Condominiums Polish banking experience by Bank DnB NORD Polska S.A. Kyiv June 30, 2011

Condominiums’ Porfolio Clients Transactions –5900 credit clients –7000 credit transactions: 3700 thermo-modernization investment loans (with subsidy from Thermo Fund managed by state owned Bank Gospodarstwa Krajowego) 3300 regular investment loans Quality –0 defaults –0 refusals to pay out a subsidy Is this an opportunity or risk?

Condominiums Condominiums’ needs attractive short term deposits reputation and brand awareness of bank low costs of account maintenance and low interest „New” condominiums (buildings after 1990) accessibility to products and services via Internet „Old” condominiums (buildings up to 1990) cash service investment needs and credit consultancy: Condominiums Lending market Source: The Gdańsk Institute for Market Economics on the basis of Central Statistical Office; Infrastructure Ministry 2009 low quality and poor standard of properties built in years renovation or upgrade standard of property need Majority of investments based on bank loans Loans can be subsided by BGK* up to 20% of total credit limit *State owned Bank Gospodarstwa Krajowego

Condominiums Condominiums are part of the Small and Medium Enterprises segment. DnB NORD Polska is one of Top 3 Banks for Condominiums in Poland: Leader on the market with 10 years of experience Considerable market share 99% of portfolio – „Old” condominiums 26 specialised Condominium Relationship Managers and dedicated team in HQ Target group: Large condominiums (lower risk profile) Condominium acquisition via property managers Condominiums in DnB Nord Polska C Market: Housing Condominiums (lending: ) DnB NORD Polska market share: 26% in lending

Condominiums – major risks and mitigators Credit risk Operational risk –Too low flows in the dedicated renovation account –Risk connected with the correctness of condominium’s resolutions RISKS –The dedicated account in our Bank is a must –Flows are strictly monitored (increase of margin or termination in case of breach of this covenant) –Pre-defined templates required by the Bank –Resolution’s generator prepared in-house MITIGATORS

Condominiums – what we verify Documents Cash Flows –Verification of documents provided by a client, i.e. completeness, up-to-date, authenticity, formally in accordance with Bank’s requirements –Cash Flows via a dedicated bank account (called renovation account) especially taking into consideration collection rate Knock outs –Identification of absolute rejection criteria In-house made IT Tool supports process

Condominiums – what we verify Documents –Client’s application –Check list –Correctness of resolutions regarding: Approval of financial statements for previous year incl. a financial statement Performance approval of a condominium’s board for the previous year Approval of a financial forecast for the current/coming year Election/change of a board Renovation charge (amount)/m² Loan, incl.: –Source of repayment and collateral –Power of attorney to condominium’s account –Statement that there will be no other proxies to the account –Statement that the account will not be closed –Power of attorney to the Condominium’s Board to sign credit agreement and to establish collaterals

Condominiums – what we verify Cash Flows –Renovation charge given in a client’s application vs. formal resolution –Amount of cash collected on a renovation account –Collection rate given in a client’s application vs. real cash flows via a renovation account –Own share Knock outs General rule: meeting 1 rejection criteria ends the credit process –Any crucial condominium’s resolution contested at court –Any crucial resolution is conditional or in a variant mode –Execution proceedings towards condominium during 6 months before submitting an application –Condominium is registered in bad clients’ databases –Board member or proxy is using restricted (stolen) ID –Bad monitoring track record –Overdue liabilities towards the Bank –Client moved to Restructuring & Vindication Dept. –Default

Condominiums – credit worthiness analysis and disbursement Credit worthiness –Verification of real cash flows via renovation account (6 months) incl. inhabitants’ payments and other income (e.g. lease) –DSCR corrected by an average collection rate is calculated and it takes into account: Size of a building (the bigger building the lower DSCR is acceptable) Amount of renovation charge/m² (the higher charge the higher DSCR is required) Repayment schedule (equal principal instalments or annuity) Conclusion: small condominium with high renovation charges/m² must have bigger buffer –In case of thermo-modernization loans credit worthiness is calculated taking into consideration amount of a loan decreased by a future subsidy Disbursement –Proportional disbursement is allowed

Condominiums – collateral and monitoring Collateral Obligatory: –Power of attorney to a renovation account –Assignment of rights from insurance in case of: Own share is lower than 20% Building is made of pre-fabricated concrete blocks –Voluntary: Cash deposit Monitoring –Portfolio approach in case of small exposures –Quarterly/annual case-by-case check for significant exposures, i.e.: Due obligations towards bank Cash flows via account (turnover covenant) Annual resolutions delivery and verification

Condominiums – supporting IT Tools Excel based Work-flow tool (WEB-based)

Condominiums – lesson learned  very stable through the crisis  stabilizing bank’s profitability  effective if processed in line with lean methodology  very often self-financed portfolio  x-sale potential for universal or retail bank with large network  easy from risk perspective  no credit losses if done properly  no big investments needed BUT  market is relatively small and specialized so you have to be the first and the best  it is relation based business and word of mouth marketing

Condominiums Is this an opportunity?