Global Credit Research Credit Opinion 23 APR 2009

Credit Opinion: OTP Bank (Ukraine)

OTP Bank (Ukraine) Kyiv, Ukraine

Ratings Category Outlook Bank Deposits -Fgn Curr Bank Deposits -Dom Curr NSR Bank Deposits -Dom Curr Bank Financial Strength Parent: OTP Bank Outlook Bank Deposits -Fgn Curr Bank Deposits -Dom Curr Bank Financial Strength Senior Unsecured Subordinate Other Short Term

Moody's Rating Rating(s) Under Review *B2/NP Ba1/NP Aa1.ua/-**D Rating(s) Under Review Baa1/P-2 ***Aa3/****P-1 ***C+ ***Aa3 ***A1 ****P-1

* Placed under review for possible downgrade on February 25, 2009 ** Placed under review for possible downgrade on April 2, 2009 *** Placed under review for possible downgrade on November 7, 2008 **** Placed under review for possible downgrade on March 31, 2009 Contacts Analyst Elena Redko/Moscow Yaroslav Sovgyra/Moscow Reynold R. Leegerstee/London Yana Ruvinskaya/Moscow

Phone 7.495.228.6060 44.20.7772.5454

Key Indicators OTP Bank (Ukraine) [1]2007 Total assets (US$ million) Shareholders' Equity (US$ million) Return on average assets Recurring earnings power [2] Net interest margin Cost/income ratio (%) [3] Problem loans % gross loans Tier 1 Ratio (%)

3618.47 380.10 2.56 3.57 5.94 45.72 5.01 11.00

2006 2259.64 227.28 3.38 5.30 7.02 35.87 5.50 13.00

2005 1454.79 164.57 3.19 4.51 6.78 38.90 0.84 13.00

2004 853.46 85.39 1.84 4.03 5.22 36.01 0.52 12.11

2003 558.86 72.04 1.87 2.40 2.38 49.84 1.87 15.03

Avg. 1749.04 185.88 2.57 3.96 5.47 41.27 2.75 12.83

[1] As of December 31. [2] Preprovision income % average assets. [3] Non-Interest Expense % Operating Income.

Opinion SUMMARY RATING RATIONALE Moody's assigns a bank financial strength rating (BFSR) of D to OTP Bank (OTP), which translates into a Ba2/NP Baseline Credit Assessment (BCA). The rating reflects the bank's strong risk management processes, which are

based on those of its predecessor (Raiffeisenbank Ukraine - former subsidiary of Raiffeisen Zentralbank Oesterreich AG), as well as its solid and improved franchise as one of top ten banks in the country and its financial fundamentals, especially its profitability, efficiency and asset quality. However, the BFSR is constrained by the deteriorating operating and still volatile political environment in Ukraine, increasing pressures on the bank's liquidity position and the limited branch network. Other significant concerns are: the rapid growth in the bank's loan book in recent years, which quality has yet to be seen in economic slowdown; the unseasoned nature of the retail and SME loan portfolio, together with excessive concentrations in the corporate book; expected pressure on historically moderate internal capacity to generate capital on the back of continuous margin squeeze and potential asset quality issues, necessitating external injections; and high dependence on its parent in funding resulting in concentration risks. BFSR was placed on review for possible further downgrade to reflect Moody's concerns over expected pressure on assets quality, profitability and capital adequacy under currently deteriorating operating environment. OTP's Ba1/NP Global Local Currency (GLC) deposit ratings incorporate (i) the BCA of Ba2 derived from the bank's BFSR; (ii) our assessment of a very high probability of parental support from the bank's 100% owner, OTP Bank (Hungary) (with an A2 BCA); and (iii) a low probability of systemic support, given the bank's importance to the national financial system as a top ten bank. There is thus one-notch uplift from the bank's BCA. The GLC rating of OTP is constrained by the local currency deposit ceiling for Ukraine of Ba1. OTP's Foreign Currency Deposit rating of B2 is on review for possible further downgrade, the rating is contrained by the country's foreign currency deposit ceiling which is also on review for possible downgrade. Credit Strengths - Support from parent underpins the ratings - Solid franchise as a top 10 Ukrainian bank and notable market shares - Corporate governance standards and risk management processes - Robust asset quality, profitability and efficiency - Experienced management team Credit Challenges - Deteriorating operating environment in Ukraine is likely to put pressure on the bank's financial fundamentals over a medium term - The rapid growth in the bank's loan book in recent years, which quality has yet to be seen in economic slowdown - High single-name concentration in loan book - Non-equity funding is excessively dependent on parent - Relatively small branch network Rating Outlook OTP's BFSR was placed on review for possible further downgrade to reflect Moody's concerns over expected pressure on assets quality, profitability and capital adequacy under currently deteriorating operating environment. The bank's GLC ratings carry stable outlook. OTP's Foreign Currency Deposit rating is on review for possible further downgrade, the rating is contrained by the country's foreign currency deposit ceiling which is also on review for possible downgrade. What Could Change the Rating - Up Moody's does not anticipate a BFSR upgrade in the near future. In the longer term, the BFSR would likely be upgraded in the event of (i) a strengthening of capital adequacy measures on the back of an improved internal capacity to generate capital; (ii) a strengthening of the bank's franchise (by further implementing new products, increasing the number of products per customer, and improving customer reach, maintaining or perhaps increasing market shares) without sacrificing profitability, asset quality or liquidity; (iii) a reduction in concentration in the loan book in relation to equity and pre-provision income; (iv) diversification of the funding base beyond funding provided

by parent, and/or (v) further enhancements in risk management systems and a more cautious approach to risks. The local currency deposit ratings of the bank are constrained by the country ceiling for Ukraine and as such unlikely to be upgraded unless the country ceiling is raised. Similarly, the long-term foreign currency deposit rating would likely be upgraded following an upward movement in the country ceiling. What Could Change the Rating - Down The bank's BFSR is well positioned and no downward pressure is anticipated in the foreseeable future. In the longer term, continuous deterioration in the operating environment that led to a material decline in asset quality, liquidity or capitalisation, requiring an external bailout, would exert pressure on the BFSR. A downgrade of OTP's GLC deposit ratings could occur if the estimated probability of external support were to decrease. Recent Results and Developments OTP's total assets, as reported under an (un-audited) IFRS-based framework, amounted to US$5.2 billion as of the end of September 2008 and net income of US$67.5 million for the nine months then ended. In November 2008 the bank's shareholders injected additional capital of UAH862 million. DETAILED RATING CONSIDERATIONS Detailed considerations for OTP's currently assigned ratings are as follows: Bank Financial Strength Rating Moody's assigns a D BFSR to OTP, underpinned by the bank's solid franchise in Ukraine and its cautious approach to market risks but constrained by its tightening liquidity, high single-name borrower concentrations in comparison with pre-provision income and unseasoned nature of the bank's loan portfolio that could be stressed in the currently deteriorating operating environment. Other credit challenges include a heavy reliance on its parent for funding in conjunction with a growing dependence on market funds, and less wide-spread branch network coverage than local peers. As a point of reference, the assigned BFSR is line with the outcome generated by Moody's bank financial strength scorecard. Qualitative Factors (70%) Factor 1: Franchise Value Trend: Neutral OTP is the ninth-largest bank in Ukraine in terms of total assets (market share of 3.3%), seventh-largest by gross loans (3.9%), sixth-largest by retail loans (5.5%) and ninth-largest in terms of loans to corporate borrowers (2.9%) as at 30 September 2008 (in accordance with National Bank of Ukraine statistics). The bank has a constrained branch network limited to 24 branches, 137 outlets and 29 representative offices in all major regions of Ukraine with more entrenched positions in its home Kyiv region, with further plans to increase its regional presence. OTP's franchise value has strengthened considerably in recent years as the bank has diversified away from a reliance on large corporates in its lending activities and is strengthening its positions in such relatively new segments (in the Ukrainian context) as SME and retail. As at 30 September 2008, 46% of the gross loan book was extended to corporate borrowers, 38% to retail borrowers (around three-quarters of this is mortgage loans) and 16% to SMEs. As noted, around three-quarters of the retail loans are mortgage exposures, with the aim of securing earnings stability over the longer term. We note the relatively manageable risks and long tenor of such loans, however subject to stability in operating environment which is currently deteriorating. On the other hand, the bank's franchise is quite limited on the liability side as the bank considers its parent as one of the main contributors of funding going forward. This results in a narrowing of the core deposit base. In our opinion, an overall score of D+ for franchise value is an appropriate measure of the bank's moderate market shares, limited branch network but good product diversification.

Factor 2: Risk Positioning Trend: Neutral OTP's supervisory board consists exclusively of its shareholder's representatives and members that are not fully independent from the owners; this is mitigated somewhat by the bank's close integration with its parent, which has relatively advanced corporate governance standards in place. The bank's conservative risk management and rigorous underwriting standards were inherited as part of the business approach of Raiffeisen International, the former parent of the bank, and are implemented by an experienced professional management team. The currently mounting competitive pressure is potentially associated with a loosening in credit underwriting standards. OTP's loan book is somewhat concentrated: the 20 largest borrower exposures accounted for close to more than 100% of Tier 1 capital at end of H1 2008 and the top three borrowers 25% of Tier 1 capital, making loan book quality susceptible to the performance of a few customers. This risk is mitigated to some extent by the fact that these names belong to the most sophisticated economic groups (in the Ukrainian context) with interests that are normally diversified; however, we also understand that borrowers' credit quality is far from investment-grade. In addition, the bank's rapid growth in recent years conceals credit risks that may become evident when the loans, especially those to consumers and SMEs, become more seasoned. Another source of risk stems from US dollardenominated loans (especially long-term mortgage loans which prevail in the retail book, provided to borrowers with un-hedged earnings), which quality in terms of currently depreciating local currency has yet to be seen. The bank's funding is heavily concentrated, with financing from the parent (including sub-debt) representing up to 65%% of total non-equity funding at end-Q3 2008. Its dependence on domestic and international market funding was also quite high (15% of non-equity funding at end-Q3 2008) when considered in conjunction with the high dependence on the parent. However, this is mitigated somewhat by the fact that a large portion of the cross-border funding (excluding the parent's financing) was provided by IFIs, which are normally considered a relatively stable source of funding in a market distress (as opposed to non-policy banks). At the same time, the majority of the bank's funding is nominated in foreign currency, it could put additional pressure on the bank's earnings through revaluation losses as local currency lost almost 40% of its value with respect to US dollar and 25% with respect to Euro in October-November 2008. The bank's market risk appetite, as measured by the potential losses on trading and non-trading books due to major market movements, is modest as its exposures are limited fixed-income instruments (as opposed to shares), which include t-bills and bonds of Ukrainian blue-chips. The bank's strategy limits its investments to fixed-income instruments, not allowing investments in shares. OTP releases condensed financial statements in accordance with IFRS on a monthly basis and full scope IFRS financial on annual basis, but we are of the opinion that the level of public disclosures could be improved to include more relevant information - especially in the area of risk management. OTP's D score for risk positioning reflects the high level of single-name concentration in the loan book and high dependence on its parent in funding in line with the very narrow deposit base, the very high pace of growth in the bank's loan book, which is associated with higher credit risks, as well as FX related risks. It also reflects the strong risk management framework, as evidenced by rigid credit underwriting criteria (and management information systems in line with those standards maintained by OTP). In our view, a neutral trend for the bank's risk positioning is appropriate, given the emphasis on expanding the business in the years ahead. Factor 3: Regulatory Environment For a discussion of the regulatory environment, see Moody's latest Banking System Outlook on Ukraine, published in November 2007. Factor 4: Operating Environment Trend: Neutral This factor is also common to all Ukrainian banks. Moody's assigns an E+ score for the overall operating environment. For a discussion of the operating environment, see Moody's latest Banking System Outlook on Ukraine, published in November 2007. Quantitative Factors (30%) Factor 5: Profitability Trend: Weakening

The bank's bottom-line profit is underpinned by recurring sources of income, which chiefly include net interest income and, to a lesser extent, fee & commission income. The net interest margin will likely be preserved in the range of 5-7% going forward as the bank relies on reasonably priced funding, which represents a blend of crossborder funding and low-cost customer deposits, channeling those funds into higher-yield SME and retail and loweryield corporate loans. However, we note that the bank's ability to generate earnings could be stressed by potential threats to the bank's asset quality and expected pressure on interest margins given current operating environment and economic slowdown. The bank's A score does not fully capture our concerns with regard to the future earning streams thus we assign Weakening trend to this factor. Factor 6: Liquidity Trend: Neutral The presence of a financially strong parent gives the bank an advantage in providing it with access to longer-term, predictable and lower-cost international financing. On the other hand, the dependence on its parent (up to 65% of non-equity funding at end-Q3 2008) raises concentration risks. The disruption risk is mitigated by the strategic link of its parent with its Ukrainian subsidiary. Given the stable nature of the parent's funding, we are inclined to classify this type of funding as deposits, resulting in an adjusted loan-to-deposit ratio of 117% at end-Q3 2008, demonstrating a low dependence on market funding. The bank's dependence on other sources of cross-border funding is high, but the fact that bulk of the loans are provided by IFIs is considered a mitigating factor as IFIs normally tolerate higher risks than privately owned (non-policy) banks. Although this has allowed the bank to better match liquidity gaps, in the longer term it may entail higher refinancing risks. Nevertheless, customer accounts (about 30% of non-equity funding) include customer accounts/deposits that have been stable over time while bearing a short-term contractual maturity profile (being regularly rolled over), but have to be tested through recent developments on the market following imposed by the regulator partial freeze of deposits (moratorium on premature deposit withdrawal in the system) as such measures could damage vulnerable confidence on the market in the medium term. The bank's liquidity management is reasonably well-developed, allowing it to monitor its liquidity position on an ongoing basis (its treasury reports, which are part of MIS, are detailed and are produced and used by management regularly). As part of liquidity management, given the bank's reliance on its parent for funding, internal limits such as the net loans/customer deposits ratio are excessive, in Moody's view. The current score of D- for OTP's liquidity takes account of the growing dependence on the parent for funding. Moody's would like to see a diversification of the bank's funding base as well as the elimination of negative liquidity gaps (based on contractual maturities) within the one-year liquidity bucket (which was the case on a historical basis). Factor 7: Capital Adequacy Trend: Weakening The bank's internal capital generation was historically moderate, and it has to resort to periodic capital injections from its shareholder. OTP's capitalisation is adequate, with the total Capital Adequacy Ratio and Tier 1 ratio standing at around 18% and 15% of risk weighted assets as at 30 September 2008, respectively. In addition the bank's shareholders injected additional capital in amount of close to UAH862 million in November 2008 and placed Tier 2 capital of US$50 million in February 2009. The bank relies on its parent to replenish its capital and this will likely remain the case going forward. The score for capitalisation has been lowered from the generated scores to take into account of the bank's inability to generate sufficient economic capital on a standalone basis to replenish expected losses from deteriorating assets and its constant need to resort to additional capital. Factor 8: Efficiency Trend: Neutral The bank's impressive efficiency has been maintained thanks to a low cost base. The key efficiency ratios were historically less than 3% for the cost to average assets ratio, and less than 40% for the cost-to-income ratio (for the latter ratio we took a three-year horizon)., Going forward, the bank's cost base will grow only moderately, caused by inflation. The branch network enlargement will be basically completed by end-2008 and only organic expansion in selective regions is expected, the bank will be focused on process optimization and efficiency providing for existent network in 2009 while more active regional development is subject to more favorable operating environment. This assumptions are reflected in A score for efficiency with Neutral trend. Factor 9: Asset Quality Trend: Weakening

The bank's asset quality has been healthy historically, with problem loans (doubtful and loss category as per NBU classification) accounting for 1.9% of the gross loan book as of 31 December 2007 (2006: 1.5%). However, we expect the asset quality rations to be reported at damaged levels as at YE2008 and what is more important be deteriorated further in 2009 given macroeconomic slowdown in Ukraine while depreciation of local currency would harm quality of foreign currency denominated loans (over 50% of the bank's book), thus we maintain a weakening trend. Global Local Currency Deposit Rating (Joint Default Analysis) Moody's assigns global local currency deposit ratings of Ba1/NP to OTP. The ratings are supported not only by the bank's BCA of Ba2 but also by Moody's assessment of a very high probability of parental support in case of need from OTP Bank (Hungary) (which has a BCA of A2) and a low probability of systemic support (Ukraine's local currency deposit ceiling is Ba1). This results in one-notch uplift from its BCA of Ba2. Moody's assessment of a very high probability of parental support is based on (i) the management control of OTP by OTP Bank (Hungary), (ii) OTP's name association with OTP Bank's name, and (iii) the strong strategic fit of OTP within OTP Bank's Group (among other things, OTP is its parent's second largest subsidiary (out of eight) accounting for a material share of the parent's consolidated assets and loan book) and hence a low risk of OTP being disposed of by its parent. The low systemic support assessment reflects the bank's importance to the Ukrainian financial system based on its considerable market shares as a top ten Ukrainian bank. National Scale Rating Moody's rates OTP Aa1.ua on Ukraine's National Scale. Foreign Currency Deposit Rating The B2/NP foreign currency deposit ratings are constrained by the B2/NP foreign currency deposit ceiling for Ukraine (the ratings as well as the country ceiling are on review for possible downgrade). ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such external support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include bankspecific elements such as financial fundamentals, franchise value, and business and asset diversification. Although BFSRs exclude the external factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and relative fragility of the financial system, and the quality of banking regulation and supervision. Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and explicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors, but they do recognize the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of external elements of support into the bank's Baseline Credit Assessment. In calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the probability of systemic support for the bank in the event of a stress situation and the degree of dependence between the issuer rating and the Local Currency Deposit Ceiling. National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each

other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss expectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign currency debt rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.

Rating Factors OTP Bank (Ukraine)

Rating Factors [1]

A

B

C

D

E

Total Score

Trend

Qualitative Factors (70%)

E+

Factor: Franchise Value

D+

Neutral

D-

Neutral

Market Share and Sustainability

x

Geographical Diversification

x

Earnings Stability

x

Earnings Diversification [2] Factor: Risk Positioning Corporate Governance [2] - Ownership and Organizational Complexity - Key Man Risk - Insider and Related-Party Risks Controls and Risk Management

x

- Risk Management

x

- Controls

x x

Financial Reporting Transparency - Global Comparability - Frequency and Timeliness

x x

- Quality of Financial Information

x

Credit Risk Concentration

x

- Borrower Concentration

x

- Industry Concentration

x

Liquidity Management

x

Market Risk Appetite

x

Factor: Operating Environment

E+

Economic Stability

x

Integrity and Corruption

x

Legal System

x C

Financial Factors (30%) Factor: Profitability PPP % Avg RWA

5.28%

Net Income % Avg RWA

3.60%

Factor: Liquidity

A

Weakening

D-

Neutral

A

Weakening

A

Neutral

C

Weakening

39.61%

(Mkt funds-Liquid Assets) % Total Assets x

Liquidity Management Factor: Capital Adequacy Tier 1 ratio (%)

12.33%

Tangible Common Equity % RWA

12.33%

Factor: Efficiency Cost/income ratio

Neutral

40.17%

Factor: Asset Quality Problem Loans % Gross Loans

3.78%

Problem Loans % (Equity + LLR)

28.46%

Lowest Combined Score (9%)

D-

Economic Insolvency Override

Neutral

Aggregate Score

D

Assigned BFSR

D

[1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information [2] - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral

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