Slide 1 / 17.10.2015 Impact of crisis on retail banking Ionut Dumitru, Chief-Economist Raiffeisen Bank

Slide 1 / 20.04.23

Impact of crisis on retail banking

Ionut Dumitru, Chief-Economist Raiffeisen Bank

Slide 2 / 20.04.23

Overview – Impact of crisis on demand for retail banking products

Rapidly deteriorating economic activity caused

Downward adjustment in financial position of households – real disposable income decreased, unemployment increased

Low consumer morale – as a result of both current financial situation and persisting uncertainties regarding future economic and financial outlook

Dynamics of private credit turned negative – consumer loans were the most affected

Both WILLINGNESS and CAPACITY of households to take on new debt has been significantly impaired

Increased propensity to save and lower consumption

Slide 3 / 20.04.23

Economic activity deteriorated rapidly...

Adjustment in retail sales Sharp contraction in industrial output

Industrial output in new-EU member countries

50

100

150

200

250

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10-45

-33

-21

-9

3

Buildings: residential and non-residential (2005=100, 3 months avg)Building permits - area in square meters (2005=100, 3 months average)Sentiment index in construction (RHS, 3 months average)

Output in construction sector shrank

Source: Eurostat, Raiffeisen RESEARCH

105

110

115

120

125

130

135

140

Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10

Industrial output - total industry (2005=100)

Industrial output - manufacturing (2005=100)

100

120

140

160

180

200

Apr-

06

Oct-

06

Apr-

07

Oct-

07

Apr-

08

Oct-

08

Apr-

09

Oct-

09

Apr-

10

Non-foods, excluding fuels Fuels

Total retail sales Foods

2005=100,

3 months average

Index of industrial output (2008Q2=100)

75

80

85

90

95

100

105

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10

Romania CEE 4 Countries Baltic countries Euro area

Slide 4 / 20.04.23

… with a negative impact on households’ financial position

Flat real wages since beginning of 2009

Increasing unemployment rate

Decrease in remittances

0

300

600

900

1200

1500

03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 2010Q1

Remittances from Romanians working abroad (EUR mn)

Real disposable income started to decrease

Source: National Bank of Romania, National Institute of Statistics, Raiffeisen RESEARCH

3

4

5

6

7

8

9

10

Dec-05 Jan-07 Jan-08 Jan-09 Jan-10

Registered unemployment rate (seasonally adjusted)

May 2010: 8%

500

700

900

1100

1300

1500

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

150

230

310

390

470

550

Real net wage in economy (RON, Dec 2009 prices)

Nominal net wage in economy (in EUR equivalent, RHS)

-20

0

20

40

60

80

100

120

05Q1 06Q1 07Q1 08Q1 09Q1 2010Q01

Real disposable income (2008=100)

Real disposable income (% yoy)

Slide 5 / 20.04.23

Households savings continued to increase, as economic and financial uncertainties persisted

Outstanding deposits of households

Structure of households’ deposits

Dynamics of households’ savings remained positive

Source: National Bank of Romania, Raiffeisen RESEARCH

-

2.00

4.00

6.00

8.00

10.00

12.00

-

10

20

30

40

50

60

70

Jan-

05

Jun-

05

Nov

-05

Apr

-06

Sep-

06

Feb-

07

Jul-0

7

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug

-09

Jan-

10

RON deposits FCY deposits (r.h.s.)

RON, bln EUR, bln

4.1

18.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

Total deposits real growth (yoy, CPI deflated)

RON deposits real growth (yoy, CPI deflated)

FCYdeposits growth (yoy, EUR equivalent)

6.1

-

10

20

30

40

50

60

70

80

Current account Time deposits

RON bn

-60

-50

-40

-30

-20

-10

0

10

Financial situation over next 12 months

General economic situation over next 12 months

Unemployment expectations over next 12 months

Savings over next 12 months

Confidence indicator

Consumer confidence remains at very low levels

Slide 6 / 20.04.23

Loans for consumer purposes were the most affected

Outstanding consumer loans are decreasing

Outstanding housing loans

Sharp decline in purchases of durables goods

4

5

6

7

8

9

10

11

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

15

20

25

30

35

40

Consumer and other purposes in FCY

Consumer and other purposes in RON (RHS)

-80

-60

-40

-20

0

20

40

60

Mar-07 Mar-08 Mar-09 Mar-10

Computers, telecommunications equipment (% yoy, 3M avg)Audio-video and electrical household appliances (% yoy, 3M avg)Passenger cars (% yoy, 3M avg)

0

1

2

3

4

5

6

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

1

1.2

1.4

1.6

1.8

2

2.2

Housing loans in FCY (EUR equivalent)

Housing laons in RON (RON bn, RHS)

An increase was recorded only for housing loans in FCY due to Prima Casa Program


-92

-50

0

50

100

150

200

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

Total loans real growth (yoy, CPI deflated)

RON loans real growth (yoy, CPI deflated)

FCY loans growth (yoy, EUR equivalent)

Dynamics of loans to households turned negative

Slide 7 / 20.04.23

Overview – Impact of crisis on banks (supply-side of retail banking products)

Financial standing of banks’ clients deteriorated, future outlook of credit risk remains negative Tightening of lending standards by banks in an attempt to contain future potential losses

Rapid increase in non-performing loans and risk costs leading to a significant erosion of banks’ profit margins

Increase in funding costs as a result of the financial crisis added to the pressure on profit margins, as it was not (fully) passed on to customers.

Slide 8 / 20.04.23

Banks tightened the lending standards and became more reluctant to lend money


Lending standards have been tightened

-40

-20

0

20

40

60

80

100

Bala

nce

(%)

Companies Households

Tigh

teni

ng le

ndin

g st

anda

rds

Easi

ngle

ndin

g st

anda

rds

-40

-20

0

20

40

60

80

100

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

SME Corporate

Ris

ing

cred

it risk

Dec

reas

ing

cred

it risk

Credit risk of real sector as perceived by banks increased substantially

Slide 9 / 20.04.23

Mounting credit risk deteriorated banks’ portfolio quality and increased the associated costs

Source: NBR, Raiffeisen RESEARCH

Rapid increase in NPLs Risk costs increased sharply

-

5

10

15

20

25

30

-

10,000

20,000

30,000

40,000

50,000

60,000

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10

Unadjusted exposureAdjusted exposureNon-performing loans (% of total loans, unadjusted) (r.h.s.)Non-performing loans (% of total loans, adjusted) (r.h.s.)

EUR, mln percent

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Sep

-08

Oct-

08

Nov-0

8

Dec

-08

Jan-09

Feb-09

Mar-0

9

Apr-0

9

May-0

9

Jun-09

Jul-0

9

Aug-09

Sep

-09

Oct-

09

Nov-0

9

Dec

-09

Jan-10

Feb-10

Private credit, yoy growth Provisions, yoy growth

Rapidly deteriorating portfolio quality

Slide 10 / 20.04.23

Cost of credit (LCY plus FCY) in Romanian banking sector remains at elevated levels…

Overall cost of credit* by components (avg.)

*Includes both interest income and fees and commissions and refers to both FCY and LCY loans

Cost of credit* components (2009 avg.) (% of total loans)


5.9%3.1% 2.4%

-0.1%-1.0%

1.8% 2.3%

3.5%

3.4% 4.2% 4.5%4.0%

2.5% 3.5%5.8%

6.1%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2006 2007 2008 2009

Profit margin Risk costs Administrative costs Cost of funds (incl. cost of reserve)

11.3%

-0.1%

2.4% 3.5%

4.0%

1.1%

5.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Total credit cost Risk costs Administrative costs

Cost of reserve Cost of funds Remaining profit margin

Interest income Fees and comissions

…determined/ justified by: Sharp increase in risk costs (+) Higher cost of funds (+) Containment of administrative costs (-) Lower profit margins (-)

Slide 11 / 20.04.23

LCY lending in 2009: marginally higher cost of credit, BUT significantly lower profit margins

Local currency cost of credit* by components (2008 avg.)


Local currency cost of credit* by components (2009 avg.)


17.4%

2.3%

4.2% 5.3%

4.0%

1.2%

8.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%




16.0%

4.5%

3.8% 3.4%

4.5%

1.8%

5.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%




LCY lending remained marginally profitable in 2009, despite the

sharp increase in risk costs

Compared to 2008 profit margins have been significantly eroded

Slide 12 / 20.04.23

FCY lending in 2009: lower cost of credit and negative profit margin

Foreign currency cost of credit* by components (2008 avg.)


Foreign currency cost of credit* by components (2009 avg.)


7.2%

-0.8%

1.7% 2.1%

4.0%

1.0%2.5%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




8.8%

0.7%

2.1% 1.4%

4.5%

2.1%

2.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%




In case of FCY loans the associated costs exceeded the revenues in 2009

by almost 1%

Higher funding costs on the back of higher risk premiums

Increased risk costs due to deteriorating portfolio quality

Slide 13 / 20.04.23

The fiscal adjustment process (1) Will have a negative effect on the economy and consequently on demand and supply of loans

Public revenues, expenditures and deficit

Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH

The large budget deficit is the result of fast increase in public expenditures, especially with wages and social transfers (pensions, unemployment benefits)

The large budget deficit is difficult to finance in the current context

Radical measures are required to lower the budget deficit in a sustainable way: cut in the expenditures or/and increase in taxation

Main drivers of expenditures

10

17

24

31

38

45

2005 2006 2007 2008 2009

Compensation of employees (% of revenues)Intermediate consumption and other current expenditure (% of revenues)Social benefits (% of revenues)Capital investments (% of revenues)

The government decided to adjust the deficit on the expenditure side: cut in public wages by 25% and in pensions by 15%

The measures are radical and they would trigger resistance of unions; Increase in taxations should not be completely ruled out

Even with these measures, the budget deficit would be very high in 2010 (close to 7% of GDP based on cash methodology and 8% of GDP based on ESA 95)

1.2

2.22.5 5.4

8.3

7.8

38.8

40.4

37.6

36.035.3

33.5

32.333.1

33.5

32.132.1

31.030

32

34

36

38

40

42

2005 2006 2007 2008 2009 2010P

30

32

34

36

38

40

42

Budget deficit (% of GDP) Public expenses (% of GDP)

Public revenues (% of GDP)

Slide 14 / 20.04.23

The fiscal adjustment process (2) There is room for government to cut public spending and to increase efficiency of spending

Sharp increase in pensions in 2007-2008

Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH

Ratio between earnings in public and private sector

101108

116

132 127 132 126119 118 113

108 106101

86

0

20

40

60

80

100

120

140

RO

03

RO

04

RO

05

RO

06

RO

07

RO

08

RO

09

LV

08

BG

08

HU

08

LT

08

CZ

07

PL

08

SK

08

Government intermediate expenses (% of GDP)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

CEE4 countries Baltic countries Romania

Public investments (% of GDP)

5.5

6.0

6.5

7.0

7.5

8.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

CEE 4 countries Baltic countries Romania

49.7

43.8

37.3

34.4

33.083.7

25

30

35

40

45

50

55

1991 1994 1997 2000 2003 2006 200960

85

110

135

160

185

210

Ratio between average monthly pension and net average monthly wage in theeconomy (%)Ratio between the number of employees and the number of pensioners (%, RHS)

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Slide 1 / 17.10.2015 Impact of crisis on retail banking Ionut Dumitru, Chief-Economist Raiffeisen Bank