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Central european leasing market

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Central & Eastern Europe and the Financial Crisis: the Impact on the Banking Sector and the Leasing Market

Matteo Ferrazzi, CEE Strategic Analysis, UniCredit GroupThursday, 2 April 2009 Istanbul, Turkey

AGENDA

The global financial crisis and the effects on Central Eastern Europe The banking sectors in CEE The challenges for the leasing market Conclusions

2

A global economic storm, with no safe havens

The features of the international crisis: Global economic slowdownThe IMF is expecting the global economic growth in 2009 to be negative (from +3.9% in 2008)

Banks write-downs at global level(USD bn)800 700664 bn 742 bn

Difficulties of the banking systemLack of confidence in the financial industryRisks due to the presence of toxic assets Costs and availability of funding

600 500 400 300209 bn 365 bn 490 bn

De-leveraging New capital adequacy standard

200 100 0Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

46 bn

Commodity cycleOil and commodity price collapse

3

Source: UniCredit Group CEE Strategic Analysis, UBS Investment Bank

The banking sector in US is the epicentre of the crisis, but no one is immuneAcquirer LLoyds TBS BNP Paribas Banco Santander HBOS Fortis Benelux banking operations Bradford & Bingley branches Alliance & Leicester Target

M&A

JP Morgan

Bearn Stearns (announced in March 2008, one of the first signal of the bank crisis in US) Washington Mutual

Bank of America

Countrywide Merril Lynch

Wells Fargo

Wachovia

4

With the governments recently active in rescuing some important playersThe US Government is directly participating in the rescue of: CitiGroup Freddy Mac Fannie Mae AIG The German Government has bought important participations into: Commerzbank State intervention Hypo Real estate The English Government has bought important participations into: Northern Rock (March 2008) Royal Bank of Scotland Lloyds Other governments which intervened nationalizing some banks were: Iceland (four major banks), Ireland (Anglo Irish Bank, third major bank in the country), Latvia, Ukraine, Kazakhstan, etc.

5

The new international environment is posing additional challenges for CEE countries MACRO CEEDependency on capital inflows (consumption and investment boom financed through external savings) Dependency on international demand (industrial sector part of the international production chain) Dependency on commodities in Russia, Kazakhstan, Ukraine

BANKING CEE

Imported lack of confidence in banks Banking sector fully dependent on foreign funding to finance lending growth availability of funding and cost of funding an issue FX lending both in retail and corporate sector Real Estate market boom

The international crisis is reflected in Central Eastern European with peculiar characteristics

6

Paradoxically, global capital could flow back to countries where the crisis originated, out from emerging markets and from some transition economies

The impact of the financial crisis on CEE has been particularly serious in some countries, milder in others CEE not an homogenous areaRepricing of riskCountry Rank

1

2

3

4

5High macro vulnerability

5Y USD Credit Default Swaps4184Ukraine

Low macro vulnerability

371Turkey

486Russia

996Kazakhstan

913Latvia

399Croatia

474Romania

510Bulgaria

253Poland

132Slovakia

Italy and Austria ~150 bpsCurrent

222Czech Rep.

30/12/2008460Hungary

30/09/2008

7

Source: UniCredit Group CEE Strategic Analysis

Macroeconomic vulnerabilities (dependency from capital inflow, from international demand and commodities) are on the spotlight, but EU/EMU is having a stabilising effectCEE Macro vulnerability indicators (2008E)1

External VulnerabilityExt. Debt/ GDP, % Poland Czech R. Slovakia Hungary Slovenia Estonia Latvia Lithuania Croatia Bulgaria Romania Serbia Bosnia Turkey Ukraine Russia Kazakhstan 51.4 40.0 56.0 108.7 107.1 125.9 144.6 76.4 94.6 106.3 36.9 67.0 46.1 63.9 47.0 72.0 CA/ GDP, % -5.3 -3.4 -6.2 -6.9 -6.1 -10.3 -14.5 -11.9 -11.0 -25.0 -12.7 -17.9 -15.8 -5.5 -6.9 5.4 6.2 Reserves/ ST Debt, % 0.8 0.8 1.0 0.4 0.4 0.5 2.5 0.9 1.3 6.8 1.9 1.4 1.3 3.9 2.1

TradeExport (G&S)/ GDP, % 40 77 82 81 71 75 43 59 49 60 25 31 37 19 50 29 58

Raw material dependence

Real EstateRE price (ytd JanSep 2008) Construc./ GDP, % 6.9 6.3 6.0 4.2 7.0 7.9 7.4 10.0 6.0 17.9 10.3 3.6 4.7 4.8 4.6 5.1 11.9

EU / EMU

high high high

1.5% 22% 10.9% -11.2% -1.5% 5.2% 16.6% -0.5% -17.5%

EU EU EMU EU EMU EU EU EU EU EU -

8

(1) Reserves/ST debt as of Q3 2008 for Croatia, Bosnia-H, Baltics, Turkey, Ukraine, Czech Republic, Hungary; Source: UniCredit Group CEE Strategic Analysis

International commitment (from IMF, EU, ECB, EBRD, EIB, WB) toward the regions is very highInternational supportIMF Plans 2008-09

Belarus (USD 2.5 bn) Latvia (USD 2.4 bn) Ukraine (USD 16.5 bn) Hungary (USD 15.7 bn) Turkey is expecting to receive more than USD 15-20 bn Serbia (USD 3.5 bn)

Romania (USD 26 bn)

At world level, Iceland, Pakistan and Armenia also received IMF support (respectively for USD 2.1, 7.6, 0.5 bn)

9

Not a supportive environment for the corporate sector - With export demand falling off of a cliff German demand and CEE export25 20 15 10 5 0 -5 -10 -15 -20 Jan-03 Jan-01 Jan-08 Jan-02 Jan-04 Jan-06 Jan-07 Jan-05YoY growth in German machinery and equipment new orders, left axisCZK, HUF, PLN, RON, TRY export growth yoy (EUR), right axis*

25

20

15

10

5

0

10

and FDI halving, with parent companies support clearly reduced, investment activity in CEE will be subdueForeign direct investmentsEUR bn, 2006-09

Real Investment growth%, avg growth, 2005-08 and 2009-10-10.0 -6.0 -2.0 2.0 6.0 10.0 14.0 18.0

120

Central Europe

avg 2005-'08 avg 2009-'10

100Baltics

80SEE

60Turkey

40

20

Ukraine

0 2006 2007 2008 2009Broader EuropeCentral Europe

Russia

SEE & Baltics

11Source: National Central banks, UniCredit Research

On lower profitability, credit squeeze and possible repatriation of profit, corporate liquidity is drying up and this trend is already clearly visible on depositsCorporations in CEE Corporate1 deposits% variationPoland Czech Slovakia Hungary Slovenia Croatia Serbia

Lower export and lower FDI from abroad Profitability sensibly eroded => corporate selffinancing under pressure Intra-company loans will be sensibly lower Banks more selective => reduced availability of banks credit Repatriation of profits could increase

~ 965 bn of export and 117 bn of FDI in 2008

Self-financing represent from 50 to 80% of total financing in CEE

2008 yoy Sept- Dec 08

Bosnia Romania Bulgaria 700 bn of corporate loans in 2008 (+87 bn vis--vis 2007, +14%)

Estonia Latvia Lithuania Turkey Russia Ukraine Kazakhstan-15% -5% 5%

1030 bn of deposits pool (of which 366 bn corporate)

15%

25%

35%

12

(1) Corporate: including SME and public enterprises, excluding govt, municipalities and non monetary financial institutions;

The manufacturing sector in CEE: a stronger industry after the crisis or the end of a successful story?CEE became in the last decade the manufacturing arm of Old Europe. But the financial crisis is affecting significantly CEE countries: Is the end of the successful story in producing in CEE or will the crisis create a further incentive to move production towards more efficient locations in Eastern Europe (creating even a stronger industry in CEE in the long run)?Some considerations: Incentives for some industries in Western Europe (for cars and durable goods) could favor Western factories, even if protectionism risks will not materialize; Labor flexibility is higher in some CEE countries (its easier to cut production in CEE rather than in Western Europe) Pressures on labor cost in CEE will be lower than before (CEE is even more an efficient location) Competitive pressures intensifies, ie. stronger incentive to look for efficiency 13

A difficult international environment and weaker corporate activity: which are the effects for the banking sector and for the leasing market?Channels of transmission of the crisis Weaker economic growth corporate activity subdue Re-pricing of riskBANKING SECTORBANKING SECTOR

Possible impact

MACRO

CORPORATE PROFITABILITY AND WILLINGNESS TO INVEST

Availability of funding Future problems in terms of credit quality

LEASING MARKET

14

AGENDA

The global financial crisis and the effects on Central Eastern Europe The banking sectors in CEE The challenges for the leasing market Conclusions

15

Banking System Vulnerabilities sound structural indicators, but high dependency from international funding, some FX issues for the clients and coming out from a credit boomCEE Banking vulnerability indicators (2008*)

Stability IndicatorsEquity/ Assets, % Poland Czech R. Slovakia Hungary Slovenia Estonia Latvia Lithuania Croatia Bulgaria Romania Serbia Bosnia Turkey Ukraine Russia Kazakh. 11.7 9.1 9.1 8.3 7.7 7.5 8.3 8 17.1 10.2 10.1 28.9 13.3 13.5 11.7 12.9 18.4 For. ow n., % 66.9 97 96.5 67.5 29.5 98 55.9 87.6 90.4 75.3 88.6 75.5 91 29.9 32.5 12.1 5.4 State Relev., %** 13.6 20.4 46.1 18.8 4.2 4 9.4 29.1 15.9 44.9 72.3

PenetrationLoans / GDP, % 48.2 52.5 44.8 67.9 85.5 99.1 95.8 63.2 80.4 73