1. Analysis of Sberbank’s proposal to issue new shares
by William F. Browder Managing Director, Hermitage Capital Management
January 2001

2. Background
On December 28, 2000 Andrei Kazmin CEO of Sberbank sought approval of the Board of Sberbank to increase capital by 36% in order to raise $130 mln;
The move came abruptly and unexpectedly;
The following presentation analyzes this proposal to determine the merit of the proposal. 2

3. Who owns Sberbank? 2

4. Proposed Capital Increase2

5. Why does Sberbank Management want to issue equity?
We don’t know for sure;
But they have given two explanations:
Because there are shares already authorized by shareholders approval in 1997;
To improve Capital Adequacy. 2

6. Do their arguments make sense?
NO:
The share price way too low to issue shares without harming investors;
The proposed new issue does not substantially improve capital adequacy;
..as a result shareholders could face the same choice shortly (6-8 months);
If improving Capital Adequacy is the goal, there are more effective means of doing this. 2

7. Sberbank share price
The share price is way too low to issue shares and much lower than when the discussion was made to sell shares
The first principal of Corporate Finance is to sell new shares when the price is high 2

8. Sberbank: Share Price
Sberbank shares are trading at a huge (74%) discount to the Bank’s Book Value 2

9. Sberbank: Share Price
It is rare for bank to trade at such low values relative to its capital
P/B 2

10. Sberbank: Share Price
It is Unheard of for Banks to issue stock below book value, unless a bank is going though some sort of bankruptcy procedure 2

11. Capital Adequacy
Sberbank’s Capital ratios were tight early in the year, but are improving with better profitability 2

12. Capital Adequacy
Surplus is about $100 mln 2

13. Capital Adequacy
If Capital Adequacy Ratio is the key issue, there are a number of options for improving it 2

14. Capital Adequacy: 1. Share Issuance
Share Issue at a current market price does not change dramatically the capital adequacy ratio (H1)
Issuance Shares dilutes equity with only marginal effect on Capital Adequacy
10.7% -> 11.7% 2

15. Capital Adequacy: 2. Revalue unrealized assets
Realizing Market Value of fixed assets can add $494 to the capital 2

16. Capital Adequacy: 2. Revalue unrealized assets
Revalue unrealized assets can result in much stronger impact on Capital Adequacy
10.7% -> 12.5% 2

17. Capital Adequacy: 3. Improving Profitability
Possible Actions
Reduce headquarter by 10% => $66 m; 2

18. Capital Adequacy: 3. Improving Profitability
2000 Net Profit _____________
Cost Savings Low estim
Cost
Change in Capital at year 2001 X%
Improving Capital Adequacy from 10.7% Y% 2

19. Capital Adequacy: 4. Not distributing dividends
Dividend Policy
If Sberbank does not pay dividends in 2001, the capitalization will increase by approx. $30 mln 2

20. Capital Adequacy: 5. Sell Risky Loans2

21. Capital Adequacy: 5. Sell Risky Loans
Sberbank could increase Capital Adequacy by:
Realizing 15% of Risky Loans can result in 11% increase of Capital Adequacy 2

22. Capital Adequacy - Summary2

23. Capital Adequacy - Summary
Issuing New Shares is a very expensive way to provide only a small increase in Capital;
Revaluing Assets and cutting Costs are much better ways to improve capital adequacy without diluting shareholders. 2

24. Summary - Wider Implications
1) There is an oligarch “waiting in the wings” to buy the major part of new issue and control a crucial and undervalued economic asset;
2) The Management is too “soviet” and does not understand the most basic principals of Corporate finance. 2

25. Who made this decision?
Unanimous decision 2

26. Sberbank: Share Issuance
How long does it take to breach capital adequacy ratio again?
Will shareholders face the same problem in 6-8 month? 2

27. Sberbank: Loans Portfolio
Analysis of Loan Book 2

28. Sberbank: Retaining Profit
The situation can be resolved by retaining future
$280 mln in profit (7.9 bln Rbl)
Current Future
Capital retaining 7.9 Bln
H1 = = = ============> = 12.8
Risk Adjusted Assets 2

29. Sberbank: Central Bank regulations
Sberbank faced problems with capital adequacy ratio (H1) as a result of:
Central bank increased the low limit for capital adequacy ratio from 8% to 10%;
Algorithm of calculations of Risk Adjusted Assets (RAA) was significantly changed which resulted in 71% growth of Sberbank RAA.
During the same year 2000 Sberbank breached the required limit of Maximum exposure ratio (25%) by three times and received special permission from Central Bank.
Whether it will be cheaper way for Central Bank to issue the same type permission for capital adequacy ratio rather than put additional financing to sustain its position in Sberbank? 2

30. Disclaimer
This material is for information purposes only and is not an invitation to subscribe for units or shares in the Hermitage Fund. Subscriptions will only be received and units or shares issued on the basis of the current prospectus for the Fund, and prospective investors should carefully consider the risk warnings and disclosures for the Fund set out therein. Investors should also consider any other factors that may be relevant to their circumstances, including tax considerations, before making an investment.
The information is based on data obtained from publicly available sources, which have not been verified by Hermitage Capital Management Limited, or any of its respective associates or affiliates. As a result of the difficulty in obtaining reliable data in Russia, we do not represent this information to be accurate and complete and we do not accept any responsibility for the reasonableness of any conclusions based upon such information.
Past performance is not necessarily indicative of the likely future performance of an investment. The price of units or shares can go down as well as up and may be affected by changes in rates of exchange.
The Hermitage Fund has been authorised by the Guernsey Financial Services Commission as a Class B Collective Investment Scheme under the Protection of Investors (Bailiwick of Guernsey) Law 1987 and the Collective Investment Schemes (Class B) Rules It must be understood that in giving this authorisation the Commission does not vouch for the financial soundness or correctness of any of the statements made or opinions expressed with regard to The Hermitage Fund. Investors in The Hermitage Fund are not eligible for the payment of any compensation under the Collective Investment Schemes (Compensation of Investors) Rules 1998 made under the Law.