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

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
environment
May 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
Serbia
May 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 Debt
May 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 the
few 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 Serbia
started 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 in
most 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 deficit
was 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 worth
EUR 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 strong
economic 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 Serbia
After 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 260
have been frozen due 321
Romania
to crisis, while 245
salaries 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 the
threat of another sudden
rise in investor risk
aversion has diminished.
1250
Although capital inflows
were much lower yoy
through 2009, they were
sufficient to cover lower
750
current account deficit.
In April, the IMF
Executive Board gave 250
the 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 bank's target for 12.0%
11.7%
2009.
11.0%
End of period CPI in 2009
was 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 2010f
to 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 achieve
1.5% -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 countries
secured 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 set
infrastructure upgrade as 1
one of its top priorities,
France Germany Croatia FYROM Albania Bulgaria Serbia Romania Bosnia
and 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 include
construction of transport
Corridor 10, and railway
and 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 the
lowest exports to GDP
ratio among the
observed group. 64%
However, it is one of
the 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 recently
finalized 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 International
Settlement,
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 Measures
May 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 starting
point 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 42
banks 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
29
state 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 assets
per 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 is
setting 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
international
group and whose
acquisition 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 50
proven to be one 20%
19%
of the strongest
18%
growing lending
markets in the 40
36
period from 2006 35
15%
to 2009. 15%
30 28
Even with 27 26 25 12%
stagnation in
2010 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 7
CAGR 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) CAGR
Lending activity in 100% 14%
Serbia grew from
13.2%
31% of GDP to
estimated 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 8
the 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 strong
growth 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 Ratio
Capital adequacy
ratio for Serbian CAR Tier 1 ('09f)
banks remains
exceptionally high 30 20.8 25
providing a strong
cushion, even for
very pessimistic 24.7
scenarios 25
20
regarding non
21.3
performing 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
9.3
would need to be 10.6 10
provided with 10 8.8 7.0
more equity.
The same applies 5
to international 5
players with
subsidiaries
which are in need
of additional 0 0
capital injections, CE SEE Baltic Serbia Bulgaria Croatia Bosnia Romania Macedonia Albania
which 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 748
the brink of crisis 750 692
while its growth, 667 650
although high,
actually 579
repositioned
Serbia much
better relative to 500
its neighbors.
385 866
717 486
However, SEE 644
region is still 640
perceived as high 551
risk region due to 250
many structural 369
issues which
remain 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 & ROE
other SEE in the ROA ROE
period 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 stable
ROA at the level
of 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
macroeconomic
imbalances such
as Hungary,
Ukraine and
Baltic States
Fine growth of
SG’s market
capitalization
allows it to collect
more capital and
to restructure its
current
obligations.
SG seems to be
well positioned to
use the
opportunity
unavailable to
many other
groups and to
build up its
presence,
leveraging on its
diversification
and strong
funding positions
depending 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. Vienna
Initiative) 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 loan
repayment 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 CEE
May 2010 34