Strictly Confidential

Information Memorandum

PPIIVVDDEENNNNYYII BBAANNKK

US$ 25 000 000 SYNDICATED TERM LOAN FACILITY

MANDATED LEAD ARRANGERS

September, 2006

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CONTENT

DISCLAIMER......................................................................................................................................... 4

AUTORISATION LETTER .................................................................................................................. 5

CONTACT LIST..................................................................................................................................... 6

TRANSACTION TIMETABLE............................................................................................................ 7

1. EXECUTIVE SUMMARY................................................................................................................. 8

1.1. TRANSACTION OVERVIEW .............................................................................................................. 8 1.2. BANK DESCRIPTION ........................................................................................................................ 8

Background ..................................................................................................................................... 8 Ownership........................................................................................................................................ 9 Financial Highlights ...................................................................................................................... 10 Rating Agencies............................................................................................................................ 10

1.3 KEY INVESTMENT CONSIDERATIONS.............................................................................................. 11 1.4 TRADE FINANCE TRANSACTIONS................................................................................................... 12

2. TERM SHEET .................................................................................................................................. 13

3. PIVDENNYI BANK ......................................................................................................................... 17

3.1. HISTORY AND OVERVIEW ............................................................................................................. 17 Key Features of Pivdennyi Bank................................................................................................ 17 Milestones of the Bank's development since its foundation: ................................................. 18 Ownership...................................................................................................................................... 21 Pivdennyi Bank’s beneficial owners .......................................................................................... 22 Affiliates.......................................................................................................................................... 23 Subsidiaries ................................................................................................................................... 24

3.2. STRATEGY..................................................................................................................................... 24 Mission and strategic objectives ................................................................................................ 24 Reorganization.............................................................................................................................. 24 Financial Targets .......................................................................................................................... 25 Market Positions ........................................................................................................................... 26 Regional activity............................................................................................................................ 26 Comparative analysis – performance ....................................................................................... 27 Client base..................................................................................................................................... 28 Corporate Banking ....................................................................................................................... 28 International Banking ................................................................................................................... 28 Retail Banking............................................................................................................................... 29 Mortgage lending.......................................................................................................................... 29 Securities Investment Policy....................................................................................................... 29 Liquidity and asset/liability management .................................................................................. 29 Pivdennyi Bank’s Organisational Structure .............................................................................. 30 Information Technology – Management Information System ............................................... 31

3.3. MANAGEMENT AND EMPLOYEES .................................................................................................. 31 3.3. MANAGEMENT AND EMPLOYEES .................................................................................................. 32

Management Bodies .................................................................................................................... 32 Members of the Board ................................................................................................................. 33

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Employees ..................................................................................................................................... 34 3.4. RISK CONSIDERATIONS................................................................................................................. 35

Exposure to credit risk ................................................................................................................. 35 Exposure to market risk............................................................................................................... 35 Liquidity Risk ................................................................................................................................. 36 Loan and deposits concentrations ............................................................................................. 37

3.5. RISK MANAGEMENT ..................................................................................................................... 38 Liquidity risk................................................................................................................................... 38 Credit Risk ..................................................................................................................................... 39 Operational risk............................................................................................................................. 40 Market Risk.................................................................................................................................... 41 Legal risk........................................................................................................................................ 42 Anti Money-Laundering Measures............................................................................................. 42

4. FINANCIAL ANALYSIS................................................................................................................ 44

4.1. BASIC FINANCIAL INFORMATION .................................................................................................. 44 IFRS Balance Sheet Analysis .................................................................................................... 44 IFRS Income Statement Analysis .............................................................................................. 45 IFRS Ratio Analysis ..................................................................................................................... 45

4.2. ASSET QUALITY ............................................................................................................................ 46 Securities ....................................................................................................................................... 46

4.3. LOANS........................................................................................................................................... 47 Loans and advances to customers............................................................................................ 47 Economic sector concentrations ................................................................................................ 47 Individual Customer Concentrations ......................................................................................... 48 Loan portfolio quality.................................................................................................................... 48 Collateral........................................................................................................................................ 49 Related Party Lending ................................................................................................................. 49 Capital Resources and Adequacy ............................................................................................. 50

5. UKRAINE AND ITS BANKING ENVIRONMENT..................................................................... 51

5.1. GENERAL OVERVIEW .................................................................................................................... 51 Government and Politics ............................................................................................................. 51 Historical development ................................................................................................................ 52 Macroeconomic Overview........................................................................................................... 53 Inflation and exchange rates ...................................................................................................... 54 Foreign Direct investments ......................................................................................................... 54

BANKING SECTOR OVERVIEW.............................................................................................................. 55 Market structure............................................................................................................................ 56 Assets structure ............................................................................................................................ 56 Loans.............................................................................................................................................. 57 Deposits ......................................................................................................................................... 58 Capital adequacy.......................................................................................................................... 59 Profitability ..................................................................................................................................... 59 Banking sector regulations.......................................................................................................... 60

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DISCLAIMER This Information Memorandum (the “Memorandum”) is provided to selected banks in connection with an invitation to participate in a [US$25000000] Term Loan Facility (the “Facility”), on condition that each recipient and its officers, employees, agents and advisors shall keep confidential the information contained in this Memorandum. Pivdennyi Bank has mandated Bank Austria Creditanstalt AG and Landesbank Berlin AG (hereafter the “Mandated Lead Arrangers”) to arrange on its behalf the Facility herein described and have authorised the issue of this Memorandum to potential participants in the Facility. Information in this Memorandum has been provided by Pivdennyi Bank and has not been independently verified by the Mandated Lead Arrangers Furthermore, the Memorandum contains information based on general market intelligence. Pivdennyi bank has warranted (i) the accuracy and completeness of the information and (ii) the reasonableness and fairness of the information contained in the Information Memorandum as at the date of issue. This Memorandum is not intended by the Mandated Lead Arrangers to provide the basis of any credit or other evaluation and should not be regarded as a recommendation by the Mandated Lead Arrangers that any recipient of this Memorandum participate in the Facility. Each potential participant should determine its interest in participating in the Facility based upon such investigations as it deems necessary for the purpose. Nothing contained in this Memorandum is, or shall be relied upon as, a representation of fact or a promise as to the future. The Mandated Lead Arrangers, except as provided otherwise in the Facility documentation, make no representation or warranty, express or implied, as to the accuracy or completeness of the information and statements set out in this Memorandum or that these remain unchanged after the date of its issue. The Mandated Lead Arrangers accordingly have no liability for such information and statements. The Mandated Lead Arrangers are and will be entitled to enter into other and new business with Pivdennyi Bank next to their involvement as Mandated Lead Arrangers for the Facility described in this Memorandum. The Mandated Lead Arrangers shall not be under any obligation and do not undertake (nor shall the Mandated Lead Arrangers be liable in any way as a result of not doing so) to review the financial condition or affairs of Pivdennyi Bank at any time nor to advise any participant in the Facility of any information coming to their attention except as specifically provided in the Facility documentation. The Facility documentation for the Facility has not been finalised at the date of this Memorandum and the Summary of Terms and Conditions of the Facility is qualified by reference to the final Facility documentation. The distribution of this Memorandum in certain jurisdictions may be restricted by law. Persons into whose possession this Memorandum comes are required by Pivdennyi Bank and the Mandated Lead Arrangers to inform themselves about and to observe and comply with any such restrictions. Without limitation, the contents of this Memorandum and the proposals envisaged thereby are confidential and are being submitted to selected banks in connection with the Facility. This Memorandum is intended only for the person to whom it is supplied by the Mandated Lead Arrangers and may not be reproduced or used, in whole or in part, for any purpose other than that contemplated by it.

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AUTORISATION LETTER

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CONTACT LIST Pivdennyi Bank 2 Sabanskyi lane, Odessa 65014, Ukraine

Vadym Mokin Head of Treasury and International Business

Tel: Fax: Email:

+ 38 0482 372775 + 38 0482 307015 mvl@pivdenny.odessa.ua

Dmitriy Likhota Head of correspondent banking

Tel: Fax: Email:

+ 38 0482 344272 + 38 0482 307015 lds@pivdennyi.odessa.ua

Andrew Dobriy Head of financial markets analysis and international co-operation

Tel: Fax: Email:

+ 38 0482 307037 + 38 0482 307082 daa@pivdenny.odessa.ua

Bank Austria Creditanstalt AG Member of UniCredit Group 8067/Syndication and Loan Markets Schottengasse 6 A – 1010 Vienna, Austria

Monika Alram Tel: Fax: Email:

+43 50505-43122 +43 50505 43139 monika.alram@ba-ca.com

Thomas Sommer Tel: Fax: Email:

+ 43 50505-43130 +43 50505 43139 thomas.sommer@ba-ca.com

Landesbank Berlin AG Alexanderplatz 2 10178 Berlin Germany

Lutz Reimann Tel: Fax: Email:

+ 49 30 245 62856 + 49 30 245 66567 lutz.reimann@lbb.de

Ralf Schuster Tel: Fax: Email:

+ 49 30 245 62855 + 49 30 245 66567 ralf.schuster@lbbde

Michael Süßelbeck Tel: Fax: Email:

+ 49 30 245 66538 + 49 30 245 66567 michael.suesselbeck@lbb.de

Landesbank Berlin AG, London 1 Crown Court, Cheapside, London, EC2V 6LR Fax: + 44 20 7572 6796

Edith Pasternak-Albert Tel: Email:

+ 44 20 7572 6490 edith.pasternak-albert@bankgesellschaft.de

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TRANSACTION TIMETABLE Date: Event September 11, 2006 Launch of Syndication September 28, 2006 Commitments subject to documentation due from potential

lenders September 29, 2006 Draft documentation circulated to all potential lenders October 6, 2006 Deadline for comments on draft documentation October 10, 2006 Signing date October 16, 2006 Drawdown

September 2006 M T W T F S S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1

October 2006 M T W T F S S 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

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1. EXECUTIVE SUMMARY

1.1. Transaction Overview Bank Austria Creditanstalt AG and Landesbank Berlin AG have been mandated to arrange US$25 000 000 Syndicated Term Loan Facility (the “Facility”) for Pivdennyi Bank.

The main terms and conditions of the Facility are:

Facility Amount: US$25million Purpose: To fund Trade Finance facilities made available by the Borrower to its

clients Margin: 285 bps Final Maturity: 6 months with 6months extension option For more detailed terms and conditions of the Facility please refer to the Term Sheet section of the present Information Memorandum.

1.2. Bank Description Background

Pivdennyi Bank was initially formed as an universal commercial bank in 1993. It operates under General License No.65 of the National Bank of Ukraine for all types of banking operations and is regulated by Ukrainian Banking Legislation and supervised by National Bank of Ukraine. Pivdennyi Bank has 15 branches and 73 outlets in all centers of Ukrainian business activity and headquartered in Odessa, South-West of Ukraine. Pivdennyi Bank has foreign currency ratings from Moody’s, Fitch and local currency rating from Credit Ratings by the National scale. Memberships, relationships

WesternUnion Holdings, Inc.

Visa International Service Association

Master Card International Incorporated

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Reuters

S.W.I.F.T. FSTS – First stock trade system of Ukraine UICE – Ukrainian interbank currency exchange PARD – Professional association of registrars and depositaries of Ukraine ISU – Interregional Stock Union of Ukraine Ukrainian non-state fund to guarantee individuals’ deposits Client Base

• over 500 largest companies of Ukraine have VIP servicing with personal account-managers

• over 16200 corporate customers • over 94800 private customers

Ownership As of April 1, 2006, Pivdennyi’s major nominal shareholders were six Ukrainian companies and eleven individuals owning over 61% and 37% of the outstanding shares respectively. Names of major shareholders (%) Residence Basic activities Ownership Enterprise “

���������” LLC 9,1434 Ukraine, Odessa Commerce

Private

German-Ukrainian JV “Vivien GMBH” LLC 7,3667 Ukraine, Odessa Commerce

Private “Strong-

�” LLC 6,4299 Ukraine, Odessa Commerce

Private

CJSC Insurance Company “���������

” 5,2223 Ukraine, Odessa Insurance

Private CJSC Insurance Company “

���������-Life” 3,2249 Ukraine, Odessa Life Insurance

Private

Yuriy A. Rodin 16,4077 Ukraine, Odessa Commerce Alla Yu. Vanetsyants 11,1287 Ukraine, Odessa Banking Mark Is. Bekker 9,7602 Ukraine, Odessa Commerce Vadim V. Morokhovskiy 6,7418 Ukraine, Odessa Banking Alexander G. Rodin 5,0614 Ukraine, Odessa Equity holding Tamara M. Rodina 3,3910 Ukraine, Odessa Equity holding Liya S. Morokhovskaya 3,0830 Ukraine, Odessa Banking Other (less then 3%) holders subtotal 13,0390 Ukraine, Odessa Total 100,0000

For further ownership details please refer to § 3.1.

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Financial Highlights Pivdennyi Bank produces its consolidated audited financial statements in accordance with International Accounting Standards. Since 1997 PriceWaterhouseCoopers is the Bank’s auditor. All amounts in USDm

Year to 31 December 2005 2004 2003 Total assets

435,346

298,896

218,930

Share capital 49,769 30,044 22,286 Total shareholders’equity 41,365 28,065 20,425 Net profit 5,679 4,335 4,273

Estimates for 2006 year-end figures of the Pivdennyi Bank are based upon conservative expectations.

Historic Audited Estimates For the Year ended 31 December

2005 2004 2003 2006 Net Interest Income 19,891 16,317 13,896 21,584 Net Non-Interest Income 8,441 4,639 2,226 20,990 Operating Income 28,333 20,957 16,123 42,772 Operating Expenses 20,879 14,643 9,819 33,465 Operating Profit 7,453 6,313 6,304 9,307 Profit before Income Tax and Minority Interest

7,453 6,313 6,304 9,307

Income tax (expense)/credit 1,774 1,978 2,030 1,980 Profit before Minority Interest 5,679 4,335 4,273 7,327 NET PROFIT 5,679 4,335 4,273 7,327

Rating Agencies Name 2005 2006 Fitch Ratings CCC+ /Stable B- / Stable Moody’s Investors Service - B2 / Stable Credit Rating (national scale) - uaBBB+ / Stable

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1.3 Key investment Considerations

Ukraine

• Key advantages of today’s economic development of Ukraine which positively impact on foreign investments:

• Solid track record of prudent macroeconomic and financial policies • Benefits from high level of foreign direct investment • Enhancement of the economy and its efficiency on the basis of the introduction of new

technologies • Normalisation of money circulation and formation of mechanisms for the financing of the real

sector of economy • Strengthening of the government role in the formation of the investment demand and

transfer to the innovative-investment model of the economy development • Cessation of the re-privatisation process • High potential capacity of the internal market • Stability of the national currency Hryvnia • Potentially attractive investment projects, including in the area of high technologies • Wide network of the social and economic, scientific and technical, transport infrastructure • High-quality staff and scientific potential, cheap labour forcer • Significant natural resources • Satisfactory resolution of the recent dispute with Russia concerning the purchase price and

transit of gas

Pivdennyi Bank

• Rated B- / B2 • Strong base of corporate customers • Strong shareholder support • Well positioned for growth and expansion • Continuity of the Management Team • Conservative Provisioning, satisfactory profitability, limited trading risks

The benefits of the Facility

• Trade related • Aimed at trade finance funding of the most reliable customers of Bank Pivdennyi • Short-term: 6 months • Attractive all-in pricing • Option to renew the participation in the Facility for another 6 months at sole Lender’s

discretion

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1.4 Trade Finance Transactions Transactions to be financed by the Facility Pivdennyi Bank is actively involved in the financing of export and import activities of its corporate customers. The proceeds of the Facility will go among other towards the financing of export-import contracts concluded between the main following parties: Export contracts: Exporter Importer Value of contract Nature of contract OOO “Transinvestservice” Cargotrans International

ltd, United Kingdom

USD 28 000 000

Stevedoring services

OOO “Transinvestservice” Stork Handelgeselshaft m.b.h., Austria

USD 3 000 000

Stevedoring services

OAO “Stalkanat” Mesel Trading ltd, Cyprus EUR 60 000 000

Metalwire products

OAO “Silur” Mesel Trading ltd, Cyprus EUR 25 000 000

Metalwire products

OOO “Harrison Trans Service”

ZAO “ Moldova steel works”

USD 3 000 000

Metal scrap

TOV VP “Sphere” American Technologies Network Corporation, USA

USD 1 800 000

Optical products

OOO NPP “Complex” Danaher Linear GmbH, Germany

EUR 3 000 000

Metal-working machine

DP “Gradient” OAO “Mikron”

Danaher Linear GmbH, Germany

EUR 1 000 000

Metal-working machine

JSC “Azot” Ameropa AG, Switzerland

USD 2 310 000

Carbamide

JSC “Azot” Transammonia AG, Switzerland

USD 2 000 000

Carbamide

OOO “Aqua world Ukraine”

OOO “Admiral Plus”, Russia

USD 1 000 000

Fish products

Import contracts:

Importer Exporter Value of contract Nature of contract ZAO “Medfarkom-centre” Chinoin Pharmaceutical &

Chemical Works Co. ltd, Hungary

USD 10 000 000

Medical products

OOO “ Chernigov chemical fiber”

PolimerEngineering GMBH, Germany

USD 22 195 000

Chemical fiber producing equipment

OOO “Consumtrade” ZAO “Indesit International”, Russia

EUR 8 015 000

Consumer electronics

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2. TERM SHEET 1. THE FACILITY

Borrower: Joint- Stock Bank “Pivdennyi” (the “Borrower”).

Type of Facility: 6 months Extendable Trade related Syndicated Term Loan Facility

Purpose of the Facility: for financing and refinancing of the Borrowers liabilities as evidenced by trade financing contracts in an amount at least equal to the total Facility Amount

Facility Currency: United States Dollars (“USD”)

Facility Amount: USD 25 mio

Mandated Lead Arrangers:

Bank Austria Creditanstalt AG (“BACA”) and Landesbank Berlin AG (“LBB”) ( the „MLAs“)

Lenders: The MLAs together with a syndicate of financial institutions assembled in consultation with the Borrower

Facility Agent: LBB AG, London Branch, based in the United Kingdom (the “Agent”)

Availability Period: 30 days after signing of the Facility Agreement

Drawdown: The Facility shall be drawn during the Availability Period subject to a minimum amount of USD 5 mn and integral multiples thereof and subject to the fulfilment of all conditions precedent. No more than one request may be given. Any undrawn portion under the Facility during the Availability Period will be cancelled automatically and may not be re-instated

Initial Maturity Date:

6 months from the signing of the facility agreement (the “Signing Date”) unless extended under Extension Option.

Final Maturity Date: The day which is 6 months from the Initial Maturity Date

Extension Option 6 months at the Lender’s full discretion. By giving the Agent not more than 60 days and not less than 45 days prior to the Initial Maturity Date, the Borrower may request the Initial Maturity Date to be extended by 6 months at the sole discretion of each Lender. The participation of those Lenders who have not agreed to the extension request shall be repaid and cancelled in full on the Initial Maturity Date. The MLAs and the Borrower would discuss the applicable pricing and possibility of attracting new Lenders closer to the Initial Maturity Date. The Facility Documentation for the extension will be based where applicable on the Facility agreement for the Initial Facility.

Repayment: Bullet repayment on the Initial Maturity Date or on the Final Maturity Date if extended

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Prepayment: The Borrower may elect to prepay an Advance in whole or in part in minimum amount of USD 5 mn and in integral multiples of USD 5 mn at the end of any Interest Period without any fee or penalty subject to not less than 15 days’ written notice to the Facility Agent. Any amount prepaid may not be redrawn.

2. INTEREST, MARGIN AND FEES

Interest Payment: Interest will be payable in arrears on the last day of each Interest Period. Interest will be calculated on the basis of the actual number of days elapsed in a year of 360 days (in case of market practice departing from this formula 365 days)

Interest Period: 1 or 3 or 6 months at the Borrower's discretion. No interest period shall end after the Final Maturity Date.

Interest Rate: The rate of interest payable on each Advance for an Interest Period will be the rate per annum determined by the Facility Agent to be the aggregate of: (i) The Margin; (ii) LIBOR as determined by the Facility Agent by reference to the relevant Telerate Pages for the relevant period in USD as determined by the Facility Agent by reference to the relevant Telerate Pages at or about 11.00 am. London time, or, if not available, as determined by the Facility Agent on the basis of rates provided by the Reference Banks, ; and (iii) Associated Costs (if applicable).

Margin: 285 bps

Mandatory Costs:

The Borrower shall indemnify the Lenders for any mandatory costs, if applicable, in respect of compliance with the requirements of the Bank of England, the U.K. Financial Services Authority and the European Central Bank, calculated in accordance with a formula to be set out in the Facility Agreement.

Taxation: All payments by the Borrower in relation to this Facility shall be made free and clear of and without deduction for or on account of all present and future taxes, duties, withholdings, levies, imposts or deductions of whatever nature. In the event the Borrower is obliged to make any deductions or withholdings, the Borrower will pay a gross-up fee to cause the Lenders to receive, net, the amounts they would otherwise have received but for such deduction or withholding.

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3. OTHER TERMS

Conditions Precedent:

The Facility Amount will be available for Drawdown subject to the fulfilment of certain conditions precedent, including, but not be limited to: • signed Facility Agreement and related documentation satisfactory to the lenders • payment of fees and expenses • receipt by the Facility Agent of all documentation proving the corporate authority of the Borrower, and the incumbency and specimen signatures of the officers of the Borrower executing the Facility Agreement and related documentation • receipt by the Facility Agent of a copy of all required or desirable regulatory and other governmental approvals, if any, which shall be in full force and effect • receipt by the Facility Agent of satisfactory evidence of the appointment by the Borrower of an agent for service of process in London • receipt of legal opinions satisfactory to the Facility Agent in its sole discretion from the respective legal counsel to the Lenders • receipt by the Facility Agent of an original executed Facility Agreement.

On-going conditions: The making of the advances will be conditional upon • the accuracy of all representations and warranties in the Facility Documents and • there being no default in existence at the time of, or after making such advance.

Documentation: The Facility will be evidenced by a Facility Agreement acceptable to all parties incorporating clauses customary for this Type of Facility, including, but not limited to: • Conditions Precedent including satisfactory legal opinions; • Usual representations and warranties from the Borrower (to be repeated) • pari passu ranking of the Borrower’s obligation under the Facility with all other payment obligations of the Borrower; • negative pledge and other covenants (including limitation on disposal of assets, maintenance of business), • financial covenants and undertakings by the Borrower • delivery of financial information; events of default (including, but not limited to, cross default, minimum rating requirement, representations and warranties being incorrect, breach of covenants and undertakings, change of ownership, insolvency of the Borrower, attachment of or execution against the assets of the Borrower and moratorium on the indebtedness of the Borrower);

Material Adverse Change:

There shall occur no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Borrower or its Subsidiaries.

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Increased Costs: The Borrower will pay to the Lenders any increased cost incurred by the Lenders as a result of the introduction of or any change in (or in the interpretation or application of) any law or regulation after the date of the Facility Agreement.

Illegality: If it is or becomes illegal for any Lenders to provide or continue to make the Facility available, the commitment of the relevant Lenders shall be cancelled and the Borrower will prepay all outstanding amounts owing to that Lenders under the Facility on the next Repayment Date or, such earlier date as the relevant lender shall certify as necessary to comply with the relevant law.

Legal Counsel: A Ukrainian Legal Counsel on behalf of the Borrower, a Ukrainian Legal Counsel on behalf of the MLAs and an English Legal Counsel on behalf of the MLAs shall be requested to opine on the Facility Agreement. The expenses relating to the legal opinion will be for the account of the Borrower, irrespective of whether the Facility is signed.

Transferability: Lenders may transfer all or part of their rights and obligations (in the latter case, in minimum amounts of USD 1 mn) to other banks and financial institutions or securitisation vehicles upon notification to the Agent and the Borrower.

Governing Law and Jurisdiction:

The Facility Agreement shall be governed by and construed in accordance with the laws of England and Wales. Any dispute, controversy or claim arising out of or in connection with the Facility Agreement or any other related Finance Document, shall be referred to, and finally settled by, arbitration under the LCIA (London Court of International Arbitration) rules, as in force at the date at which the proceedings are referred to arbitration, in each case in London, England.

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3. Pivdennyi Bank 3.1. History and Overview Pivdennyi was established in 1993 and a controlling stake was purchased by its current shareholders at the end of 1994. Since then, the bank has grown its business, often participating in joint projects with its shareholders. After 1998, the bank started to grow into a nationwide bank by developing a branch network covering a number of regions outside of Odessa, initially to serve its major customers. At end-August 2006 it had 15 branches and 73 outlets, including branches in 11 regions outside Odessa. In 2006, the bank plans to open two new branches in Chernigov and Kirovograd. Pivdennyi is a midsize Ukrainian bank with a solid regional market position, headquartered in the city of Odessa (IDR ‘B+’), located in south-western Ukraine, on the Black Sea. The city of Odessa accounted for 5% of Ukraine’s gross domestic product and 2% of its population (over 1 million people) in 2005. The gross city product is divided between industry (20%) and services (80%), with transport, trade, tourist and recreational business dominating the services sector. In the absence of a large industrial sector, the local economy is less vulnerable to higher gas prices. Pivdennyi has a focused strategy and primarily targets corporate customers in low volatile industries such as trade, food and beverages. Strong relationships with its clients help the bank to maintain a solid market presence in Odessa and the Odessa region and drive its expansion in other regions as well. The bank has built strong expertise in corporate and SME lending and will likely maintain its corporate orientation in the future. In 2002 the bank began to diversify into retail banking, but contrary to many Ukrainian banks rapidly growing their retail books, Pivdennyi is carefully expanding into this segment. The bank maintains strong market positions in Odessa and Odessa region. It had a c.25% market share in terms of loans and 26% in terms of deposits in this region at end-H106. On a country wide scale, market shares are more modest, 1.2% in both loans and deposits. In Ukraine, Pivdennyi was ranked number 17 by assets and number 16 by capital as of June 30, 2006. Key Features of Pivdennyi Bank

The Bank offers both its corporate and private customers a comprehensive range of banking services. In preserving the existing client base and attracting new quality customers, the Bank builds on the following strategic advantages: · dedicated and well-trained staff; · experienced and committed management; · strong regional presence as sound base for further expansion; · leading position in the most progressive and dynamically developing spheres of banking activities in Ukraine; · easy accessibility through multi-channel banking (branch network, e-banking, telephone banking); · increased brand awareness in targeted customer segments; · sound asset quality (in particular a strong-quality loan portfolio); · highly effective risk management system.

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Milestones of the Bank's development since its foundation:

Year events

1993 • NBU has officially registered the Joint-stock bank PIVDENNYI. The

creative team of professionals had been formed. This ensured the precise office work organization since first weeks.

1994 • The Bank develops noticeably; lending became its main activity.

• At the end of the year Yuriy A. Rodin became the head of the Supervisory Council.

1995

• The assets increased by more than 6 times, and the profit - by more than 11 times. The bank ranked 6th among commercial banks of Ukraine in terms of the assets growth.

• established direct correspondent relationship with A-class foreign banks

1996 • Became one of the leading operator of state bonds' market and actively

participated in the market of corporate securities, acted as a broker for ist customers.

1997

• Came out on the top in the project of TACIS and "PricewaterhouseCoopers" on implementation of international accountancy's standards in Ukrainian banks.

• Entered to the 1st position within Ukraine in terms of the dynamics of capital growth

• Became a member of: - S.W.I.F.T. - Interbank Currency Stock Exchange - Professional Association of Registers and Custodians - became an associate member of international payment system EUROPAY INTERNATIONAL - became an official dealer of the "THOMAS COOK" company - became the participant of "Interregional Stock Union"

1998

• The thorough market analysis allows to take measures opportunely and to avoid the sharpest financial crisis which overtook the country and put many banks out of survival. PIVDENNYI Bank provided the customers with safe protection from troubles by means of stopping to handle the state bonds and changing the assets structure in favour of bills of exchange and credit transactions.

• The interest from loans constituted up to 50% of total income.

• First "PricewaterhouseCoopers" audited

1999

• The Bank became the support for many customers which suffered from crisis in economy and furthermore strengthened its position in the financial market. In compliance with the National Bank's of Ukraine criteria JSB "Pivdennyi" was listed among the first group of financial-stable banks without troubles and held a firm position among the top 20 banks of Ukraine.

• The total volume of the funds attracted within the year increased by 5 times: turnover of corporate deposits increased by 4 times, retail

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deposits - by 3 times, customers accounts' turnover - by 6 times.

• The Bank's portfolio increased by 3 times, turnover on bills of exchange transactions - by 30 times.

• Reuters-Dealing system was put into operation in order to increase the efficiency of transactions.

• The Shareholders' Meeting elected a new Chairman of the Board - Vadim V. Morokhovskiy

2000

• The loan portfolio of Pivdennyi Bank increases by more than 3,5 times.

• The monthly volume of the loans amounted to UAH 300 MIO.

• JSB "Pivdennyi" is the first commercial bank of Ukraine to issue own bonds.

• The individuals' accounts balances increases by 8 times over the year

2001

• According to the rating of the Association of the Ukrainian Banks, PIVDENNYI Bank ranked 14th with respect to assets volume.

• The JSB "Pivdenhnyi" is one of the first banks acting as an underwriter for a number of its customers in securities transactions.

• The bank became an associated member of "VISA International Service Assotiation".

2002

• According to the rating of the Association of the Ukrainian banks, the JSB "Pivdennyi" ranked: - 7th with respect to the number of corporate deposits - 11th with respect to credit-investment portfolio - 12th with respect to net assets

• The Bank's loan-investment portfolio increased by more than 2 times and exceeds UAH 680 MIO.

2003

• Total net assets of the bank exceeded UAH one billion.

• For the personal contribution to Ukrainian economy development and integration process supporting JSB "Pivdennyi" was: - acknowledged the laureate of international contest "Gold Mercury", - created by an International corporation of social interaction "European Business Assembly", - became a winner of International contest " Gold Trade Marks - 2003".

2004

• The Financial Action Task Force on Money Laundering from criminal activity (FATF) has chosen PIVDENNYI Bank for Ukrainian financial system examination. The result of Financial Action Task Force visit was exclusion of Ukraine from FATF "dirty list" at the end of February.

• In 2004 PIVDENNYI Bank was awarded the nominations: - Brand of the Year, - Gold Trade Mark, - European quality - Best enterprise – 2004

• The Chairman of the Board, Vadim V. Morokhovskiy was acknowledged Best employer of the year.

• More than 70 000 customers use the services of the bank (12 356 legal entities and 57 806 individuals).

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2005

• The Chairman of the Board, Vadim V. Morokhovskiy was: - acknowledged Best top-manager of the year and recipient of an award by a diploma "Professional confession 2005" - granted of an award by the diploma of Parliament of Ukraine. - acknowledged one of the most influential people of Ukraine on the annual rating «TOP-100» of magazine «Korrespondent»

• The JSB "Pivdennyi": - ranked 8th with respect to the volume of acquiring operations - entered in the number of rating leaders «TOP-100. The best companies of financial sector». - granted of an award by a diploma about confession one of the most effective brands of Ukraine.

• The bank's loan-investment portfolio exceeds UAH 2 billion

• The bank's deposits portfolio exceeds UAH 1 billion.

• By the decision of december shareholders' meeting the share capital of bank is multiplied to UAH 200 MIO

• First time international rating was obtained from Fitch Ratings

2006

• The February General shareholders’ meeting has made a decision to increase in shareholders equity up to UAH 250 000 000, and general meeting of shareholders in April, 2006 has made a decision to increase in the equity capital up to UAH 273 000 000.

• In April bank obtained local currency rating “uaBBB+” from “Credit-Rating” Agency by National scale

• In May, 2006 General shareholders meeting decided to perform reorganization of bank in the Open Joint-stock company. As a date of change of ownership pattern will be considered the date of registration in the Uniform State Register for enterprises and organizations which should occur by September 25th.

• In July, 2006 the International rating agency Moody's Investors Service assigned B2/NP foreign currency deposit rating to bank.

• In August the bank has won the tender of World Bank for service of funds for social programs in Ukraine with participation of the International Bank for Reconstruction and Development

• In August Fitch Ratings updated Issue Default Rating to “B-“, short- term rating to “B”.

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Ownership The following table lists Pivdennyi Bank’s nominal shareholders as of December 31, 2005.

Nominal value of shares held

Number of shares held

% of total shares

German-Ukrainian JV “Vivien GMBH” LLC 18416734,00 18416734 9,2084 Enterprise “

���������” LLC 22858580,00 22858580 11,4293

“Strong-�

” LLC 16074607,00 16074607 8,0373 Enterprise “Techno-inform” LLC 6329030,00 6329030 3,1645 CJSC Insurance Company “

���������” 13055748,00 13055748 6,5279

CJSC Insurance Company “���������

-Life” 8062306,00 8062306 4,0312 JSC “Vtormet” 427040,00 427040 0,2135 Odessa Maritime agency “Interbroker” LLC 337466,00 337466 0,1687 Production-commercial firm “Kometex” LLC 128084,00 128084 0,0640 Firm “Mial” LLC 85579,00 85579 0,0428 CJSC “BG Realty” 83012,00 83012 0,0415 JSC Odessa Cable Plant ”Odescabel” 64184,00 64184 0,0321 Private Enterprise Trade House “Nachalo” 21395,00 21395 0,0107 CJSC “Odessa Barandy Factory” 17258,00 17258 0,0086 CJSC “Odessavinprom” 15262,00 15262 0,0076 Subtotal for legal entities 85976285,00 85976285 42,9881 Mark Is. Bekker 17300487,00 17300487 8,6502 Yuriy A. Rodin 31619358,00 31619358 15,8097 Alla Yu. Vanetsyants 18721760,00 18721760 9,3609 Alexander M. Groysman 5781669,00 5781669 2,8908 Liubov S. Bekker 7771340,00 7771340 3,8857 Anna Yu. Rodina 2876457,00 2876457 1,4382 Vadim V. Morokhovskiy 8854439,00 8854439 4,4272 Liya S. Morokhovskaya 5707582,00 5707582 2,8538 Alexander G. Rodin 5953449,00 5953449,00 2,9767 Alexander F. Kuperman 1745183,00 1745183,00 0,8726 Velya Ab. Rodina 2525377,00 2525377 1,0102 Levon S. Vanetsyants 813601,00 813601 0,4068 Betya Is. Bekker 320209,00 320209,00 0,1601 Vladimir P. Vugelman 85579,00 85579 0,0428 Ilona V. Chornenkaya 64184,00 64184 0,0321 Ekaterina A. Morozenko 21395,00 21395 0,0107 Igor G. Zhabokritskiy 10840,00 10840 0,0054 Maria S. Svoboda 10840,00 10840 0,0084 Anatoliy Ph. Tapor 6275,00 6275 0,0031 Musiy G. Khazankin 10149,00 10149 0,0051 Tamara M. Rodina 3177552,00 3177552 1,5888 Eduard P. Stas 645990,00 645990 0,3230 Subtotal for private shareholders 114023715,00 114023715 57,0119 Total 200000000,00 200000000 100,0000

The bank is ultimately controlled by two families originally from Odessa, who own c.67% and c.22% stakes in the bank. Another 10% belongs to the family of the bank’s president, and the remainder belongs to the original shareholders. The controlling shareholders of the bank also own industrial, other financial, agricultural, real estate and retail trade assets. The industrial segment is the largest of all and represented by hardware plants Silur and Stalkanat, Apostelevsky feed mill, and Krivorozhsky minium production plant. The financial segment consists of Pivdennyi, RIB, and two insurance and asset management companies. Pivdennyi’s supervisory council, exercising control over the bank’s activities, is comprised of the shareholders and members of their families.

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Pivdennyi Bank’s beneficial owners

Yuriy A. Rodin, 67% Was born on January 21st, 1950, in Odessa. Resident of Ukraine, domiciled in Odessa. Higher education – master of mathematics, certified in assets management by State securities and fund market commission Recent activities: 1990 – Small Enterprise «Kompanjony», Director and owner 1992 - « ��������� » Ltd., General director and owner 1995- Chairman of Supervisory Council and major shareholder of JSB “ Pivdennyi” 2006- Chairman of Supervisory Council and major shareholder of A/S Regionala Investiciju Banka, owns major stakes in a number of affiliated companies

Mark Is. Bekker, 22% Was born on May 11th, 1945 in Vladivostok, Russia Resident of Ukraine, domiciled in Odessa Higher education, degree in refrigeration technologies engineering Recent activities: 1997-2006 - «Vivien» Ltd., Director and owner 2003-2006 – Vice-chairman of Supervisory Council and major shareholder of JSB «Pivdennyi», owns major stakes in a number of affiliated companies

Vadim V. Morokhovskiy, 10% Was born on June 22nd, 1971 in Odessa Resident of Ukraine, domiciled in Odessa Higher education – master of Banking, chess grand master Recent activities: Since 1995 - First Vice-chairman of the Board of JSB «Pivdennyi», Since 1999 - Chairman of the Board of JSB «Pivdennyi», Since 1999 – shareholder of JSB “ Pivdennyi” , owns stakes in a number of affiliated companies

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Affiliates The beneficial owners hold major stakes in following affiliated companies:

Agricultural sector

JSC "Kotovskoe cornprocessing enterprise"

JSC "Chubovskyy grain-producing complex"

“Black sea corn company” Ltd.

“Jasnye Zory” Ltd. “Flora” Ltd.

“Kotovskoe zerno” Ltd.“Chubovskoe zerno” Ltd.

“AgroInvest” Ltd.

FIC "Yug-agrotek"

Others

JSC “Farmatsyya”

“Fynfarm” Ltd.

“Investment South Company” Ltd.

Real estate sector

“Ingsystema” Ltd.

“Energosystema” Ltd.

JSC "Kholodmash"

"Domostroy“ Ltd.

“Central Hotel” Ltd.

“Ledder” Ltd.

“Odis-group” Ltd.

Gambrinus Ltd.

“Invest-project“ Ltd.

“Gryvlad” Ltd.

“Sanplan” Ltd.

JSC “Pyschepromavtomatyka”

“Yurtal” Ltd.

“Tekhnotsentr” Ltd.“Fayn” Ltd.

Financial sector

Insurance Company"��������� -Life"

Insurance Company "�������� "

Assets Management Company"TEKOM ASS �� S

MANAGEMENT“ Ltd."South registration company“ Ltd.

Fund “S. I."

“Portfolio investor” Ltd

Fund “F.I."JSB “Regional Investment Bank”

JSB “ Pivdennyi"

Industrial sector

JSC "Krivorozhskyiminium factory"

JSC "Apostolevskyymixed fodder factory"

JSC “Silur"JSC "Stal'kanat"

Agricultural sector

JSC "Kotovskoe cornprocessing enterprise"

JSC "Chubovskyy grain-producing complex"

“Black sea corn company” Ltd.

“Jasnye Zory” Ltd. “Flora” Ltd.

“Kotovskoe zerno” Ltd.“Chubovskoe zerno” Ltd.

“AgroInvest” Ltd.

FIC "Yug-agrotek"

Others

JSC “Farmatsyya”

“Fynfarm” Ltd.

“Investment South Company” Ltd.

Real estate sector

“Ingsystema” Ltd.

“Energosystema” Ltd.

JSC "Kholodmash"

"Domostroy“ Ltd.

“Central Hotel” Ltd.

“Ledder” Ltd.

“Odis-group” Ltd.

Gambrinus Ltd.

“Invest-project“ Ltd.

“Gryvlad” Ltd.

“Sanplan” Ltd.

JSC “Pyschepromavtomatyka”

“Yurtal” Ltd.

“Tekhnotsentr” Ltd.“Fayn” Ltd.

Financial sector

Insurance Company"��������� -Life"

Insurance Company "�������� "

Assets Management Company"TEKOM ASS �� S

MANAGEMENT“ Ltd."South registration company“ Ltd.

Fund “S. I."

“Portfolio investor” Ltd

Fund “F.I."JSB “Regional Investment Bank”

JSB “ Pivdennyi"

Industrial sector

JSC "Krivorozhskyiminium factory"

JSC "Apostolevskyymixed fodder factory"

JSC “Silur"JSC "Stal'kanat"

The assessed value of Industrial, Real estate and Agricultural sectors approximately makes USDm 125 (Yuriy A. Rodin 75%, Mark Is. Bekker 24%, Vadim V. Morokhovskiy 1%)

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Subsidiaries The bank currently holds a 49% stake in Regional Investment Bank (“RIB”), which is situated in Latvia; in total, Pivdennyi’s shareholders control a 100% stake in RIB. Its assets and equity were USD97m and USD10m, respectively as of July 1, 2006. Presently, Pivdennyi receives funding from RIB, as RIB enjoys cheap (in Ukrainian terms) funding, mainly from former Ukrainian citizens. Pivdenny plans to increase its holding in RIB to 51% and consolidate the bank by January 1, 2007. Pivdennyi also plans to acquire a small bank in the US (in the state of Pennsylvania) and form a holding company which will unite the three banks under its umbrella. The new bank is expected to serve the Ukrainian community living locally in the US and business between the two countries. The acquisition is pending US regulatory approval. 3.2. Strategy Mission and strategic objectives The mission of the Bank is to retain its sound customer base and at the same time conquer an additional share of the banking services market. To guarantee this, Pivdennyi Bank behaves like a partner with regard to its customers by helping them to achieve goals in business and in private life. Thereby it relies on the following key elements:

- a committed and entrepreneurial management with a proven track record; - highly skilled and well-trained staff; - a customer-oriented strategy and business setup; - a high level of hard-earned recognition which allows customers of the Bank to benefit

from it. Pivdennyi Bank's main objective is profitable growth through its strategies in the key customer segments: corporate, SMEs and retail. The main benchmark used by the Bank to measure its success is its return on assets. The Bank's goal is to outperform the majority of domestic competitors through this indicator. Over the next 3 years, Pivdennyi bank intends to continue its expansion in the Ukrainian banking sector and aims for an average asset growth of 1.5 - 2 times higher than the average asset growth in the banking sector. Pivdennyi Bank aims to achieve this through a combination of organic growth in its above named key customer segments in the geographic regions where it is already present and in targeted Ukraine’s regions with formed potential customer base in targeted segments. Reorganization Since May 2006, taking into consideration recommendations of the National Bank of Ukraine to the ukrainian banks and to improve informational transparency of the bank, Pivdennyi is being under reorganization from a Closed-type JSC to a JSC. Date of registration of JSC "Pivdennyi" in the Uniform state register of the enterprises and the organizations which will occur before September 26, 2006 will be considered as date of change of a pattern of ownership of the bank.

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Financial Targets Forecast of general indicators of the Pivdennyi Bank is based upon conservative expectations.

As at 31 December (USDm): 2006 2007 2008

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 27,525 46,535 54,653

NET INTEREST INCOME 21,584 36,832 43,762

NET NON-INTEREST INCOME 20,990 25,149 35,446

OPERATING INCOME 42,772 61,782 78,020

OPERATING EXPENSES 33,465 43,960 53,069

OPERATING PROFIT 9,307 17,822 24,950

Loans and advances to customers, less allowance for loan losses 516,832 778,218 1083,168

ASSETS 625,743 950,495 1386,139

Liabilities 571,584 819,208 1202,574

Shareholders’ equity 54,158 131,287 183,564

ROA 1,17% 1,52% 1,46%

ROE 13,53% 11,01% 11,00%

ROAA 1,35% 1,83% 1,73%

ROEA 15,63% 15,59% 12,83%

Equity / assets 8,66% 13,81% 13,24%

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Market Positions Pivdennyi has a focused strategy and primarily targets corporate customers in low volatile industries such as trade, food and beverages. Strong relationships with its clients help the bank to maintain a solid market presence in Odessa and the Odessa region and drive its expansion in other regions as well. The bank has built strong expertise in corporate and SME lending and will likely maintain its corporate orientation in the future. In 2002 the bank began to diversify into retail banking, but contrary to many Ukrainian banks rapidly growing their retail books, Pivdennyi is carefully expanding into this segment. The bank maintains strong market positions in Odessa and Odessa region. It had a c.25% market share in terms of loans and 26% in terms of deposits in this region at end-H106. On a country wide scale, market shares are more modest, 1.2% in both loans and deposits. In Ukraine, Pivdennyi is being ranked number 17-18 by assets and number 16-17 by capital.

Regional activity

After 1998, the bank started to grow into a nationwide bank by developing a branch network covering a number of regions outside of Odessa, initially to serve its major customers. At end-August 2006 it had 15 branches and 73 outlets, including branches in 11 regions outside Odessa. In 2006, the bank plans to open two new branches in Chernigov and Kirovograd.

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Comparative analysis – performance Table shows the comparative analysis of Pivdennyi’s profitability ratios with TAS-Kommertzbank, Ukrprombank, and Forum. Pivdennyi’s earnings performance compared favourably to the peers. At end-2005, its operating ROAA stood at 2.2% and lagged behind only TAS-Kommertzbank’s ROAA. Due to higher leverage Pivdennyi reportes a stronger operating ROAE (19.9% vs. 15.2% of TAS-Kommertzbank’s ROAE). Pivdennyi enjoyes strong net interest margin (the second highest in the peer group). Overall, despite the competitive market environment Pivdennyi demonstrates satisfactory profitability.

As at 31 December: PIVDENNYI BANK Forum Ukrprombank TAS-Kommerzbank

(%) 2005 2004 2003 2005 2004 2003 2005 2004 2003 2005 2004 2003

Net Interest Margin 6,55 7,52 8,46 5,82 7,52 6,64 9,21 12,52 7,10 6,43 10,64 9,00

Cost/Income Ratio 63,42 57,94 47,94 57,15 41,92 48,82 44,77 43,71 79,06 68,79 47,09 55,88

Operating ROAA 2,16 2,77 3,13 1,53 1,86 1,75 0,85 0,53 -0,05 2,24 4,06 1,98

Pre-Impairment

ROAA 3,21 4,10 5,56 2,85 4,97 3,89 4,92 6,41 1,50 2,49 6,91 5,23

Operating ROAE 19,87 27,39 34,30 13,40 14,66 15,26 4,51 2,52 -0,44 15,18 22,57 14,01

Core Capital/Total

Assets 10,23 9,90 10,18 10,01 13,11 11,04 15,05 25,15 10,75 16,82 38,44 37,03

Source: Adapted from banks’ IFRS financial statements

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Client base Customers are segmented by two groups: corporate customers consisting of mid and small-size companies and private customers. At present, the bank serves over 17000 corporate customers and over 95,000 private customers. The client base is constantly growing.

Customers growth

8476

11406

12356

15236

16241

57806

8292794861

4135429714

0

20000

40000

60000

80000

100000

120000

2002 2003 2004 2005 2006/1H

Corporate Banking The Bank’s corporate customers represent the following cash-rich industry sectors: commodity trading (oil, metal, grain), retail & wholesale trade, wine & beverages, pharmaceuticals, insurance companies. Historically, Pivdennyi Bank’s corporate division is the core business and competence of the Bank. Key products include cash management and treasury services, deposits, working capital and capital expenditure loans, trade finance, receivables finance and factoring, leasing. International Banking International banking activities are mainly represented by trade finance off-balance operations and at the moment are being the subject of priority development. International Payments Pivdennyi Bank maintains a broad correspondent network in all major currencies with leading financial institutions worldwide. The Bank's correspondent network includes 29 accounts held with domestic and foreign credit institutions. The Bank has established solid partnerships with a number of major foreign banks, including: The Bank of New York, New York (SWIFT IRVTUS3N) Commerzbank AG, Frankfurt (SWIFT COBADEFF) Hypovereinsbank AG, Munich (SWIFT HYVEDEMM)

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Bank of America NA, New York (SWIFT BOFAUS3N) ING Bank, Amsterdam (SWIFT ABNANL2A) Retail Banking Services offered by the Retail Banking Division, which are currently provided under the brand of the bank. Main target groups are the upper end of the retail market, with disposable incomes in excess of US$ 2,000 per month, and the middle retail market, with disposable monthly incomes between US$ 300 and US$ 2,000. The Bank’s retail offerings include a portfolio of customized loans, deposits and credit card products. These services are offered through the Bank’s branch network, a centralized telephone banking centre and an advanced internet banking system. In addition to general marketing, Pivdennyi acquires customers by partnering with specialized retailers. Mortgage lending Mortgage is currently developing business for bank – first mortgage programs were presented in 2004. These programs are offered through the Bank’s branch network, construction companies and real estate agencies. Despite the rapid growth gross mortgages were USD25 million at end-H206 and constituted 5% of the loan portfolio. The retail loan portfolio is composed of 51% consumer loans and 49% mortgages. The growth in retail loans will likely continue as a result of the strategic focus on retail banking and in conjunction with the geographical penetration into other regions of Ukraine. Up to the end of 2008 mortgages are expected to make up to 10% of the gross loan portfolio of the Bank. Securities Investment Policy In recent future Bank’s will likely continue holding of the small securities portfolio (up to 1-2% of assets) mainly comprised of bonds and corporate shares. Liquidity and asset/liability management The liquidity management department within treasury and international business supervises payment position daily, an automated reporting system, including a calendar of payments and gap-tables for each division, is in place. In addition to classic gap method new statistical approaches applied for customer accounts balances’ analysis. Thus, daily-based stable balances’ research allowed bank to hold low level of liquid assets up to the current moment However, the management of the bank has approved changes in liquidity management policy from aggressive to conservative up to 2H07. Thus, obtaining of attractive ratings from international rating agencies and entrance to international money and capital markets (CLN and Eurobonds issue planned for 4Q06 and 2Q07) will bring the ability to attract long-term funds and form the basis for new conservative policy application

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Pivdennyi Bank’s Organisational Structure

Current organisational structure is historically based on processes and operational activities of the bank during initial growth stage – as the bank was growing and new types of banking products and services were implemented in addition to initial bank’s operations.

However, the decision was approved by Supervisory Council and the Board concerning implementation of new customer- focused organisational structure up to the end of 2008. Thus, there should be formed front-, middle- and back-office allowing to optimize business-processes of the bank and strengthen the effectiveness.

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Information Technology – Management Information System

Emission and processing system

“ IS –Card” Payment cards

Transaction system „ODB”

Corporate business

Transaction system «Metacard»

Retail business

Analytical system «Vicont»

Consolidation of balance

Processing system of acquiring Sub-system

Reuters Dealing 3000

Dealing terminal

Dealing Manager Dealing analytical system

Intranet portal for additional information

Authorization and firewall system for remote access

Remote access consoles for branches, outlets and

departments.

Reuters Xtra 3000 Information system

Mathematical and statistical analysis subsystem Mathlab

Management reports system Crystal Reports

Management reports for instant and current liquidity,

for funding structure, for structure of assets and

liabilities, for structure of markets positions and flows’

prognosis

Management reports for market

risks

Management Information System

Data warehouse

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3.3. Management and Employees

Management Bodies

Management bodies of Pivdennyi Bank are the General Meeting of Shareholders, the Supervisory Council and the Management Board (the Board includes the Chairman of the Board).

The General Meeting of Shareholders (GMS) is the senior governing body of the Bank. Within its exclusive competence are determination of main directions of Bank’s activity and execution reports approval, approval of the articles of bank, corrective actions and additions, approval of annual results of the bank’s activity (including subsidiaries), distribution of profit, approval of the terms and the order of dividends’ distribution, increase or reduction of an shareholders’ equity, appointment and exemption of Chairmen and members of the Supervisory Council, Revision Commission, approval of reports and conclusions of the Revision Commission and the external auditor, decisions on reorganization of the bank and decisions on the termination of the bank’s activity.

The SC is responsible for decisions relating to the determination of development targets and strategies, overall supervision and control, determination of foremost business issues and making decisions on the composition of executive bodies. SC also appoints the external auditors, approves the Board member’s wages and bonuses.

The Board is the executive body of the Bank and oversees its operations and day-to-day management. Its powers are delegated by the Bank’s Supervisory Council. Chairman of the Board is Mr. Vadim V. Morokhovskiy. The decisions of the Board are taken by majority vote of the members in attendance at a meeting.

Controlling bodies

The controlling bodies are Revision Comission and Internal audit. Revision Commission is represented by 3 shareholders and performs independent control over the bank’s financial and economical activity. Internal audit is represented by Internal Audit and Control Division which is subordinated to the SC.

Internal collective bodies

Internal collective bodies are represented by Assets and Liabilities Management Committee (ALCO), Tariff Committee (TC), Level 1 and Level 2 Credit Committees (CC1 and CC2), branches’ credit commissions (BCCs). The decisions of the ALCO, TC, CC1, CC2 and BCCs are taken by majority vote of the members in attendance at a meeting.

Risk management is represented by Risk Management Department (RMD) subordinated to the Board and to the Supervisory Council. Risk managers of the branches (BRMs) are subordinated to RMD. Head of RMD is a member of ALCO, TC, CC1 and CC2. BRMs are members of BCCs. Head of RMD and BRMs have the Veto for decisions of the above bodies.

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Members of the Board

Vadim V. Morokhovskiy Chairman of the Board General Management, supervises Corporate Business Master of banking, Chess Grand Master With Pivdennyi Bank since 1995

Liudmila I. Khudiyash Vice-Chairman of the Board General management, supervises cash-desk operations, financial monitoring Master of Banking With Pivdennyi Bank since 1999

Liudmila I. Oliferchuk Vice-Chairman of the Board Supervises internal book-keeping, HR and staff-training, IT Master of banking With Pivdennyi since 1993

Liya S. Morokhovskaya Vice-Chairman of the Board Supervises all operational activities, retail business, payment cards, marketing Master of banking With Pivdennyi since 1996

Liudmila V. Kovalenok Chief Accountant – member of the Board Supervices book-keeping, operational activity and taxation Master of Banking With Pivdennyi since 1998

Valentina D. Grechko Head of Legal Devision – member of the Board As a member of the Board also supervises operations with securities Master of Law, Master of Banking With Pivdennyi Since 1996

Elena G. Tsvetkova Head of Division for co-ordination and Methodology – member of the Board Supervises distribution network activities Master of Finance With Pivdennyi since 1998

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Employees The key factor of PIVDENNYI Bank's success and development is well-considered staff policy. The Bank has created a team of professionals but due to an effective development, introduction of up-to-date technologies, enhancement of banking products’ range, penetration into new markets and branch network development, Pivdennyi Bank increases each year the number of its professionals, as of 1 January 2006 Pivdennyi Bank numbers 1514 employees. The Bank created all conditions for fruitful work of its employees. A special attention is devoted to work places of employees to make them feel at ease. Functional furniture and office equipment, microclimate systems and convenient lighting – are necessary attributes of any department of the Bank, they create the atmosphere of comfort and support, and at the same time demonstrate a considerable increase in labour productivity and decrease in stress situations and, as a consequence, the efficiency and enthusiasm of the employees increase.

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3.4. Risk Considerations Exposure to credit risk Driven by strong growth in the local credit market, the loan portfolio grew by 37% and reached UAH1.6 billion (USD325 million) at end-2005. The growth has continued into 2006, at end-H206, the loan portfolio reached UAH2.2 billion. It comprised 89% corporate loans and 11% retail loans. As margins continue to come under pressure in the corporate sector the bank plans to direct an increased amount of funds into the retail segment. By the end of 2008, the retail loan portfolio is planned to represent about 30% of the loan portfolio. The growth of retail banking is expected to be gradual and not compromise credit quality. Credit risk stemming from interbank lending is average. The bank has established limits on a large number of Ukrainian banks and, although most of these limits are not utilized, a more prudent approach to counterparty risk could be taken. Furthermore, monitoring of the counterparties requires additional costs. Corporate Clients The corporate loan portfolio (gross) totalled UAH2.1 billion at end-H0206. 52% of loans were extended to large corporates and 48% - to SMEs. The largest sector exposures were to retail and wholesale trade (46.3%), real estate and construction (9.7%), and the food industry (6.0%). Lending to the trade sector included investment loans to retail stores for construction purposes, hence, the exposure to the volatile real estate sector is higher than stated. Although the bank places a strong emphasis on the borrowers’ ability to repay their loans it may not know a level of experience and expertise of the builders contracted to construct the retail stores. The concentration levels in the loan portfolio have trended down but remained significant reflecting the corporate orientation of the bank. The top 20 borrowers represented 31% of the loan book or 2.0x of equity at July 1, 2006. The top 20 loans are predominantly in the trade, shipping, real estate and alcoholic beverages sectors. Regional concentration exists as c.50% of the loan book is issued to companies in Odessa and the Odessa region. The loan portfolio tenor has lengthened, with 44% of the portfolio having a maturity of over one year at end-2005 compared to 35% at end-2004. As of July 1, 2006, about 57% of the loan portfolio was issued in foreign currencies (mostly in USD) compared to 49% as of January 1, 2005. While some of the bank’s borrowers may have access to FX income streams, this is not always the case, ultimately exposing Pivdennyi to the risk of the borrowers’ inability to service debt if a substantial devaluation of the local currency occurs.

Individuals

Despite the rapid growth gross retail loans were UAH252 million at end-H206 and constituted 11% of the loan portfolio. The portfolio was composed of 51% consumer loans and 49% mortgages. The growth in retail loans will likely continue as a result of the strategic focus on retail banking and in conjunction with the geographical penetration into other regions of Ukraine.

Exposure to market risk

Interest Rate Sensitivity

The bank’s exposure to interest rate risk is increasing. To take advantage of the existing declining interest rate environment the bank is exploiting the positive yield curve and

PIVDENNYI BANK

36

mismatching long-term assets and short-term liabilities. At end-H205, the negative funding gap within a one year timeframe widened to 18.2% of total assets from 13.6% of total assets at end-2004. In July 2006, the bank estimates that a 1% decline in interest rate should contribute about UAH7 million to its revenues.

Foreign currency rate risk

FX risk is mainly structural as the majority of FX transactions are customer-driven. The bank anticipates a small (about 2-3%) depreciation of the national currency against the US dollar during 2006, thus, it holds a long aggregate FX position close to USD5 million, or 8% of regulatory capital, i.e. within the bank’s internally established limit of 15% of regulatory capital. Although FX proprietary transactions represent only 10% of total transactions, VAR is calculated for trading book, based on a 99% confidence level and 30-day holding periods. FX risk is moderate and adequately managed.

Market risk inherent in securities trading is low. The securities portfolio represented 0.8% of assets at end-2005 and was comprised of 54% bonds and 46% corporate shares. Most securities holdings have speculative ratings but are liquid and can be easily sold in the Ukrainian market.

Liquidity Risk

The low level of liquid assets reflect the bank’s aggressive policy used in liquidity management concerning the behaviour of instruments. For example, 95% of current account funding is being stable in the amount of the minimum balance during the last three months, and can be assumed to be a one-year funding, with zero gaps targeted after this adjustment. However, in the past, the bank has had no serious liquidity problems. Between September 2004 and January 2005, during the general market turbulence in the Ukraine, the bank lost c.15% of its corporate balances and c.10% of its retail deposits, but was able to withstand the crisis. The bank has a liquidity contingency plan, according to which alternative funding in case a liquidity crisis arises would be attracted in the form of loan repayments, deposits from RIB and the insurance companies which are part of the holding group. The loan-to-deposit ratio has improved to 102.7% at end-2005 from 112.7%.

The following table sets forth liquidity ratios of the Pivdennyi Bank as of December 31, 2003, 2004 and 2005. As of

December 31, 2003 As of December 31, 2004

As of December 31, 2005

Loans to clients(1) as % of total assets

89.87% 82,86% 80.26%

Loans to clients(1) as % of client Accounts

116,88% 123,80% 110,28%

Loans to clients(1) as % of total equity

882,89% 824,30% 702,06%

(1) Net of allowance for loan impairment

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Loan and deposits concentrations

Loans portfol io concentrations 2004

Trade and commerce 64%

Manufacturing 9%

Other 10%

Agriculture and food industry 10%

Transport and communication 3%

Individuals 4%

Loans portfol io concentrations 2005

Trade and commerce 54%

Manufacturing 11%

Agriculture and food industry 12%

Transport and communication 9%

Individuals 7%

Other 7%

Depos it por tfolio concentrations 2004

Finance and insurance 2%

Manufacturing 5%

Transport and communications 7%

Trade and commerce 28% Other 8%

Individuals 50%

Depos it por tfolio concentrations 2005

Individuals 43%

Other 7%Trade and commerce

24%

Transport and communications 9%

Manufacturing 7%

Finance and insurance 10%

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3.5. Risk Management The purpose of risk management is to control and monitor the size and concentration of risks arising from Pivdennyi’s activities. The principal categories of risk inherent in the Bank’s business are liquidity risk, credit risks (risks of possible losses on commercial and consumer loans), risks arising from inter-bank business, foreign currency rate risk, interest rate risk, operational risk, market risk and litigation risk. Pivdennyi Bank manages risk in an integrated manner, evaluating it in terms of the correlation of the overall risk level and Pivdennyi’s capital. Pivdennyi’s risk management and control systems are based on the requirements of the National Bank of Ukraine and the recommendations of the Basle Committee on Banking Supervision. Pivdennyi’s Asset and Liability Management Committee (“ALCO”) sets Pivdennyi’s asset, liability and risk management policy in line with its business strategy and makes necessary corrections in light of Pivdennyi’s financial and market position and in accordance with the growth and diversification of its business. The ALCO also sets targets for asset and liability allocations and exposure limits for various banking operations, determines the optimal allocation of Pivdennyi’s funds, and establishes lending and funding policies, including base and target interest rates for various types of loans, based on their maturity and purpose. The Credit Committee coordinates Pivdennyi’s credit policy, establishes lending policies and procedures and criteria for problem loans, approves loans and guarantees for most legal entity clients, sets lending limits within the exposure limit parameters set by the ALCO and approves new credit products. Liquidity risk Liquidity risk arises from the timing of cash flows generated from the bank’s assets, liabilities and off-balance sheet instruments. The Bank’s liquidity management policies are reviewed and monitored by ALCO. The liquidity management policy of the Bank is based on classic requirements which enforce the ratios applied in respect of various groups of liquid assets and liabilities. The estimation of such internal ratios was carried out based on the facts of the 1998 banking crisis, that is, a maximum possible fluctuation of the resource base was taken into account. The level of liquidity is monitored on a daily basis and is examined monthly by the RMD. In this context, it is to be noted that the Bank is not dependant on large depositors. The liquidity management department within treasury and international business supervises payment position daily, an automated reporting system, including a calendar of payments and gap-tables for each division, is in place. In addition to classic gap method new statistical approaches applied for customer accounts balances’ analysis. Thus, daily-based stable balances’ research and Cash flow at Risk (CFaR) estimation allowed bank to hold low level of liquid assets up to the current moment. Stress-testing is undertaken at weekly intervals to ensure that planed liquidity positions are maintained under all scenarios. Detailed multilevel contingency plans were proven in times of market turbulences and allowed bank feeling comfortable even without excessive liquidity reserves.

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However, the management of the bank has approved changes in liquidity management policy from aggressive to conservative up to 2H07. Thus, obtaining of attractive ratings from international rating agencies and entrance to international money and capital markets (CLN and Eurobonds issue planned for 4Q06 and 2Q07) will bring the ability to attract long-term funds and form the basis for new conservative policy application. Credit Risk The Credit Risk is one of the principal risks the Bank takes. As loans constitute a significant portion of its assets, credit risk management is therefore a priority for Pivdennyi Bank. The identification and adequate measurement of credit risk is one of the key factors contributing to increased efficiency of the Bank's operation. Pivdennyi Bank manages its credit risk through establishing exposure limits for single borrowers, groups of borrowers and industries, which are set by the Credit Committee, as well as by complying with exposure limits established by the National Bank of Ukraine. Pivdennyi Bank also mitigates its credit risk by conducting thorough reviews of prospective borrowers, obtaining collateral, corporate and personal guarantees and ongoing credit monitoring. The Credit risk is also reduced by setting appropriate allowances for loan impairment and loan losses. Credit risk of off-balance sheet financial instruments such as guarantees is defined as a possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The ALCO sets exposure limits for off-balance sheet exposures and counter party limits for off-balance sheet transactions with banks and other financial institutions, including foreign currency position limits and documentary transaction limits, reviews transactions that would exceed these limits and, if necessary, adjusts the limits. The RMD monitors Pivdennyi Bank’s off-balance sheet commitments on a weekly basis. The Bank’s back office departments monitor the compliance with limits for off-balance sheet transactions with corporate clients and banks on a daily basis. Corporate / SME credit risk Pivdennyi Bank’s Corporate / SME sector policy is to maintain a broad sector spread of exposures which reflect the Bank’s areas of expertise. Credit exposures to businesses are assessed individually. The quality of the overall portfolio is monitored using a credit grading system calibrated to the probability of incurring losses. All aspects of credit management are controlled centrally for the Bank and Branches Network. The Board receives regular reports on new facilities and changes in facilities, sector exposures, bad debt provisions and problem loans. Retail credit risk Retail lending is tightly controlled through advanced credit and behavioral scoring techniques. The Board receives regular reports on the performance of the portfolio. On the basis of expert appraisals and using mathematical models, the Bank has developed certain methods for different products, which allow to determine the acceptable extent of credit risk and to set the credit limit. The Bank’s approach to the analysis of borrowers provides that the examination of a borrower (corporate and SME) must be carried out by two independent experts, working in two different departments of the Bank: Lending Division and Risk Management Department. The evaluation of a potential corporate borrower includes the analysis of certain risks

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related, in particular, to financial standing, industry, market, management, operational risks, etc. To properly assess SME and retail customers’ risk, the credit decision is supported by a highly effective scoring model. On the basis of the complex analysis of the customer and in conformity with the Bank’s procedures, experts set credit limits and define the borrower’s risk category. Lending Division is responsible for structuring the credit transaction on the basis of its own analysis of the customer and opinion of the Risk Management Department. Assessment of collateral is performed by another member of staff from independent Department of Estimation and Mortgage operations who carries out the assessment of loan security and executes collateral repossession if the situation so requires. The Bank has developed a set of credit products, which made it possible to facilitate the credit risk management system and unify the fundamental approaches to assessment of a borrower, security requirements, and structure of credit operations. On top of this, the Bank offers a number of credit products which require specific approaches to credit risk management; structured and trade finance, as well as project finance, are the most complex of these. Control over loan quality is a relevant element of the Bank’s credit risk management. The control function is assigned to the Credit and Collateral Monitoring Department. The Bank has developed a mechanism of control which ensures the highest possible protection of the Bank’s interests in the process of loan issuing. It includes the monitoring of documentation in the credit file to make sure that it remains complete and valid until maturity. The credit risk management system is complemented by

- constant monitoring of borrowers and collateral for issued loans; - management of problematic assets - the creation of adequate loan loss provisions.

Pivdennyi Bank’s risk management policies are of utmost concern to the Bank’s management. The general approach follows a rather conservative pattern. A number of general ratios related to risk evaluation are enforced in conformity with the regulations of the National Bank of Ukraine, and the Bank fully complies with these requirements. Risks from inter-bank business The Asset and Liability Management Committee approves credit risk limits for loans issued to banks. Pivdennyi Bank uses its own methods for assessment of banks’ solvency and an automated system designed for monitoring financial statements of credit institutions. The fixed inter-bank limits can be exceeded when exposure is secured by certain assets, such as bank promissory notes, government securities and cash. Operational risk Operational risk arises from the potential for key systems failures, breaches in internal controls or from external events resulting in financial loss or reputation damage. Key operational risks include outsourced contracts, payment systems and information systems. Operational risk is controlled and mitigated through comprehensive, ongoing risk management practices which include formal internal control procedures, training, segregation of duties and responsibilities, delegated authorities and contingency planning.

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The Internal Audit and Control Division performs a programme of operational reviews and reports regularly to the Management Board. The division managers are responsible for controlling operating risks within their areas of accountability and for compliance with bank’s policies which are extensively documented. Following is a listing of key elements of the Bank’s internal control system. Elements of Internal Control System Management Control - The Board regularly conducts meetings with the management of the bank in which estimates of interior control prepared by the external auditors are considered Monitoring of Interior controls - Analysis and estimation of various risks taken by the Bank, implementation of bank products Distribution of responsibilities - Distribution and management of the professional responsibilities of employees of the Bank in order to avoid conflicts of interests Management of information channels and information security - Control of physical access; backup equipment and systems for storing all banking operations and procedures; use of continuous sources of electricity for maintenance of servers; different access rights for different categories of users; anti-virus software; monitoring employees’ use of the Internet, computers, telecommunication channels, etc. Market Risk Market risk arises from the effect of changes in market prices of financial instruments, on income derived from the structure of the balance sheet, execution of customer and internal bank business and proprietary trading. Due to its functions, a prominent role in the control and day-to-day management of market risk is played by Treasury and Interbank Business Department. There are no direct interactions between Treasury’s analytical section and the Bank’s clients. Primary functions of the Treasury include

- risk management and control - assets and liabilities management - foreign exchange and capital markets - organization and support of resources within the bank

The analytical section of Treasury provides services out of head office for all the bank’s branches. It does not generate any interest income from intra-bank funds transfers. The Analytical Section is completely independent from the Bank’s other divisions. Interest Risk For Pivdennyi Bank, market risk manifests itself primarily in the form of interest risk. Interest risk policy statements, approved by the Bank’s Board, specify the scope of the Bank’s market activity, market risk limits and delegated authorities. The policy is executed by the Asset and Liabilities Management Committee (ALCO), which meets at monthly intervals. Its prime task is to assess the interest risk inherent in the maturity and re-pricing characteristics of the bank’s assets and liabilities. It sets limits within which the Bank’s

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Treasury manages the effect of interest rate changes on the bank’s overall net interest income. The principal analytical techniques involve assessing the impact of different interest rate scenarios and changes in balances over various time periods. The following are key elements of the Bank’s interest rate risk management policy:

- An established system of strict gap limits for interest rate changes of assets and liabilities

- Duration analysis undertaken on regular basis for different terms - Permanent monitoring of interest rate market - Monthly data collection and research analysis pertaining to interest rate movements - System ensures isolation of risk from individual business-managers - Level of possible negative influence on budgeted income - less than 7% of equity

Currency Risk Currency risk is significantly limited by the regulations enforced by the National Bank of Ukraine according to which the open position in any currency should not exceed 10% of a bank’s capital. The Bank’s activity on FX markets is focused on customer related FX operations on covered spot basis. The Bank does not hold open positions on the ‘hard forex’ market. In addition to the open position limits, the bank has established stoploss limits which are being reconsidered on 1, 10 and 30 day Value at Risk calculation basis. The following are key elements of the Bank’s currency risk management policy:

- The system in place sets limits for amount of open currency position, monitors and controls all types of exchanges rate risk

- Trading limits are applicable to transactions of Dealing Operations Division - Investment limits restrict the amount of open currency position of the entire bank

(The amount of open currency position in any one currency can never exceed 10% of equity amount and total position in all currencies cannot exceed 20% of total equity amount, Include limits of assets and liabilities gaps, and off-balance liabilities in one currency)

- There are two types of limits employed that restrict losses: stop-call and stop-loss - All open positions supervision is conducted on-line in real-time system - The level of stated limits confines the amount of probable one-time losses to below

1% of equity Legal risk From time to time and in the normal course of business, claims against Pivdennyi Bank are received. On the basis of its own estimates and internal professional legal advice the Management is of the opinion that no material losses will be incurred in respect of claims. Accordingly, as at 31 December 2005, and before at year-end 2004, no respective provisions were made. Anti Money-Laundering Measures

Pivdennyi Bank’s anti-money laundering measures are based on and are in compliance with relevant Ukrainian legislation. Pivdennyi Bank has procedures and operative documents aimed at preventing money laundering and terrorist financing, including a general anti-money laundering policy and internal control procedures and rules on

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counteracting money laundering and financing of individuals and legal entities engaged in terrorist activities, as well as procedures for reporting to the State Financial Monitoring Department. These procedures aim to, among other things, minimise the risk of Pivdennyi Bank being used as a vehicle for money laundering or terrorist financing, protect Pivdennyi Bank from financial and reputational risk of being associated with money laundering or terrorist financing activities and ensure that banking services are provided only to bona fide clients.

Pivdennyi Bank’s procedures relating to the prevention of money laundering and terrorist financing include, but are not limited to:

• “ Know-your-customer” procedures. These procedures require clear identification of clients, verification of their identity and appraisal of risk of their engaging in prohibited transactions. Pivdennyi maintains a database containing information on all clients and transactions in which they engage, which facilitates identification of unusual transactions. In addition, Pivdennyi Bank verifies each client’s identity, legal status and authority to engage in particular transactions. Pivdennyi Bank does not enter into business relationships with clients that refuse to provide sufficient identity and authority information. Pivdennyi Bank pays particular attention to obtaining information about its bank counter parties and does not enter into banking relationships (including inter bank lending and deposit taking and operating correspondent bank accounts) with shell banks.

• Detection. Pivdennyi Bank identifies transactions that must be monitored and reported pursuant to the Ukrainian anti-money laundering legislation. Such legislation requires Pivdennyi Bank to monitor and report such transactions to the State Financial Monitoring Department.

• Record Keeping. Pivdennyi Bank keeps records of all of its banking and financial transactions. It also maintains a database of all of its clients and their transactions, facilitating identification of unusual activities.

• Confidentiality. Pivdennyi Bank keeps all information obtained as a result of applying its anti-money laundering procedures confidential, except where it is required to report it to State Financial Monitoring Department.

• Education. Pivdennyi Bank provides education and training of personnel with respect to anti-money laundering procedures at least once a year.

Pivdennyi Bank’s Financial Monitoring Department monitors client transactions and the activities of all of Pivdennyi Bank’s departments for compliance with the relevant Ukrainian anti-money laundering legislation. Monitoring is conducted via Pivdennyi Bank’s IT systems as well as manually. Pivdennyi Bank’s other departments notify the FMD of suspicious transactions, using the criteria set out in Pivdennyi Bank’s internal anti-money laundering regulations. The FMD pays particular attention to transactions involving large sums of money, counter parties located in off-shore jurisdictions, or significant amounts of cash. If monitoring indicates that a client may be engaging in money-laundering or terrorist financing, the level of monitoring of such client is increased. Activities are analysed on a regular, as well as long-term basis, which allows detection of money-laundering schemes. If necessary, the FMD obtains additional information about a particular transaction’s purpose and/or suspends suspicious transactions.

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4. FINANCIAL ANALYSIS 4.1. Basic Financial Information

The Pivdennyi Bank has produced financial statements under IFRS since 1997.

IFRS Balance Sheet Analysis (USDm)

31 Dec 2003

31 Dec 2004

31 Dec 2005

A. LOANS 1. Private n.a. 10,4 26,2 2. Corporate n.a. 237,2 323,2 3.Loan Impairment n.a. 22,2 24,1 Total A 177,6 225,4 325,3 B. Other earning assets 1. Loans and advances to customers 4,8 15,5 7,7 2. Government Securities 0,0 2,6 0,0 3. Trading Assets 0,0 n.a. 1,7 4. Other Securities and Investments 5,2 2,1 14,4 TOTAL B 10,0 20,3 23,8 C. TOTAL EARNING ASSETS (A+B) 187,6 245,7 349,0 D. TANGIBLE FIXED ASSETS 7,8 10,1 33,1 E. NON-EARNING ASSETS 1. Cash and Due from Banks 22,8 36,1 52,2 2. Other 0,7 6,9 0,9 F. TOTAL ASSETS 218,9 298,9 435,3 G. DEPOSITS & MONEY MARKET FUNDING

1. Due to customers – current 56,4 69,0 106,3 2. Due to customers –Term 111,9 131,0 210,6 3. Deposits with banks 21,5 54,9 59,4 4. Other deposits and short-term borrowings n.a. 7,78 n.a TOTAL G 189,8 262,7 376,3 H. OTHER FUNDING 1. Long-term funding 3,2 4,4 5,4 2. Subordinated debt 2,1 0,0 1,5 TOTAL H 5,3 4,4 6,9 I. NON-INTEREST BEARING 8,2 1,7 2,4 J. TOTAL LIABILITIES 196,6 268,9 385,6 K. EQUITY 1. Common Equity 22,3 30,0 44,6 2. Revaluation reserves n.a n.a. 5,2 TOTAL K 22,3 30,0 49,8 CORE CAPITAL 22,3 29,6 44,6 ELIGIBLE CAPITAL 22,3 29,6 44,6 L. TOTAL LIABILITIES & EQUITY 218,9 298,9 435,3

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IFRS Income Statement Analysis (USDm)

31 Dec 2003

31 Dec 2004

31 Dec 2005

1. Interest income 31,5 37,4 47,1 2. Interest Expense 17,6 21,1 27,2 3. NET INTEREST REVENUE 13,9 16,3 19,9 4. Net Fees & Commisions 5,9 6,6 9,0 5. Other operating Income 0,8 2,4 4,0 6. Personnel Expenses 3,7 6,7 9,9 7. Other Operating Expenses 6,1 7,9 10,9 8. PRE-IMPAIRMENT OPERATING PROFIT 10,7 10,6 12,0 9. Loan Impairment Charge 5,4 3,1 4,3 10. Other Credit Impairment and Provisions -0,7 0,4 -0,3 11. OPERATING PROFIT 6,0 7,2 8,1 12. Other Income and Expenses 0,3 -0,9 -0,6 13. PUBLISHED PRE-TAX PROFIT 6,3 6,3 7,5 14. Taxes 2,02 2,0 1,8 15. Other gains not in Published Net Income n.a. n.a. 5,2 16. PUBLISHED NET INCOME 4,2 4,3 5,7 IFRS Ratio Analysis

(%) I. Performance ratios 31 Dec

2003 31 Dec

2004 31 Dec

2005 1. Net Interest Margin 8,46 7,52 6,55 2. Loan Yield n.a. 16,16 14,74 3. Cost of funds 10,25 9,09 8,19 4. Costs/Average Assets 5,12 5,64 5,57 5. Costs/Income 47,94 57,94 63,42 6. Pre-Impairment Operating ROAA 5,56 4,10 3,21 7. Operating ROAA 3,13 2,77 2,16 8. Pre-Impairment Operating ROAE 60,69 40,55 29,61 9. Operating ROAE 34,13 27,39 19,87 II. Capital Adequacy ratios 31 Dec

2003 31 Dec

2004 31 Dec

2005 1. Internal Capital Generation 24,32 16,53 26,78 2. Core capital / Total assets 10,18 9,90 10,23 3. Eligible Capital + Eligible Revaluation Reserves / Regulatory Weighted Risks

11,55 12,59 11,95

4. Tier 1 Regulatory Capital Ratio 11,60 12,80 11,95 5. Total Regulatory Capital Ratio 11,60 12,80 13,76 6. Free Capital / Equity 65,07 66,31 33,39 III. Liquidity (year end) ratios 31 Dec

2003 31 Dec

2004 31 Dec

2005 1. Liquid Assets / Deposits & Money Market Funding

11,9 20,48 19,07

2. Loans / Deposits 105,53 112,70 102,66

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4.2. Asset Quality Securities The securities portfolio represented 0.8% of assets at end-2005 and was comprised of 54% bonds and 46% corporate shares. Most securities holdings have speculative ratings but are liquid and can be easily sold in the Ukrainian market. Trading Securities

(USDm) As at 31 December : 2004 2005

Corporate shares - 1,6 Total trading securities - 1,6 Other securities at fair value through profit or loss

(USDm) As at 31 December : 2004 2005

Ukrainian Treasury Bonds (OVDP) 2,6 - Municipal bonds - 1,0 Corporate bonds - 0,9 Corporate shares 0,9 0,2 Total other securities at fair value through profit or loss 3,5 2,1

Municipal bonds represent bonds of local authorities of Odessa city, traded on Ukrainian over-the-counter market (PFTS). The bonds mature in December 2007, have coupon rate of 12% and yield to maturity of 12%. Corporate bonds represent bonds of Ukrainian enterprises, traded on PFTS. The bonds mature from December 2008 to October 2010, have coupon rates of 16,5%-18%, and yield to maturity of 16,5% -18% The above securities are not part of bank’s trading book, as at fair value through profit or loss. Investment securities available for sale

(USDm) As at 31 December : 2004 2005

Corporate bonds 0,8 12,0 Corporate shares 0,8 0,9 Promissory notes 0,2 - Less provision for impairment of investment securities available for sale

-0,6 -0,6

Total investment securities available for sale 1,2 12,3

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4.3. Loans Loans and advances to customers

(USDm) As at 31 December : 2004 2005

Current loans 240,5 346,2 Overdue loans 5,7 3,2 Reverse sale and repurchase agreements 0,2 - Less provision for loan impairment -22,1 -24,1 Total loans and advances to customers 224,35 325,28 Pivdennyi’s asset quality is strong and reflects its prudent credit policies and procedures and high collaterization values. At end-2005, overdue loans (overdue more than 1 day) were UAH16.3 million (or 0.9% of the loan portfolio) compared to UAH30.7 million (2.4% of the loan portfolio) at end-2004. The improved asset quality reflected the bank’s effective work-out strategies, relatively conservative approach to retail lending and the benign economic conditions. To buffer potential cyclical swings, the bank maintains relatively high reserve levels. At end-2005, the LLR/gross loans coverage stood at 7.0% (2004: 9.2%). High provisioning levels should help the bank to withstand asset quality pressure in the event of an economic downturn. Quality Ratios 31 Dec

2003 31 Dec

2004 31 Dec

2005 1.Loan Impairment Charge / Gross loans (av.)

3,13 1,37 1,41

2.Total Credit Impairment / Pre-impairment Operating Profit

43,76 32,45 32,89

3.Loan Impairment / Gross Impaired Loans 435,76 383,71 747,24 4.Impaired Gross Loans / Loans Gross 2,23 2,34 0,92 5.Impaired Loans Net / Eligeble Capital -66,08 -55,55 -46,89 6.Net Charge-offs/Gross Loans (av.) 0,08 0,03 1,14

Economic sector concentrations

(%) As at 31 December : 2004 2005

Trade and commerce 64,0 54,0 Agriculture and food industry 10,0 12,0 Manufacturing 9,0 11,0 Transport and communication 3,0 9,0 Individuals 4,0 7,0 Other 10,0 7,0 Total loans and advances to customers 100,0 100,0

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Individual Customer Concentrations

The portfolio is composed of 51% consumer loans and 49% mortgages. The growth in retail loans will likely continue as a result of the strategic focus on retail banking and in conjunction with the geographical penetration into other regions of Ukraine.

Loan portfolio quality

Pivdennyi’s asset quality is strong and reflects its prudent credit policies and procedures and high collaterization values. At end-2005, overdue loans (overdue more than 1 day) were UAH16.3 million (or 0.9% of the loan portfolio) compared to UAH30.7 million (2.4% of the loan portfolio) at end-2004. The improved asset quality reflected the bank’s effective work-out strategies, relatively conservative approach to retail lending and the benign economic conditions. To buffer potential cyclical swings, the bank maintains relatively high reserve levels. At end-2005, the LLR/gross loans coverage stood at 7.0% (2004: 9.2%). High provisioning levels should help the bank to withstand asset quality pressure in the event of an economic downturn.

2003 2004 2005 As at 31 December : USDm % USDm % USD

m %

Pass 104,6 53,7 120,6 48,8 33,7 9,7 Watch 0,0 0,0 0,3 0,1 234,2 67,2 Substandard 81,9 42,0 117,7 47,6 64,9 18,6 Doubtful 2,6 1,3 2,6 1,1 13,2 3,8 Losses 5,8 3,0 6,2 2,5 2,8 0,8 Total tested Loans 194,9 100,0 247,3 100,0 348,8 100,0 Untested Loans 0,0 0,0 0,0 0,0 0,0 0,0 Total Net Loans 194,9 100,0 247,3 100,0 348,8 100,0

In March 2005 National Bank of Ukraine issued new guideline for loan classification recommending Ukrainian banks to toughen internal scoring models for loans classification. Pivdennyi Bank applied a new, more conservative, scoring, which resulted in a high percentage of loans move from “pass” to “watch” as of April 1, 2006 – see the following table:

01.04.2005 01.07.2005 01.10.2005 USDm % USDm % USD

m %

Pass 15,5 6,5 18,3 6,5 17,8 5,6 Watch 153,0 63,6 187,2 63,6 224,9 71,2 Substandard 55,5 23,1 50,7 23,1 56,9 18,0 Doubtful 11,2 4,7 10,4 4,7 12,2 3,9 Losses 5,5 2,3 7,1 2,3 4,0 1,3 Total tested Loans 240,7 100,0 273,7 100,0 315,9 100,0 Untested Loans 0,0 0,0 0,0 0,0 0,0 0,0 Total Net Loans 240,7 100,0 273,7 100,0 315,9 100,0

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Collateral Pivdennyi bank generally requires collateral, personal or corporate guarantees and/or an assurance arrangements as security for each loan. Acceptable collateral includes real property, land leasing rights, securities, industrial equipment, vehicles, airplanes, ships, precious metals, raw materials and inventory. In most cases, collateral, guarantees and assurance arrangements, separately or together, cover at least 1,5 times the principal of the loan, accrued interest and commissions.

Collateral portfolio structure

Other property rights and types of collateral

10,88%

Non-govermental securities 0,65%

Property rights to the cash deposits and nominal certificates

4,29%

Other movables 17,02%

Real estate 40,31%

Goods in turnover 25,85%

Related Party Lending The volume of related party lending has increased. However, due to the stronger capitalization it comprised only 34% of end-2005 equity compared to 54% of end-2004 equity. Credit risk is viewed as above average. The inherent risks of concentrations make the bank vulnerable in the event of economic downturn. The main risk mitigant is collateral. Some large exposures are secured by cash deposits and haircuts applied to other types of collateral are very conservative.

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Capital Resources and Adequacy Outlined below are capital ratios calculated in accordance with the international framework for capital measurement and capital standards of banking institutions set by the Basle Committee on Banking Regulations and Supervisory Practices. The capital ratios in the table below outline core (“Tier 1”) and supplementary (“Tier 2”) capital requirements relative to a bank’s assets and certain off-balance sheet items, weighted according to risks (“Risk-Weighted Assets”).

all amounts in USDm As of

Dec 31, 2003 As of

Dec 31, 2004 As of

Dec 31, 2005

Tier 1 capital Share Capital 20,5 28,1 41,4 Share Premium - - - Retained earnings 1,9 2,0 3,2 Total Tier 1 capital 22,4 30,1 44,6 Tier 2 capital - - 6,7 Total qualifying capital 22,4 30,1 51,3 Total Risk-Weighted Assets 192,9 234,6 372,9 Tier 1 Risk Adjusted Capital Ratio 11,61% 12,83% 13,76%

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5. UKRAINE AND ITS BANKING ENVIRONMENT

5.1. General Overview �

In terms of land area, Ukraine is the largest country within continental Europe (603,700 sq. km or 233,100 sq. miles). Its population is the fifth largest in Europe (after Germany, Italy, Great Britain, and France). Its population is approximately 48 million, of which over 52% are of working age. Kiev, the capital, has a population of over 3 million. Ukraine borders on Russia, Belarus, Moldova, Romania, Poland, Slovakia and Hungary with the Black Sea serving as its southern-most flank.

Map of Ukraine

�

Government and Politics Ukraine gained independence from the Union of Soviet Socialist Republics (USSR) in 1991. It adopted its own constitution in June 1996, creating three branches of power: Legislative (Parliament), Executive (President, Cabinet of Ministers), and Judicial (Supreme Court) branches. The President, elected for a five-year term, is the head of state, while the Prime Minister is the head of government. Viktor Yushchenko, elected following an unprecedent mass protest in late 2004, which has been termed the ‘Orange Revolution’, is the current President with the next presidential elections scheduled for October 2009. The constitution adopted in 1996 left the division of power between the three groups relatively unclear as the President has the power to appoint and dismiss the Prime Minister with Parliamentary approval.

The Parliament has the primary legislative power so that it can override both presidential and governmental decrees. It is a unicameral body with 450 representatives elected under

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a mixed system, with half the members elected in single mandate districts and half elected via a proportional representational system. The term of office for parliamentary representatives is four years. Parliamentary elections were held on March 26th, 2006.

On July 6th 2006 the Socialist Party of Ukraine (SPU) suddenly defected from the pro-presidential "orange" coalition and entered into an alliance with the opposition. This produced a governing majority centred on the Party of Regions.

Parliament's new majority coalition, which unites the Party of Regions, the pro-presidential Our Ukraine and the parliamentary left, has secured Viktor Yanukovych's return to the post of prime minister. He brought with him many figures from the former administration headed by Leonid Kuchma, as well as priorities that differ from those of the current president, Viktor Yushchenko. Combined with disputes over recent constitutional changes to reduce presidential powers, this will ensure tense inter-institutional relations.

In December 2004, the Parliament passed legislation amending the Constitution with a view to redistribute power between the legislative and executive branches of government. These amendments were approved by the President and became effective on January 1st, 2006. Under the new rules, the Parliament is to be elected via a proportional system for a five-year term and shall be entitled to appoint key Cabinet members, in addition to the Prime Minister. Moreover, following the recent parliamentary election, the office of the Prime Minister is expected to act as a powerful new counterweight to the President, and the cabinet will be more accountable to Parliament than in the past. In particular, Parliament will have the right to approve the Prime Minister and ministers individually (previously it could only approve the Prime Minister, who then submitted ministerial candidates to the President for approval). At the same time it gives additional rights to the President to dissolve the Parliament if it fails to form a government.

The highest court in the general jurisdiction is the Supreme Court of Ukraine, and all justices are elected by the Parliament with life tenure. An 18-member Constitutional Court adjudicates constitutional matters. The President, Parliament, and a board of judges appoint six constitutional justices each for a limited term of nine years. Historical development After the disintegration of the Soviet Union, Ukraine suffered significant economic difficulties, resulting in a period of hyperinflation during the early to mid nineties. The difficulties were compounded by Ukraine’s relative tardiness in embarking on market reforms.

Following the implementation of a strict monetary policy with the issuance of a new currency in 1996, inflation was brought under control and the local currency, the Hryvnya, has since remained relatively stable. Economic progress was adversely impacted by the Russian debt crisis of 1998. However since the second half of 1999, the Ukrainian economy has demonstrated positive growth due to a recovery in the Russian economy and strong global commodity prices. Successive governments have exercised fiscal prudence limiting budget deficits, while strengthening government finances and the international reserves position. Still, Ukraine is a fast growing transitional economy with a number of ongoing problems, including pace of structural reforms, independence of judiciary, or cross party commitment to a transparent market economy. Yet the disposable income of individuals is increasing, resulting in increasing purchasing power and domestic consumption in the country. Ukraine has received market economy status from the European Union and is making progress toward WTO accession which is expected to be granted before the end of 2006.

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Macroeconomic Overview

Ukraine has been classified as a country in a transitional stage by the EBRD. Ukraine’s recent economic history has been marked by periods of active reform followed by interim periods of slow privatization and delayed restructuring. Despite various hurdles on Ukraine’s path to a market economy, enterprises responsible for over 70% of the nation’s output have been privatized by 2006. A small number of very significant enterprises were privatized in 2005, generating revenues of over EUR 4 billion. The informal sector is estimated to be one of the highest in Europe and constitutes between 40-50% of GDP based on Ministry of Finance and IMF estimates.

Table 1 Selected macroeconomic data � � � � � � � � � � � � � � � � � � � � � � � � � � � �

� � � � � � �� � �� � � � � �� � � � �� � ��

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �

� � � � ! � � " � � ! � � ! � # � � � $ � � � � � � % � � � � � � � � � � # � � � � � � �

� � � � � � �� � & � � � � � � ' � � � � % � � � � � � � � � � � � � � � � � � � � � � �

( � � � � " �� � & � � � �� � � � � " � ) � � � � % � � � � � � � � � $ � � � � $ � � � � � � �

* � � � ! � � � � & � ! ) � � � & � ! �+ � � �� � � �� � � , ' � � � � � � $ � ' � � � � ' � � � � ' � � % � ' � � � � ' � � � �

� � �- � �. " �

- / � ! � � � � � $ � � � % � � � � � % � % � # � # � � # � � �

� � � ! � � � � � � � � � $ � � � � � � � � � � � $ � $ # $ � �

0 � � �� � � " 1 � � % � � � � � � � � % � � � � � # � � �

� � � �� ! � ! � � � . ! �+ � � �� � � �� � � , � � � � � � � � � � � � � # � � � � � � � � � � � � $ � � � � � � � � ������� � � � � � � � � � � � � � � �� � � �� � � � � � � � � � � � � �

After ten years of steady decline, the first cumulative year-on-year GDP growth of 5.9% was registered in 2000 and continued ever since. GDP in real terms grew by 12% in 2004 to reach UAH 345 billion (EUR 52.1 billion), while GDP per capita was approximately EUR 1,109. Strong GDP growth was due to increasing commodity prices, the recovery of the Russian economy, and strong harvests recently. In the first half of 2005, in the aftermath of the Orange revolution, economic growth slowed down with GDP growing 2.6% year-on-year. GDP growth is estimated to remain in single digits in 2005-2010. The structure of Ukraine’s GDP is well-diversified with the largest contributors to GDP being the metallurgy, chemical and agricultural sectors. Over 50% of GDP is generated by export oriented industries. The main trading partners of Ukraine are Russia and the EU.

Ukraine’s GDP and real GDP growth rate

��� �

�� �

� �

6.0%4.0%2.6%

12.3%

9.6%

�

� �

� ��

� ��� � ��# � ��� - � ��� 0 � ��$ 0

��

� �

� ��

� � �

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������ � � � � � � � � � � � �� � � �� � � � � � � � � � � � � �

Ukrainian GDP by industry, 2005

� � � ! � & ! � � � �

� # �

2 ! � � �

� � � & � � � � % �

3 � � � � ! � ! �

� � � � �

& � � � � � & � ! �

� � � � � # �

4 � " � � � " � �

� � � � ! � � " �

! � � � � � � �

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- / ! � & ! � � � �

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5 � � & � " ! � � � �

� � �

������� � � � � � � � � � � � �� � � �� � � � � �

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Inflation and exchange rates Ukraine’s inflation rate is higher than the inflation rate generally observed in Central and Eastern European economies. Following a period of relatively low inflation between 2000- 2003, inflation has picked up in recent years primarily due to loosening of monetary policy during the pre-election period in 2005 and also subsequently by the impact of dramatically higher energy prices. This resulted in year-on-year CPI and PPI (in real terms) of 12% and 24% in 2004, respectively, while year-on-year CPI for 2005 slightly exceeded 10%. Inflation is expected to stay at the same level in 2006 and decrease to 5-10% during 2007-2009.

CPI and PPI statistics

6.1% 5.7%

24.1%

12.3%

-0.6%

10.3%8.2%

0.9%

9.5%11.1%

' � �

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� � � � � ��

������ � � � � � � � � � � � �� � � �� � � � � �

UAH exchange rates

� � � � � � � � � � � � � � � � � ��

# � $ �� � $ $

� � � �$ � � �

� � � %

�

�

� �

� ��� � ��� � ��� � ��# � ���

6 5 ( ) 6 7 � 6 5 ( ) - 6 8

������� � � � �

In spite of high inflation rates, the remarkable stability of the Hryvnia against the USD throughout the last five years has been achieved as a result of the successful stabilization policy pursued by the National Bank of Ukraine. A substantial increase of the NBU’s hard currency reserves allowed for the further liberalization of the NBU’s policies on the currency markets and helped maintain exchange rate stability in recent years. In 2005 exchange rate fluctuations were in the range of UAH 5.3-5.05 per USD, while in 2005-07 the currency is forecasted to be stable against the USD at UAH 5.2–5.6. Foreign Direct investments In the beginning of 2005, aggregate FDI stock accumulated by Ukraine since independence reached EUR 7.2 billion, which corresponds to EUR 151 per capita, one of the lowest levels in the region. Inefficient privatization, an absence of structural reform, and high levels of corruption had to date deterred Western investors from Ukraine. By the end of 2005, however, total foreign direct investments into Ukraine exceeded EUR 13.2 billion. Nearly 45% of the total was invested in 2005, following the political and economic changes inspired by the Orange Revolution. FDI revenues were primarily generated by the sale of the largest metallurgy enterprise “Kryvorizhstal” for USD 4.8 billion to Mittal Steel and the second largest bank “Aval” for USD 1 billion to Raiffeisen International. In addition, the banking sector is expected to attract an additional USD 1.5 billion in FDI in 2006 related to the investments by BNP Paribas in Ukrsibbank and BCI Intesa in Ukrsotsbank.

Further FDI is expected in the financial services, consumer retail, and real estate sectors. Another potential driver for FDI is privatization in the energy and telecommunications sector, however, the prospect for such investments are predicated on the policies of the new government.

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Figure 1 Accumulated FDI, EUR million*

# � � � �� � �% �

� � $ � % � � � � �$ � � $ �

� � � � # �

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������ � � � � � � � � � � � �� � � �� � � � � �

Figure 2 Origin of FDI by country, 2005

� # �

� �� � � % � $ �� � # � # �

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9

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Banking Sector Overview The Ukrainian banking sector is one of the fastest growing within Central Europe albeit from a low base. Its assets to GDP ratio has shown rapid growth over the past year as it grew from 39% to 53% from 2004 to 2005. Total banking industry assets and capitalization grew by 59% and 41%, respectively over the same period, and reached EUR 33.6 billion and EUR 4.3 billion, respectively as of December 31st, 2005. Relatively low penetration rates as compared to its major peers indicate significant growth opportunities and that the high growth rates are likely to be sustained over the foreseeable future.

Banking assets to GDP

� � � # % � # � �

$ � � $ � �

� � � � �� �

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8 �� �� �

8� �� ��

*� "� � ��

� " ��

(� �� � �

7" �< ��

= �! � �

�> �& �� 8� ��

Source: NBU, CBR, ECB, EIU

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Market structure The Ukrainian banking sector shows rather low concentration with the share of the top five banks at around 36% in terms of assets as of January 1st, 2006. The official number of active banks stood at 165 by the end of 2005. Most of the banks, however represent small captive banks serving the needs of industrial conglomerates owned by the banks’ shareholders. Prior to 2005, the banking sector was heavily dominated by local banks with a number of international institutions such as ING, Citibank, HVB, and Raiffeisen as well as subsidiaries of major Russian banks serving mostly their multinational client base. By the end of 2005, the number of banks with foreign capital increased from 19 to 23. Two of the top five banks – “Aval” and “Ukrsib” were sold and shareholders of the 4th largest bank “Ukrsots” recently agreed to sell 85% of the bank to Banca Intesa for USD 1.2 billion. As a result of these and other M&A activity in the sector, the share of foreign owned banks in the industry is expected to exceed 35% in 2006 as compared to a mere 7% in the beginning of 2005. The NBU has indicated that certain limitations might be put on foreign entry into the industry once the share of foreign banks reaches 50%. Simultaneously certain steps have been taken to support the two remaining state-owned banks (Ukrexim and Oschadbank) Key banking industry indicators

� � � � � � � � � � � �

: � � . � � � � � & ! � � � � . � � < � � � % � � � � � �

3 ! � " � . � � < � � � � � ! � � + - � � . " � , � � � � � �� � � � � �

7 � � � � � � � ! � ! � � . � � < � � + � � � � 3 ! � " � � � � � ! � , � � � � $ � $ � � � � �

7 � � � � � � � � � � � � . � � < � � + � � � � 3 ! � " � � � � � ! � , % � �� � � � � � # � � �

5 � � � ! � � ! � � � � � $ � � � � � � �

= � � � � ! � � � � � $ � � � � � � �� � � ! � � � � & & � � ! � � ! � � � � � # � � � � � $ �

������ � � � � � � � � � � � � � � �� � � �� � � � � �

Assets structure Over the period 2001 to 2005, the Ukrainian banking sector maintained the highest growth rates in the CEE region, with CAGR exceeding 46%. Total banking assets have reached EUR 33.6 billion which represents a 66% growth in EUR terms and 37% in UAH terms over 2004. Interest income on loans remains the largest source of revenues for banks, as loans dominate the banks’ balance sheet. The structure of banking assets remained virtually unchanged in 2005.

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Banking asset structure

= � � � � ! �

& � � ! � � �

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. � " � � & � � �

1 � ! � � : * 6

� � �

0 � / � �

� � � � ! �

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�

������ � � � �

Loan portfolio by industry

� � � ! � & ! �

�

# �

� & � � � � �

�

� � �

8 � ! � � " � � � �

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Loans Total customer loans currently account for around 65% of total banking assets. In 2005, the volume of customer loans increased to over UAH 142 billion (EUR 23.8 billion) and total loans to GDP reached 35%.

Total customer loans (UAH bn)

2841

67

87

142

'

� �

# �

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% �

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Lending penetration

� � �

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= �! � �

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������� � � � �

Retail lending accelerated by an impressive 127% in 2005 reaching UAH 33 billion (EUR 5.5 billion), rising to 23% of the total loan portfolio from 17% in 2004. Local banks are expected to maintain strong lending growth in 2006-07 supported by the continuing economic expansion and growing disposable income. Foreign entrants have indicated retail lending as their primary area of focus. As a result, due to the intensifying competition, it is expected that interest rates will decrease and loan requirements will ease, especially for mortgages and car loans. As of the end of 2005, consumer loans made up 44% of the total retail loan portfolio, with mortgages accounting for 32%, and auto loans for 24%.

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Retail loans and their share in total loans

'

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8 � ! � � " � " � � � � + 6 5 ( � . " � , 7 � � � � � � � ! ! � " � � �

������ � � � �

Composition of retail loans

? ! � � � � � �

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5 � ! � �

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& � � � � �

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������� � � � �

Deposits Total deposit balances in the system also expanded in 2005 to over UAH 134 billion (EUR 22.4 billion), representing 63% of total liabilities, with the most dramatic increase coming from new retail deposits, primarily in the form of short-term time deposits and savings accounts. Total deposits grew almost 64% during 2005 with deposits from individuals increasing at a remarkable 76% and the corporate deposit base rising by 53%. With this substantial increase in retail deposits, the structure of bank deposits in the system is now balanced between retail and corporate deposits. The increased confidence in the banking sector and the lack of income tax on interest income has fuelled deposit growth. By the end of 2005, the share of term deposits exceeded 60% of total deposits, however the average term to maturity remains comparatively low at around 18 months. As a result, the banking system has a systemic tenor mismatch as the average tenor of the deposit base is shorter than that of the loan exposure.

Deposit growth dynamics (UAH, bln)

� $� �

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Deposit structure by currency and type (UAH bln)

# �# �

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The share of foreign currency deposits has been declining steadily since 2000 and fell to 34% of total customer accounts by the end of 2005. Over 90% of the foreign currency accounts are denominated in USD, with the balance denominated principally in EUR and in Russian rouble.

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Capital adequacy The equity to assets ratio for the Ukrainian banking system stood at 12% as of December 31st, 2005. Banks are required to maintain minimum capital adequacy ratio of 10% calculated according to Basel I principles in accordance with NBU regulations. Current capital adequacy ratios indicate that while the banks generally comply with NBU requirements, they are likely to require additional equity injections before the second half of 2006 in order to maintain historical growth rates.

Profitability The revenue dynamics of the banking sector have improved substantially with total revenues reaching UAH 27.5 billion (EUR 4.3 billion) during 2005 up by 37% from 2004. Banking sector profitability has been also improving over the past five years. The mismatch between change in ROAA and ROAE is largely caused by a lag in equity growth rates as compared to asset growth rates. The largest portion of revenue is derived from interest and commission income, which accounted for 69% and 21% of total revenue earned over 2005, respectively. Industry profitability is projected to improve substantially in the next 2-3 years due to increasing share of higher margin retail loans, better access to cheaper funds on international capital markets, and completion of branch network rollout programs being undertaken by most banks, requiring large investments in infrastructure and human resource development.

ROAA and ROAE of the banking sector

� � � � � � � �

� � �� � � � �� � � �

% � �� $ � � � % � # �� � � �

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Interest margin

� $ � # �

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$ � # � � � % �

� �� ��

$ � � � $ � # � % � ��

� � � �$ � � �

��

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= � � � � � � ! � � � � & & � � ! � : � ! � � � � � �

�

������ � � � �

Since 2000, there has been an overall decline in interest rates for bank loans. In addition, the spread between interest rates on loans granted and deposits attracted from customers has also been declining to an average of 6.2% by the end of 2005, though remaining high in comparison to average Central and Eastern European lending spreads. This results in attractive net interest margins enjoyed by Ukrainian banks.

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Banking sector regulations According to the Ukrainian constitution, the NBU’s primary function is to maintain the stability of the national currency via regulation and supervision of the banking sector. The key regulatory framework for the banking industry is Law on the NBU, adopted in 1999 and the Banking Law adopted in 1991. The major regulations regarding Ukrainian banks is as follows:

• The NBU prescribes the minimum amount of capital for the establishment of a bank to be EUR 5 million;

• In 2004, the Bank has set minimum regulatory capital ratio (Tier 1) at 4% and minimum capital adequacy ratio at 10%;

• Maximum size of credits, guarantees and sureties granted to single related parties must not exceed 5% of regulatory capital, while the similar ratio for the group of related parties must not exceed 40% of a bank’s regulatory capital;

• The investment in securities ratio to one entity should not exceed 15% and total investment in securities should not exceed 60% of a bank’s regulatory capital;

• The Banking Law also requires the NBU’s approval prior to direct or indirect acquisition of 10% or more of a bank’s capital or voting rights.