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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. CEE- Banking Outlook -
  • 34. CEE Banking Outlook - Contents The Economic Framework – Crisis Transmission to CEE Banks – International Commitment to CEE Region – Growth Model Rebalancing – Outstanding Risks Banking Framework Challenges and Constraints for CEE Banks – Rebalancing the Banking Model Competitive Framework – International Players in CEE – Government Aid to Banking Groups – Profit Potential and Key Strategic Drivers For CEE Banks FX Lending in CEE Central Europe Baltics South-Eastern Europe Other CEEMay 2010 34
  • 35. CEE Banking Outlook – Economic Framework Crisis Transmission Channels to CEE Banks Macroeconomic transmission channel – poor economic performance and drying capital inflows in the CEE region International banking sector crisis of confidence transmission channel at a later stage sustainability of external funding became the issue lending growth has been financed through funding from their parent banks or through access to international markets. International Commitment to CEE Region Strong international commitment to the region has been the key for alleviating the effects of crisis. Support packages IMF, EU and IFIs have helped to boost investors’ confidence Banks to sign bilateral agreements on maintaining their exposureMay 2010 35
  • 36. CEE Banking Outlook – Economic Framework Growth Model Rebalancing Strong growth across CEE has been fuelled by buoyant domestic consumption and rising investments Need for rebalancing Outstanding Risks Uncertain period of recovery New risks arising from fiscal pressures and financial volatility in western Europe. Crisis in Greece Renewed problems in the European banking sectors.May 2010 36
  • 37. CEE Banking Outlook – Banking Framework Credit Quality - New Challenge For Banking Business Availability of long-term funding and cost of borrowing remained a constraint for Funding cost for CEE remains high. CEE banks will have to rely more on deposits to finance their lending growth, but access to external funding will remain a key competitive advantage for domestic players. Low demand for credit on one hand and rising concern for credit quality behind the credit crunch Slowdown in lending activity of both households and corporate sector Corporate sector was under pressure Substantial increase in distressed banking assets across the region, for both retail and corporate sector. 10% 8% 15% 1% 15% 4% 0.2% 4% 2% 6% 6% 6% 35% 55% 51% 51% 50% 24% 16% 18% 6% 10% 4% 1% CE SEE Baltics Other MFIs deposits External liabilites Customers deposits Other liabilites Debt sec.issued Capital and reservesMay 2010 37
  • 38. CEE Banking Outlook – Banking Framework The Road Ahead-Rebalancing The Banking Model Lending volumes are likely to grow at a more moderate pace after the crisis, with lending growth more tied to ability to generate deposits. Lending growth recovery will be led by the corporate sector, while retail lending will be more constrained in the short run. Access to external funding at reasonable prices will remain key competitive advantage for market players. Banking profitability in the region is likely to stay subdued in the next two years due to higher bad loans provisioning costs as credit quality remains key challenge. NPLs have been rapidly rising, and have not peaked yet in some of the CEE states, while cost of risk is expected to stay high in 2010. Non-performing loans (% of gross loans) Cost of risk (provisions over average loans) Somerebalancing in the model of growth 25 8 for CEE banking is required, but long-term 7 potential of the 20 CEE banking 6 industry the industry remains 15 5 clear. 4 10 3 2 5 1 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CE SEE Baltics Other CE SEE Baltics Other May 2010 38
  • 39. CEE Banking Outlook – Competitive Framework International Players in CEE- Winners Are Those Players With Enough Risk Appetite The list of international Total Assets Net Profit Nr of Countries of CEE, % Share In Market Cap, players in CEE Data as of 2008 (EUR bn) (EUR mn) Branches Presence Group Assets EURmn * region remained stable during the previous period Unicredit 121.6 2,557 4,005 19 12 44,977 will all of them Raiffeisen 85.4 1,078 3,231 16 54 7,141 remaining Erste 79.3 1,569 2,099 7 39 9,729 committed to the market. KBC 71.6 309 1,940 12 20 12,355 UniCredit, KBC Societe Generale 65.9 1,201 2,609 16 6 35,947 and Societe Intesa San Paolo 42.5 186 1,781 11 7 40,167 Generale OTP 35.2 958 1,573 9 100 6,050 emerged as highly diversified * data as of Ocotber 2009 on a regional Source: Unicredit Group CEE Strategic Analysis, Bloomberg perspective, with less than 20% of Group assets in CEE. RZB, OTP and Erste are much moredependent on the region, with a significant portion All players have of assets in CEE been affected by and large part of the crisis in termstheir profit coming of stock prices from the region. and market cap, as well as cost of funding, as expressed by CDS. May 2010 39
  • 40. CEE Banking Outlook - Competitive FrameworkGovernment Aid to Banking GroupsCountry Government aid plan CEE Banking Group applying for government aidAustria Recapitalization of credit institutions and insurance Erste Group agreed to issue participation and hybrid capital up to EUR 2.7bn. Republic of Austria has companies - EUR 15bn subsribed EUR 1.22bn of participation capital while EUR 540mn has been placed with institutional investors. Raiffeisen Group issued EUR 1.75bn participation capital to the Republic of Austria (part of an issue totalling EUR 2.5bn, EUR 750mn of which subsribed by RZB shareholders (EUR 500mn of which placed with new investors in public offering) . Interbank Guarantee-clearing house, able to issue Erste Group agreed to issue up to EUR 6bn of government guaranteed bonds. guaranteed bonds to stimulate interbank market -EUR Raiffeisen Group issued EUR 4.25bn of government guaranteed bonds, out of EUR 10bn agreed. 75bnBelgium Bailout program for distressed banks KBC issued non-voting equity securties to both the Belgian Federal State and the Flemish Regional Government of belgium, totalling EUR 7bn. Interbank Loan Guarantee and Assets Guarantee KBC agreed to the purcahse of CDO-linked guarantee from Belgian Federal State in the amount of ca EUR 20bn.France Recapitalization of banks-EUR 40bn (of which EUR Soc Gen issued EUR 1.7bn of deeply subordinated notes plus EUR 1.7bn of non-voting preference 10.5bn available in 2008 for Top 6 banks) shares to the French government. Interbank Guarantee - guarantees on bank papers- Soc Gen placed EUR 14.05bn of government guaranteed bonds, out of EUR 14.75 bn possible EUR 320bnHungary Capital Injection - Capital Base Enhancement Fund - HUF 300bn (EUR 1.1bn) Interbank Guarantee - refinancing - Guarantee Fund - HUF 300bn (EUR 1.1bn) Ad Hoc Lending Facilites to 4 local banks (OTP, FHB, OTP received HUF 400bn (ca EUR 1.4bn) loan from the Hungarian government MFB, Eximbank) for a total amount of EUR 2.5bnGreece Capital Injection - EUR 5bn NBG issued EUR 350mn preference shares to the Greek state Eurobank EFG issued EUR 950mn preference shares to the Greek state Piraeus issued EUR 370mn preference shares to the Greek state Liquidity injection through the issuance of special Eurobank EFG received EUR 1bn of liquidity injection through special government bonds, out of EUR bonds - EUR 8bn 1.4bn agreed Piraeus received EUR 865mn of liquidity injection through special government bonds State guarantee for new medium to long-term bank NBG agreed to issue EUR 1bn of government guaranteed bonds loans - EUR 15bn Eurobank EFG issued EUR 500mn of government guaranteed bonds, out of EUR 3.2bn agreedSource: Unicredit group CEE Strategic Analysis 40
  • 41. CEE Banking Outlook - Competitive Framework Profit Potential and Key Strategic Drivers For CEE Banks Top banking players committed to CEE can reinforce their position in the region, leveraging on their existing network, improved capital position and better access to international funding. Medium term winners in CEE banking business will be either international players active in the region with enough risk appetite and ability to leverage on diversification and strong funding position or new market entrants. Profit Potential For Top Players * CEE International Players- Key Strategic Drivers CEE, % Share CEE Loans CEE Gap 3 (CEE Group CEE Cost Group T1 2 Loans - CEE In Group 1 /Deposits CDS Of Risk Ratio in % Deposits) in % of Assets in % bps bps Group Assets Unicredit 12 8.5 118 1.5 81 ~200 Raiffeisen 54 8.9 127 10.1 248 >300 Erste 39 8.1 95 3.8 128 ~200 KBC 20 10.8 98 1.4 157 n.a. Societe Generale 6 9.9 96 0.5 84 n.a. Intesa San Paolo 7 8.1 118 1.1 47 ~200 OTP 100 12.0 129 14.2 - >300 Note: T1 Ratio is pro forma Jun 2009, Cost of Risk of Jun 2009, other data as of Dec 2008 1) It inlcudes private and public T1 injections announced untill mid- Oct 2009 2) Net Loans 3) CEE gap= sum of various (loans - depostis) only if loans>depostis . Loans are net loans. Source: Unicredit Group CEE Strategic AnalysisMay 2010 41
  • 42. CEE Banking Outlook - Competitive Framework Times of Change Bring Strong Opportunities for Those Able to Take Advantage of Them Banking Environment OPPORTUNITIES THREATS State influence increased Long term growth potential unchanged Weaker competitive pressures in the local New entrants might consider the market, market, with some competitors strongly taking advantage of lower prices and constrained by their strategies untapped long-term potential CEE Players STRENGTHS WEAKNESSES Incumbents with: Credit quality problems eroding profitability 1) strong presence in the market 2) long term commitment and Incumbents might be forced to retreat as 3) adequate risk appetite that might turn dealing with strict risk control out to be clear winners Funding constraintMay 2010 42
  • 43. CEE Banking Outlook – FX Lending In CEE FX Lending In CEE Predominance of FX lending has been particularly relevant in Hungary, Poland, Romania, Serbia and in the countries with fixed or ‘stable’ exchange rate, like the Baltics, Bosnia and Croatia. FX lending was negligible in the Czech Republic and in Slovakia, before euro introduction, mainly due to historical absolute low level of benchmark rates in the two countries and the introduction in early ‘90s of mortgage finance and housing scheme which made lending in LC more appealing. Strong demand for FX lending has been determined by the lower level of interest rates applied, given the lower benchmark of EUR, CHF, JPY or USD, versus that of local currencies. Retial Loans (% of total) Retial Loans (growh 2009) Corporate Loans (2009 growh) Total FX o/w EUR o/w other Total FX o/w EUR o/w other % of total 2009 growth Central Europe Poland 40 40 - 8 8- 26 7 Hungary 66 4 63 0.3 107 -3 58 -0.1 Czech R. 0.1 0.1 0.01 -13 -14 4 17 -10 Slovakia 0.2 - 0.2 3 - 3 2 -17 Slovenia 17 - 17 -8 - -8 3 -24 Baltics Estonia 83 83 - -1 -1 - 89 1 Latvia 89 89 - -1 -1 - 92 -0.3 Lithuania 67 66 1 5 6 -4 72 0.5 SEE Bulgaria 30 30 1 5 5 0 74 2 Romania 60 48 13 3 4 0 58 2 Croatia 69 54 15 -1 5 -17 68 14 Bosnia 89 89 - -4 -4 - 64 0.3 Serbia 82 82 - 4 4- 64 12 Other Turkey 3 - 3 -5 - -5 48 -4 Ukraine 72 2 70 -9 -10 -9 44 -15 Russia 12 - 12 -4 - -4 29 2 Kazakhstan 40 - 40 12 - 12 58 35 Note: Other FX includes mainly loans denominated in CHF and USD ; growth rates are not adjsuted for FX movementsMay 2010 Source: Unicredit Group CEE Strategic Analysis 43
  • 44. CEE Banking Outlook – Central Europe More Resilient But Recovery Of Banking Profitability Needs Time Central Europe (CE) has been relatively more resilient to the crisis than the rest of the region. Poland is the only country in Europe which managed to avoid a recession in 2009. The Czech Republic and Slovakia have seen a substantial contraction but are expected to rebound, as well as Slovenia. As opposed to other CE countries, Hungary has been severely hit by the crisis because of its high external and domestic imbalances at the time of its onset of the crisis. Low demand Central Europeand credit quality concerns will be the main factors behind subdued lending activity. Only in Hungary and Slovenia isthe gap between loans and deposits significant,meaning relative dependency of the localbanking industry on external funding. In Central Europe as a whole, lending growth will be mostly driven by the recovery of corporate lending. May 2010 44
  • 45. CEE Banking Outlook - Central Europe More Resilient But Recovery Of Banking Profitability Needs Time Deposit growth will slow in 2010 still affected by modest economic recovery and fading effects from state support. Credit quality remains the issue to watch. The non-performing loans ratio is expected to reach a peak in 2010 to more than double the level observed at the end of 2008. The cost of risk is expected to remain high in 2010, stretching profitability. All CE countries are, however, forecast to achieve profit both in 2009 and in 2010, due mainly to cost efficiency.May 2010 45
  • 46. CEE Banking Outlook - Baltics Collapsing Economic Growth, With Impact On The Banks The Baltics were severely affected by the global credit crunch and recession. recession. In the first half of 2009, economic activity was weaker than expected particularly in Lithuania, where GDP contraction deepened to -20.2 % yoy, worse than those of Estonia and Latvia, which moved into recession earlier. The very first signs of credit squeeze that emerged in the second half of 2007 particularly in Estonia and Latvia, became evident in 2008 driven by both demand and supply factors. Credit demand was shrinking while at the same time, Nordic banks – which dominate the local banking system – gradually reduced their funding to the local financial institutions. BalticsMay 2010 46
  • 47. CEE Banking Outlook - BalticsCollapsing Economic Growth, With Impact On The Banks Lending growth is anticipated to remain in negative territory in all three Baltic countries in 2010, with some slower dynamic in retail lending compared to the corporate side. The dynamic in customer deposits has also remained weak since mid 2008 with some outflows from banks driven by residents’ withdrawals in late 2008. The cooling in refinancing from parent banks and the relative high loan-to-deposits ratio (among the highest in the CEE region) will remain a key constraint for lending growth. Credit quality is expected further to deteriorate looking ahead with the non-performing loans ratio most likely peaking around mid/end of 2011. 47
  • 48. CEE Banking Outlook – South-Eastern Europe More Adjustments in 2010, Credit Quality Key Constraint The economic outlook deteriorated in the SEE region at the beginning of 2009 as the transmission channel passing through lower capital inflows and the internationally induced credit squeeze took effect. A sharp contraction in domestic demand are a common denominator in SEE. A clear credit crunch has materialised in the first months of 2009 in Romania, Bulgaria and Bosnia, while some lending activity has been recorded in both Croatia and Serbia later in the year, mostly due to government-guaranteed schemes or infrastructural projects South-Eastern EuropeMay 2010 48
  • 49. CEE Banking Outlook - Central Europe More Adjustments in 2010, Credit Quality Key Constraint All countries in SEE feature a loans-to-deposits ratio well above 100 %, which indicates dependency on external funding. Deleveraging in 2009 will be recorded only in Romania and Bosnia, though, while the loans-to-deposits ratio will continue to increase in the other countries. With parent banks of the top local institutions having signed commitments with the local central banks (as part of the IMF support packages) to maintain on their cross-border exposure to Serbia, Romania and Bosnia, liquidity should not be an issue for the banks in those countries. The peak in terms of non performing loans in the region is expected between the end of 2010 and the first half of 2011, with the peak in cost of risk in 2010. The outlook for the SEE banking system remains challenging with deterioration in credit quality and slackening volumes growth expected to put further pressures on banks’ profitability. Some moderate growth is expected for 2010 in Croatia, Bulgaria and Bosnia, as retail lending will continue to be hampered by low consumption demand and corporate lending by weak investment spending. In Serbia and Romania some more dynamic acceleration is possible.May 2010 49
  • 50. CEE Banking Outlook – Other CEE Countries Turkey Benefits From Solid Banking Sector, State Intervention Key In The CIS Ukraine and Kazakhstan have been the first countries in the region experiencing a full fledged economic and banking crisis, while decline in economic activity was evident in Turkey and Russia as well in 2009. As a result of the above-mentioned macro trends, a credit crunch has materialised in all the countries in 2009. Other CEE CountriesMay 2010 50
  • 51. CEE Banking Outlook – Other CEE Countries Turkey Benefits From Solid Banking Sector, State Intervention Key In The CIS Strong leveraged banking sector and dependency on external funding have been a key driver for banking sector correction in Kazakhstan, Ukraine and Russia, together with rapidly mounting credit quality issues. In Turkey, the banking sector is more balanced, with the loans/deposits ratio below 100 %, meaning no issues in terms of funding and no pressure for deleveraging. Retail lending growth has been extremely weak in Russia, Ukraine and Kazakhstan, in contrast to Turkey. On the corporate side, some more resilience has been recorded in Russia, thanks to a government stimulus program. Deposit growth has remained relatively comfortable in Russia, Turkey and Kazakhstan. In contrast to Russia, Ukraine and Kazakhstan, the Turkish banking sector proved to be very resilient to the crisis. With no liquidity issues and the deterioration in credit quality under control, profitability in 2009 is remaining strong.May 2010 51
  • 52. Banking crises – 117 episodes of systemic crises and 51 cases of borderline or non-systemic crises – Authorities need to take some remedial action – Reduce the disruption to the payments system and damage to confidence in the financial system – Knock-on effects and the supply of credit to the private sector – Future moral hazard – Governments limit the fiscal costs of crisis resolutionMay 2010 52
  • 53. Measures affecting the costs and benefitsof crisis resolution Private sector solutions Loss imposition The design of deposit protection schemes Transparency and disclosure – Time-consistency problem provides a case for clear rules, violations of which are obvious to the private sector and carry some political cost Speed of resolutionMay 2010 53
  • 54. Choice of resolution strategies – At one extreme, a bank can be kept open through an injection of capital – Other extreme, a bank can be closed with its assets sold and depositors and possibly other creditors paid offMay 2010 54
  • 55. Bank insolvent Bank status unchanged Bank status changed Liquidation Financial injection from existing shareholdersPrivate or other partiessectorsolutions Unassisted private sector merger/take-over (M&A) LiquidateGovernment bankassisted Assisted private sectorsolutions merger/P&A Sell assets Compensate creditorsGovernment Bridge bank/solutions Government assistance Nationalisation (LOLR, open bank May 2010 assistance) 55
  • 56. Unassisted resolutions – Bank status unchanged • Curtail lending • A request for additional capital • Management changes • Operational changes – Bank status changed – private sector merger Liquidation • Bank is declared insolvent, closed, and depositors paid off Assisted resolutions – Bank status unchanged • Lender of last resort (LOLR) • Open bank assistanceMay 2010 56
  • 57. Bank status changed • Assisted merger or acquisition • Purchase and assumption transactions (P&A) • Bridge banks are a form of temporary government ownership • Outright government ownership when a very large bank failsMay 2010 57
  • 58. Type of shock and resolution technique – If the situation is non-systemic, merged with a healthy bank or liquidated – In a systemic situation guarantees are likely to be given to liability holders at the failed bank(s), and perhaps to the financial system as a whole to avoid or reduce panicMay 2010 58
  • 59. Shock Idiosyncratic Common (Small-medium bank) (Sectoral or regional Banks) No widespread contagion A B Barings S&L (US)Transmission BCCIof shock Small banks (UK) (Isolated LCFI failure) (System-wide crisis) C D Potential widespread Nordic countries (early 90s) contagion Continental Illinois Japan (early 90s) East Asia (late 90s) May 2010 59
  • 60. Serbia- Macroeconomic and Banking Environment -
  • 61. Serbia – Macroeconomic and Banking Environment Macroeconomic Environment – Economic Activity – Inflation – Unemployment & Wages – International Transactions – Fiscal Balance & Public Debt – External Debt – Monetary and Financial Indicators – Lending Activity Banking Environment – General Information – Top Players in the Serbian Banking Industry – Foreign vs. Domestically Owned Banks Equity Lending Deposits Results – Interest Earning Assets vs. Interest Bearing Liabilities – Net Interest and Commission Income – Operating Expenses vs. Net Interest and Commission Income Profitability – Profit Before Tax – Return on Equity Perceived Market Direction of CompetitorsMay 2010 M&A 61
  • 62. Serbia – Macroeconomic and Banking Environment Macroeconomic Environment Industrial Production & Real GDP growth Trade balance, monthly figures Monetary Aggregates, annual growth EUR mn 9% Real GDP Grow th yoy chg. 0 22% Industrial Output yoy chg. 6% 17% 3% -200 12% 0% -400 . 7%-3% 2%-6% -600-9% -3%-12% -8% -800 M1 M2 M3-15% j-07 m-07 s-07 j-08 m-08 s-08 j-09 m-09 s-09 j-10 -13% Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 J-09 M-09 M-09 J-09 S-09 N-09 Source: Statistics Source: Statistics Source: NBS Office Office Inflation and Repo Rate Budget deficit, % of GDP Foreign reserves, imports coverage in months yoy mom repo rate 5.0% mo nths18% 916% 4.0%14%12% 3.0% 610% 8% 2.0% 6% 3 4% 1.0% 2% 0% 0.0% 0-2% 2007 2008 2009 2010f 2006 2007 2008 Q3/09 J-08 A-08 J-08 O-08 J-09 A-09 J-09 O-09 Source: Statistics Office, NBS Source: Finance Source: NBS Ministry May 2010 62
  • 63. Serbia – Macroeconomic and Banking Environment Economic Activity Manufacturing, construction and trade were the sectors most affected by the crisis. The expectations for 2010 vary from central banks 1.5% GDP growth projection to more optimistic 2% of the IMG and the government and even 2.1% of the EBRD). Industrial output contracted by 12.1% yoy in the entire 2009 and returned to growth in January (3.7% yoy) Real GDP Growth Per Sectors Seasonally-Adjusted Industrial Output (monthly chg.) Ind.pro d. growth 6% Q3/09 4% 2% Q2/09 0% -2% Q1/09 -4% -6% Q4/08 -8% Total Industry Manufacturing -10% Q3/08 yoy growth O-08 J-09 A-09 J-09 O-09 J-10 Source: Statistics Office -20% -10% 0% 10% 20% Agriculture Industry Constructio n Trade Transport & Teleco ms Financial Intermediatio n Source: Statistics OfficeMay 2010 63
  • 64. Serbia – Macroeconomic and Banking Environment Inflation CPI Inflation & Base Inflation 2.2% Montlhy Inflation Base Inflation Consumer price inflation considerably 1.8% moderated to end-year 6.6% and average 8.4% 1.4% in 2009, falling closer to the lower end 1.0% of the targeted range (6% -10%) of the central 0.6% bank. 0.2% Serbia’s -0.2% employee -0.6% numbers -1.0%dropped 5.1% in D-08 F-09 A-09 J-09 A-09 O-09 D-09 F-10 2009, and the Source: Statistics Office, NBS country had a 17.4% unemployment Unemployment & Wages rate in October 2009. Number of Employed & Unemployment Rate Average net monthly salary in EUR Negative trends m n % are likely to 2.1 22 2009 375 Nr. of Employed sustain in 2010 Unemploym Rate ent despite the 2008 403gradual recovery 2.0 18 of economic activity. 2007 347 1.9 14 Net wage 2006 260 growth will 1.8 10remain subdued 2001 2002 2003 2004 2005 2006 2007 Apr- Oct- Apr- Oct- 0 80 160 240 320 400 this year. 08 08 09 09 Source: Statistics Office Source: Statistics Office May 2010 64
  • 65. Serbia – Macroeconomic and Banking Environment International Transactions Key Export Items In 2009 Current Account Deficit (% of GDP) Total Exports EUR 5.96 billion -5.5% 0 100 200 300 400 500 EUR mn -8.0% 7.7% * Iron&steel -13.1% -16.2% 6.5% Clothes -17.8% 5.7% Cereals 2006 2007 2008 2009 2010e 5.4% Fruit&vegetables Source: 5.3% Non-ferrous NBS metals * % of total exports Key Import Items In 2009 Serbia’s trade deficit narrowed by 36% yoy to Total Imports EUR 11.2 billion EUR 5.2bn in 2009. EUR mn 0 200 400 600 800 1000 1200 The exports returned to 10.7% annual growth in January 2010, but this largely reflects low 9.5% * Oil& Oil derivatives level from 2009. The imports were still lower 6% yoy in January. 7.7% Road vehicles The current account deficit narrowed by hefty 5.0% Gas 71% yoy to EUR 1.7bn in 2009, down from EUR 6.1bn in 2008. The CA gap is likely to 4.4% Electical machinery reach 8% of GDP this year, according to the Industrial machinery projection of the NBS. 4.5% * % of total imports FDI were lower by 25% yoy at EUR 1.4bn in Source: Statistics Jan-Dec 2009. OfficeMay 2010 65
  • 66. Serbia – Macroeconomic and Banking Environment Fiscal Balance and Public Debt Public Debt (% of GDP) The consolidated budget gap stood at over 4% of the country GDP in 2009. EUR mn %of GDP 11,000 34 The 2010 budget law projects consolidated fiscal deficit of 4% of GDP, in line with Serbia’s stand-by arrangement with the IMF. 10,000 30 By end-December 2009, public debt reached EUR 9.9bn (31.3% of GDP). 9,000 26 Serbia’s public debt is projected to rise to some 34% of GDP at end-2010. 8,000 22 2007 2008 2009 2010 Source: Finance MinistryMay 2010 66
  • 67. Serbia – Macroeconomic and Banking Environment External Debt External Debt (as % of GDP) External Debt By Sectors 98% Public Sector Corporates Banks EUR mn 12,000 72% 67% 64% 62% 63% 64% 9,000 60% 54% 6,000 3,000 0 31.12.07. 31.12.08. 31.1.09. 28.2.09. 30.4.09. 31.5.09. 30.6.09. 31.7.09. 31.8.09. 30.9.09. 31.12.09. 31.3.09 31.10.09 30.11.09 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: NBS Source: NBS Short-term External Debt Gross external debt rose by 4.5% yoy in 2009 or EUR mn Short term debt some EUR 760mn to EUR 22.8bn which stands at over 72% of the country’s GDP for 2009. 2,400 2,000 In 2009, public sector was the major contributor to the rise in gross foreign debt. 1,600 Serbia’s gross external debt stayed flat at EUR 22.8bn in 1,200 January 2010. 800 400 0 31.12.00. 31.12.04. 31.12.08. 30.4.09. 31.8.09. 31.12.09 Source: NBSMay 2010 67
  • 68. Serbia – Macroeconomic and Banking Environment Monetary and Financial Indicators During 2009, the repo rate has been slashed by a Key Rate Evolution total of 825bps. The NBS said at the beginning of the year that monetary policy easing is expected to be Repo Rate 17.75% more gradual in 2010. However, since late March the 17% rate has been cut three times to record low of 8%. 16.50% 15.75% The NBS has poured over EUR 7500mn into the forex 15% 15.00% market so far this year in attempts to bolster the 14.00% national currency. 13% 13.00% 12.00% The dinar lost over 7% against the euro last year. 11% 10.75% 11.00% Gradual weakening of the national currency is expected in 2010 as investment inflow remains 9.50% 9% scarce. J-08 M-08 M-08 J-08 N-08 J-09 M-09 M-09 J-09 N-09 S-08 S-09 After shrinking or being almost flat in the course of Source: NBS 2009, M3 monetary aggregate has recovered in the final quarter. Monetary Aggregates Monetary Aggregates 1,200,000 yoy grow th M1 M2 M3 Dinar Reserve Money Currency In Circulation 100% 1,000,000 80% 800,000 60% 600,000 40% 400,000 20% 200,000 0% 0 -20% RSD mn 2008 F-09 A-09 J-09 A-09 O-09 D-09 J-09 M-09 M-09 J-09 S-09 N-09 Source: NBS Source: NBSMay 2010 68
  • 69. Serbia – Macroeconomic and Banking Environment Lending Activity Lending Activity (Annual Growth) Placements in REPO Securities % (%) RSD bn 60 18 200 50 16 150 40 14 30 100 12 20 10 50 10 0 8 0 1 1 1 0 1 2 1 2 3 4 5 6 7 8 9 10 1 1 1 2 1 2 2007 2008 2009 2008 2009. 2010. Total Corporate Sector Households Outstanding balance of repo securities - right scale Nominal interest rate - left scale Source: NBS Source: NBS The foreign Foreign Currency Reserves Bank lending was nominally up by 16% in Q3 compared currency to Q4/2008. EUR mnreserves held by 12,000 NBS Banks Total Reserves the central bank Bank lending will remain stable thus year, rather than increased by increase. 9,000 EUR 2.4bn in 2009, hitting The strongest growth in Q3 (20%) was recorded in EUR 10.6bn at 6,000 lending to the government which was the trend in the end 2009. entire 2009. 3,000 Bank lending to households and enterprises grew at much lower rates. 0 At the end of Q3/ 2009, non-performing loans accounted 31.12.08. 28.2.09. 30.4.09. 30.6.09. 31.8.09. 31.10.09. 31.12.09. for 10.4% of all loans in Serbia. Source: NBS May 2010 69
  • 70. Serbia – Macroeconomic and Banking Environment General Information A total of 34 banks operate in Serbia, – 20 banks are foreign owned (majority ownership), – 9 are state-controlled and – 5 are privately owned. Serbian banking sector is yet to undergo a major concentration phase, since share of the . top five (46.6%) and top ten (69.4%) banks, by Total Assets, is still substantially below . . the average in other countries in CEE. Major international banks present on the market include (among others): – Large Internationals - Banca Intesa, Unicredit and Societe General (KBC is present, but through an insignificant bank) – Austrian regional Banks - Raiffeisen, Hypo Alpe-Adria, Erste and Volksbank. – Greece regional Banks – National Bank of Greece, EFG and Alpha Banking sector employs around 31,500 people. Number of employees has been rising steadily since the major restructuring of the banking system in the period of 2000-2003, when the number was below 20,000. Assets per employee at the end of September where EUR 670 th. per employee. At the end of September all 34 banks in Serbia operate a network of 2,660 branches (any separate point of sale managed by the bank). This produces an average of 11.9 employees per branch, slightly below EU. National Bank of Serbia is the chief regulatory body which oversees banking industry and other financial services (insurance, pension funds). Since NBS is also in charge of monitoring and conducting the monetary policy of the country, banking sector provisions have been used at times more as a monetary policy tool, than for risk control andMay 2010 management of the stability of the banking system. 70
  • 71. Serbia – Macroeconomic and Banking Environment Top Players in the Serbian Banking Total Assets as of September 2009 reached EUR 21.1 bn. In the observed period Banca Intesa managed to increase and solidify its leading positions on the market, but still controls less than 15% of the market. Data shows that there is only one more bank controlling 10% of the market, and another four over 5% market. Since 2006 , Assets Market 6,000Total Assets have share grown at an 14.8% 10.0% 9.4% 6.3% 6.1% 6.0% 4.8% 4.5% 4.2% 14.7% 3.4%average of 12.5% 30.6% 6,448 5,000 Average assets 14.7% per bank are EUR 620 m. Average assets 4,000 20.5% of foreign owned banks are EUR 788 m. 3,130 EUR M Top five banks 2.7% 3,000 17.5% control 46.6% -1.9% and top ten 69.34% of Total 17.2% 2,101 13.5% 27.4% -1.4% Assets 1,975 12.7% 2,000 15.7% 1,339 1,283 1,264 1,003 950 892 1,000 719 0 Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank Unicredit AIK banka Société Vojvo anska Volksbank Other banks banka banka Adria-Bank EFG bank Générale banka (NBG 2006 2007 2008 Sep-09 Group) May 2010 71 *September figures were used as a end-of-the-year proxy for CAGR rates
  • 72. Serbia – Macroeconomic and Banking Environment Foreign vs. Domestically Owned Banks Foreign owned banks account for eight of the ten top players on the market. After an entrance of a number of foreign owned banks in Serbia it the beginning of this decade (mainly through acquisitions) by 2006 foreign owned banks achieved a dominating position on the market. However, since 2006, remaining domestically owned banks have defended its position well and even advanced in market share. Market Shares 90.00% 10.45% CAGR over 79.04% period 80.00% 75.51% 75.34% 74.69% 70.00% Market share of domestically 60.00%owned banks has increased at the expense of 50.00% Austrian banks. 19.86% 40.00% In the observed period, domestically 30.00% owned banks 24.49% 24.66% 25.31% achieved almost 20.96% twice as fast 20.00% 12.72% growth rate. 10.00% 4.48% 4.19% 4.05% 4.50% 0.00% Société Générale Foreign Banks Domestic Banks 2006 2007 2008 Q3 2009 May 2010 72 *September figures were used as a end-of-the-year proxy for CAGR rates
  • 73. Serbia – Macroeconomic and Banking Environment Equity Equity invested by banks in Serbia is extremely high due to local regulations. Banks must at all times maintain a 12% Capital Adequacy Ratio, compared to usual 8% in EU States. Also, Obligatory Reserve levels and bad loan provisioning system are extremely strict, forcing banks to invest heavily into equity, just to meet these requirements. Equity 16.6% 13.6% 25.5% 25.2% 31.4% 19.6% 39.6% 22.4% 27.2% 23.3% 600 Capital to Total Assets Komercijalna 519 Ratio 503 Banka has 500 arranged anequity investmentof EUR 120 M forthe first quarter of 403 398 2010. Investors 400 will be EBRD, IFC, SwedFund, 338 KfW and JBIC. State has two EUR M 300 286 years to match 270this investment in 248order not to loose 242 controlling stake, 214 213 202 195 but the 186 185 200 agreement also 168 160 envisages full 140 privatization after 122 2015 91 100 0 Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank Unicredit AIK banka Société Vojvo anska Volksbank banka banka Adria-Bank EFG bank Générale bankaMay 2010 2006 2007 2008 Sep-09 73 *Ranked by Assets size
  • 74. Serbia – Macroeconomic and Banking Environment Loans and other lending (Cross-Border lending not included) First nine months of 2009 have shown the results of the crisis and most of the banks achieved low or negative growth in lending activity. Two exceptions to this rule were SGS and Unicredit, banks’ which were less shaken by the crisis and which have the best access to international funding. Total Loans and other lending at September 2009 stood at EUR 12.3 b. Local Lending 15.7% 10.1% 7.1% 6.7% 6.3% 5.9% 5.7% 4.8% 4.0% 3.2% 30.5% Market 4,000 share 3,764 -2.15% 3,500 Both SGS and 3,000 Unicredit have benefited form 0.8% the situation, but 2,500 Unicredit’s loans on a local level EUR M have risen faster 1,932 due to, in part, 2,000 1.23% 5.7% 51.7% local lending to -25.5% -25.3% 5.1% huge state 19.22% controlled -10.2% 1,500 3.0% companies. SGS 1,244has facilitated this lending through 874 1,000 828 cross-border 774 732 704 arrangements. 596 491 500 395 0 B anca Intesa Komercijalna Hypo Alpe- Unicredit Euro bank Raiffeisen A IK banka So ciete Vojvo anska Vo lksbank Other Banks banka Adria-Bank Bank EFG banka Generale banka May 2010 2008 Sep-09 74 *Due to lack of precise data, lending has been calculated as a sum of two Balance Sheet positions – “Loans, Advances and Lending” and “Other Lending” **Cross-Border Loans are not included ** Ranked by the size of proxy loans
  • 75. Serbia – Macroeconomic and Banking Environment Loans and Other Lending including Cross Border Estimated sum of all Cross Border Lending at the end of Q3 2009 was EUR 3.5 bn. Top 10 banks on the market provided 60% of all Cross Border lending, and together with Alpha bank from Greece 75% of all lending CB lending. Total Loans with Cross Border lending as of September 2009 stood at EUR 15.7b. Local Lending and Cross Border Lending (September 2009) 2,500 12.1% 7.9% 7.8% 7.4% 6.8% 6.7% 6.2% 4.5% 4.0% 3.3% 5.4% Market share 2,032 2,000 When both local and CB lending are calculated SGS is the six 1,500 ranked bank in EUR M Serbia. 1,244 1,232 1,174 1,078 1,050An addition to the 974 1,000 854 top 10 banks is Greek Alpha 704 Bank, which had 641 high CB lending 520 500 0 B anca Intesa Komercijalna Raiffeisen Eurobank Unicredit Societe Hypo Alpe- AIK banka Vojvo anska Vo lksbank Alpha Bank banka banka EFG B ank Generale Adria-Bank banka Local Cross Border May 2010 75 *Cross Border lending figures are unofficial estimates, but are considered to be representative. No similar data is available for end of 2008 ** Ranked by the size of total lending for top 10 banks
  • 76. Serbia – Macroeconomic and Banking Environment Deposits – Transaction and Other Deposits Local deposits have changed quite differently between banks in 2009. Generally in Serbia, deposits from general public are drown through offering of extremely high interest rates, which even reach 8%-9% for term deposits in euros. Total deposits at September 2009 stood at EUR 12.3 bn. Deposits Societe 16.8% 13.8% 8.8% 6.9% 5.6% 4.9% 4.4% 4.3% 3.7% 3.2% Generale’s policy 4,000 Market 27.6% was not to share overpay for deposits, but to 3.8% 3,403 win customers by 3,500 offering safety above all. This is achieved by 3,000 conducting a 29.3% conservative and 13.7% secure 2,500investment policy. 2,072 EUR M Result is a small decline in overall 2,000 deposits, but it 1,705 1.7% can be assumed -11.2% that the deposit 1,500 8.02% -3.2% 5.4% -10.6% base is more 17.9% secure for SGS, 1,079 -4.6.% than for banks 1,000 849 which have 685 extreme interest 604 542 525 rates as a main 458 396 selling point 500 0 Banca Intesa Ko mercijalna Raiffeisen Euro bank Unicredit Vojvo anska A IK banka Hypo Alpe- A lpha B ank So ciété banka bank EFG bank banka Adria-Bank Générale May 2010 Dec-08 Sep-09 76 *Due to lack of precise data, deposits are calculated as a sum of two Balance Sheet positions – “Transaction Deposits” and “Other Deposits” ** Ranked by the size of proxy deposits
  • 77. Serbia – Macroeconomic and Banking Environment Interest Earning Assets vs. Interest Bearing Liabilities Interest Earning Assets and Interest Bearing Liabilities show that most of the banks have good structured balance sheets. Only exemption to this rule was the sole state owned bank among top banks. Main reason behind this could be the fact that Komercijalna Banka has one of the lowest Equity / Total Assets ratio and was forced to seek funding through borrowing money. IEA / IBL 3,000 109.0% 114.9% 95.8% 97.5% 123.9% 106.3% 105.8% 123.7% 136.7% 151.3% 119.8% 120.0% 124.2% IEA / IBL 130.9% 2,778 ratio 2,500 2,338 SGS and Hypo 2,000 are the banks with the highest 1,662 Equity base EUR Mamong top banks 1,453 1,487 1,451 1,500 High IEA /IBL 1,188 1,164 1,152 ratio also shows 1,043 1,019 that funds arewell used and not 1,000 771 802 trapped unprofitably 639 500 0 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Banca Intesa Komercijalna banka Raiffeisen banka Unicredit bank Hypo Alpe-Adria- Eurobank EFG Société Générale Bank Interest Bearing Liabilities Interest Earning Assets May 2010 77 *Top international Banks and largest local state controlled bank *IEA and IBL per bank are calculated by adding positions from unaudited banks statements published by NBS
  • 78. Serbia – Macroeconomic and Banking Environment Net Interest and Commission Income (2006 – 2008) Net Interest and Commission Income has grown at impressive rates over the period from 2006-2008. This was a result of several factors. Main are the development of foreign owned banks which finished post acquisition restructuring of local subsidiaries and turned to profit generation, rapid development of Serbian economy and relatively cheap international funding. Net Interest & Commission Income (2006 - 2008) 44.7% 16.8% 35.6% 47.4% 69.3% 10.0% 49.3% 31.6% 26.9% 66.6% CAGR 250 over period 216 Banca Intesastrongly benefited from a leading 200 place on themarket, wrapping up of restructuring and 154 157 an add-on 150 acquisition in 2007 EUR M 123 111 113 103 97 98 100 85 86 82 78 71 72 67 66 57 60 52 55 52 50 43 44 42 41 36 34 21 12 0 Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank Unicredit AIK banka Société Vojvo anska Volksbank banka banka Adria-Bank EFG bank Générale banka 2006 2007 2008 May 2010 78
  • 79. Serbia – Macroeconomic and Banking Environment Net Interest and Commission Income (Sep 2008 – Sep 2009) Crisis has pushed incomes of local banks lower and this is visible at almost all banks. Societe Generale and Volksbank are the only exemptions. Volksbank has achieved this at a generally lower level of income. SGS and its prudent selection of client base through rigorous implementation of conservative standards have prepared the bank in the best possible way for the ongoing turbulent times. Net Interest & Commission Income (Sep. 2008 – Sep. 2009) 180 -2.8% -10.8% -10.0% -8.2% -5.5% -2.4% -33.4% 3.5% -36.8% Change 20.7% % 160 160 156SGS continued to fair quite well in 2009 (Q3 results 140 showing y-o-ygrowth of 3.5% in 116 net interest and 120 commission 104 income) as wellas in the previous 100 EUR M years, unlike 88 83 83 most of the 78 competitors 80 74 whose net interest and 58 commission 60 54 53 50 48 52 52 54 income decreased. 40 34 29 24 20 0 Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank Unicredit AIK banka Société Vojvo anska Volksbank banka banka Adria-Bank EFG bank Générale banka May 2010 79 Sep-08 Sep-09
  • 80. Serbia – Macroeconomic and Banking Environment Operating Expenses vs. Net Interest and Commission Income (2006 – 2008) On a local level most of the top banks experienced high fluctuations of Operating Expenses (Employees, Depreciation and Other) and Net Interest and Commission Income. Only Raiffeisen and SGS have simultaneously maintained a steady policy of cost control which maintained favourable Costs to Income ratio and at the same time achieved a steady growth of income. Opex vs. Net Interest & Commission Income (2006 - 2008) 250.0 89.2% 61.5% 50.4% 68.2% 68.0% 57.8% 118.7% 78.6% 54.0% 81.8% 85.5% 81.5% 64.7% 60.4% 58.4% 89.9% 78.2% 58.2% 48.9% 58.7% 51.0% Cost to Income Ratio 200.0 150.0 SGS hasimproved its Costto Income ratio in each of the 100.0 previous three years, while at the same time strongly 50.0 expanding its retail network 0.0 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 Banca Intesa Raiffeisen banka Eurobank EFG Komercijalna banka Société Générale Hypo Alpe-Adria- Unicredit bank Bank Operating Expenses Net Interest and Commisions IncomeMay 2010 80
  • 81. Serbia – Macroeconomic and Banking Environment Operating Expenses vs. Net Interest and Commission Income (Sep 2008 – Sep 2009) September 2009 on Sep 2008 figures mainly show that most of the key banks have maintained Cost to Income ratio at relatively the same level. This was done by slashing cost to keep up with the declining income from banking activities. Only exemption is SGS, which has at achieved growth in Net Banking Income and has avoided painful measures of reducing staff, salaries or other operating expenses to control costs in a state of generally deteriorating revenues. Opex vs. Net Interest & Commission Income (Sep. 2008 – Sep. 2009) 46.7% 45.8% 55.1% 58.3% 53.3% 51.1% 78.1% 85.1% 58.6% 61.0% 54.3% 57.3% 47.3% 180.0 48.5% Cost to Income Ratio 160.0 140.0 120.0 Among the top players, only 100.0 SGS has 3.4%achieved growth of revenues in 80.0first nine months 60.0 40.0 20.0 0.0 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Banca Intesa Raiffeisen banka Eurobank EFG Komercijalna banka Société Générale Hypo Alpe-Adria- Unicredit bank Bank Operating Expenses Net Interest and Commisions Income May 2010 81
  • 82. Serbia – Macroeconomic and Banking Environment Profit Before Tax (2006 – 2008) In the period between 2006 and 2008, most of the top ten banks achieved strong growth through leveraging on high interest rates on the market, cheap international financing and primarily low demands on the creditworthiness of clients. There could have been an even larger expansion of lending, but the National Bank of Serbia intervened several times with raising of obligatory reserve rates and even prohibiting of certain retail loan products. Profit Before Tax (2006 - 2008) 100 144.0% 83.8% 73.1% 78.8% 643.1% 49.5% 21.1% 0.1% -32.3% CAGR 28.8% over 90 period 85 79 80 Total profit for 742008 achieved by all profitable 70 banks was EUR 63 542 M 60 56 Total loss 51 51 recorded by all 50 EUR M unprofitable banks was EUR 42 113 M 38 40 36 35 Foreign owned 30 29 banks recorded 30 27 27 26 26 EUR 375 M of profits and EUR 19 20 20 18 17 16 52 M of losses 13 10 12 9 10 8 7 4 0 Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank EFG Unicredit bank AIK banka A.D. Société Vojvo anska Volksbank -4 banka bank Adria-Bank Niš Générale banka -10 May 2010 2006 2007 2008 82
  • 83. Serbia – Macroeconomic and Banking Environment ROE (2006 – 2008) Return on Equity achieved by leading ten banks on the market is very good. Average ROE of the top ten banks by assets size in 2008 was 12.7%. ROE (2006 - 2008) 30.0% 25.2% 25.0% 20.3% 20.0% 19.3% 17.2% 17.2% Decline in the 16.5% 15.9%profit rate of SGS 15.1% 15.1% is partially 15.0% 13.9% explained by 12.9% 12.8% 12.8% strong growth of 12.0% 11.7% 11.2% equity in 2007, 11.0% which put 10.2% 9.4% 9.7% pressure on the 10.0% profit rate, since 8.2% 8.2% 7.6% overall profits 6.9% 6.3% stagnated 5.4% 5.5% 5.0% 3.1% 3.1% 0.0% Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank EFG Unicredit bank AIK banka Société Vojvo anska Volksbank banka banka Adria-Bank Générale banka A.D. Beograd -2.2% -5.0% 2006 2007 2008 May 2010 83 *ROE is calculated based on Profit Before Tax, due to lack of precise data of After-tax Profit for 2008
  • 84. Serbia – Macroeconomic and Banking Environment Profit Before Tax (Sep 2008 – Sep 2009) Crisis has hit strongly the Serbian banking industry in 2009 and this led to extensive fall of comparable profit to the previous year. All top banks had a decline in profit compared to the previous period. Unicredit, SGS and Volksbank have recorded the smallest decrease among the top banks. Profit Before Tax (Sep. 2008 – Sep 2009) -31.3% -50.6% -58.6% -24.8% -52.0% - 12.0% -38.8% -26.1% -67.1% -27.3% Change 90 % 78 71 70 53 52 50 39 32 29 29 30 26 26 24 18 19 17 16 13 13 12 8 10 5 Banca Intesa Komercijalna Raiffeisen bank Hypo Alpe- Eurobank EFG Unicredit bank AIK banka A.D. Société Vojvo anska Volksbank banka Adria-Bank Niš Générale banka -10 Sep-08 Sep-09May 2010 84
  • 85. Serbia – Macroeconomic and Banking Environment ROE (Sep 2008 – Sep 2009) When 9 months results for 2008 and 2009 are compared, six among the top ten banks have achieved a major fall in profitability, while four, including SGS have recorded smaller drop in overall profitability. ROE (Sep. 2008 – Sep. 2009) 16.00% 14.00% 13.67% 12.53% 12.23% 12.00% As seen on 11.09% previous graphs, 10.30% 10.34% cost control and relatively stable 10.00%level of operating 8.68% costs to NBI 7.98% 8.05%within SGS, have 8.00% 7.42% led to smaller 7.08% decrease in overall 5.84% 6.05% 5.94% profitability. 6.00% 5.37% 5.57% 4.99% 4.69% 4.45% 4.00% 2.23% 2.00% 0.00% Banca Intesa Komercijalna Raiffeisen Hypo Alpe- Eurobank EFG Unicredit bank AIK banka Société Vojvo anska Volksbank banka banka Adria-Bank Générale banka A.D. Beograd Sep-08 Sep-09 May 2010 85 *ROE is calculated based on Profit Before Tax
  • 86. Serbia – Macroeconomic and Banking EnvironmentPerceived Market Direction of Competitors Banca Intesa Achieved a leading role on the market in the previous few years through a combination of both organic and acquisition driven growth. Their aim is to capture at least 25% market share in Serbia, which would provide for stable and profitable operations in future Hypo Due to current problems in the holding companies, sale can be expected in short to medium term for both Hypo Volksbank and Volksbank. While Hypo might be sold in peaces (country by country), Volksbank will probably be sold as a whole (Raiff. is a potential suitor) Unicredit Unicredit entered Serbia through merger with HVB, which acquired local private bank in 2005. Since present on the market, achieved constant growth. Extremely interested in acquiring Komercijalna Banka and are actively monitoring its operations. Raiffeisen Has even achieved a leading position on the market in 2006, but has since lost share. However, they have now stabilised and have a firm position among the top five banks, which they will probably try to maintain, maybe make small add-on acquisitions Erste Since acquiring a relatively small state owned bank in 2005, Erste has not been able to strongly increase its market share. Hypo is seen as a primary acquisition target for them, but they also seem to be interested in eventual privatization of Komercijalna Komercijalna Managed to increase its market share in recent years, leveraging on the fact that it was the only strong state owned bank. Lack of equity led to several increases of capital by EBRD and the State has agreed to privatize the bank in the future. Strong organic growth can be expected in the meantime, fuel by new equity and easier access to funds. Credit Agricole Entered the market through small private bank in 2005. Still not achieved profitability, do not seem to eager to push. Findomestic (BNPP) Entered the market through small private bank in 2005. Still not achieved profitability, do not seem to eager to push. KBC Present through a small Bank (EUR 170 m Assets). Mulled selling in near future. On the other hand, KBC holds 30.6% of Nova Ljubljanska Banka – NLB (Slovenia), a relatively strong regional player (ex-Yu). NLB has a medium sized bank in Serbia (EUR 430m in Assets) ProCredit Operates successfully for a number of years. Specialized bank for financing of small companies and entrepreneurs. Greek Banks (EFG, Not perceived to have financial strength to pose a threat to major players in the medium future. If local market NBG, Alpha, Pireaus, and general conditions in Greece deteriorate further, some Greek banks might even consider divesting foreign Marfin), OTP subsidiaries. (Hungary)