Transcript Bank Recapitalization Fund

Asset Management Company
Russian Bank Capitalization Fund (RBCF)
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
• 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 third-party funds to
increase investment
• Treasury operations
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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, Russian Federation, VEB and international investors
What?
Investments in bank equity
Target investment sizes US$20-$100 million
Shares of 10%-30% (with some exceptions)
RBCF investing to profit – need to exit
When?
Fund established June 2012
Considering investments now
2-4 investments per year, maximum ~10
How?
IFC Moscow is primary point of contact
Prepare information in advance
Present IFRS financials and investment presentation
• Be realistic: in equity investments, one in twenty-fifty projects
make it through full process
• Some very good banks will not meet fund criteria
• RBCF is not a ‘bail-out fund’
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RBCF legally established June 2012
Initial fund size US$275
First investments under consideration
Target investors
Target investments
Target
Commitment
(in $M)
Investor
IFC
$250
Russian Federation
50
VEB
250
Other institutional
investors
Target Total Commitments:
Up to 1,000
$1-1.5 billion
RBOF established with first close of US$275m
One-half of committed amounts for IFC, RF
and VEB
Avg.
investment
(in $M)
Target bank
profile
Bank
size
# of
projects
National
consolidators
$4-$20
bln
(Assets)
3-5
100 – 300
Medium-sized,
high growth,
niche and
other
$500$4000 mln
(Assets)
8-10
20 – 200
Target Fund Size
10-15
$1-1.5 billion
A few larger ticket investments combined with
Combination of larger banks with smaller banks with funding
higher-growth mid-sized banks to benefit from
fueled growth...
consolidation ‘at both ends’
4
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
IFC
TRUST
FUND
LP 2
100% owned
IFC
manage
d
Manager: IFC
Asset
Management
Company, LLC.
LP 3
IFC Russia Bank
Capitalization
Fund
GP interest
LP interest
LP interest
LP interest
LP interest
Equity GP
5
5
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%
4%
Banks 11–20
10%
Banks 51–100
Banks 101–200
Banks 201–500
25%
Asset
size
5%
Banks 501-~1000
1%
100%
0
20
40
60
80
52%
53%
Banks 1-20
Banks 21-50
Banks 51-100
$2-6Bn
$2Bn-$800M
0
8%
5%
All banks
74%
20%
12%
RBOF's target
segment
accounts for a
quarter of all
banking assets
80%
40%
7%
Banks 21–50
% (1H 2010)
Cost1 / income ratio
60%
3%
Banks 6–10
Lower cost efficiency in smaller
banks of RBOF's target segment
100
Total
assets (%)
$6Bn+
Growth / consolidation will help achieve
minimum efficient scale and market power
Opportunity for value creation through
consolidation and improved efficiency
6
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 stake of 10% -30% (exceptions
possible)
Co-investors: RBOF 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
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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 business
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
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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
IFC already in contact with
many banks on regular basis
• Six banks: equity investment
• 26 investee companies
+ High demand from non-client
banks
10 target banks in 10-24
months
• $650M
• Follow-on investments
anticipated
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RBOF able to identify opportunities and add value
Key issues of Russian market
High growth
opportunities
Attractive
valuations
Mid-sized banks
lack funding and
scale
Banking market set to out-pace
GDP as penetration catches up
with Western levels
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
How RBOF creates value
Bank
selection
1 Target
Target selection
Operating phase
2 Reputation
selection
• 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
• Identifying
banks with
highest
upside
potential
• Selecting
best banks
with basic
risk mgmt
3 Improving bank fundamentals
• Supporting active risk
management and NPL recovery
• Strong
deal flow
based on
IFC client
base
• Ensuring basic banking
capabilities
4
Structured
exit
5 Sale
preparation,
execution
• Structured
exit
preparation
• Attracting
potential
acquirers
• Opening
investment
opportunities
for foreign
investors
Efficiency and profitable growth
• Sustained growth improving
efficiency, profits and M&A
opportunities
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IFC has demonstrated strong performance in
Russia and financial services investments
IFC has a proven track record in financial
services and Russia
Over past ten years, 3 of 4 of IFC exits from
Russian banking investments were highly
successful
Globally, financial services is one of IFC's most
profitable sectors with average IRR of ~30%
IRR since inception at 40% for all sectors in Russia
• 1998-2008 IRR was 62.1% for all sectors...
• ...and 67% for financial services
Milestone transactions executed successfully
• First mortgage securitization
• Ruble bond issues (partial guarantees)
• Close to $1 billion in ruble financing
• $500M syndication in 2008
• Investments in over six regional banks
Currently no NPLs and none incurred during
financial crisis
IRR
Bank 1
103%
Bank 2
47%
Bank 3
46%
Bank 4
-5%
• Sold at same price as purchased in ruble terms
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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
 Fund will be comprised of sophisticated international investors
 Investees will continue to receive the same level of services and benefits as if
they were transacting directly with IFC, with added oversight from AMC staff
Counter-Cyclical
Strategy
 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
Experienced Team
 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
Advisory Services
 Benefit from advisory services to portfolio banks
 Strengthening private sector development and improving banks’ economic and
financial performance, and their social and environmental sustainability
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Rigorous Investment Process
AMC leverages IFC’s proven origination, execution and supervision resources while conducting rigorous
independent investment evaluation approved by independent Investment Committees.
Origination
• IFC infrastructure,
network and name
leads to steady
pipeline of potential
deals
• Locally-based
business developers
supported by AMC
and IFC Management
Evaluation
• Deep and broad analysis
of local markets,
regulatory regimes and
sector fundamentals
• Due diligence conducted
by industry experts and
appropriately staffed
teams of investment
professionals
• Unique access to
Supervision
• Negotiation leverage
• Dedicated, locally
due to limited
competition and
institutional credibility
based portfolio
supervision teams in
frequent contact
with clients
• Flexibility to offer
• Strict social and
tailored investment
products across the full
capital structure
environmental
compliance
requirements
• 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
• 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
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Proven Strategy
AMC enhances the time tested IFC investment process that has evolved over the past 50+ years.
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
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