Barclays Capital

Ensuring Capital Efficiency of Russian Securitisation Transactions

October 2006

2

Introduction

Why is capital efficiency so important for Russian Banks? How does securitisation provide capital relief? How current Russian legislation addresses capital relief for securitisation

transactions. What structural features should a securitisation have to ensure capital relief

is achieved?

SpeakerMichael Strange: Director –Financial Institutions Securitisation. Worked on over 75 securitisation transactions to date from countries as

diverse as Australia to Russia. Oversees Barclays Capital’s Russian Securitisation franchise – offering

public securitisation, private secured lines of credit (“Warehouses”) and securitisation swaps.

Has completed the first public securitisation of Russian consumer loans and Russian residential mortgages.

3

1. Why is Capital Efficiency so Important for Russian Financial Institutions?

4

$0

$20

$40

$60

$80

$100

$120

$140

1997 1998 1999 2000 2001 2002 2003 2004 2005 E 2006 E 2007 E

Ret

ail L

oans

(USD

bn)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

% o

f GD

PLoans USD bn % of GDP

Rapid growth expected in the retail and mortgage lending sectors

Most experts predict substantial increases in retail and mortgage related lending in the coming years.

The high expected growth rates raise two problems: How is this growth funded by Russian banks. Ensuring banks’ capital ratios remain above Central Bank of Russia

guidelines.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

2005 2006 2007 2008 2009 2010

USD

billion

McKinsey AHML IUE (conservative) IUE (optimistic) average

Growth Expectations for the Russian Mortgage Market

AHML – Federal Mortgage Finance Agency; IUE – Russian Institute of Urban Economics

Source: VTB

Source: CBR, Bulletin of Banking Statistics; 2005 Broker reports

Growth Expectations for Russian Retail Lending

5

Growth seen to date has impacted capital adequacy ratios The Central Bank of Russia (CBR”) has set a minimum capital adequacy

ratio of 10%. Institutions that have grown rapidly, and enjoyed a lot of success in the

consumer lending market, will have to manage capital closely in the future to allow continued growth:

Russian bank’s are increasingly beginning to explore the international debt capital markets to raise Tier 2 capital: While attractive, these markets can be volatile and investor demand can

vanish at the first sign of bad news. At present, most Tier 2 capital issuance is limited in term (3 to 5 years)

and is therefore not ideal for a bank with long term assets (e.g. mortgage loans).

Russian Standard Bank2003 2004 2005

Capital Adequacy Ratio (%) 20.2 15.6 11.3

Selected Russian BanksCapital to Total Assets RatioVTB (31/ 3/ 06) 13.6%MDM Bank (31/ 3/ 06) 17.0%RSB (30/ 6/ 06) 11.4%Rosbank (31/ 12/ 05) 10.7%Impexbank (31/ 12/ 05) 11.0%

6

2. How does Securitisation Provide Capital Relief?

7

Securitisation provides risk transfer from originator to ABS investors

Class A NotesBBB

Class B NotesBB

Class C NotesB

Sub. Loan - NR

MortgagePortfolio

100%

98.5% - SOLD TO ABS INVESTORS

1.5% - RETAINED BY ORIGINATOR

The priority of payments in securitisation transactions allocate losses (due to borrower default) to the most subordinated debt first of all.

The note classes with most risk therefore are, in order, the Subordinated Loan, the Class C Notes, Class B Notes then the Class A Notes.

LOSSES

LOSSES

8

Sale of the subordinated notes results in capital relief

As illustrated previously, sale of the Class B and C Notes transfers material amounts of risk from the originator to the ABS investors: If capital relief is not required today but funding is required, originators

should structure and retain the Class B and C Notes:– If capital relief was required at a later date, these Notes could be sold

on the secondary market. Subsequent to securitisation, originators can therefore materially reduce

the amount of capital required to be held against a mortgage portfolio:

Pre-Securitisation Capital Requirements

Post-Securitisation Capital Requirements

Mortgages$100

Capital $10

Assets Capital

$1.5 $1.5

Assets Capital

Subordinated Loan to securitisation SPV

Capital required to be held against Subordinated Loan

9

Example: Capital and provisions reliefAssumptionsTransaction Size $400,000,000Auto Loan Provisions 4.0%Regulatory Capital requirement for banks 10%This Analysis assumes Class A, B and C notes are all note classes are sold to ABS investors

AnalysisClass Rating % of Issuance Wtd. Ave. Life Margin / YieldA BBB+ 88.00% 3.0 1.50% Margin over EuriborB BB 8.00% 3.5 9.00% Fixed RUR rateC B 4.00% 3.5 12.00% Fixed RUR rateReserve Fund Not rated 2.00%

Weighted Average Note Margin Over Time 2.03%Originator provide subordinated loan to fund reserve fund ($m) $8,000,000

Capital Released CommentCapital held prior to securitisation $40,000,000.0Basel I capital held post securitisation $8,000,000.0 In some European jurisdictions this can all be held against tier 2 capitalBasel II capital held post securitisation $8,000,000.0 This should be held 50% against tier 1 and 50% against tier 2 capitalRussian regulatory framework * $800,000.0

Basel I Capital Relief $32,000,000.0Basel II Capital Relief $32,000,000.0Russian framework capital relief $39,200,000.0

Provisions Released CommentProvisions Held Prior to securitisation $16,000,000.0Maximum provisions held post securitisation $8,000,000.0 This is the MAXIMUM loss that the originator could possibly sufferMinimum level of provisions released $8,000,000.0

*In the absence of any clear guidelines, it is arguable that the subordinated loan was simply a loan to another institution and thereby would only attract a 10% capital requirement. This is obviously not particularly prudent.

10

3. How current Russian legislation addresses capital relief for securitisation transactions.

11

No securitisation specific Russian guidelines exist at present No guidelines currently exist, although the Central Bank of Russia (“CBR”) is

expected to produce a securitisation policy paper by the end of 2006. Under existing CBR legislation, the securitised assets have been de-

recognised from the originator’s balance sheet as a consequence of “true sale”: Any subordinated loan is simply seen as a loan to a third party company

and could be treated as 100% risk weighted. This is obviously not prudent as the subordinated loan contains “first

loss” risk for the entire securitised portfolio. Russian originators would be best served treating their securitisations as

outlined under Basel I or Basel II: These regulations are fairly comprehensive and prudent in relation to

capital treatment for securitisations.

12

4. What structural features should a securitisation have to ensure capital relief is achieved?

13

Key securitisation structural features in relation to capital relief Assuming that the CBR follows Basel II principals, it is likely that the

following structural points need to be noted: No credit support from the originator can be provided to the securitisation

unless documented at the outset of the transaction:– A Subordinated Loan would be deducted from capital.– Liquidity facilities cannot be provided by the originator.– An originator can provide swaps to the SPV as long as they are

executed on “arms length” terms.– Ongoing substitution asset sales must not be at a discount to par

(unless agreed at the outset of the transaction). There can be no put option for the SPV to the originator. There can be no guarantee of the SPV’s obligations by the originator. The originator can not have a call option over the assets except for the

following options that allow the originator to purchase the assets at their par value:– A 10% clean up call option.– A step up and call option is allowed in residential mortgage

securitisations.

14

THANK YOU – ANY QUESTIONS?

Michael Strange – Director, Financial Institutions Securitisation

Tel - +44 2077731158

Michael.strange@barcap.com