Eastern Europe after the Crisis

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Taras Kirichenko, CEO, Pravex-bank, Ukraine

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Eastern Europe after the Crisis

  1. 1. INTERNATIONAL SUBSIDIARY BANKS DIVISIONEE Banking landscape"There are only the pursued, the pursuing, the busyand the tired.“Francis Scott Key Fitzgerald “The Great Gatsby”Taras Kirichenko, CEO Pravex Bank, Intesa Sanpaolo GroupCIS Bankers, 2nd International Banking Conference & ExhibitionKiev, June 6th, 2013
  2. 2. 24 key trends – 3 strategiesStrong fundamental growthpotential1Structural volatility2Increasing diversity ofperformance3Technological shifts4Portfolio reshapingFront-office effectivenessOperational consolidation
  3. 3. 3EE again sells its potentialS t r o n gfundamentalg r o w t hpotential1Ø  EE is likely to return to a moderate GDP growth track (EE CAGR 20112020 +3,2%, Ukraine +3,8%,Russia +4,1%)Ø  In the long run EE banking revenues have above par growth prospects mostly driven by economic growth,lending volumes and risk costs (EE revenues CAGR 20112020 +9,7%)Ø  EE is still very underpenetrated in banking (Retail volume/Disposable income 100% vs 371% world av. -Corporate volume/GDP 56% vs 99% world av.)Source: EIU. McKinsey Global Banking PoolsOrigin Outlook for the next yearsq EE markets continue to beunderpenetrated (retail volumes overdisposable income is only 100% vs~370% global average)q There is a natural momentum to PFAaccumulationq Eastern Europe is likely to stay one ofthe fastest growing regions in a globalsettingq Two drivers at playØ  GDP growth potential of theregionØ  Low penetration
  4. 4. 4RollercoasterØ  EE macro-economic outlook clearly worsened in the last 12 months (Ukraine 20112015 GDP growthforecast in July 2011 was +4,23%, in July 2012 was +3,48% and continuously decreasing)Ø  Plenty of possible global downturn banking scenarios could impact EE banking in different extent (Eurozonebreakup, Asia slowdown, US fiscal spiral)Ø  Macro volatility led ¾ of banks to be valued at below 1.0x (EE is the region with the highest number of“below 1x” P/BV banks (77% vs world av. 61%)Source: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global InsightS t r u c t u r a lvolatility2Origin Outlook for the next yearsq Fragmented markets with:Ø  Low financial wealthØ  Declining demographicsq Sensitivity to developments in EUand global commodities markets(Russia/Ukraine)q The combination of low wealth and poordemographics creates vulnerabilityq The region seems to be sensitive toadverse events, e.g., EMU breakupq Valuation multiples hit their lows
  5. 5. 5There are different sheeps in the herdØ  In the last 12 months divergences in performance have been expected among EE banks. Main groups:Relative stability (Czech Republic, Slovakia), Healthy (Russia, Poland, Croatia, Bulgaria), Constrained(Hungary, Ukraine, Serbia, Romania, Bosnia, Albania)Ø  The increasing diversity is reflected by the widening ROE gap between the best and the worst (more than10% difference between “performing” and “constrained” groups)Ø  The divergence between banking groups is also prominent, even within the same markets (Av. ROE–COE,from +2,6% to -5,2%)Ø  High margin and low cost in EE are key factors keeping banking returns high versus WE, however, both arevulnerableSource: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global Insight, Annual reports; McKinsey estimatesI n c r e a s i n gdiversity ofperformance3Origin Outlook for the next yearsq Macro/banking vulnerability differs bycountryq Broadly, two country performance groups:“Constrained” and “Performing” countriesq Several regional players are severely hurtq Risk costs at peak levels in many marketsq Health’ (sustainable Loan-to-Depo andcapital adequacy) has become a truedifferentiatorq Risk cost rebound
  6. 6. 6Industrial revolution starts in Emerging MarketsØ  While slower than in Northern Europe, role of branches is expected to change in CEE as well, requiringanswers from banks (expected decline in branch visits: NE -48%, CE -27%, EE -20%)Ø  Young citizens of some EE countries already match and exceed their WE peers in terms of Internet usage,but there is still a gap in mature groupsØ  16-24 generation growing older will likely apply their habits also to banking needsSource: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global Insight, Annual reports; McKinsey estimatesTechnologicalshifts4Origin Outlook for the next yearsq Rapid changes in consumer behavior andchallenging economics make for rapidadoption of new technologiesq Threat of new/non-traditional entrants
  7. 7. 73 key strategiesØ  The portfolios of the Top 10 banking groups remainfragmentedØ  Consolidate / exit sub-scale marketsØ  Potential asset swapsPortfolio reshapingFront-office effectivenessOperational consolidationØ  Raise effectiveness of physical networks, re-definechannel strategyØ  Pilot new technologiesØ  Focus more on strategic customer segmentsØ  Truly ‘frugal’ look at operating cost base andprocessesØ  Lean 2.0 to reduce waste in operations andrationalize costsØ  Consolidate operations regionally, where possibleSource: McKinsey
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