Opportunities and Challenges after the Crisis for Macroeconomic          and Banking Sector Development in Serbia         ...
Content           SEE Cross country comparison ….           Macroeconomics           SEE Cross country comparison ….. … … ...
SEE Cross Country Comparison                             - Macroeconomics -           Sources:           Eurostat, Europea...
SEE Macroeconomics - Contents           Economic Activity           –   Growth In 2006-2008           –   Contraction In 2...
SEE Macroeconomics - Economic Activity                          Growth In 2006-2008                           SEE economie...
SEE Macroeconomics - Economic Activity                              Contraction In 2009                               As a...
SEE Macroeconomics - Economic Activity                     Gradual Recovery In 2010                             The EU eco...
SEE Macroeconomics – Economic Activity                       Adjustment of SEE Economies                            Robust...
SEE Macroeconomics – Labour Market                             Unemployment & Wages                                High un...
SEE Macroeconomics – Capital Inflows                    Capital Inflows In Serbia                         Emerging Europe ...
SEE Macroeconomics – Inflation                               Consumer Price Inflation                                In a ...
SEE Macroeconomics – New Growth Model                                More Balanced Future Growth Model                    ...
SEE Macroeconomics – New Growth Model                            Exports of SEE Countries                              Pre...
SEE Macroeconomics – Public Finances                          Fiscal Positions                           Sharp contraction...
SEE Macroeconomics – Public Finances                 Public Debt                     Sharp increase in general government ...
SEE Cross Country Comparison           - Banking -Sources:National and Central Banks (NBS,BNR, BNB,HNB,CBBH), European Ban...
SEE Banking – Contents           Market Characteristics            –   Asset Size            –   Market Structure         ...
SEE Banking – Market Characteristics                      Assets Size                          Reduced growth in assets ha...
SEE Banking – Market Characteristics                      Market Structure                         After a wave of privati...
SEE Banking – Market Characteristics                      Average Assets per Bank                         Strong organic g...
SEE Banking – Market Characteristics                       Market Concentration                          Concentration of ...
SEE Banking – Market Dynamics                     Loans                        Stock of loans kept its growing trend throu...
SEE Banking – Market Dynamics                        Lending dynamics                           Lending is generally to su...
SEE Banking – Market Dynamics                           Deposits                              Deposits were not in the cen...
SEE Banking – Market Dynamics                        Loans to Deposits Ratio                            Loan to deposit ra...
SEE Banking - Capital                      Capital Adequacy                         Given the downgrade of asset quality a...
SEE Banking – Risk Profile                        Risk Perception                           Different SEE countries reacte...
SEE Banking – Risk Profile                      Non Performing Loans                         Non Performing Loans are expe...
SEE Banking – Risk Profile                     Foreign Currency Risk                         Foreign currency lending as d...
SEE Banking - Results                       Profitability                              Profitability of banking sector in ...
SEE Banking – Key Players                        Key International Groups                           Large international ba...
SEE Banking – Support Measures                        Anti-Crisis Support Measures                               As the in...
CEE- Banking Outlook -
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
Prof. dr Goran Pitić, FEFA
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Prof. dr Goran Pitić, FEFA

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Prof. dr Goran Pitić je 10. maja 2010.g. održao predavanje na italijanskom univerzitetu Bocconi na temu Mogućnosti i izazovi nakon krize za makroekonomiju i razvoj bankarskog sektora u Srbiji

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  1. 1. Opportunities and Challenges after the Crisis for Macroeconomic and Banking Sector Development in Serbia Regional perspective Goran Pitic Professor of Macroeconomics President of the Board of Directors
  2. 2. Content SEE Cross country comparison …. Macroeconomics SEE Cross country comparison ….. … … …. Banking CEE Banking outlook Competitive framework Cost and benefits of Banking crisis resolution Serbia Macroeconomic and Banking environmentMay 2010 2
  3. 3. SEE Cross Country Comparison - Macroeconomics - Sources: Eurostat, European Commission Economic Forecast Autumn 2009, European Commission Reports on Candidate Countries, IMF, World Economic Forum, Serbian Statistics Office, Serbian Ministry of Finance, National Bank of SerbiaMay 2010 3
  4. 4. SEE Macroeconomics - Contents Economic Activity – Growth In 2006-2008 – Contraction In 2009 – Gradual Recovery In 2010 – Adjustment of SEE Economies Labour Market – Unemployment & Wages Capital Inflows Inflation New Growth Model – Future Growth Model – Exports of SEE Countries Public Finances – Fiscal Positions – Public DebtMay 2010 4
  5. 5. SEE Macroeconomics - Economic Activity Growth In 2006-2008 SEE economies have been posting robust growth rates over the last few years, but this growth was mainly domestic-demand driven, fuelled by large capital inflows and strong credit growth. Real GDP Growth (% chg, on previous year) Serbia is one of thefew countries among presented group 8.0% 8.0% which improved growth in 2008 7.0% 7.0% compared to 2006. 6% 7% 6% 6% 6.0% 6% 6.0% Robust growth was 5% also due to very low 5.0% 5% 5.0% base, as Serbiastarted transition with 4% a 10-year delay 4.0% 4.0% compared to other states. 3.0% 3.0% Key contribution to 2.0% 2% 2.0% GDP growth in past years in Serbia came 1.0% 1.0% from services sector- telecommunication, 0.0% 0.0%financial services and Euroarea CEE Albania Bosnia Bulgaria Croatia FYROM Romania Serbia real estate. 2006 2007 2008 Average May 2010 5
  6. 6. SEE Macroeconomics - Economic Activity Contraction In 2009 As a result of slowing capital inflows and shrinking domestic and external demand due to global crisis, GDP growth turned to negative in 2009. As the world economy started recovering in the second half of 2009, the declines in output of SEE countries have been contained.Growth reversal in Serbia Real GDP Growth (% chg, on previous year) was less steep than inmost regional peers, and less severe than in CEE region and Euroarea. 1.0% 0.7% Following a sharp 4.1% 0.0% contraction in H1/2009, the economic activity in -1.0% Serbia stabilized by the -2.0%end of 2009 and full-year -2.0% GDP fall ended at 3%, -3.0% according to the data -3.0% -3.0%from the Statistics Office. -4.0% -4.1% Cabinet responded to -5.0% the crisis by securing -5.0% stand-by arrangement -6.0% -5.9% -5.8%with the IMF, introducing economic stimulus -7.0% measures (state- subsidized loans to -8.0% -8.0% businesses and individuals), while the -9.0% central bank has been Euroarea CEE Albania Bosnia Bulgaria Croatia FYROM Romania Serbia lowering the key policy rate and easing reserve requirements. May 2010 6
  7. 7. SEE Macroeconomics - Economic Activity Gradual Recovery In 2010 The EU economy has emerged from recession with GDP growth turning positive again in the second half of 2009. As the initial upturn in economic activity both in EU and other developed economies was largely driven by temporary factors, such as positive impact of inventory adjustment and stimulus packages of the governments, the growth in 2010 is expected to be sluggish. SEE economies are also expected to recover in 2010, on the back of international developments. Although the growth in SEE will outpace the one in the EU and other developed economies, it would remain much below the pre-crisis average recorded in the last few years. EBRD Projections For Real GDP Growth In 2010 and 2011 Serbian economy is projected to grow by 1.5% this year, with 4.5% investments in large- scale infrastructure projects expected to 3.5% 3.1% 3.2% 3.0% 3.0% incite the economic activity. The IMF has 2.5%recently raised upwards 2.5% 2.2% 2.1% Serbia’s GDP growth 1.7% 1.8% projection for this year 1.4% 1.5% to 2%. Although return to pre- 0.5% 0.3% 0.3%crisis growth cannot be 0.0% expected in the mid- term, according to -0.5% Albania Bosnia Bulgaria Croatia FYROM Romania Serbia EBRD projections, Serbia is projected to -1.2%post higher growth than -1.5% many of its SEE peers in 2010 and 2011. 2010 2011 May 2010 7
  8. 8. SEE Macroeconomics – Economic Activity Adjustment of SEE Economies Robust growth of SEE economies over the past few years has been accompanied by building up of their external imbalances, which have increased their exposure to global economic downturn. Since the onset of the crisis, trade and current account deficits started narrowing on the back of reduced capital inflows and contraction of domestic and foreign demand. In most of the observed countries contraction of foreign trade was more pronounced on the import side, due to lower domestic and foreign demand, as well as lower commodity prices thus resulting in current account deficit shrinkage. Current Account Balance (% of GDP)In Serbia, narrowing of -1.0% current account deficitwas larger than initially expected, with -6.0% shrinkage of the trade -6.1% -5.5% -5.5% gap being the main reason behind -8.8% -11.0% -9.4% improvement. -10.5% -10.6% -11.4% -12.3% -13.1% Serbia’s balance of -16.0% -14.5% -14.7% payment was supported by the -17.8%stand-by arrangement -21.0% with the IMF worthEUR 2.9bn, which has helped the country to -25.5% -26.0% address lower capital flows and reassure Albania Bosnia Bulgaria Croatia FYROM Romania Serbia investors. 2007 2008 2009 2010f 2011f May 2010 8
  9. 9. SEE Macroeconomics – Labour Market Unemployment & Wages High unemployment rate is one of the main problems in SEE countries, in many of which registered unemployment rate sits above 20%. However, considering sizable grey economy that exists in SEE and employs part of the population, the actual unemployment is lower. Nevertheless, unemployment calculated in line with international methodology is highest in Bosnia, Macedonia, and Serbia. The recession has caused a deterioration in the labour market, with unemployment on the rise and wage pressures dampening. 50.0% 44.2% Unemployment 42.3%Unemployment rate in 40.0% 36.0% 36.1% Serbia has been falling in 2006-2008, 30.0% on the back of strongeconomic growth and 20.9% 20.0% 18.7% new investments. 13.7% 12.7% 11.2% However, due to 9.0% 9.8% 8.7% 8.0% 7.3% crisis, the 10.0% unemployment rose by 2.6pps in 2009. 0.0% Albania Bosnia Bulgaria Croatia FYROM Romania SerbiaAfter strong growth in the last few years, 2006 2007 2008 2009 2010f particularly in 2008, average net wage in Average Net Monthly Salary (EUR) Serbia fell to EUR 333 333 at end-2009. Serbia Public sector wages 260have been frozen due 321 Romania to crisis, while 245salaries in the private 327 sector stayed frozen FYROM or were cut to avoid 221 lay-offs. 718 Croatia 629 Bosnia 385 300 Bulgaria 296 184 2006 2007 2008 2009 May 2010 * Data not available for Albania 0 200 400 600 800 9
  10. 10. SEE Macroeconomics – Capital Inflows Capital Inflows In Serbia Emerging Europe suffered the sharpest decline in net capital flows in 2009 among emerging market economies. After massive slowdown in H2/2008 and Q1/2009, capital flows in Emerging Europe slightly recovered by the end of 2009. In Serbia, capital inflows slowed down considerably in 2009 on the back of fall in FDI and other investments.Capital inflows improved Capital Inflows In Serbia (in USD million) compared from their Q4/2008 lows and thethreat of another sudden rise in investor riskaversion has diminished. 1250 Although capital inflows were much lower yoythrough 2009, they were sufficient to cover lower 750 current account deficit. In April, the IMF Executive Board gave 250the green light for Serbia to draw a third tranche under the stand-by Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 arrangement, but the -250 NBS then said it withdrew only a half of the approved EUR 360 million instalment, in -750 what brought total disbursements to some Direct Investment Other Investment Portfolio Investment EUR 1.3 billion.May 2010 10
  11. 11. SEE Macroeconomics – Inflation Consumer Price Inflation In a recessionary, consumer price inflation has declined substantially in the course of 2009 across the SEE. In Serbia, both headline and base inflation have eased since the beginning of 2009. High inflation rates in Serbia in the previous years have been accompanied by robust growth rates. Lower inflation in 2009 was driven by decrease in aggregate demand, lower food prices, as well as halt in regulated prices growth. NBS had more success CPI Annual Average in inflation targeting than regional peers, for example Romania where inflation ended above 13.0% central banks target for 12.0% 11.7% 2009. 11.0%End of period CPI in 2009was at 6.6%, closer to the 9.0% 8.3% 7.9% 8.3%lower end of the 6%-10% 7.4% 7.6%target band. Average CPI for 2009 was 8.3%. 7.0% 6.1% 6.5% 5.7% 4.9% 5.1%Downward trend resumed 5.0%in 2010. According to the 3.4% latest projections of the 2.9% 3.0% 2.9% central bank, end-2010 3.0% 2.4% 2.3% 2.6% 2.2% inflation is expected at 2.0% 1.6% 1.5% 1.5% 5%. 1.7% 0.9% 1.1% 1.0% The NBS has been easing the monetary -1.0% -0.6% policy in the course of Albania Bosnia Bulgaria Croatia FYROM Romania Serbia 2009, cutting the key policy rate from 17.75% 2007 2008 2009 2010fto 9.5%. The easing cycle continued in 2010, with key rate currently standing at 8%. 11
  12. 12. SEE Macroeconomics – New Growth Model More Balanced Future Growth Model In line with the global economic recovery, SEE economies are expected to rebound this year, but the recovery will be slow. GDP growth in the coming years will be considerably below the pre-crisis level across the whole region. As demand-driven growth model is now hardly viable, SEE countries need to shift towards more balanced growth pattern. Serbia plans to achieve1.5% -2% GDP growth in 2010 through Quality of Infrastructure (transport, energy, telephony – country investments in large rankings) infrastructure projects. Score According to Global Around EUR 1bn in 7 Competitiveness international loans for Survey, Serbia is at infrastructure the bottom of the 6 investments has been list of countriessecured from EBRD, EIB, according to WB, and Chinese 5 infrastructure government. Talks over quality, ranked USD 800mn Russian 122nd among 132 4 loan for railway countries. infrastructure projects 3 have not been finalized yet. 2 Government has setinfrastructure upgrade as 1 one of its top priorities, France Germany Croatia FYROM Albania Bulgaria Serbia Romania Bosniaand plans to invest a total of EUR 5bn in 5 6 48 88 97 115 122 127 132 infrastructure by 2012. Rank Major infrastructure projects includeconstruction of transportCorridor 10, and railwayand energy infrastructure upgrade. * 1=extremely underdeveloped infrastructure, 7= extensive and efficient infrastructure 12
  13. 13. SEE Macroeconomics – New Growth Model Exports of SEE Countries Pre-crisis demand-driven growth in SEE should be replaced with more sustainable one. As far as Serbia is concerned, there seems to exist a consensus among policy makers that economic growth in the coming years cannot be based on flows of foreign capital or increasing domestic consumption, but rather on the implementation of all planned investments, and increasing exports in mid-term. Exports (as % of GDP) Serbia is one of the countries with thelowest exports to GDP ratio among the observed group. 64% However, it is one ofthe few SEE countries 60.0% that managed to improve share of 47% 47% exports in GDP in 43% 41% 2006-2008. 40.0% 37% 37% The efforts to boost 32% 32% exports should be 28% 28% aided by the recentlyfinalized deal with Fiat 20.0% 19% which has announced it would produce new 9% 9% car models in Serbia mainly intended for US and EU markets. 0.0% Albania Bosnia Bulgaria Croatia FYROM Romania Serbia The unfreeze of the interim trade 2006 2007 2008 2009 agreement with the EU will also lift exports to the union. May 2010 13
  14. 14. SEE Macroeconomics – Public Finances Fiscal Positions Sharp contraction across SEE has put public finances under strong pressure. Deterioration in fiscal positions in most countries started in 2008, as public revenues started faltering along with the decline in economic activity, while spending pressures remained high. In Serbia, fiscal targets for 2009 and 2010 have been set under the country’s stand-by loan deal with the International Monetary Fund. Fiscal Deficits (as % of GDP) The state budget for 2010 envisages a 8.0% 7.8% deficit of RSD 107 billion or 3.5% of 7.0% 6.8% GDP. The 6.4% consolidated budget 6.0%gap has been limited 5.5% 5.5% to 4% of GDP in 5.0% 4.7% 2010 under the 4.5%arrangement with the 4.0% 3.9% 4.0% 4.0% IMF. 4.0% 3.7% 4.0% 3.5% 3.5% Under the deal with 3.0% 3.0% the IMF, Serbia 2.5% 2.5% 2.5% 2.1% pledged to keep 2.0% pensions and public 1.2% 1.4% sector wages frozen 1.0% 1.0% 0.8% in 2010, trim the budget deficit after 0.1%2010, and reform the 0.0%public sector and the Albania Bulgaria Bosnia Croatia FYROM Serbia Romania pension system. 2007 2008 2009 2010f May 2010 14
  15. 15. SEE Macroeconomics – Public Finances Public Debt Sharp increase in general government deficits amid economic and financial crisis have led to significant increases in public debts across SEE countries. However, public debt ratios in SEE have not reached unsustainable levels given low base. Public Debt (% of GDP) Serbia’s public debt stood at 31.3% of GDP at 2009 and is currently at 31.5% of the 84% projected GDP for 80.0% 2010. Last year Serbia’s public debt 70.0% 66% rose some 10% or EUR 884 million. Half 60.0% of this rise came from 53% domestic 50% 50.0% Indebtedness. 40% 39% 40.0% Serbia is in the middle 33% 34% 30% 29% of the scale according 30.0% 28% 28% 27% to public debt to GDP ratio in SEE. Albania, 20.0% 18% 16% Croatia and Bosnia 13% have higher 10.0% indebtedness ratios. Public debt to GDP 0.0% ratio is lower in the rest Euroarea Albania Bulgaria Bosnia Croatia FYROM Romania Serbia of SEE, but in Romania and FYROM it grows at 2007 2008 2009 2010f a faster pace than in Serbia.May 2010 15
  16. 16. SEE Cross Country Comparison - Banking -Sources:National and Central Banks (NBS,BNR, BNB,HNB,CBBH), European Banking Federation, Bank for InternationalSettlement,CEE Banking Outlook, Fitch Ratings Banks Special Report, EMIS IntelliNews Country Reports (Bulgaria, Croatia,Romania,Serbia), etc.
  17. 17. SEE Banking – Contents Market Characteristics – Asset Size – Market Structure – Average Assets per Bank – Market Concentration Market Dynamics – Loans – Lending Dynamics – Deposits – Loans to Deposits Ratio Capital Risk Profiles – Risk Perception – Non Performing Loans – Cost of Risk – Foreign Currency Risk Results Key Players Support MeasuresMay 2010 17
  18. 18. SEE Banking – Market Characteristics Assets Size Reduced growth in assets has been evident in the last 2 years. It is expected that once the funding costs are reduced and macro-economic stability and growth are regained, assets should continue their strong growth as they grew before the onset of the crisis. Speed of growth for each country’s banking sector will depending on the extent of asset quality weakening brought by the current crisis. Assets Assets (EUR bn) CAGR 100 20% 18% 18% 84.3 Compound 80 annual growth 15% rate of 13% for 13% the period between 2006 60 52.0 12% and 2009, with 12% 12% 51.9 positive y-o-y growth provides 10%Serbia, as well as 41.5 most of the SEE 8% 35.7 40 countries with a good startingpoint for the after 21.1 crisis years to 21.6 5% come. 20 14.8 10.5 7.5 7.0 4.0 5.0 2.8 0 0% Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania 2006 2007 2008 2009f CAGR May 2010 18
  19. 19. SEE Banking – Market Characteristics Market Structure After a wave of privatizations, consolidation in the sector slowed down due to the capital market conditions and future profitability uncertainties brought by the crisis. However, several governments contemplate further decrease of state ownership in respective banking systems, while a number of international players plan partial or full divestment from some of their core and non core subsidiaries in the region. Few banks are looking to boost their organic growth with add on acquisitions. Foreign Banks have seized massive market shares in most of SEE countries. After a period of being the engine behind modernization and growth of the sector, foreign banks now make SEE banking system vulnerable to “flight to quality”, closures of non core businesses and reduced exposures towards SEE region, altogether becoming constraint for growth of the sector. Number of Banks & Foreign Banks Market Share Serbian (%) No. Share (Assets) Government still holds majority 50 100% stakes in 9 banks, while 5 42banks are private (international 38 93% 93% 40 37 91% banks are not 91% 90%majority owners). 33 34 34 32 32 The only large 30 29state owned bank 30 is the second 84% largest market 80% player 78% 19 18 Komercijalna 20 17 Banka (10% 75% 16 market share), while other state 70% banks mainly 10 occupying tail of asset size ranking. 0 60% Romania Croatia Serbia Bosnia Bulgaria Macedonia Albania May 2010 19 2006 2007 2008 2009 Foreign banks (%Assets 08)
  20. 20. SEE Banking – Market Characteristics Average Assets per Bank Strong organic growth and investments from parent banks boosted assets level of foreign banks. Since foreign banks dominate SEE markets, average assets per bank made a strong improvement in the last 4 years. It is expected that average assets per bank will continue to grow further closing the gap between SEE countries and EU average of EUR 5.77 bn (end 2008), given that SEE countries post significantly stronger growth rates than EU. Possible further consolidation of the sector could give further impetus to this ratio. Average Assets (in Eur bn per bank) CAGR 2,5 24% 22% 2,01 Serbia posted 16% CAGR of 2,0 14% average assets 18% per bank while EU 27 CAGR of 1,53 average assets 7% 16%per bank stand at 1,5 14% 1,36 1,23 11%. 1,26 However, 12% average assetsper bank stand at 1,0 EUR 620 m, which is 0,67 0,62 significantly below EUR 5.77 6% 0,35 bn of assets 0,5 0,40 managed by EU 27 banks on 0,23 average. - 0% Romania Croatia Bulgaria Serbia Bosnia 2006 2007 2008 2009f CAGR May 2010 20
  21. 21. SEE Banking – Market Characteristics Market Concentration Concentration of banking sectors vary across SEE. Apparently, different countries are going through different phases of their banking sector development. Croatian market, for example, has been consolidated by several international and regional players, while its growth is not particularly inviting and competitive for further Greenfield entries. Romanian market, however, appears to be growing in number of institutions, and moreover in assets of banks which are not in the top five. Serbian market is at the lower end of the list with less than 50% of the market share belonging to top 5 players, awaiting consolidation surge from the present international players or less likely, strong Greenfield moves. Top 5 banks in the Serbian Top 5 Banks market share (in % of total assets) market hold approximately Share (Assets)46.6% of the total 100% assets.Serbian market issetting a stage for 90% international players to either exercise their organic growth 80% models and 75.0% strategies to a 74.0% 72.7% 72.0%stronger extent or to pursue add on 68.0% 70% acquisitions 66.1% resulting in larger 60.8% market shares. 60.3% 59.3% 60% 57.9% However, it is 54.3% important to note that only one 50.5%bank from the top 46.6% 50% 47.2%5 is not part of an internationalgroup and whoseacquisition would 40% significantly reshape current Croatia Bosnia Bulgaria Romania Serbia Macedonia (Top 3) Albania market. 2006 2007 2008 2009f May 2010 21
  22. 22. SEE Banking – Market Dynamics Loans Stock of loans kept its growing trend throughout the crisis, however the forecast is not of growth but rather stagnation, meaning that the stock of loans should weather the crisis with moderate growth rates for each country. Stagnation in the period from 2009 to 2011 is due to the fact that the crisis manifested in strong risk aversion and drying up of capital inflows to the SEE region. Loans (in Eur bn) Loans (EUR bn) CAGR 60 25% 55 52 Serbia has 50proven to be one 20% 19% of the strongest 18% growing lending markets in the 40 36period from 2006 35 15% to 2009. 15% 30 28 Even with 27 26 25 12% stagnation in2010 and 2011, it 10% should come out of crises with an 20 17 15 impressive growth track 12 7% 9 5% record of 18% 8 10 7CAGR for 2006 to 5 2011 period. 3 3 1 2 0 0 0 0% Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania 2006 2007 2008 2009f 2010f 201 f 1 CAGR 2006-2011 May 2010 22
  23. 23. SEE Banking – Market Dynamics Lending dynamics Lending is generally to support GDP in times of growth, while now, it is expected that GDP, once its starts to recover after crisis, is to pull the growth of lending. Although rapid loan growth was both global and SEE hype, most of SEE economies avoided overheating in the lending sector, leaving room for further growth and convergence to the levels currently held by some new EU members. Loans as % of GDP Loans (% of GDP) CAGRLending activity in 100% 14% Serbia grew from 13.2% 31% of GDP toestimated 47% of 90% GDP in 2009. 86% 12% Further recovery of GDP should 79% 80% 77% 77% make this growth 10% less strong but more stable. 9.2% 9.0% 70% 66%It is expected that 8% with the advance 60%60% 60%61% of the economy 60% 56% 54% and reduced risk 6.7% 6% aversion, lending 7.2% 49% 48% activity should 50% 46% 47% regain 43% 43% 42%42% momentum and 40% 39% 4%that it will alow for 40% 4.7% a much stronger 3.6% ratio of loans to 31% 29% 2% GDP, thus 30% 27% reducing the gap 22%with EU countries (currently 20% 0% standing at loans CE SEE Bulgaria Croatia Bosnia Serbia Romania Macedonia Albania being 156.4% of GDP 2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011 May 2010 23
  24. 24. SEE Banking – Market Dynamics Deposits Deposits were not in the center of attention of banks operating in SEE during the years before crisis. However, crisis also manifested through serious liquidity pressures in the interbank market, making banks question current funding policies. Those banks which had large deposits and savings pools are better positioned to defend their positions and to use the opportunities ahead. A more balanced funding profiles, including amassing deposits is to be expected in the future. After last quarter of 2008 when both Serbia and other Deposits (in Eur bn) countries suffered major deposit flee from banking system, Serbia Deposits (Eur bn) CAGR recovered and is 70 15% expected to 14% continue growing throughout 2009 to 60 2011 period, totaling to some 14% of CAGR over 50 48 11% the whole presented period. 43 10% 10% This makes Serbia a SEE leader 40 11% regarding deposit growth. 29 30 27 27 Long term 23 23 prospects are also 20 5% supported by the 20 fact that retail 14 13 clients are still 4% 12 regaining trust in 10 7 7 8the banking system. 5 4 5 Trust in banks was 2 3 shattered during the nineties, when 0 0% many banks Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania collapsed and were not able to return 2006 2007 2008 2009f 2010f 201 f 1 CAGR 2006-2011 savings to retail 24 customers
  25. 25. SEE Banking – Market Dynamics Loans to Deposits Ratio Loan to deposit ratios have surged in the last years all over the SEE. However, SEE is well below unprecedented levels reached by the Baltic countries. A number of countries which were characterized by strong loan to deposit ratio, indicated that either their banking sector was dependent on wholesale funding or foreign parent bank funding while more affordable foreign currency lending dominated. Next few years should provide a decrease of this ratio making the average annual growth over the period more modest. Loans to Deposits ratio L/D (as %) CAGR 240% 15% 213% Loan to Deposit ratio in Serbia 210% had a stronggrowth from 2006 12% (from 107% in 180% 169% 2006 to 10% estimated 125% in 2009). 150% 8% This level of 129%132% 131% 124% 126% loans to deposit 121% 123% 121% 120% 118%117% ratio is not 120% 115% 114% alarming. 106% 107% 106% 102% 100%Measures of NBS 97% which made 93% 4% 5% 86% 83%retail lending less 90% attractive as well 73% as strong 66% 4% 2% promotion of 4% 60% savings in 2009 3% 3% should 36% successfully rebalance levels 30% 0% of loans and CE SEE Baltic Croatia Serbia Bulgaria Bosnia Romania Macedonia Albania deposits. 2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011 May 2010 25
  26. 26. SEE Banking - Capital Capital Adequacy Given the downgrade of asset quality and weaker profitability induced by the crises, capital stands under pressure. Capital Adequacy Ratio and Tier 1 Capital Ratio, however, remain relatively high making SEE banking sectors well capitalized at the moment. Depending on potential further deterioration of asset quality as well as decline in the value of collaterals, some banking systems might need capital injections. Regulatory pressures might result in many countries increasing capital requirements. Capital Adequacy Ratio & Tier 1 Capital RatioCapital adequacy ratio for Serbian CAR Tier 1 (09f) banks remainsexceptionally high 30 20.8 25providing a strong cushion, even for very pessimistic 24.7 scenarios 25 20 regarding non 21.3performing loans. 16.3 20 18.1 18.3 On average, 17.7 18 17.3 17.3 Serbian banking 16.4 15 is more 15.9 15.8 15.2 competitive to 14.5 14 15 13.7 13.8 those banking 13.7 systems which 14.2 9.3would need to be 10.6 10 provided with 10 8.8 7.0 more equity.The same applies 5 to international 5 players with subsidiarieswhich are in need of additional 0 0capital injections, CE SEE Baltic Serbia Bulgaria Croatia Bosnia Romania Macedonia Albaniawhich will be less competitive. 2006 2007 2008 2009f Tier 1 - 2009f May 2010 26
  27. 27. SEE Banking – Risk Profile Risk Perception Different SEE countries reacted differently to the crises. All of them suffered both macroeconomic downturn and scarcity of available capital. Their banking systems, were additionally hit by the crisis of confidence. While deposit insurance schemes and government help prevented larger bank runs, external funding became an issues as SEE countries have been assessed as those which are to witness hardest times while their banking sector grew over the past years out of boundaries of sustainability. CDS price reaction was very strong. However, multilaterals as well as national governments prevented an even worse scenario by applying variety of measures reducing the overall effects. CDS (bps)Serbia presents a rare case compared to most SEE 1.000 countries. 874 Starting point for CDS price was much higher at 748the brink of crisis 750 692 while its growth, 667 650 although high, actually 579 repositioned Serbia muchbetter relative to 500 its neighbors. 385 866 717 486 However, SEE 644 region is still 640perceived as high 551risk region due to 250 many structural 369 issues whichremain unsolved. 16 48 8 31 27 164 28 0 CE SEE Baltic Romania Bulgaria Serbia Croatia 5Y CDS (USD) before crisis Delta CDS since onset of crisis 5Y CDS (USD) at peak May 2010 as of 15/08/2007 as of 05/03/2009 27
  28. 28. SEE Banking – Risk Profile Non Performing Loans Non Performing Loans are expected to peak in 2010, after an extreme speed of growth in 2008 and 2009. If the methodology for calculating NPL would be the same across all countries, results for Serbia and Romania would be more in line with other countries given that these two have strictest possible methodologies which made forecasted NPL as high as 15% for 2009. NPLs are expected to slow down, but still increase in 2010 before they start to reduce in 2011. What is to influence current perception is the “masking” effect of loan restructuring efforts and further devaluation of collaterals. Some comfort lies in strong capitalization of banking sectors and announced moves by governments and IFC to provide guarantee schemes. Non Performing Loans as % of total loans NPL (% Loans) CAGR 20% 18% 100% 90% 17% 86% Serbian banks 16% reported strong 15% 80% surge of non 15% 14%performing loans 13% 70% over the 13%presented period 12% 12% 11% 60% However, NPL significantly 10% 10% varies across 10% 50% 9%individual banks, 8% making those 40%with stronger risk 7% 39% 6% policies less 6% 6% 30% vulnerable and 29% 5% more 5% 26% 5% 26% 4% 26% 4%advantageous to 3% 3% 3% 3% 20% others. 3% 10% 8% 1% 8% 0% 0% CE SEE Baltic Serbia Romania Croatia Bulgaria Bosnia Macedonia Albania 2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011 May 2010 28
  29. 29. SEE Banking – Risk Profile Foreign Currency Risk Foreign currency lending as dominant type of lending is a characteristic of most banking systems in SEE. As gradual transition to local currency lending takes time, and Euro adoption is to take more time, this risk is likely to remain strong characteristic of SEE. Combined effect of potential depreciation, devaluation of underlying assets and regulatory pressures toward additional capital requirements for foreign currency lending make this structural risk a persistent pressure on the profits. Share of Euro or Fx Clause Loans Fx Loans (% of Loans) 90% 85% 79% 80% 76% 74% 72% 72% 73% 69% 70% 70% 66% Serbian banking system is 61% deemed as high 60% 58% 57% 56% 55% foreign currency 51% lending one. 50% 45% 46%However, most of the SEE countries are of 40% similar profile 29% 29% 30% 20% 10% 0% CE SEE Baltic Bosnia Serbia * Croatia Bulgaria Romania Macedonia Albania 2006 2007 2008 May 2010 29 * - Data for 2006 and 2007 estimated based on the SGS track record
  30. 30. SEE Banking - Results Profitability Profitability of banking sector in SEE has been satisfactory, however due to rebalancing of further growth 2009 to 2010, it should show more modest result. Profitability will be pressured by higher cost of funding and cost of risk, but it might be benefiting from a leaner cost structure and more balanced/less risky portfolio. ROA is expected to be show volatile result over the period for most of the countries. Some countries are to make losses while other will be posting strong growth of ROA compared to other SEE countries. Given that Serbian banking system is well capitalized, ROE in Serbia for 2006-2008 period seems low compared to several SEE countries. Bulgaria however, posted impressive 23% ROE over the same period. ROA of Serbian banking compared to ROA & ROEother SEE in the ROA ROEperiod from 2006 23.0% and 2008 is 4% 24.0% evaluated to be medium. It is to be 3.0% 17.3% followed by a 3% 18.0% period of stableROA at the levelof approximately 12.9% 13.3% 12.3% 2.2%2.2%1%, unlike most other countries 2% 2% 1.8% 1.8% 12.0% where ROA is 1.7% 1.6% 1.6% expected to be 1.4% 2% 1.5% 1.4% 1.4% 1.4% volatile. 1.3% 7.8% 7.3% 1.4% 1.2% 1.1%Serbian banking 0.9% 0.9% 1% 1% 0.8% 6.0% sector average 0.7%ROE for 2006 to 0.5% 0.5%2008 period was 0.3% 7.8% 0% 0.0% CE SEE Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania May 2010 2006 2007 2008 2009f 2010f 2011f Av. ROE (06-08) -1% -6.0%
  31. 31. SEE Banking – Key Players Key International Groups Large international banking groups, active in SEE, have remained fairly committed to the region, keeping their widespread presence. Among those players, Societe Generale, UniCredit, Intesa, and KBC emerge as highly diversified on a regional perspective, with assets in CEE accounting for less than 20 % of total Group assets. Austrian Raiffeisen and Erste, as well as Hungarian OTP are much more heavily dependent on the region. All players have been impacted by the crisis in terms of SG benefited market capitalisation, stock prices and cost of funding, while the key factor of difference was the exposure of groups to the from its CEE and SEE market. Strong interventions from the Governments and multilaterals have successfully turned the sentiment conservative growth in the towards SEE during 2009 to a positive one.Emerging Europe and good choice of geographic Dynamics of Market Capitalization of international groups present in SEE presence,avoiding markets with strong macroeconomicimbalances such as Hungary, Ukraine and Baltic States Fine growth of SG’s market capitalizationallows it to collect more capital and to restructure its current obligations. SG seems to bewell positioned to use the opportunity unavailable to many other groups and to build up its presence, leveraging on its diversification and strongfunding positionsdepending on the 31 risk appetite.
  32. 32. SEE Banking – Support Measures Anti-Crisis Support Measures As the international crisis intensified, each SEE country government and regulators resorted to both new regulations and numerous regulation changes as well, aiming at reducing lack of confidence, increasing liquidity of banks, supporting lending and decreasing costs related to financing. Bosnia Bulgaria Croatia Romania Serbia Top 10 foreign banks in Serbia, 1) Strengthening of deposit guarantee schemes √ √ √ √ signed a treaty (aka. ViennaInitiative) with the 2) Lowering reserve requirements. √ √ √ √ √ NBS, backed by IMF, to maintain 3) Subsidies and guarantee schemes for lending √ √ √ their “end 2008” level of exposure until end of 2010 4) Tax easing related to different sectors of economy which were hard hit by the crisis √ √ √ and to ease loanrepayment terms. 5) Securing commitment of international banks present in the country √ √ √ √ √ 6) Interventions to protect excessive volatility of exchange rate √ √ √ • Multilaterals and Foreign Countries provided funding at both government and company levels. Bosnia Bulgaria Croatia Romania Serbia Further, banks are available to use IFC risk 1) IMF and World Bank have stepped in with strong backing of sovereigns in need of funding √ √ √ sharing facilities in their effort to 2) EBRD, EIB and World Bank also boosted their lending towards SEE √ √ √ √ reduce cost of risk of their portfolio, or to 3) EU members benefited from extensive help from the EU. √ √ build capacity to take more risk in 4) National governments of developed countries supported and “bailed in” for the banks having extensive networks and exposures in SEE. √ √ √ √ building their further exposures.
  33. 33. CEE- Banking Outlook -
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