1. Entry strategy for an international commercial bank into Latvian market Nikoaljs Kozlovs Master of Business Administration program Riga Business School

2. Industry background Banking industry in Latvia shows attractive results ROE 27.09% in 2005 European benchmark 15-20% European banks show their interest to invest in Latvian banking market More than 50 banks registered in FCMC Local banks are interested in finding strong financial partners Rumours about acquisition of Baltic Trust Bank by GE Money Rumours about Svenska Handelsbanken interests in Latvia Parex Banka stated their clear interest of finding financial investor LHZB president told that he is interested in cooperation with international bank in order to acquire additional know-how

3. Growth potential Mortgage loan sector: Mortgage loan portfolio in Latvia is increasing by 100 mio LVL/month By the end of 2006 it could reach 3YRD LVL (SEB estimate) By the end of 2008 ~ 6YRD LVL, by the end of 2010 ~ 11YRD LVL (Nordea estimate) Industries with high growth potential: Tourism Transit Production

4. GDP & population income Source: Ministry of Economics

5. Average salary in Central & Eastern Europe (EUR/month) Source: National statistics agencies

6. Key success factors of the entering banks Multinational organization with presence in every part of Europe A credit rating Ability to rise funds at a IBOR rate in international markets Wide range of services to provide Modern and secure IT system, effective IT solutions

7. Characteristics of the industry in Latvia Mass Player Cost Leadership SWOT Analysis of the Bank Abells Framework Porters Framework Industry Life Cycle Analysis Fragmented industry Price wars Ability to compete in the European market Cheap cost of funds Creating economy of scale and economy of scope

8. Achieving cost leadership Branch vs. Subsidiary Legislation in Latvia gives more opportunities for branches of international banks Branch is the most effective competing entity There is only one international bank branch in Latvia Bank of Latvia is trying to slow down local banks loan issuing activities but it does not pay any attention to the branches of international banks

9. Reserve costs Branch vs. Subsidiary Additional reserve costs for local banks (LVL) Reserve requirements Interest rate Loan portfolio Reserve costs per year 160,000,000.002 %2,000,000,000.003,156,164.38 Income on loan per year * Income loan economy (%) 20,277,777.7816% 40,555,555.568% *Mortgage loan margin 1 – 2 %

10. Entry through acquisition Saving time and money on creating infrastructure and customer base Existence of local banks clearly stating their willingness to find strategic investors Best candidates: mass players; banks that are oriented on serving local customers with priority on loan activity

11. Entry through acquisition Saving time and money on creating infrastructure and customer base Existence of local banks clearly stating their willingness to find strategic investors The most suitable banks are: Parex, LHZB, AB & Lateko

12. Strategy implementation Compatible COF and experience of international bank Strong position, experience and infrastructure of local bank Marketing strategy of newly settled bank in Latvia Achieving leader position in terms of loans

13. Expected results Share of loan market ~10% Market share growth 4 – 5% per year Market share after 5 years 31 – 36%

14. Further steps Marketing strategy of new entity How to develop network of branches What additional services to provide How to gain customer base Retain existing customers Acquire new customers Lure from competitors Price for acquisition of a local bank For that purposes it is essential to analyze bank performance, P&L statements and balance sheets for the previous years

15. Thank you very much!