Q2008 2Q2008 3Q2008 2008 1Q2009 2Q2009 3Q2009 2009 1Q2010 2Q2010 3Q2010 2010

Cash assets Acco un ts with th e Cen tral B an k Co rr espon den t acco un ts with oth er ban ks Secur ities

Source: CBS

In addition, Russian banks access to debt financing has increased (see Exhibit 6). Due to low interestrates, Russian banks are actively issuing Eurobonds as well as domestic bonds, allowing new debtissuance to exceed pre-crisis levels.11

11 For more information see

For instance, the volume of outstanding domestic-bank bondsincreased by more than 50% from 2008, to around US$25 billion in 2010. The large pipeline ofplanned bond issuances by Russian banks will underpin future issuance growth; the pipeline of newdomestic bonds likely to be placed by Russian financial institutions in 2011 is very large (around

Russian Banks: Supporting Growth of Domestic Bond Market by Acting as Issuers and Investors, published February 2011.
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_131068http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_131068http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_131068http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_131068


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RUB720 billion, or US$24 billion).12

EXHIBIT 6

We also expect Eurobond issuance in 2011 to exceed the 2010volume.

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

0

20

40

60

80

100

120

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010

RUR

billion

Source: Cbonds

Partial privatisation of government-controlled banks

The Russian governments plans to partly privatise state-owned banks may contribute to M&A activitywhen state-owned shares are sold to private banks. The government aims to bring the private sectorback to the fore, after state control of the economy rose as high as 60% during the global financialcrisis.

In February 2011, the Russian government sold a 10% stake in Bank VTB via the open market. Inaddition, the government also plans to sell a 10% stake in Sberbank and 25% in Russian AgriculturalBank. 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 60.3% 10% --

Bank VTB 75.5% 25% 10% (February 2011)

Russian Agricultural Bank 100.0% 25% --

Eased administrative conditions for bank mergers

The administrative conditions for M&A have recently been eased. Credit institutions that intend tomerge 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 wasRUB24 billion (US$0.8 billion).13

12 According to cbonds.info (

Although a small gesture, such measures could encourage mergersof small players in the market.

www.cbonds.ru)13 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.
http://www.cbonds.ru/http://www.cbonds.ru/http://www.cbonds.ru/http://www.cbonds.ru/


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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 othis report and that more recent reports may be available. All research may not be available to all clients.
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102151http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102151http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102639http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102639http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102639http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127578http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127578http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130825http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130825http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130825http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130825http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130825http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_130867http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127578http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102639http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102639http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_102151


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Appendix 1

Overview of Recent M&A Deals in Russia

Buyer

BuyersRankby Assets

Total Assets(RUB million)

Local

CurrencyDepositRating Seller

SellersRankby Assets Type of Deal

CombinedAssets(RUB million)

2011

VTB 2 3.939.673 Baa1 Bank of Moscow 5 Acquisition

2010

VTB 2 3.712.949 Baa1 Transcredit 13 Acquisition 3.939.673

Promsvyazbank 10 463.505 Ba2 Nizhniy Novgorod 356 Merger

Volgoprombank 297 Merger

Yarsotsbank 253 Merger 470.441

Uralsib 12 364.300 Ba3 Uralsib-Yug Bank 95 Merger

Stroyvestbank 374 Merger 438.251Nomos-Bank 15 281.104 Ba3 Khanty-Mansiysky Bank 25 Acquisition 355.296

Rossiya 38 98.328 NR Gazenergoprombank 31 Merger 228.082

Rus'-Bank 37 97.767 B2 Rus'-Bank-Ural 316 Merger 84.938

OTP Bank 40 89.190 Ba1 Donskoy Narodniy Bank 355 Merger 92.000

Vostochny 56 56.725 B2 Kamabank 347 Merger

Rostpromstroybank 312 Merger

City Mortgage Bank 394 Acquisition

Santander Consumer Bank (345) 345 Acquisition 91.978

Banca Intesa (KMB) 54 60.772 Baa3 ZAO Bank Intesa 188 Merger 68.029

Otkrytie 72 45.002 NR Bank Petrovsky (from Nomos) 75 Merger

IB Otkrytie 106 Merger 109.039

Novikombank 76 42.448 B2 Lada-Kredit 279 Acquisition 48.700

Commetsbank Eurasia 94 28.902 NR Dresdner bank 213 Merger 39.203

Asiattsko-Tihookeansky Bank 109 21.126 NR Kolyma-Bank 358 Merger

Kamchatprombank 406 Merger 31.251

Mezhtopenergobank 129 18.185 NR Alemar 201 Merger 20.258

Evrasbank 283 5.520 NR Interkommerts 204 Merger

Russkiy Ipotechniy Bank 510 1.815 NR Baltsotskombank 924 Merger 2.950

2009

Rosbank 10 478.762 Baa3 Tsentralnoe OVK NA Merger 436.629

Transcreditbank 14 237.947 Ba1 Superbank 575 Merger 241.617

MDM Bank (URSA Bank) 25 152.860 Ba2 MDM-Bank (Moscow) 13 Merger 379.238

Vostochny 81 32.170 B2 Dvizhenie 523 Merger

Etalonbank 162 Merger 51.407

SMP 97 25.234 B3 MBTS-Bank 366 Merger 45.492

Rusnarbank 303 4.194 NR Beldorbank 611 Merger 5.049

Rostpromstroybank 366 3.004 NR Yuzhniy Region 717 Merger 4.353


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Overview of Recent M&A Deals in Russia

Buyer

BuyersRank

by AssetsTotal Assets

(RUB million)

LocalCurrencyDepositRating Seller

SellersRank

by Assets Type of Deal

CombinedAssets

(RUB million)

Miraf-Bank 791 507 NRPeterburg-Invest

910 Merger

Chitapromstroybank 279 Merger

Yugo-Vostok 372 Merger

Metrakombank 308 Merger 828

2008

Alfa-Bank 6 602.691 Ba1 Severnaya Kazna 67 Acquisition 663.264

Promsvyazbank 12 399.461 Ba2 Yarsotsbank 229 Acquisition 443.688

Svyaz-Bank 20 153.085 NR Russian Industrial Bank 259 Merger 172.771

Gazenergoprombank 37 82.919 NR Sobinbank 41 Acquisition 101.036

MBRR 3282.621

B1 Dalkombank 112 Acquisition 83.645

Trust (Trust National Bank) 51 61.298 NR Trust Investment Bank 145 Merger 74.638

National Reserve Bank 64 46.223 B2 Rossiysky Kapital 107 Acquisition 58.402

Probusinessbank 68 42.951 NR Gazenergobank 238 Acquisition

Bank24.ru 179 Acquisition 62.967

Sarovbusinessbank 126 16.855 NR Nizhegorodpromstroybank 151 Acquisition 16.426

Solidarnost' 199 8.332 NR Potentsial 302 Acquisition 12.938

Investbank 343 3.477 NR Grankombank 314 Merger

Voronezhprombank 440 Merger

Konversbank 127 Merger 22.642

FK Otkrytie NR ZAO Russian Development Bank 96 Acquisition

VEB NA NA NA Svyaz-Bank 20 Acquisition

Globex 35 Acquisition

Prominvestbank 485 Acquisition NA

2007

Raiffaisenbank 7 312.273 Baa3 Impexbank 33 Merger 413.239

Etalonbank 158 8.900 NR Mass Media Bank 536 Merger 10.858

Energotransbank 254 4.208 NR JSC "Narodniy Fond" NA Merger

Stroyvestbank 332 2.857 NR Volgoinvestbank 553 Merger 4.228

Dorozhnik 894 Merger

Tyumenprofbank NA Merger

Dzerjinsky 938 MergerEurasia NA Merger

Zheldorbank(was renamed to Etalonbank)

NA NA NR Etalonbank 181 Merger 8.649

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) followi ng completion of the deal.


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12 MARCH 17 2011 SPECIAL COMMENT RUSSIAN BANKS MERGERSAND ACQUISITIONS WILL STRENGTHEN THE BANKING SECTO

Report Number: 131131

AuthorsKatrin RobeckVictoria Voronina

Production AssociateAmanda Ealla

2011 Moodys Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODYS). All rights reserved.

CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURECREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THERISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANYESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK,INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOSTATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIALADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES.CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MISISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWSTUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NOOF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERREDDISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR INPART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODYS PRIOR WRITTENCONSENT. All information contained herein is obtained by MOODYS from sources believed by it to be accurate and reliable. Becausof the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS ISwithout warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is osufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources.However, MOODYS is not an auditor and cannot in every instance independently verify or validate information received in the ratingprocess. Under no circumstances shall MOODYS have any liability to any person or entity for (a) any loss or damage in whole or in pcaused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside thcontrol of MOODYS or any of its directors, officers, employees or agents in connection with the procurement, collection, compilatio

analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special,consequential, compensatory or incidental damages whatsoever (includ ing without limitation, lost profits), even i f MOODYS is advisin advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financiareporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and mu st beconstrued solely as, statements of opinion and not statements of fact or recommendations to p urchase, sell or hold any securities. Eauser of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holdinor selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY ORFITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BYMOODYS IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moodys Corporation (MCO), hereby discloses that most issuers of debtsecurities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS haveprior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 toapproximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MISs ratings andrating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and betweenentities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posannually atwww.moodys.comunder the heading Shareholder Relations Corporate Governance Director and ShareholderAffiliation Policy.

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 clientswithin the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODYS that you are, or are accessing the document as a representative of, a wholesale client and that neither you nthe entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning ofsection 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 curreopinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, MIS in theforegoing 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., whi ch is wholly owned by Moodys OverseasHoldings 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 issu er oany form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decisionbased on this credit rating. If i n doubt you should contact your financial or other professional adviser.
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