BANKING OUTLOOK IN CENTRAL EASTERN EUROPE

Gianfranco Bisagni, Head of CEE Corporate and Investment Banking Helsinki, November 2012

2

The banking sector‘s view on Central and Eastern Europe

EE LV

LT

PL

CZ

SI HR SRB

SK

BG

UA

RO

TK

HU

KZ

AUT

RU

GER

BIH IT

3

AGENDA

CEE – Banking Sector Outlook

Future Challenges & Outlook 2013

4 SOURCE: Central Banks, UniCredit CEE Strategic Analysis

-5,6 HU

-1,1

Baltics

0,6

SLO CRO

1,8 CZ

3,0 BH

3,0 UA

3,1

RO 3,7 BG

5,1 PL

KZ 10,0

TK 12,2

SRB 12,2 RU 19,4

131

71

132

123

145

138

120

155

90

118

101

111

103

145

100

HU

Baltics

SLO

CRO

CZ

BH

UA

RO

BG PL

KZ

TK

SRB

RU

Total Loans, 2012 forecast, % growth Loan-to-deposits ratio, % 2012 forecast

-9,1

3,4

SK SK

Lending growth generally higher where funding gap is lower (with exceptions)

Banking Outlook

5 SOURCE: Central Banks, UniCredit CEE Strategic Analysis

In most sub-regions in CEE lending growth recovered since 2009, with Baltics being a clear exception

Banking Outlook

Lending growth in CEE - subregions

60

80

100

120

140

160

180

2008 2009 2010 2011 2012 2013

Central EuropeSEEBalticsformer CIS & TKCEE Total

Baltics

SEE

CE

CIS&TK

6

CEE loans as well as deposits are expected to move in parallel aiming at a more balanced banking sector

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Deposits, yoy growth Loans, yoy growth

Before the crisis loan growth was higher than deposit growth

Since 2011 loan growth and deposits moving in close correlation.

Growth in Loans and Deposits in CEE

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

Banking Outlook

L > D

L < D L ~ D

7

At single country level this trend is mainly confirmed, only Hungary is expected to show negative growth also in 2013

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

-2.0

2.0 2.4 4.8

1.3 0.7

-1.1 -3.6

2.1 2.6 1.1 1.9

11.2 8.4

2.9 3.7 7.4 5.9 7.2

9.6 6.1 6.3

12.4 12.2 12.5

7.5 10.6 9.9

14.0 14.2

3.1 3.2 3.0

UA

3.4 7.2

3.0 4.8

SK

3.0

RO

19.4

SRB

9.6

14.3 12.2

RU

-1.1

2.2

Baltics

1.1

SI

-5.6

0.6

CZ

2.7

HR BH

1.8

HU

-0.9

1.5

-9.1

KZ

11.3 12.2 10.0

TK

17.6

BG

4.3 4.7 3.7

PL

5.1

2013 2012

Total Deposits, yoy % growth

Total Loans, yoy % growth

UA SK RO SRB RU Baltics SI CZ HR BH HU KZ TK BG PL

Banking Outlook

8

Risk perception remains a key variable to monitor

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

Note: (1) International banks in CEE include UCG, ERSTE, KBC, SOCGEN and INTESA; EU large banking groups include BARCLAYS, RBS, HSBC, BBVA, DB

0

100

200

300

400

500

600

700

800

900

1000

Mar-0

7

Jun-

07

Sep-

07

Dec-0

7

Mar-0

8

Jun-

08

Sep-

08

Dec-0

8

Mar-0

9

Jun-

09

Sep-

09

Dec-0

9

Mar-1

0

Jun-

10

Sep-

10

Dec-1

0

Mar-1

1

Jun-

11

Sep-

11

Dec-1

1

Mar-1

2

Jun-

12

Sep-

12

CEE Sovereign CDS CDS of International Banks in CEE CDS of EU large banking groups

Turmoil begins

Bear Stearnsrescue take-over

LehmanBrothersdefaults

Global liquiditycrisis affecting CEE

Increasing alarmover Eurozonedebt crisis

ECB announces easing measures

Global banking and CEE regional risks (1) (5Y CDS, bp)

Banking Outlook

CEE countries under pressure

Banks under pressure

9 SOURCE: Central Banks, UniCredit Group CEE Strategic Analysis

Revenue generation capacity reaching a bottom in 2012, expected to improve in 2013. Banks keep strong focus on costs.

1

1,5

2

2,5

3

2006 2007 2008 2009 2010 2011 2012 20133

3,5

4

4,5

5

5,5

6

CEE Net revenues [right hand scale]CEE OPEX [left hand scale]GOP [left hand scale]

Revenues, expenses and GOP in CEE, % on average volumes (L+D)

CEE Net revenues and CEE OPEX over average volumes (Loans + Deposits) both follow a decreasing trend, but some stickiness on costs is jeopardizing Gross Operating Profits

Banking Outlook

10

Gradual normalization in credit quality problems…

(1) CEE includes Poland, “Impaired Loans” = loans that are 90 days overdue (definition according to Basel 2 regulation, however, some local variations are possible). SOURCE: Central Banks, UniCredit CEE Strategic Analysis

Impaired loans and CoR (% on lending) in CEE(1)

0

4

8

12

16

2006 2007 2008 2009 2010 2011 2012 2013

1.4

13.0

1.4

13.8

1.4

13.6

1.8

14.1

5.0

12.9

2.4

7.8

1.4

5.6

1.4

6.1

CoR Impaired loans

Banking Outlook

11

…especially in countries with a high percentage of impaired loans during the crisis

Impaired loans, % 2011 2012 2013

Poland 7.5 7.9 8.3

Czech R. 6.2 6.3 6.5

Slovakia 5.8 5.5 5.6

Bulgaria 14.7 18.9 19.3

Romania 22.9 26.1 23.6

Croatia 12.4 13.8 14.0

Russia 16.3 16.8 16.2

Turkey 2.6 2.9 3.2

Ukraine 37.0 33.0 30.0

Kazakhstan 34.4 34.1 33.9

Hungary 17.3 20.0 18.5

Serbia 19.0 20.0 19.0

Bosnia-H. 11.8 12.9 13.8

Slovenia 11.3 13.3 13.1

Baltics 13.2 11.5 10.7

∆ 2012-13

+0.4

+0.2

+0.1

+0.4

-2.5

+0.2

-0.6

+0.3

-3.0

-0.2

-1.5

-1.0

+0.7

-0.2

-0.8

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

Banking Outlook

12

0

10.000

20.000

30.000

40.000

50.000

60.000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EUR, mn

And a lower cost of risk can support profitability

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

CEE BANKING FORECAST CEE (incl. PL) – Pre-tax profit (EUR, mn)

Banking Outlook

~ 90% from TK and RU

13

CEE banking sectors with proper capital buffer

Capital Adequacy ratio, % (June 2012)

SOURCE: Central Banks, UniCredit CEE Strategic Analysis

2,0 1,7 2,0 2,0

2,5

4,02,0

0

5

10

15

20

25

10.0

SI

10.8

8.0

SK

15.0

10.0

CZ

16.3

8.0

HU

14.8

8.0

PL

13.6

8.0

KZ

17.5

10.0

RU

13.8

10.0

1.0

UA

18.0

10.0

TK

16.5

8.0

SRB

17.3

12.0

BH

16.8

12.0

HR

20.2

12.0

RO

14.7

8.0

BG

16.7

12.0

LT

14.2

8.0

LV

17.2

8.0

EE

19.6

CAR min Additional recommendation Jun-2012 CAR

1 Bulgaria: Minimum is set at 12% However BNB requires banks to keep sufficient Capital buffer 2 Czech republic: Minimum CAR is 8%, but informal limit is 10% 3 Latvia Minimum is 8% but regulators strongly recommend keeping ratio above 10% 4 Serbia: Minimum set at12%, however dividend payout limited to ratios above 14.5% 5 Slovenia: Bank required to keep ratio of 1.216 between Pillar II and Pillar I capital requirement (8% * 1.216 = 9.7%) 6 Romania: Formalized minimum level is 8%, informal limit is 10% 7 Russia: Minimum 10% for banks , 11% for banks participating in deposit insurance system 8 Turkey: Although minimum is 8% according to legislation, local regulator recommends 12%, the banking system uses 12% as the effective minimum.

Banking Outlook

14

AGENDA

CEE – Banking Sector Outlook

Future Challenges & Outlook 2013

15

An increase in the regulatory pressures on banks also in CEE

SOURCE: UniCredit Group CEE Strategic Analysis

Basel III

Action against FX lending

Bank levy

Domestic funding resources continue to become more important

Loan growth is more and more closely tied to growth in deposits than it was in the past

Liquidity coverage requirements & net stable funding ratios represent a major challenge and might intensify competition for deposits

LLSFR of 110% (Loans to local funding ratio), introduced in Austria, affects lending in countries where loans/deposits ratio is already high

16

The banking sector in Central and Eastern Europe: Outlook 2013

Generally tight funding / liquidity conditions remain an issue to be carefully watched, a fully fledged credit crunch has been avoided in most of the countries

Credit quality problems – the major challenge for the banking sector worldwide - are gradually normalizing especially in countries with a high percentage of impaired loans such as Kazakhstan, Ukraine and Romania

A differentiated regulatory environment poses serious challenges for cross border banking groups

Poland, Turkey and Russia emerge as having the greatest growth potential in the medium-long term. In other CEE countries the environment remains more challenging

Challenges & Outlook

17

The long term growth potential of the CEE region vs other markets are still visible, mainly driven by under-penetration…

NA: North America; AF: Africa; ME: Middle East; WE: Western Europe; SOURCE: Economist Intelligence Unit (EIU), McKinsey Global Banking Pools 17

Retail volume/Disposable income (%, 2011) Corporate volume/GDP (%, 2011)

458417392

219

13310087

371

NA Asia WE AF ME CEE LatAm

World avg.

138122

95

60565639

LatAm NA ME AF Asia

99

WE CEE

World avg.

18

The banking sector in Central and Eastern Europe: Outlook 2013

Some re-shaping of business strategy with a clearer focus on specific markets became

visible - in 5 years time we expect to see a more consolidated, less leveraged and more resilient banking sector: Focus on cost Capital strengthening Focus on Funding Business reshuffle

Banks are either choosing selective growth or selective exit from non-core markets

In the retail sphere, multichannel banking becomes more and more important

In the corporate banking area, consultancy, Fee&Commission business has a greater role – less eagerness for gaining market shares, more for quality of revenues. Risk management more and more important

Challenges & Outlook

19

EUR4bn

What happened so far

Poland

EUR0.5bn

Poland

EUR4.1bn

Russia

RBI acquired a 70% stake, Eurobank EFG remained

with 30%

Bank of Moscow ranked #6

Santander

USD 3,5bn

EUR 0,5bn

Merger

Opportunities still there

SEE subs (HR, SRB, SLO, ME, BiH and AT head office) on sale for ~EUR1.5bn

Merger

Units in SRB, RU, SLO to be sold

In Slovenia, EUR100mn recapitalization needed, Gazprombank among potential buyers

Merger

Merger creates #10 player

Santander holds 76.5% of the merged lender and KBC 16.4%, 7.1% free

floating

M&A activity is again significant

Denizbank is #10 player by assets

Entered into CEE market

Turkey

CEE

Russia

Greek banking groups merging

20

THANK YOU!

Q & A