Bank Capitalization 2013
Russian Bank Capitalization Fund
Galina Klimenko
Principal Investment Officer
Europe & Central Asia
Moscow
July 9, 2013
Russian Banking Sector
• The sector is highly concentrated: five government controlled
banking groups hold 60% of assets, foreign banks hold 18%, and large
private banking groups hold the majority of the remainder.
• Competitive landscape: many Russian mid-cap banks are all pursuing
similar strategies with few operational or niche market advantages.
• Funding is becoming tighter: deposits are slowing, government
resources are ultimately limited, and long-term financing remains
unavailable on the market. Many capital market instruments (e.g.
securitization, etc) are limited in use by the current legislation.
• Capital requirements are increasing: CBR is emphasizing
strengthening banks’ capitalization, including increased risk weights
for certain retail loans, increased RR for certain project finance loans,
and Basel III-like capital rules.
2
AMC is a capital mobilization vehicle of IFC:
‘crowding in’ investment to emerging markets
Investment
Services
Advisory
Services
• Loans and intermediary services
• Access to finance
• Equity and quasi-equity
• Corporate advice
• Syndications
• Environmental and social
sustainability
• Structured and securitized products
• Risk management products
• Trade finance
• Subnational finance
• Treasury operations
• Infrastructure Advice
• Investment Climate
Asset
Management
Invests third-party capital in a private
equity format
Allows outside investors benefit from
IFC’s expertise at achieving strong
equity returns as well as
development impact
Helps IFC fulfill its role and leverage its
balance sheet by mobilizing thirdparty funds to increase investment
What is the Russian Bank Capitalization Fund?
Why?
Russian banking sector is promising, but with huge capital needs
Financial sector critical to development of economy
Bring new investors to Russian banking sector and set examples
Who?
Private equity fund managed by IFC Asset Management Co
Investors IFC, Ministry of Finance of RF, and VEB
What?
When?
How?
Investments in bank equity; sub-debt possible but Basel III makes
this instrument uncertain
Target investment sizes US$20-$100 million
Shares of 10%-30% (with some exceptions)
RBCF investing to profit – need to exit
Fund established June 2012; second closing June 2013
2 investments made (Credit Bank of Moscow, Orient Express Bank),
considering further investments now
2-4 investments per year, maximum ~10
IFC Moscow is primary point of contact
Prepare information in advance
Present IFRS financials and investment presentation
RBCF Legal Structure
•Limited partnership managed by IFC Asset Management
•Russian Federation &VEB investments through an IFC-managed trust fund
•Investors: IFC, IFC Trusts 1 & 2
•No RF & VEB involvement in management of Fund or investment decisions
LP 2
IFC
manage
d
100% owned
IFC TRUST
FUND
Manager: IFC
Asset
Management
Company, LLC.
LP 3
5
IFC Russia
Bank
Capitalization
Fund
GP interest
LP interest
LP interest
LP interest
LP interest
Equity GP
The Russian banking market is highly fragmented
Fragmented market:~1000 banks, led
by a few State banks
27%
Top 5 banks (all
state) account for
over half of all
banking assets
12%
6% 51%
Lower cost efficiency in smaller
banks of RBCF's target segment
Cost1 / income ratio
% (1H 2010)
80%
4%
60%
3%
40%
7%
Banks 6–10
10%
Banks 11–20
Banks 21–50
RBCF's target
segment
accounts for a
quarter of all
banking assets
Banks 51–100
Banks 101–200
Banks 201–500
20%
74%
52%
53%
Banks 120
Banks 2150
Banks 51-100
$2-6Bn
$2Bn-$800M
12%
25%
0
8%
5%
5%
Asset
size
$6Bn+
Growth / consolidation will
100%
help achieve minimum
Total
assets (%)
efficient scale and market
40
60
80
100
Opportunity for value creation through power
1%
Banks 501-~1000
All banks
0
20
consolidation and improved efficiency
Criteria for Bank Selection – Target Banks
IFC
Standards
All IFC performance standards, financial reporting, financial covenants
and others are unchanged
IFC is a demanding investor and will look for partners with track record,
excellent reputations and good corporate governance
Investment
Thesis
IFC is investing its own funds and those of investors
Value proposition (expected returns to investors) are critical
How are investors (including IFC) going to profit from the
investment?
Real Role in
Economy
The
Numbers
Meaningful role in economy (% of regional market, role in providing
necessary financial services to SMEs, households, corporations)
Innovative services and products welcome
Size: Primarily top 250 banks by assets, with regional presence
Investment size: $20-100 mln, for stakes of 10% -30% (exceptions
possible)
Co-investors: RBCF goal is to help attract additional foreign
investment – hence structures with more investors get priority
IFC may co-invest and provide debt, risk management and other
products
Simplified Investment Criteria
Transparency
Investment
Operations
Basic
approach
IFRS financial statements by a high-quality auditor
Clear ownership, reputation of owners and institution critical
Quality of management
Problems: high related party, linked loans, unclear strategy
Clear answers to why invest? (ROE, NIM, COI, etc)
Profitability, stability, capital, growth, potential returns
Clear path to sale/exit in 5-10 years
What will market position be during investment period?
Meaningful role in regions
Both traditional and innovative banking products (non-speculative)
Strong risk management
Size: Primarily top 250 banks by assets, with regional presence
Investment size: $20-100 mln, for stakes of 10% -30% (in most
cases, some exceptions)
Largest banks / foreign / government mostly excluded
Smallest banks: more likely through acquisitions
Robust Sourcing Methodology
Russian Banks
Identify eligible banks
• Screening for key financial
indicators (e.g., minimum scale)
• Excluding reputational issues
• Screening for private sector (or to
be privatized)
~ 1000 banks
Identify commercially viable
candidates
Eligible Banks
~ 300 banks
• Locally owned
• Privately owned
• Good reputation
• Non captive
• Excluding “pocket banks”, “treasury
banks” or “ captive banks”
• Excluding subsidiaries of
international banks
• Excluding banks not having basic
minimum financials (IFRS
requirement)
Target Pool
Identify top target banks for
focused business
development efforts
• Specific opportunities have been
identified or are likely, based on
IFC’s relationship (excluding
recently exited investments),
ranking by capital needs, likelihood
of transaction, size, and systemic
importance (in particular network
banks)
~ 100 potential targets
• Meeting minimum
financial requirements
Near-term Pipeline
10 target banks in 10-24
months
• $650M
• Follow-on investments
anticipated
IFC already in contact with
many banks on regular
basis
• Six banks: equity investment
• 26 investee companies
+ High demand from non-client banks
RBCF able to identify opportunities and add value
Key issues of Russian market
High growth
opportunities
Banking market set to out-pace
GDP as penetration catches up with
Western levels
How RBCF creates value
Bank
selectio
Operating phase
n
Target selection
1 Target
2 Reputation
selection
Attractive
valuations
Mid-sized banks
lack funding and
scale
Market valuations currently a
fraction of pre-crisis levels
Structural underfunding of economy
and banking sector, concentration of
large state banks
Many banks lack due to scale,
credit, and transparency concerns
High NPLs with
low standards of
professionalism
Need to introduce basic banking
standards (e.g., proper risk
management, principles of ALM)
Over-due loan levels in RBOF's
target segment appear to have
peaked, but are under-reported
Market
Fragmentation
with opportunity
to increase
efficiency
>1000 banks in total, led by a few
state banks. with ~60% of banks
either captive or subscale
Opportunity for value creation
through consolidation
• Identifying
banks with
highest
upside
potential
• Selecting
best banks
with basic
risk mgmt
• Strong
deal flow
based on
IFC client
base
• IFC “stamp of approval” and
involvement
• Enforcing international standards
of Corporate Governance
Funding
Equity funding combined with range
of IFC debt instruments and
increased market access
3 Improving bank fundamentals
• Supporting active risk
management and NPL recovery
• Ensuring basic banking
capabilities
4 Efficiency and profitable growth
• Sustained growth improving
efficiency, profits and M&A
opportunities
Structure
d exit
5 Sale
preparation,
execution
• Structured exit
preparation
• Attracting
potential
acquirers
• Opening
investment
opportunities
for foreign
investors
Target banks will be in a position to benefit from the Fund’s
resources at a crucial time.
Key Benefits for Investee Banks
Credible Investors
Counter-Cyclical
Strategy
Experienced Team
Advisory Services
 Investees continue to receive the same level of services and benefits as if they
were transacting directly with IFC, with added oversight from AMC staff
 During times of financial crisis, foreign investments in emerging markets diminish
further as portfolio investments decline rapidly
 Fund will act to stabilize banks in order to speed up economic recovery and increase
lending to productive sectors of local economies
 By directly providing emerging market banks with much needed capital, as well as
catalyzing additional capital for those banks in a time of severe crisis, the Fund will:
 Support economic growth in Russian economies through financial intermediation
 Be well positioned to capture upside via countercyclical investment
 Senior AMC and IFC investment professionals with extensive experience originating,
executing and supervising investments in Russian commercial banks
 Investment teams have the full support of IFC’s entire investment infrastructure,
including dedicated portfolio, risk, corporate governance and equity sales departments
 Benefit from advisory services to portfolio banks
 Strengthening private sector development and improving banks’ economic and
financial performance, and their social and environmental sustainability
AMC leverages IFC’s proven origination, execution and supervision resources while conducting rigorous independent
investment evaluation approved by independent Investment Committees.
Rigorous Investment Process
Origination
• IFC infrastructure,
network and name
leads to steady pipeline
of potential deals
Evaluation
• Deep and broad analysis of
local markets, regulatory
regimes and sector
fundamentals
• Locally-based business
• Due diligence conducted by
developers supported
by AMC and IFC
Management
industry experts and
appropriately staffed teams
of investment professionals
• Unique access to
• Negotiation leverage due
to limited competition and
institutional credibility
• Flexibility to offer tailored
investment products
across the full capital
structure
• Deep knowledge of local
challenging markets
facilitates deal flow
Largest emerging
market deal flow
Execution
legal environment drives
efficient deal structuring
Deep industry/
regional knowledge
Capability to develop
innovative structures
Supervision
• Dedicated, locally
based portfolio
supervision teams in
frequent contact with
clients
• Strict social and
environmental
compliance
requirements
• Unique relationship
with and access to
local regulators
Dedicated teams with
relevant experience
Exit
• Frequent use of
structural exit
mechanisms
• Multiple scenarios:
- Sale to strategic
- IPO
- Put to sponsor
• Experience in less
developed capital
markets
Defined strategies
AMC enhances the time tested IFC investment process that has evolved over the past 50+ years.
Proven Strategy
Deal Sourcing
IFC’s unmatched access to emerging market
investment opportunities
• AMC Funds enhance the IFC product offering
by enabling additional/larger deals
Fund Management
Investment Selection
• Experienced operations staff with long
private equity experience at leading
fund managers
• Thorough review of all eligible IFC
investment proposals
• Use of first class third party firms for
audit and ancillary back-office
functions
Alignment with fund objectives
Independent decision-making
• Clear exit strategies
Value-Add
• Experienced professionals with extensive
principal investment experience
• Tax and legal structuring with Fund specific
focus
• Review and mitigation of conflicts of interest