see Outlook Quarterly - Addiko Bank Hrvatska · SEE MACROECONOMIC OUTLOOK Page 2 January-17 EXECUTIVESUMMARY BOTTOM LINE: We have upgraded 2017 growth outlook in all economies except

by Economic Research Department

1 | 17

see Outlook Quarterly

SE

18 January 2017

ENJOYING THE GROWTH PICK UP

Slovenia: Domestic Demand Sets the Scene page 5

Croatia: Spreading the Feel-Good Factor page 11

Serbia: Stronger Growth Prospects page 17

Bosnia and Herzegovina: Political Wrangling Barely Over page 23

Montenegro: Fiscal risks in spotlight page 27

-8

-4

0

4

8

12

2004 2006 2008 2010 2012 2014 2016F 2018F

Source: Natioanl sources, Addiko Research

SEE GDP GROWTH DYNAMICS (%, YOY)

Croatia Slovenia

Serbia MNE

B-H SEE average

SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION

SEE MACROECONOMIC OUTLOOK

Page 2 January-17

EXECUTIVE SUMMARY

BOTTOM LINE: We have upgraded 2017 growth outlook in all economies except Montenegro where

growth nevertheless accelerates. Positive effects from tax and other reforms, and the impact of

another record tourist season, stronger EU funding and steady EU demand make Croatia the growth

(3.5%) outperformer in 2017. External demand is also one of the reasons behind Serbian GDP upgrade,

additionally underpinned by strong investments and personal consumption recovery. Slovenia is

expected to maintain 2.7% GDP growth, with stronger domestic demand and EU funding the main

drivers. Inflation is expected to pick up across the region on the back of low base effects, stronger

energy and food price recovery as well as stronger domestic demand.

KEY POINTS:

1. In Slovenia we lifted 2017 GDP forecast by 0.7pp to 2.7% on the back of stronger domestic demand

and EU funding, partly offset by negative net export contribution as imports gather pace. In Croatia,

we have upgraded 2017 GDP to 3.5% on positive effects from tax and other reforms, and the impact

from another record tourist season and stronger EU funding on private spending and investment.

Exports continue to benefit from steady EU demand and competitiveness gains. In Serbia, we upgraded

2017 growth by 0.7pp to 3.2% as investments continue stellar performance most notably in tradable

sector, personal consumptions continues to recover and EU continues steady growth. In Bosnia, we see

2017 growth at 3.2%, driven by investments left on hold in 2016 and additionally helped by IFI funding,

while Montenegro growth forecast is left unchanged at 3.2%, but still speeding up from 2.6% in 2016.

2. As for fiscal performance, in Slovenia we see flattish budget deficit in 2017 (2.2% of GDP), before

falling to 1.8% of GDP in 2018 on stronger nominal GDP growth and better labour market conditions. In

Croatia, while 2016 budget deficit is set to decrease just below 2% of GDP, in 2017 we expect it to re-

widen to 2.5% on the back of public wage hike, potential spending overruns in healthcare and war

veteran transfers as well as lower CIT due to banking NPL write-offs. In Serbia, we lowered 2017

budget deficit to 2.0% of GDP on the back of stronger GDP growth fairly strong fiscal consolidation in

2016 to date, allowing the government to transfer certain 2017 costs in 2016 budget.

3. As for price movements, in Slovenia we see average 2017 inflation at 1.4%, just below the euro area

average on the back of food inflation pick-up, weaker euro, rising unit labour costs and more resilient

consumer demand. In Croatia, notwithstanding about -0.4pp direct impact from tax reform, we see

average 2017 CPI inflation at 1.6% on higher energy and food prices and stronger domestic demand. In

Serbia, inflation is also set to accelerate to 2.1% in 2017 supported with low base effect, higher global

commodity prices and stronger domestic demand.

4. Prolonged ECB purchases (even at a weaker monthly pace), further restructuring of the yield and

maturity profile, ongoing economic recovery and successful monetary transmission might result in

additional Slovenian rating upgrades, supporting investor sentiment going forth. We see Slovenian

bonds outperforming as long as the sovereign's macro story supports the yields profile. In Croatia, we

expect dovish CNB and a low rates environment to prevail as FX stability is in place and monetary

easing allowed by C/A surplus, banks' external position and lower fiscal risks. We are constructive on

Croatian bonds, cognizant of stronger GDP outlook and reform momentum, expected EDP suspension

and further rating upgrades upon restructuring of some relatively expensive (quasi)sovereign debt,

accommodative ECB and the CNB's incentives to hold state bonds. We finally see Serbian key policy

rate unchanged through (most of) 2017 but do not completely rule out rate hikes in Q4 in case of

stronger Fed hikes.

3-month view Government yields FX vs EUR Monetary policy

Slovenia ▼ ▼* unchanged

Croatia ▼ ◄► easier

Serbia ▼ ◄► unchanged

Bosnia and Herzegovina ◄► ◄► unchanged

Montenegro ◄► ▼* unchanged

*vs USD

Page 3


January-17

Source: National sources, Addiko research

SEE data trends

0

1

2

3

4

SLO CRO SRB B-H MNT SEE

Real GDP growth (%)2015 2016F

2017F 2018F

-1,5

0,0

1,5

3,0


CPI inflation (average, %, YoY)

2015 2016F

2017F 2018F

5

10

15

20

25

30


Unemployment rate (ILO, average, %)

2015

2016F

2017F

2018F

-18

-14

-10

-6

-2

2

6

10


Current account balance (% of GDP)

2015

2016F

2017F

2018F

-10

-8

-6

-4

-2

0


Government balance (% of GDP)

2015

2016F

2017F

2018F

50

65

80

95

110

125

140

155

170


Gross foreign debt (% of GDP)

2015

2016F

2017F

2018F

Page 4

*Net loans; **Slovenia excluded; Source: central banks, Addiko research


January-17

SEE banking sector trends

30

40

50

60

70

80

90

SLO* CRO SRB B-H MNT SEE**

Gross loans (% of GDP)

2015

2016F

2017F

2018F

70

80

90

100

110

120

SLO* CRO SRB B-H MNT SEE**

Loan-to-deposit ratio (%)

2015

2016F

2017F

2018F

0

1

2

3

4

5


Net interest margin (%)

2015

2016F

2017F

2018F

40

45

50

55

60

65

70


Cost-to-income ratio (%)

2015

2016F

2017F

2018F

0

3

6

9

12

15

18

21

24

27

CRO SRB B-H MNT SEE**

NPL ratio (%)

2015

2016F

2017F

2018F

5

9

13

17

21

25


Capital adequacy ratio (%)

2015

2016F

2017F

2018F

Page 5 January-17

SEE MACROECONOMIC OUTLOOK SLOVENIA

Domestic Demand Sets the Scene

The Q3 GDP (up 1.0% qoq, 3.0% yoy s.a., prev. upwardly revised to 2.2% yoy) outshone expectations,with household consumption and net exports the main drivers. Stronger-than-expected consumermomentum owed to solid hiring, strong tourist season and low inflation (which have all boosted realincome growth), resurgent retail credit, cheaper debt service, and housing market recovery.Meanwhile, exports are driven by solid euro zone's demand, price competitiveness gains and higherdegree of export market differentiation and product specialization. Private machinery and equipmentcapex growth was halved relative to 1H16 dynamics, reflecting Brexit-related uncertainty that provedto be temporary. Marking stronger than expected Q3 growth, and the expected strong export-drivenQ4 growth showing (+0.7% qoq, on our estimates), have made our FY16 growth forecast pushed up to2.7%. While we see external demand slowing in 1H17 as the euro zone's import/consumer demandfalters, and uncertainty weighs on investments, Slovenian local demand is holding pretty well.

We made an 0.7pp upgrade to our 2017 GDP forecast to 2.7% to capture stronger carry-over effect,steady and above potential growth in the euro zone, whereby slower spending and subduedinvestments will be cushioned by stronger net exports, helped by a weaker euro and stronger globaldemand. The growth is also underpinned by fiscal loosening (both locally and EU-wise) and strongerinvestments on supportive financial conditions, stronger EU funding under the new EU budgetary cycleand against high capacity utilization. On the back of the strong labor market, low debt service costs,higher disposable income and stronger household credit, private consumption is seen growing at 2.5%-alike clip, despite the benefits from oil price slump over 2015-2016 are now reversing. The risks to ourbaseline forecasts seem to lie a bit more on the downside, mainly driven by the difficult-to-quantifypolitical uncertainty, which tends to be negatively correlated with business investment spending andthe overall euro zone's import demand. On a positive note, while bank-based financial conditionsdeteriorated in 4Q16, we think the steeper yield curve, rising European bank equity, supply of creditas well as stronger demand for investment credit courtesy of stronger external demand all argue infavor of financial conditions. Upside risks also stem from a stronger impact of more effective fiscalpolicy on domestic demand.

A significant rebound in headline inflation is underway in most advanced economies, largely reflectingthe fact that the slump in energy prices at the start of 2016 drops out of the annual comparison. Therecent increases in energy prices, notably that of oil, as well as food and service prices haveentrenched Slovenian inflation in positive territory. Energy prices (rising about 10% yoy) will be themain driver of the expected recovery in inflation, as their contribution to headline inflation couldswing by up to 1pp between 2016 and 2017. This combined by some pick-up in food inflation (highestsince 2013), weaker euro, rising unit labour costs and more resilient consumer demand will likely seethe average 2017 inflation at 1.4%, just below the euro area average, and with a neutral impact oncompetitiveness. With the underlying inflation still rising at a lower rate than the ECB hopes, and aself-sustaining upswing in the euro zone is far from granted, we think the central bank is likely tomaintain its ultra-loose monetary policy.

Growth to maintain pace as domestic demand pick up steam

2016 ends with stronger than-expected 2.7% growth

Inflation heading north on energy prices, weaker euro and tighter labour market

We expect 2017 growth to maintain 2.7% pace, driven by domestic demand and stronger EUfunding, partly offset by negative net export contribution as imports gather pace. Meanwhile,reform agenda takes the back seat ahead of mid-2018 elections, as privatization efforts arediluted as well. Ongoing ECB activism, hefty C/A surplus and further public debt reduction suggestongoing Slovenian bonds outperformance despite the global reflationary pressures.

-13

-7

-1

5

11

1Q05 2Q07 3Q09 4Q11 1Q14 2Q16

Source: SORS, Addiko research

Slovenia: contributions to quarterly changes in real GDP (in pps)

Household General Government GFCF Net trade

Page 6

SLOVENIA

January-17


Higher C/A surplus owes to rapid exports growth, subdued imports given a temporary EU-funded capex

slowdown, narrower income deficit and corporate de-leveraging. Positive developments are however

offset by temporarily lower EU transfers and the worsening of the general government position. With

the ongoing strengthening of domestic (import-) demand and higher commodity prices, we expect C/A

surplus to decline in the next years as the C/A balance becomes increasingly 'structural'. As long as net

external debt is falling, we see a further improvement in the net international position toward -30% of

GDP, which is below the Baa3 median of about -40% of GDP.

With record C/A surplus and about 10% of GDP fiscal reserve upon substantial dollar bond buybacks and

partial debt retirement, Slovenian funding position is on a strong footing. With further ECB easing likely

by end-year, the MinFin will likely engage in further prefunding for 2017 along with USD bond

repurchase. After last year's sale of NKBM bank, privatization has stalled since the political context

(elections by mid-2018), government's plan to keep 25%+ share in the largest state NLB bank do not

help to attract investors, and the sale of Telekom Slovenia still faces legal setbacks. That said,

removing restrictions on holding higher stakes in strategic SOEs and further competitiveness reforms are

needed to attract FDI and reduce public debt as a prolonged period of low interest rates requires state-

owned banks to adapt business models.

The budget gap likely fell to 2.3% of GDP on buoyant tax revenues, a large drop in EU-funded public

capex and subsidies as well as lower interest payments, despite 5% public wage bill hike. While the

ongoing tax-rich domestic consumption, employment growth and better tax compliance bode well for

5% tax revenue growth (and hence fiscal consolidation) in 2017, stronger-than planned interest cost

cuts (by 0.3-0.4pp of GDP), there are a number of risks on the expenditures side of the budget. High-

teens public capex growth, additional 4% wage and benefits hike (about 0.2pp of GDP higher than

planned) after 6% hike in 2016, migration-related spending, potentially larger impact of the BAMC

consolidation and generally higher outlays for safety, science and health pose the key performance

risks. Looking ahead, politics are not supportive for larger consolidation in 2017-2018 when structural

balance will deteriorate to -2.5% of GDP (from -1.9% in 2015) due to a spike in the positive output gap,

and public capex will hit 2013 levels, which alongside higher entitlement spending leads to solid fiscal

easing. We doubt the government including the pensioner party DeSUS will bring meaningful pension

and healthcare reforms to address the areas that largely explain fiscal sustainability gaps. We see

flattish budget deficit in 2017 (2.2% of GDP), before falling to 1.8% of GDP in 2018 on stronger nominal

GDP growth and better labour market conditions.

After a spike to 83.1% of GDP in 2015, public debt likely fell near 80% of GDP in 2016, and we expect it

to drop further in 2017-2018 thanks to successively lower deficits and state bond redemptions partly

covered by the reduction of the ample MinFin's cash buffer and ever lower interest rates. With similar

funding needs in 2017 (EUR3.9bn) and redemption profile to that in 2016, Slovenia has perhaps the best

position in CESEE being (pre)funded by 1Q18 on our estimates. The assumed drawdown in cash reserve

by EUR250m p.a. in 2017-2020 will on our estimates help a reduction in the gross government debt to

78% of GDP this year and 73% of GDP by the end of this decade, i.e. stronger than the EC-enshrined

MIP's requirement of the debt reduction by 1.2pp of GDP p.a. The pace of the debt reduction could be

faster in case of stronger reform-driven spending rationalization, revival of privatization (generating

EUR400m in 2014-2015), sale of BAMC assets (EUR300m p.a.) and the adherence to a zero budget deficit

rule. As for the latter and the overall reform agenda, real estate tax implementation (bringing EUR200-

300m), broadening tax base and the approximated EUR200m savings out of healthcare reforms are the

main options with an eventual larger fiscal impact. Further banks and SOEs' restructuring are equally

important to reduce the risk to public finances in the medium term.

C/A surplus expected to peak this year

Fiscal easing in the pipeline?

... but public debt is expected to fall due to reduction in fiscal reserve

-9

-6

-3

0

BG EST CZE B-H LIT LAT SRB SLO HUN CRO POL ROM

Source: European Commission, Addiko research

Slovenia: fiscal deficits (% of GDP)

2010 2017

Page 7


January-17

SLOVENIA

US reflation story lifts yields...

... but more ECB easing on the horizon

The global pressure for curve steepening after the US' Trump election saw a reversal in Slovenian

longer-term yields by 40-50bp from end-3Q16 to early December, only to level off somewhat recently.

Slovenian bonds still outperformed not only CEE ones in the last months, but also periphery issuers Italy

and Spain under pressure from high political uncertainty and banking sector concerns. The downward

reversal in public debt trajectory, increasingly cheaper debt service and S&P rating outlook upgrade are

all important underpinnings. Prolonged ECB purchases (even at a weaker monthly pace), further

restructuring of the yield and maturity profile, ongoing economic recovery and successful monetary

transmission might result in additional credit upgrades, supporting investor sentiment going forth.

While the ECB announced it will slow its QE purchases from April, it also committed to buying for longer than thought, eventually providing more policy support than expected. It also gave an asymmetric commitment to greater support in terms of size and/or duration if certain risks to the macro outlook and financial conditions resurface. Whether the ECB opts to re-accelerate the pace of purchases or to extend the length of its QE purchases will depend on the reason why looser monetary policy is needed, with the former possible in the event political risks materialize and the latter would be on the cards eg in case of downside risks to inflation development. In such case, we'd expect additional drop in Slovenian yields. While the ECB backstop via QE purchases is an important market support in the wake of the global reflation pressures and politically-driven spikes in EMU yields, the all important monetary bazooka is unlikely to be enough to stop 20-50 spread widening episodes, in our view. We though see Slovenian bonds outperforming as the sovereign's macro story supports the yields profile, unlike in many peripherals, and domestic banks' bid remains strong in the wake of subdued local lending activity. We'd also expect upside pressures on euro and Slovenian yields if the euro zone's macro picture is still holding up well and the ECB looks into tapering options more seriously later in 1H17, which would cast a bearish shadow over much of the EU sovereign spreads landscape, in our view.

100

160

220

280

340

400

460

Oct-12 Aug-13 Jun-14 Apr-15 Feb-16 Dec-16

Source: Bloomberg, Addiko research

Slovenian spreads in tandem with peers

Slovenia USD 2022

Romania USD 2022

Hungary USD 2021

Page 8

Source: Slovenian National Bank, Statistical office of the Republic of Slovenia, Ministry of Finance, ECB, European Commission, Bloomberg, Addiko research

SEE MACROECONOMIC OUTLOOK SLOVENIA

Slovenia's data trends

-3

-2

-1

0

1

2

3

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Real GDP growth (% YoY)

-1

1

3

5

7

9

Jul-01 Jun-04 May-07 Apr-10 Mar-13 Feb-16

CPI inflation dynamics (% YoY)

Slovenia Euro area

-80

-60

-40

-20

0

20

Aug-04 Sep-07 Oct-10 Nov-13 Dec-16

Business sentiment in manufacturing

Confidence indicator

Export order-books

Overall order-books

-12

-8

-4

0

4

8

12

60

70

80

90

100

110

120

1Q02 3Q05 1Q09 3Q12 1Q16

Economic Sentiment Index (lhs)

GDP growth, 3m lag (yoy, rhs)

Economic confidence vs. GDP growth

-25

-20

-15

-10

-5

0

5

10

LUX FIN ITA FRA SLO BEL ESP NL AT GRE GER IRE

Unit labour cost for the total economy

1Q99-3Q16

-24

-20

-16

-12

-8

-4

0

4

8

12

30

35

40

45

50

55

60

65

Jan-07 Apr-09 Jul-11 Oct-13 Jan-16

PMI vs Industrial production - Slovenia

Germany mnfg PMI, (lhs)

Italy mnfg PMI, (lhs)

Slovenian industrial production, 3mma, (YoY, w-d-a, rhs)

January-17

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

36,3 36,9 36,0 35,9 37,3 38,5 40,2 41,9 43,7

48,1 51,4 46,3 47,7 49,6 42,7 44,2 44,4 43,7

17.693 17.972 17.496 17.431 18.091 18.665 19.439 20.213 21.064

23.471 25.028 22.499 23.150 24.034 20.701 21.383 21.425 21.064

1,2 0,6 -2,7 -1,1 3,1 2,3 2,7 2,7 2,6

1,1 0,0 -2,4 -4,1 1,9 0,4 2,7 2,4 1,9

-13,3 -4,9 -8,8 3,2 1,4 1,0 -1,2 5,3 5,6

7,1 1,3 -1,1 -0,7 2,2 4,6 6,4 5,9 5,5

7,3 8,2 8,9 10,1 9,7 9,0 8,0 7,6 7,2

1,8 1,8 2,6 1,8 0,2 -0,5 -0,1 1,4 1,8

1,9 2,3 2,7 0,7 0,2 -0,5 0,5 1,6 1,7

2,1 4,5 0,9 0,3 -0,6 -0,2 -1,5 1,8 2,0

3,9 2,1 0,4 0,6 0,8 0,7 1,9 2,2 1,0

-8,7 -6,7 -4,1 -15,0 -5,0 -2,7 -2,3 -2,2 -1,8

58,2 46,6 53,9 71,0 80,9 83,2 80,4 78,3 76,2

7,0 10,5 8,2 19,5 14,6 6,4 8,1 9,4 9,0

23,285 25,948 26,363 27,010 28,520 30,064 31,928 33,588 35,267

22,823 25,516 24,934 24,569 25,641 26,547 28,034 29,671 31,404

-0,748 -0,974 -0,081 0,708 1,181 1,498 1,754 1,677 1,624

-2,1 -2,6 -0,2 2,0 3,2 3,9 4,4 4,0 3,7

1,925 1,975 2,008 2,043 2,060 2,257 2,337 2,408 2,476

-0,043 0,068 0,930 1,732 2,325 1,998 2,814 2,721 2,578

-0,1 0,2 2,6 4,8 6,2 5,2 7,0 6,5 5,9

0,1 0,6 0,5 0,0 0,6 1,2 0,8 0,8 0,9

0,3 1,7 1,3 0,1 1,6 3,2 2,0 2,0 2,0

n/a n/a n/a n/a n/a n/a n/a n/a n/a

0,803 0,767 0,722 0,669 0,837 0,760 1,400 2,000 2,700

0,4 0,4 0,3 0,3 0,4 0,3 0,6 0,8 1,0

42,123 41,669 42,872 41,658 46,314 44,954 44,554 44,704 45,234

8,190 8,748 11,092 15,459 22,416 23,169 23,819 24,419 24,919

30,273 28,534 25,709 23,457 21,815 20,385 19,335 19,085 19,115

116,2 112,9 119,1 116,0 124,2 116,6 110,8 106,8 103,5

180,9 160,6 162,6 154,2 162,4 149,5 139,5 133,1 128,3

1,34 1,30 1,32 1,38 1,21 1,09 1,05 0,96 1,04

1,33 1,39 1,29 1,33 1,33 1,11 1,10 1,06 1,00

13,5 1,5 4,4 0,1 18,5 24,9 17,1 9,2 5,3

2,4 3,5 -1,4 -1,3 6,1 4,6 7,1 5,9 3,4

1,6 -4,6 -5,8 -21,4 -11,5 -5,9 -2,5 2,4 3,3

1,00 1,00 0,75 0,25 0,05 0,05 0,00 0,00 0,00

0,81 1,39 0,58 0,22 0,21 -0,02 -0,25 -0,39 -0,40

3,03 3,96 4,55 4,35 2,14 0,84 0,15 0,45 0,75

3,84 4,98 6,01 5,87 3,28 1,67 1,05 1,30 1,80

Page 9

Broad money M3 (% YoY)*

Domestic credit (% YoY)

EURIBOR 3M interest rate (average %)

SLO 5Y yield (average %)

SLO 10Y yield (average %)

Gross international reserves (EURbn)

Import cover (months of imports)

Gross external debt (EURbn)

Government (EURbn)

Private (EURbn)

Gross external debt (% of GDP)

Merchandise trade balance (EURbn)

Gross external debt (% of exports)

Debt indicators

Exchange rates and money growth

EUR/USD (end-year)

EUR/USD (average)

Money supply M1 (% YoY)*

Merchandise trade balance (% of GDP)

Tourism receipts (EURbn)

Current account balance (EURbn)


Net FDI (EURbn)

FDI (% of GDP)

FDI cover (%)

Fixed investment (YoY, %)

Industrial production (YoY, %)

Unemployment rate (ILO, average %)

CPI inflation (average % YoY)

CPI inflation (end-year % YoY)

PPI inflation (average % YoY)

Net wage rates (% YoY, nominal)

State budget balance (ESA-95)

Public debt

Gross public funding needs

Export of goods and services (EURbn)

Import of goods and services (EURbn)

* Since 2007 ECB data


SELECTED ECONOMIC FORECASTS

ECB reference rate (end-year %)

January-17

SLOVENIA

Source: Slovenian National Bank, Statistical office of the Republic of Slovenia, Ministry of Finance, IMF, Addiko Research

Activity

Prices

Fiscal balance (% of GDP)

External balance

Nominal GDP (EURbn, current prices)

Nominal GDP (USDbn)

GDP per capita (EUR)

GDP per capita (USD)

Real GDP (constant prices YoY, %)

Private consumption (YoY, %)

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

50.319 48.748 46.125 40.344 38.714 37.383 36.550 36.770 37.137

-2,5 -3,1 -5,4 -12,5 -4,0 -3,4 -2,2 0,6 1,0

138,8 132,1 128,2 112,4 103,8 97,0 90,9 87,8 85,0

34.450 32.875 30.964 24.338 21.540 20.275 19.768 20.243 20.913

1,6 -4,6 -5,8 -21,4 -11,5 -5,9 -2,5 2,4 3,3

95,0 89,1 86,0 67,8 57,7 52,6 49,2 48,4 47,9

23.507 24.170 23.856 22.550 24.426 25.140 25.705 26.808 27.642

-0,3 2,8 -1,3 -5,5 8,3 2,9 2,2 4,3 3,1

64,8 65,5 66,3 62,8 65,5 65,2 63,9 64,0 63,3

146,6 136,0 129,8 107,9 88,2 80,6 76,9 75,5 75,7

11,3 11,6 11,9 14,0 19,3 20,8 20,7 20,1 19,7

1.038 1.018 886 708 832 718 658 632 650

11,3 -2,0 -12,9 -20,1 17,5 -13,7 -8,4 -3,9 2,8

1.474 1.447 1.566 1.091 1.233 1.074 1.042 1.036 1.056

3,4 -1,9 8,2 -30,3 13,0 -12,9 -2,9 -0,6 2,0

709 670 823 370 547 479 471 479 513

7,3 -5,4 22,8 -55,0 47,7 -12,4 -1,6 1,6 7,2

810 1.207 1.599 3.809 614 325 240 202 185

2,0 2,1 1,9 1,6 2,1 1,9 1,8 1,7 1,8

-0,2 -1,1 -1,6 -8,0 -0,2 0,4 0,6 0,8 0,9

-2,4 -13,3 -20,3 -92,9 -1,7 3,6 5,1 5,8 6,6

51,9 53,7 47,4 66,1 55,7 55,4 54,8 53,8 51,4

1,5 1,6 1,6 1,7 1,7 1,6 1,5 1,5 1,5

7,3 11,4 15,0 13,7 11,5 9,9 6,1 5,8 5,5

65,7 58,6 60,4 91,6 80,0 98,4 101,0 102,8 104,9

1,6 2,4 3,4 8,8 1,6 0,9 0,7 0,6 0,5

114,3 180,1 194,3 1.029,2 112,3 67,8 51,0 42,1 36,0

Page 10

Provision charges (% of PPP)

Operating expense (% of assets)

NPA ratio (%)



Net interest income (EURm)

Net interest income (%, YoY)

Total operating income (EURm)

Balance sheet

Performance

Profitability and efficiency

Credit quality and provisioning

Assets (EURm)

Assets (%, YoY)

Assets (% of GDP)

Net loans (EURm)

Net loans (%, YoY)

Net loans (% of GDP)

Deposits (EURm)

Deposits (%, YoY)

Deposits (% of GDP)

SELECTED BANKING SECTOR DATA


Pre-tax ROAA (%)

Pre-tax ROAE (%)



Total operating income (%, YoY)

January-17

SLOVENIA

Pre-provision profit (EURm)

Pre-provision profit (%, YoY)

Provision charges (EURm)

NPA coverage (%)

Provision charges (% of loans)

Source: BSI, Addiko research

Credit de-leveraging eased in 10M16 to 2.9% ytd (vs 5.9% in 2015), with a positive contribution only

from 6.0% stronger household credit underpinned by improved labor market, higher real wages and

bright economic outlook. Conversely, the strongest negative contribution was from corporate (-6.6%

ytd in 10M16) as firms relied on even cheaper cross-border funding, inter-company loans and bond

issuance. Given 10M16 trends and usual de-leveraging pressures at the year end, we adjusted our FY16

forecast amid stronger-than-expected retail credit to finally 2.5% yoy total net loans decline. In 2017,

we see credit growth in positive territory thanks to ever lower interest rates, with the strongest

positive contribution from retail as banks target less-risky household credit. The overall credit growth

will remain subdued due to relatively weak corporate credit activity (despite positive economic

outlook) as firms continue to fund via cheaper non-bank alternatives or higher retained profits. NPLs

restructuring, liquidation of collaterals and portfolio sales helped to reduce NPL ratio to 6.3% in

October 2016 from 9.9% at end-2015, and we see it around 6% at end-2016 with further reduction in the

next years.

On funding, deposit growth (1.3% ytd in 10M16) is driven by private sector as both retail and corporate

deposit collection went up 4.8% ytd on the back of improved labor market and higher firms’ revenues.

However, public deposits slump accelerated to -32.8% ytd from -10.8% drop at YE15. That said,

following the expected 2.2% deposit growth in 2016, we expect deposit collection to accelerate in 2017

thanks to further employment and wage growth as austerity measures ease further, which bodes well

for domestically-oriented companies, while exporters’ cash flow continues to benefit from steady

external demand. On profits, NII decreased by 10.0% yoy in 10M16 due to contraction in credit activity

and falling active interest rates. That said, we see 8.5% lower NII in 2016, followed by nearly 4% drop in

2017 amid subdued credit growth and falling interest rate, and such environment will force banks to

optimize their business models and reduce opex.

De-leveraging slowdown, growth in retail loans

Low-yield environment is weighting on NII

Page 11


January-17

CROATIA

Spreading the Feel-Good Factor

The economy has been resilient in the aftermath of a short political deadlock, echoing the almighty

tourist season, which typically gives leverage to both foreign and local demand, as well as stronger EU

demand. Notably, private consumption soared 3.5% yoy in H2, driven by tourist-related spending,

increase in employment and real wages, lower savings rate and resurgent consumer credit.

Investments added to bullish tone on private capex (notably in tourism) amid entrenched business

optimism, stronger EU funding (1.9% of GDP in 2016 from 1.3% in 2015), stronger firms' profits and

bank credit increasingly dispersed across sectors. The expected Q4 growth acceleration to 3.5% on

stronger consumption, capex and upside surprises in the EU activity led us to upgrade FY16 GDP

growth forecast to 3.0%. Strong tourism earnings, improving labour market and significant tax cuts are

contributing to spreading a feel-good factor, which sent confidence gauges to 10Y highs.

Many factors are instrumental in our 2017 growth forecast upgrade to above-potential 3.5%, including:

(i) stronger consumption growth, (ii) better investment outlook, (iii) another record tourist season, (iv)

export competitiveness gains and (v) newly found space for fiscal easing (after two years of substantial

tightening). Private consumption is driven by PIT cuts, public wage, pension and minimum wage hikes,

tourist consumption, employment growth, higher foreign remittances and re-leveraging. The latter

comes after a multi-year de-leveraging as seen in 15pp decline in households debt to disposable

income alongside 2pp drop in interest cost to disposable income since 2009. We also expect stronger

business optimism and capex in response to reduced policy uncertainty, price competitiveness gains

out of comprehensive tax reforms and HRK1.5bn administrative cost cuts, faster pace of EU funding,

replacement capex needs (tourist industry, exporters), stronger firms' profits (including EBITDA

margins growth) and looser funding conditions. Risks are again broadly to the upside - from the record

tourist season, stronger monetary easing, to extra fiscal easing into the spring local elections.

Downside risks stem from external backdrop (slower EU demand, faster Fed tightening in a year with

challenging redemption profile), potential lawsuits against banks, unfavorable demographic trends and

the subsequent lack of available quality labor due to high emigration, and corporate balance sheet

adjustments.

Notwithstanding about -0.4pp direct impact from tax reform, CPI inflation will rebound sharply

towards 2% yoy this spring due to a large base effect on energy, higher commodity prices and stronger

domestic demand. The former should be the main driver of the expected recovery in inflation, with

energy (and in turn fuel) prices in particular expected to turn from a significant drag in 2013-2016 to a

boost in 2017-2018. Some pick-up in processed food inflation amid agricultural prices normalization

also looks increasingly likely, from the about 0.2% trend seen in 2015-2016. In 2017, we see average

CPI at 1.6%, with risks mainly tilted to the upside in the event of stronger-than-expected import

prices, USD appreciation and stronger fiscal easing locally, especially in the context of unfreezing of

public wage bill, and post-election administrative price hikes. As such, higher inflation remains the

only major headwind to counter otherwise very supportive factors for citizens' purchasing power.

Growth to accelerate in 2017 on tax reform, tourism, EU funding and looser funding conditions

2016 likely ended with stronger-than-expected 3% GDP growth.

End of deflation: CPI back around 2%

We upgraded 2017 GDP growth outlook on positive effects from tax reform, and the impact ofanother record tourist season and EU funding on private spending and investment. Exportscontinue to benefit from steady EU demand and competitive gains. Further monetary easing isallowed by higher C/A surplus, firmer banks' external position and the expected EDP suspensionthis spring. Notwithstanding fiscal easing, public debt will likely fall further, which alongsidestronger macro and reform momentum, accommodative ECB, CNB's incentives to hold state bondand rating upgrade prospects bodes well for further Croatian risk compression.

-16

-12

-8

-4

0

4

8

12

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Source: CBS, Addiko research

Croatia: contributions to GDP (in pps)

HOUSEHOLDS STATE INVESTMENT STOCKS NET TRADE GDP DOMESTIC DEMAND

http://web.addiko.hr/mrd/Send.aspx?doc=35bbe1ca-0512-40cb-9285-7e71e542cc23

Page 12

SEE MACROECONOMIC OUTLOOK CROATIA

January-17

The euro zone Composite (manufacturing/services) PMI's strongest level in five years, driven by strong

gains in the output and new orders components, points to 6%-alike export growth in 1H17. Steady

EU/global demand, Croatia's further integration into global value chains and price competitiveness

gains will continue to drive exports in 2017-2018 and the ongoing outperformance of most CESSEE

peers. Meanwhile, stronger consumer demand, private capex, broader private credit recovery and

higher commodity prices lead to stronger imports as well, leading to somewhat higher goods trade

deficit and equally C/A surplus moderation relative to 2016. Despite that, we expect higher tourism FC

receipts and EU transfers to keep C/A surplus at still decent 2.7% of GDP. Consequently lower foreign

borrowing needs alongside the record banks' net foreign assets (EUR2.5bn or 5.5% of GDP) and external

de-leveraging (as part of NPL sales and funding sources restructuring) and resurgent FDI will see an

improvement in net international investment position and in turn external debt slump.

.

One of the CNB's key goals is to keep credit recovery going, so we expect dovish stance and a low rates

environment to prevail as FX stability is in place. After creating HRK5.3bn since mid-December in FX

transactions as banks may want to deploy hefty foreign assets, we think the CNB's proven ability to

engineer a strong downward shift in the kuna yield curve (notably in 1Y+ sector), support the kuna bond

market and pent up demand for kuna credit vindicate further easing in 1H17 via REPO, mandatory

reserve cuts or FX deals. One step further in support of fixed-rate kuna credit would be the CNB's

interest rate swaps with banks, but we understand the CNB would prefer to lengthen the structure of

REPO instruments. From a risk perspective, monetary easing is allowed by higher C/A surplus, firmer

banks' external position and the EDP suspension in Q2, but given the growing risks to price stability in

Europe and locally, one must not bank on the current level of accommodativeness in the long run.

Fiscal incentives for removing NPLs and real estate from balance sheets in 2017 (only) are good news

in that banks cut provisions and costs of debt collection, and will further restructure funding. But in our

view, the banking system needs a broad-based solution to improve asset quality, profits and the overall

monetary transmission, with consideration given to durable incentives for NPL write-offs and firm

capital hikes, developing the market for restructuring NPLs, promoting asset management companies,

and improving the insolvency framework.

The EUR/HRK settled on low levels on seasonal norms on hefty tourism FC intake in 2016, rising goods

import cover and the ongoing build-up in the record banks' net foreign assets. The latter helps banks in

orderly external de-leveraging and covering short FX positions in case of clients' FX-linked credit de-

leveraging. To smooth appreciation pressures the CNB bought EUR716m in the eve of 2016, lifting FC

reserves to EUR14.7bn or 8.1x months goods imports cover. Given stronger kuna, HRK16bn-alike excess

interbank liquidity, short rates stay record low. But stronger Fed tightening outlook and adverse effects

of Trumponomics have started to hurt EM debt, and CESEE sovereigns including Croatia have been no

exception. Thankfully, CESEE economies are less vulnerable in the whole EM context, having high

savings ratios, low net USD liabilities, not so significant trade with US, and Croatian bonds

outperformed amid macro/fiscal over performance and S&P's outlook upgrade.

Notwithstanding favorable C/A trends and external position on many gauges, we see the EUR/HRK

somewhat higher in the near term. Namely, depreciation pressures may emerge from the worsening

trade trends and some nervousness about the hawkish Fed and EU-wide political concerns combined by

the regional FX aversion. Speculative USD forward buying may also continue given the bets on the USD

strength. Given rather comfortable CNB position as far as FX reserve ratios, interest rate differential

and the new Eurobond prospects are concerned, and traditionally little sensitivity to global risk

volatility, we'd not expect stronger FX volatility for the time being. All being said, we see generally

slightly lower EUR/HRK within 7.40-7.60 during 1H17, i.e. well within boundaries of financial stability.

C/A surplus moderates, still improving external position

No end in sight for CNB monetary support

Constructive kuna outlook

-30

-20

-10

0

10

20

30

Jan-04 Feb-06 Mar-08 Apr-10 May-12 Jun-14 Jul-16

Source: Eurostat, CBS, Addiko research

Croatia: merchandise exports (seas.adj. 6mma, %, yoy)

Croatia CEE4 avergae CEE average

http://web.addiko.hr/mrd/Send.aspx?doc=1fb6e8f0-a1e7-4170-8303-fde48d63a26b

Page 13


January-17

CROATIA

We see Croatian CDS spreads tightening by 50bp this year

Fiscal easing in 2017...

...in exchange forreforms (appetite)

Given further CNB easing, stable FX outlook and muted new bank lending, we see short-end rates at

new lows. Namely, despite soaring demand for kuna credit and refinancing of FX-linked loans, new

disbursements are low in historic terms to exert a significant impact on MM rates. Since the sovereign

stands out with 20%/GDP gross funding needs in 2017 (and approaching EUR2.2bn bond supply in 1Q17,

and yet-to-be quantified fiscal easing, Croatian spreads may widen as soon as the global reflationary

trend regains momentum. There is however, ample liquidity (both FC and kuna) readily available in

support of much larger local bond issue if the global markets are too volatile. By mid-Q2, when

uncertainty has gone, we'd stick to our constructive medium-term view on Croatian bonds, cognizant of

stronger GDP outlook and reform momentum, expected EDP suspension and further rating upgrades

upon restructuring of some relatively expensive (quasi)sovereign debt, accommodative ECB and the

genuine CNB's incentives to hold state bonds. All said, there is a case for cca 50bp CDS spreads

compression this year, allowing Croatian bonds over performance in CESEE universe in the environment

of rising core rates and CEE spreads. Back to EM, let's not forget a stable institutional flow into EM debt

is a paramount condition for stability in the high-yielders, something which may be at risk in the event

of stronger-than-expected Fed tightening.

Fiscal ledgers saw a strong performance in 2016, with the consolidated budget deficit just below 2% of

GDP on cyclically 6% higher revenues and spending freeze during the caretaker cabinet. While the 2017

budget has formal conditions (stable 1.2% primary surplus, lower public debt) to exit the EDP,

supporting the sovereign rating upgrade, the newest package provides a substantial fiscal easing ahead

of elections. With the planned HRK3.3bn higher revenue intake within reach on stronger, tax rich

domestic demand and the record tourist season, the main challenges arise in the expenditures area.

Namely, the cabinet apparently rejected the genuine chance for entitlement rationing during the

cyclical upturn (in the first year after parliamentary elections, and will instead spend more on

pensions, subsidies, defense et al, all of which reduces the government's leverage in negotiating less

than a full-blown 6% public wage hike (against just 2% budgeted). The latter alongside other sources of

potential spending overruns - healthcare arrears and war veteran transfers - and lower CIT due to

banking NPL write-offs, will necessitate budget reshuffle soon. Given stronger nominal GDP growth and

provided the 2017 budget gap does not exceed 2.5% of GDP in ESA 2010 terms, we expect a further

slide in public debt and risk premia, helping to lower interest rate spending and create buffers for

dealing with short-term uncertainties.

On top of tighter deficit policy and 3%+ GDP growth, better sovereign asset management remains one

the of the key three drivers of public debt reduction. The latter includes not only further privatization

efforts (starting with the electricity board HEP's IPO?), but also SOEs restructuring and efficiency

improvement on a peer basis, with stronger profits and cost flexibility of utmost importance in the

state guarantee-free capex financing. Cognizant of the automatic pension, public wage et al

indexation, higher EU co-funding needs, and nearly exhausted space for tax-driven consolidation, we

expect sustainability of public finances to rest on entitlement (healthcare!), labour and public sector

reforms, with the former boosting the government's leverage in preparatory phase for the latter. With

successful tax reform at hand and its possible 0.5pp attribution to potential growth in 2017 (and up to

1pp thereafter), further progress in the economy's potential rests on parafiscal levy cuts (starting with

HRK1.5bn cuts this year and depending on right-sizing of state agencies), plus wide-ranging supply-side

measures including further flexibilization of the labour, product and services markets, etc. The final

aim should be to build up a 5%/GDP+ primary surplus in the medium term to deal with one of the EU's

highest interest rate expenditure (3.3% of GDP) and ensure that public debt reduction stays on a

sustainable trajectory and risk premium is brought down further.

7,17

7,31

7,45

7,59

7,73

150

250

350

450

550

650

Jan-09 Aug-10 Mar-12 Oct-13 May-15 Dec-16

Source: CNB, Blomberg, Addiko research

Croatia: 5Y CDS spreads and EUR/HRK

5Y CDS spread EUR/HRK

Page 14


Source: Croatian National Bank, Central Bureau of Statistics, Ministry of Finance, European Commission, Bloomberg, Addiko research

CROATIA

Croatia's data trends

45

50

55

60

65

70

75

80

85

90

95

100

-8

-6

-5

-3

-1

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Budget balance and public debt (%/GDP)

BUDGET BALANCE (LS)

PUBLIC DEBT (RS)

70

79

88

96

105

114

70

75

80

85

90

95

100

105

110

115

120

Jan-00 May-03 Sep-06 Jan-10 May-13 Sep-16

Industrial production, 2010=100

Original indicies (ls)

Seasonally adjusted (ls)

Trend (rs)

-8

-4

0

4

8

12

16

20

24

28

32

Change in export shares vs EU countries, 2014-2008, (%)

-10

-8

-6

-4

-2

0

2

4

6

8

10

1Q08 1Q10 1Q12 1Q14 1Q16

Croatia

Slovenia

Serbia

CESEE

CRO growth in line with CESEE

-110

-80

-50

-20

10

40

70

100

130

160

Dec-13 Sep-14 Jun-15 Mar-16 Dec-16

CRO-ROM CRO-HUN

CRO-SRB CRO-SLO

Spread on CRO USDs vs peers (bp)

55

58

61

64

67

70

jan feb mar apr may jun jul aug sep oct nov dec

Merchandise import cover (% 3mma)

2014

2015

2016F

January-17

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

328,0 332,6 330,5 329,6 328,4 334,2 342,3 361,5 380,5

45,0 44,7 44,0 43,5 43,0 43,9 45,5 48,1 50,9

59,6 62,2 56,5 57,8 57,2 48,7 50,3 48,3 51,9

10.191 10.453 10.300 10.225 10.157 10.364 10.721 11.348 11.998

13.882 14.542 13.233 13.571 13.488 11.492 11.868 11.391 12.238

-1,7 -0,3 -2,2 -1,1 -0,5 1,6 3,0 3,5 2,9

-1,5 0,3 -3,0 -1,9 -1,6 1,2 3,3 3,3 2,7

-15,2 -2,7 -3,3 1,4 -2,8 1,6 5,0 6,5 6,8

-1,4 -1,2 -5,5 -1,8 1,2 2,7 4,5 4,7 4,1

11,6 13,7 15,9 17,3 17,3 16,3 13,5 11,8 10,7

1,1 2,3 3,4 2,2 -0,2 -0,5 -1,1 1,6 1,8

1,8 2,1 4,7 0,3 -0,5 -0,6 0,2 1,3 2,0

4,3 6,4 7,0 0,5 -2,7 -3,9 -4,1 2,4 2,8

1,3 -0,2 -0,4 -0,1 -0,4 1,5 3,5 3,0 2,7

-6,0 -7,5 -5,3 -5,3 -5,5 -3,2 -1,9 -2,5 -2,0

57,0 63,7 70,7 82,2 86,5 86,7 85,6 83,8 82,1

n/a n/a n/a 16,3 19,9 19,8 16,3 19,8 15,9

17,007 18,110 18,315 18,764 19,978 21,991 23,135 24,255 24,964

17,158 18,297 18,097 18,573 19,106 20,757 21,436 22,734 23,752

-5,924 -6,382 -6,296 -6,587 -6,355 -6,635 -6,987 -7,599 -8,083

-13,2 -14,3 -14,3 -15,1 -14,8 -15,1 -15,4 -15,8 -15,9

6,230 6,617 6,858 7,202 7,402 7,961 8,581 8,996 9,199

-0,488 -0,316 -0,021 0,443 0,368 2,293 1,520 1,295 1,108

-1,1 -0,7 0,0 1,0 0,9 5,2 3,3 2,7 2,2

0,8 1,1 1,2 0,8 1,3 0,1 1,4 1,3 1,9

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,01,8 2,5 2,7 1,9 3,1 0,3 3,2 2,8 3,6

167,8 352,4 5.775,5 n/a n/a n/a n/a n/a n/a

10,660 11,195 11,236 12,908 12,688 13,707 14,683 15,294 15,964

7,5 7,3 7,5 8,3 8,0 7,9 8,2 8,1 8,1

46,908 46,397 45,297 45,958 46,664 45,534 42,275 43,381 45,029

11,096 11,449 12,705 14,647 15,841 18,049 16,555 17,555 18,155

35,812 34,949 32,592 31,312 30,823 27,485 25,721 25,827 26,875

104,2 103,7 103,0 105,6 108,4 103,7 93,0 90,2 88,5

275,8 256,2 247,3 244,9 233,6 207,1 182,7 178,9 180,4

5,57 5,82 5,47 5,55 6,30 6,99 7,22 7,86 7,23

5,50 5,34 5,85 5,71 5,75 6,86 6,80 7,48 7,33

7,39 7,53 7,55 7,64 7,66 7,64 7,56 7,55 7,52

7,29 7,43 7,52 7,57 7,63 7,61 7,53 7,51 7,48

1,7 7,3 0,9 11,5 9,6 11,4 14,0 7,8 5,5

1,92 4,75 3,58 3,52 2,76 3,10 3,48 2,90 2,40

6,09 4,01 -2,55 -0,36 -2,61 -1,68 -3,04 2,46 2,77

2,58 3,19 3,55 1,54 0,99 1,27 0,90 0,37 0,22

4,19 3,72 3,93 2,54 1,86 1,50 0,96 0,43 0,43

6,34 6,68 6,67 5,78 5,14 4,09 3,50 2,85 3,35

Page 15




HRK 10Y yield (average %)

Private (EURbn)



USD/HRK (end-year)

USD/HRK (average)

HRK 1Y yield (average %)

EUR/HRK (end-year)



Activity

Prices

FDI cover (%)

Money supply M1 (% YoY)

Domestic credit (% YoY, euros)

ZIBOR 3M interest rate (average %)



Debt indicators


Government (EURbn)

EUR/HRK (average)



Source: Croatian National Bank, Central Bureau of Statistics, Ministry of Finance, Addiko research

Nominal GDP (HRKbn, current prices)

Nominal GDP (EURbn)

Nominal GDP (USDbn)






Net wage rates (% YoY, nom., €)

State budget balance


CROATIA

Broad money M4 (% YoY)


External balance





Public debt





Net FDI (EURbn)

FDI (% of GDP)

January-17

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

53.386 55.395 54.123 54.564 54.719 54.512 54.512 54.784 55.332

4,2 3,8 -2,3 0,8 0,3 -0,4 0,0 0,5 1,0

118,6 123,8 123,1 125,4 127,1 124,1 119,9 113,9 108,8

37.173 38.665 37.678 37.543 36.561 35.946 34.853 35.711 36.700

6,1 4,0 -2,6 -0,4 -2,6 -1,7 -3,0 2,5 2,8

82,6 86,4 85,7 86,3 84,9 81,8 76,7 74,2 72,1

29.215 29.139 30.001 31.014 31.881 33.666 35.251 36.543 37.734

0,3 -0,3 3,0 3,4 2,8 5,6 4,7 3,7 3,3

64,9 65,1 68,2 71,3 74,1 76,7 77,5 75,9 74,2

127,2 132,7 125,6 121,0 114,7 106,8 98,9 97,7 97,3

18,5 19,2 20,6 21,0 21,0 18,8 20,4 20,5 20,4

1.485 1.540 1.449 1.360 1.366 1.404 1.464 1.518 1.549

13,6 3,7 -5,9 -6,2 0,5 2,7 4,3 3,7 2,1

2.204 2.249 2.015 1.923 1.922 1.908 2.047 2.102 2.138

5,3 2,0 -10,4 -4,5 0,0 -0,7 7,3 2,7 1,7

1.093 1.127 972 920 934 917 1.066 1.121 1.158

3,1 3,1 -13,7 -5,4 1,6 -1,8 16,2 5,2 3,2

510 500 501 780 645 1.533 708 670 652

2,8 2,8 2,6 2,5 2,5 2,6 2,8 2,5 2,4

1,1 1,2 0,9 0,3 0,5 -1,1 0,7 0,8 0,9

8,0 8,4 6,2 1,9 3,9 -8,7 5,1 6,0 6,7

50,4 49,9 51,7 52,2 51,4 51,9 47,9 46,7 45,9

-4,2 -4,1 -3,7 -3,5 -3,5 -3,5 -3,8 -3,8 -3,9

11,2 12,4 13,9 15,7 17,1 16,7 14,5 11,0 10,8

38,8 41,4 42,6 46,2 51,0 71,4 94,6 133,5 186,2

1,4 1,3 1,3 2,1 1,7 4,2 2,0 1,9 1,8

46,7 44,4 51,5 84,8 69,0 167,0 66,4 59,8 56,3

Page 16




Pre-tax ROAA (%)

Pre-tax ROAE (%)


Deposits (%, YoY)

Deposits (% of GDP)






Balance sheet

Performance



Assets (%, YoY)

Assets (% of GDP)

Gross loans (EURm)

Gross loans (%, YoY)


Deposits (EURm)

Assets (EURm)



January-17


SEE MACROECONOMIC OUTLOOK CROATIA

NPL ratio (%)

NPL coverage (%)




Source: CNB, Addiko research

Credit de-leveraging accelerated in 2016 (-3.7% ytd in 11M16 vs. -1.7% in 2015), with the strongest

negative contribution from retail credit (-3.4% ytd) due to forced CHF loans conversion and resultant

loan stock adjustment. Public sector also contributed negatively (-7.2% ytd drop or -EUR510m in 11M16

as sharply lower T-bill/bond yields moved the MinFin to market funding. More positively, corporate de-

leveraging eased from -4.8% in 2015 to -0.6% in 11M16, and corporate lending actually grew in FX-

adjusted term, in line with stronger business optimism and private investments. Looking ahead, after

roughly 3% overall loan stock reduction in 2016, we see lending growth this year supported with

stronger GDP growth and further kuna interest rate compression as strong fiscal consolidation, reduced

policy risks and the record banks’ net foreign assets allow CNB to ease further. The commitment to low

single-digit mandatory reserve rate by 2020 and expansionary structural REPO prospects show the CNB

cares about funding costs and pent-up demand for kuna credit. Downside risks to our loan stock

forecast stem from accelerated NPL sales after the recently adopted reform of income tax

deductibility for banking NPLs so far solely in 2017. All in all, we see NPL ratio down to 11.0% by end-

2017.

On funding, deposits continued solid growth in 11M16 (+4.6% ytd vs. +5.6% yoy in 2015), with the

strongest positive contribution from corporate (+9.3% ytd) thanks to another record tourist season and

overall stronger firms' revenues. Household and public deposits also contributed positively with a 2.0%

and 26.1% ytd gains in 11M16, respectively. In 2017, we expect deposit collection to slow from the

expected 4.7% in 2016 to 3.7% on slower tourism revenue growth, further decline in citizens’ savings

rate and the ever lower passive interest rates, which motivates deposit migration to AuM. On profits,

net interest income (NII) increased 4.0% yoy in 9M16 as funding cost slump (-22.9% yoy) offset 7.4% yoy

lower interest income. We see 4.3% higher NII in 2016 and 3.7% in 2017 on stronger new disbursements,

notably in corporate, structural changes in loans stock towards margin-lucrative retail cash loans and

cheaper kuna funding amid the CNB easing.

Corporate de-leveraging decelerating

Solid deposit growth set to continue



Page 17


January-17

SERBIA

Stronger growth prospects

The average 2.8% yoy GDP growth during 9M16 surprised us slightly on the upside, triggering an

0.3pp upward revision of our 2016 GDP forecast to 2.8%. The growth was driven by soaring private

investments, domestic big-ticket infrastructure projects and continued strong exports performance

as new export-oriented FDI projects compensate for lower FIAT output. Furthermore, given

favorable weather conditions, agricultural output has likely grown in double-digit, which bodes well

for food processing. That said, with hard indicators entering Q4 on strong footing, we see 4Q growth

at 2.8% yoy. Indeed, industrial output continues to benefit from hitherto investments in tradable

sectors, overhauls in a number of electric energy plants and improved euro zone growth prospects.

Meanwhile, household consumption recovery is set to continue amid ongoing private employment

gains, moderate wage hikes, cheaper debt service and lower citizens’ savings rate. All in all, we see

2016 GDP growth at 2.8%.

We lift our 2017 growth forecast to 3.2% on a plethora of reasons. Namely, we see investments

continuing stellar performance on the back of infrastructure works, and due to improved business

climate as seen in the latest World Bank’s Doing Business survey where Serbia was among top ten

countries with the strongest improvement in business conditions (from the 54th to 47th position)

due to easier business starting and dealing with construction permits. Furthermore, investments are

driven by tradable sectors, combined with stronger than expected EU economy in the aftermath of

Brexit, suggesting exports will continue solid growth. We also see stronger personal consumption

growth on the back of further 1%-alike employment growth, 5.1% public wage hikes, further

increase in private sector wages, citizens’ re-leveraging and lower debt service costs. We see the

aforementioned wage hikes partly offset through public sector rightsizing, but with the ongoing at

least 30% spike in public capex, public consumption is expected to contribute positively to growth.

Having in mind domestic demand is very much import-intensive, we see net exports’ contribution in

2017 negative. Downside risks stem both from external and internal environment, with the former

mainly related to the accelerated Fed tightening outlook and political instability in the EU. As for

the latter, should PM Vučić opt for another snap elections in April, the subsequent election fatigue

may reduce SNS’ chances in getting parliamentary majority, in which case the EU talks and reforms

may at least slow down, delaying the expected rating upgrades.

The C/A deficit narrowed by 15.7% yoy to EUR1.1bn in the first ten months of 2016 on the back of

further improvement of goods and services balance. That said, goods deficit fell 12.8% yoy in the

year to October as exports soared 10.5% yoy, driven by EU demand, ongoing increase of FDI inflows

in tradable sectors and low base effect, while services surplus jumped 33.5% yoy due to positive

contribution from roaming charges but also somewhat stronger tourism activity. However, primary

income contributed negatively with its deficit widening further by 19.0% yoy, while secondary

income surplus decreased by 5.0% yoy. Among the latter, workers’ remittances surprised on the

downside with a 9.5% yoy decline in 10M16, which we put down to a high base effect after recording

double-digit growth rate in 2015.

We have lifted our 2017 growth forecast to 3.2% as investments are expected to continuestellar performance on the back of infrastructure works and improved business climate. Asinvestments are driven by tradable sectors, combined with stronger EU economy suggestsexports will continue solid growth and we also expect to see further pick-up in personalconsumption. We see inflation rising gradually to enter the new target band in 1Q17, with pricepressures from higher global commodity prices and stronger domestic demand on top of the lowbase effect. While solid appetite for Serbian debt is expected to stay in place, investors will be

2016 GDP set to increase by 2.8%

2017 GDP growth upgraded to 3.2%

Goods and services balance improving further

-10

-5

0

5

10

15

20

1Q05 2Q06 3Q07 4Q08 1Q10 2Q11 3Q12 4Q13 1Q15 2Q16

Source: SRS, Addiko research

Serbia: contributions to GDP (pps, %)

Household Government GFCF Net trade GDP (rhs)

Page 18

SEE MACROECONOMIC OUTLOOK SERBIA

January-17

Looking into financial accounts, although most risk-off events materialized in 2H16, both FDI and

portfolio investment saw solid performance. In details, net FDI likely hit 5.7% of GDP in 2016, with

further changes in structure that is becoming more destined to tradable sectors on account of larger

productivity gains expectations relative to that in most CESEE peers. Portfolio investments jumped

from EUR286m at end-2015 to EUR746 in October last year. In all, we expect an 1pp C/A deficit

narrowing to 3.9% of GDP in 2016, while in 2017 we see it flattish at 4.0% of GDP as lower interest

expenses, solid export growth and higher EU (IPA) funding are offset by stronger import-intensive

domestic demand, higher commodity prices, and higher non-residents’ profit repatriation.

With the support of the IMF, the NBS lowered its CPI inflation target band by 1pp to 3%±1.5 pp, in

line with inflation movements in past three years being within or below the new target band. In line

with somewhat higher global oil and food prices, CPI inflation rose to the highest level in eight

months (1.5% yoy), flirting with the low end of the new target band. Looking ahead, we see inflation

rising gradually from here to enter the new target band in 1Q17, with price pressures from higher

global commodity prices and stronger domestic demand on top of the low base effect. Meanwhile,

still significant albeit diminishing output gap and high unemployment partly offset price pressures.

Upside risks to our view mainly stem from the global commodity markets, administered price hikes,

whereas another successful agricultural season may exert downside pressure on food prices. All in

all, after an 1.1% average CPI inflation in 2016, we see CPI accelerating to 2.1% in 2017.

FX reserves hit EUR10.2bn in the eve of 2016, covering roughly 200% of M1 money supply or six

months of the country’s import cover. In spite of stronger dinar, still relatively high discrepancy

between 2W REPO rate and MM rates as well as relatively low inflation, the NBS refrained from

easing for the sixth consecutive month in January this year, leaving the key rate unchanged at 4.00%

amid persistent uncertainty in the global markets (especially over the pace of Fed’s rate hikes) as

the main culprit behind such decision.

Despite hefty ECB support this year, we expect the global reflation story, stronger Fed tightening

outlook (three rate hikes in 2017 in our baseline scenario), resurgent speculation about removing

policy support in many CESEE economies, potential pressures on the dinar (from volatile capital

flows) and domestic political risks have diminished chances for NBS easing unless deflation fears

resurface again. As a result, we see the key policy rate unchanged through (most of) 2017. However,

given that the Fed has not yet included the impact of the expected fiscal stimulus in their

projections as Trump’s exact plans still need to be detailed, the pace of rate hikes may even have to

be stronger, not our base case though. In case those risks materialize, the NBS may be even forced to

increase rates, perhaps in 4Q 2017 but this is not our base case scenario.

2017 C/A deficit seen flattish at 4.0% of GDP

Key policy rate expected to stay unchanged through 2017)

Inflation entering new target band in 1Q17

100

103

106

109

112

115

3

6

9

12

15

18

Jan-07 Jun-08 Nov-09 Apr-11 Sep-12 Feb-14 Jul-15 Dec-16

Source: NBS, SORS, Addiko research

Serbia CPI inflation and NBS policy rate

NBS policy rate (%, lhs) CPI (%, yoy, rhs)

Page 19


January-17

SERBIA

The RSD was stable with sporadic appreciation pressures curbed with the NBS’ interventions. Since

end-November though depreciation prevailed on stronger pre-holiday imports and large SOEs

payments abroad. Seasonal pressures aside, there are reasons for the dinar stability to continue on

stronger macro picture and risk profile after positive IMF review and rating upgrades also reflecting

lower internal and external imbalances, improvement in banks’ net foreign assets and general NBS’

intolerance of the weaker dinar in view of 33% of external debt is in USD (un-hedged) and stronger

USD. Also, the NBS continues to withdraw excess interbank liquidity through REPO, which in case of

soaring dinar lending forces banks to sell euros. Lower inflation target also implies once the mid-

term inflation target is reached, depreciation pressures are naturally less wanted. Downside risk

stem from political instability in case of material changes in the parliamentary math, US reflation

and stronger USD (causing a focus on dual deficits, external vulnerability and funding) and stronger

import demand. All in all, we see the dinar around 124, and the NBS in nominal FX targeting mode,

cognizant of political risks and stronger inflation outlook.

The 2017 budget bill sees lower IMF-approved deficit at 1.7% of GDP, driven by 1.8% higher tax

intake relative to MinFin's 2016 estimate inflated by hefty tax intake overperformance and 9%-alike

revenue growth last year. However, 2017 spending forecast is given only in comparison with a more

subdued 2016 budget plan perhaps because the cabinet may want to book some 2017 costs in 2016 to

create better starting point for the year in which capex may double, public wage bill will rise and

contingent SOE-related liabilities remain high. Furthermore, while certain progress has been made in

SOE restructuring in form of debt restructuring and improving payment collection (Srbijagas, EPS),

investors will be focused on further moves as only third of the planned layoffs has been made in

2016. Interest rate costs are seen down 4.3% on the back of lower domestic interest outlays, while FX

interest payments are flattish albeit subject to downside risks, in our view. In all, the current 2017

budget deficit plan seems reasonable given stronger GDP growth, staedy euro zone outlook and lower

interest rates. In all, we see 2017 budget deficit around 2.0% of GDP, which allows further public

debt reduction to about 72.5%.

The MinFin continued increasing T-bill/T-bond stock in 2H16, issuing RSD128bn (EUR1.5bn) at lower

costs. In addition, the MinFin also continued prolonging debt maturity as it lowered the stock of <2Y

debt and increased debt stock in the 2-7Y region. Serbian spreads fell sharply last year only to

increase in the aftermath of US Trump election victory, and stronger Fed’s rate hike outlook for

2017, when the markets briefly entered risk-off mode. The peak spreads have not only been

reversed, but they declined to new lows, narrowing 85bp on average, by 45bp only in January. That

said, while the ECB reduced QE purchases, they still committed to proceed with QE at least by the

end of 2017. On the other hand, certain risks do stem from stronger Fed hikes dependent on yet-to-

be-defined US fiscal stimulus. Notwithstanding that, we see a good appetite for Serbian debt as

faster and stronger Fed hikes as well as occasional turbulences in the global markets are offset by

strong macro/fiscal performance, narrower external imbalances, further rating upgrades and the

ongoing IMF positive assessment. In all, we expect solid interest for the forthcoming euro bond this

spring that would take away pressures on relatively active local issuance. Downside risks would stem

from market-unfriendly election outcome (not our base case though), delays in EU talks over Kosovo

issues and resurgent risky assets selloff albeit domestic banks’ demand could provide substantial

support in case of stronger withdrawal of non-resident investors from local market debt.

Dinar expected to maintain stability in the forthcoming period

Fiscal consolidation on track

Solid appetite for Serbian debt expected to stay in place for the time being

1,0%

3,5%

6,0%

8,5%

11,0%

13,5%

16,0%

Mar-09 Jan-14

Source: MinFin, Addiko Research

91 days 182 days 365 days

53 weeks 18 months 2 years

3 years NBS policy rate

Serbia: T-bill/notes yields

Jun-10 Sep-11 Jan-13 Apr-15 Oct-16

Page 20


Source: National Bank of Serbia, Statistical Office of the Republic of Serbia, Ministry of Finance, Consensus Economics, Bloomberg, Addiko research

January-17

SERBIA

Serbia's data trends

-4

-2

0

2

4

6

-16

-12

-8

-4

0

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Budget and current account gaps (% of GDP) vs. real GDP growth (%)

BUDGET DEFICIT (LHS)

CAD (LHS)

GDP (RHS)

-2

1

4

7

10

13

16

19

Jan-07 Jun-09 Nov-11 Apr-14 Sep-16

CPI contribution - key categories (pps)

Recreation and culture Transport

Health Housing, water, electricity, gas

Alcoholic beverages, tobacco Food and non-alchoholic beverages

ITA

GER

RUS

B-H

CHI

ROM

HUN

0

0,4

0,8

1,2

1,6

2

2,4

2,8

3,2

-0,18 0,32 0,82 1,32 1,82 2,32

Import of goods ( in EURbn, 11M16)

Exports of goods ( in EURbn, 11M16)

Size of the bubble shows total trade share, (X+M)/GDP

114,8

116,6

118,4

120,2

122,0

123,8

-80

-55

-30

-5

20

45

70

Jan-14

NBS active in the market

NBS buys euros

NBS sells euros

0

5

10

15

20

25

Jan-05 Dec-07 Nov-10 Oct-13 Sep-16

Public

Corporate

Banks

Corporate external de-leveraging comes to a halt? (EURbn)

-260

-240

-220

-200

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

20

40

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016

2013

2014

2015

Consolidated government budget balance (RSDbn)

Jan-15 Jan-16

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

3.067 3.408 3.584 3.876 3.908 3.981 4.128 4.335 4.580

29,8 33,4 31,5 33,9 32,3 32,8 33,5 35,1 36,8

39,4 46,5 40,7 45,5 44,1 36,6 36,9 37,3 37,4

4.082 4.620 4.401 4.783 4.521 4.584 4.693 4.925 5.166

5.400 6.423 5.650 6.353 6.177 5.116 5.161 5.237 5.253

0,6 1,4 -1,0 2,6 -1,8 0,7 2,8 3,2 3,0

-0,6 0,9 -2,1 -0,4 -1,3 0,4 0,9 1,7 2,0

-6,5 4,6 13,2 -12,0 -3,6 5,5 6,1 5,6 4,7

1,2 2,5 -2,2 5,5 -6,5 8,4 4,7 4,9 4,5

19,2 23,0 23,9 22,1 19,2 17,7 17,9 17,7 17,1

6,5 11,0 7,8 7,8 2,1 1,4 1,1 2,1 3,0

10,2 7,0 12,2 2,2 1,7 1,5 1,4 2,7 2,8

12,7 14,2 5,6 3,6 0,7 0,1 0,1 0,4 0,9

-7,9 1,1 -1,8 -1,8 -4,6 -4,1 0,9 2,1 2,5

-2,2 -2,8 -3,7 -5,5 -6,6 -3,7 -2,0 -2,0 -2,2

40,8 46,6 57,9 61,1 71,9 76,0 74,2 72,7 73,3

10,2 11,3 12,3 16,1 17,6 17,0 15,7 18,3 16,9

n/a n/a 11,498 13,937 14,451 15,618 16,845 17,783 18,672

n/a n/a 16,993 17,782 18,096 18,899 19,763 20,710 21,845

n/a n/a -5,634 -4,159 -4,111 -4,006 -4,028 -4,262 -4,593

n/a n/a -17,9 -12,3 -12,7 -12,2 -12,0 -12,2 -12,5

n/a n/a 1,989 2,217 1,931 2,155 2,198 2,242 2,287

-2,082 -3,305 -3,640 -2,098 -1,985 -1,590 -1,319 -1,387 -1,515

-7,0 -9,9 -11,5 -6,2 -6,1 -4,9 -3,9 -4,0 -4,1

n/a n/a 0,7 1,3 1,2 1,8 1,9 2,0 2,1

n/a n/a 2,1 3,8 3,8 5,5 5,7 5,7 5,6

n/a n/a 18,4 61,9 62,3 113,2 144,0 143,1 136,6

10,002 12,058 10,915 11,189 9,907 10,377 10,957 11,556 12,110

n/a n/a 7,7 7,6 6,6 6,6 6,7 6,7 6,7

23,786 24,125 25,645 25,747 25,741 26,358 25,277 25,017 26,067

9,076 10,773 12,185 13,166 14,198 15,289 14,721 14,521 15,021

14,710 13,352 13,460 12,581 11,543 11,069 10,556 10,496 11,046

79,9 72,2 81,4 75,9 79,7 80,4 75,4 71,3 70,9

n/a n/a 223,0 184,7 178,1 168,8 150,1 140,7 139,6

79,28 80,87 86,18 83,13 99,46 111,64 118,72 124,00 120,39

77,91 73,34 88,12 85,17 88,54 108,88 111,93 116,26 122,43

105,5 104,6 113,7 114,6 121,5 121,8 123,5 124,0 122,8

103,0 102,0 113,7 114,3 121,0 121,5 123,1 123,6 124,5

-10,9 16,9 -3,3 24,8 5,2 16,4 13,0 8,0 7,0

2,6 11,2 0,7 3,7 3,0 6,6 7,0 5,4 3,5

15,3 8,9 0,8 -5,2 -2,3 2,4 2,0 3,2 4,3

9,13 11,54 10,14 11,00 8,79 6,08 4,15 4,00 4,38

11,50 9,75 11,25 9,50 8,00 4,50 4,00 4,00 4,75

11,00 13,13 12,00 10,40 8,53 6,43 3,65 3,78 4,25

Page 21

EUR/RSD (average)

6M BELIBOR interest rate (average %)

Source: National Bank of Serbia, Statistical Office of the Republic of Serbia, Ministry of Finance, Addiko research

January-17


Domestic credit (% YoY, euros)

NBS policy rate (average %)

NBS policy rate (end-year %)


Government (EURbn)

Private (EURbn)



Net FDI (EURbn)

FDI cover (%)



Exchange rates and money


USD/RSD (end-year)

USD/RSD (average)

EUR/RSD (end-year)









Activity

Prices




Net wage rates (% YoY, nominal, euros)



Debt indicators

Nominal GDP (RSDbn,current prices)

Nominal GDP (EURbn)

Nominal GDP (USDbn)



SERBIA





External balance

FDI (% of GDP)

State budget balance

Public debt

Remittances, net (EURbn)


2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

24.015 25.211 25.322 24.827 24.545 27.202 28.194 29.043 30.206

6,6 5,0 0,4 -2,0 -1,1 10,8 3,6 3,0 4,0

80,7 75,4 80,3 73,2 76,0 83,0 84,1 82,8 82,1

15.621 17.013 17.148 16.255 15.879 16.253 16.584 17.108 17.840

15,3 8,9 0,8 -5,2 -2,3 2,4 2,0 3,2 4,3

52,5 50,9 54,4 47,9 49,1 49,6 49,4 48,8 48,5

11.897 13.099 13.310 13.634 13.967 14.787 15.746 16.813 17.648

4,0 10,1 1,6 2,4 2,4 5,9 6,5 6,8 5,0

40,0 39,2 42,2 40,2 43,2 45,1 47,0 47,9 48,0

131,3 129,9 128,8 119,2 113,7 109,9 105,3 101,8 101,1

19,9 19,1 19,9 20,9 20,0 20,9 17,7 17,8 16,5

1.052 1.131 1.025 1.044 1.063 1.075 1.007 996 1.027

-1,7 7,6 -9,4 1,9 1,8 1,1 -6,4 -1,0 3,1

1.541 1.590 1.484 1.435 1.489 1.520 1.444 1.431 1.477

-3,5 3,2 -6,7 -3,3 3,8 2,1 -5,0 -0,9 3,2

563 617 571 504 529 574 517 488 515

-5,8 9,6 -7,5 -11,6 4,8 8,6 -9,9 -5,7 5,6

316 313 339 510 490 494 427 396 419

4,5 4,6 4,1 4,2 4,3 4,2 3,6 3,4 3,4

1,1 1,2 0,9 -0,1 0,1 0,3 0,3 0,3 0,3

5,1 5,9 4,3 -0,3 0,6 1,6 1,8 1,8 1,8

63,5 61,8 66,1 65,3 64,7 62,2 64,2 65,9 65,1

4,2 4,0 3,6 3,7 3,9 3,7 3,3 3,3 3,2

16,9 19,0 18,6 21,4 21,5 21,6 19,5 18,8 17,2

47,2 51,0 50,0 50,9 56,7 63,0 62,3 61,0 61,5

2,2 1,9 2,0 3,1 3,1 3,1 2,6 2,4 2,4

56,2 50,7 59,4 101,1 92,8 86,0 82,5 81,2 81,4

Page 22

Assets (%, YoY)

Deposits (%, YoY)

Pre-tax ROAA (%)

Pre-tax ROAE (%)



NPL ratio (%)

NPL coverage (%)












Performance

Deposits (% of GDP)


Assets (% of GDP)



Balance sheet

Assets (EURm)

Deposits (EURm)

Gross loans (EURm)





SERBIA

January-17

Source: NBS, Addiko research

Credit growth decelerated from 2.4% yoy in 2015 to 1.1% ytd in 11M16 on 26.0% lower loans to public

sector as the government used cheaper T-bill/bond financing to close more expensive bank credit,

which we expect to continue in 2017. However, retail credit accelerated to 8.8% ytd in 11M16 after

4.2% in 2015 on the back of moderate wage hikes, private employment gains and record low interest

rates on both RSD and FX-linked credit, where certain banks offer housing loans in RSD maturity up

to 30 years and interest rate below 5.0%. Meanwhile, corporate lending clawed back into positive

territory only recently, with a 0.3% increase for the 11M16. Looking ahead, we expect lending

growth to speed up in 2017 from the expected 2.0% at end-2016 to 3.2% on the back of lower

interest rates, stronger personal consumption and improved business climate in case of corporate

lending. Downside risks to our view stem from possible further decrease in public loans whose share

fell from 5.9% of total loans in 2015 to 4.2% in November 2016.

On funding, deposit growth accelerated from 5.9% in 2015 to 6.3% in 11M16, with the strongest

positive contribution from 4.5% stronger retail deposit collection, followed by 10.8% stronger

corporate deposits and 14.9% higher public deposits. Looking ahead, after 6.5% -alike deposit growth

in 2016, we expect 6.8% increase in 2017, with household deposits driven by private sector job

creation and wage hikes, counting in most likely increase in public deposits given the expected

Eurobond issue and prefunding for 2018. On profits, 6.6% lower net interest income (NII) and 2.0%

lower net fee and commission income led to 6.9% lower total operating income in 9M16. Given lower

opex and provisioning, we keep our view of a 12.5% yoy pre-tax income growth. In 2017, we expect

pre-tax profit to increase 1.5% with still cheap sources of funding and stronger disbursements being

the main drivers. Meanwhile, NPL ratio fell from 21.6% at end-2015 to 19.5% on the back of better

collection, and we expect this to continue amid better macro outlook. However, the NBS has

recently formed working group in charge to draft a regulation according to which agencies and funds

would be able to buy retail NPLs.

Corporate lending in green

Deposit growth accelerating

Page 23


January-17

BOSNIA AND HERZEGOVINA

Political Wrangling Barely Over

Following a disappointing 1.8% yoy GDP growth during 9M16, the latest 4Q16 data suggest the

economic growth has accelerated its pace. Namely, industrial production increased by 4.8% yoy over

October-November (vs. +3.9% yoy in 9M16) mostly on the back of the energy generation given the

strong electricity price hikes in 2H16. Such performance was translated into better trade numbers

as export growth accelerated to 9.7% yoy on average over October-November (vs +2.5% yoy in

9M16), while imports rose 3.0% yoy (vs. 0.0% in 9M16), which pulled the import cover up by 304bps

yoy to 60.0% in November (on a 3mma basis), suggesting a positive net export contribution to GDP

growth in 4Q. Furthermore, rising employment along with solid real wage growth underpinned retail

sales growth of 7.2% yoy in October-November (vs. +6.6% yoy in 9M16).

Given the ytd economy underperformance, we lower 2016 growth forecast by 0.5pp to 2.4% as

political turmoil and the postponed IMF tranche led to what we have feared - delays in the planned

large investments seen in 1.6% yoy lower construction output during 9M16, while FDI sank 64.0% yoy.

However, we stay constructive regarding private consumption amid higher employment, real wage

growth and higher remittances. As for 2017, we upgraded our GDP growth by 0.2pp to 3.2% given

investments left on hold in 2016 and additionally helped by IFI funding, including the EBRD’s

EUR90m loan intended largely for the Vc motorway construction. Also, we see private consumption

accelerating going forth given rising employment, higher remittances benefiting from solid labor

market in euro zone and re-leveraging. Major downside risks still stem from complex and hence very

slow decision making system, divergent interests that are slowing implementation of reforms and

high youth unemployment, which forces emigration and raises pressure on pension system.

The IMF’s allocation of only one tranche instead of the two planned by B-H representatives due to

constant political outwitting and the absence of the WB credit, forced FBiH to rebalance the 2016

budget by 3% (EUR42m) in the guise of further implementation of restrictive public spending

promised to the IMF. The lack of funds has been resolved by issuing 5Y and 3Y bonds on the

domestic market at somewhat higher interest rates. Both entities based 2017 budgets on three IMF

tranches and capex hikes and simultaneous reduction of the current spending (ie public wages),

showing both budgets were tailored to match the IMF rules. All in, we still see 2016 budget deficit

at 0.7% of GDP, bearing in mind improved tax collection and public spending cuts, while we expect

the next year’s deficit at similar levels as stronger public investments will be offset by ongoing

current spending reduction. Major downside risk to our forecast is strong dependence o the IMF (and

other IFIs) as they must complete the policies set down by IMF in order to receive the each tranche.

Last year was filled with political turmoil that has just calmed down, but did not disappear given

the complex political and legal situation in country, which stifles economic prosperity. Many preach

that B-H’s EU accession could be a solution, but B-H has made slow progress towards EU integration

since signing SAA agreement. In July 2016, B-H submitted an application for membership and the

experience of Western Balkan countries indicate that B-H won’t get candidate status before 2018.

B-H’s accession to the EU is a necessity, but the question remains whether this is enough to finally

push the B-H economy on the path of convergence. Stimulus for better cooperation between

entities and more efficient decision-making was given even by S&P that would consider rating

upgrade if those objectives are met. However, downside risks to rating still dominate and possible

delays in debt repayment might result with lowering rating by more than one notch.

Regarding external balances, we expect C/A deficit narrowing towards 5.4%/GDP in 2016 on the

back of improved merchandise balance, while in 2017 we see re-widening of C/A gap to 6.1%/GDP

on stronger imports amid rising private consumption and commodity price normalization. As for

prices, lower oil and food prices led to - 1.2% average deflation in 11M16, in line with our 2016

inflation forecast in the -1% region. Administrative increase in excise duties on petroleum products,

tolls and cigarettes, as well as the expected increase in global energy and food prices will push

prices in positive territory, whereby we see this year’s inflation at around 1.6% on average.

We downgraded our 2016 GDP growth forecast by 0.5pp to 2.4% as political turmoil led todelays in planned investments. As for 2017, we slightly upgraded our forecast growth to 3.2%.Meanwhile, we expect inflation to turn into positive territory in 2017 on the back ofadministrative price hikes, while C/A deficit is expected to re-widen.

High frequency data suggests economy has accelerated in 4Q16

2017 budgets suggests ongoing fiscal consolidation

Slow progress towards EU

GDP forecast for FY16 reduced further to 2.4%

Inflation to enter positive territory in 2017

Page 24


Source: Central Bank of Bosnia and Herzegovina, The Agency for Statistics, IMF, Ministry of Finance, Addiko research


January-17

Bosnia and Herzegovina's data trends

-3

-1

1

3

-12

-9

-6

-3

0

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Budget and current account gaps (% of GDP) vs. real GDP growth

BUDGET DEFICIT (LHS)

CAD (LHS)

GDP (RHS)

-3

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Real GDP growth (% YoY)

-2,2

-0,7

0,8

2,3

3,8

5,3

6,8

8,3

9,8


Key CPI contributions (pp)

Food Housing Transport

-8

-2

4

10

16

22

28

34

Jan-06 Feb-08 Mar-10 Apr-12 May-14 Jun-16

Private credit dynamics (%, YoY)

Corporate

Retail

R² = 0,6736

35

40

45

50

55

60

65

Jan-08 Oct-09 Jul-11 Apr-13 Jan-15 Oct-16

Merchandise import cover (%, 3mma)

70

80

90

100

110

120

130

140

Mar-07 Jul-09 Nov-11 Mar-14 Jul-16

Industrial production (%, yoy, s-a, 3mma)

Intermediate

Non-durable goods

Energy

Industry Total

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

25,3 26,2 26,2 26,7 27,3 28,2 28,6 30,0 31,7

13,0 13,4 13,4 13,7 14,0 14,4 14,6 15,3 16,2

17,2 18,7 17,2 18,2 18,5 16,0 16,1 16,3 16,2

3.373 3.488 3.486 3.559 3.634 3.754 3.806 3.991 4.217

4.404 4.789 4.431 4.682 4.785 4.140 4.187 4.230 4.217

0,8 0,9 -0,9 2,4 1,1 3,2 2,4 3,2 3,5

-0,8 1,6 -2,7 0,9 2,6 2,7 2,4 2,9 3,0

7,9 6,8 6,3 -2,4 9,5 -1,8 4,8 6,2 4,5

1,6 5,9 -5,3 6,6 0,3 3,1 4,2 4,8 5,0

27,2 27,6 28,0 27,4 27,5 27,7 26,3 25,7 24,9

2,1 3,7 2,1 0,1 -0,9 -1,0 -1,0 1,6 2,1

3,1 3,1 1,8 -1,2 -0,4 -1,3 0,9 1,2 1,4

0,9 3,8 1,5 -2,2 -0,5 0,6 -2,2 1,0 1,3

1,3 2,0 1,2 0,1 0,4 0,0 0,7 1,4 1,8

State budget balance -2,4 -1,2 -2,0 -2,2 -2,0 0,7 -0,7 -0,7 -1,3

Public debt 42,8 42,6 44,3 43,5 44,0 44,7 44,5 43,2 42,6

3,851 4,297 4,312 4,597 4,733 5,043 5,222 5,439 5,656

-6,649 -7,484 -7,483 -7,414 -7,943 -7,813 -7,939 -8,331 -8,690

-3,797 -4,131 -4,091 -3,741 -4,142 -3,810 -3,778 -3,996 -4,187

-29,3 -30,8 -30,5 -27,4 -29,7 -26,4 -25,8 -26,1 -25,8

1,015 1,027 1,070 1,097 1,163 1,210 1,249 1,280 1,303

-0,783 -1,270 -1,168 -0,773 -1,057 -0,833 -0,789 -0,928 -1,039

-6,0 -9,5 -8,7 -5,7 -7,6 -5,8 -5,4 -6,1 -6,4

0,3 0,3 0,3 0,2 0,4 0,2 0,1 0,5 0,5

2,1 2,6 1,9 1,6 3,0 1,4 0,7 2,9 3,0

34,8 27,1 22,3 29,1 40,0 24,7 12,7 48,5 47,4

3,302 3,285 3,328 3,614 4,001 4,400 4,433 4,404 4,237

6,0 5,3 5,3 5,8 6,0 6,8 6,7 6,3 5,9

6,687 7,183 8,410 8,491 7,818 8,654 8,876 9,024 9,104

3,217 3,407 3,687 3,867 4,316 4,444 4,524 4,584 4,499

3,471 3,776 4,723 4,624 3,501 4,210 4,305 4,440 4,605

51,6 53,6 62,8 62,1 56,0 60,0 60,7 62,0 58,3

173,6 167,2 195,0 184,7 165,2 171,6 170,0 165,9 160,9

1,46 1,51 1,48 1,42 1,61 1,79 1,88 1,96 1,92

1,47 1,40 1,52 1,47 1,47 1,76 1,78 1,85 1,96

1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96

1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96

7,9 6,5 6,5 7,2 6,0 5,1 6,2 6,3 6,4

7,2 5,8 3,4 7,9 7,3 8,0 7,2 6,8 6,5

3,5 5,3 4,1 0,5 2,8 2,4 2,2 3,9 5,0

0,81 1,39 0,58 0,22 0,21 -0,02 -0,35 -0,45 -0,10

Page 25

Net FDI (EURbn)

FDI (% of GDP)

FDI cover (%)




Government (EURbn)

Private (EURbn)


EURIBOR 3M interest rate (average %)




Remittances (EURbn)




External balance

Debt indicators


Nominal GDP (BAMbn, current prices)

Nominal GDP (EURbn)

Nominal GDP (USDbn)












Activity

Prices

Source: Central Bank of Bosnia and Herzegovina, The Agency for Statistics, IMF, Ministry of Finance, Addiko research



USD/BAM (end-year)

USD/BAM (average)

EUR/BAM (end-year)

EUR/BAM (average)




January-17


Unemployment rate (ILO, average, %)


2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

10.828 11.196 11.414 11.794 12.299 12.756 12.976 13.713 14.588

0,8 3,4 1,9 3,3 4,3 3,7 1,7 5,7 6,4

83,6 83,5 85,2 86,3 88,1 88,4 88,7 89,4 90,0

7.436 7.828 8.151 8.194 8.423 8.624 8.815 9.163 9.620

3,5 5,3 4,1 0,5 2,8 2,4 2,2 3,9 5,0

57,4 58,4 60,9 59,9 60,3 59,8 60,3 59,8 59,4

6.407 6.643 6.814 7.285 7.861 8.452 9.020 9.561 10.078

3,6 3,7 2,6 6,9 7,9 7,5 6,7 6,0 5,4

49,4 49,6 50,9 53,3 56,3 58,6 61,7 62,4 62,2

116,1 117,8 119,6 112,5 107,1 102,0 97,7 95,8 95,4

16,2 17,1 17,0 17,8 16,3 14,9 15,9 16,2 16,8

366 396 389 385 383 398 416 424 460

1,1 8,2 -1,8 -1,0 -0,5 3,9 4,6 1,9 8,4

609 620 610 618 623 642 671 691 744

4,8 1,8 -1,5 1,2 0,8 3,1 4,6 3,0 7,7

220 209 207 184 213 206 216 225 267

15,7 -5,1 -0,8 -11,1 15,8 -3,6 4,8 4,3 18,6

275 125 130 192 117 157 131 144 141

3,4 3,6 3,4 3,3 3,2 3,2 3,2 3,2 3,3

-0,5 0,8 0,7 -0,1 0,8 0,4 0,7 0,6 0,9

-4,4 5,9 4,8 -0,5 5,6 2,7 4,5 0,0 6,2

63,9 66,3 66,0 70,2 65,7 67,9 67,9 67,5 64,2

-3,6 -3,7 -3,6 -3,7 -3,4 -3,5 -3,5 -3,5 -3,4

11,4 11,8 13,5 15,1 14,2 13,7 12,0 11,5 11,1

43,7 66,3 65,9 66,7 69,7 71,2 66,6 63,5 61,7

3,8 1,6 1,6 2,3 1,4 1,8 1,5 1,6 1,5

-124,8 -60,0 -62,8 -104,1 -55,1 -76,2 -60,7 -64,0 -52,8

Page 26


Deposits (EURm)



Balance sheet


Assets (%, YoY)

Assets (% of GDP)

Assets (EURm)

Gross loans (EURm)








NPL coverage (%)


NPL ratio (%)


Deposits (%, YoY)

Deposits (% of GDP)

January-17

Performance








Pre-tax ROAA (%)

Pre-tax ROAE (%)


Source: CBBH, banking agencies, Addiko research

Overall loans grew 1.2% ytd in 10M16 on the back of stronger lending to private sector as retail and

corporate loans grew 3.1% ytd and 1.1% ytd, respectively amid employment growth and the overall

economic recovery. Retail credit is driven by cash non-purpose loans and does not support

investment activity as housing loans account for less than 20% of total retail and are in constant

decline. Public loans contributed negatively with 9.6% ytd decline on stronger market funding

operations. With our assumptions largely materializing, we are comfortable with our FY16 loan

growth expectations of 2.2% yoy. In 2017, we see acceleration of credit activity to 3.9% yoy on the

back of stronger lending to corporate sector for public infrastructure projects and further decline in

interest rates. NPL ratio was flattish 12.1% at end-September last year, which is in line with the

expected end-2016 NPL ratio of 12.0%.

On funding, deposit collection increased by 5.6% ytd in 10M16, driven by 4.3% ytd higher retail

deposits, with deposit growth in F B-H much faster than in RS, implying lower confidence in banking

sector prompted by several banks’ bankruptcies in 2015. Despite further decline in passive interest

rates, all other sectors contributed positively as well, whereby corporate deposit grew 4.6% ytd and

public deposits surged 11.7% ytd. All in, we keep our FY16 deposit growth forecast at 6.8% yoy,

implying L/D ratio of 98%, while in 2017 we see deceleration towards 6.0% yoy. On profits, B-H banks

saw 2.7% yoy decline in pre-tax profits due to 9.5% higher opex in 9M16. However, we see 1.7x

higher pre-tax profits in 2016 as last year’s results were hit by high provisioning in 4Q. In 2017, we

see profits on similar levels driven by stronger disbursements and lower provisioning, with. We also

see faster banks’ deleveraging this year since excess liquidity is abundant even for the planned

higher credit activity and has already been penalized by negative interest rates introduced by the

CBBiH in July 2015.

Private lending remains in green

Deposit collection accelerated despite further decline in interest rates

MONTENEGRO

Page 27


January-17

Fiscal Risks in Spotlight

After increasing by 2.1% yoy on average in 9M16 on the back of soaring but still lower than plannedconstruction growth (+27.2% yoy) given the delays in highway construction, the latest Q4 data showmixed picture. On the hand, after a 3.3% yoy decline in 9M16, industrial production accelerated itsslump to -11.1% yoy during October-November on average. Meanwhile, retail trade faced a minorgrowth slowdown from 3.9% yoy on average in 9M16 to 3.6% yoy in October-November. We relatesuch performance to strong 14.7% yoy tourism growth in October-November as well as solid 2.2% yoyemployment growth and 5.0% yoy increase in net wages that continue to support domestic demandrecovery. As for goods trade, export growth slowed from 11.3% yoy in 9M16 to 10.3% yoy in October-November, which combined with imports acceleration from 11.9% yoy to 14.6% yoy has resulted inwidening of the goods trade gap by 19.5% yoy, as goods import coverage fell by 49bp to just 18.0%.

In such circumstances we cut 2016 growth forecast by 0.9 pp to 2.6%. For 2017, however, we keep3.2% growth forecast, with private consumption the main growth driver supported with pre-electionpublic wage and pension hikes as well as higher social benefits. Also, we expect that back-loading ofconstruction activity of Bar-Boljare highway will be reflected in higher growth rates in 2017 on topof mostly tourism and energy projects. In line with that, we see public consumption having positiveimpact on growth for the time being. Meanwhile, we expect a strong negative contribution from netexports amid further import growth acceleration driven by ongoing private consumption recoveryand highway construction, while export is expected to grow at somewhat slower pace given poorindustrial production performance. Risks to our growth forecast mainly reflect any further delays inhighway construction or possible underperformance of tourism revenue given the relative low addedvalue.

As for the budget performance in the year to October, revenues soared 12.0% on better taxcompliance and solid growth rates. At the same time, expenditures fell 8.3% yoy to be as much as15.4% lower than planned on the back of lower spending on Bar-Boljare highway construction. Giventhe latter, budget deficit could be much lower than planned at about 3.3% of GDP in 2016 on ourestimates. As for 2017, the government adopted the budget plan according to which budgetrevenues are set to increase 6.2%, while EUR450m lack of funds are planned to be secured throughcredits. Current expenditures are set to decrease by 19.8%, whereas only currently known measuresare wage decrease of 8% for 800 highest state officials and lower benefits for mothers that havemore than three children. In addition, the government plans to lower capital expenditures by 21.5%which we found puzzling as the plan to proceed with highway construction should keep the budgetdeficit elevated around 7% of GDP in 2017-2018. In such circumstances, public debt is also set toincrease further and surpass 70% of GDP this year.

Looking at price dynamics, following five months of deflation, Montenegrin inflation facedstagnation in August and prices have gradually recovered since then only to increase by 0.6% yoy inNovember. The pick-up in inflation has been led by recovery of domestic prices and increases insegments of restaurants and hotels and to smaller extent alcoholic beverages and tobacco, whileimported inflation continued to contribute negatively through still lower prices of food and oil. Thatsaid, with our assumptions largely in place, we have marginally lowered our 2016 average inflationexpectations by 0.1pp to 0.1%, while in 2017 we see further price recovery as higher households’disposable income is expected to boost domestic consumption and global energy prices are rising.All in all, 2017 year end inflation is seen at around 2.0% for an average 1.8% increase through theyear.

In the year to September current account gap roughly doubled as 6.6% stronger export of goods wasnot enough to offset 12.0% yoy stronger goods import related to the ongoing highway constructionand domestic demand recovery being the main culprit. In addition, in spite of 8.1% growth offoreign tourist nights in the same period, services income increased by just 2.1% yoy, suggestingMontenegro has a plenty of room to improve services offered to tourist in order to increase tourismincome. Looking into capital and financial accounts, net FDI sank 46.3% yoy in 9M16, while portfolioinvestments entered negative territory. We find such movements particularly worrying as highexternal imbalances that are expected to deepen further will continue to push investors away. Thatbeing said, while the exact plans are yet to be known, we can only say that newly appointed PMMarković that announced some reforms in order to improve business climate will have hands full ofwork in order to regain investors confidence. All in all, we keep our view of 15%-alike currentaccount deficit in 2016 and then expect to see further increase to 16.7% of GDP in 2017.

In 2017 we keep our view of a 3.2% GDP growth with private consumption and back-loading ofconstruction activity of Bar-Boljare highway the main growth driver on top of other most energyand tourism projects. Fiscal metrics remain a cause of concern as highway construction shouldkeep the budget deficit elevated around 7% of GDP in 2017-2018 and further increase publicdebt. Prices are expected to recover further in 2017 with average CPI inflation of 1.8%.

Capex delays harming growth

Fiscal metrics remain a cause of concern

Inflation set to increase further

GDP set to increase by 3.2% in 2017

Current account deficit set to widen further

SEE MACROECONOMIC OUTLOOK MONTENEGRO

January-17Page 28

Source: Montenegrin National Bank, MONSTAT, Ministry of Finance, IMF, Addiko research

Montenegrin data trends

-0,2

-0,1

0

0,1

0,2

0,3

0,4

0,5

2009 2010 2011 2012 2013 2014 2015

Capital Account

Errors Omissions

Change in Reservs (+ is decrease)

Other

Portfolio Investment

Net FDI

Current Account Deficit

Balance of payments (%, yoy)

10

14

19

23

27

32

Mar-09 Aug-10 Jan-12 Jun-13 Nov-14 Apr-16

Merchandise import cover (%, 3mma)

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

100

200

300

400

500

600

700

800

900

1Q05 2Q07 3Q09 4Q11 1Q14 2Q16

Moving 4Q Net Tourism Revenues EURm (lhs)

Moving 4Q Foreign Overnights, in 000 (rhs)

Tourism

-50

-30

-10

10

30

50


Industrial production

Manufacturing

Industrial production (%, yoy)

65

80

95

110

125

140

155

170

185

200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

mil. €

2014 2015 2016 - plan

Budget revenue movements

-2

-1

0

1

2

3

4

5

6

Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16

CPI by key contributions (pps)

Food

Alcoh. Beverages, tobacco

Transport

Housing

Headline CPI

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Activity

3,1 3,2 3,1 3,3 3,4 3,6 3,6 3,8 4,0

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,04,1 4,5 4,0 4,4 4,5 3,9 4,0 4,0 4,3

5.011 5.211 5.062 5.359 5.460 5.715 5.872 6.169 6.497

6.648 7.257 6.510 7.117 7.253 6.339 6.459 6.416 6.951

2,5 3,2 -2,7 3,5 1,5 3,2 2,6 3,2 3,2

4,2 7,0 -0,7 1,6 2,9 2,2 2,3 2,5 2,5

-21,2 -9,6 -1,8 10,7 -2,5 11,9 12,2 13,5 7,3

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,017,5 -8,7 -6,2 10,7 -10,5 9,2 -4,2 3,7 3,5

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,019,7 18,1 20,6 19,5 18,1 17,9 17,7 17,3 16,9

Prices

0,5 3,3 4,0 1,8 -0,5 1,4 0,1 1,8 2,0

0,0 0,0 0,0 0,0 0,0 0,0 2,1 0,0 0,00,7 3,0 4,4 0,4 -0,6 1,7 0,9 2,0 2,1

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0-0,7 3,2 1,8 1,7 0,2 0,3 0,5 0,9 1,2

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,03,5 1,0 0,7 -1,7 0,1 0,7 3,6 0,9 1,3

-4,9 -6,7 -5,8 -6,3 -3,1 -8,5 -3,3 -7,1 -6,4

40,7 45,6 53,4 55,2 59,9 66,4 69,2 74,6 78,9

n/a n/a n/a 9,5 5,1 17,8 20,1 15,4 9,7

1,158 1,383 1,389 1,390 1,388 1,539 1,598 1,706 1,7900,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000

-1,961 -2,100 -2,166 -2,066 -2,074 -2,213 -2,350 -2,544 -2,676

-1,267 -1,306 -1,389 -1,329 -1,376 -1,463 -1,550 -1,701 -1,774

-40,8 -40,4 -44,1 -39,9 -40,6 -41,2 -42,5 -44,4 -43,9

0,552 0,619 0,643 0,666 0,682 0,813 0,829 0,896 0,922

-0,710 -0,573 -0,588 -0,487 -0,526 -0,482 -0,557 -0,640 -0,685

-22,9 -17,7 -18,7 -14,6 -15,5 -13,6 -15,3 -16,7 -17,0

0,6 0,4 0,5 0,3 0,4 0,6 0,4 0,4 0,4

0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,017,8 12,0 14,7 9,7 10,4 17,4 10,2 9,9 9,6

77,7 67,9 78,5 66,6 67,3 128,5 66,7 59,2 56,4

0 0 0 0 0 0 0 0 00,386 0,273 0,318 0,395 0,514 0,641 0,772 1,657 1,997

2,4 1,6 1,8 2,3 3,0 3,5 3,9 7,8 9,0

4,395 4,689 4,909 5,041 5,253 5,403 5,642 6,789 7,427

0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,0001,308 1,415 1,477 1,354 1,396 1,441 1,507 1,711 1,905

0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,0003,087 3,275 3,432 3,687 3,857 3,962 4,135 5,078 5,522

0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000141,6 145,0 155,9 151,5 154,8 152,1 154,6 161,2 164,1

379,6 339,2 353,3 362,6 378,4 351,0 353,1 397,9 414,8

1,34 1,30 1,32 1,38 1,21 1,09 1,04 1,07 1,09

0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,0001,33 1,39 1,29 1,33 1,33 1,11 1,10 1,04 1,07



0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000-4,8 -6,3 -0,7 3,1 -1,9 0,8 3,7 4,5 3,8

0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,00001,00 1,00 0,75 0,25 0,05 0,05 -0,20 -0,25 -0,25

0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,00000,81 1,39 0,58 0,22 0,21 -0,02 -0,35 -0,45 -0,10EURIBOR 3M interest rate (average, %)

EUR/USD (average)

Money supply M1 (% YoY)*

Broad money M3 (% YoY)*


ECB reference rate (end-year %)

Private (EURbn)



EUR/USD (end-year)


Government (EURbn)

FDI cover (%)




Debt indicators

State budget balance (ESA-95)

Public debt


Net FDI (EURbn)

FDI (% of GDP)









Nominal GDP (EURbn,current prices)

Nominal GDP (USDbn)


External balance












Source: Montenegrin National Bank, MONSTAT, Ministry of Finance, IMF, Addiko research


January-17Page 29

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

2.944 2.810 2.808 2.959 3.136 3.472 3.743 3.893 4.049

-2,7 -4,5 -0,1 5,4 6,0 10,7 7,8 4,0 4,0

94,8 86,9 89,2 88,9 92,4 97,3 99,3 97,6 100,3

2.518 2.359 2.342 2.414 2.367 2.386 2.473 2.584 2.682

-4,8 -6,3 -0,7 3,1 -1,9 0,8 3,7 4,5 3,8

81,1 72,9 74,4 72,6 69,8 66,8 65,6 64,7 66,4

1.790 1.817 1.981 2.098 2.308 2.625 2.839 3.008 3.150

-1,9 1,5 9,0 5,9 10,0 13,7 8,1 6,0 4,7

57,7 56,2 62,9 63,0 68,0 73,5 75,3 75,4 78,0

140,7 129,8 118,2 115,1 102,6 90,9 87,1 85,9 85,1

15,9 16,5 14,7 14,4 16,2 16,0 16,3 16,2 15,7

111 106 106 104 111 117 126 131 136

-8,2 -4,8 -0,1 -1,6 6,6 5,3 7,9 4,0 3,7

155 221 178 156 158 171 183 192 199

-4,4 42,6 -19,5 -12,0 1,2 8,3 6,9 4,6 3,8

53 114 65 48 46 52 57 59 59

-13,0 114,7 -43,2 -26,7 -2,6 11,5 11,2 2,9 0,3

148 124 121 44 21 53 34 35 37

3,7 3,7 3,8 3,6 3,6 3,5 3,5 3,4 3,4

-3,2 -0,3 -2,0 0,1 0,8 -0,1 0,6 0,6 0,6

-30,0 -3,2 -18,7 1,0 6,0 -0,4 4,5 4,0 3,7

65,6 48,2 63,5 69,6 70,7 69,8 68,7 69,1 70,2

3,4 3,7 4,0 3,8 3,7 3,6 3,5 3,5 3,5

21,0 15,5 17,6 17,5 15,9 12,5 10,0 9,6 9,4

28,6 27,6 32,7 44,7 46,0 49,6 41,8 34,5 27,7

5,7 5,1 5,1 1,9 0,9 2,2 1,4 1,4 1,4

277,2 108,5 185,7 92,5 45,6 103,2 59,2 59,8 62,1

NPL ratio (%)

NPL coverage (%)



Balance sheet

Performance

Assets (EURm)

Assets (%, YoY)

Assets (% of GDP)

Gross loans (EURm)


Pre-tax ROAE (%)








Pre-tax ROAA (%)

Deposits (EURm)

Deposits (%, YoY)









Page 30 January-17

Deposits (% of GDP)



Source: CBCG, Addiko research

Overall loan growth accelerated from 0.8% yoy in 2015 to 2.5% ytd in 11M16, with retail loans the

main driver, jumping 9.9% ytd supported by higher public wages, PIT relief and solid tourist season.

Corporate lending recorded a 2.7% ytd increase, whereas public loans ended 11M16 in the red with a

3.7% ytd drop. With lending figures largely in line with our assumptions, we keep our credit growth

forecast of 3.7% yoy in 2016. For 2017, we have upgraded our loan growth forecast to 4.5% yoy given

the expected further decline in active interest rates, with Montenegrin banks having the highest

spread between active and passive interest rates in SEE. NPL ratio continues its downward path to

10.2% at end-September in line with the expected NPL ratio at 10.0% at end-2016, followed by a

decline towards 9.5% by end-2017.

On funding, deposit collection rose 8.7% ytd in 11M16, with the strongest contribution from 19.3%

ytd stronger corporate deposit, with roughly half of the increase attributed to the EUR51m deposit

intake from a single company. Furthermore, public and retail deposits contributed positively as well

with 22.3% ytd and 4.5% ytd deposit growth, respectively, while other deposits sank 39.1% ytd in

11M16. That said, we are comfortable with our 8.1% yoy growth forecast for 2016, while in 2017 we

see deposit growth slowing to 6.0% from a high base. Meanwhile, L/D ratio fell to 85.7% at end-

November (vs 91% at YE15) and we expect the downward trend to continue in 2017 since lending,

although accelerating, is far from its pre-crises levels. On profits, pre-tax profit surged 2.5x yoy in

9M16 as 2.7% yoy higher total operating income more than offset 0.8% higher G&A expenses. That

said, we expect pre-tax profit to enter positive territory in 2016 and to maintain those levels in 2017

as well. However, relatively high CIR and excessive G&A expenses compared to SEE peers suggests

overcrowded banking sector ripe for consolidation in the coming years.

We upgraded our 2017 credit growth forecast to 4.5%

Private deposits rose on the back of the tourist season

Page 32


ABBREVIATIONS

Page 32 January-17

AUM Asset Under Management

BAMC Bank Assets Management Company

BRICS Brazil, Russia, India, China, South Africa

CAD Current Account Deficit

CAR Capital Adequacy Ratio

CARDS Community Assistance for Resconstruction, Development and Stabilization

CBS Central Bureau of Statistics

CEE Central Eastern Europe

CIR Cost-to-income ratio

CIT Corporate Income Tax

CNB Croatian National Bank

CPI Consumer Price Index

EC European Commission

ECB European Central Bank

EE Eastern Europe

EMU European Monetary Union

EU European Union

FC Foreign Currency

FDI Foreign Direct Investment

Fed Federal Reserve

FX Foreign Exchange

GDP Gross Domestic Product

GFCF Gross Fixed Capital Formation

IEA International Energy Association

IFI International Financial Institution

IFRS International Financial Reporting Standards

IMF International Monetary Fund

IP Industrial Production

IPO Initial Public Offering

ISPA Instrument for Structural Policies for Pre-Accession

LDR Loan-to-Deposit Ratio

M&A Mergers and Acquisitions

M1, M4 Monetary aggregates (the narrowest and the broadest, respectively)

MinFin Ministry of Finance

MM Money Market

MoM month-on-month

NII Net Interest Income

NIM Net Interest Margin

NPA Non-Performing Assets

NPL Non-Performing Loans (Impaired Loans)

OECD Organization for Economic Co-operation and Development

OPEC Organization of the Petroleum Exporting Countries

PER Price vs. Earnings

Phare Pologne et Hongrie - Aide á Restructuration Economique

PPI Producer Price Index

PPP Pre-Provision Profit / Public-Private Partnership

PSE Public Sector Entity

REER Real Effective Exchange Rate

SAPARD Special Association Program for Agriculture and Rural Development

S-D gap Supply-Demand gap

SPO Secondary Public Offering

T-bill Treasury bill

TOI Total Operating Income

VAT Value Added Tax

YE year end

yoy year-on-year

ytd year-to-date

ZIRP Zero Interest Rate Policy

SEE ECONOMIC RESEARCH

Disclosures Appendix

ANALYST CERTIFICATION

The information and opinions in this report were prepared by Addiko Bank d.d.. and/or one or more of its subsidiaries/affiliates (collectivelly, AddikoBank'). The research analyst or analysts who prepared this report hereby certifies that: (1) the views expressed in this report accurately reflect theirpersonal views about the subject securities or issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is, orwill be directly or indirectly related to the inclusion of specific recommendations or views in this report. On a general basis, the efficacy ofrecommendations is a factor in the performance appraisals of analysts.

IMPORTANT DISCLOSURES

The remuneration of research analysts is not tied to specific Investment banking / Treasury transactions performed by Addiko Bank d.d. although itis based in part on overall revenues, to which Investment banking / Treasury contribute.

Securities prices: Prices are taken as of the previous day’s close on the home market unless otherwise stated.

Conflicts of interest policy. Addiko Bank manages conflicts of interest arising as a result of the preparation and publication of research through its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by Addiko Bank Compliance and Security Department. For further details see our research policies page at http://www.addiko. com.

Addiko Bank is involved in many businesses that may relate to companies, issuers or instruments mentioned in this report. These businesses includemarket making, providing liquidity and specialized trading and other proprietary trading, fund management, investment services and investment

banking. Addiko Bank trades as principal in the securities/instruments that are the subject of this report. Addiko Bank may have a position in the debtof the Company or instruments discussed in this report, and may trade them in ways different from those discussed in this report.

POTENTIAL CONFLICTS OF INTEREST

Addiko Bank and/or affiliate (pursuant to relevant domestic law) acts as a market maker in government bonds issued by the Croatian Ministry ofFinance (Treasury).

DISCLAIMER

Addiko Bank does not undertake to advise you of changes in its opinion or information. Any opinions and estimates contained herein reflect the currentjudgement of the author(s), and do not necessarily reflect the opinion of Addiko Bank or any of its subsidiaries and affiliates. It has not been

determined in advance whether and in what intervals this report will be updated. Addiko Bank and others associated with it may make markets orspecialize in, have positions in and effect transactions in securities of companies mentioned and may also perform or seek to perform investment bankingservices for those companies.

This report is based on information available to the public. While reasonable care has been taken to ensure that the information contained herein is not

untrue or misleading at the time of publication Addiko Bank d.d. makes no representation or guarantee with regards to the accuracy, completeness orsuitability of the data. Additional information is available upon request. Facts and views presented in this report have not been reviewed by, and may

not reflect information known to, professionals in other Addiko Bank business areas, including Investment banking / Treasury / Corporate personnel.

This report is not investment advice or an offer or solicitation for the purchase or sale of any security/financial instrument or to participate in any

trading strategy. Neither Addiko Bank Croatia d.d. nor its subsidiaries/affiliates accept any liability for any direct or consequential loss arising from any

use of this publication or its contents. Clients should contact and execute transactions through Addiko Bank d.d. or group entity in their homejurisdiction unless local regulations permit otherwise. Copyright and database rights protection exists in this publication and it may not be sold,

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Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitablefor all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Pastperformance is not indicative of future results. Estimates of future performance are based on assumptions that may not be realized. Investors shouldmake their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters toevaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on thebasis of this publication.

This report may include research based on technical analysis. Technical analysis is generally based on the study of trading volumes and price movements in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying issuer or instrument and may offer an investment opinion that conflicts with other research generated by Addiko Bank. Investors may consider technical research as one input in formulating an investment opinion. Additional inputs should include, but are not limited to, a review of the fundamentals of the underlying issuer/security/instrument.

This report is diseminated and available primarily electronically to professional investors, who are expected to make their own investment decisionwithout undue reliance on this publication, and may not be redistributed, reproduced or published in whole or in part for any purpose. Additionalinformation is available on request.

SEE ECONOMIC RESEARCH

fax: +385-1-604-6522

phone: +385-1-603-3522

Tajana Striga, Analyst (+385-1-603-3522)

Ines Antic, Junior Analyst (+385-1-603-3657)

Addiko Bank d.d.

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[email protected]

Hrvoje Stojic, Economic Research Director (+385-1-603-0509)

Documents

see Outlook Quarterly - Addiko Bank Hrvatska · SEE MACROECONOMIC OUTLOOK Page 2 January-17 EXECUTIVESUMMARY BOTTOM LINE: We have upgraded 2017 growth outlook in all economies except