Market's review.

1.What’s sale?

On the beginning of 2007 year there were 1188 banks with operating licences, from the general number before the registered 3467 banks. Last three years at single instances of registration of new banks, the Central Bank withdraws licences with a speed about 100 examples in a year; apparently, it will lead to that in some years remains an order of 500 banks. From the general number of the operating credit organizations 280 have the General licence, 788 -Hard currency, 70 - Roubles, 50 - the so-called non-banking credit organizations(NCO). 935 of banks have entered Deposit insurance system(DIS) and have possibility to work with contributions of private persons.

In Moscow it is concentrated more than half of all credit organizations - almost 600, in St. Petersburg - 60, in Dagestan - 60, and in many other regions, it is literally - 1 - 2 banks.
Assets of the 20 largest Russian banks make about 8.5 billion roubles (nearly 320 billion $) or about 65 % from cumulative actives of all Russian commercial banks, and assets of two hundred largest banks are over 90 %. From the general number of the Russian banks the 80 banks and more than 50 % belongs to non-residents. These banks in aggregate operate of 12 % from cumulative assets of all Russian commercial banks.

The cumulative capital of the Russian banks is made an order of 1.7 billion roubles and by annual profit to the taxation for 2006 - nearly 350 billion roubles. Thus, average profitability of the banking capital makes 20 %. Fuller information can be gathered in section «Bank sector's Review of the Russian Federation» on an official site of Russian Bank.

Only seven banks in Russia have the capital (own fund), exceeding 1 billion US dollars, only 70 banks - over 100 million dollars and less than 300 banks- over 20 million dollars.

Last figure is some nominal border separating really profitable banks which can be engaged "white" (completely legal) in bank business from banks "pocket" (carrying out a role of a purse for the owners), "grey" (engaged highly remunerative, but not quite legal bank operations), and also low-profit or unprofitable banks.

Banks with the capital less than 5 million dollars which are not engaged in "grey" operations, have negative real profitability, that actually confirms the Central Bank of the Russia which have established the minimum size of the authorised capital for again registered banks at level of 5 million of euro.

Let's mention, that the capital is a basis for calculation of all obligatory specifications, therefore very few people from bankers is kept from temptation at least partially to "draw" the capital, i.e. to use some schemes, allowing it to increase «on a paper», "de jure", instead of "de facto", not putting in bank of real money.

Insufficient capitalization is still the general problem of all Russian banks; despite a blest stream of petrodollars which is recovered all bank system for last three years.

It is possible to consider, that first twenty largest banks, belonging to non-residents, are not on sale or have already sold, and one thousand others with cumulative actives of an order of 3 billion roubles and with the cumulative capital about 400 billion roubles - are on sale.
Taking into account the average relation of sale cost to the bank capital, the general market capacity can be estimated in 1 billion roubles, and taking into account futures IPO and sale minority packages of the largest banks - in 2-3 billion.

2.Banks Purchase & Sale Market.

For convenience of the further description, we will divide sale banks into following basic groups:

1. The largest banks with the capital over 100 million $ - about fifteen;

2. Average banks with the capital from 50 to 100 million $ with a filial network and certain retail business - about thirty;

3. Average banks with the capital from 20 to 70 million $ without a network and retail - about two hundred;

4. Average banks with the capital from 10 to 20 million $ - about three hundred;

5. Small banks with the real capital to 10 million $ - about five hundred;

Banks from last group are not on sale as business, and are on sale as the tool, or the non fictitious assets conditionally named the licence and, share on following groups:

5.1. Moscow, hard currency, DIS;

5.2. Region, hard currency, DIS;

5.3. Moscow, hard currency without DIS;

5.4. Region, hard currency, without DIS;

5.5. Moscow, Roubles, DIS;

5.6. Region, Roubles, DIS;

5.7. Moscow, Roubles without DIS;

5.8. Region, Roubles without DIS;

5.9. Moscow, hard currency, NCO.

Here the hard currency, Roubles are designate, accordingly, the hard currency or Roubles licence of a bank, DIS - participation in deposit insurance system, NCO – non-banking credit organization, Region - a site of a bank out of Moscow and St. Petersburg.

The prices for bank licences in Moscow and St. Petersburg of the last year are practically identical. The detailed information of a Bid and Offer ratio for banks of the fifth group is presented in section "Bid and Offer prices", and the public information of actually concluded transactions of 2006 is presented in section "Public deals".

Real banks purchases are made to 100 in year, but Bid and Offer ratio for different groups is variously. At present time the greatest bid is shown on banks from groups 1, 2, 5.1, 5.2, 5.3, 5.9, and on banks of first and last groups it is possible to name it an agiotage group, but on banks of groups 3, 5.4, 5.5 it is essential less offers, and on banks of groups 4, 5.6, 5.7, 5.8 - disappearing is small. Also there are the own buyers and the own pricing in each group of a banks.

The banks of the first two groups are bought by foreigners at the price, which multiple to the bank capital, and the multiplicity factor grows and often exceeds 5.

Certainly, from the economic point of view it is absolutely purposeless waste of money, however foreign investors, and investment advisers and auditors who serving them, do not know and do not wish to know other ways of fast occurrence to the high-yielding financial market.

In other words, more reasonable from the investment point of view, purchase of the banks from the 3rd and the 4th groups is rejected by as not western banker, as its advisers who thus will not receive considerable commission fee from the transaction.

After negotiations endings about Russia's accession to the World Trade Organization with the USA foreign demand has especially grown when the interdiction has been confirmed about opening western banks branches on the territories of Russia.

Also it would be desirable to note the feature of last year: for the first time there was an essential foreign demand not on controlling interests of the Russian banks, but on minority packages in 5 - 10 % of shares which are selling as portfolio investment. Unfortunately, this demand is limited, by banks of the 1st group.

Especially obvious this demand is felt on an equity market where shares of such banks as «the Moscow Bank» and "Revival" have grown for the last half year in times.

Banks of the 3rd group either independent or through mergence and takeover are aspiring to grow to the 1st or the 2nd groups for further to be on sale to foreigners more expensively.

Thus, they actually buy similar, but not for the sums, multiple to the capital, but for the reasonable price which consists of three components: costs of the licence, cost of the capital and triple annual profit.

It is necessary to underline, that aforementioned cost of the capital is completely not equal to the capital calculated by the Central Bank method, and represents a difference between market cost of a bank assets and its total obligations, including obligations of the future periods to the personnel and fiscal bodies. Also notice, that the capital can be negative if it is calculated by thus method.

Banks of the 4th group practically are not in demand and have no real chances to grow to the 1st group. Besides, banks from this group, as a rule, are connected with "grey" schemes. Most likely, they will gradually be on sale as the licence on the banks terms of the 5th group, or will simply lose licences.

Banks of the 5th group, naturally, expects the same destiny, as the previous group, it is sale easier and faster.

Almost such banks buy for short-term highly remunerative and single financial operations in 90 % of cases.

Bank minority holding of shares of the 5th group can be sold simultaneously with control, or to the majority shareholder on its conditions, or it cannot be sold because it is of absolutely illiquid goods.

Even theoretically zero-base bank registration in any case occupies more than a year and a half, and after April 2004 it is impossible without a direct contact with a management of Russian Bank, though from the economic point of view, it is the most reasonable way for own bank acquisition.

3. Who buys banks?

As sellers, buyers may be divided into some groups:
- Foreign banks or portfolio investors who wish to buy bank with faultless reputation and the international audit, and also with the capital more than 100 million $;
- Basically regional banks buy large Russian banks for the clientele and local communications, then, usually, these affiliated banks turn to their branches;
- The medium-sized Russian banks, aspiring to be integrated and capitalized at the expense of absorption of smaller colleagues;
- Banks of the CIS countries, first of all Kazakhstan and Ukraine, aspiring to place in Russia a part of its actives;
- The managers of large banks having own clientele and ambitions for opening of own business;
- Experts in "grey" bank operations who, as a rule, buy bank for short time for which the expenses on purchase have time to justify;
- The speculators buying bank for resale.
Curiously enough, but now there are many buyers of the first group in the market (not scores of people, but hundreds sufferers) …

4. Transaction technology (how to buy bank in practice)

Usually the process of a bank purchase may be divided into four stages.

1. Search and choice. Actually my business consists of the help to the buyer and granting to him some purchase variants. The most important for search - accurately formulate requirements to the bank, including a licence kind, a site presence of own premise, branches, infrastructures, bank technologies, client base and, of course, financial indicators and the price. In the course of negotiations with sellers preferences of the client are gradually specified, and the buyer is iterative comes nearer to a required variant. Subject to such recurrence the search takes up from one to two months; but, in case of a bank purchase from group of the keen demand choice of a preferable variant takes a week.

2. Check. As a rule, it is checked both a current financial condition of a bank that is necessary for specification of the transaction sum, and the condition of its accounting reporting and definition of the tax sum and other fiscal risks, usually the auditor companies are engaged to it. Also it is necessary to check up the presence of claims to the bank from the Central Bank, and its reputation in bank circles and power structures.
The check takes up from one month (in simple cases), to three months (if the bank exists more than three years and worked actively).

3. In law purchase of an essential share of a bank should be registered in the Central Bank and if it is bought more than 20 % - it is necessary to receive the preliminary permission of the Central Bank and at the big capital of a bank bought - in Department of Antimonopoly Politician.

In some cases it is possible to buy not bank actions, and its participants that essentially simplify registration procedure, and then it can be finished literally for one month (having registered only a new management of a bank), otherwise this stage may last from three to six months.

4. The calculations completion of the transaction. In case of guarantees granting of intermediate term actives by the seller, this stage may be stretched for some years.

Usually at bank purchase the basic problem is not so much considered at purchase and/or the obligations not reflected in balance, as fiscal risks which, usually are more as have more volume and character of the bank operations. Usually sellers give guarantees on fiscal risks, but it is not possible to be protected from them completely. Besides, recently the Central bank has sharply toughened requirements to shareholders and bank shareholders, and for transaction registration is required the most careful preparation.

5. Intermediaries, characteristic and market subtleties

Recently with a rise in prices simultaneously there were a huge number of the intermediaries working with banks buyers and sellers in the market. Unfortunately, this people, maybe, having concern to the bank system, they are bank lawyers, employees of Russia Bank, auditors, investment advisers, but perceiving intermediary business in this rather specific market not as a trade and as a way allowing to earn the big money easy, simply having informed a phone number of the necessary person.

Certainly, to earn on a freebie - treasured dream of any Russian person, but excessive number of intermediaries in the market which is not suffering chatter, a vanity ring, as a rule, only prevents. If the buyer wishes to have a real choice from several variants, and the seller - to sell the goods more expensively, it will be reasonable to address to the professional intermediary. In Moscow work not less than ten professional intermediaries who perfectly know each other and can reach, as a rule, reasonable compromises if one represents interests of the buyer, and another - the seller.

Purchase and sale of shares and banks actions and its actives is regulated not only the civil code, but also the specific bank legislation including internal instructions of the Central Bank.

To fulfil all formal requirements of these instructions it is necessary know it, and also to put a lot of skill. The same skill is required for the decision of the adjacent questions arising at purchase of a bank: to change a site, a modification of constituent documents of a bank, an increase in the capital, the coordination of heads of the credit organization.

At purchase of the working bank is very important to present correctly passing negotiations and the transaction to supervising bodies, employees and clients of a bank, and also to minimize a burden and tax losses.

The best transaction is that with which both the buyer and the seller are equally dissatisfied, and curator GM CB, the tax inspector, clients, employees and bank contractor do not know anything about it …

At last, there are unwritten norms and customs in the purchase and sale of a banks market which the person, as a rule, buying the credit organization once in a life simple may not know about unwritten norms and customs - for this purpose is necessary the competent intermediary too.
For example, all aforementioned prices have concerned to 100 % of actions or bank shares, however, if the organizational-legal form of a bank - public corporation the same price will be valid and for any share holding, more 75 %. If the bank has Company Limited (Co Ltd) form even 99.99 % of its shares to sell for a market price are practically impossible.

6. Market prospects

In the purchase and sale of banks market, as any other, the prices are defined, first of all, by a supply and demand ratio. Till 2004 it was possible easily to register new bank, and there was even a separate business on registration of a banks for the purpose of their further resale. The superfluous offer pushed the prices downwards, and cost of new bank with the currency licence in Moscow fell to a half-million of dollars. After April 2004 the Bank of Russia has almost ceased to register the new credit organizations for sale, and their general quantity decreased.

One more of the reasons for upsurge of the prices were campaign for the introduction of the banks in the deposit insurance system. Bankers did not managed to enter to the system, showed heightened interest to purchase of the banks which have entered in DIS therefore the prices for such banks for a year have doubled.

However not all banks are in demand. Particularly, Moscow and peripheral banks with the Roubles licence practically are not in demand and possibly the prices for them will decrease.
On other banks price will grow until two basic sources of demand will reserve - foreign investments and short-term domestic buyers, of course, if the Central Bank once again will not change a game rule that may occur at any moment.
At preservation of current trends within the next five years the quantity of operating banks will decrease approximately to five hundred, the empty banks will leave from the market, the prices for the remained credit organizations will stabilize, and the purchase and sale of a banks market will turn to a segment of the usual market of absorption and amalgamation of business.