bank center credit, initiation of coverage, 10th of september 2009

Banks Kazakhstan

September 10, 2009

Bank CenterCredit

A Chance to Leapfrog with Kookmin's Support

Askar Turganbayev +7(727) 244-6984 [email protected]

Market data

• We commence coverage of BCC with a ‘Buy’ and a price target of

KZT 589 per share. • Strategic partnership with Kookmin Bank (KB), and later with IFC, is

expected to give BCC a new lease on life by strengthening its equity base and reducing the cost of funds at a critical time. We expect this long-term partnership to play a major role in streamlining the bank’s operations and lifting the standards of its services which we think will percolate through the financials for years to come.

• Historically, the retail and SME segments have been BCC’s fortes.

We expect BCC to expand to other segments by capitalizing on recent demise of BTA and Alliance Bank. We forecast ROE to rise to double digit in 2011 and grow its lending book at CAGR 12% during EY08A-FY12E.

• We forecast BCC’s NPLs to peak at 12.5% by end 2009 (excluding

restructured loans) and subside thereafter. Despite a 40% increase in provisioning charges we expect BCC to stay profitable in 2009.

• BCC currently trades at 2009E P/B of 0.7 and we believe that much of

the downside risks have already been priced in while the current discounts of 18% to Kazakh peers and 33% to Russian peers seem unjustified.

Profitability Value KZT mn Net profit EPS RoAE RoAA P/E* P/Op** BVPS P/B*

2008 5,855 44.5 6.3% 0.6% 10.2 1.9 795 0.62009E 1,569 7.8 1.3% 0.2% 58.7 3.1 675 0.72010E 12,437 61.6 8.7% 1.1% 7.4 3.2 736 0.62011E 17,624 87.2 11.3% 1.4% 5.2 3.5 806 0.6

* Valuations based on share price of KZT 456 on 09/09/09. ** Here operating profit is pre-provision pre-tax profit

12m Target price, Tenge 589 Current price*, Tenge 456 Mkt Cap, $ mn 437 4-year CAGR EPS (2008-12E) 20% Free Float <10% Ticker CCBN KZ Common shares in issue, mn 145 Pref shares in issue, mn 0 52 week low, Tenge 200 52 week high, Tenge 1,410 Tier 1 ratio (BIS), 1H09 13.7% Total CAR (BIS), 1H09 22.6%

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KKB Halyk BCC

* Close price on 09/09/09 on KASE Source: Bloomberg, Halyk Finance

Halyk Finance 1

Bank CenterCredit September, 2009

Contents Investment Case

Snapshot of BCC 2

Valuation and Sensitivities Two Scenarios of Forthcoming Rights Offering 5 Our Preferred Valuation Method 7 Our Adjuvant Valuation Method 9

Challenges Asset Quality 12

Asset quality under IFRS and on consolidated basis 12 Asset quality under FMSA and on unconsolidated basis 13 Mortgages – Achilles’ heel of BCC 13

Provisioning Extremes – Three Stress Tests on BCC 16 FX Exposures 19

Strengths

Funding 20 Government Support 21 Profitability 22

Most recent 1H09 IFRS results and the conference call 22 IT Systems and Asset Gathering, KB to help 24

Synergetic Partnership with KB KB’s Triangular Strategy 25 Capital Injection 25

Competitive Position Halyk 27 KKB 28 General Banks Comparison 29

Forecasts Profitability in 2009 and 2010 32 Pro Forma Income Statement and Balance Sheet 34

Appendix Peer Group Data 35 KB’s and BCC’s ‘wide ranging and comprehensive strategy’ 36

Halyk Finance 2


Investment Case

Snapshot of BCC BCC is the fourth largest lender in Kazakhstan’s $100bn economy (end 2008) with total assets of $6.7bn (8.4% of market share) and loan book of $4.6bn (6.8% of market share) by end 7M09. KB Financial Group (KB), the largest bank in Korea by assets ($222.7bn, 1H09) currently holds 30.5% stake in BCC and plans to increase it to 40.1% by 1Q 2010. IFC, of the World Bank, plans to acquire 10% of BCC’s stake. If executed, KB and IFC jointly will hold the controlling stake. The uncertainty remains as to the extent of the dilution due to the rights offering. The current BCC’s story is about taking advantage of its relative funding competitiveness and expected synergies with its heavyweight Korean partner while BTA and Alliance, two large Kazakh banks mired in foreign debt restructuring, are rapidly loosing market share.

Figure 1: Shareholders structure, 1H09

Mr. Bayseitov,

36.4%

KB, 30.6%

Mr. Lee, 4.8%

BCC board members,

7.2%

Other minor shareh, 21.0%

Source: Company data

• Competitive Advantages. Strategic partnership with KB has given BCC a new lease on life by strengthening its equity base and reducing cost of funds at a critical time. BCC is expected to strive to leadership status in cost and risk management by taking advantage of KB’s IT platform recently put into operation. KB introduced private banking technology while the development of new credit card products should attract a relatively well-off clientele. Traditionally strong in the SME sector, BCC is likely to strive to strengthen its position in retail banking by taking on board KB’s extensive experience and superior IT technology.

• Funding is a clear advantage for BCC. We do not expect the international wholesale

funding will be accessible for Kazakh banks in the foreseeable future. Much will depend on the final outcome of foreign debt restructuring at BTA and Alliance.

…and to inject $120mn of fresh capital by 1Q10

KB and IFC jointly to take a controlling stake…

Halyk Finance 3


In December 2008 KB injected $140mn of fresh capital into BCC. By end 1Q 2010, KB and IFC together are expected to inject $120mn in additional capital amounting to 20% post-emission stake. In addition IFC will provide $85mn in subordinated debt that will qualify as Tier 2 capital. With 8.4% of system’s assets, BCC enjoys 14.7% market share of retail deposits (non-consolidated data end 7M09). During 7M09 BCC deposit base expanded by 25.4% and its retail deposits grew by 22.6% (cf. 10.6% for the system).

• BCC is KB’s gateway to CIS. In 2007 KB’s CEO announced a masterplan of KB’s oversees expansion. According the plan KB is planning to set up “KB Triangle network” by acquiring key banking organizations in CIS, China and South East Asia. Before approaching BCC with an M&A offer, KB set up a representative office in Almaty whose main task was to identify good performing bank with good prospects for an ultimate M&A move. BCC became KB’s first acquisition in CIS. BCC has a Moscow branch and in late April opened a representative office in Kiev, Ukraine. Although we do not expect any further acquisitions in CIS in the near term, there may be more to come once KB’s investment in BCC pays back.

• Signs of Stabilization. According to the statistical agency, Kazakh GDP contraction has slowed down to -2.3% YoY in 1H09. The Ministry of Economy estimates GDP may start growing as early as in 3Q09. The decline in industrial production slowed to 2.7% YoY in 1H09, but the pace of the decline in retail turnover continued to accelerate. With increasing optimism about global economic recovery and rising commodity prices, Kazakhstan’s mining sector is poised to rebound in 2H09 while the rest of the economy may need more time to regroup.

• BCC to stay profitable in 2009. Despite hefty ($167mn) provisions recognized in 1H09

($69mn in 1H08), BCC managed to record profit of $69mn in 1H09 (up c. 29% YoY), chiefly due to profit recognized from the repurchase of own bonds (consolidated data). Recent 7M09 YtD non-consolidated data suggests a $14.7mn net income whilst its major competitors are running losses. We forecast BCC to show $10mn in its bottom line by end 2009 and 40% increase YoY in provision charges via profit and loss. With $200mn of fresh capital, the bank’s Basel T1 ratio is likely to end 2009 around 13%. Our $10mn net income forecast for BCC in 2009 is below management expectations that are closer to $30mn. Our conservatism reflects the risk of a surprise disappointment stemming from swaps revaluation or trading losses.

• Second wave of KZT devaluation is highly unlikely. Strong commodity prices and reflux in

FDI flows provide adequate support to the balance of payments. Government refusal to bail out BTA and Alliance strengthen its net foreign asset position. As a result, sovereign CDS have come down. Improved prospects of global recovery (3% growth in 2010 according to the IMF) are likely to help the all commodity producing countries, Kazakhstan included. The government remains firmly committed to the peg at 150 KZT/USD +/-3% in the near future, while entertaining proposals for more flexible regime in the midterm. With oil price steadily above $65-70 and $43.1bn (c.43% of GDP) in foreign exchange reserves and the National Oil Fund (as of 1 September), we side with the markets pricing one year Tenge forward at 165 KZT/USD.

Growth potential in SME & Retail

BCC to show at least $10mn in its bottom line in 2009

Halyk Finance 4


• Government Support for the Economy. In November 2008 the government published a crisis management plan with a potential value of $18bn ($15bn after devaluation)_over 2009-10. This compares with Kazakhstan’s GDP of around $100bn. It included grants and loans from the National Oil Fund (SWF) via SWF (SK), lower tax rates, and lower compulsory deposits at the National Bank (NBK). Unlike most of its major peers, BCC did not participate in Government’s recapitalization program. Nonetheless, it actively participates in the other government programs to prop up the economy. The bank secured $62mn to credit SME and $20mn to refinance mortgage loans.

• Asset side. With 39% of its loans in real estate, construction and mortgages (RECM), BCC

is deeply exposed to the most vulnerable sectors of Kazakhstan’s economy. These sectors have been hit hardest by the combination of restricted bank lending, a massive reduction in demand and a concomitant collapse in real estate prices, lifting the bank’s NPLs (90d overdue) to 5% in 1Q09, a 1.6 percentage point increase YtD (consolidated data). Although concerned by this continuing deterioration, and by the level of restructured loans (10% of the loan book) on the balance sheet, which are not included in NPLs, BCC was able to cope. According to the CEO, a self-administered stress test revealed that a rise in LLR to 18-19% of gross loans will not require additional capital. The bank expects LLR to reach 12.5-13% by end 2009. We forecast NPLs to peak at 12.5% by end 2009 and subside thereafter due to increased lending and economy rebounding in 2H10.

• Assumptions. In our base case we forecast BCC to shrink its loan book by 10% in 2009 and

grow it by 15% in 2010 due economic recovery and rising demand for credit; a moderate shrinkage of the net interest margin, in 2009 due to increased share of lower yield IEA and the NPL increase, and in 2010 as lending competition picks up; provision charge/loans of 5% in 2009 and 3% in 2010; net write-offs of 30% in 2009 and 31% in 2010 against year end provisions; and even in 2010 we do not forecast any significant write-backs or releases due to the legal, procedural and practical uncertainties involved in this, the first ‘cycle’ of its kind for the Kazakh banking system. Our bottom line forecasts show 73% decline in 2009, followed by a sharp sevenfold increase in 2010 due to falling provisions.

NPLs to peak at 12.5% by end 09

Halyk Finance 5


Valuation and Sensitivities Two Scenarios of Forthcoming Rights Offering Before we present the valuation part of our story we would like to present a backdrop to KB’s increasing its stake at BCC and with certain assumptions to come up with the reasonable estimate of the number of shares outstanding by end 2009.

The Chronology After extended selection process of an acquisition target, in March 2008 KB reached an agreement with BCC to acquire 30% stake with a possibility of increasing it to 50.1% with 2.5 years. Although the details of the agreement were withheld, the following subsequently came to a light:

• As the result of the ingenious ‘open’ action the initial 23% stake changed hands in which Mr. Bayseitov sold part of its stake to KB for c. $0.5bn (c.3.8x of book value). KB also secured two seats in BCC’s board and appointed their representatives on key positions within the bank.

• In December 2008 KB further increased its stake to 30.6% by acquiring c. 15mn newly issued shares for $140mn.

• Late July, KB announced its plan to bring its stake at BCC to 40.1% by end 2009. IFC (a member of World Bank) also announced its plan to acquire 10% of BCC and if executed the deal will give a joint controlling 50.1% to KB and IFC. The key question is whether there will stake transfer or rights offering. In the former case we do not expect KB to be as generous as it was when acquiring the initial 30.5% of BCC and think KB began re-negotiation with BCC to reduce the acquisition price for remaining shares. But we believe the latter case is most likely to materialize because of BCC’s CEO statement.

Early in August, BCC’s CEO said that Kookmin along with IFC are to inject $120mn of fresh capital via acquiring newly issued common and convertible preference1 shares which suggests $60mn for 10% stake. BCC’s IR manager also guided that KB will increase its stake via acquiring newly issued and secondary shares though withholding the proportion. Below, we present two scenarios which we think are most plausible at this juncture.

1 Preference shares are actually considered equity as they are entitled to an almost identical share of KKB’s profits. So in calculating EPS and BVPS we also take them into account. BCC has not issued preference shares to date.

KB already injected $140mn and will inject $120mn by 1Q10

Halyk Finance 6


1. Our central scenario assumes that no existing shareholders but KB will participate in rights offering and the new issue will be fully subscribed to by KB and IFC. KB will also acquire secondary shares from the current major shareholder, Table 1. BCC’s equity to increase by $200mn (core capital by $120) by end 2009 as a result of KB increasing its stake from the current 30.5% to 40.1% and IFC’s acquisition of another 10% stake.

Table 1: Shareholders structure

Mr. Bayseitov,

24.0%

KB, 40.1%

IFC, 10.0%

Management, 11.7%

Minors, 14.2%

Source: HF estimates

BCC’s shares currently trade at around 0.7x its book value (as of August 1st, non-consolidated data shows that BCC’s book equity value stands at KZT 89.8bn ($595 mn) whereas its current market value is $437mn, assuming KZT 456 per ordinary share with 145 mn shares outstanding). We think that rights offering will be at a price higher than current market price, perhaps at least at around 1x of BCC’s current book value (or KZT 620 per share) which would likely deter most of minor shareholders from participating in rights offering. Existing major shareholder and BCC’s board members are unlikely to participate either as the original option which gives the right to KB to acquire BCC’s 51% within 2.5 years is likely to contain provision that secures KB smooth entrance. According to our estimates, after rights offering, the number of both common and preference shares will increase by c.37mn and total c202mn. As the result, Mr. Bayseitov’s stake will be diluted and fall from current 36.4% to 24% though he retains a blocking minority.

Stake, % # of Shares, mn Pre Post Pre Post Mr. Bayseitov 36.4 24.0 53 48KB 30.6 40.1 44 81IFC 10.0 0 20Management 12.0 11.7 17 24Minors 21.0 14.2 30 29

Total 100.0 100.0 145 202

Only KB and IFC to participate in rights offering under the central scenario

Halyk Finance 7


2. In our sideline scenario we assumes that all minor shareholders over whom Mr. Bayseitov does not have direct influence will participate in rights offering in anticipation of expected synergies between KB and BCC. We also think it is reasonable to assume that Mr. Bayseitov and his team (CEO and the other board members) would wish to retain a blocking stake.

Table 2. Shareholders structure under sideline scenario

Mr. Bayseitov,

21.7%

KB, 40.1%

IFC, 10.0%

Management, 7.2%

Minors, 21.0%

Source: HF estimates

According to our estimates, after rights offering, the number of both common and preference shares will increase by 98mn and total c. 243mn. As the result, Mr. Bayseitov’s stake will be diluted and fall from current 36.4% to 21.7% but along with the other board members they would retain a joint blocking 28.9%.

Our Preferred Valuation Method Given the inherent uncertainty in valuing EM companies, we find it germane to come up with an explicit value range instead of a point estimate. For that purpose we decided to employ comparables based valuation as our primary valuation technique and to triangulate with DDM (Dividend Discount Model) and FCFE (Free Cash Flow to Equity) with an explicit forecast for up 2013. All computations are based on IAS 39 accounts. Until recently most of the EM bank stocks have rallied as global sentiment towards recovery of global economy improves and risk appetite increases. Relative valuation is an important indicator of market momentum and we think it would be more useful for investors trying to choose amongst ‘oversold’ emerging market banks. Compared to eps, bvps is only marginally impacted by massive provision flows via profit and loss and one off gains (e.g. debt buybacks) which we currently observe and therefore bvps provides a better benchmark. More so, Bloomberg sourced peer group consensus data suggests that major Russian banks are likely to end 2009 with the bottom line in red and some even in 2010, please see peer group table in Appendix.

Stake, % # of Shares, mn Pre Post Pre Post Mr. Bayseitov 36.4 21.7 53 53KB 30.6 40.1 44 97IFC 10.0 0 24Management 12.0 7.2 17 17Minors 21.0 21.0 30 51

Total 100.0 100.0 145 243

Relative valuation is an important indicator of market momentum…

… and is based on P/B multiple

Halyk Finance 8


Under the base case scenario where we see NPLs peaking at 12.5%, our valuation model suggests BCC is likely to end 2009 with a bvps of around 675 KZT (fully accounting for $200mn fresh capital and estimated dilution). If economic recovery is well underway by 2010, given BCC’s funding advantage and underlying profitability this book value is likely to be an undemanding valuation at that stage. Table 15 (see Appendix), contains the short-listed peer EM banks that are exposed to more or less the same set of macro variables as BCC is. All banks operate in the countries dependent on oil revenues and some of them also experienced real estate boom and bust. Using Bloomberg-sourced consensus we took the weighted average of the P/B ratio estimates for 2009 and 2010 and applied a discount of 30%.

Table 3: Target price derivation details Discount applied to EM peers 30%Discounted EM P/B 0.9Equity end 2009, HF estimate, $ mn 904Implied market cap, $ mn 788Number of common shares, mn 202Number of preferred shares, mn Target price, $ 3.9Target price, KZT 589

Source: Halyk Finance estimates We put more weight (70%) on banks from Kazakhstan2, Russia and UAE because of a similar spillover from oil prices to non-oil economy (chiefly RECM) caused RE prices to soar and subsequently collapse though with a different pace and magnitude. Of course applying weights is inherently subjective so we provide a sensitivity analysis to the weights and discounts attached (LHS table) and to the number of shares outstanding (RHS table).

Table 4: Sensitivity Analysis # of shares, mn

Source: Halyk Finance estimates

2 NB excluding BCC itself and considering KKB and Halyk as the closest comparable peers.

Discount to EM peers 589 0% 10% 20% 30% 40% Distant 0% 721 649 577 505 433

peers' 10% 761 685 609 533 457weights 20% 801 721 641 561 481 30% 841 757 673 589 504 40% 881 793 705 617 528

KZT 145 202 243589 820 589 489

Peer group table doesn’t run the gamut of all EM banks…

…but mindful selection of peers and attaching weights partially compensates

Halyk Finance 9


Our discount figure to EM peers is factored into the following:

• Kazakhstan’s country CDS is the highest among peers though it is tightening as investors’ sentiment towards global recovery improves and risk appetite increases. We apply 15% discount. Below, 5 year sovereign CDS data table as of 10th of July

Table 5: 5-year country CDS as 09/09/09

Source: Bloomberg

• High exposure to RECM sector, which stands at 39% of the total loan book at end 1Q09 amidst falling real estate prices.

• There is a moderate risk of dilution by more than we currently envisage should all the minorities subscribe to rights offering and current major shareholder insist on securing a blocking stake at BCC. Collectively, for these three bulleted items we apply 10% discount.

• Reduced free float, estimated to be less than 10%. We apply 5% discount.

Our Adjuvant Valuation Method

Although our primary valuation approach may well capture market momentum, we believe that in the next few quarters country-specific factors are likely to come increasingly into play alongside global concerns. Specifically, the market will respond to the outlook for the commodity prices, for government resources (fx reserves and SWF) as well as the timing of the start of the hydrocarbons flow from the super-giant oil field Kashagan. We expect real hydrocarbon growth to ignite the growth in Kazakhstan’s non-oil sector of economy and the market will gradually zone in on the long term growth potential of the Kazakh banking sector. Therefore we see some value in FCFE and DDM-based absolute valuations which better reflect the fundamentals and the long term growth of the bank.

Kazakhstan 345 Russia 276 Saudi Arabia 85 Qatar 87 UAE 137

We see an increasing value in absolute valuations…

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Halyk Finance 10


Critical Inputs to Both Models We fed into FCFE and DDM the following inputs:

• We use CAPM to arrive at cost of equity (COE) using as a risk free rate the sum of effective yield on Kazakh government bonds with maturity of more than 5 years and 5-year country CDS. We set beta at 1.1 to reflect CCBN KZ’s low free float and use equity risk premium of 7%.

Table 6: BCC’s Cost of Equity Estimate

COE derivation Expected Rate of Return 18.4% Risk Free Rate 10.7% Equity Risk Premium 7% Beta 1.1 Terminal Growth Rate 5%

Source: Halyk Finance

• To derive terminal values under both methods, we employed WEV (Warranted Equity Valuation) method which determines target P/B ratio using long-term attributable ROE, long-term cost of equity and long-term growth. We also ran the sensitivity test by flexing LT COE and LT growth to gauge the impact on TP, Tables 7-8.

• Under both approaches we made explicit forecasts of net income and free cash flows up until 2013 with target tier 1 (Equity/RWA) ratio of 10%.

Dividend Discount Model (DDM) Although historically, BCC has never paid dividends, in our base case we forecast BCC to commence paying them in 2011 with an initial payout of 30% and growing at CAGR 17.2% in the next 4 years (FY12E-FY16E). Before 2011 we however forecast full plowback to sustain BCC’s growth at a critical time.

Table 7. TP Sensitivity Analysis (LHS) and TP Derivation Details (RHS)

Total Value Per Share Today - KZT 479.6 PV of Dividends 102.05 PV of Terminal value 377.55 Dividends to 2016 21% Terminal Value's contribution 79% 12m Forward Fair Value 567.8 Earnings visibility discount 15.0% Adjusted Fair Value 482.6 Upside/Downside to 12m Fair Value 5.8%


LT Growth Rate 482.6 4.0% 4.5% 5.0% 5.5% 6.0% COE 16% 527.1 530.7 534.6 538.9 543.7 17% 501.7 504.0 506.4 509.2 512.0 18% 479.9 481.2 482.6 484.2 485.8 19% 461.0 461.6 462.2 462.8 463.6

…however they are very sensitive to the assumptions of long-term growth and COE

Halyk Finance 11


WEV based terminal value is derived from target P/B of 1.2 and required BVPS in FY16E which is in turn set as minimum 10% of RWA by end FY16E. Terminal value’s contribution to today’s estimated fair value of share is 78% so it is not surprising that our DDM-based TP is so sensitive to LT growth rate. Our DDM-based valuation suggests KZT 483 per share under the base case.

Free Cash Flow to Equity (FCFE) We have made an explicit forecast of FCF available to shareholders until 2013 which is defined as the difference between net income less required capital retention with marginal capital charge of 10% (applicable to increase in RWA).

Table 8. TP Sensitivity Analysis (LHS) and TP Derivation Details (RHS)


WEV based terminal value is derived from target P/B of 1.2 and required BVPS in FY16E which in turn is set as minimum 10% of RWA by end FY16E. Terminal value’s contribution to today’s estimated fair value of share is 58% which suggests that the target price derived is rather WEV based. Using this approach we arrived at KZT 496 per share which is only 3.7% higher than under DDM approach.

LT Growth Rate 495.8 4.0% 4.5% 5.0% 5.5% 6.0% COE 16% 540.3 543.9 547.8 552.1 556.8 17% 514.8 517.1 519.6 522.3 525.3 18% 493.1 494.4 495.8 497.3 499.0 19% 474.2 474.8 475.4 476.0 476.8

Total Value Per Share Today - KZT 492.7 Current surplus capital 76.47 PV of FCF to shareholders 132 PV of Terminal value 284 FCF to 2016 42% Terminal Value's contribution 58% 12m Forward Fair Value 583.3 Earnings visibility discount 15.0% Adjusted Fair Value 495.8 Upside/Downside to 12m Fair Value 8.7%

DDM and FCFE suggest TP range of KZT 483-496 per share

Halyk Finance 12


Challenges

Asset Quality Asset Quality under IFRS and on consolidated basis Latest (1H09) consolidated data for BCC showed NPL of 5.3%, 190 bp increase from EY08 and we forecast it to peak at 12.5% by end 09 and subside thereafter due to economic rebound that we expect in 2010 and increased lending. BCC is adequately provisioned with c.2x NPL coverage ratio or 10% of loan book. Figure 2: Loan impairment by segment (LHS) and NPL (IFRS, RHS)

0.5%

2.3%

3.3%

6.6%

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1.9%

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Privisions/Gross loans NPL/Gross loans

Source: company data The highest loan delinquencies are observed in SME and retail segments but this of no surprise as 40% and 36% of BCC’s loan book are in these segments respectively. On consolidated basis, in reporting the asset quality data BCC uses standard 90 days overdue loans whereas some of its peers use more conservative loan impairment metrics (e.g. Halyk reports 30 days and KKB uses 30 days for corporates (60 days for retail)) which renders direct cross bank comparison less appropriate. In modeling BCC, we used a standard definition of NPLs, that is, loans more than 90 days overdue and 100% NPL coverage going forward. These NPL numbers are based on consolidated data reported by the company quarterly with a 2-3 month lag on a quarterly basis. More current data is contained in an alternative measure of NPLs, which is a sum of loans classified as ‘Doubtful 5’ (or, D5) plus those defined as ‘Loss’, according to the official classification, to which are added actual provisions made on pooled loans (ie those which are too small to classify individually, so the bank’s own provisions against them are used as an estimate of ‘at risk’ loans). These numbers are reported monthly, with 3 weeks delay, by a regulator (FMSA). The definition of D5 includes loans to borrowers in difficult financial circumstances. According to the regulator, this makes D5+Loss a leading indicator of NPLs.

Higher delinquencies stem from SME and Retail…

…but 76% of loans are in these segments

Halyk Finance 13


Asset Quality under FMSA and on unconsolidated basis Hence, we are concerned with the rise of D5+Loss, which, as a ratio to total loans, grew to 11.8% at August 1, 2009, up 5.4 percentage points YtD. BCC loans went sour when real estate prices collapsed as the flow of international funding to the Kazakh banking sector was stemmed. 39% of total loans at BCC are in real estate, construction and mortgages (RECM) that are the major drivers of NPL growth in the corporate and SME segment. We expect the funding difficulties experienced by Kazakh banks to continue to starve the real sector leading to further asset deterioration and are assuming that 20-30% of loans of these types and issued during 2006-07 are likely to turn bad at some point. 06-7 issuance accounts for c.70% of outstandings in these segments, translating into 5.3-8.2 percentage points of NPLs.

Figure 3: NPL (FMSA)*, LHS and 90-days overdue loans on the RHS

11.9%

8.9% 8.9%

6.4%4.4%

8.9%

16.6%

10.4%11.7%

5.4%

12.1%13.0%

17.1%

11.1%

7.4%

14.6%

8.1%

10.2%8.6%

26.0%

7.9%

17.2%

25.9%

15.6%

11.8%

7.6% 7.3%

17.5%

KKB Halyk ATF BCC Kaspi Nurbank Sector exBTA,ALB

EY-08 1Q-09 1H-09 7M-09

6.4% 5.8%

2.5%

5.4%6.3%

8.7% 9.2%

6.9%

1.3%

7.4%

14.7%

4.7%

3.0%

15.7%

1.0%

6.8%5.4%

4.4%

11.0%

7.4%

12.1%

8.8%

11.6%

3.1%

7.3%

3.9%

12.0%

9.9%

KKB Halyk ATF BCC Kaspi Nurbank Sector exBTA,ALBEY-08 1Q-09 1H-09 7M-09

Source: FMSA, Company data, Halyk Finance estimates *For certain companies HF’s NPL estimate is different than that provided by FMSA

Tentative stabilization of asset quality in July Although we observed continued worsening of asset quality, the pace of deterioration slowed and certain banks’ NPL (FMSA) even reversed (Fig. 3). Of the three banks that did so, ATF and BCC have actually shrunk their loan books by 0.7% and 0.4%, but shrank the stock of NPL even more. For BCC, the fall in 90day overdues is likely to have been achieved through maturity extension. For ATF, a 8.9% decline in the stock of NPL (FMSA) could be attributed to 16.2% MoM decline in the stock of D5 category loans. Although ATF’s stock of Loss category loans and stock of provisions for homogenous loans added 14.7% and 12% respectively, we believe the bulk of D5 loans migrated to lower (better) categories thereby allowing to derecognize certain amount of provisions (Fig.3). ATF’s marginal asset quality improvement was supported by a slight decrease in 90day overdue loans.

Mortgages - Achilles’ heel of BCC

Achilles’ heel of BCC is in mortgage loans which soared during 2H06-EY07 (more than 100% increase, Fig. 5) when real estate prices reached their peak and subsequently collapsed by

Real estate, construction and mortgage loans (RECM) are major drivers of NPL

In July some bank, including BCC showed first signs of asset quality stabilization

Halyk Finance 14


more than 33% in the primary market (Fig. 5) and even more drastically in the secondary market, down c. 49% (Fig. 5, RHS) from that peak.

Figure 4: Stock of mortgage loans, LHS and rental rates for housing, RHS

5,060

26,871

69,439

137,241

127,137-7%

98%

158%

431%

2004 2005 2006 2007 2008

Rental rates for housing

1,700

1,750

1,800

1,850

1,900

1,950

2,000

2,050

2,100

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09

KZT/sq.m.

AstanaAlmaty

During 2004-2009, BCC’s mortgage loans grew at CAGR 98% and currently (1H09) its LTV equals 76%, up 11% from EY07, Fig. 6. We estimate that majority of mortgage loans originated during 2H06-1H08 is already in negative equity territory. In addition BCC’s 98% loans are secured but are collateralized predominantly by real estate though with safer LTV level. Although we see tentative signs of real estate price stabilization (especially in capital Astana, Fig. 5), we still see a further c. 10-15% downside in RE prices by 2H10. Stricter lending policy, decreasing wages and falling rental rates (Fig. 4, RHS) weigh on property prices. Arguably, at least in Almaty, financial sector workers are deemed to be relatively well paid. However, early September, in their 1H09 financial results major employers (e.g. Halyk, KKB) announced substantial cost cutting measures including slashing wages by 20%, staff and branch network optimization.

Figure 5: Real estate prices in primary market (LHS) and secondary market (RHS)

150

200

250

300

350

400

Jan-0

7

Mar-07

May-07

Jul-0

7

Sep-07

Nov-07

Jan-0

8

Mar-08

May-08

Jul-0

8

Sep-08

Nov-08

Jan-0

9

Mar-09

May-09

Jul-0

9

AstanaAlmaty

150

200

250

300

350

400

450

Jan-0

7

Mar-07

May-07

Jul-0

7

Sep-07

Nov-07

Jan-0

8

Mar-08

May-08

Jul-0

8

Sep-08

Nov-08

Jan-0

9

Mar-09

May-09

Jul-0

9

AstanaAlmaty

Sharp fall in real estate prices pushed hefty share of mortgages into negative equity

Halyk Finance 15


Figure 6: LTV evolution (LHS) and share of RECM in loan book (RHS)

76.0%

69.0%

60.0%

76.0%74.0%65.0%

61.0% 65.0%69.0%

56.0% 60.0%57.0%

2007 1H 2008 2008 1H2009

Mortgages Retail Consumer

Source: Company data, Stat agency, Halyk Finance estimates

In an attempt to alleviate woes in a property market government launched several programs (described in the next section) in which BCC actively takes part, especially in a mortgage refinancing program. Some banks (e.g. KKB) went even further in aiding those borrowers not eligible for refinancing under government program by initiating their own refinancing programs. We think BCC may well follow the suit.

Loan Portfolio Structure Assets increased marginally by c.4% YtD in KZT terms but most likely fell in USD terms assuming 57% of loans are FX denominated. Figures 7-8 below show BCC’s loan portfolio structure at 1H09, showing a high concentration of loans in RECM (in fact one of the highest among its peers).

Figure 7: Loan portfolio by sector, EY2006 (LHS) and 1H09 (RHS)

Retail35%

Trade16%

RE&C17%

Other32%

Retail36%

Trade19%

RE&C19%

Other26%

2005 2006 2007 2008 1H09 Loans 1,622 3,305 5,201 4,977 4,878 Mortgage, % of Loans 13% 17% 22% 20% 18% Construction 171 424 795 807 691 Residential, % of Loans 7% 7% 7% 7% 6% Industrial, % of Loans 4% 6% 8% 8% 8%

Halyk Finance 16


Figure 8: Loans to individuals by type, EY2006 (LHS) and 1H09 (RHS)

Other53%

Mortgage47%

Mortgage50%

Other50%

Source: Consolidated company data *Here RE&C stands for real estate and construction, including hotel business sector

In Fig. 7-8 we see no substantial changes in loan portfolio structure between YE2006 and 1H2009. However we expect that in the medium term the share of corporate loans will rise, while the share of RECM will decline. We expect BCC to cherry-pick its borrowers and in the current environment to maintain a cautious stance towards lending to the new (‘untested’) customers, we forecast BCC’s loan book to shrink by 10% in 2009 YoY.

Provisioning extremes Internally Conducted Stress Test In August in his interview to Reuters agency BCC’s CEO said that by end 2009 the bank expects to pile up to 12.5-13% of provisions and in the extreme case the bank may withstand up to 17-18%. He also added that if to take into account the additional $200mn of fresh capital coming from KB and IFC, the bank may stack up to 18-19%. Although he did not mention the basis of presentation (i.e. consolidated data or not, statutory CARs or Basel), we understand the figures were based on non-consolidated data and using statutory CARs as he was speaking in the context of FMSA-compliant provisioning data. FMSA Conducted Stress Test In July the FMSA conducted a stress test which showed that Kazakhstani banking system may pile up to 21% (under KAS, excluding BTA and Alliance) of provisions which now (as of August 1st) stand at 16.4% (excluding BTA and Alliance).

All three stress tests suggest that Halyk, BCC and KKB have adequate safety margins in provisioning…

Halyk Finance 17


Table 9: Loan Loss Reserves (LLR) as % of Gross Loan Book

Source: Consolidated company data, FMSA, Halyk Finance

The table above shows that among the peer banks, KKB has the highest threshold of provisions, whereas BCC has the lowest, but the current (1 Aug) provisioning levels and NPLs are commensurate. According to FMSA, exceeding these thresholds would result in k1 ratio (statutory core capital adequacy ratio) fall below the minimum level of 6% as mandated by the FMSA. Halyk Finance Conducted Stress Test We decided to cast our net wider to better gauge the provisioning level extremes in peer banks by conducting our own stress test which was run on the most recently available (1H09) consolidated IFRS data. In the test we estimated provisioning level thresholds exceeding which would result in breaching T1 and total CAR ratios under Basel accord. We see more value in using consolidated IFRS data and Basel CAR ratios because:

• There is a chance (though quite small) that Kazakh FMSA may temporarily loosen its capital adequacy requirements if several large banks will have to book more provisions than FMSA stress test results suggest. For instance, the central bank of UAE cut Tier 1 ratio to 7% from 11% by mandated earlier. If FMSA will follow UAE example then capital adequacy requirements under Basel accord may serve as a better benchmark measure of banks’ capital adequacy.

• Issued quarterly, consolidated IFRS data is more comprehensive and has more

disclosures than monthly FMSA-compliant data, though the latter is more up-to date

Eurobonds issued by these peer banks are likely to contain covenants mandating banks to maintain certain minimum capital adequacy ratios. Although we do not know the exact requirement, we decided to consider three CAR levels, Table 10. In each case, on top the already created new provision charges, we estimated the extra amount of provisioning charge (ceteris paribus) run via profit and loss that would eat into retained earnings and lower T1 and Total CAR to the these three critical levels.

7M09

FMSA comp.

threshold

Reported LLR, % of

loans NPL

(FMSA) NPL, 90d overdue

KKB 25.9 22.9 25.9 9.9 Halyk 23.6 17.7 14.6 15.7 BCC 19 12.2 11.8 3.9

4.6

6.67.2

8.910.0

4.5

6.7 7.1

10.2

11.7

EY07 9M08 EY08 1Q09 1H09

IFRS KAS

Halyk Finance 18


Table 10: Provision Thresholds Derivation, KZT bn, 1H09

KKB Halyk BCC Assets 2,803 2,035 979RWA 2,722 1,654 720Tier 1 378 245 99Tier 1, % 13.9% 14.8% 13.7%Total CAR 493 306 163Total CAR, % 18.1% 18.5% 22.6% Tier 1 @ 4% 109 66 29Implied Pretax Loss, T1 @ 4% (a1) 269 179 70 Total CAR @ 8% 218 132 58Total CAR @ 10% 272 165 72Implied Pretax Loss, TCAR @ 8% (a2) 275 174 105Implied Pretax Loss, TCAR @ 10% (a3) 220 141 91 Provisions Stock (b) 437 180 74Gross Loans (c) 2,865 1,390 739Provisions/Loans 15.3% 12.9% 10.0% Provisions Threshold, T1 @ 4% (a1+b)/c 24.7% 25.8% 19.5%Provisions Threshold, TCAR @ 8% (a2+b)/c 24.9% 25.4% 24.2%Provisions Threshold, TCAR @ 10% (a3+b)/c 23.0% 23.0% 22.3% KKB Halyk BCC Share of RECM loans, % 43 31 39 Share of FX loans, % 75 54 57 Source: Consolidated Company Data, Halyk Finance estimates

Table 10 suggests that all three banks are adequately provisioned and have some room to book extra provisions under IFRS. Our analysis did not account for an extra $200mn of fresh capital to be injected in BCC’s capital by 1Q10 but in that case BCC’s safety margin would be even higher. Although provisioning levels are not directly comparable under KAS and IFRS, we still can observe a similar ascending trend under both standards, Table 9, RHS. In response to the asset quality disaster in BTA and turmoil around Alliance, FMSA introduced amendments to the current provisioning rules: - starting from the beginning of 2010, banks will have to book 100% provisions on loans to offshore and offshore-related companies. - starting from September 2009, the banks are obliged to book 20% provision charge on foreign currency denominated loans which we have already factored in our financials.

…and BCC enjoys the highest safety margin in provisioning

Halyk Finance 19


FX Exposures

Market and FX Exposure in the Trading Book Contributing to the hefty part of non-interest income, trading income was by no means stable in the last 5 quarters reported. This is of course due to revaluation of FX and IRS swaps employed for hedging and revaluation of held-for-trading securities gains and losses on which are percolated through the P&L. With KB’s representative incumbency as a chief of risk management, BCC’s treasury operations have largely been reined in. Instead, treasury mainly focused on executing orders on behalf of bank’s clients. In 1H09 clients’ FX operations jumped 46% YoY whereas operations with securities soared 609% YoY. With ongoing installation of Data Warehouse (DW)-based Financial Information System, ALM systems and market risk calculating systems BCC will be well equipped to better gauge its exposure to FX and price movements and take necessary steps to mitigate the impact of unfavorably market conditions. FX Exposure via the Loan Book Although BCC’s assets and liabilities do not suggest substantial currency mismatch, the high share (c. 57%, 1H09) of FX denominated loans render BCC vulnerable to further KZT devaluation. Table 11: Currency and Maturity Structure of BCC’s Lending Book in bn KZT, 1H09

<1m 1m<…<3m 3m<…<6m 6m<…<1y 1y<…<3y 3y<…<5y 5y< Total KZT 5.1 18.8 31.6 26.4 58.5 134.2 20.0 294.6USD 22.6 22.8 30.8 47.7 109.5 145.3 1.7 380.3EUR 0.5 1.2 2.1 1.8 5.6 2.9 2.7 16.8Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1Total 28.3 42.7 64.5 75.9 173.7 282.4 24.4 691.8

Source: Company Data, Halyk Finance Table 11 suggests that we are likely to see further rises in 90 days delinquent loans due higher share of FX-denominated loans maturing in the next 0-90 days counting from 1 of July. Although we think that by end 7M09, the bulk of the effects of early February Tenge devaluation on the Bank’s asset quality have already materialized, we expect the negative effects to fully dissipate only by end 2009.

BCC loan book’s FX profile suggests KZT devaluation effects may still hurt

Halyk Finance 20


Strengths

Funding BCC does not have material debt redemptions in 09-10 and is actively engaged in buying back its Eurobonds maturing in 2011 and 2014. In 1H09 alone it recognized KZT 28.5bn (c. $200mn) of profit from the debt repurchase. We expect BCC to continue buying back its Eurobonds even at lower yields currently traded at higher teens in order to avoid negative carry. We do not expect the international wholesale funding will be accessible for Kazakh banks in the foreseeable future. Much will depend on the final outcome of the restructuring of BTA’s and Alliance’s foreign debt obligations. Thus far, KB injected $140mn of fresh capital into BCC in December 2008. By end 2009, KB along with IFC, is expected collectively to inject $120mn more for 10% stake at BCC for each. In addition IFC will provide $85mn of subordinated debt that will qualify as Tier 2 capital. IFC already provided c. $100 mn to credit SME and leasing programs. BCC is traditionally strong in retail deposits market and may boast the 3rd place just behind Halyk and KKB. With 8.4% of system’s assets, BCC enjoys 14.7% of retail deposits market share based on non-consolidated data as of end 7M09. During 7M09 BCC increased its deposit base by 25.4% and more importantly its retail deposits eked out 22.6% versus 10.6% increase across system.

Figure 9: BCC’s International Obligations, USD mn (LHS) and Funding Structure, 1H09 (RHS)

10 6

470

50

1,025

2H09 2010 2011 2012 2012<

Eurobonds20%

Bank Loans19%

Deposits61%

Source: Company Data, Halyk Finance

We think the terms of the options contract entered into by KB and Mr. Bayseitov, mandated the latter to deposit the proceeds of the 23% stake sale into BCC and hold the funds till the option expiration (until 2011). Indeed, 3Q08 IFRS financial statements revealed c. $1bn (more than 30% increase QoQ) increase in customers’ deposits and c. $0.4bn in retail (individuals) deposit accounts alone. Digging further down, in ‘transaction with related parties’ section we found $200mn deposit placed in 3Q08 by a related party but we think the rest of stake sale proceeds were deployed among directly or indirectly controlled legal entities (BCC’ other depositors).

BCC has no material foreign debt repayment…

…and it relies chiefly on domestic and shareholders’ funding

Halyk Finance 21


Figure 10: Funding Structure at 1H08 (LHS) and 1H09 (RHS)

Eurobonds21%

Bank Loans28%

Deposits51%

Eurobonds20%

Bank Loans19%

Deposits61%

Source: Company Data, Halyk Finance With international debt financing remaining prohibitively dear, we expect BCC to abstain from borrowing abroad until 1H10 and rely chiefly on shareholders’ financing and to the lesser extent on domestic retail deposits.

Government Support The first government attempt to support the banks was undertaken in early 2008. Then, the government allocated $4bn in financial support to troubled construction companies and SMEs through participating banks. During 2006-07 a number of banks, including BCC had begun to issue mortgage loans against unfinished construction. These turned sour as credit to the economy dried up in 2H07, placing some construction companies into de facto default on their unfinished construction. According to the program, the banks had to contribute 10% toward financing of the unfinished construction, SWF added 85%, and only 5% had to be financed by construction companies. The program was expected to prevent the bankruptcy of the construction companies, but only delayed the inevitable adjustment in the banks.

Government program to bail out ‘distressed’ assets from the banks and corporate sector was announced in August 2008 and a fuller anti-crisis program was published in November 2008. According to the program, a total amount of around $18bn, equivalent to about 17% of GDP, is to be deployed Kazakhstan’s economy mainly from the SWF ($10bn), from the state budget, and from the NBK. Funds have been allocated as follows: 1) $4bn was injected into the capital of Kazakhstan’s four largest banks (BCC and ATF abstained from SWF’s capital injections) 2) $1bn to support the agriculture sector 3) $1bn to support of SMEs 4) $1bn for the implementation of the innovative, industrial and infrastructure projects 5) $3bn to support real estate/mortgage market and completion of stalled construction projects 6) $1bn seed funding for a distressed asset fund, about half of which has already been allocated. We interpret the term ‘distressed assets’ as loans of Doubtful 2 and Doubtful 3 categories that would be frozen for 2-3 years after which time they are expected to perform

Government support – a mixed blessing

Halyk Finance 22


again and be sold back to the banks. Based on official commentary, we believe that the government will design a better program than the previous one. However, given the official unwillingness to let failed companies go bankrupt, we believe the program runs the risk of only delaying the inevitable. 7) Tax breaks. To support Kazakhstan’s economy, starting from January 2009, the Government has cut corporate income tax from 30% to 20%, and plans to lower it further to17.5% in 2010 and 15% from 2011. 8) Lower compulsory deposits. Starting from late November, 2008 second tier banks became subject to lower compulsory deposits requirement. Specifically, minimum reserve requirements are now 2% (down from 5%) for local liabilities and 3% (down from 7%) for foreign liabilities. According to the NBK, it was estimated that such a measure have will have freed up 350bn KZT ($2.9bn). Profitability Pre-crisis years BCC delivered ROE of around 30% and ROA of 2.2% but since end 2007 its margins and profitability have been under significant pressure. Higher provision charges (up 22% YoY in 2008) via P&L and capital injections from KB (+$140mn in December 2008) dampened profitability ratios, Fig. 11. Rising funding costs and increasing NPLs lowered NIM from 6.6% in 2007 to as low as 4% (annualized) in 1H09. Although we forecast a decrease in funding costs due to falling rates and shareholders’ support, we still see NPLs weighing on core interest income in 2009.

Figure 11: Profitability Ratios (LHS) and Selected Margins (RHS)

2.2%0.6%

2.2% 2.2%

7.0%

20.9% 28.4%30.1%

1H09 YE2008 YE2007 YE2006

ROAA ROAE

35.8%40.2%47.0%22.2%

6.6%

4.9%5.6%

4.0%

3.3%4.0%

4.4%

3.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1H09 YE2008 YE2007 YE2006 0%

1%

2%

3%

4%

5%

6%

7%Cost/Income NIM OP/Assets

Source: Consolidated company data, Halyk Finance

Tight cost control enabled BCC to cut operating expenses by 8.6% in 1H09 YoY by slashing wages and freezing fringe benefits. This is coupled with a slight increase in operating profit allowed BCC to halve its cost-to-income ratio, Fig. 11, RHS. 1H09 MD&A highlights. During conference call BCC’s MD said that the bank expects to show KZT 4-5bn in its bottom line by end 2009, however early in August BCC’s CEO guided that the bank is likely to show $10mn (KZT 1.5bn) in its bottom line. We maintain a cautious stance to the figure mentioned by MD as he most likely took into account one-off gains from the debt buyback which we did not factor in our valuations. Our forecast is more in line with

NIM is depressed but non-interest income helps.

Halyk Finance 23


CEO’s guidance as we expect increased provision charges to eat into beyond net interest income. Sluggish economy and cautious lending in 1H09 got the bank to pile up KZT 125.3bn of cash (more than 5x increase YtD and c. 13% of total assets) which it mainly parked in NBK accounts. The bank may start lending as soon as in 4Q 09 and it is contingent on BTA debt restructuring outcome. The bank restructured 10% of loans, mainly SME and retail as a result of government’s program of SME loan support. We understand that these restructured loans are margin dilutive. We think BCC is likely to continue buying back its debts (as it did in 1H09) even at lower yields just to avoid negative carry. During the conference call held on 7th of September, MD of BCC however informed that the bank does not plan to buyback its debt in the next 1-2 months, but may consider doing so going forward. We regularly monitor the performance bonds and stocks of Kazakh issuers in our HF’s Weekly Update issues. Most Recent Profitability. During 1H09 BCC created KZT 25.3bn of provisions (up 243% YoY), however it managed to record a profit of KZT 10.4bn (up, 61% YoY), chiefly thanks to a KZT 28.5bn pretax income recognized from the repurchase of its own Eurobonds. Sensitivity Analysis. Figure 12 provides sensitivity to higher provisioning. Unsurprisingly, a sharper than expected increase in NPLs, with a suitable response from the bank, could make a bigger hole in any one year’s earnings, particularly in 2009 where the earnings forecast is already reduced by a high provision charge forecast.

Figure 12: Pre-tax profit sensitivity (bars) to provision charge*, LHS figure for 2009 and RHS for 2010 176.8%

117.8%

58.9%

0.0%

-58.9%

-117.8%

-176.8%

4.2% 4.4% 4.6% 4.8% 5.0% 5.2% 5.4%

23.5%

15.7%

7.8%

0.0%

-7.8%

-15.7%

-23.5%

2.3% 2.5% 2.7% 2.9% 3.1% 3.3% 3.5%

Source: Halyk Finance estimates * We flexed provision charge for 09/10, horizontal axis It is interesting to note that pre-tax income gets extremely sensitive (Fig. 12, LHS) to the provision charges near the break-even point which metaphorically can be compared to the volatility of the at-the-money option close to expiration date.

In 2H09 BCC is to continue buying back its debt…

…and is likely to record at least $10mn of profit in 2009

Halyk Finance 24


IT Systems and Asset Gathering in the context of KB’s expertise IT & Systems. Having taken over KB’s best practice IT and technology, we believe that BCC has a technological advantage over its peers. It is difficult to find data to prove this and to link it to profitability, but subjective usage of the bank’s retail products supports such a view, and we note that during 1H09 the bank registered an impressive growth in the number of clients suing its IT systems. In 2Q09 the number of clients subscribed to Internet Banking System (IBS) for corporate entities increased 35% YoY whereas work flow via IBS indicator reached 62.5% at end 1H09 versus 57.8% at end 1H08. KB has brought with it many other sophisticated systems and IT solutions (see Appendix section, ‘a wide ranging and comprehensive strategy’) whose full impact on BCC’s performance and financial we are yet to see. But one thing is clear at the moment, being a critical for banking business, these IT-based systems and solutions will greatly enhance decision making, risk management and information flow processes in the medium term and bump BCC’s up one step closer to western banking standards. A more important factor than the systems themselves is the trained staff to operate them, and we will continue to inquire re. progress in this area.

Asset Gathering. BCC has subsidiaries that offer a wide range of financial products and services including insurance, life assurance, brokerage, and asset management. All of these businesses have good growth potential in Kazakhstan’s young economy as Eurasian bank demonstrated by reporting more than a half of its revenues coming from asset gathering in FY07. BCC has a pension fund, Capital, that holds 4% of the total sector’s assets. As of end 7M09 the total assets under management of all pension funds equaled $11.1bn (11% of the country’s GDP) and are expected to make up 15-16% by 2016, suggesting an increase in assets of $1.3-1.5bn annually. Currently the market leader in this segment is Halyk Bank’s subsidiary ‘Halyk Bank’s Pension Fund’ which holds under management 30% of sector’s assets. In Kazakhstan’s $2bn (c. 2% of GDP) insurance industry, as of 1 August, BCC’s ‘Oil Insurance Company’ holds a modest 3% of industry assets. These business areas are likely to grow faster than the balance sheet in the medium term and are not subject to the balance sheet-type risk of provisioning stemming from leverage, and so are normally considered higher quality, higher (PE) multiple earnings. They typically require less capital, ie can achieve very high RoEs if critical mass can be achieved to drive down cost income ratios. They are not free of risk and volatility; capital risk for insurance, operational risk for pension/asset management (eg the requirement to make good if third party funds are impacted by fraud or systems failure), but achieving operational efficiency is normally the biggest challenge but it is here where KB can bring its expertise and help BCC’s subsidiary to conquer market share by offering superior services and products. KB is actively engaged in asset gathering beyond Kazakhstan. Currently it negotiates the acquisition terms of South Korean brokerage business unit of an American insurance company Prudential Financial Inc. The deal size is estimated to be Won 840bn ($680mn). Market speculates that an ongoing Won 1trln ($840mn) rights offering proceeds to be directed to fund this acquisition.

Good growth opportunities beyond pure banking…

…ignited by KB’s guidance and expertise

Halyk Finance 25


Synergetic Partnership with KB In 2007 KB’s CEO announced a masterplan of KB’s oversees expansion. According the plan KB is planning to set up “KB Triangle network” by acquiring key banking organizations in CIS, China and South East Asia. Before approaching BCC with an M&A offer, KB set up a representative office in Almaty whose main task was to identify good performing bank with good prospects for an ultimate M&A move. Since BCC became KB’s first acquisition target in CIS, we think KB saw the potential for BCC to grow its share of an expanding retail banking market in Kazakhstan and CIS where low penetration rates of banking services are expected to converge to Eastern European levels. BCC has a Moscow branch and in end April it opened a representative office in Kiev, Ukraine. For detailed information on strategic expansion see Appendix 2 section, ‘KB’s wide ranging and comprehensive strategy’. Acquisition of 50.1% (eventually) of BCC for c. 3.8x book gives control of >8% of the consolidating Kazakh market with high growth potential and low penetration levels of banking services. KB – Jupiter in South Korean Banking System Kookmin Bank (KB), the largest bank-centric FHC in Korea in terms of assets size ($222.7bn, 1H09) was found in 1963 and got listed on the Korea Stock Exchange in 1994. In 2001 it merged with Housing and Commercial Bank of Korea and two years later merged again with Kookmin Credit Card. KB has nine subsidiaries including Kookmin Bank (KB), KB Investment & Securities, KB Asset Management and KB Life Insurance. Its registration as financial holding company (FHC) has been accomplished by mid 2008. The business models applied to these subsidiaries may well be tailored to BCC’s subsidiaries in our view. KB together with SFG (Shinhan Financial Group) enjoys strong retail franchise and competes fiercely in plastic cards business. With KB’s initiative, BCC is soon to commence the development of new card products (including credit cards). KB may boast the largest branch network with 1,193 branches, 9,593 ATMs and vast customer base of 23 mn (or c. 70% of South Korea’s population) clients. The bank is ranked as Asia’s top 10 banks by Moody’s rating agency and is recognized as world’s top 500 firms by Financial Times. Capital As of 1 August under local (FMSA) requirements, BCC is well capitalized with k1 (local tier one) ratio of 11.3% and k2 (local total CAR) of 13.2%, when required minimums are 6% and 12% respectively. Under Basel regulations its ratios are stronger still, and by international comparisons it is strongly capitalized (Basel data is provided in Figure 13). Additionally, capital strength comparison analysis is provided for the largest Kazakh banks under local and international regulations in the section Competitive Position.

Penetration rates of banking services are expected to converge to Eastern European levels

KB is the largest player in Korean market with 23mn of customer base…

…is ranked as Asia’s top 10 banks by Moody’s

Halyk Finance 26


Figure 13: KKB’s capital strength under Basel guidelines, 1H08.

22.6%

20.4%19.4%19.7%

10.8%11.9%

12.7%13.7%

2006 2007 2008 1H09

Total CAR Tier 1

Source: Company data, Halyk Finance

BCC’s balance sheet has been considerably strengthened by KB’s $140mn capital injection in December 2008 and we expect another $100-120mn of fresh capital to be injected by KB and IFC by 1Q10. In addition, the current major shareholder Mr. Bayseitov placed a long term deposit (estimated to be at least $0.4bn) as a part of the option agreement between him and KB.

BCC has a strong capital base

Halyk Finance 27


Competitive position

All figures presented in this section have been calculated excluding BTA and Alliance and are based on non-consolidated FMSA data as of 1 August. In this section we compare BCC with Halyk and KKB deemed to be its close peers. This trio jointly controls 61% of Kazakhstan’s US$60.3bn banking assets and 65% of all loans outstanding as of 1 August 2009.

Figure 14: Stock (LHS) and bond (RHS) price performance relative to peers

0

20

40

60

80

100

120

S-08

O-08

N-08 D-08 J-09 F-09

M-09

A-09M-0

9

J-09

J-09

A-09 S-09

KKB Halyk BCC

5

25

45

65

85

105

125

S-08

O-08

N-08

D-08

J-09

F-09

M-0

9

A-09

M-0

9

J-09

J-09

A-09

S-09

BCCRD 8 02/02/11 HSBKKZ 7 3/4 05/13 KKB 5 1/8 03/23/11

Source: Bloomberg, Halyk Finance. In stock prices chart the data is rebased to 9 September 2008

Halyk is the third largest bank by assets ($13.5bn, c. 22% of market share) and enjoys the largest share of retail deposits with 26% of market share versus 17% at BCC, based on non-consolidated data as of 1 August 2009. It also has the largest branch network inherited from the soviet period when it served as the monopoly savings bank. Significantly, Halyk was a relatively moderate borrower before the credit crunch. Among international investors it has therefore been considered a safe haven among Kazakh banks and has the lowest CDS spread among its peers. Figure 15: 5-year CDS Spreads

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

S-08

N-08

J-09

M-0

9

M-0

9

J-09

S-09

Kazakhstan Kookmin KKB Halyk

Source: Bloomberg, Halyk Finance. There is no CDS on BCC’s debt. Halyk has less exposure to RECM loans than BCC however comparing asset quality using FMSA data Halyk’s loan quality appears to be poorer than BCC’s.

Halyk is a major competitor for retail deposits

Spreads on BCC bonds tightened significantly but the stock price trailed behind

Halyk Finance 28


Halyk is well presented in almost all segments of the financial services market. Its subsidiaries comprise a large pension fund, an asset management company, an insurance company and a leasing company. On the whole Halyk is more developed in the asset gathering segments and arguably better positioned to benefit from the expected growth. However things may well change with KB’s endeavor to streamline the subsidiaries’ business practices and lift the services they render to higher level. In 1H09 Halyk along with KKB benefited from the capital injections by SWF and they both enjoy regular hefty deposit placements by large quasi-sovereign commodity exporters. KKB is the largest bank in Kazakhstan with total assets of $16.5bn (27% of market share). It is currently struggling to repay c. $1bn foreign debt due in 4Q09 by shrinking its loan book and attracting customer deposits. It is a clear cut corporate bank with a high share of RECM and hydrocarbon loans. KKB may start lending again as soon as in 1Q10 as it does not have any substantial repayments in 2010. According to the bank’s strategy it will focus more on SME and retails segment where BCC usually casts it net. In spite of the current sluggish state of economy, Kazakhstan remains an attractive market for foreign investors interested in commodities on a medium term view. For instance, Bank of Tokyo-Mitsubishi plans to open a branch in Almaty in 2010 to service Japanese companies interested in uranium. Raiffeisen International Bank, the largest foreign issuer of home and auto loans in Russia, plans to set up a bank in Kazakhstan to serve local and international companies. Such a bank with a renowned brand and good customer service practice is likely to make Kazakhstan’s banking sector more competitive, notably in the corporate segment, although again these expansion plans may be subject to revision or at least delay in the present environment. Peer banks comparison in 7M09 using unconsolidated data from the FMSA. Banking system gross credit to the economy has grown 9.7% YtD in KZT but most probably shrank in USD terms assuming half of the system’s loans are in FX. Over the same period, banking assets grew by meager 1.8%, in part reflecting a rising need for provisions on previously issued loans. Corporate deposits grew by 29%, driven by the need to replace short-term wholesale foreign debt due in 2009 by domestic savings.

Table 12: Peer banks comparison, non-consolidated data from statutory accounts as of 1 Aug, 2009

Assets. KZT bn MoM,% YtD% Loans,

KZT bn MoM, % YtD,% Shareholders' Equity MoM, % YtD,%

KKB 2,493 -2.1% 6.7% 1,926 0.2% 17.9% 259 -1.8% 31.4% Halyk 2,035 3.0% 25.6% 1,259 -3.4% 2.2% 223 -0.3% 30.8% ATF 1,150 7.1% 16.0% 891 -0.7% 10.3% 94 -4.2% 24.6% BCC 1,014 4.9% 7.9% 689 -0.4% 4.0% 90 2.1% -2.3% Kaspi 319 3.0% 26.0% 235 5.0% 24.3% 33 1.4% 7.5% Nurbank 298 1.4% -0.1% 256 0.8% 5.0% 45 -2.9% 1.3% Eurasian 313 -11.3% 15.1% 164 -4.8% 28.2% 28 0.4% 10.9% RBS 174 15.8% 6.2% 49 -3.0% -19.7% 20 -3.6% 0.5% Sector 12,102 -0.4% 1.8% 10,146 -0.7% 9.7% -548 -45.5% -137.7%

KKB is still currently busy with shrinking and deleveraging its book

Halyk Finance 29


Total

deposits* KZT bn

MoM,% YtD, % Retail

deposits, KZT bn

MoM,% YtD, % Corp deposits, KZT bn MoM,% YtD, %

KKB 1,113 -0.8% 18.7% 304 -1.1% 14.3% 810 -0.7% 20.5% Halyk 1,210 3.3% 42.2% 373 0.9% 14.2% 837 4.3% 59.6% ATF 446 15.0% 38.2% 166 5.6% 53.3% 281 21.5% 30.6% BCC 525 9.7% 25.6% 243 3.5% 22.6% 282 15.6% 28.3% Kaspi 187 8.0% 48.9% 78 4.1% 69.4% 109 10.9% 37.1% Nurbank 180 3.0% 3.5% 28 1.3% 51.9% 152 3.3% -2.2% Eurasian 209 8.5% 59.1% 82 6.5% 157.3% 127 9.8% 27.7% RBS 143 18.3% 8.5% 11 2.4% -32.7% 132 19.9% 14.5% Sector 5,644 5.1% 23.0% 1,659 1.4% 10.6% 3,985 6.7% 29.0%

Source: FMSA, Halyk Finance

Specifically, during July, the Kazakh banking sector’s assets remained broadly flat whereas loans marginally shrunk by 0.7%. Deposits. During the first 7 months of 2009 retail deposits increased by 10.6% whereas corporate deposits leapt by 29%, and added 6.7% in July alone, Table 12, a bottom part. Among the peer banks, BCC faired well adding 28.3% to its corporate deposit base (YtD) in line with a sector trend whereas it added twice as much as the sector did to its stock of retail deposits. Corporate deposits have been volatile for most banks all year, partly due to companies shopping round for the best rates as their deposits mature. Kaspi and Eurasian banks showed an upbeat growth in retail deposits, 69% and 157% YtD increase respectively mainly due to the high rates offered and the aggressive marketing campaigns. Profit. Based on non-consolidated data, during the 7 months of 2009, Kazakh banking sector earned c. $27mn of net profit, and c. $15mn of which is attributable to BCC. Halyk, for instance, reported $87mn net loss due to massive provisions created and the bank expect a small profit by end 2009 on consolidated basis.

Small banks are luring clients with higher rates

Halyk Finance 30


Income Sources

Figure 16 compares the peer banks by their revenue mix. Net interest income is given before the deduction of provisioning.

Figure 16: Income sources, 1H09 (LHS) and BCC’s Non-interest Income Breakdown (RHS)

74

4161

395926

KKB BCC Halyk

Net % inc Net non % inc

363

-5,587

5,682 5,559

675

25,658

6,720

25,630

1H08 1H09

Trading Net F&C One-off Non % inc

Source: Consolidated company data, Halyk Finance estimates.

All three banks continue to have a high dependence on interest income, although due to one-off gain from the debt repurchase BCC showed a temporary domination of non-interest income. KKB’s strong focus on corporate banking (with a high dependency on plain vanilla deposit and lending business), its high loan to asset ratio and high NIM render it more dependent on interest income than most of its peers.

Capital strength across banks BCC has strong capitalization ratios under international and local standards, with tier 1 ratios of 13.7% and 10% correspondingly at end 1H09. In today’s tough environment, these capital ratios should be seen in conjunction with the possible support from KB and IFC in the near future.

Figure 17: Capital Adequacy Ratios (CARs) under FMSA (LHS), 7M09 and under BIS* (RHS), 1H09

12.1

9.9 9.5 10.0

13.6

16.514.8

20.1

KKB Halyk ATF BCC

k1 k2

13.914.8

13.7

18.1 18.5

22.6

KKB Halyk ATF BCC

T1 CAR

Source: Consolidated company data, FMSA, Halyk Finance. ATF has not released 1H09 IFRS results yet.

Local (FMSA) capital requirements are actually stricter than those set by BIS with minimum 6% for Tier 1 and 12% for CAR versus 4% and 8% under BIS.

Interest income remains Kazakh banks’ bread and butter

Halyk Finance 31


Recently FMSA introduced an amendment to capital adequacy requirements which mandates the hybrid instruments to be excluded from Tier 1 capital calculation starting from the beginning of 2011. Currently BCC does have any hybrid instruments in its capital structure but it will issue convertible preference shares that will qualify as tier 2 capital.

Loan Quality. We have witnessed considerable asset quality deterioration across banks year to date. Figures 18 show data from the FMSA based on which we refrain from direct comparison of banks as the data may not fully reflect the situation with a particular bank’s asset quality. For more information on NPL definition, see asset quality section of this note.

Figure 18: NPL (FMSA), without BTA and Alliance (LHS), sector NPL (RHS)

Source: FMSA. As of 1 August 09, provision coverage is higher for KKB and Halyk than for other banks, although this ignores the possibility of different NPL recognition policies among the banks.

Figure 19: Provisions, 1 Aug 09

18.7%

7.1%

12.0%

19.8%

14.4%

10.2%8.7%

5.7%

16.5%

12.4% 11.7%

9.6%

7.1%

17.7%16.4%

5.1%

10.9%10.2%

8.6%

13.9%

12.0%

15.7%

21.9%22.9%

12.3% 12.2%

9.5%

6.9%

KKB Halyk ATF BCC Kaspi Nurbank Sector exBTA,ALB

EY-08 1Q-09 1H-09 7M-09

Source: FMSA

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-09

May-0

9

Jun-

09

Jul-0

9

Sector ex BTA&ALB

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Sector with BTA&ALB

Halyk Finance 32


Forecasts Profitability in 2009 Interest income. By end 2009 we forecast BCC’s gross loan portfolio to shrink by 10% and the balance sheet to grow by 18% YoY, chiefly hoarding cash parked in NBK’s accounts. We expect BCC to increase interbank lending and continue buying back its debt securities to avoid negative carry. Assuming NIM to be at depressed 4% in 2009, we forecast a 15% decrease in net interest income before provision charge, with H2 to be on par with H1.

Non-interest income. 1H09 data showed unusually high non interest income figure mainly due to one-off gains stemming from the bank’s debt repurchase and we expect more of the same in FX translation losses on foreign currency denominated liabilities and operations with 2H09. We therefore forecast non interest income to be as strong as in 1H09, and result in 5% increase YoY (see Figure 20 below for 6 month comparisons). Figure 20: BCC’s non interest income breakdown, KZT mn

363

-5,587

5,682 5,559

675

25,658

6,720

25,630

1H08 1H09

Trading Net F&C One-off Non % inc

Source: Consolidated company data, Halyk Finance estimates

Expenses. We see cost-to-income ratio falling slightly from 43% in 2008 to 41% in 2009, chiefly due to decreased staff expense (down c. 10%). With KB’s IT systems on board, BCC should be able to restrain its IT cost which appears to be hurting the other banks’ P&Ls. Provisions. The main swing factor in the 2009 forecasts, in our opinion, is the provision charge. This will depend on the rate of increase of NPLs, the management’s approach and the accountants’ view on what is permissible for tax purposes. We forecast a charge of 1.1% in Q4, but there is significant scope for an even higher number given the tax opportunity and the chance to start 2010 with a larger buffer. Due to this provision uncertainty, investors with a medium term view should focus on operating (excluding provisions) performance, looking at H2 as the base for future earnings power.

One-off gains help BCC to remain profitable

Halyk Finance 33


Profitability in 2010 With over the long haul support from its heavyweight partner KB, BCC is well placed for medium term growth in GDP and banking services penetration. Assuming that BCC branch network expansion will achieve its targets we expect increased market share in retail banking and improved customer service. By 2010/11, we may see growth in non-capital intensive products (‘asset gathering’) taking off, further contributing to the bank’s profitability. We forecast a further fall in (pre-provision) net interest income due to our assumption of a falling NIM. However, in our base case scenario, provisioning should be falling sharply in 2010 resulting in a flat post-provision net interest income. We forecast non-interest income to grow by 33% boosted by transactions and asset gathering. Table 13: Key Financial Ratios

DuPont Decomposition - % Avg. Assets 2008 2009E 2010E NIM 4.93 3.75 3.02 Non interest income 1.22 1.14 1.34 Total Revenue 6.16 4.89 4.36 Staff Costs -0.98 -0.87 -0.85 Total Opex -2.62 -1.99 -1.91 Operating profit (PPP) 3.53 2.89 2.45 Provision Charges -1.50 -0.97 -0.94 ROAA 0.64 0.15 1.07 Leverage (Avg Eq / Avg Assets) 9.6x 8.5x 8.1x ROAE 6.2 1.3 8.7

Source: Halyk Finance estimates

We forecast 3% rise in BCC’s cost-to-income ratio in 2010. The main driver is the fall in pre-provision net interest income, but we do forecast a 20% increase in costs as BCC kicks off further investment and bank’s staff begins to command higher salaries once again. In 2010, we forecast almost sevenfold increase in net profit primarily due to falling provisions.

In 2010 net profit is to be boosted chiefly by falling provisions

Halyk Finance 34


Financials Table 14. Pro Forma Income Statement and Balance Sheet Income Statement (KZT mn) 2008 2009E 2010E 2011E Interest Income 114,260 114,573 113,847 125,353 Interest Expense (69,289) (76,184) (78,854) (85,883) Net Interest and Financing Income 44,971 38,389 34,993 39,470 Annual Growth % 4% -15% -9% 13% Non-Interest Income 11,125 11,674 15,540 19,584 Total Revenues 56,096 50,063 50,534 59,054 Annual Growth % 2% -11% 1% 17% Staff Expenses (8,920) (8,920) (9,802) (11,053) G&A Expenses (13,696) (9,930) (10,923) (12,561) Depreciation (1,270) (1,571) (1,421) (1,019) Goodwill - - - - Total Operating Costs (23,886) (20,421) (22,145) (24,633) Annual Growth % 24% -15% 8% 11% Pre-Provision Income 32,210 29,642 28,388 34,421 Annual Growth % -10% -8% -4% 21% Impairment Charges/Recoveries - Net (19,736) (27,630) (13,034) (13,314) Profit before tax 7,159 2,011 15,354 21,107 Taxes (1,304) (442) (2,917) (3,483) Net Attributable Profit 5,855 1,569 12,437 17,624

Annual Growth % -64% -73% 693% 42% Dividends - - - 3,525 2008 2009E 2010E 2011E Balance Sheet (KZT mn) Cash & Reserves 24,361 61,543 70,774 81,390 Interbank 106,348 341,906 352,692 325,389 Marketable Securities 126,029 126,029 126,029 132,330 Net Loans 601,221 541,099 622,264 746,716 Annual Growth % -4% -10% 15% 20% Fixed Assets 9,244 9,244 9,706 10,677 Other Assets 27,066 27,066 29,773 34,238 Average Earning Assets 850,697 964,268 1,121,168 1,228,793 Equity investments 657 657 690 759 Total Assets 940,528 1,107,544 1,211,928 1,331,501 Customer Deposits 427,381 512,857 589,786 678,254 Annual Growth % 36% 20% 15% 15% Interbank Borrowing 49,220 61,525 73,830 88,596 Other Borrowings 318,803 376,374 376,374 376,374 Other Liabilities 5,636 20,481 23,195 25,434 Average Interest Bearing liabilities 746,787 846,493 927,695 1,010,394 Total Liabilities 835,054 971,237 1,063,184 1,168,658 Shareholder's Equity 105,474 136,307 148,743 162,843 Annual Growth % 26% 29% 9% 9% Liabilities and Equity 940,528 1,107,544 1,211,928 1,331,501 Source: Halyk Finance forecasts

Halyk Finance 35


Appendix 1: Peer Group Table Table 15. KKB – Peer Group Data

P/B P/E Peer Banks Country Mkt cap, mn $

Price, $

2009 2010 2009 2010 Kazakhstan BCC Kazakhstan 437 3.0 0.7 0.6 58.7 7.4Halyk Kazakhstan 1,874 6.1 0.9 1.1 38.5 14.8KKB Kazakhstan 2,083 5.4 0.7 0.8 16.1 10.6Kazakh Banks mean 0.8 0.9 27.3 12.7GCC Samba Financial Group Saudi Arabia 10,127 11.3 1.7 1.5 8.8 8.0Riyad Bank Saudi Arabia 9,119 6.1 1.3 1.2 12.5 10.3SABB Saudi Arabia 8,879 11.8 2.3 2.0 11.0 9.9Arab National Bank Saudi Arabia 7,470 11.5 1.9 1.7 10.5 10.0National Bank of Abu Dhabi UAE 8,258 3.8 1.9 1.7 10.8 9.7Emirates NBD UAE 5,583 1.0 0.7 0.6 5.7 5.4Abu Dhabi Commercial Bank UAE 2,816 0.6 0.7 0.7 9.4 8.5Union National Bank UAE 2,106 1.0 0.9 0.9 8.3 7.7First Gulf Bank UAE 6,102 4.4 1.3 1.2 8.7 8.8Qatar National Bank Qatar 11,428 38.0 2.3 2.1 10.6 9.5Doha Bank Qatar 2,240 12.4 1.7 1.5 7.8 7.0FirstBank Nigeria Nigeria 2,597 0.1 1.0 1.0 6.9 5.9GCC mean 1.5 1.3 9.2 8.4Russia SBER Russia 41,396 1.9 1.7 1.6 7.5 0.8VTB Russia 10,019 3.0 0.8 1.0 neg neg Russia mean 1.3 1.3 0.6 neg EM Banks' weighted mean 1.3 1.2 12.1 8.4 BCC's premium to EM banks -47% -49% 385% -12%BCC's premium to Kaz banks -18% -33% 115% -42%BCC's premium to Rus banks -48% -52% 9867% n/a Source: Bloomberg, HF estimate

Halyk Finance 36


Appendix 2: BCC’s and KB’s ‘wide ranging and comprehensive strategy’ Goal – to become 1 of top 3 banks by assets, efficiency and innovations

1. Strengthen and diversify funding and capital base

• Increase market share in domestic retail deposits; • Lower funding costs by accessing IDOs and FIs; • Attract medium and long run borrowings in domestic and international market.

2. Enhance operating efficiency

• Introduce profit and cost centre approach to increase profit focus; • Increase return from the current client base; • Streamline organizational structure; • Upgrade HRM (refine motivation program, create HR planning system) to

increase labor productivity and train qualified and loyal personnel.

3. Increase geographic presence

• Explore opportunities to open foreign branches in CIS 4. Enhance risk management and internal controls

• Improve Automated Risk Management Software System; • Establish CRM, Credit Rating and Scoring, DW-based Financial • Information, Activity Based Costing systems; • Develop Risk Calculating, Integrated Monitoring systems.

5. Maintain and develop distribution network

• Optimize efficiency of the branches by upgrading its IT systems and increasing

and optimizing the number and range of products sold; • Enhance internet and tele-banking services

6. Solidify market position in retail and strengthen one in corporate banking

• Establish automatic process for retail loan review and approval; • Introduce advanced product development and marketing techniques; • Introduce private banking technology; • Actively exploit cross-selling opportunities.

Halyk Finance 37


Disclaimer © 2009 Halyk Finance, a subsidiary of Halyk Bank. For contact details see the information on Halyk Finance website www.halykfin.kz or contact Halyk Finance office. All rights reserved. This document and/or information has been prepared by and, except as otherwise specified herein, is communicated by Halyk Finance. This document is for information purposes only. Opinions and views expressed in this document do not necessarily represent the opinions and views held by Halyk Finance, or other subsidiaries of Halyk Bank. The differences of opinion stem from different assumptions, sources information, criteria and methodology of valuation. Information and opinions expressed herein are subject to change without notice; and neither Halyk Finance, or Halyk Bank, or any of its subsidiaries or affiliates are under any obligation to keep them current. This document is not an offer or an invitation to engage in investment activity. It cannot be relied upon as a representation that any particular transaction necessarily could have been or can be effected at the stated price. This document does not constitute an advertisement or an offer of securities, or related financial instruments. Descriptions of any company or companies or their securities or the markets or developments mentioned herein are not intended to be complete. Views and opinions expressed in this document cannot substitute for the exercise of own judgment and do not attempt to meet the specific investment objectives, financial situation or particular needs of any specific investor. The information and opinions herein have been arrived at based on information obtained from sources believed to be reliable and in good faith. Such sources have not been independently verified; information is provided on an ‘as is’ basis and no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness, reliability, merchantability or fitness for a particular purpose of such information and opinions, except with respect to information concerning Halyk Finance and its affiliates. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign-currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or income derived from, the investment. Halyk Finance and its affiliates, directors, representatives, employees, or clients may have or have had interests in issuers described herein. Halyk Finance may have or have had long or short positions in any of the securities or other financial instruments mentioned herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any such securities or other financial instruments at any time, as principal or agent. Halyk Finance and its affiliates may act or may have acted as market maker in the securities or other financial instruments described herein, or in securities underlying or related to such securities. Employees of Halyk Finance or its affiliates may serve or have served as officers or directors of the said companies. Halyk Finance and its affiliates may have or have had a relationship with or have provided investment banking, capital markets, advisory, investment management, and/or other financial services to the relevant companies. Halyk Finance relies on information barriers to avoid the appearance of conflict of interests within Halyk Finance or in its relations with clients, other issuers, and external investors. The information herein is not intended for distribution to the public and may not be reproduced, redistributed or published, in whole or in part, for any purpose without the written permission of Halyk Finance. Neither Halyk Finance nor any of its affiliates accepts any liability whatsoever for the actions of third parties in this respect. This information may not be used to create any financial instruments or products or any indices. Neither Halyk Finance, nor its affiliates, nor their directors, representatives, or employees accept any liability for any direct or consequential loss or damage arising out of the use of any information herein.

Macro Sabit Khakimzhanov, 7 (727) 244-6541 [email protected] Madina Kurmangaliyeva, 7 (727) 330-0157 [email protected] Metals and Mining Gaukhar Sarsembayeva, 7 (727) 330-0157 [email protected]

Financial Sector, Fixed Income Securities Askar Turganbayev, 7 (727) 244-6984 [email protected] Roman Assilbekov, 7 (727) 330-0160 [email protected] Olga Poltarak, 7 (727) 330-0153 [email protected] Oil and Gas Maulen Burashev [email protected]

Address Bloomberg Halyk Finance 19/1, Al-Farabi Ave., Nurly-Tau Business Center, Suite 3b Almaty, Republic of Kazakhstan, 050013 Tel. +7 (727) 259 0467 Fax.+7 (727) 259 0593 eng.halykfin.kz

HLFN

bank center credit, initiation of coverage, 10th of september 2009

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