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SecuritizationA useful tool for the Bank of the 21st

Century

Presentation to the Association of Serbian BanksBelgrade, December 6, 2007

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Agenda

Why Securitization?

What are the challenges?

The US Sub prime Crisis

What is the future?

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Why Securitization?

„In our country, banks are not interested in securitization because they have enough liquidity and

equity.“Senior Manager of a large CEE bank

„In our country, banks are not interested in securitization because they have enough liquidity and

equity.“Senior Manager of a large CEE bank

But why do the world‘s largest banks apply the securitization? They also have enough liquidity and

equity.

But why do the world‘s largest banks apply the securitization? They also have enough liquidity and

equity.

Because securitization can significantly improve the profitability of any bank and provides another source of

liquidity!

Because securitization can significantly improve the profitability of any bank and provides another source of

liquidity!

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1. Why Securitization

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FundingFunding Risk Transfer/Equity Relief

Risk Transfer/Equity Relief

The Fundamental Business Motivation

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Synthetic

• Only „guarantee“

• Risk transfer but no funding

• Less local structuring required

• Multi-seller transactions easier to implement

• Sovereign rating ceiling of less relevance

Synthetic

• Only „guarantee“

• Risk transfer but no funding

• Less local structuring required

• Multi-seller transactions easier to implement

• Sovereign rating ceiling of less relevance

True Sale

• Sale of loan portfolio

• Funding plus risk transfer

• Legally more complex to implement

True Sale

• Sale of loan portfolio

• Funding plus risk transfer

• Legally more complex to implement

The Basic Options

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ONSHORE

Loan PortfolioLoan Portfolio

OFFSHORE

Loan

In

sta

lmen

tsLoan

In

sta

lmen

ts

BankOriginator

Non-recourse sale

of portfolio

Non-recourse sale

of portfolio

Senior NotesSenior Notes

Public / PrivateInvestor markets

Public / PrivateInvestor markets

Mezzanine NotesMezzanine Notes

Junior NotesJunior Notes

Special

Purpose

Vehicle

( SPV)

Purchase Price

Typical True Sale Structure

Junior NoteInvestor

(e.g. Originator)

Junior NoteInvestor

(e.g. Originator)

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ONSHORE

Loan PortfolioLoan Portfolio

OFFSHORE

Loan

In

sta

lmen

tsLoan

In

sta

lmen

ts

BankOriginator

Public / PrivateInvestor markets

Public / PrivateInvestor markets

SpecialPurpose Vehicle( SPV)

orhighly ratedInstitution(e.g. KfW)

Guarantee/CDS

Typical Synthetic Structure

Junior Investor

(e.g. Originator)

Junior Investor

(e.g. Originator)

Bank-to-backSuper Senior Hedge

Bank-to-backJunior Hedge

Bank-to-backSenior/Mezz HedgeP

oss. In

ter-

med

iate

d b

y S

PV

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Risk Transfer / Equity Relief

• Freed-up equity can be re-invested and generates additional income. This is profitable if you have

Growing portfolios

Profitable portfolios

• You improve the ROE to your shareholders.

Funding

• In certain cases, securitization provides cheaper funding (currently rather the exception).

Becomes more relevant if maturity mismatches (and resulting Pillar 2 capital charges) are considered

• In the long run, access to dis-intermediated funding sources will become crucial.

Our Fundamental Business Motivation

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Without

Securitization

With

Securitization

Securitization &

Re-Investment

Assumptions

Portfolio Volume 100.000 100.000 266.667

Net Asset Margin (in %) 1,50% 1,50% 1,50%

CAR 8% n.a. n.a.

First Loss Piece 3,00% 3,00%

Conventional Funding Spread 5 yrs 0,25% 0,25% 0,25%

All-in Securitisation Spread (in %) 0,75% 0,75%

Profit & Loss

Net Asset Margin 1.500 1.500 4.000

Less Incremental Securitisation Cost -500 -1.333

Net Profit before Tax 1.500 1.000 2.667

Simplistic ROE Calculation

Required Equity 8.000 3.000 8.000

ROE 18,8% 33,3% 33,3%

Securitization improves the ROE

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2. What are the challenges ?

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Legal & Regulatory issues

– Transferability of loan portfolios

– Tax/Stamp duty

– Registration of collateral

– Acceptance by the regulator – EU Directives create certain standards

Accounting

– On-balance sheet vs off-balance sheet

Internal target setting mechanisms

– Go for ROE rather than absolute profit and asset targets

Early mover challenges

– Interest from investment banks

– Pricing

Basel 2 considerations

– Focus on portfolios with higher PDs or volatile capital consumption

There are generally challenges:

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Securitization can be supported by

– Aligning individual legal clauses in the concerned laws

– Drafting a specific securitization law which covers all relevant points

A specific securitization law is generally appreciated by rating agencies

– However, it needs to be to the point in order to really facilitate securitization

Issues to be considered for the Serbian Securitization Act is :

– The act should provide a flexible framework

Reflecting the Basel II Accord

Certain structural issues (foreign vs. domestic SPVs; treatment of synthetic securitizations) are already covered by other provisions

Scope of assets that may be securitized should be determined by market participants

– The framework should allow for cost-efficient structures

The management supervisory model is very similar to the patterns used in regulated industries

Securitization structures used in the international markets should be allowed

Ensuring bankruptcy remoteness in a cost-efficient way is the key element of any such law

Specific Issues in Serbia

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3. Implications of the

US Sub-prime Crisis

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US Mortgage Subprime CrisisCEE-markets are fundamentally different – However, we have to learn the lesson!

US Subprime Mortgage Crisis

100

200

300

400

500

06/0

4

09/0

4

12/0

4

03/0

5

06/0

5

09/0

5

12/0

5

03/0

6

06/0

6

09/0

6

12/0

6

03/0

7

06/0

7

09/0

7

-10

0

10

20

30

40

50

60

70

02.0

1

16.0

1

30.0

1

13.0

2

27.0

2

13.0

3

27.0

3

10.0

4

24.0

4

08.0

5

22.0

5

05.0

6

19.0

6

03.0

7

17.0

7

31.0

7

14.0

8

28.0

8

11.0

9

25.0

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1m AA ABCP Spread

Overweighed investments into subprime market

Major funding through credit wholesale markets Weak credit policy causes deteriorating credit

quality

Market Developments

Increasing customer defaults (Teaser rates) Liquidity shortfall even applying to prime

names Lack of trust and confidence (Counterparty

risk)

Triggers

Manage Exposure according to highest standards

Diversify Funding structure Spread Curve will widen

Conclusions

iTraxx Crossover 5yr

Spread over USD-Libor (2007, in bps)

GM und Ford downgraded

to 'junk bonds'

Subprimedownturn

H1/2007 205 bps

24.Sep:

297 bps

Source: International Index Company, Bloomberg

Source: Federal Reserve, BBA

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4. What is the future?

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Western European investors regard CEE as the natural choice for diversifying

their portfolio risks

– The CEE & CIS securitization markets will grow comparably stronger

than the matured markets

Banks will diversify their funding and capital tool box

– Securitization is a useful tool but should not be exaggerated

Securitization plays a growing importance in providing market feedback on

portfolio risks

– Shareholders expect banks to use capital most efficiently and to be

transparent in risk management

What can we expect for the future

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Thank you!

Georg FeldscherHead of SPM

Raiffeisen International Bank-Holding AGTel. +43-1-71707 1026Fax +43-1-71707 1226

e-mail georg.feldscher@ri.co.at