First Synthetic Securitization of. SME Loans in CEE. Lessons Learned. Worldbank Conference. Bratislava, May

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1 Bratislava, May Worldbank Conference Page 1 First Synthetic Securitization of SME Loans in CEE Lessons Learned May 2008

2 Why securitisation? The profitability of CEE banking business frequently supports a risk transfer through securitisations Securitisation is an alternative to conventional equity. The transaction significantly increases the ROE Given the dynamic growth rates, the freed-up regulatory and economic capital is re-employed very quickly. Page 2 May 2008

3 Why Synthetic Securitisation? Funding was not an issue thanks to access to liquidity Combining the portfolios of two originators only appeared possible with a synthetic structure A true-sale securitisation for two countries would have been possible only with an excessive structuring work We use a variety of underlying products which are partly also secured. This would have created numerous additional legal issues. A synthetic structure allowed us to reach Aaa-rating levels and therefore provided an attractive pricing. Page 3 May 2008

4 KfW Involvement KfW as main counterparty in the transaction Strong counterparty because of German State Guarantee Strong support with know-how transfer not only intermediary but also advisor role. Clear advantage of using main features of KfW s Promise Platform Page 4 May 2008

5 Strengths of Promise Platform The main features of standardised securitisation infrastructure are: - Transaction structure (synthetic with funded mezzanine tranche) - Standard Documentation (to a large extent) - Swap auction process for super-senior swap (not required in ROOF CEE ) - Uniform collateral (KfW paper) - Uniform call features - Uniform loss allocation principles (realised losses) - Similar credit event definition (failure to pay, insolvency, restructuring) Page 5 May 2008

6 Differences to Promise? PROMISE light - similar to PROMISE platform, but some distinctive differences - Two independent bank swaps with originators - Sub-pools are not individually tranched and rated - KfW combines the sub-pools of Polish and Czech SME risks - No SPV, i.e. transaction is unfunded (fully synthetic) - One rating agency only (Moody s) - Private placement but public rating CDS are denominated in EUR (despite three currencies in pool) Replenishment period of up to 5 years permits originators - to realize economies of scale (ie amortisation of up front cost) - provides for continuing support of new business Page 6 May 2008

7 Case study: ROOF CEE the originators Raiffeisen Bank Polska S.A. (RBPL) Raiffeisenbank a.s. (RBCZ) - Founded in Total assets 2006: EUR 4 bln - Net profit 2006: EUR 65 mln - 2,194 employees - Market share in Poland 5,2 % - Founded in Total assets 2007: EUR 4,6 bln - Net profit 2007: EUR 36 mln - 2,500 employees - Fifth biggest bank in Czech Republic - SMEs are one of the most important group of clients (make up 36 % of all loans), market share: 7,8 % Page 7 May 2008

8 Development SME Portfolios Raiffeisen Bank Polska S.A. (RBPL) Raiffeisenbank a.s. (RBCZ) - Compounded yoy growth of SME business 9% - Majority of loan tenor in the area of below year, increase in the 1 to 3 years bucket - Strongly represented industries: trade and manufacturing - Strong growth in SME lending: average yearly growth +20% during last 7 years - Tendencies to investment loans with longer maturities especially with tenors above 5 years - Working capital finance with short term - Strongly represented industries Food and Real estate - customers regional concentration in the Prague (approx 50%) Page 8 May 2008

9 KfW Reference Pool Requirements - Average quality of pool: BB+ (Ba1) or better - Maximal Weighted Average Lifetime (WAL) of pool: 4,5 years - Replenishing pools possible - Maximum single obligor concentration of pool up to 1% - Maximum single industrial sector concentration up to 15% of total pool; furthermore, up to 3 industrial sectors could have a share of more than 10% each of the pool - as long as their combined share would not exceed 35% of the pool (according to industrial sector codification of rating agencies) - Maximum aggregate Top 10 obligor concentration up to 7% of total pool - Minimum collateral requirement for pool not less than 50% Page 9 May 2008

10 Eligibility criteria - Claims are SMEs according to KfW-definition of Mittelstandskredit (i.e. loans to enterprises with yearly revenues not exceeding EUR 500m) - SME assets according to EIF definition* (i.e. EU definition as of January 1, 2005); larger obligors (i.e. companies with up to 3,000 employees) may also be included but should not represent more than [e.g. 25%] of the pool - Eligible reference claims are SME assets like loans and guarantees - Reference claims are performing SME assets as of the cut-off date - Each individual reference claim carries a minimum rating equivalent to "B" (B2) - Reference claims are free of Third Party Rights Page 10 May 2008

11 Portfolio Characteristics Ref. Obligations: EUR, CZK and PLN denominated corporate loans to Czech and Polish SME borrowers (including borrowers which are classified as corporate borrowers) Number of Ref. Obligations: 1,256 Number of Borrowers: 942 Geographic Diversity: Poland 59.41%, Czech Republic 40.59% Remaining Term: Average months, min 0 months, max 59 months WA Internal Rating: 2.49 Max. Single Borrower: 0.70% Max. Single Industry: approx. 15% Closing March 2006 Volume EUR 450 mln Assets SME Loans Replenishment 5 years Average Tenor approx. 7 years Page 11 May 2008

12 ROOF CEE Final Structure applied Risk Seller KfW-Platform Risk Taker Portfolio CDS EUR 183 mln RBCZ Combined Reference Pool Super Senior 83.9% RBPL EUR 450 mln Aaa 6% Aa2 1.7% Portfolio CDS EUR 267 mln A2 2.8% Ba2 2.8% First Loss Piece 2.8% RI Page 12 May 2008

13 Dez.07 Jän.08 Feb.08 Mär.08 ROOF CEE Delinquencies 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Page 13 May 2008 Okt.07 Nov.07 Jun.07 Jul.07 Aug.07 Sep days days days Apr.07 Mai.07 Jun.06 Jul.06 Aug.06 Sep.06 Okt.06 Nov.06 Dez.06 Jän.07 Feb.07 Mär.07

14 ROOF CEE Replenishment M onthly Replenishment Outstanding volume EUR 450 mln Number of Securitised Loans Page 14 May 2008 Jun.06 Jul.06 Aug.06 Sep.06 Okt.06 Nov.06 Dez.06 Jän.07 Volume in EUR mln Feb.07 Mär.07 Apr.07 Mai.07 Jun.07 Jul.07 Aug.07 Sep.07 Okt.07 Nov.07 Dez.07 Jän.08 Feb.08 Mär.08

15 The Conventional way to cope with asset growth Shareholders More Shareholders More Equity EUR mln Equity* ROSCC 20% RI Group 15% Loans Net Margin 2% p.a. New Loans Net Net Margin 1% p.a. EUR 2 mln p.a. EUR 100 mln Loans EUR 200 mln Loans Net Margin EUR 3 mln p.a. *Assuming a 10% Economic Equity Requirement Page 15 May 2008

16 ROE 23.75% The benefit of securitisation Shareholders EUR 10 Equity* RI Group Loans Net Margin 2% p.a. New Loans Net Margin 1% p.a. EUR 200 mln Net Margin EUR 3 mln p.a. EUR 125mln Securitisation Return on Equity improves to 23.75% rather than decreases to 15% EUR 2.375mln EUR 125mln Securitisation 0,5% Cost (i.e. EUR 0,625 mln) *Assuming a 10% Economic Equity Requirement Securitisation Investors Page 16 May 2008

17 Some considerations regarding Basel 2 Basel 2 reduces the risk weight for certain high-quality retail portfolios and thus reduce the equity-relief effect of securitisations for these assets Securitisation will become interesting for mid-cap corporate and SME portfolios but also for high yield consumer loan portfolios Securitisation will bring little benefit for high-quality mortgage loan portfolios. For high quality loans funding is more prevailing Selling lower rated and even first-loss tranches will become increasingly an issue Securitisation is an efficient tool to reduce the capital volatility otherwise occurring under Basel 2 With certain shifts of focus, Basel 2 will fuel securitisations further Page 17 May 2008

18 The potential for the future Transaction allowed RBPL and RBCZ to diversify their capital sources - risk transfer as alternative strategy to access equity at competitive cost Structure helps originators to sustain growth process and further lending to SMEs atcompetitive margins We consider applying synthetic structures also in the future when our funding cost are below a certain threshold when we look at non-standardized products when we want portfolios of several units Considering the above, synthetic structures may be the obvious choice for Poland, the Czech and Slovak Republics, Hungary and Slovenia in general for mid-cap and SME portfolios which is optimal also for Basel 2 purposes Page 18 May 2008