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CEE Banking Sector ReportCEE Banking Sector ReportJune 2015

2015: A transition year

Upside on some CE/SEE markets

Restructuring in HU and RO well advanced

NPL improvements in CE/SEE, downside in EE

2014 RoE in CEE at 6%, not much upside for 2015

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2 Please note the risk notifi cations and explanations at the end of this document

Content

Executive Summary 3

Defi nition of subregions, economic overview 5

Banking trends in CEE

Ownership structures and market concentration 6

Focus on Russia: Harsh market and political trends to impact competitive landscape 8

Financial intermediation, asset-to-GDP ratios 9

Focus: “Deleveraging debate” in CEE banking 11

Loan growth, growth by segments (retail, corporate) 12

Funding, deposit growth and L/D ratios 14

Profi tability (Return on Assets, Return on Equity) 16

Focus: Non-performing loans and NPL ratios 17

CEE banking growth and overall market outlook 19

Country Overviews

Poland 22

Hungary 24

Focus: A big-picture view on Hungarian banking 26

Czech Republic 30

Slovakia 32

Slovenia 34

Croatia 36

Romania 38

Bulgaria 40

Serbia 42

Bosnia and Herzegovina 44

Albania 46

Russia 48

Ukraine 50

Belarus 52

Focus on Ukraine: Key provisions of IMF program 54

Market players in CEE 55

Appendix: Key CEE banking sector data 81

Key abbreviations 82

Risk notifi cations and explanations 84

Disclaimer 86

Table of contents


Executive Summary

Dear reader of the CEE Banking Sector Report 2015!

The year 2014 marked the 25th anniversary of the fall of the Iron Curtain – a his-toric event that laid the foundations for a success story in terms of economic de-velopment and political stability on the European continent. Yet, the celebrations were rather moderate, as 2014 turned out to be quite challenging for the EU and Central and Eastern Europe (CEE) – economically and politically.

For one, 2014 was characterized by great uncertainty stemming from the po-litical tensions in the EE region. While the Ukrainian economy and banking sec-tor saw a terrible year, Russia was still able to absorb the negative impacts from the economic nosedive, RUB collapse and Western sanctions. For 2015, we ex-pect a deterioration of key economic indicators with negative impacts gradually feeding into the banking sector performance. Moreover, the medium-term eco-nomic and banking sector outlook for Russia seems less favorable than antici-pated some years ago. Hence, the largest foreign-owned banks may overthink their presence in Russia and consider more cautious business models, while state-owned banks might even increase their market share. Up until 2016, we cur-rently do not see a significant improvement of the economic situation in EE. It will take extensive structural reforms to recover and to return to somewhat sustainable growth patterns. Also, only time will show if the current IMF program for Ukraine will be sufficient to make up for the structural and economic damage caused over the past months of armed conflict and political challenges. Given the significance of EE for the entire CEE region, we dedicated a focus on both Russia (page 8) and Ukraine (page 54) to take a closer look on the current situation and to give a near-term outlook on the development of these two banking sectors.

The second major topic in 2014 in European banking was the Asset Quality Re-view (AQR) and stress testing by the European Central Bank (ECB) and the Euro-pean Banking Authority (EBA). The results were stricter regulations and require-ments for the entire European banking industry and a broad-based balance sheet clean-up. CEE banking markets were also affected, as Western CEE banks had to adapt their business models and overall market presence. On a positive note, this process led to improved NPL ratios in CE/SEE and more risk-averse lending policies. At the same time, stricter capital requirements and increasingly nega-tive effects stemming from the ultra-low interest rates environment resulted in prof-itability pressure in several key CE banking markets. Overall, the appeal of CE/SEE banking markets, with the exception of Poland, the Czech Republic and pos-sibly Slovakia, suffered compared to the euro area. Hence, our focus on the “De-leveraging debate” (page 11) discusses the current dilemma of Western banks in CEE.

Executive Summary

CE/SEE: New lending cycle may start; balance sheet clean-up results in improved NPLs, but affects profi tability EE: Western banks may start to rethink their market presence, returning to “boutique-style” business models High-growth markets: Poland, the Czech Republic, Slovakia, Hungary and Romania

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2012 2013 2014e 2015f 2016fCE/SEE EE Euro area

Real GDP (% yoy)

Source: national sources, Eurostat, RBI/Raiffeisen RESEARCH

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CE/SEE EE Euro area

Cross-border claims*

* BIS-reporting Western European banks(Dec 2007 = 100, latest data point Q4 2014)Source: BIS, RBI/Raiffeisen RESEARCH


Executive Summary

With regards to the growth outlook for the individual CEE banking markets, we continue to consider Poland, the Czech Republic and Slovakia as high-growth markets, characterized by modest levels of financial intermediation and hence a fair chance that lending and asset growth can outpace GDP growth on a sus-tained basis. From a fundamental perspective, the turnaround markets of Hun-gary and Romania may be added to this group of countries. Both banking mar-kets did see an economic and banking sector turnaround in recent years (based on deleveraging, harsh one-off losses and NPL restructuring). However, at this point it is difficult to predict if the restructuring of the past few years has been yet sufficient to start a decent upturn already in 2015. Our country pages (page 22) provide a detailed picture of individual CEE banking sectors. A special section (page 26) covers the long-term trends in Hungarian banking. Following harsh ad-justment in recent years, we may see a return to growth and profitability based on a more constructive stance by Hungarian policymakers.

In retrospective, 2014 was much more challenging than expected. Economic growth in the euro area was disappointing, and the stricter regulations on the banking sector resulted in a “new reality” for the European banking industry as a whole. In addition, the political tensions in the EE subregion worried businesses and investors. In total, three out of 14 CEE banking markets (Hungary, Romania and Ukraine) were loss making in 2014, which is close to the number of loss mak-ing markets (four) seen in the aftermath of the global financial crisis in 2008/09. The Russian banking market experienced a noticeable drop in profitability in 2014 (RoE down from 15% to around 8% in 2014, Q1 2015 RoE at 4.8%). For 2015, we expect cautious and very selective business strategies of larger Western European CEE banks, characterized by capital discipline as well as a stark differentiation between country and business segment strategies. Therefore, overall business strategies in CEE banking are likely to be dominated by balance sheet optimi-zation, cost-cutting, very selective growth and investments strategies focusing on product optimization, modernization and operational efficiency. It is unlikely that we will see new market entries or large-scale expansions of existing branch net-works. Although we still expect 2015 to be a transition year in CEE banking, we see players that are already positioned to profit from the increasing upside and next credit cycle in CE/SEE banking and who are placed to gain market share and to lay the foundations for future growth and profitability. The overview on in-dividual market players (page 55) discusses the business models and strategies of the largest Western and Russian banks operating in the CEE region and offers data for comparison.

We hope you find the CEE Banking Sector Report 2015, with our analysis, data and graphics in it, a reliable and unique reference for your daily work.

On behalf of the author team, Gunter Deuber Elena Romanova

Vienna, June 2015

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CEE RoE (right hand scale)Impact on foreign banks**

CEE: RoE & impact on foreign banks*

* RoE and average market share loss-making CEE bank-ing markets in %, loss-making in 2014: Hungary, Roma-nia, Ukraine** Average market share foreign-owned banks on loss-making CEE markets, number of loss-making markets - if any - in brackets on horizontal axisSource: national central banks, RBI/Raiffeisen RESEARCH

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* 1999-2014Source: national central banks, ECB, RBI/Raiffeisen RESEARCH


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CZ HU PL SK SI AL BH BG HR RO RS BY RU UA

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Subregions and economic overview

Central Europe (CE)

Southeastern Europe (SEE)

Eastern Europe (EE)

Key economic indicators

Real GDP (%yoy) GDP (EUR bn)

Trade (% of GDP)

Public debt (% of GDP)

Unemployment (%)

2000-2013 2014-18f Chg. (14-18f vs. 00-13) 2014 2014 2008 2014 2008 2014

Poland 3.6 3.4 -0.2 412 80 47 49 9.8 12.3

Hungary 1.9 2.7 0.8 103 164 73 77 7.8 7.7

Czech Republic 2.6 2.4 -0.2 155 148 29 44 4.1 7.7

Slovakia 3.9 2.9 -1.1 75 170 28 54 9.6 13.2

Slovenia 2.0 2.0 0.0 37 120 22 80 4.4 9.7CE 3.2 3.0 -0.2 783 115 44 54 8.1 10.7

Croatia 1.8 0.8 -1.0 43 45 36 85 8.5 17.3

Romania 3.6 3.0 -0.6 151 62 13 40 5.6 6.8

Bulgaria 3.5 2.5 -1.0 42 105 14 27 8.1 10.7

Serbia 3.2 1.6 -1.6 33 87 27 69 13.6 22.0

Bosnia and Herzegovina 3.1 2.8 -0.4 14 66 30 45 23.4 27.5

Albania 4.7 3.5 -1.3 10 31 55 72 12.8 18.0SEE 3.3 2.4 -0.9 298 67 21 49 8.7 12.5

Russia 4.8 0.0 -4.8 1,384 54 7 12 6.3 5.3

Ukraine 3.9 -2.0 -5.9 99 84 20 70 6.4 9.3

Belarus 6.2 1.1 -5.1 57 94 13 34 0.8 0.5EE 4.8 -0.1 -4.9 1,540 57 8 17 6.1 5.5Euro area 1.1 1.4 0.3 10,111 38 69 92 7.6 11.6Source: national sources, Eurostat, RBI/Raiffeisen RESEARCH

CEE: GDP per capita (in % of European Union average)*

* at PPP; 2016-18f: IMF forecastsSource: IMF WEO, RBI/Raiffeisen RESEARCH

Key institutional indicators

Ease of Doing Business Rank*

Getting Credit*

Enforcing Contracts*

Resolving Insolvency*

Corruption Per-ception Index**

Poland (EU) 32 17 52 32 35

Hungary (EU) 54 17 20 64 47

Czech Republic (EU) 44 23 37 20 53

Slovakia (EU/EA) 37 36 55 31 54

Slovenia (EU/EA) 51 116 122 42 39CE (avg.)*** 44 42 57 38 46

Croatia (EU) 65 61 54 56 61

Romania (EU) 48 7 51 46 69

Bulgaria (EU) 38 23 75 38 69

Serbia 91 52 96 48 78

Bosnia and Herzegovina 107 36 95 34 80

Albania 68 36 102 44 110SEE (avg.)*** 70 36 79 44 78

Russia 62 61 14 65 136

Ukraine 96 17 43 142 142

Belarus 57 104 7 68 119EE (avg.)*** 72 61 21 92 132* out of 189 countries, ** out of 175 countries, *** regional aggregates unweighted averagesSource: World Bank, Transparency International, RBI/Raiffeisen RESEARCH

Key banking indicators

Bank assets (EUR bn,

2014)

Assets-to-GDP (2000)

Assets-to-GDP (2014)

PL 360 61% 89%

HU 102 67% 100%

CZ 195 125% 126%

SK 63 89% 81%

SI 37 71% 100%CE 756 78% 98%

HR 53 63% 123%

RO 90 29% 61%

BG 28 36% 104%

RS 27 53% 85%

BH 13 36% 92%

AL 10.2 52% 98%SEE 222 37% 81%

RU 1,136 32% 109%

UA 68 23% 86%

BY 33 28% 62%EE 1,238 31% 106%Source: national central banks, RBI/Raiffeisen RESEARCH



In the CE banking sectors, the secular trend of gradually decreasing foreign own-ership ratios continued in 2014. For the first time in over 15 years, the foreign-ownership share dropped slightly below 70% of total assets. This decreasing share reflects a market-based gradual decrease of foreign ownership in Poland, a state-led restructuring of ownership in Hungary as well as state-driven bank bailouts in Slovenia. In SEE, the foreign ownership ratio remained at a high level of around 80%, with a slight upward bias from 2012 to 2014. Minor decreases in the foreign ownership ratio in Croatia and Romania were overcompensated by a fairly strong rise in Bulgaria by some 5 pp, which was the result of the fail-ure of one fast growing local player. Hence, a modest correction in the SEE for-eign ownership ratio could be in the cards for 2015/16.

In the EE countries, foreign ownership ratios are characterized by two very di-vergent trends. In Russia, the market share of 100% foreign-owned banks has been decreasing ever since 2008. The 100% foreign ownership ratio in the Rus-sian banking sector currently stands at 7.6%, the 50% foreign ownership ratio (which includes lenders with foreign participation and partially also Russian off-shore-money) stands at some 14%. Compared to Russia, the market share of for-eign-owned banks in Ukraine was on an uptrend in 2014, increasing from 27% to around 31%. However, this market share increase should not be overrated. It is by and large a reflection of an increasing number of failed and restructured lo-cally-owned banks, while foreign-owned players (among the largest banks) are still in the market. The overall foreign ownership ratio in the EE banking sector remains below 10%, showing that foreign-owned banks in EE are niche players compared to their presence in the CE/SEE region.

Not much has changed with regards to state ownership ratios in nearly all CEE banking sectors, with the possible exception of Hungary. There, state ownership increased from some 6% in 2013 to around 12% in 2014. The overall state own-ership in the CE region remains more stable at around 15%, mainly driven by Po-land, Hungary and Slovenia (as state ownership is insignificant in the Czech and Slovak banking sector). In SEE, state ownership remains insignificant in all bank-ing sectors, with the exception of Serbia where it stands at some 20%. With re-

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CEE: Presence of foreign-owned banks (% of total assets)


Ownership structures and market concentration



gards to potential changes in state ownership, we may see a sale of state assets in Hungary and Serbia going forward.

In the EE region, state ownership in the banking sector remains significant, with an uptrend in recent years mainly driven by Russia, with a 55% share in 2014 and potential for further increases. The Russian Central Bank (CBR) expects the market share of state-owned banks to increase above 60% in the years ahead. Moreover, the de facto influence in the banking sector is even higher (and in-creasing) compared to the official ownership figures (see also our focus section on page 8). The banking sector in Ukraine also experienced an increase in state ownership in 2014, while there was a further modest decrease in the state own-ership ratio – from very high levels – in Belarus.

Given the high fragmentation of the Russian and Ukrainian banking market, the challenges of 2014 resulted – as expected – in an increased number of market exits and overall market consolidation. This trend comes as no surprise and is ex-pected to continue in 2015. In Russia, the number of banks dropped from 923 to 834, which reflects one of the highest reductions in over a decade. However, this high number of market exits did not impact the market concentration, as the exiting banks were quite small. The market share of the Top 5 banks in Russia re-mained more or less flat at around 55%. In all other CEE banking markets there was not much change in terms of the number of banks and market concentra-tion. In Ukraine, the high number of market exits (17 in 2014 and at least 10 to 15 more as of May 2015) may finally result in an improvement of overall mar-ket standards and practices. As a result, the market share of the Top 5 banks in-creased to 43% in 2014 (up from the mid-30ies), which still leaves room for fur-ther structural consolidations.

On the Russian market, the increasing de facto and de jure state ownership may partially compensate for the positive effects of a decreasing number of market players (in some cases with non-viable business models). Over the past years, the number of banks in CE stayed quite stable with 200 banks, while SEE contin-ued to see a modest drop. Here, some 20 banks left the region in the past five to six years. However, as the SEE banking market is comparably small (total as-sets at some EUR 200 bn vs. EUR 750 bn in CE banking markets), the currently 170 banks operating in it still suggest more room for consolidation. That said, the overall profitability and margin pressure in CE and SEE (including core mar-kets like Poland, Hungary and Romania) makes further consolidations in both re-gions likely.

The Top 5 concentration in CE remains more or less constant at around 60%, with higher concentrations on the Czech and Slovak markets, but below average mar-ket shares in Hungary and Poland. While the Top 5 concentration in Hungary is further decreasing, it is on the rise in Poland. Although this increasing concentra-tion in Poland (driven by organic growth and M&A) is positive for the market, it also implies that further players may reconsider their presence on this consolidat-ing market. On average, the Top 5 concentration in SEE remains a tad lower than in CE. However, this ratio is largely driven by a fairly low market concentration in Romania, Serbia and Bulgaria, while in other SEE markets the market share of the Top 5 banks is much higher. We expect further consolidation (in terms of mar-ket shares) in SEE to be concentrated in Romania and Serbia – either in terms of organic growth or M&A.

Financial analysts: Gunter Deuber, Elena Romanova, RBI Vienna

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2004 2006 2008 2010 2012 2014EERussiaRussia (excl. Sberbank, VTB)Ukraine

EE: Average bank size (EUR bn)*

* Total assets divided by number of banksSource: national central banks, RBI/Raiffeisen RESEARCH

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CEE: Avg. market share Top 5 banks*

* in % of total assetsSource: national central banks, RBI/Raiffeisen RESEARCH



Focus on Russia: Harsh market and political trends to impact competitive landscape

2014 was a challenging year for Russia, as its banking sector had to digest and adjust to multiple changes that also impacted its com-petitive landscape. Several trends in the sector’s composition intensified, and some new tendencies revealed their initiations. Following, we will focus on three main trends:

Sector concentration is set to increase, with the share of state-controlled banks boosting

Foreign banks are set to contract on cautious risk taking

Total overall number of banks is expected to progressively diminish

We start from the latter. The banking sector clean-up continued. Both, the CBR-initiated foreclosure of feeble banks as well as the im-pact of deteriorating economic and market conditions, which intensified further crowding-out of inefficient bank-like institutions, led to a notable reduction of the number of banks. In 2014, it contracted by about 10% yoy to 834. We see this development as positive and long needed for the sector improvement, and expect the number of banks to further decline, albeit perhaps at a bit lower speed. Be-sides, along with the decreasing fragmentation of the Russian banking sector, there comes an increasing concentration within the re-maining banking cohort.

We expect state banks’ market share to increase further

Although on balance, the share in total assets of state-controlled banks stayed stable at 55% in 2014, we expect it to grow towards 60% in the course of the next couple of years. The current financial market turmoil, and the expected economic nosedive in 2015/16, should benefit state-controlled banks’ market positions both on funding and lending sides. On the funding side, first, state-controlled banks are still considered “safe havens” and places for the retail savings to wait until the market calms down again. Second, amidst the volatil-ity of interest rates, these banks are able to offer the most attractive deposit pricing to private deposit holders. Also, as the government started to talk about re-thinking the volumes and rules for state guarantees on commercial banks’ deposits, risk-averse households are likely to shift their funds to state-controlled banks, too. On the lending side, these banks are the first choice for the government to distri-bute stabilization loans and other financial support to distressed systemic borrowers. In retail business, the recent state measures to sup-port the mortgage lending (interest rates subsidizing, issuing loans to low-income categories of population, etc.) are also by and large introduced via state-controlled banks. The fact that funding and recapitalization of these banks also benefit from the governmental sup-port, makes it easier for them to maintain and even increase their asset size and market shares. In addition, the role of sizeable regional banks that are controlled by the regional authorities must not be discounted. Even though their relative size is much smaller (below 1% of total banking assets for each), and their individual impact on the Russian economy is much less notable than that of the Top 5 play-ers, these regional players’ role gains increasing importance in supporting the regional economies.

Foreign banks: Contracting lending and presence

It seems that for the first time in over a decade, foreign banks are losing their optimism regarding the development of the Russian bank-ing market. Even though the market still suggests potential for returns, the nature of emerged counterweighting risks makes it currently difficult and costly to manage the risk-return tradeoff. In addition, Western sanctions crowd out a significant share of corporate custom-ers from foreign banks’ franchises, and respectively, all sorts of related business.

Therefore, foreign banks, which kept their presence in Russia after the 2008/09 crisis, have started to act towards de-risking in Russia. Whether accompanied by publicly de-clared programs, or just organically implemented on a routine basis, we expect the bal-ance sheet contraction (in EUR-terms) of Russian subsidiaries of the major foreign banks to be notable. Like for all processes linked to political risks, the scope of this expected con-traction is hard to predict precisely. However, if today’s trends in geopolitics stay approx-imately unchanged, without sudden significant worsening or improvement in the short-term perspective, we see a possibility for foreign banks’ share in total banking assets to go down closer to 5%, which are the levels seen back in 2002/03, within the next two to three years. Nevertheless, such a scenario would imply that Western foreign-owned lenders would still have a combined asset base of some EUR 50 bn to 60 bn on the Rus-sian market, while Russian assets of major foreign-owned banks stood at some EUR 5 bn to 10 bn some ten years ago.

Financial analyst: Elena Romanova, RBI Vienna

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RU: Market shares (% of total assets)

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CEE vs. EA: Long-term asset-to-GDP ratio trends

* Excluding MFI-businessSource: national central banks, ECB, RBI/Raiffeisen RESEARCH


Overall financial intermediation in CEE – as measured by asset-to-GDP ratios – increased from some 89% in 2013 to well above 100% in 2014. Hence, this ra-tio reached an all time high, posting one of the strongest increases (in pp) over the past 15 years. Such a surge is definitely somewhat surprising, given the still ongoing deleveraging in several key CEE economies, the subdued or just mod-estly recovering GDP growth and moderate loan demand in numerous countries of the region.

However, there were stark distorting effects at play that inflated the overall CEE financial intermediation level in 2014. Due to massive currency devaluation ef-fects in the EE region (including the heavyweight Russia), tangible shares of as-sets in FCY as well as negative developments for the denominator (GDP), the in-crease of the 2014 asset-to-GDP ratio in EE was stronger than the “real” asset growth. Moreover, Russian asset growth was also driven by other distorting ef-fects, namely the strong banking sector expansion in the first half and state sup-port to banks and corporates in the second half of 2014 (which supported strong corporate loan growth). The average asset-to-GDP ratio in CE continues to re-main more or less constant at around 98% – a level that has not changed much since 2008/09. For the SEE region, the year 2014 was again characterized by another drop of the asset-to-GDP ratio, down by 2 pp to 80% in 2014 – about 6 pp below its peak in 2010.

The relative stability in the CE asset-to-GDP ratio masks stark and fundamen-tally backed intra-regional divergences, while the ratio’s downward trend in SEE is more broad-based. In CE, the financial intermediation trends continue to re-main more positive in Poland, the Czech Republic and Slovakia, while in recent years substantial drops in the asset-to-GDP ratio (by around 30 pp) in Hungary and Slovenia were driven by decisive deleveraging and restructuring (including write-offs). The sustained and more broad-based pressure on the asset-to-GDP ra-tio in SEE, which was seen over the past few years, is well in line with our long-held view that some deleveraging was needed (and in some cases still is) follow-ing the brisk financial sector expansion that took place between the years 2000 and 2008/09.

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* EUR-basedSource: national central banks, ECB, RBI/Raiffeisen RESEARCH

In Hungary, Slovenia and Romania – where the deleveraging process lasted at least half the time of the boom phase – most of the much needed deleveraging has already been achieved or is likely to be achieved in 2015. Interestingly, the strongest deleveraging took place in Romania – the one SEE country with pos-sibly the least deleveraging needs from a fundamental point of view. Going for-ward, we see a chance that the asset-to-GDP ratio in CE continues its modest up-trend. In contrast, we do not see much near-term upside for the asset-to-GDP ra-tio in SEE. Although we see the Romanian banking sector ready for a new lend-ing cycle, improvements in countries like Croatia and Serbia are still to come.

With the recent surge in asset-to-GDP ratios in Russia and Ukraine, both coun-tries are characterized by financial intermediation levels close to or even above thresholds that could be deemed as fundamentally backed and sound. A com-parison of the wealth and financial intermediation levels with CE/SEE peers il-lustrates this quite well. Russia’s GDP per capita level currently remains some 25 pp below the one in CE, while its asset-to-GDP ratio (currently at some 110% of GDP) is about 11 pp above CE levels. A comparison to the still more lever-aged SEE region is even clearer. On the one hand, GDP per capita levels in Rus-sia are some 12 pp above the ones in SEE. On the other hand, Russia’s asset-to-GDP ratio is now some 36 pp above SEE levels. Although overall financial mar-kets in Russia are fairly sophisticated from a regional perspective, which usually adds to a certain upward bias in the asset-to-GDP ratio, it seems that there is not much fundamental underpenetration left on Russia’s banking sector. Therefore, the times of fairly “easy” catching-up asset growth (with asset growth strongly out-pacing GDP growth) without risks of accumulating too much threats to asset qual-ity seems to be over. Hence and for the time being, Russia’s banking sector can-not be considered as a high-growth market from a fundamental point of view, i.e. unless wealth levels and nominal GDP levels are again increasing very strongly – a scenario that we do not foresee for at least the next one to two years. The in-creasing leverage of the Russian economy during the recent years of weaker eco-nomic expansion implies that the (retail) credit-driven growth model runs out of steam – just like the economy’s strong dependence on oil price growth. This de-velopment adds to our more cautious medium-term economic and banking sector growth outlook. In Ukraine, the fundamental degree of overleverage is extreme. As one of the poorest countries in CEE, Ukraine has one of the highest asset-to-GDP ratios in the region at some 80% to 90%. While in Russia, we might only see a period of “just” a flat asset-to-GDP ratio, in Ukraine a substantial reduction, similar to the one between 2009 and 2012, seems likely for the years ahead. This process will be supported by the massive banking restructuring as well as substantial write-offs (page 54).

The current real “growth” picture in CEE banking seems to be better represented in the overall total asset base of the region. Due to somewhat improving banking dynamics inside the euro area, still ongoing deleveraging in some CEE banking markets, modest currency weakness in several CE/SEE markets as well as strong currency depreciation in EE, the overall CEE banking asset base decreased in 2014 in absolute EUR-terms as well as in relative terms (e.g. in relation to the euro area). Total CEE banking assets dropped from EUR 2.400 bn to around EUR 2.200 bn in 2014. Given slightly increasing banking assets inside the euro area – the first increase in nominal terms since 2011 – overall CEE banking assets dropped from 9.7% of euro area banking assets to 8.6% in 2014 (marking one of the strongest relative drops in recent years). That said, it seems that the (West-ern) European large-scale rebalancing and deleveraging cycle – at least in terms of total banking assets – is gradually drying up, while the CEE banking sector was underperforming compared to broader European banking trends in 2014.

Financial analyst: Gunter Deuber, RBI Vienna



Focus: “Deleveraging debate” in CEE banking

Cross-border financing and the (potential) deleveraging of Western banks in CEE continues to be a widely followed topic. Its relevance has even increased once again as new aspects in the so-called “Deleveraging debate” arose. By and large, there was nothing like an aggressive deleveraging of Western banks in CEE up to now, although the region exhibits one of the most impressive penetrations by foreign (cross-border) banks among Western and global emerging market banking sectors. Currently, cross-border claims of Western European banks in the whole CEE region are 5% to 10% below their 2008-levels, while overall international exposures or exposures to Western Europe (by Western European banks) were slashed by around 35% to 40% during the same period of time. Cross-border exposures of Western European banks to the countries of the so-called euro area “periphery” were even cut down by some 70% from 2008 to 2014, reflecting a trend of national re-orientation and substantial (cross-border) deleveraging in overall European banking. The “Banking Union” implementation (including the AQR exercise, stress testing etc.) added to the deleveraging process at Western Euro-pean banks that are in a defensive mode regarding their international operations anyway (e.g. compared to international peers). That said, there is also a general trend of global cross-border banking deleveraging, also driven by regulatory tightening for cross-border exposures as well as a refocusing of business strategies (see also the Global Financial Stability Report 2015, International Banking Af-ter the Crisis: Increasingly Local and Safer?, Chapter 2, pp. 54-91).

A critical reflection of the success of the “Vienna Initiative” in stabilizing cross-border funding as well as crisis experience within West-ern European banking sectors shows that regulation should clearly focus on the risks stemming from excessive cross-border funding and lending that is not backed by deep ownership links (or in other words, an equity-based cross-border integration). At the same time, cross-border funding to CEE (and especially in the CE and SEE region) had been fairly stable in the recent challenging years. The over-all commitment of leading Western European banks to their large and locally embedded franchises in CEE can be seen by the develop-ment of CEE exposures compared to overall international exposures in Western European banking sectors of systemic importance for the CEE region, i.e. those in Austria, Italy and France. In these three banking sectors, cross-border exposure to CEE developed much more favorably than overall international exposures or the CEE exposures of other Western European banking sectors. The relatively stable cross-border exposures to CEE in general and the CE region in particular are also a reflection of the fact that, up to now, all larger di-vestments of Western European banks in the region involved another Western European bank on the buyer side.

Nevertheless, leading Western CEE banks also had to adjust their exposures in the region. Recent regulatory tightening was a blow to less profitable and funding-consuming (but possibly still moderately profitable) business lines and markets. It also became more challeng-ing for banks to pursue long-term strategies, which may offer less short-term profit, while profits and retained earnings are currently the best means to shore up capital positions and to meet regulatory and/or market demands in terms of capitalization. Moreover, the over-all modest cuts in cross-border exposures towards the whole CEE region are partially hiding increasingly selective country strategies. In some countries (such as Poland, Slovakia or the Czech Republic), there was definitely no pull-back of Western European banks. How-ever, in the more challenging SEE markets, as well as in Hungary, Slovenia, Ukraine and since 2014 also in Russia, they pursued more conservative business strategies. Due to this de-risking, Western European banks were by and large increasing their gearing towards markets with lower macro-financial risks, lower NPL ratios (i.e. less legacy problems) and better profitability. Moreover, the modest re-duction in cross-border exposures also reflects still limited new lending dynamics, a turn to more local refinancing and finally also selling (to non-bank investors) or write-offs of certain NPL exposures (like in SEE or Ukraine). Western European banks, who are still key pro-viders of liquidity and financing to Russia, turned more conservative in terms of cross-border exposures to the country in 2014, a clear decoupling of overall trends in emerging markets banking. Many drivers for the most recent reduction of cross-border exposures to Rus-sia (higher macro-financial risks, weak developments in the domestic economy and in external trade in comparison to other emerging markets, more conservative business strategies of Western corporate clients in Russia, and Western sanctions) are likely to stay well into 2016. This is why overall cross-border exposures to CEE are likely to see some downward pressure in 2015, mainly driven by decreas-ing exposures to Russia and still limited need for large cross-border financing in most CE/SEE markets as indicated by low L/D ratios.

From a strategic perspective, the “Deleveraging debate” in CEE also reflects a cer-tain dilemma for leading Western European CEE-lenders. On the one hand, they deliv-ered on their regional commitment and were sometimes even criticized by regulators or IFIs for trimming their exposures in certain markets in a modest way (e.g. in the reg-ular “CESEE Deleveraging and Credit Monitor”). On the other hand, their European competitors with a focus on Western and global business improved their capitalization ratios via substantial deleveraging in international business. Capital ratios were raised substantially in the EU and the euro area, and this was partially achieved via substan-tial cross-border deleveraging. Given the modest deleveraging compared to their West-ern European peers, it comes as no surprise that most leading Western European CEE banks (still) have lower capitalization ratios than their peers (page 20) with a focus on non-CEE markets (although there are other drivers for this development as well).


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Dec 09 Feb 11 Apr 12 Jun 13 Aug 14AT, IT, FR banks CEEEuropean banks CEEAT, IT, FR banks Dev. MarketsEuropean banks Dev. Markets


* Dec 2009 = 100, latest data point Q4 2014Source: BIS, RBI/Raiffeisen RESEARCH


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CE/SEE (total loans)Euro area (total loans, r.h.s.)

CE/SEE vs. EA loan growth (% yoy)


Loan growth, growth by segments (retail, corporate)

Major trends in the regional CEE loan-to-GDP ratios are a reflection of the as-set growth picture sketched previously (relative stability in CE, downward trend in SEE, distorted increase in EE with a massive impact on the overall CEE trend). In combination with currency effects, the total CEE loan stock posted a drop in 2014 (down from EUR 1.370 bn to EUR 1.200 bn). In relation to bank loans inside the euro area, the overall CEE loan stock dropped from 11.7% in 2013 to 10.4% in 2014 (driven by currency devaluation effects as well as a slightly increasing loan stock inside the euro area). Once again the drop was mainly driven by the EE region, as the CE/SEE total loan stock remained more or less flat in 2014, at around EUR 550 bn or 4.7% of total loans inside the euro area. Hence, in terms of loan growth there was at least no significant underper-formance of CE/SEE markets compared to the euro area in 2014 (where total loan growth stood at 0.2% after two years of decline).Nevertheless, in 2014 overall loan growth remained modest in CE and SEE as in-dicated by a CE/SEE loan stock that remained virtually flat in nominal terms. But stark country differentiation prevails. CE banking markets once again strongly outperformed SEE markets. Annual CE loan growth in LCY-terms came in at 5.1% yoy in 2014 and at 1.5% in EUR-terms, while the respective annual “growth rates” in SEE stood at -2% in LCY-terms and -2.9% in EUR-terms yoy. Real loan growth in CE/SEE in LCY-terms, largely driven by the larger CE banking mar-kets, reached some 3% yoy in 2014, which has been the strongest level since 2011 and quite decent given the subdued inflation developments. Therefore, the 2014 loan-to-GDP ratios increased by several percentage points in the CE mar-kets without adjustments needs (like in Hungary or Slovenia). Due to contract-ing loan stocks, the overall SEE loan-to-GDP ratio (mainly driven by Romania, Bulgaria and Croatia, where loan stocks were dropping in both LCY- and EUR-terms) dropped modestly from 50% to 48% in 2014. Now the ratio stands some 5 pp below the peak levels of 53% (reached from 2010 to 2012) reflecting broad based regional deleveraging needs. As already mentioned, the strongest regional adjustment was observed in Romania, mainly driven by regulatory tight-ening related to NPL exposures, which caused write-offs and NPL sales. There could be similar adjustment needs in other SEE markets with similar high loan and NPL stocks, that have not been addressed yet.

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1999 2001 2003 2005 2007 2009 2011 2013

CEE total loans (% of GDP) Euro area total loans (% of GDP, r.h.s.)*

CEE vs. EA: Long-term loan-to-GDP ratio trends

* Excluding MFI-businessSource: national central banks, ECB, RBI/Raiffeisen RESEARCH



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Spain Portugal Ireland UK

Start credit cycle Peak 2014

Deleveraging Western Europe/EA*

* Loan-to-GDP ratio (%), period from 2000-2014Source: national central banks, ECB, RBI/Raiffeisen RESEARCH

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Hungary Romania Slovenia

Start credit cycle Peak 2014

Deleveraging CE/SEE*

* Loan-to-GDP ratio (%), period from 2000-2014Source: national central banks, RBI/Raiffeisen RESEARCH

Hungary, Slovenia and Romania saw drops in their loan-to-GDP ratios by some 10 pp to 20 pp in recent years. We consider Hungary and Romania ready for a new lending cycle (especially in LCY lending), which cannot be said about some other SEE banking markets. In euro area countries with substantial deleveraging needs, like Spain or Portugal, recent drops in loan-to-GDP ratios were even more extreme (in absolute and relative terms) than in the CE/SEE region. In light of deleveraging experience in selected CEE markets and inside the euro area, we see a fair chance that at least 30% to 50% of a brisk pre-crisis expansion of the loan-to-GDP ratio has to be corrected within a deleveraging phase (either via less credit-driven economic growth and/or loan write-offs).

From a longer-term perspective, the outperformance in the by and large more healthy CE banking sectors compared to SEE markets is even more striking. The cumulative loan growth from 2011 to 2014 stands at 18% in LCY-terms or 8% in EUR-terms. On contrary, in SEE the cumulative loan growth was just some 6% in LCY-terms or 1% in EUR-terms over the same period of time. Putting the cumu-lative LCY loan growth rates in relation to cumulative nominal GDP growth, the recent SEE deleveraging becomes even more obvious. From 2011 to 2014, no-minal GDP growth in SEE stood at 20% (i.e. well below loan growth), whereas in CE loan growth was at least slightly outpacing cumulative nominal GDP growth at 16%. Since the overall CE aggregate was driven down by a negative perfor-mance in Hungary and Slovenia, the real loan growth in the other CE markets was even higher. The overall loan growth in most CE/SEE banking sectors cur-rently remains geared towards more short-term transactions in corporate and re-tail lending as well as mortgage lending. In many CE/SEE markets – with the possible exception of Poland for overall corporate lending and Hungary for SME lending – corporate lending growth remains below expectations and mostly fo-cused on working capital financing. The focus of many CEE banks on retail lend-ing seems to be explained by still higher margins and better (risk-adjusted) re-turn prospects. However, the recent substantially increased consumer protection on EU and CE/SEE banking markets should also support cautious business strat-egies in retail lending, in order to avoid unpleasant restructuring issues later on.

Interestingly, SEE banking markets are not clearly underperforming their CE peers in mortgage lending. In some countries, there is also government support for mortgage lending. Moreover, customers are currently attracted by the fairly low nominal interest rates and are refinancing existing mortgage loans. In some CE/SEE markets strong retail/mort-gage lending has led to an increasing regulatory alertness. In some cases, like Slovakia, recommendations aim-ing at more prudent retail/mortgage lending standards were issued. From a through-the-cycle perspective and given the positive experience on the Polish banking sector, such recom-mendations should be welcomed. This holds especially true as the mortgage loan penetration in CE and Croatia is not very low anymore and stead-ily increasing. Here mortgage loan-to-GDP ratios are currently hovering at around 20% of the GDP. At first sight such levels seem low compared to the average euro area mortgage loan-to-

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2002 2008 2014

Mortgage loans (% of GDP)

* Larger EA countries with lowest mortgage loan-to-GDP ratios in 2002 (AT, FR, BE, IT)** Larger EA countries with highest mortgage loan-to-GDP ratios in 2014 (NL, ES, FR, DE)Source: ECB, national sources, RBI/Raiffeisen RESEARCH



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EE loan growth (% yoy, LCY)EE loan growth (% yoy, EUR-based)

EE: Loan growth LCY- vs. EUR-terms


GDP ratio at some 38% (some countries like Spain, France or the Netherlands even have a mortgage loan-to-GDP ratio of up to 40% to 60%). In this context, it is also worth mentioning that a decade ago and before the most recent sustained financial cycle (with some excesses inside the euro area) mortgage loan-to-GDP ratios in some euro area countries, like Austria, Belgium and France, had been as low as 16% to 20% (which are current mortgage loan penetration ratios in several CE/SEE economies).

In Russia, overall loan growth, like the asset growth, looks inflated for 201 4. The Russian banking sector actually posted a higher loan growth rate in 2014 yoy, although the overall economy was moving into a different direction. Even when corrected for FX effects, the overall 2014 loan growth came in at fairly high levels of 12% to 15% yoy. This development is the result of a complex mix of var-ious factors, while the overall market trends in Russia are definitely opposite to the picture in most other CEE banking markets. Corporate loans showed a strik-ing increase, accelerating in the second half of 2014. Robust corporate lending growth was mainly driven by the idea to draw on all existing and still available credit lines to secure an adequate cushion for (external) debt repayments (as in-dicated by the fact that corporate deposits also increased in times of strong loan growth). State-support also played an important role here. Strong corporate loan growth, driving the overall market growth, was even over-compensating for a continuous decline in retail loan growth with an above average decline in activ-ity in longer-term transactions, including mortgage loans. As a result, the share of corporate loans in total loans increased to around 77% at Russian banks – lev-els seen from 2005 to 2010, i.e. before the strong retail lending boom. A some-what similar trend was visible in Ukraine, where the corporate loan stock in total loans also increased in 2014, to a level of 80%. Therefore, the looming restruc-turing in corporate exposures and related-party lending at Ukrainian lenders, as requested by the IMF, will affect large parts of the local banking sector (page 54).


The past years’ trend in core funding dynamics in CEE, and its relation to the lending base, saw a continuation in 2014 as well. The aggregated loan-to-de-posit (L/D) ratio across the CEE banking markets remained stable at some 97% (i.e. notably below its peak at 114% in 2008). Two general tendencies contrib-uted to that in 2014. First, the CEE L/D ratio, well below its peak levels, is a clear indication that the times of very strong loan growth across CEE markets are over. Second, the increasing reliance on local funding is also a reflection of the global trend to decrease cross-border banking flows and penetration that is driven by market and regulatory forces (see also the focus on page 11 about cross-border financing in CEE banking markets.) Thus, the predominantly conservative lend-ing behavior of CE/SEE banks was going in parallel with still sanguine deposit dynamics within the banks.

2014 was another good year for deposit funding growth in the entire CEE area, notwithstanding some countries’ headwinds, that left the respective banking sys-tems in a tougher funding situation (e.g. Bulgaria, Russia and Ukraine). That said,

Funding, deposit growth and L/D ratios

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Source: national sources, Raiffeisen RESEARCH

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CEE: Loan-to-deposit ratio


it is possible that the CEE region’s low L/D ratio may witness something like a turning point in the lending cycle. Given the rebalancing of the L/D ratio in most of the countries, and especially in those countries with the strongest macro-perfor-mance, we see sufficient room to finance a new, but more cautious, lending cy-cle going forward. In particular in those CE markets without secular deleverag-ing needs (i.e. the Czech Republic, Poland and Slovakia) the trend of loan and deposit growth continued in 2014 at more or less similar levels, with a slightly stronger deposit growth in comparison to loan growth. Poland, for example, en-joyed deposit growth rates close to 10% yoy, the Czech Republic at 3% yoy and Slovakia at 4% yoy, all in LCY-terms. Banking markets with secular deleverag-ing needs (i.e. SEE as well as Hungary and Slovenia) continued to show a signif-icantly stronger growth in deposits than in loans. In SEE, the leaders in deposit growth were Bosnia and Herzegovina, Romania and Serbia, each posting a 8% yoy customer fund’s growth. Like in previous years, the weakest core funding dy-namics were in Hungary with 2% yoy (LCY-denominated) and Croatia with zero growth. Bulgaria, which managed to recover after the mid-year banking sector turmoil, posted a modest 2% yoy deposit growth (LCY-terms).

Across the CEE countries, the dynamics in EUR-terms were more diverse, as de-termined by the multidirectional trends in the local exchange rates, and in partic-ular in Russia and Ukraine. As a result, the total deposit stock in the overall CEE area was significantly down by 10% (yoy, in EUR-terms) in 2014. This includes a decline of 40% in Ukraine and of 18% in Russia as well as a 4% decline in Hungary, which resulted from a HUF depreciation against the EUR of about 4%.

In SEE, the regional L/D ratio has reached the lowest level since 2006, with around 90% in 2014. A similar pattern also revealed in Hungary and Slove-nia, where the L/D ratios reached their lowest levels over the past decade. In our view, this has come as a clear reflection of a need for deleveraging and restructuring on the asset side (i.e. low loan growth, managing high stock of NPLs), while deposit growth remained at solid levels. In the EE region, the de-posit growth and L/D ratio posted decreases in 2014. The L/D ratios in Russia have been gradually rising since the 2008/09 downward adjustment, while we view the recent L/D ratio increase in Ukraine as a crisis-induced phenomenon (the country’s L/D ratio was on a downtrend before 2014).

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CEE: Loan-to-deposit ratios at the country level (%)

* Scale capped at 160%; Slovenia, Ukraine and Belarus in 2008 with values above 160%; Sl: 166%, UA: 205%, BY: 171%Source: national central banks, RBI/Raiffeisen RESEARCH


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Number of countries with negative RoE

CEE: Loss-making banking markets*

* out of 14 CEE banking sectors covered in this report (loss-making 2014: HU, RO, UA)Source: national central banks, RBI/Raiffeisen RESEARCH


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00 02 04 06 08 10 12 14CESEEEECE (excl. Hungary)

CEE: Return on Equity (%)


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CE SEE EE

CEE: Return on Assets (%)


Profi tability (Return on Assets, Return on Equity)

Profitability in CEE banking was a mixed bag in 2014. The overall CEE banking RoE has reached its lowest level at some 6.9% since the year 2000. This disap-pointing performance can be attributed to several factors. First, in 2014, three markets in the region, namely Hungary, Romania and Ukraine, turned negative, which is a significant worsening compared to 2013, when only Slovenia made a loss and marks one of the worst years in CEE banking. Only in 2010/11 the sit-uation in the region was worse, with four loss-making banking markets. Although the losses were partially related to one-off effects, the RoE readings in the three affected markets were deep in the red (HU: -11%; RO: -12.5%; UA: -30%). The losses in the Hungarian and Romanian banking sector had a substantial impact on leading Western CEE banks given the still high foreign ownership in both banking sectors. The average foreign ownership ratio on loss-making CEE bank-ing markets reached 61% in 2014 (compared to 57% back in 2011).

Second, in 2014, the overall profitability pressure was notable also in profita-ble CE markets like Poland, the Czech Republic and Slovakia and resulted in a further round of profit compression from already low levels by historical regional standards. The regional CE RoE dropped from 10.3% to 9.2%; excluding Hun-gary, the regional RoE decreased from12% to 11.7%. Due to the relative matur-ing of the CE markets, the risk premium in the region went down, supporting the respective downwards pressure on profitability. Nevertheless, we want to em-phasize that the CE countries currently have the greatest potential for banking business in CEE. In SEE, the negative performance of the Romanian market (RoE: -11.6%) was overwhelming. In the other SEE markets, the average RoE has re-mained at meagre 3% and thus at a disappointing level ever since 2009.

Finally, the lower RoE margins in the CEE area reflect the new European regu-latory requirements that are pushing banks towards larger capital buffers. The lower ratio of return to equity in the CEE region, per se, was determined by the increase in denominator value (E: Equity), while Western European banks were acting towards being in accord with the new European capital requirements, and also domestic regulators were increasingly solidifying banking sectors’ capitali-zation in their countries.

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CEE Euro area

CEE vs. EA: Return on Equity (%)




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CEE: NPL ratios*

* % of total loansSource: national sources, RBI/Raiffeisen RESEARCH

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CEE: Markets with NPLs <10%*

* year-end 2014; ** RU: Latest data as of April 2015Source: national sources, RBI/Raiffeisen RESEARCH

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CEE NPLs (total EUR bn)CEE NPLs (% of total loans, r.h.s.)

Overall CEE NPLs

Source: national sources, RBI/Raiffeisen RESEARCH

Focus: Non-performing loans and NPL ratios

Regarding NPL ratios, 2014 was finally a turnaround year in the CE and SEE banking sectors and brought dropping ratios after years of increases. In CE, the positive regional NPL ratio trend got support from solid and/or improving asset quality and new lending activity in markets like Poland, the Czech Republic and Slovakia, while asset quality was finally also improving in hard-hit Hungary (NPL ratio down from 14% to 13.3%) and Slovenia (down from 22% to 16%). The overall NPL ratio in the CE region improved from 9.1% to 8.5%, the regional NPL ratio excluding Hungary dropped from 7.1% to 6.8% in 2014. Hence, on a regional level (whole CE aggregate) the NPL ratio dropped by 0.6 pp in 2014 following five consecutive years of a cumulative increase by 5.2 pp. It is likely that an even larger drop in the regional CE NPL ratio would have been pos-sible, however, the ECB’s AQR led to more cautious assessments of the asset quality in the affected banking sectors (directly or indirectly part of the SSM).

The regional SEE NPL ratio dropped by some 5 pp from 19.5% in 2013 to 14.8% in 2014. This turnaround follows an overall increase of 16 pp between 2008 and 2013. This NPL drop mainly stems from a substantial balance sheet clean-up in Romania (with increased provisioning, write-offs and asset sales) as well as stabilizing or slightly im-proving NPL ratios in some other SEE markets (like Albania, Bulgaria and Bosnia and Herzegovina), partially supported by a mild lending recovery. In Croatia and Serbia, the NPL ratios continued to inch higher throughout 2014 and in both markets we expect the asset quality either deteriorating further or stabilizing only very gradually in 2015. In the SEE region, 30% of the NPL ratio increases of the years 2008 to 2013 were re-versed in 2014 – three times as much as in the CE region. The boldness of the NPL ra-tio turnaround in SEE was reflected in a negative profitability performance of the over-all SEE banking sector, largely driven by Romania, where the banking sector was once again loss-making in 2014. In 2014 and also in 2015, Romania saw a larger number of NPL sales transactions, that may finally pave the way for more transactions to follow in Romania and possibly other markets (e.g. also part of strategic restructuring or possi-ble divestment and M&A transactions). As a first candidate for potential NPL sales trans-actions we see Hungary. Like Romania, Hungary is a large banking market (by regional standards) and hence decent sized NPL transactions are possible. In addition, the EU ju-risdiction in Hungary and an economic turnaround, driven by domestic demand, seem to be supportive factors (like in Romania). In the other SEE markets with high NPL levels, namely Albania, Bulgaria, Croatia and Serbia, we doubt to see NPL sales transactions, as at least one or several previously mentioned criteria are not fulfilled. Here we expect banks to continue with internal work-out procedures for the time being.

The combined CE/SEE NPL ratio dropped from 12% to around 10% in 2014. In con-trast, NPL ratios inched up in all EE countries and we expect this trend to continue in 2015. The NPL ratio in Russia increased from some 4.2% in January 2014 to 5% in De-cember 2014. However, 2014 was still characterized by modest asset quality deterio-ration, also supported by strong loan (which led to a downward bias in the NPL ratio). For 2015, we expect a stronger deterioration of asset quality due to the looming reces-sion of the Russian economy. The first months of 2015 already brought a strong rise of the NPL ratio from 5% to 6% (April), with 7.1% of NPLs in retail and 5.6% in corporate lending. Currently, we expect the Russian NPL ratio to reach 8% to 10% of total loans (depending on loan growth dynamics) in 2015, while the overall restructured loans are expected at 20% to 30%. In Ukraine, we see IFRS-based NPL ratios once again at around 40%, while the recent adverse conditions may add 10 pp to 15 pp to this al-ready high NPL stock. The looming structural banking sector clean-up (as requested by the IMF support package) may also add to NPL formation in 2015. This may finally pave the way for a more sustained NPL resolution in 2016 and beyond. In total, the diverging NPL ratio trends in the three CEE subregions were still somewhat offsetting each other in 2014, resulting in a fairly stable overall CEE NPL ratio of 8.5%. How-ever, in 2015 the developments in EE could overshadow positive NPL developments in other CEE markets, a scenario that may lead to an increase of the total CEE NPL ratio to above 9% until year-end 2015.




-15%

-10%

-5%

0%

5%

10%

15%

20%

HU SI** SK PL CZ

2013 2014

CE: Return on Equity (RoE, %)*

* countries sorted by 2014 RoE** scale capped at -15%; Slovenia RoE 2013: -31.6%Source: national sources, RBI/Raiffeisen RESEARCH

-15%

-10%

-5%

0%

5%

10%

15%

RO RS HR BH BG AL

2013 2014

SEE: Return on Equity (RoE, %)*

* countries sorted by 2014 RoESource: national sources, RBI/Raiffeisen RESEARCH

-10%

-5%

0%

5%

10%

15%

20%

UA** RU BY

2013 2014

EE: Return on Equity (RoE, %)*

* countries sorted by 2014 RoE; ** scale capped at -10%; Ukraine RoE 2014: -30%Source: national sources, RBI/Raiffeisen RESEARCH

As a result, given the profitability pressure in key CE/SEE markets, the regional RoE dropped to below 6%, which is hardly above the current RoE inside the euro area and in Western European banking. In the CE/SEE region, the 2014 RoE marks a new 15-year low (previous lows were at around 9% in 2009/10), while the RoE of about 5% in Western European banking represents a recovery. Hence, the overall appeal of CE/SEE banking markets vs. euro area peers suffered a lot in 2014, with the exception of Poland, Slovakia and the Czech Republic.

Also and important for the CEE banking in general, this time around EE markets could not offer any meaningful compensation for the profitability pressure in CE/SEE banking. In fact, in 2014 there was a significant positive profitability gap between the CE RoE and the RoE in the EE banking sectors. In the second half of 2014, the Russian banking sector RoE dropped to 7.9%, which is still well above the 4.9% crisis-driven slide recorded in 2009. But given the further pressure on profitability, the expectations for 2015 are still on the downside (Q1 2015 RoE at 4.8%). The overall RoE in the EE banking markets stood at around 7% in 2014, i.e. hardly above the average RoE on the CE/SEE banking markets, which bear a notably lower risk profile at the same time.

Depending on the strength of the turnaround in larger CE/ SEE markets, in 2015 the profitability of the CEE banking sector could fall below the one in Western Eu-ropean banking. This would be a first ever since the year 2000, when the CEE region was still characterized by the aftermaths of the Russian crisis of 1998/99.Similar to the situation in Western Europe and given the current profitability in the region, Western banks could barely recoup their equity costs in CEE. The fact that the current profitability in the CEE region is only slightly above the levels in Western European banking will add to pressure on market players in the region and may result in further consolidation and strategic re-orientation. Respectively, given the near-term profitability expectations (put in risk-adjusted return perspec-tive or in relation to funding costs), it will be difficult to sustain large and capital-consuming franchises in some SEE markets, Russia or Ukraine.

In 2014, the aggregated RoA in CEE developed similarly to the RoE in the re-gion. The RoA stood at fairly disappointing 0.8%, which is the same low level like back in 2009. In the SEE and EE banking sectors, the 2014 RoA readings were just at some 40% of their pre-crisis values, with the 2014 RoE at just around 50% of long-term pre-crisis values. The positive exception is once again the CE region, where the core profitability in terms of RoA remains at 64% of its long-term pre-crisis average and hence above the RoE (56% of its long-term pre-cri-sis average), which reflects the higher capitalization levels in the region. Exclud-ing Hungary, the CE RoA is even better at 87% of its pre-crisis average vs. RoE of 75%. All in all, the profitability outlook for CEE banking remains challenging. Profitability pressure is likely to stay in the few lucrative CE markets. In Slovakia there is some upside to profitability due to the reduction of the fairly high banking tax. In other larger markets, like Hungary or Romania, it is difficult to predict to what extent a turnaround in profitability can be achieved in 2015. In Romania, the plan to join the SSM is likely to result in further tough stress testing and pos-sible adverse effects on the local banking market. Moreover, potential settlement to CHF exposures could lead to negative effects in Poland, Croatia and partially also in Romania. Furthermore, we expect profitability pressure to stay on the Rus-sian market. Here the main factors will be the ability of the CBR to cut rates sub-stantially without damaging the RUB stability, the pace of asset quality deteriora-tion as well as the ability of Russian banks to cut costs and restructure their fran-chises. The previous credit growth cycle supported fairly expansionary and ag-gressive strategies, while cost inflation was a long-standing issue.




According to our current assessment, the prospects for CEE banking in 2015 and 2016 are likely to be shaped by a complex mix of supportive factors, but also headwinds (related to legacy issues and new challenges).

On a positive note, CEE banks are likely to profit from the adjustments and pos-itive trends seen in major CE/SEE banking markets in recent years and in 2014 in particular (e.g. deleveraging, improved L/D ratios, petering out of asset qual-ity deterioration, increased tackling of NPL stocks). The increasing economic mo-mentum in Western Europe and CE/SEE markets adds to the uplift in CE/SEE banking. This holds especially true as in CE/SEE markets economic growth is in-creasingly generated by domestic drivers. Such a situation should translate into growing demand for new lending and investment financing as well as longer-term transactions. Therefore, corporate lending and also SME lending may de-velop in a more favorable way going forward. Up to now, positive dynamics in these two segments were limited to Poland and Hungary. Over the recent one to three years, loan growth in CE/SEE markets was largely driven by short-term transactions (like consumer financing or working capital financing), refinancing

CEE banking growth and overall market outlook

PolandRussia

Czech Republic

Romania

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

25 50 75 100 125 150 175Ave

rage

ann

ual l

oan

grow

th ra

te 2

015-

2019

f (%

yoy

in L

CY-

term

s)

Change in total loan volume year-end 2014-2019f (EUR bn)

CEE: Long-term banking growth outlook: Larger markets

Source: national sources, RBI/Raiffeisen RESEARCH

Hungary

Slovenia

Bulgaria

Croatia

Serbia

Bosnia and Herzegovina

Albania Slovakia

0%

2%

4%

6%

8%

10%

12%

14%

- 5 10 15 20 25

Change in total loan volume year-end 2014-2019f (EUR bn)

Ave

rage

ann

ual l

oan

grow

th ra

te 2

015-

2019

f (%

yoy

in L

CY-

term

s)

CEE: Long-term banking growth outlook: Smaller markets*

* Ukraine and Belarus not shown due to expected decline in loan stock in EUR-termsSource: national central banks, Raiffeisen RESEARCH

Banking growth outlook (EUR- vs. LCY-terms)

Current loan stock

Loan stock growth*

Avg. growth

2015-19f

Avg. growth

2015-19f

EUR bn EUR bn % yoy, EUR

% yoy, LCY

PL 210 143 11.2% 8.8%

HU 43 16 8.0% 6.8%

CZ 95 53 9.3% 6.6%

SK** 40 21 8.1% 8.1%

SI** 23 11 4.0% 4.0%

RO 48 44 14.2% 12.4%

BG** 28 6 3.8% 3.8%

HR 37 0.3 0.2% 0.1%

RS 15 5 6.1% 7.6%

BH** 9 2 4.4% 4.4%

AL 4 2 8.9% 8.8%

RU 598 114 5% 9.3%

UA 51 -11 -2.5% 19.3%

BY 23 -6 -5.3% 15.0%Regions

CE 411 233 8.4% 8.2%

SEE 141 60 8.8% 8.1%

EE 672 98 4.2% 10.3%

CEE 1,224 411 5.8% 9.5%* From 2015-2019f in nominal EUR-terms** In SK, SI, BG and BH loan growth rates in LCY and EUR are matching due to EA membership or Currency Board arrangementsSource: national sources, RBI/Raiffeisen RESEARCH



0

40

80

120

160

9.8

10.5

11.3

12.0

12.8

13.5

Avg. largeEurop. banks**

Avg. 3 leadingWestern CEE

banks*Year-end 2014Chg. CET-1 ratio 2014 vs. 2013 (bp, r.h.s.)

CET-1 ratios (%)***

* RBI, Erste, UniCredit** Swedbank, SEB, Nordea, Danske, Intesa, Deutsche, HSBC, Standard Chartered, ING, SocGen, BNP, Com-merzbank, Santander*** CET-1, fully loaded Basel III pro forma CET-1 ratiosSource: company data, Bankscope, RBI/Raiffeisen RESEARCH

and/or debt restructuring transactions. Given the fact that deleveraging and re-structuring seem to be largely completed on larger CE/SEE markets, like Hun-gary and Romania, as well as the absence of restructuring and deleveraging needs in Poland, the Czech Republic and Slovakia, CE/SEE banking sector as-sets may develop in a fairly positive way over the next one to two years. As a re-sult, deleveraging and restructuring needs in markets like Croatia, Serbia or Bul-garia are likely to be overcompensated by positive developments elsewhere. In contrast to the encouraging banking outlook in CE/SEE on the operational level, banking dynamics in the EE region are likely to be less impressive in 2015. We see tough times ahead on the Russian market although RUB stabilization as well as the ability to bring funding costs back to more normal levels may help to avoid larger downsides in terms of restructuring needs and write-offs. The Ukrainian banking market is likely to see another year of hefty losses and recapitalization needs, and also the Belarusian economy is facing tough economic challenges in the year ahead.

Moreover, there are also broader and longer-term challenges in CEE banking (e.g. regulatory pressure, capital and profitability pressure) that may constrain the near-term upside offered by increasing economic and banking sector growth momentum in CE/SEE. For instance, the effects of the ultra-low rates environment are likely to gradually feed into the banks’ portfolios in 2015 and 2016 (as in-dicated by strong profitability pressure on CE markets that are characterized by solid asset quality). Moreover, market strategies of major Western CEE banks are increasingly focusing on just a few markets, which will add to profitability pres-sure. On the regulatory side, the handling of CHF loan stocks in several CEE countries, like Poland or Croatia, adds to uncertainty, as individual players could face significant costs of restructuring. Overall regulatory and market trends in Eu-ropean banking are also likely to spill over to CEE banking. Some CEE banking sectors in non-euro area countries may finally join the SSM on a voluntary ba-sis which may imply a need for strict stress testing and balance sheet clean-up. Moreover, joining the SSM may also add to profitability pressure due to the need to build up crisis funds as requested within the SRM framework. Furthermore, overall European regulatory pressure is likely to continue impacting on CEE bank-ing sectors, e.g. via continuous ECB stress-testing or the continuous focus on cap-ital and profitability planning (following years of subdued profitability in CEE banking). Such broader trends in European banking could particularly challenge larger Western European CEE banks operating in the region. They are still char-acterized by fairly low capitalization levels compared to major European peers and measured by current market standards, while doing business on CEE mar-kets is likely to require more capital for future growth than operations in Western European markets. Besides, internal capital generation capability is likely to be challenged by the currently very subdued profitability outlook in CEE banking.

For some leading Western CEE banks the results of the 2014 stress testing and AQR were a mixed bag. Therefore, ongoing restructuring at leading Western CEE banks is mainly targeting capital positions, while adjustments were largely achieved via asset sales, balance sheet optimization and only to a lesser extent via outright capital increases and financial market transactions. We expect cau-tious and very selective business strategies of larger Western European banks, characterized by capital discipline as well as a stark differentiation between country and business segment strategies, to prevail in 2015. Consequently, over-all business strategies in CEE banking are likely to be dominated by balance sheet optimization, cost-cutting and very selective growth and investments strate-gies focusing on product optimization, modernization and operational efficiency. Hence, it is unlikely to see new market entries or large-scale expansions of ex-

Banking growth trough-the-cycle*Average loan growth

2000-10 2011-14 2015-2019f

PL 15.2% 6.8% 8.8%

HU 17.7% -4.7% 6.8%

CZ 6.7% 4.8% 6.6%

SK 10.9% 6.5% 8.1%

SI 15.8% -8.8% 4.0%

RO 40.3% 0.6% 12.4%

BG 34.0% 0.9% 3.8%

HR 16.2% 0.6% 0.1%

RS 49.8% 4.4% 7.6%

BH 16.7% 3.8% 4.4%

AL 36.3% 8.8% 8.8%

RU 38.0% 22.1% 9.3%

UA 48.1% 7.9% 19.3%

BY 67.2% 36.7% 15.0%Regions

CE 13.0% 4.5% 8.2%

SEE 27.9% 1.5% 8.1%

EE 39.7% 21.5% 10.3%

CEE 31.2% 14.8% 9.5%* Loan growth rates in LCY-termsSource: national sources, RBI/Raiffeisen Research



-10

-5

0

5

10

15

20

05 06 07 08 09 10 11 12 13 14

CE SEE EE EA

CEE: RoE vs. gov. bond yields (%)*

* Long-term LCY-yields if available for CEE countries, otherwise yields on long-term FCY instruments, for EA German Bund yieldsSource: national sources, RBI/Raiffeisen RESEARCH

0

20

40

60

80

0

200

400

600

800

1,000

2004 2013 2014

RU: Number of branchesRU: Total assets (EUR bn, r.h.s.)

RU: Market footprint RBI, UniC, SocG

Source: company data, RBI/Raiffeisen RESEARCH

0%

5%

10%

15%

0%

4%

8%

12%

16%

20%

24%

2004 2013 2014RU: Total assets (% of total)RU: Number of branches (% of total, r.h.s.)

RU: Importance for RBI, UniC, SocG

* Compared to the whole CEE business at RBI, UniCredit and SocGenSource: company data, RBI/Raiffeisen RESEARCH

isting branch networks (page 55). Although we expect 2015 to still be a transi-tion year in CEE banking, we see players that are already positioned to profit from the increasing upside and next credit cycle in CE/SEE banking and who are placed to gain market share and to lay the foundation for future growth and profitability.

With regards to the growth outlook for the individual CEE banking markets, we continue to consider Poland, the Czech Republic and Slovakia as high-growth markets, characterized by modest levels of financial intermediation and hence a fair chance that lending and asset growth can outpace GDP growth on a sus-tained basis. From a fundamental perspective, also Hungary and Romania can be added to this group of countries. However, at this point it is difficult to predict if the restructuring of the past few years has yet been sufficient to start the upturn already in 2015. In several other CEE banking markets, such as Bosnia and Her-zegovina, Bulgaria, Croatia, Serbia or Ukraine, overall financial intermediation levels continue to remain at fairly elevated levels. Hence, there seems to be less upside in terms of headline banking sector growth. Overall loan/asset growth may come in below GDP growth rates. This holds especially true in case of an in-creasing economic momentum and once again increasing inflation rates in CE/SEE markets. On markets characterized by already elevated financial intermedi-ation levels any growth has to be very selective, but business strategies based on large volume growth seem to be no viable option.

Given the massive increase in lending and financial intermediation in recent years, Russia can no longer be considered as a high-growth market. Although fi-nancial intermediation levels have not overshot levels that could yet be deemed as sustainable, more cautious business strategies are likely to prevail here (not taking into account other factors like low capitalization levels, increasing refi-nancing pressure or lack of investor and consumer confidence). The closer a country inches towards a sustainable level of financial intermediation, the more cautious overall business strategies should evolve in light of increasing risks of accumulating inferior asset quality. Moreover, we expect the recovery in the Rus-sian economy and banking sector to be weaker than following the strong hit seen in 2008/09 (when it was mostly related to global factors and not per se country specific issues). The short- and medium-term outlook for much lower banking sec-tor dynamics in Russia as well as the increased operational and legal risks result-ing from having a larger local presence are likely to result in further strategic re-positioning of the largest Western European banks operating there. Although the leading Western CEE banks continue to remain niche players in Russia (in terms of overall market shares) their business strategies changed dramatically over the past five to seven years (as indicated by massive increases in balance sheets and branch networks, partially based on M&A activity). Instead of offering exclusive “boutique-banking” they were following more ambitious business models in or-der to catch the mass market. However, the big retail lending boom seems to be over, while the corporate lending segment remains highly competitive (at least for better credit risks). Moreover, some Western players may also consider a re-scal-ing on the Russian market, as some of their customers (e.g. larger Western Eu-ropean corporates) are also taking a more conservative stance on Russia due to the tense EU-Russia relations and the outlook that Western-Russian economic rela-tions are likely to have peaked .



20%

40%

60%

80%

100%

5,000 15,000 25,000

GDP per capita (EUR at PPP)

Tota

l loa

ns (%

of G

DP)

Total loans vs. GDP per capita

Data for 2014, red triangle shows Poland vs. all other CEE marketsSource: NBP, national sources, RBI/Raiffeisen RESEARCH

Poland

Lending upswing, profi tability may come under pressure

-10

-5

0

5

10

15

20

25

Jan-10 Mar-11 May-12 Jul-13 Sep-14Household loans (% yoy)Corporate loans (% yoy)Mortgage loans (% yoy)

Lending growth*

* in LCY-termsSource: NBP, RBI/Raiffeisen RESEARCH

Key economic fi gures and forecasts

Poland 2010 2011 2012 2013 2014 2015f 2016f

Nominal GDP (EUR bn) 359.8 377.0 386.1 396.0 412.2 426.5 457.3

Nominal GDP per capita (EUR) 9,463 9,905 10,144 10,403 10,842 11,218 11,920

Real GDP (% yoy) 3.7 4.8 1.8 1.7 3.3 3.5 3.4

Consumer prices (avg, % yoy) 2.6 4.3 3.7 0.9 0.0 -0.4 1.3

Unemployment rate (avg, %) 12.1 12.4 12.8 13.5 12.3 10.7 9.7

General budget balance (% of GDP) -7.6 -4.9 -3.7 -4.0 -3.6 -2.7 -2.0

Public debt (% of GDP) 53.6 54.8 54.4 55.7 49.2 50.4 50.3

Current account balance (% of GDP) -5.0 -4.8 -3.7 -1.3 -1.3 -1.5 -2.0

Gross foreign debt (% of GDP) 66.3 66.4 72.0 70.1 71.1 70.3 69.1

EUR/LCY (avg) 3.99 4.12 4.18 4.20 4.19 4.14 4.08

Source: national sources, wiiw, RBI/Raiffeisen RESEARCH

The Polish banking sector continued to profit from a solid macroeconomic devel-opment and GDP growth of 3.3% in 2014. Moreover, the zero-inflation in 2014 with its positive impact on nominal wage growth supported the increasing de-mand in household lending. In this loan segment, both nominal and real growth remained decent. Corporate lending showed a clear uptrend as well, following an underperformance in the past years. The return of corporate lending growth is definitely positive, considering that large Polish corporates can currently also fi-nance themselves at very favorable conditions on the local bond market or inter-nationally. Therefore, the Polish banking sector saw a modest financial deepen-ing in 2014, in line with the performance in other solid CE markets not charac-terized by fundamental deleveraging needs. Solid growth in new lending as well as fairly solid asset quality trends supported another modest drop of the NPL ra-tio to 8.1% in 2014. In terms of refinancing, the trend of deposits growing faster than loans – a development that has been characterizing the Polish banking sector since 2012 – continued in 2014. The average L/D ratio reached about 105% – the lowest reading since 2007/08. Hence, there are sufficient domes-tic resources to finance the current decent loan growth and economic expansion.

The banking sector’s FCY exposure remains significant with some 30% of total loans. Consequently, the “CHF shock” in early 2015 had a significant negative impact. Ironically, the previous warnings of NBP governor Marek Belka that the FCY exposures were a “ticking time bomb”, in fact partially materialized due to the surprising move of the Swiss National Bank. However, the FX effects on the Polish market are somewhat eased by declining benchmark CHF/LIBOR rates. Currently, discussions are still ongoing on how to tackle the CHF exposure, al-though the overall exposures are less of a systemic threat than in Hungary. At this point, it seems likely that the domestic banks will have to contribute to a final solution/conversion, as there are explicit claims by Polish officials on the table in that respect. Depending on the details of such a solution, the CHF exposure’s profitability of the Polish banking sector (and especially of individual banks with high CHF exposures) is likely to remain under pressure in 2015. This will add to already increasing overall profitability and margin pressure.

Solid lending growth in 2014 with a clear upturn in the corporate segment Suffi cient domestic resources to fund growth at present; L/D ratio at lowest level for years Solution for CHF-loans may add to profi tability pressure on highly competitive market


Key banking sector indicatorsBalance sheet data 2010 2011 2012 2013 2014

Total assets (EUR mn) 292,755 293,100 330,267 338,950 359,502

growth in % yoy 6.9 0.1 12.7 2.6 6.1

in % of GDP 81.8 85.0 84.6 86.1 88.8

Total loans (EUR mn) 176,384 181,285 198,230 202,242 210,017

growth in % yoy 13.0 2.8 9.3 2.0 3.8

in % of GDP 49.3 52.6 50.8 51.4 51.9

Loans to private enterprises (EUR mn) 55,472 59,888 66,593 67,024 70,614

growth in % yoy 2.6 8.0 11.2 0.6 5.4

in % of GDP 15.5 17.4 17.1 17.0 17.5

Loans to households (EUR mn) 120,048 120,447 130,436 133,947 138,079

growth in % yoy 18.4 0.3 8.3 2.7 3.1

in % of GDP 33.6 34.9 33.4 34.0 34.1

Mortgage loans (EUR mn) 67,547 72,223 78,706 81,083 83,468

growth in % yoy 27.4 6.9 9.0 3.0 2.9

in % of GDP 18.9 20.9 20.2 20.6 20.6

Loans in foreign currency (EUR mn) 60,406 64,789 62,465 60,567 65,341

growth in % yoy 15.1 7.3 (3.6) (3.0) 7.9

in % of GDP 16.9 18.8 16.0 15.4 16.1

Loans in foreign currency (% of total loans) 34 36 32 30 31

Total deposits (EUR mn) 156,647 158,168 177,097 186,970 200,387

growth in % yoy 13.5 1.0 12.0 5.6 7.2

in % of GDP 43.8 45.9 45.4 47.5 49.5

Deposits from households (EUR mn) 106,648 108,078 126,211 132,181 142,271

growth in % yoy 13.0 1.3 16.8 4.7 7.6

in % of GDP 29.8 31.3 32.3 33.6 35.2

Total loans (% of total deposits) 113 115 112 108 105Structural information

Number of banks 70 66 69 69 64

Market share of state-owned banks (% of total assets) 22 22 21 20 18

Market share of foreign-owned banks (% of total assets) 66 66 63 62 60Profi tability and effi ciency

Return on Assets (RoA) 0.9 1.2 1.2 1.1 1.1

Return on Equity (RoE) 13.7 14.6 14.3 12.5 12.0

Capital adequacy (% of risk weighted assets) 13.7 13.1 14.7 15.5 15.0

Non-performing loans (% of total loans) 7.8 7.5 8.8 8.6 8.1 Source: NBP, RBI/Raiffeisen RESEARCH

Profitability indicators were already a tad weaker in 2014 compared to 2013. It has to be stressed that, from a long-term perspective, overall prof-itability remains at fairly decent lev-els compared to the pressure recorded in other CEE markets. This holds espe-cially true for the RoA as an indicator for core banking profitability. The increasing pressure on profitabil-ity is adding to a consolidation mo-mentum on the highly competitive and still fairly fragmented Polish market. As large international banks, like San-tander or BNP, are only present in Po-land and no other CE/SEE markets, further M&A activity seems likely in 2015 and beyond. Unlike some regional peers, Poland seems to have no intention to join the European SSM on a voluntary basis, and we see that the national regulator (KNF) is quite satisfied with its role as an independent and powerful authority.

Financial analysts: Text: Gunter Deuber, RBI Vienna; Data: Dorota Strauch, Raiffeisen Polbank, Warsaw

Poland

PKO BP, 15,9%

Bank Pekao (UniCredit), 10,9%

mBank (Commerz-bank), 7,7%

ING Bank, 6,5%

BZ WBK (Santander + Kredyt Bank),

7,9%Raiffeisen Polbank,

3,5%Bank Millennium (BC

Portugues), 4,0%

Bank Handlowy (Citibank), 3,3%

Bank BPH, 2,1%

Alior, 2,0%

BOS, 1,3%

Others, 34,9%

Market shares (2014, eop)

% of total assetsSource: NBP, RBI/Raiffeisen RESEARCH


Hungary

20%

40%

60%

80%

100%

5,000 15,000 25,000GDP per capita (EUR at PPP)

Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Hungary vs. all other CEE marketsSource: MNB, national central banks, RBI/Raiffeisen RESEARCH

Reconciliation between government and banks continues

-20-15-10

-505

1015

Jan-10 Mar-11 May-12 Jul-13 Sep-14

Household loans (% yoy)

Corporate loans (% yoy)

Lending growth*

* in LCY-termsSource: MNB, RBI/Raiffeisen RESEARCH


Hungary 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 0.8 1.8 -1.5 1.5 3.6 3.0 2.5

Consumer prices (avg, % yoy) 4.9 3.9 5.7 1.7 -0.2 0.1 2.7


General budget balance (% of GDP) -4.3 4.2 -2.1 -2.3 -2.6 -2.8 -2.8


Current account balance (% of GDP) 1.1 0.8 1.9 4.1 3.9 3.8 3.7


EUR/LCY (avg) 275.38 279.40 289.23 296.84 308.71 309.73 320.00

Source: national sources, wiiw, RBI/Raiffeisen RESEARCH

The Hungarian economy left behind its long-lasting misery and a GDP growth of 3.6% surprised on the upside in 2014. This growth was driven by strong exports, public sector investment activity, slowly recuperating household consumption de-mand, and the National Bank’s Funding for Growth Scheme (FGS).After a long period of deleveraging (2009 to 2013), the first bright spots ap-peared in the Hungarian banking sector in the course of 2014. Total banking sector assets increased by 3% yoy (HUF-terms). However, total assets declined in EUR-terms (due to the HUF weakening by 6%) as well as in relation to GDP (due to the nominal GDP growth of almost 7%). Looking at the details, the picture is fairly mixed: corporate loans increased, while household net lending was still negative. Corporate lending is supported by the FGS (targeting cheap HUF-loans for the SME sector). The program started in mid-2013, and by the end of 2014, a total of HUF 1,300 bn was disbursed through commercial banks. Households were still in the process of paying back FX-loans, but net household lending in lo-cal currency turned positive in 2014. Deposits increased by 1.7% due to corpo-rate deposits, while household deposit depletion slowed compared to the mas-sive outflow registered in 2013 (-10% vs. -1%).After peaking at 14.0% in 2013, NPLs started to inch down to 13.3% in 2014. The improvement was due to the stabilization of the financial situation of private households as well as re-emerging economic growth. Nevertheless, the National Bank targets a more sizeable NPL-reduction. To that end, it has set up an asset management company (MARK), a “bad bank” that will buy failed commercial real estate projects at market prices starting in the second half of 2015. Due to the Settlement Act and the hefty banking levy, banking sector profitability turned negative in 2014 (RoA: -1.3% and RoA: -13.2%), while the CAR stayed at an el-evated level. For more details on regulatory measures affecting the Hungarian banking sector in recent years see pages 26 - 29.In 2014, the government purchased MKB from Bayerische Landesbank and an-nounced its plan to purchase Budapest Bank form GE Finance in 2015. It seems likely that these banks will be merged to become the country’s second largest com-mercial bank. In early 2015, the government, together with the EBRD, announced the plan that they would each acquire a 15% stake in Erste Bank Hungary. At the same time, a Memorandum of Understanding (MoU) was signed between

Government to cut banking tax and refrain from harmful measures Household FX-mortgage loans converted to HUF National Bank’s funding scheme extended


Hungary



growth in % yoy (2.9) (7.7) (3.6) (3.1) (2.8)

in % of GDP 124.9 124.2 110.1 104.1 100.4


growth in % yoy 3.2 (10.5) (6.8) (7.7) (7.0)

in % of GDP 61.8 59.5 51.0 46.0 42.4


growth in % yoy (2.4) (9.2) (4.4) (5.3) (4.5)

in % of GDP 28.2 27.6 24.2 22.4 21.2


growth in % yoy 7.7 (11.5) (9.2) (7.3) (7.2)

in % of GDP 31.8 30.3 25.3 22.9 21.1


growth in % yoy 11.1 (10.3) (9.5) (7.8) (6.5)

in % of GDP 25.4 24.6 20.5 18.4 17.1


growth in % yoy 3.7 (11.1) (16.6) (13.4) (8.2)

in % of GDP 38.1 36.4 28.0 23.6 21.5



growth in % yoy (2.0) (5.4) 6.0 (2.4) (4.0)

in % of GDP 44.0 44.9 43.7 41.7 39.6


growth in % yoy (4.3) (5.7) 5.5 (11.6) (6.3)

in % of GDP 27.4 27.8 27.0 23.3 21.6



Market share of state-owned banks (% of total assets) 4.6 5.3 5.1 5.8 12.6

Market share of foreign-owned banks (% of total assets) 90 89 89 88 83

Market share of foreign-owned banks (ex. OTP, % of total assets) 69 70 68 67 59Profi tability and effi ciency

Return on Assets (RoA) 0.2 (0.2) (0.4) 0.5 (1.3)

Return on Equity (RoE) 2.3 (1.7) (3.8) 4.5 (13.2)


Non-performing loans (% of total loans) 7.8 11.5 13.7 14.0 13.3 Source: MNB, RBI/Raiffeisen RESEARCH

the government and the EBRD, agree-ing on a gradual cut of the banking tax starting in 2016, to refrain from implementing any measures that could potentially damage the banking sec-tor’s profitability as well as on the pri-vatization of recently acquired state-owned banks within the next three years. We consider this agreement a real shift in the previously rather hostile stance of the government towards its banking sector. Nevertheless, consol-idation and profitability pressure are likely to remain due to the strict regu-lation of retail lending fees as well as the possible pressure on margins from the growing market presence of state-owned or state-near banks. Moreover, the government’s plan to make the financial sector to pay for losses of clients at failed brokerage companies, disregarding earlier set guidelines, clearly violates the MoU signed with the EBRD.

Financial analyst: Zoltán Török (+36 1 484 4843), Raiffeisen Bank Zrt., Budapest

OTP, 22.2%

K&H (KBC), 7.6%

UniCredit, 7.0%

Raiffeisen Bank, 6.7%

MKB*, 6.1%Erste, 5.9%

CIB (Intesa), 5.5%

MFB*, 4.6%

BB (GE Money)*, 3.1%

Others, 31.3%


% of total assets; * MFB and MKB state-owned, state ownership planned for BBSource: MNB, RBI/Raiffeisen RESEARCH


Pre-crisis boom and deleveraging phase

From 2000 to 2008, the Hungarian banking market was a highly attractive and profitable place for (foreign-owned) banks. With an average RoE of 20% (also reflecting attractive margins), the country’s banking sector was among the most profitable ones in CEE. Growth was spectacular, which finally resulted in a cer-tain overshooting (e.g. in terms of loan-to-GDP or L/D ratios). This holds espe-cially true as lending growth was still strong in times of subdued economic ex-pansion, and finally banking growth surpassed levels that could be re-financed domestically and on a sound basis (as indicated by a high L/D ratio). Moreover, growth in FCY lending was fairly aggressive, which resulted in additional down-sides and overleverage problems in times of HUF depreciation. In this context, and in comparison to regional peers, it has to be stressed that there was never any sufficient regulatory action to slow down the strong lending, especially in FCY, during those years.

Given too strong and externally financed growth as well as an increasingly chal-lenging legal and operational environment, it comes as no surprise that Hunga-ry’s banking market finally came to see a protracted deleveraging (from 2009 to 2014). Western European banks slashed their exposure to Hungary to the same extent as in the so-called euro area “periphery”. High pre-crisis profits as well as a sustained deleveraging, aiming at a reduction of both cross-border and in-country risk positions, definitely added to a negative sentiment towards banks and foreign-owned lenders in particular. This in turn ultimately led to a vicious cy-cle of growing legal and operational risks and additional rounds of deleverag-ing on behalf of (foreign-owned) banks.

Focus: A big-picture view on Hungarian banking

0

3,000

6,000

9,000

12,000

15,000

18,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

98 00 02 04 06 08 10 12 14

Boom-Phase Deleveraging-Phase

Nominal GDP (HUF bn) Total loans (HUF bn, r.h.s.)

GDP and total loans (LCY)


5

15

25

35

45

55

65

30

40

50

60

70

80

90

100

110

98 00 02 04 06 08 10 12 14


Nominal GDP (EUR bn) Total loans (EUR bn, r.h.s.)

GDP and total loans (EUR)


-15-10

-505

1015202530

00 02 04 06 08 10 12 14Hungary CE-3*

Return on Equity (%)

* CE-3: PL, SK, CZSource: national central banks, RBI/Raiffeisen RESEARCH

-2

-1

0

1

2

3

00 02 04 06 08 10 12 14

Hungary CE-3

Return on Assets (%)


Sturdy leveraging and high (short-term) lucrativeness pre-crisis caused large-scale rebalancing Turnaround following very harmful policy against (foreign-owned) banks in 2014, excessive bank tax to be cut Growth focus of government requests healthy banks, some implementation risks in more bank-friendly policy agenda

Hungary


A very harmful policy turn for banks

In light of the sketched up-and-down dynamics, the regulatory action seen in re-cent years was clearly aimed at “punishing” past behavior and “reclaiming” parts of earlier profits. Some measures were designed to hit banks that grew ag-gressively during the years of strong expansion (mostly foreign-owned lenders). Given a lot of one-off loss items, the Hungarian banking sector was finally among the worst performing in CE/SEE in terms of profitability. Moreover, the dominant political agenda since 2010, namely to deliver an overhaul of the banking struc-tures, finally resulted in a substantial drop of the foreign-ownership ratio (now in a range of 50% to 60% of total assets depending on the way of measurement). Or in other words: local and state ownership increased substantially within a short period of time. Basically, the current Fidesz/Orbán government, which has been in power since 2010, has always had an explicitly negative attitude towards the banking sec-tor. This stance was based on the generally quite negative feelings of the Hungar-ian public against banks, as well as on the attempts of the current government to differentiate itself from the previous (Socialist) administration labelled as a “bank-ers’ government”(partly because of the business background of several cabinet members and the IMF program that started in 2008). As there was no room to in-crease budget deficits after the 2010 elections (with the country being under the EU’s Excessive Deficit Procedure for many years), the Fidesz/Orbán government was looking for measures to generate extra revenues as an alternative to the pre-vious austerity stance burdening mostly households. Therefore, putting an extra tax burden on the banking sector seemed to be a “natural” choice (later to be fol-lowed for several other sectors). The policy was in general also not completely different from what was implemented in other countries. However, the situation in Hungary was aggravated due to the massive FX lending boom (typically in CHF in case of households) and the massive CHF appreciation (or HUF depreciation). As over one million Hungarian households (practically one out of three) were in-debted in FX, the jump in monthly instalments (doubling in certain cases) became a major social, political and macroeconomic issue – for which the government promised to present a “solution”, which was then delivered in several stages.

Measures negatively infl uencing the Hungarian banking sector

Banking sector levy: 0.53% based on total assets as at year-end 2009, unchanged in the period from 2010 to 2015, one of the highest bank levies in Europe, totalling over EUR 2.5 bn. Eviction moratorium on non-performing household mortgages: Initially, there was a full moratorium, which was eased gradually in a regulated manner. Early FX mortgage repayment scheme: Approximately 25% of total outstanding FX-mortgage loans were repaid at the preferential exchange rate of CHF/HUF 180 (at a market rate of 220 to 230). The difference resulted in a loss of almost EUR 1 bn for the banking sector.Financial transactions levy: All financial transactions are taxed at 0.2%. This tax can be transferred to customers for the largest part, but has to be paid by the service provider. ATM cash withdrawals are free of charge up to HUF 150,000 per account/month.Settlement Act: The Hungarian Supreme Court ruled that previous practices of banks to unilaterally change the contract terms (i.e. interest rates) and FX margins utilized were unconstitutional. Fees and charges generated via such practices had to be repaid, caus-ing a one-off loss of EUR 3 bn for the sector.Fair Banking Act: The National Bank of Hungary strictly regulates the terms and condi-tions of new household loans from 2015 onwards.

0

3

5

8

10

13

15

04 06 08 10 12 14

Hungary CE-3

NPLs (% of total loans)


50

65

80

95

08 09 10 11 12 13 14

Hungary (excl. OTP, % of total assets)CE-3Romania

Market share foreign-owned banks*

* % of total assetsSource: national central banks, RBI/Raiffeisen RESEARCH

Hungary


Hungarian banking sector: Under reconstruction

The Fidesz/Orbán government aimed to reduce the (high) foreign ownership in the banking sector. A target was set to raise Hungarian ownership to above 50%. As a starter, the government purchased DZ Bank’s stake in Takarékbank – the central bank of saving cooperatives – in 2013 (the public stake was later sold to selected private participants of the saving cooperation system). The gov-ernment also raised capital in small privately owned local lenders (Gránit Bank, Széchenyi Bank). In 2014, it purchased MKB from Bayerische Landesbank and in 2015, Budapest Bank (BB) from GE Finance. These two banks are likely to be merged later on to become a prominent player with a market share of around 10%.

In February 2015, the government and the EBRD announced the purchase of 15% stakes each in Erste Bank Hungary. At the same accord, a MoU between the government and the EBRD was signed. In this document, the government promises to reduce the bank levy (from 0.53% to 0.31% in 2016 and further down later on, aligning it with general EU norms by 2019), while the tax base is changed from total assets as at year-end 2009 to year-end 2014 (which is a more proper measurement given market shifts and deleveraging seen in re-cent years). The government also pledges not to purchase further stakes in sys-temically important banks and promises to privatize its recently acquired stakes within three years, i.e. before the next elections. Additionally, it assures to refrain from any further measures with potentially negative impact on overall banking sector profitability.

In our view, this marks a major change of the government policy towards banks. Moreover, the overall setting of the MoU (i.e. to include EBRD) serves the purpose to restore international trust in the Hungarian banking sector and economic poli-cymaking (a factor that was also a constraint to the sovereign rating in the past).

What purposes did banking sector-hostile policies serve and why do we see a turnaround in 2015?

The negative measures served numerous purposes: (1) fiscal purpose; (2) social purpose, i.e. to soften the consequences of the FX-debt trap; (3) consumer pro-tection purpose, i.e. to correct previous “unfair” practices; (4) political purpose, namely to stop potential new radical political movements benefitting from the question of high indebtedness in FCY; and (5) strategic policy purpose, namely to decrease the dependence of foreign-owned lenders by increasing domestic own-ership and showing a paradigm shift towards banks.

So, what is the explanation for the policy shift towards banks in 2015? (1) The government achieved the above targets; (2) economic policy is shifting its empha-sis on growth, for which it needs a supportive banking sector; and (3) the nega-tive measures hurt the state-owned banks as well.

While the MoU is very positive and signals reconciliation in government-banking sector relationships, there still remain some concerns. The most notable one is re-lated to the series of brokerage scandals erupting in early 2015 with considera-ble losses (amounting to EUR 1 bn) and the government’s attempt to make the fi-nancial sector pay the bill, disregarding the rules of the games set earlier. This is a continuation of the political routine witnessed between 2010 and 2014, and risks the violation of the MoU as well as halves the positive financial impact of the banking tax cut (for banks).

0%

15%

30%

45%

60%

75%

99 01 03 05 07 09 11 13Hungary CE-3* Romania

Loan-to-GDP ratio (%)

* CE-3: PL, SK, CZSource: national central banks, RBI/Raiffeisen RESEARCH

-30

-20

-10

0

10

20

30

40

Hungary CE-3 Romania

2000-2008 2010-2014

Change loan-to-GDP ratio (pp)


15

25

35

45

55

65

00 02 04 06 08 10 12 14

Hungary CE-3* Romania

FCY loans (% of total loans)*

* SK included until 2009, afterwards average of PL and CZSource: national central banks, RBI/Raiffeisen RESEARCH

Hungary


Hungarian market outlook in the CEE context

The market structure shifts seen recently and possibly also to happen in the near future are definitely differentiating the Hungarian banking sector from its regional peers characterized by more stability in terms of markets shares (especially at the top-end of the market). While previously, market structures in Hungary were practically frozen (seven large universal banks with stable market shares), we have been witnessing major structural changes in 2014 and 2015. Several for-eign players are exiting fully or partially. Moreover, the MKB-BB merger is seen to take place with an eventual privatization in 2017 or 2018. We see a fair chance that the government will try to push for an IPO of the merged MKB-BB entity, as this may also create a lot of business opportunities for domestic elites. Given the ongoing market consolidation (increasing concentration, strong competition and margin pressure) we expect three to five large universal banks to remain on the market in the medium-term, while other banks may have to follow a more selec-tive approach.

Margin and profitability pressure is likely to stay high due to several regulatory and structural issues. Moreover, it remains to be seen to what extent there will be a fair market pricing in the years ahead, given the increasing government influ-ence on some larger market players. This holds especially in corporate lending, while retail lending is expected to suffer from margin pressure resulting from in-creasing (fee) regulation. As things stand, it will be difficult to achieve double-digit RoE numbers on the Hungarian market within the next three years. The out-look of strong competitive pressure in combination with the increasingly positive market perspective (that may result in improving valuations for Hungarian banks) may ultimately add to M&A-activity and market consolidation.

Nevertheless, due to the most recent indications of a turnaround in the banking sector – following the one of the real economy that started in 2013/14 – as well as a more supportive government stance towards banks, the relative attractive-ness of the Hungarian banking market increases once again. The deleveraging seen in recent years in terms of overall banking sector size and FX-exposures was among the strongest ones in the whole CE/SEE region, which implies that not all other regional banking sectors have adjusted up to now. Coupled with the ultra-low domestic interest rates environment and improving economic prospects, this now adds to upside potential in terms of loan demand. In light of the currently modest penetration ratios (i.e. loan-to-GDP ratio) in the corporate and retail seg-ments there seems to be room for growth in both segments at or even slightly above nominal GDP-growth.

All in all, we see a fair chance that loan demand will finally be met by sup-ply given the improving legal and operational environment. Moreover, a lot of leading regional CEE banks still consider Hungary a core market, a view that is largely backed by the deep economic integration of the country’s economy and its corporate sector in the common European market.

Financial analysts: Gunter Deuber, RBI Vienna, Zoltán Török (+36 1 484 4843), Raiffeisen Bank Zrt., Budapest

45%60%75%90%

105%120%135%150%

00 02 04 06 08 10 12 14


Hungary CE-3 Romania

Loan-to-deposit ratio


20

45

70

95

120

145


Hungary CE-3Euro area Romania


* BIS-reporting Western European banks(Dec 2007 = 100, latest data point Q4 2014)Source: BIS, RBI/Raiffeisen RESEARCH

50

100

150

200

250

300

350

400

Dec 99 Dec 04 Dec 09 Dec 14

Hungary CE-3


* BIS-reporting Western European banks(Dec 2000 = 100)Source: BIS, RBI/Raiffeisen RESEARCH

Hungary


Czech Republic

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows the Czech Republic vs. all other CEE marketsSource: CNB, national sources, RBI/Raiffeisen RESEARCH

Slowly moving towards clear waters

-10

-5

0

5

10

15


Lending growth*

* in LCY-termsSource: CNB, RBI/Raiffeisen RESEARCH

In 2014, the Czech GDP posted a 2.0% growth, following a decline of 0.7% in the year before. For 2015, we forecast economic growth to accelerate to 2.4%. Despite the economic recovery and the labor market improvement, we expect in-flation in 2015 to remain low at 0.2%. After an excessive asset growth of 8.8% in 2013, backed by the CNB FX interventions, the Czech banking sector’s as-sets returned to a more conventional growth rate of 3.7% in 2014. In 2014, the growth rate of total loans followed the pattern and decelerated slightly to 4.8% from 6.5% in 2013. Household loans remained the major growth driver, keep-ing growth rate at 4.5%. In particular, mortgage loans continued to provide the strongest increase with a stable growth rate of 6.7%. On the other hand, con-sumer credits decreased again, namely by 0.4% in 2014. The development of corporate loans was below expectations with an increase of only 0.9% in 2014.In line with our expectations, the deposit growth rate was decreasing to 2.9% in 2014. This, however, was not a result of any significant withdrawals by house-holds or corporations, which posted a healthy growth of 5.7% and 8.0%, respec-tively. The decline came on the back of decreases in deposits from financial insti-tutions (down 11% yoy) and the government (down 18% yoy). The L/D ratio thus rose slightly to 76.7%.In 2014, the net profit of the Czech banking sector increased by 3.9% to CZK 63.5 bn. This growth was backed by a slight increase of the banks’ core income (4.7%), and a simultaneous reduction of risk costs by 35.9%, which could be seen as a correction to somewhat excessive provisioning in 2013. Therefore, the profitability of the banking sector remained stable in 2014 with an RoA of 1.2% and an RoE of 16.9%. Prudent retained earnings, in turn, supported the banks’ capitalization, making Czech banks able to overshoot the regulatory cap-ital requirements. The total CAR increased to 17.7% in 2014, and the CAR Tier1 reached 17.3%. The quality of loan portfolio did not change significantly in 2014. Although a considerable write-off of receivables by the Czech export bank caused a surge of NPLs to 6.5% in March, the final share of NPLs in total loans decreased to 6.04% as at year-end 2014, mostly due to the base effect, i.e. resulting from the growing loan stock.

Economy expected to accelerate due to competitive FX rate, expansive fi scal policy and low oil price Meager lending recovery driven by household loans and mortgages Low level of interest rates promotes alternative investment decisions


Czech Republic 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 2.1 2.0 -0.7 -0.7 2.0 2.4 3.0

Consumer prices (avg, % yoy) 1.5 1.9 3.3 1.4 0.4 0.2 1.7




Current account balance (% of GDP) -3.6 -2.1 -1.6 -0.5 0.6 0.6 0.6


EUR/LCY (avg) 25.28 24.59 25.14 25.98 27.54 27.63 27.28

Source: national sources, wiiw, Raiffeisen RESEARCH


Czech Republic



growth in % yoy 8.0 4.2 5.7 (0.3) 2.3

in % of GDP 109.6 114.7 118.0 127.3 126.3


growth in % yoy 8.9 3.7 4.5 (2.4) 3.5

in % of GDP 55.0 57.3 58.3 61.5 61.8


growth in % yoy 5.0 3.8 2.9 (4.9) (0.4)

in % of GDP 19.8 20.6 20.6 21.2 20.5


growth in % yoy 12.6 2.8 5.6 (4.2) 3.2

in % of GDP 24.3 25.1 25.8 26.7 26.7


growth in % yoy 14.8 6.7 8.4 (2.3) 5.4

in % of GDP 15.3 16.4 17.3 18.3 18.7


growth in % yoy 11.7 12.1 2.9 21.3 6.0

in % of GDP 7.6 8.5 8.5 11.2 11.5



growth in % yoy 8.8 2.3 9.5 (2.1) 1.6

in % of GDP 70.6 72.5 77.3 81.7 80.5


growth in % yoy 10.4 1.5 5.6 (6.3) 4.4

in % of GDP 38.9 39.7 40.8 41.3 41.8

Total deposits (% of total credits) 78 79 75 75 77Structural information







Non-performing loans (% of total loans) 6.5 6.2 6.2 6.1 6.3 Source: CNB, RBI/Raiffeisen RESEARCH

The Czech banking sector operates in an extremely low interest rates en-vironment. Although not dramatically, the impact still started to be reflected in the banks’ deposit structures. The to-tal amount of term deposits declined by 13% in 2014, as customers rather favored immediately callable demand deposits (which were up by 39%). A very small difference in interest rates creates insufficient benefit to outweigh the lack of prompt access to cash saved on term deposits. Alternative investment options have gained from this trend. Over the past three years, both mutual and pension funds posted growth of assets under management by 46% and 37%, respectively. On the asset side, decreasing interest rates motivate households to take new mortgage loans or to refinance existing ones. Over the past three years, newly granted mortgages grew on average by 17% yoy. The cur-rent interest rate trends have no effect on corporate loans so far, as corporations are cash sufficient and seem to postpone larger investments in anticipation of a further inflation rate decline.

Financial analyst: Lenka Kalivodova (+420 724 266869), Raiffeisenbank a.s., Prague

CSOB (KBC), 18.4%

CS (Erste), 15.9%

KB (SocGen), 15.7%

UniCredit, 9.1%


GE Money, 2.6%J&T Banka, 2.3%

PPF banka, 2.2%

Sberbank, 1.3%

Air Bank, 1.1%

Others, 27.5%

Market shares (Q3 2014, eop)

% of total assetsSource: CNB, RBI/Raiffeisen RESEARCH


Slovakia

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Slovakia vs. all other CEE marketsSource: NBS, national sources, RBI/Raiffeisen RESEARCH

Sober performance backed by retail banking

-5

0

5

10

15

20


Household loans (% yoy)Corporate loans (% yoy)Mortgage loans (% yoy)

Lending growth*

Source: ECB, RBI/Raiffeisen RESEARCH

The Slovak economy experienced a strengthening of GDP growth to 2.4% in 2014, coming from 1.4% in 2013. The main driving force was domestic de-mand, which was particularly reflected in retail lending trends. The steady growth of loans to households accelerated to 12.1%, with mortgage loans accounting the lion share, but also consumer lending saw a 20% upswing. Although the growth rates are high, we do not see them – yet – as a matter of concern regard-ing too aggressive risk taking. The level of household indebtedness in Slovakia is still somewhat below the average of its CE peers. That, and the steady posi-tive economic performance over the past few years, explain the above average growth of retail loans that was recorded in recent years.In order to limit the risks of the accelerating retail lending growth, the National Bank of Slovakia (NBS) issued a number of recommendations on tightening credit standards for retail loans. These include, for example, stricter LTV ratios in mort-gage loans, and more detailed checks regarding the borrower’s income sustain-ability and credibility. However, this new policy and its goal to limit retail lend-ing is in some way counteracting the major ECB policy pattern with its historically low interest rates as a stimulus for private consumption. Backed by the European monetary trends, interest rates on new mortgage loans in Slovakia have now al-ready reached the level of France or the Netherlands. This makes us hesitant to expect that the growth of household loans would decrease in 2015, and if at all, we expect the decrease to be only moderate.In contrast, corporate loans stagnated in 2014. We do not take this as a sign of the corporate sector’s lower loan demand, but rather interpret it as a switch to cross-border financing on intra-group level, facilitated by Slovakia’s accession to the euro area. The NPL ratio increased moderately to 5.4% in 2014 despite the sustainable growth of the loan base. While in part possibly driven by accelerat-ing consumer lending, the NPL ratio may also have been affected by a more con-servative approach of the banks following the ECB’s AQR. Deposit trends remained reasonable, with customer deposits posting a 4.1% yoy increase, evenly split between households and companies. The L/D ratio in-creased to 91%, leaving substantial room for further loan growth in 2015. The three biggest Slovak banks have successfully passed the AQR and stress tests. The banking sector’s current Tier 1 CAR is around 16% and supported by

Increase of aggregate loan volume due to accelerating retail loans Slovak banks passed AQR and stress test, confi rming buffers for further expansion Low-interest rate environment had a negative impact on margins and profi tability

Key economic fi gures and forecasts*

Slovakia 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 4.8 2.7 1.6 1.4 2.4 2.5 3.0





Current account balance (% of GDP) -3.6 -3.7 2.2 2.1 0.2 0.0 0.0


* Slovakia is a euro area member as of 1 January 2009Source: national sources, wiiw, Raiffeisen RESEARCH




growth in % yoy 3.1 2.0 4.1 2.5 5.4

in % of GDP 81.4 79.5 80.5 80.9 83.4


growth in % yoy 4.9 9.5 3.4 5.4 6.6

in % of GDP 49.8 52.2 52.5 54.2 56.6


growth in % yoy 0.4 6.3 (2.4) 0.2 (0.7)

in % of GDP 23.3 23.8 22.5 22.2 21.5


growth in % yoy 12.3 10.8 9.6 10.0 12.1

in % of GDP 22.0 23.3 24.9 26.8 29.4


growth in % yoy 14.6 13.5 10.6 11.8 13.5

in % of GDP 15.7 17.1 18.4 20.2 22.4

Loans in foreign currency (EUR mn) 340 330 520 409 400

growth in % yoy (9.5) (2.9) 57.7 (21.3) (2.2)

in % of GDP 0.5 0.5 0.7 0.6 0.5

Loans in foreign currency (% of total loans) 1.0 0.9 1.4 1.0 0.9


growth in % yoy 5.6 2.0 6.3 4.3 4.1

in % of GDP 59.0 57.6 59.5 60.9 62.0


growth in % yoy 5.5 7.3 6.0 2.7 4.0

in % of GDP 33.1 34.0 35.1 35.3 36.0




Market share of foreign-owned banks (% of total assets) 99 99 99 99 98.5 Profi tability and effi ciency




Non-performing loans (% of total loans) 6.1 5.7 5.31 5.20 5.4 Source: NBS, RBI/Raiffeisen RESEARCH

good profitability (RoE close to 10% in 2014). We expect the sector’s finan-cial result in 2015 to be further sup-ported also from the legislative side. The bank levy has halved since the beginning of 2015. Another support-ive stance will be a lower contribution to the deposit protection scheme start-ing from 2015 onwards. At the same time, we expect some negative pres-sure on the sector’s financial stand-ing from shrinking interest margins, as the Slovak banks cannot bring down the level of deposit interest rates in ac-cordance with the decreased interest rates on loans. Interest rates on term deposits are currently above EURIBOR and can hardly be trimmed any more despite negative margins. As much as 45% of primary deposits are kept on current accounts with basically zero interest, thus limiting the room for an additional decrease of the aggregate deposit interest rate. Besides, strong competition on the refinancing market is further squeezing the banks’ margins and increases the neg-ative effect on their gross income.

Financial analyst: Juraj Valachy (+421 2 5919 2033), Tatra banka, a.s., Bratislava

Slovakia

Slovenska Sporitelna (Erste), 22.3%

VUB Banka (Intesa), 19.2%

Tatra Banka (Raiffeisen), 16.6%CSOB (KBC), 10.3%

Postova banka, 7.2%

Prima Banka (Penta), 3.3%

Sberbank, 3.5%

OTP Banka, 2.5%

Others, 23.0%

Market shares (2014, eop)*

% of total assets; * UniCredit not shown as operations in Slovakia are parts of Czech operationsSource: NBS, RBI/Raiffeisen RESEARCH


20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Slovenia vs. all other CEE marketsSource: BSI, national sources, RBI/Raiffeisen RESEARCH

-32-24-16

-808

162432


Lending growth*

Source: ECB, RBI/Raiffeisen RESEARCH

After two years of decline in growth, the Slovenian economy grew again by 2.6% in 2014. Our positive outlook for 2015/16 is an indication that the re-cent reforms took effect. In addition, the regulator made a clear commitment to improve the situation of the banking sector, which already started to show an im-provement in the major performance parameters. The main push for this positive development was the banking sector clean-up, which started in late 2013. The major measures during this process included the EUR 3 bn recapitalization of the largest state banks, the transfer of EUR 1.6 bn in impaired loans from Nova Ljubljanska banka, Nova KBM and Abanka to the government-funded Bank As-set Management Company (BAMC) as well as the write-off of EUR 440 mn of non-performing debt and the unwinding of Probanka and Factor Banka. Follow-ing these measures, the share of non-financial private sector NPLs came down to 16% in the third quarter of 2014 (as per an estimate of the European Commis-sion). This can be seen as a notable stabilization sign of asset quality, albeit the ongoing loan base contraction in Slovenia continues.The stock of private sector loans kept contracting in 2014, due to low corporate demand, continual high leverage of large corporations, and the ongoing restruc-turing of the banking sector’s funding structure. The latter was mostly related to the gradual replacement of external funding by domestic deposits. According to the National Bank of Slovenia (NBS), these replacements have exceeded EUR 11 bn since 2008, thereof EUR 2.8 bn in 2013 and about EUR 1 bn in 2014. Al-though this development was positive and necessary for the sustainability of the sector’s funding, the replacement of external funding also had constrained new loan issuances in 2014. External debt redemption demanded sizeable resources that hence could not be used for domestic lending, and as a result, the non-finan-cial private sector loan stock decreased by 12%. Corporate lending growth de-clined by 19%, whereas retail loans remained flat.Government deposits are gradually losing their importance for the banking sec-tor’s funding. There was very limited, if any, new placement by the government, and “old” deposits were used for recapitalization needs. In total, state-related de-posits contracted by EUR 0.7 bn in 2014. The sector’s refinancing risk is gradually improving due to external debt redemp-tion and moderate private deposits growth. As at year-end 2014, the share of

Slovenia

Out of the negative territory, but restructuring needs remain

Key economic fi gures and forecasts*

Slovenia 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 1.2 0.6 -2.6 -1.0 2.6 2.0 2.0





Current account balance (% of GDP) -0.1 0.4 3.2 6.4 6.1 4.8 4.6


* Slovenia is an euro area member as of 1 January 2007Source: national sources, wiiw, Raiffeisen RESEARCH

Sector clean-up has helped to sort out NPL issues and created pre-conditions for new lending Funding structure has improved; moderate private deposit growth Aggregate returns broke even in 2014, but structural risks remain



Total assets (EUR bn)* 45.8 45.6 44.5 39.6 37.4

growth in % yoy 1.1 (0.4) (2.4) (11.0) (5.6)

in % of GDP 129.0 126.0 126.1 112.3 100.4

Total loans (EUR bn)* 33.8 33.0 31.7 26.4 23.2

growth in % yoy 3.4 (2.4) (3.9) (16.7) (12.1)

in % of GDP 95.2 91.2 89.8 74.8 62.3

Loans to private enterprises (EUR bn) 21.0 20.3 18.8 14.1 11.4

growth in % yoy 0.0 (3.3) (7.4) (25.0) (19.1)

in % of GDP 59.2 56.1 53.3 40.0 30.6

Loans to households (EUR bn) 9.3 9.5 9.3 8.9 8.9

growth in % yoy 10.7 2.2 (2.1) (4.3) 0.0

in % of GDP 26.2 26.2 26.3 25.2 23.9

Mortgage loans (EUR bn) 4.8 5.2 5.3 5.3 5.5

growth in % yoy 23.1 8.3 1.9 0.0 3.8

in % of GDP 13.5 14.4 15.0 15.0 14.8

Total deposits (EUR bn)* 20.8 21.3 20.9 21.2 22.1

growth in % yoy 4.1 2.5 (2.0) 1.4 4.2

in % of GDP 107.4 104.7 104.5 91.9 81.1



Market share of state-owned banks (% of total assets) 47 47 45 61 52.5

Market share of foreign-owned banks (% of total assets) 28 29 31 31 n.a.Profi tability and effi ciency

Return on Assets (RoA) (0.2) (1.1) (1.6) (2.6) 0.4

Return on Equity (RoE) (2.4) (11.7) (19.0) (31.6) 3.8


Tier-1 capital adequacy (%) 9.0 9.6 10.1 11.1 12.1

Non-performing loans (% of total loans) 8.2 11.8 15.2 22.0 16.0 * excluding MFI business; Source: BSI, ECB, RBI/Raiffeisen RESEARCH

external debt has decreased to 16% of the banks’ total funding. The share of pri-vate deposits, on the other hand, grew by 4% and makes up for about two thirds of total banking sector liabilities now. The share of retail deposits was 38% of to-tal liabilities as at year-end 2014. These trends on the asset and liabilities sides resulted in a decline of the L/D ratio to 105% in 2014 (excluding loans and de-posits by MFIs). Compared to the L/D ratio of 150% back in 2011/12, this de-velopment should be a good starting point for upcoming loan issuances.

Backed by the sector clean-up and aggregate banking balance sheet fine-tuning, the Slovenian banking sector’s profitability left negative territory for the first time since 2010. In the third quarter of 2014, profitability (in terms of pre-tax prof-its) broke even and the sector’s RoE was again positive as well at 3.8%. Thus, although with caution, one can state that the Slovenian banking sector has po-tential for an upside development in 2015 and beyond. However, on the funda-mental risk side, banking performance can still be subject to a negative spill-over from the economy’s structural weakness. This relates in particular to the still high indebtedness of the corporate sector, a vast part of which remains under state ownership or control (about one third of assets and over 40% of equity value of non-financial companies). Also, it is possible that, with the re-start of a new cor-porate lending cycle, a new wave of inferior asset quality will again be accumu-lated by the large (state-controlled) banks.


Slovenia

Market share ranking as of 2014

1 Nova Ljubljanska banka (state-owned)

2 UniCredit Banka Slovenija d.d. (UniCredit)

3 SKB Banka d.d. Ljubljana (Societe Generale)

4 Nova Kreditna banka Maribor (state-owned)

5 Abanka Vipa (state-owned)

...

12 Raiffeisen Bank Slovenia (RBI)Source: BSI, RBI/Raiffeisen RESEARCH



Croatia 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) -1.7 -0.3 -2.2 -0.9 -0.4 0.0 1.0





Current account balance (% of GDP) -1.1 -0.8 -0.1 0.8 0.7 0.4 0.7


EUR/LCY (avg) 7.29 7.43 7.52 7.58 7.63 7.66 7.69


Croatia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Croatia vs. all other CEE marketsSource: CNB, national sources, RBI/Raiffeisen RESEARCH

Still waiting for the upturn

-20-15-10

-505

101520

Jan-09 May-10 Sep-11 Jan-13 May-14Household loans (% yoy)Corporate loans (% yoy)Mortgage loans (% yoy)

Lending growth*

* in LCY-termsSource: CNB, RBI/Raiffeisen RESEARCH

The ongoing recession of the Croatian economy weighs on its banking sector. In the past six years, the cumulative decline in real GDP exceeded 12%, resulting in an accumulation of systemic risks for the banking sector: inferior lending en-vironment, deteriorating asset quality, and shrinking cross-border funding possi-bilities, on the flows contraction by the large European financial groups active in the market. The demand for loans remains on a downward trend, private sector lending continued to shrink in 2014 due to the long-lasting deleveraging process in the household sector and the continued decrease of business activity in the cor-porate sector. Nevertheless, the aggregate Croatian leverage remains high by CEE standards. The volume of household loans is close to 40% of GDP, while the overall corporate indebtedness exceeds 80% of GDP. Only about a third of the latter, however, are domestically issued loans, while the majority is direct borrow-ing from abroad. NPLs have continued to rise also on the back of the loan base contraction in 2014. At the end of the year, the share of NPLs in the total loan portfolio reached 17.0%, with corporate NPLs exceeding 30%. In this segment, construction and real estate companies are suffering the most due to declining de-mand and prices following the economic downturn.

Pressure on asset quality also comes from FCY-denominated lending to house-holds, as CHF mortgage loans account for 36% of total mortgage loan volume. In January 2015, following the CHF appreciation, the Croatian government has intervened in CHF-denominated lending contracts. A special amendment to the Consumers Loans Act fixed the CHF/HRK exchange rate at 6.39 for twelve in-stalments maturing in 2015. The financial burden of the resulting differences be-tween the fixed and the market rates was placed on the banks. The consequences of the measure will definitely have a negative impact on the sector’s 2015 finan-cial results and may well lead to deterioration of its profitability indicators, which posted an improvement in 2014 (RoE at 3.3%, RoA at 0.6%).

In 2014, the Asset Quality Review was conducted for Croatian banks in line with the common European methodology. The results indicated that after asset reclas-sification, the sector-wide CAR of more than 21% was one of the highest capital-

Weak economic performance and overleverage kept banking activities subdued NPL ratio showed no improvement in 2014 – upside risks for 2015 due to concerns over CHF-denominated loans Banking system remains well-capitalized despite stagnating economy




growth in % yoy 4.2 2.2 (2.0) (1.7) (0.8)

in % of GDP 121.5 124.8 123.4 122.9 122.7


growth in % yoy 6.8 3.9 (2.3) (0.3) (2.4)

in % of GDP 84.3 88.1 86.8 87.7 86.1


growth in % yoy (3.6) 6.0 (9.4) (3.3) (0.9)

in % of GDP 26.9 28.7 26.2 25.7 25.6


growth in % yoy 4.9 (1.0) (1.5) (2.9) (1.0)

in % of GDP 39.5 39.3 39.1 38.4 38.3


growth in % yoy 13.8 0.8 (1.0) (3.1) (2.5)

in % of GDP 19.7 19.9 19.9 19.5 19.2


growth in % yoy 10.1 5.9 (4.4) (0.7) (3.2)

in % of GDP 63.1 67.2 64.8 65.1 63.5



growth in % yoy 4.0 2.2 (3.2) 1.9 1.7

in % of GDP 82.3 84.6 82.6 85.2 87.3


growth in % yoy 11.0 2.6 4.1 2.5 1.7

in % of GDP 48.3 49.8 52.3 54.3 55.6








Non-performing loans (% of total loans) 11.2 14.4 13.9 15.7 17.0 Source: CNB, RBI/Raiffeisen RESEARCH

ization levels within the entire CEE re-gion. The reason for this sound capi-talization is the market domination of Western European banking groups, which can recapitalize their Croa-tian subsidiaries more easily than do-mestic players. Currently, about 90% of the assets in the 28 banks operat-ing in the highly competitive Croatian banking sector are foreign-owned. Given the ongoing weak economy, the smaller banks in the market are suffering difficulties, and both takeo-vers of smaller banks by larger play-ers as well as bank closures can there-fore not be excluded.

Financial analyst: Anton Starcevic (+385 1 6174-210), Raiffeisenbank Austria d.d., Zagreb

Croatia

Zagrebacka Banka (UniCredit), 25.4%

Privredna Banka (Intesa),17.1%

Erste, 14.9%

Raiffeisenbank, 7.8%

Splitska Banka (SocGen), 7.1%

Hypo Alpe Adria Bank, 7.0%

HPB, 4.3%

OTP , 3.9%

Sberbank, 2.5%

Others, 9.8%


% of total assetsSource: CNB, RBI/Raiffeisen RESEARCH


Romania

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Romania vs. all other CEE marketsSource: NBR, national sources, RBI/Raiffeisen RESEARCH

Getting ready for a new lending cycle

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10152025



Lending growth*

* in LCY-termsSource: NBR, RBI/Raiffeisen RESEARCH

The GDP growth of 2.9% in 2014 was better than expected and mostly driven by increasing private consumption. Household spending picked up due to improv-ing labor market conditions, but demand for loans stayed suppressed neverthe-less. Corporate sector demand for borrowed funds remained low as well, as com-panies were further cutting back their plans for investment projects. On the back of a nearly stable exchange rate, the LCY- and FCY-denominated stocks of gross banking loans moved in accord decreasing by 3.1% in 2014. The aggregate lending decline, however, masks the restructuring of the credit risk within the Ro-manian banking sector, which will in our opinion eventually lead to a healthier new lending take-off. 2014 saw divergent trends in the FCY versus LCY lending segments: while the active de-risking across all business lines resulted in a decline of 10% yoy in FCY-denominated loans, lending in RON increased by 7.8% yoy. Supported by the governmental “First House” program, housing loans had the highest growth rate among all loan categories. While FCY-denominated corpo-rate lending declined by over 10% in 2014, LCY corporate loans grew by 2.5% over the same period of time.In 2014, the Romanian central bank implemented a range of measures to speed up the balance sheet clean-up in the banking sector. Hence, banks had to in-crease provisions for impaired and doubtful loans and finally sold or wrote off bulks of already provisioned NPLs. While this new regulation led to the largest loss of the banking sector since 2009 of about EUR 1 bn, it also resulted in the intended sharp fall of the NPL ratio from 20.5% in April 2014 to 13.9% at year-end. The record loss notwithstanding, the banking sector’s solvency improved at the same time, as the asset stock also contracted and its quality improved.A further regulatory measure was the reduction of the Minimum Reserve Require-ments (MRR) for local banks from 15% to 10% for RON liabilities and from 20% to 14% for FCY liabilities. This regulation helped to improve the sector’s fund-ing profile, since banks used proceeds and repayments from FCY loans together with resources relieved by the MRR cut to repay foreign credit lines. As a result, external liabilities of the Romanian banking sector decreased by EUR 2.7 bn to 17.7% of assets as at year-end 2014 (at year-end 2008, this ratio had peaked at 30.7%).

Lending activity showed signs of recovery with the new LCY-denominated loans taking off in 2014 Sector-wide NPL ratio declined from ~22% to ~14% after clean-up of balance sheets Solvency and funding improved due to regulatory measures, although the sector’s aggregated loss was notable


Romania 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) -0.8 1.1 0.6 3.4 2.9 3.0 3.0

Consumer prices (avg, % yoy) 6.1 5.8 3.3 4.0 1.1 -0.3 1.7






EUR/LCY (avg) 4.21 4.24 4.46 4.42 4.44 4.44 4.40



Romania



growth in % yoy 4.3 1.1 0.6 (0.3) (0.7)

in % of GDP 72.2 69.5 67.9 64.1 60.6


growth in % yoy 3.4 5.9 (1.1) (4.8) (3.1)

in % of GDP 39.5 39.8 38.3 34.5 31.8


growth in % yoy 7.7 9.8 0.7 (7.3) (5.8)

in % of GDP 19.8 20.7 20.3 17.8 16.0


growth in % yoy 0.5 1.3 (2.3) (2.4) (1.2)

in % of GDP 19.2 18.5 17.6 16.2 15.3


growth in % yoy 17.8 14.4 8.3 8.8 9.6

in % of GDP 5.4 5.9 6.2 6.4 6.7


growth in % yoy 8.4 6.6 (2.5) (7.2) (10.1)

in % of GDP 25.0 25.4 24.0 21.1 18.1



growth in % yoy 4.8 4.5 1.6 7.5 7.9

in % of GDP 36.0 35.8 35.3 36.0 37.0


growth in % yoy 4.8 7.4 5.3 4.8 5.9

in % of GDP 19.8 20.3 20.7 20.6 20.7





Return on Assets (RoA) (0.2) (0.2) (0.6) 0.0 (1.3)

Return on Equity (RoE) (1.7) (2.6) (5.9) 0.1 (-12.5)


Non-performing loans (% of total loans) 11.9 14.3 18.2 21.9 13.9 Source: NBR, RBI/Raiffeisen RESEARCH

Following several years of restructur-ing, Romanian banks are now well prepared to expand lending again. Supported by low interest rates, pri-vate demand for loans is expected to gradually pick up amidst economic recovery. The central bank targets to join the European SSM by signing a “close cooperation” agreement by the end of 2016, following an extensive local AQR in 2015. This may add to profitability pressure (although the overall process is complex and we may see a delay). Another point to watch is the sector‘s competitive structure, in particular fol-lowing the recent acquisition of Volks-bank Romania by Banca Transilvania, and ongoing restructuring and business fine-tuning at BCR (Erste Bank). These two cases may well reduce the market share of foreign-owned banks in favor of those domestically owned.

Financial analyst: Nicolae Covrig (+40213061262), Raiffeisen BANK S.A., Bucharest

BCR (Erste), 16.2%

BRD (Societe Generale), 12.4%

Banca Transilvania, 9.8%


UniCredit, 7.9%

Others, 45.9%


% of total assets, preliminary dataSource: Ziarul Financiar, RBI/Raiffeisen RESEARCH


Bulgaria

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Bulgaria vs. all other CEE marketsSource: BNB, national sources, RBI/Raiffeisen RESEARCH

Digesting the consequences of the bank crisis

-12-9-6-30369

12



Lending growth*

* in LCY-termsSource: BNB, RBI/Raiffeisen RESEARCH

In 2014, the Bulgarian GDP grew by 1.7% posting some improvement over 2013. The increase came on the back of positive dynamics of all three ma-jor GDP components on the production side (services, industry and agriculture), which has happened for the first time since 2009. The banking sector, however, could not fully benefit from the overall positive eco-nomic dynamics, as the behavioral patterns of both banks and customers were negatively affected by the banking crisis in June 2014. After the spread of nega-tive news regarding the shareholders of Corporate Commercial Bank (CCB), Bul-garia’s fourth largest bank, and its subsidiary Commercial Bank Viktoria (CBV), and reports on their alleged lack of liquidity, both banks faced massive deposit withdrawals until June 20, 2014, when CCB stopped all its banking operations. Another locally owned bank – the country’s third-largest First Investment Bank (FIB) – faced tight liquidity pressure. As a result, FIB had to be bailed out by the government, while CCB and CBV were put under special supervision of the Bul-garian National Bank (BNB). This step was followed by the revocation of CCB’s banking license and the commencement of its liquidation at year-end 2014.Obviously, the banking sector was affected by these developments. The banks’ total assets shrank by 0.7% as at year-end 2014. Corporate loans contracted by 6.7%, while the retail segment recorded a decline of 1.2%. In total, the ag-gregated loan stock declined by almost 5.0%. On a positive note, household savings recovered again during the second half of the year. Household deposits increased by more than 4.5% to BGN 41 bn. This growth, however, was strongly supported by the Deposit Insurance Fund (DIF), which paid reimbursements to the depositors on account of the CCB collapse. The majority of these funds remained in the sector, since only 2.0% of them were withdrawn in cash by year-end. At the same time, corporate deposits declined by 1.2% to BGN 22.7 bn. Nevertheless, the total deposit base grew by 2.4% overall. Despite the negative impact from the mid-year crisis, the Bulgarian banking sec-tor registered a net profit of BGN 746 mn in 2014, which is about 25% above the results of 2013. That, on the back of a shrinking asset size, caused an im-provement in both aggregate RoA and RoE figures.

Lending activity and funding stance were impacted by the bank crisis in June 2014 Regulator and government are processing the consequences of the crisis, targeting European regulation standards Despite the shake-up, 2014 banking sector fi nancial results were positive


Bulgaria 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 0.7 2.0 0.5 1.1 1.7 1.2 2.1

Consumer prices (avg, % yoy) 2.4 4.2 3.0 0.9 -1.4 -0.1 2.2




Current account balance (% of GDP) -1.4 0.1 -0.8 1.8 0.0 -0.5 -0.8


EUR/LCY (avg)* 1.96 1.96 1.96 1.96 1.96 1.96 1.96

* Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH


In 2014, the Bulgarian banking sec-tor saw a number of important legal and regulatory developments. First, in order to join the SSM, the Bulgarian regulator implemented the EU CRD and CRR. As a result, the banking sec-tor‘s overall CAR increased to 22.0%, and its liquidity ratio reached 30.1%. Second, and as a direct consequence of the crisis, the government intro-duced amendments to the legislation on bankruptcy for the banking sector.

The overall NPL ratio remained at 16.8% and continues to be subject to upside risk. The major risks stem from possible vulnerabilities, which can still emerge in the system that could be somehow related to the recent banking crisis.

Financial analysts: Emil S. Kalchev, Angel R. Kavrakov, Raiffeisenbank (Bulgaria) EAD, Sofia

Bulgaria

UniCredit Bulbank, 17.4%

DSK Bank, 11.7%

First Investment Bank, 10.2%

United Bulgarian Bank, 7.7%

Eurobank, 7.2%


Societe Generale Expressbank, 5.4%

Central Cooperative Bank, 4.9%

Alpha Bank, 4.3%

Piraeus Bank, 3.8%

Others, 20.3%


% of total assetsSource: BNB, RBI/Raiffeisen RESEARCH



growth in % yoy 4.0 4.2 7.3 4.0 (0.7)

in % of GDP 102.5 97.9 103.0 106.8 103.6


growth in % yoy 2.7 4.1 3.2 1.1 (5.0)

in % of GDP 74.9 71.5 72.3 72.9 67.7


growth in % yoy 4.4 6.4 5.0 1.4 (6.7)

in % of GDP 49.1 47.9 49.3 49.8 45.4


growth in % yoy (0.5) (0.4) (0.5) 0.5 (1.2)

in % of GDP 25.8 23.6 23.0 23.0 22.3


growth in % yoy 3.5 1.1 0.8 (0.6) (0.9)

in % of GDP 12.9 11.9 11.8 11.7 11.3


growth in % yoy 7.3 8.2 3.7 (3.4) (11.5)

in % of GDP 45.9 45.5 46.3 44.6 38.6



growth in % yoy 8.4 12.5 8.4 8.7 2.4

in % of GDP 65.3 67.3 71.5 77.5 77.5


growth in % yoy 12.9 13.8 12.4 9.4 4.5

in % of GDP 39.0 40.7 44.8 48.9 49.9








Non-performing loans (% of total loans) 11.9 14.9 16.6 16.9 16.8 Source: BNB, RBI/Raiffeisen RESEARCH


Serbia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Serbia vs. all other CEE marketsSource: NBS, national sources, RBI/Raiffeisen RESEARCH

Struggling with structural vulnerabilities

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101520253035


Lending growth*

* in LCY-termsSource: NBS, RBI/Raiffeisen RESEARCH

After an improvement and 2.6% GDP growth in 2013, the Serbian economy shrunk by 1.8% in 2014. One of the reasons for the return of the recession was the devastating flood in May. Although a government investment incentive scheme and a new IMF stand-by arrangement were introduced in order to sup-port the economy, the banking sector did not benefit from these measures, and was affected by increasing risks. Although the government’s loan subsidizing program failed to reverse the down-trend in corporate lending (corporate loans down 2.2% yoy in 2014), the NPL ratio inched slightly lower recently, after a deterioration during mid-2014 (cor-porate NPL ratio at 24.8% in Q1 2015 vs. 27.4% mid-2014). We assume that changes to the law on the bankruptcy, making the process more efficient, may have added to the NPL stabilization in corporate portfolios. On a positive note, retail lending posted a moderate growth of 2.0% in 2014 on the back of cash and mortgage lending, whereas all other retail loan categories were underper-forming. At the same time, the banking sector’s total asset stock posted a 5% yoy nominal increase in LCY supported by the 7.8% growth in household deposits (also in LCY) and inflated to a certain extent by the 5% RSD depreciation against the EUR (on the mark-to-market revaluation of FCY-denominated assets).Facing a lack of adequate risk-return opportunities on the loan market, banks switched to less risky but still profitable market-based opportunities, and in-creased their exposure in LCY-government bonds. The same trends caused a fall of the L/D ratio from 116% in 2013 to 111% in 2014.In spite of the weak economy and low core margins, the banking sector posted an aggregate profit for H1 2014, although there was a decline of about 8% com-pared to the results of the same period in the previous year. The H1 2014 RoE reached 5%, however, we expect profitability to decline in both 2014 and 2015. The recession and deteriorating asset quality, which are both resulting in sluggish lending activity, are complemented by stricter requirements for capital reserves for banks. Another burden for the banking sector, especially for its largest state-owned banks, results from sizeable (non-performing) loans to state-owned enter-prises that are currently in a privatization or restructuring phase. Still, the banking sector’s capitalization suggests decent resilience, with the CAR remaining well

Economic performance had negative impact on loan issuance and asset quality Banking sector profi tability remained positive supported by banks’ investment in LCY-government bonds Capitalization remained solid, suggesting a decent resilience buffer against the economy‘s nosedive


Serbia 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 1.0 1.4 -1.0 2.6 -1.8 0.0 2.5







EUR/LCY (avg) 103.00 101.96 113.05 113.08 117.27 122.37 125.75



Serbia



growth in % yoy 6.7 6.7 0.2 (1.1) (0.4)

in % of GDP 92.8 88.1 93.8 83.1 85.0


growth in % yoy 15.4 8.5 1.0 (4.88) (2.12)

in % of GDP 54.2 52.3 56.1 47.8 48.1


growth in % yoy 15.7 6.0 2.2 (9.61) (7.33)

in % of GDP 31.0 29.3 31.8 25.8 24.5


growth in % yoy 12.3 6.1 (0.3) 2.37 1.95

in % of GDP 19.2 18.1 19.2 17.6 18.4


growth in % yoy 19.5 8.2 3.7 (1.4) 2.6

in % of GDP 9.4 9.0 9.9 8.8 9.2


growth in % yoy 15.2 16.3 2.3 (4.1) (6.8)

in % of GDP 35.7 36.9 40.2 34.5 33.0



growth in % yoy 4.0 10.1 1.6 2.6 2.3

in % of GDP 42.5 41.6 45.0 41.3 43.4


growth in % yoy 14.8 8.7 6.4 4.8 2.2

in % of GDP 26.8 26.0 29.4 27.6 28.9








Non-performing loans (% of total loans) 16.9 19.0 18.6 21.1 23.0 Source: NBS, RBI/Raiffeisen RESEARCH

above the mandatory 12%, at 20.4% at H1 2014, and NPLs are fully cov-ered with loan loss reserves (off and on balance) at 116% because of re-strictive regulation and tight credit pol-icies of foreign-owned lenders. The banking sector currently experi-ences major restructuring. The second largest bank in the country, Komerci-jalna banka, is at the moment priva-tized with 83% of its shares up for sale. Also, the main shareholders of Èaèanska banka (EBRD, Republic of Serbia and IFC) sold a 76.76% share to Turkey’s Halkbank. This transaction was closed in March 2015. Further-more, the Serbian banking market saw its first green-field investment since 2008 in late 2014. The Central Bank issued an operating licence to Mirabank, a unit of the United Arab Emirates-based Royal Group conglomerate, which plans to invest about USD 5 bn in Serbia over the next three years.

Financial analyst: Ljiljana Grubic (+381 11 2207178), Raiffeisenbank a.d. Serbia, Belgrade

Banca Intesa, 14.7%

Komercijalna banka, 12.2%

UniCredit, 8.7%

Raiffeisen, 7.3%

Societe Generale, 7.0%AIK banka, 6.0%

Eurobank, 5.3%

Vojvodanska banka, 5.1%

Hypo Alpe-Adria, 3.9%

Banka Postanska Stedionica, 3.3%

Others, 26.4%


% of total assetsSource: NBS, RBI/Raiffeisen RESEARCH



20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Bosnia a.H. vs. all other CEE marketsSource: CBBH, national sources, RBI/Raiffeisen RESEARCH

Sector stable and profi table – de spite economic slump

-10

-5

0

5

10

Jan-10 Feb-11 Mar-12 Apr-13 May-14



Lending growth*

* in LCY-termsSource: CBBH, RBI/Raiffeisen RESEARCH

In 2014, the uneven path of Bosnia and Herzegovina’s economy was deter-mined by a major natural disaster, namely the devastating floods in May that caused damages of EUR 2 bn or 14.8% of the country’s GDP. Consequently, the stable growth of 3.2% yoy recorded in the first quarter was followed by a de-crease of 0.5% yoy in the second quarter and only a modest recovery of 0.5% at year-end.The economic volatility was also reflected in the banking sector figures. Although both balance sheet growth and asset quality felt the pressure, there was no ma-jor impact on the sector’s overall stability. However, the toughened economic conditions resulted in both a diverging performance of the retail and corporate segments and a further increase in NPLs. In 2014, the total loan stock increased moderately by 2.8%, which has been, however, the lowest expansion rate within the past five years and for the first time since 2009. Corporate loans declined by 1.5% yoy. After the flood, the corporate segment’s NPL ratio peaked at 20.7% in the third quarter, as the regulator forced the banks to clean up their portfolios in order to stabilize their performance. The banks slowed down their corporate lending, and consequently, corporate loan volumes decreased and the corporate NPL ratio re-covered at 17.3% as at year-end 2014. The retail NPL ratio improved to 10.2% (the lowest figure since the third quarter of 2011), bringing down the overall NPL ratio to 14.0% as at year-end. At the same time, weakened corporate lending op-portunities coupled with increased demand for retail loans to finance housing re-construction after the flood resulted in banks focusing to a greater extent on retail business. The increasing household loan volumes resulted in retail loan growth of 5.7% in 2014 (the strongest since 2011) and loans in that segment reaching 44.2% of total loan stock. On the funding side, total deposits continued to out-perform lending growth, posting the strongest gain since 2007 (7.9% yoy). The increase was driven by retail deposits, which surged by 8.1% in 2014, account-ing for 58.8% of total deposits. Corporate deposits went up by a comparatively modest 2.4%. Strong support for the banks’ funding came from the government, with public sector deposits increasing by 26.5% (as a system support after the natural disaster) following a negative trend ever since 2007.

Disastrous fl oods resulted in economic slump, deteriorated corporate lending Good level of profi tability and capital adequacy preserved in 2014 Banking sector performance in line with the real economy, higher potential expected for 2015


Bosnia and Herzegovina 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 0.8 1.0 -1.2 2.5 0.5 2.5 3.0

Consumer prices (avg, % yoy) 2.1 3.7 2.1 -0.1 -0.9 1.5 2.5






EUR/LCY (avg)* 1.96 1.96 1.96 1.96 1.96 1.96 1.96

* Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH


The local banking sector retained a decent level of profitability in 2014, posting a RoE of 6.0% and a RoA of 0.8%. The CAR remained practically stable at 16.3%, exceeding the reg-ulatory requirements. Going forward, we expect the country’s banking sec-tor to develop in line with its real economy (2015: expected real GDP growth of 2.5%), and to post single digit values in asset and loan growth, with retail lending continuing to be the main growth driver.

We expect the performance of the banking sector in Bosnia and Herze-govina to be further strengthened by the EU initiatives for the country under the Stabilization and Association Agreement (SAA). The SAA will allow the country to benefit from EU financial and techni-cal assistance and from tariff-free access to EU markets for some of its products. The SAA will also assist with economic and structural reforms in order to boost economic growth, increase investments and reduce unemployment. For the banking sec-tor, this should result in notable growth in both the retail and the corporate segment.

Financial analyst: Ivona Zametica (+387 33 287 784), Raiffeisen BANK d.d. Bosnia and Herzegovina, Sarajevo


UniCredit*, 21.6%


Hypo Alpe Adria, 9.8%NLB Group, 9.0%

Sberbank, 7.4%

Intesa Bank, 6.1%

Others, 29.4%


% of total assets* UniCredit Bank & UniCredit Bank Banja LukaSource: CBBH, RBI/Raiffeisen RESEARCH



growth in % yoy 0.8 3.4 1.9 5.0 4.4

in % of GDP 85.1 85.0 86.8 89.2 92.4


growth in % yoy 3.5 5.3 4.1 2.9 2.8

in % of GDP 58.5 59.4 61.9 62.4 63.7


growth in % yoy 4.3 2.7 4.4 1.1 (2.1)

in % of GDP 27.9 27.6 28.9 28.6 27.8


growth in % yoy 0.3 6.0 1.3 4.0 5.7

in % of GDP 25.4 26.0 26.4 26.9 28.2

Loans in foreign currency (EUR mn) 534 372 333 325 328

growth in % yoy (27.2) (30.2) (10.5) (2.6) 1.0

in % of GDP 25.4 26.0 26.4 26.9 28.2

Loans in foreign currency (% of total Loans) 7.2 4.8 4.1 3.9 3.8


growth in % yoy 3.6 3.7 2.6 6.9 8.5

in % of GDP 50.4 50.4 51.8 54.2 58.3


growth in % yoy 14.5 8.7 8.6 9.3 9.0

in % of GDP 26.1 27.4 29.7 31.8 34.4



Market share of state-owned banks (% of total assets) 0.8 0.9 1.0 1.0 n.a.

Market share of foreign-owned banks (% of total assets) 93 92 92 90 n.a.Profi tability and effi ciency

Return on Assets (RoA) (0.6) 0.7 0.6 (0.2) 0.8

Return on Equity (RoE) (5.5) 5.8 5.0 (1.3) 6.0


Non-performing loans (% of total loans) 11.4 11.8 13.5 15.1 13.5 Source: CBBH, RBI/Raiffeisen RESEARCH


Albania

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Albania vs. all other CEE marketsSource: NBA, national sources, RBI/Raiffeisen RESEARCH

Positive signs in lending and asset quality

-10

0

10

20

30

40

08 09 10 11 12 13 14


Lending growth*

* in LCY-termsSource: NBA, RBI/Raiffeisen RESEARCH

The Albanian economy grew by 2.0% in 2014, mainly due to increasing do-mestic demand, which gets support from the expansive monetary policy. Grad-ual recovery of lending activities was one of the positive patterns. During 2014, lending activity increased by 5.0% yoy, thereby recovering from the decrease of 2.3% in 2013. The historically low interest rates, a moderate revival of consump-tion demand and business confidence were the main reasons to drive the lending recovery. In 2014, about 93% of the volume of new loans came from corporate customers, increasing this segment by 6.3%. Despite the regulator’s lower inter-est rates policy applied, total deposits increased by EUR 336 mn or 4.6%, indi-cating still suppressed investment demand. Corporate deposits grew by 18% yoy in 2014, while retail deposits only showed a 2.6% increase. The Albanian banking sector remained stable, liquid and well capitalized with a CAR of 16.8% in 2014, which significantly exceeded the 12% minimum capital requirement demanded by the Bank of Albania. Furthermore, the capitalization is supported by banks’ decent earnings in 2014, as the banking sector posted a total net profit of EUR 79.9 mn. This has been the best result since 2007 and is largely a reflection of the renewed asset quality improvement and reduction in provisioning costs.As at year-end 2014, the NPL ratio was 22.8% (coming down from 23.5% at year-end 2013). The still high NPL ratio remains the main concern for the current lending growth and is the reason for a joint-initiative between the IMF, the Bank of Albania and the Albanian government. The goal is to review and improve all aspects of the current NPL management. In particular, the review will focus on collateral management, the streamlining of write-offs as well as restructuring reg-ulations. Because of this initiative, we are positive that the country’s NPL ratio will continue to improve in 2015.Looser monetary policies and an improved business confidence, which will sup-port economic growth and lending activities, are expected for 2015. However, several foreign-owned banks could be forced to limit their exposure in Albanian assets due to requirements from their parent companies following the new ECB capital regulations. In 2015, the repayment of government arrears to private lenders will continue in accordance with the IMF program. This should eventually improve the banks’

Banking assets grew moderately compared to past fi ve years Lending activity improved due to low rates, and demand-side recovery started to kick in NPL ratio remained high, requires regulatory management


Albania 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 3.7 2.6 1.6 0.4 2.4 3.0 4.0







EUR/LCY (avg) 137.79 140.36 139.04 140.30 140.00 140.13 139.88



Albania



growth in % yoy 11.1 12.9 7.0 6.2 0.7

in % of GDP 79.9 86.1 90.2 94.1 91.5


growth in % yoy 8.5 15.2 1.6 (2.3) 5.0

in % of GDP 39.6 43.5 43.3 41.6 42.1


growth in % yoy 14.9 20.1 1.0 (3.4) 6.0

in % of GDP 26.6 30.5 30.2 28.6 29.3


growth in % yoy 1.7 0.6 (0.0) (0.3) 1.3

in % of GDP 11.9 11.4 11.2 11.0 10.7

Mortgage loans (EUR mn) 753 806 815 801 796

growth in % yoy 5.1 7.0 1.1 (1.7) (0.7)

in % of GDP 8.4 8.6 8.5 8.2 7.9


growth in % yoy 7.8 12.0 (3.5) (4.6) 4.0

in % of GDP 55.8 61.3 65.1 65.6 65.0

Loans in foreign currency (% of total credits) 70 68 65 63 62


growth in % yoy 17.0 13.0 6.8 3.0 4.6

in % of GDP 65.9 71.0 74.3 75.1 75.8


growth in % yoy 16.1 15.2 8.4 2.6 2.6

in % of GDP 55.8 61.3 65.1 65.6 65.0

Total loans (% of total deposits) 60 61 58 55 56Structural information, profi tability and effi ciency






Non-performing loans (% of total loans) 14.0 18.8 22.5 23.5 22.8 Source: NBA, RBI/Raiffeisen RESEARCH

balance sheets and increase their will-ingness to be more active in lending. The expected revival of the state ac-tivity on the Eurobond market and the disbursement of a EUR 250 mn loan (guaranteed by the World Bank) may lead to the reduction of the govern-ment borrowing from the domestic market and therefore also stimulate banks’ lending to the private sector.

The escalation of the economic hard-ships in their home market had Greek banks to rethink their presence in Al-bania. One of the four Greek banks left the country, and as a result, the market share of Greek banks shrunk to 16% in 2014 (compared to 28% in 2008).

Financial analyst: Joan Canaj (+355 4 2381000 1122), Raiffeisen Bank Sh.a., Tirana


National Commercial Bank, 24.3%

Intesa Sanpaolo Bank, 11.2%

Credins Bank, 10.2%

Tirana Bank (Pireaus Bank), 7.2%

Alpha Bank, 5.6%

Societe Generale, 5.4%

Procredit Bank, 2.8%

National Bank of Greece, 3.1%

Others, 9.2%Market shares (2014, eop)

% of total assetsSource: NBA, RBI/Raiffeisen RESEARCH


Russia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Russia vs. all other CEE marketsSource: CBR, national sources, RBI/Raiffeisen RESEARCH

Challenges constrain business opportunities, earnings and capital

-15

0

15

30

45



Lending growth*

* in LCY-termsSource: CBR, RBI/Raiffeisen RESEARCH

Aggregate banking sector data and individual banks’ financial releases for 2014 and the first months of 2015 reveal the hard hit of the fundamental chal-lenges carried over from the second half of 2014. The swift RUB devaluation and persisting financial market volatility, scarcity of funding from domestic and inter-national market sources, negative news flow from rating agencies, and negative short-term expectations for the Russian economy put the entire local banking busi-ness under serious constraint. The first of that came through the weakened lend-ing stance and inferior asset quality. At the first glance the nominal aggregate loan growth rate does not seem to be dramatic at all, and even exceeds 2013 if expressed in LCY-terms: 26% in 2014 vs. 17% in 2013. The dynamics of the individual lending components is more telling, however. Household loan growth in LCY dropped to 12% yoy as of January 2015 (coming from 28% yoy in Jan-uary 2014), and if expressed in EUR-terms, retail lending suffered a decline of 25% yoy. And while the corporate loan growth rate in nominal LCY-terms stayed high at above 30% yoy, the segment saw a decline of 13% if expressed in EUR-terms. According to our estimates, the actual market-based corporate lending dy-namics is also masked by the state-funded loans to systemically important compa-nies. If to adjust for that, and also for the impact of FCY loans inflation on the RUB devaluation, the estimated rate of LCY-expressed corporate loan growth would be positive at 13% yoy or so in January 2015. That is, the “true market” corpo-rate loan growth figures were already below the inflation rate, and the Q1-2015 saw a further lending deterioration. Corporate loans growth (expressed in LCY) fell to 15% yoy, retail loan growth rate fell below 4%, giving a 13% yoy growth for the total loan stock. Respectively, the NPL ratio climbed to 6% (above 7% in retail, and 5.6% in corporate segment). As a continuation of this trend, we ex-pect the lending growth to fall below 10% yoy in LCY-terms in 2015 (adjusted for RUB devaluation and state support to systemic borrowers), and NPLs to in-crease to up to 8% of total loans. Falling lending growth rates and the deterio-ration of asset quality weigh on the banks’ profits, as volumes and margins fall and provisioning costs go up. Besides, jumpy official and volatile money mar-ket interest rates leave no viable benchmark for the banks’ money pricing, imply-ing a prolonged period of market re-adjustment. The resulting deterioration of the major earnings indicators versus 2013 is notable. Q4 2014 recorded a bank-

Weakened economy weighs on lending growth and asset quality Financial markets turmoil and sanctions constrain funding options, thus leaving interest rates in disequilibrium State support is still strong, but can outweigh poor banking earnings only in the short-term


Russia 2010 2011 2012 2013 2014 2015f 2016f

Nominal GDP (EUR bn) 1,149.2 1,359.7 1,547.8 1,556.8 1,384.2 1,323.1 1,422.2


Real GDP (% yoy) 4.5 4.3 3.4 1.3 0.6 -4.0 0.5



General budget balance (% of GDP) -3.5 1.6 0.4 -1.0 -1.0 -3.2 -2.0


Current account balance (% of GDP) 4.4 5.1 3.6 1.6 3.5 4.4 2.9


EUR/LCY (avg) 40.27 40.88 39.91 42.32 51.04 62.50 64.47



Russia

Key banking sector indicators

Balance sheet data 2010 2011 2012 2013 2014***

Total assets (EUR mn) 838,138 998,949 1,238,697 1,276,922 1,136,230

growth in % yoy 23.6 19.2 24.0 3.1 (11.0)

in % of GDP 73.0 74.6 79.4 86.8 109.5


growth in % yoy 21.1 24.1 24.2 4.1 (17.2)

in % of GDP 39.2 41.7 44.4 49.0 57.6


growth in % yoy 20.6 21.9 17.5 0.1 (13.6)

in % of GDP 30.4 31.7 32.0 34.0 41.6


growth in % yoy 23.0 31.5 45.3 14.4 (25.1)

in % of GDP 8.8 9.9 12.4 15.0 16.0


growth in % yoy 18.0 21.4 35.5 16.4 (13.2)

in % of GDP 2.8 2.9 3.4 4.2 5.1


growth in % yoy 13.0 14.9 3.4 9.3 14.4

in % of GDP 8.7 8.5 7.6 8.8 14.3



growth in % yoy 32.3 19.6 20.3 2.5 (18.0)

in % of GDP 45.3 46.5 47.9 52.1 60.6


growth in % yoy 41.1 17.0 25.2 5.8 (28.0)

in % of GDP 21.2 21.3 22.9 25.6 26.2


Number of banks 1,012 978 956 923 834

Market share of state-owned banks (% of total assets)** 46 52 53 54.7 55.0

Market share of banks over 50% foreign ownership (% of total assets)* 18.0 16.9 17.8 15.3 13.9

Market share of 100% foreign-owned banks (% of total assets)** 8.1 8.5 7.9 7.7 7.6 Profi tability and effi ciency

Return on Assets (RoA %) 1.9 2.4 2.3 1.9 0.9

Return on Equity (RoE %) 12.5 17.6 18.2 15.2 7.9

Capital adequacy (CAR % of risk weighted assets) 18.1 14.7 13.7 13.5 12.5

Non-performing loans (% of total loans) 5.7 5.0 4.8 4.3 5.0 * As reported by the CBR, ** RBI/Raiffeisen RESEARCH estimate; *** LCY depreciation against the EUR in 2014: -38%; Source: CBR, RBC-Rating, RBI/Raiffeisen RESEARCH

ing sector RoE of 8% and an RoA of 0.9%, compared to 15% and 1.9%, respectively, in 2013. In turn, limited earning capacity creates pressure on capital, which is why the capitaliza-tion ratios of 2014 are fairly low by historical standards. The government has been strongly supportive to the banking sector, with measures aimed to boost banks’ liquidity and capital-ization; bail-outs, and vast funding support to systemic borrowers. Private funding, however, continues to be dif-ficult in 2015, as the propensity of the private sector to save is declining and the extensive cut-off from international markets stays. Deposits showed two counteracting trends at end-2014: withdrawals by households versus excessive savings by corporates against the due debt repayment. With stickiness of the former, and gradual disposal of the latter, preventing a decrease of the deposit base will be possible, in our view, only on funding support from government sources.


Sberbank, 28.1%

VTB Group*, 17.0%

Gazprombank, 5.9%RusAgro, 2.6%

Alfa Bank, 2.7%

Otkrytie Financial Corporation, 4.5%

UniCredit, 1.7%

Promsviazbank, 1.4%


SocGen*, 1.5%

Others, 33.4%


* VTB Group = VTB, VTB 24, Bank of Moscow, Transcreditbank; SocGen = Rosbank, Rusfinance and Deltacredit; % of total assets; Source: RBC-Rating, RBI/Raiffeisen RESEARCH



Ukraine 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 4.1 5.5 0.2 0.2 -6.8 -10.0 1.5

Consumer prices (avg, % yoy) 9.4 8.0 0.6 -0.2 12.1 53.7 14.0






EUR/LCY (avg) 10.55 11.12 10.39 10.83 15.89 24.64 29.84


Ukraine

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Ukraine vs. all other CEE marketsSource: NBU, national sources, RBI/Raiffeisen RESEARCH

Exhausted by 2014 crisis, longing for stabilization and reforms

-20-10

0102030405060

Jan-09 May-10 Sep-11 Jan-13 May-14



Lending growth*

* in LCY-termsSource: NBU, RBI/Raiffeisen RESEARCH

Ukraine is experiencing one of the most challenging periods in its modern history. The ongoing economic, social and political crisis has hit all market segments and the banking sector in particular. Industrial output decline, capital outflows, job cuts, and the vast volatility of the monetary fundamentals and the exchange rate created an extremely challenging environment for local banks.One of the key problems currently faced by Ukrainian banks is the liquidity short-age, enhanced by vast deposit outflow. During 2014, the Ukrainian banking sec-tor lost UAH 200 bn in deposits, which is about 15% of the banking sector’s to-tal assets. As a result, banks faced a liquidity crunch, and many of them had no other option but to close and leave the market. Since the beginning of the cri-sis, 44 banks were assimilated by the Deposit Guarantee Fund, thus leaving the market. It is likely that between 30 and 40 more financial institutions will do like-wise in 2015. The rapid and sharp worsening of the economic environment has also caused a spike in the NPL ratio. Since the latest official data on NPLs are not yet available, we rely on an IMF estimate of an NPL ratio of 32% as at year-end 2014. We expect the final figure to be even above this estimate and, based on experience from previous systemic crises, to climb to around 40% to 50% of total loans. In addition to the revenue shortfall due to escalated credit and market risks and the vastly depreciated domestic currency, banks are forced to create extra provi-sioning for bad loans and FCY-denominated loans. As a result, the total banking sector loss reached UAH 53 bn as at year-end 2014. According to IMF data, the system’s RoE was minus 30.5% as of December 2014, 14 banks failed to meet the Tier 1 CAR requirements (2013: 8 banks), and 34 banks failed to meet pru-dential regulation requirements (2013: 26).In March 2015, the IMF Executive Board approved a new four-year Extended Fund Facility program for Ukraine totaling USD 17.5 bn. The first tranche of USD 5 bn was already released, USD 2.7 bn thereof aimed at supporting the budget. The remaining amount was used for replenishing National Bank FX-reserves. The key requirement of the new IMF program was the de-escalation of the conflict in the Eastern regions of the country. It is based on the expectation that the Ukrain-ian economy will eventually cease to feel the impact of the conflict and start per-forming again in 2016 (after a deep recession in 2015).

Systemic crisis exposed banking system to multiple troubles regarding credit risk, funding and liquidity matters The banking sector’s solvency is clearly at risk The IMF program should bring stabilization and relief, but implementation is very challenging


Ukraine

Key banking sector indicatorsBalance sheet data 2010 2011 2012 2013 2014**


growth in % yoy 15.0 15.4 4.5 7.8 (40.3)

in % of GDP 87.0 81.3 80.0 88.5 86.0


growth in % yoy 8.3 12.5 0.1 6.3 (37.1)

in % of GDP 66.9 60.9 57.4 62.7 64.1


growth in % yoy 15.9 17.9 2.9 8.7 (35.0)

in % of GDP 48.0 45.8 44.4 49.6 52.4


growth in % yoy (6.7) (1.4) (8.4) (2.1) (44.9)

in % of GDP 18.9 15.1 13.0 13.1 11.7


growth in % yoy (4.8) (13.3) (18.0) (44.0) (18.9)

in % of GDP 8.6 6.0 4.6 2.7 3.5


growth in % yoy (1.5) (1.6) (9.0) (2.3) (12.8)

in % of GDP 31.2 24.8 21.3 21.3 30.2



growth in % yoy 35.8 20.7 15.4 11.0 (41.2)

in % of GDP 38.3 37.4 40.6 46.3 44.2


growth in % yoy 38.0 16.2 17.8 12.6 (44.8)

in % of GDP 25.1 23.6 26.2 30.3 27.2


Number of banks 176 176 176 180 163



Return on Assets (RoA) (1.5) (0.8) 0.5 0.1 (4.1)

Return on Equity (RoE) (10.2) (5.3) 3.0 0.8 (30.5)


Non-performing loans (% of total loans)* 42.0 40.0 37.5 37.5 40.0* Average of “unofficial” estimates based on IFRS estimates; **LCY depreciation against the EUR in 2014: -41%Source: NBU, RBI/Raiffeisen RESEARCH

In addition, and this is most impor-tant, the IMF program provides assis-tance for urgently needed reforms of economic governance and the fight against corruption, for the energy sec-tor, as well as optimizations in public spending and improvements in invest-ment climate. It is partly related to the banking system and envisages a set of measures for its stabilization, aimed at providing general monetary stabil-ity and economic growth. (For more details on the IMF program, please refer to our section on page 54.) All in all, the described set of IMF-meas-ures, if implemented as stated, should be strongly supportive to the Ukrain-ian economy and monetary system. However – as it is always the case during crises – there are major risks on the execu-tion side. Not only is enough political will required to perform all the needed steps, it is also necessary to reach an accord within the Ukrainian society to ensure general public support of the government in implementing these reforms.

Financial analyst: Ludmilla Zagoruyko (+380 44 49087-72), Raiffeisen Bank Aval JSC, Kiev

PrivatBank, 15.5%

Oshadbank, 9.7%

Ukreximbank, 9.6%

Delta, 4.6%

Prominvestbank, 4.0%

Ukrsotsbank (UniCredit), 3.7%

Raiffeisen Bank Aval, 3.6%

Sberbank, 3.5%Alfa, 2.8%

VTB, 2.8%

Others, 40.3%


% of total assetsSource: NBU, RBI/Raiffeisen RESEARCH


Belarus

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2014, red triangle shows Belarus vs. all other CEE marketsSource: NBB, national sources, RBI/Raiffeisen RESEARCH

Weak economy tests the banking sector’s resilience

20

35

50

65

80

95

Jan-09 May-10 Sep-11 Jan-13 May-14



Lending growth*

* in LCY-termsSource: NBB, RBI/Raiffeisen RESEARCH

In 2014, the economic slump and the currency devaluation in Russia and Ukraine negatively impacted the Belarusian economy, resulting in increased expectations of currency weakening and a 30% BYR depreciation. The situation in the Belarusian banking sector faced a steep deterioration at the end of 2014. In December, on high devaluation expectations, the banking sys-tem faced massive withdrawals of household deposits, namely more than BYR 6.1 bn or 8% of total BYR deposits. At the same time, net FCY purchase by house-holds amounted to USD 900 mn, as the withdrawn BYR deposits were converted into FCY. In order to prevent a strong FX reserves decline and to limit BYR money supply as well as to eliminate the excessive demand for FX, the National Bank (NBB) implemented countermeasures. These measures included stricter require-ments for the mandatory sale of FCY revenues, which were lifted in April 2015, and increased the key interest rate by 500 bp to 25% per annum. Subsequent to this and in order to reduce the negative impact on the local banks’ liquidity re-sulting from the BYR depreciation, the NBB reduced the minimum reserve require-ment on FCY deposits from 13% to 10% in early 2015. As the problems in the banking sector only started to accumulate towards the end of 2014, its yearly performance statistics were not yet significantly affected. Until the liquidity prob-lems started in December, the NBB’s measures were aimed at the ongoing limita-tion of FCY lending and the reduction of interest rates on loans. As a result, retail loan growth dropped from 34% in 2013 to 16% in 2014, and corporate lend-ing growth was down to 22% in 2014 (compared to 27% in the previous year). The loan volume increased in line with deposit growth, resulting in an L/D ra-tio slightly below 150%, as the banks’ dependency on external funding contin-ued. As a result, RoA and RoE also declined yoy to 1.7% and 13.1 %, respec-tively. The Belarusian banking sector remained decently capitalized, with an in-creased CAR of 17.4%.According to local standards, non-performing assets remained at the level of 4.4%, while NPLs increased slightly to 0.9%. They stayed low partially due to the activity of the Development Bank of the Republic of Belarus, which provides loans under government programs and helps to mop the NPLs out of the commer-cial banking sector.

Slowdown of economy resulted in reduction of lending activity Banks stayed profi table amidst weakening economic environment Further increase of NPLs possible


Belarus 2010 2011 2012 2013 2014 2015f 2016f



Real GDP (% yoy) 7.7 5.5 1.7 1.0 1.6 -2.0 1.0



General budget balance (% of GDP) -2.6 2.1 0.5 0.2 1.0 -1.0 0.0




EUR/LCY (avg) 3,952.60 7,219.56 10,746.59 11,833.61 13,597.18 16,263.00 19,364.00



Belarus



growth in % yoy 58.3 (25.2) 17.9 6.6 10.8

in % of GDP 78.3 94.6 60.9 62.1 61.9


growth in % yoy 44.2 (38.8) 30.1 11.4 10.1

in % of GDP 54.5 53.9 38.3 40.7 40.3


growth in % yoy 43.3 (35.5) 33.0 10.1 11.2

in % of GDP 40.6 42.2 30.7 32.3 32.3


growth in % yoy 47.0 (48.1) 19.6 16.4 6.1

in % of GDP 13.9 11.7 7.6 8.5 8.1


growth in % yoy 5.8 11.6 49.7 22.9 11.5

in % of GDP 11.8 21.3 17.4 20.5 20.5



growth in % yoy 35.8 (16.0) 40.1 3.6 12.4

in % of GDP 26.4 35.8 27.4 27.1 27.4


growth in % yoy 30.7 (21.5) 51.7 13.7 19.4

in % of GDP 14.1 17.9 14.8 16.1 17.3








Non-performing loans (% of total loans) 0.7 0.5 0.5 0.8 0.9 Source: NBB, RBI/Raiffeisen RESEARCH

The performance of the Belarusian banking sector in 2015 is likely to re-main subdued because of weaker Rus-sian demand, a shrinking economy, high inflation and possible ongoing BYR devaluation. It can be expected that banks will see an increased NPL ratio, less profitability, and continued pressures on capital ratios and fund-ing stability. Loan and asset growth is set to moderate levels at best, in nom-inal terms. Effective January 2015, the main change in the regulatory environment includes an increase of the income tax rate for banks and insurance compa-nies from 18% to 25%. There were no major changes in the banking landscape, and state-owned banks continued to dominate the Belarusian banking sector with 64% of total assets. One of the largest M&A deals in 2014 was the sale of Moscow-Minsk Bank, a Belarusian subsidiary of the Bank of Moscow (a member of Russian VTB Group), to NBB (99.75%) and state-owned JSC Paritetbank (0.25%). The main reasons for the acquisition were to avoid sanctions imposed on VTB group and to increase the bank’s capitali-zation. Some potential for further M&A activity remains in place, given the tough competition between the market players.

Financial analyst: Mariya Keda (+375 17 2899231), Priorbank Open Joint-Stock Company, Minsk

Belarusbank, 41.8%

Belagroprombank, 16.3%

BPS-Sberbank, 10.4%

Belinvestbank, 5.9%

Bank Bel (VEB), 5.1%

Belgazprombank, 4.7%

Priorbank (Raiffeisen), 4.4%

Bank VTB Belarus, 2.5%

Others, 9.0%


% of total assetsSource: NBB, RBI/Raiffeisen RESEARCH


Ukraine

The IMF/IFI support package (updated in March 2015) is based on 4 pillars:

Flexible and stable FX policy (although commitments to inflation targeting as well as a flexible FX rate do remain on the table)

Strengthening banking supervision and supporting banking sector restructuring Reduction of government spending, restructuring of public and private debt Improvement of business climate and deregulation

According to the current IMF program, the restructuring of the Ukrainian banking system will be based on a detailed monitoring of insider lending to related par-ties. The planned prudential review of related party lending (supported by inter-national accounting firms to guarantee creditability) definitely offers some room for negative surprises, given the large corporate loan books in the Ukrainian banking sector (around 70% to 80% of total loans). Systemic risks in this field will be monitored by a special unit of the National Bank of Ukraine (NBU) focus-sing on mapping the largest industrial and financial groups in the country. More-over, legislative changes have already been adopted and increased bank own-ers’ responsibility in case their banks violate prudential requirements. Envisaged changes in banking regulation also include the establishment of a credit registry within the NBU, a transition to IFRS by mid-2015 as well as a strategy to monitor the largest banks in detail until September 2015 (later the standards used here should be applied to the overall sector). Under the IMF framework Ukrainian au-thorities are also showing commitment to strengthen the NPL resolution frame-work with a focus on out-of-court restructuring and bilateral agreements between lenders and borrowers regarding FX exposures (based on an official guidance for negotiations). A more effective handling of NPLs will definitely be a key mea-sure. NPL exposures from the last crisis (2008/09) stayed within the banking sys-tem for too long (partially still burdening the banks). Moreover, the overall gov-ernance structure and banking sector monitoring capabilities at the NBU will be strengthened, while there will be also a detailed regular reporting to the IMF re-garding banking sector issues. The latter may help to avoid worst case scenarios.Nevertheless, the IMF estimates that the total amount of funds needed to recapi-talize the banking system in Ukraine will amount to some 9.25% of the GDP (in 2014/15). Banks’ recapitalization strategy, as proposed by the IMF, will take an updated diagnostic study of the banking system’s health into account, based on more adverse macroeconomic scenarios. A new diagnostic survey for the Top 10 banks will be provided by the end of July 2015. The IMF considers the infusion of banks’ owners funds and own capital as the best option for recapitalization. However, the IMF reserves 4% of the GDP in public funds as a buffer that could be used to restructure and recapitalize local banks. For foreign-owned banks a recapitalization by their owners is expected, while we may also see a partner-ing with the EBRD or other IFIs given the very high-risk environment in Ukraine. The new IMF program is based on a UAH/USD rate of 22 as at year-end 2015, an average UAH/USD rate of 21.7 in 2015 as well as a an update expecta-tion for a GDP drop by -9% (as of May 2015, previously -5%). Macro-financial risks do remain with the Ukrainian banking sector given the still fragile situation in the first half of 2015. Hence, we fully agree with the IMF’s take that there are still “exceptionally high” risks down the road during the process of restoring eco-nomic and financial stability in Ukraine.

Financial analysts: Gunter Deuber, RBI Vienna

Ludmilla Zagoruyko, Raiffeisen Bank Aval JSC, Kiev

Focus on Ukraine: Key provisions of IMF program

72%

28%

Non-financial corporations Other**

Sectoral distribution domestic loans*

* % of total loans to residents (96.1% of total loans, loans to non-residents at 3.9% of total loans)** Other financial corporations, private individuals, governmentSource: NBU, IMF, RBI/Raiffeisen RESEARCH

160

170

180

190

200

00 02 04 06 08 10 12 14

Number of banks

UA: Consolidation dynamics

Source: NBU, RBI/Raiffeisen RESEARCH

-20

-15

-10

-5

0

5

10

-40

-30

-20

-10

0

10

20

01 02 03 04 05 06 07 08 09 10 11 12 13 14

RoE (%)Number of banks opened/closed (r.h.s.)

UA: Profi tability and consolidation

Source: NBU, RBI/Raiffeisen RESEARCH


Market players in CEE

CEE: Market presence and networks of international banks****

2014

PLH

UC

ZSK

SIBG

ROH

RA

LRS

ME

BHKO

MK

BYRU

UA

KZM

DG

EN

o. o

fco

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ies

No.

of

bran

ches

2014

Sber

bank

4827

4512

3134

5813

917

,046

228

117

1117

,785

SocG

en48

839

856

149

860

119

4010

419

2860

050

4113

2,95

2

RBI

351

114

127

178

1415

652

977

9285

9652

9721

267

115

2,85

1

Uni

Cre

dit*

1,03

685

183

3320

318

413

772

120

110

291

122,

454

VTB

157

1,70

060

2332

51,

972

Erste

128

644

292

538

158

686

1,82

8

OTP

380

6138

584

117

5129

198

116

91,

421

Inte

sa

9523

452

7119

732

177

5161

234

101,

204

Sant

ande

r**

961

196

1

KBC

***

210

319

129

103

476

1

NBG

199

115

2710

965

551

5

EFG

179

176

953

450

Alp

ha B

ank

8614

940

8118

537

4

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27

269

426

4

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RCH

* SK

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173

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***

BG in

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Raiffeisen Bank International

Substantial group transformation program launched in early 2015 Exit from Poland and Slovenia as well as sale of direct banking unit ZUNO Targets CET1 of 12% by year-end 2017 and a medium-term consolidated RoE of 11%

With reported aggregated assets of EUR 78.7 bn in CEE and a presence in 15 regional markets, Raiffeisen Bank International (RBI) ranks No. 4 in CEE. While RBI’s regional footprint remained unchanged over the past years, its man-agement revealed a revised strategy in February 2015. The clear group tar-get is to further raise capital buffers (target CET1 ratio, fully loaded, of 12% by year-end 2017 compared to 10% at year-end 2014). The measures to be imple-mented include the sale of the operations in Poland and Slovenia as well as its direct banking unit ZUNO. The rationale for exiting the Polish market was that a further participation in the ongoing market consolidation would require substan-tial additional capital resources, whereas a market exit is calculated in resulting in a EUR 7.7 bn RWA relief. The reason for the sale of the Slovenian operations is the limited strategic relevance of the market for RBI’s overall CEE network. As part of the drive to further increase the group’s focus on the CEE region, it is planned to significantly scale back or exit niche player operations in Asia and the US.

In addition, RBI’s management plans to rescale its operations in Russia and tar-gets an RWA reduction of 20% in EUR-terms based on a footprint optimization (e.g. exit of six regions in the far east of Russia) and focus on top-tier corporates, trade finance and affluent retail banking. A reduction in exposure is also fore-seen in Ukraine, where RWAs will be decreased by about 30% in EUR-terms by year-end 2017. In Hungary, a further optimization of the operation will be under-taken with focus on corporate and affluent retail banking. Overall, the targeted gross RWA reduction of about EUR 16 bn from 2015 to 2017 should give room for further growth in core CEE markets (EUR 7 bn business growth in RWA tar-geted for the next three years).

The aggregated lending volume of RBI’s CEE entities decreased by 4.2% due to LCY depreciation and more restrictive lending in Ukraine and Russia. It was partly offset by volume growth in Slovakia (retail and corporates) and Poland (corporates). The local funding improved evidenced by an aggregated L/D ratio in CEE of 107% in 2014 compared to 109% in 2013. In the majority of coun-tries, the asset quality (NPL ratio) improved in 2014 (especially in Bulgaria, the Czech Republic, Hungary, Poland and Romania), while Ukraine (NPL ratio: 46%) and to a much lower extent also Russian operations (NPL ratio: 5.9%) have seen a weakening in credit quality. Overall, RBI managed to increase the NPL cover-age in the CEE region by 810 bp to 71.5%.

Key business position indicators in CEE

2010 2011 2012 2013 2014


Number of countries in CEE 15 15 15 15 15

Market share in CEE (% of total assets) 3.8% 3.5% 3.4% 3.2% 3.3%

Number of branches in CEE 2,947 2,914 3,093 3,010 2,851Source: company data, calculation by RBI/Raiffeisen RESEARCH

46

48

50

52

54

56

58

60

2012 2013 2014

Loans Deposits

Loans and deposits in CEE*

* EUR bn, aggregated data of CEE subsidiariesSource: company data

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2010

2011

2012

2013

2014

NPL Ratio (r.h.s.)Annual provisioning/Gross loans

Asset quality in CEE*

* aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH


RBI’s 2014 results (EUR 493 mn net loss on group level, EUR 221 mn net profit in CEE) have been character-ized by negative one-offs of about EUR 780 mn (EUR 306 mn goodwill impairments in Russia, Poland and Al-bania; EUR 251 mn impact from re-tail government measures in Hungary; EUR 196 mn deferred tax asset write-down and EUR 30 mn intangibles im-pairment in Ukraine). On a group level, the net interest margin slightly widened by 13 bp to 3.24% on re-pricing initiatives and higher margins in Russia, Ukraine and Belarus. Risk costs, however, jumped from 139 bp in 2013 to 210 bp driven by higher provisioning in Ukraine, Asia and Russia. On contrast, CE/SEE markets saw lower risk costs.

For 2015 and H2 in particular, RBI’s management still expects net provisioning to remain elevated, but below the levels of 2014. The consolidated result might still be negative, as the majority of restructuring costs (around EUR 550 mn) are ex-pected to be booked in 2015. After the implementation of the above mentioned strategic measures, RBI’s cost base should be 20% below the level of 2014 (at constant FX rates) and the RoE is targeted at about 11% in the medium-term (14% pre-tax RoE).

Financial analysts: Text: Stefan Maxian, Raiffeisen Centrobank

Data: Jovan Sikimic, Raiffeisen Centrobank


Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR)

2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 1.3% 3.6% 6.4% -3.7% -2.8%

Loans/total assets (%) 69% 69% 70% 70% 69%

Retail loans/total loans (%) 47% 45% 50% 52% 51%

Corporate loans/total loans (%) 52% 53% 48% 46% 47%Credit risk

Growth customer loans (% yoy)* 4.7% 3.7% -2.2% -2.8% -4.2%

Gross non-performing loans (% of total loans) 10.8% 11.4% 12.0% 12.3% 11.9%

Loan loss reserves/non-performing loans (%) 55% 65% 65% 66% 71%

Annual provisioning/customer loans (%) 2.0% 1.8% 1.5% 1.6% 2.2%

Funding

Customer deposits/total assets (%) 59% 63% 64% 65% 65%

Customer loans/customer deposits (%) 118% 110% 108% 109% 107%

Deposit growth (% yoy) 5.2% 11.3% 8.7% -3.2% -2.3%Profi tability and capitalization**

Cost/Income (%) 55% 56% 58% 57% 57%

NII/total assets (%) 3.9% 3.8% 3.7% 3.9% 3.9%

Return on Assets (pre-tax proportional, %) 1.08% 1.20% 1.23% 1.42% 0.52%

Profit before tax (EUR mn, proportional) 823 948 1,034 1,148 411

Total CAR ratio (%), at the group level 13.3% 13.5% 15.6% 15.9% 16.0%

Tier-1 ratio (%), at the group level 9.7% 9.9% 11.2% 11.2% 10.9%

Core Tier-1 ratio (%), at the group level 8.9% 9.0% 10.7% 10.7% 10.9%* adjusted for M&A** 2013; 2014 transitional acc. to Basel 2.5Source: company data, calculation by RBI/Raiffeisen RESEARCH

Countries of signifi cant presence in CEE (% of total assets)

Banks’ market share (%) Overall market data

Market share foreign-owned banks (%)

Market share Top 5 banks (%)

2009 2014 2009 2014 2014

Poland 2.3 2.3 62.9 59.5 49.0Hungary* 7 6.7 69.2 60.8 50.0Czech Republic 4.9 3.9 87.1 83.5 63.0Slovakia 17.6 16.6 98.8 98.5 63.2Romania 7.1 7.9 85.3 89.9 54.1Bulgaria 11 7 83.5 76.3 54.3Serbia 8.3 7.3 74.3 74.5 50.0Bosnia a.H. 21.6 16.7 95.0 90.0 64.5Russia** 1.4 1.1 8.6 7.6 56.4* foreign-owned banks excl. OTP** 100% of foreign-owned banksSource: company data, national sources, RBI/Raiffeisen RESEARCH



Erste Group

Unchanged regional footprint; interest in Poland remains in the medium-term Signifi cant impairments and risk provisions affected 2014 results, turnaround penciled for 2015 Hungarian government and the EBRD to acquire stake in Erste HU

Since exiting Ukraine two years ago, Erste Group has not changed its regional footprint with a strong retail franchise in the Czech Republic, Slovakia, Hungary, Croatia and Romania. While the management still expressed interest in enter-ing the Polish market in the long-term, it ruled out any acquisition within the next two years. The current capitalization level and valuation differential between the Erste Group share and potential Polish targets would not allow such a step. In the short- to medium-term, rather bold-on acquisitions to improve the market share in existing countries might be on the agenda. This was evidenced by Erste’s interest in Citi’s retail portfolio in Hungary and in the Czech Republic. In the past year, the management’s attention was on restructuring the group’s Romanian and Hun-garian operations with the target to return to positive profitability in 2015 (Roma-nia) and 2016 (Hungary). Also, on group level several restructuring steps have been undertaken with the target to transfer a larger part of the corporate busi-ness gradually to local banks.

In Hungary, Erste Group signed an agreement with the government and the EBRD that is aimed to enhance the effectiveness of the Hungarian banking sector via a series of measures (substantial reduction of the banking tax, no further costs in the FX conversion process, no new laws dragging on banks’ profitability, ensur-ing fair competition among local and foreign players). Based on this agreement, Erste Group has invited the government and the EBRD to invest in its local oper-ation via the acquisition of a 15% stake each. Negotiations are in progress and the government has set aside HUF 15 bn in the 2015 budget for the purchase of a 15% stake in Erste Hungary. In exchange, Erste announced the introduction of several programs to support lending growth over a period of three years.

Overall CEE lending volume was eroding by 3% attributable to FX retail loan con-version and muted lending activity in Hungary (down 20% yoy in EUR-terms) and NPL sales and selective SME lending in Romania. While other markets showed flat or slightly increasing loan volumes yoy, Erste’s Slovakian unit reported a 12% loan growth based on market share gains and a stronger demand for consumer and mortgage loans. Given its strong retail franchise in the Czech Republic and Slovakia, Erste’s funding position in CEE remains favorable with a regional L/D ratio of 92%. For 2015, the management expects low single digit loan growth on group level with contributions from all countries (except Croatia). The NPL ra-tio in CEE improved from 14.2% in the fourth quarter of 2013 to 12.3% in the fourth quarter of 2014 (11.6% in the first quarter of 2015) based on a 16%


2010 2011 2012 2013 2014





44

46

48

50

52

54

56

2012 2013 2014

Loans Deposits



0.0%

5.0%

10.0%

15.0%

20.0%

0.00%

1.00%

2.00%

3.00%

4.00%

2010

2011

2012

2013

2014






decline in NPL stock driven by signif-icant NPL sales (mainly in Romania) and lower gross inflows on supportive trends overall (except Croatia).

Erste’s 2014 results (EUR 1,442 mn net loss on group level) were charac-terized by additional risk provisioning in Romania (EUR 400 mn) and impair-ment of intangibles in Romania (good-will, brand, customer stock of about EUR 810 mn), the effect of the Hun-garian consumer loan law including the FX mortgage conversion (EUR 312 mn) as well as impairments of goodwill in Croatia (EUR 156 mn) and deferred tax assets (EUR 197 mn). The first quarter result in 2015 demonstrated a strong re-bound (EUR 226 mn net profit) due to a significant decline in risk costs especially in Romania and Hungary. Targeting a ROTE of 8% to 10% for 2015, translat-ing into a net profit range of about EUR 700 mn to 900 mn, Erste’s management also expects the significant earnings rebound in 2015 based on a significant de-cline in risk costs towards a target range of EUR 1.0 bn to 1.2 bn. The operating result is expected to decline in the mid-single digits on the back of lower operat-ing result in Hungary (FX mortgage conversion, consumer loan law) and Roma-nia (lower unwinding impact post NPL sale) as well as NIM pressure given the low interest environment.




2010 2011 2012 2013 2014

Assets and loans*

Asset growth (% yoy) 5.8% 0.5% -0.2% -5.4% -5.2%




Growth customer loans (% yoy)** 5.2% 1.5% 0.1% -5.3% -2.8%



Annual provisioning/customer loans (%) 2.66% 3.30% 2.61% 2.07% 3.16%

Funding



Deposit growth (% yoy) 5.7% -0.8% 4.6% -3.0% -1.1%Profi tability and capitalization

Cost/Income (%) 43% 44% 45% 44% 45%

NII/total assets (%) 3.9% 3.9% 3.6% 3.5% 3.4%


Profit before tax (EUR mn, proportional) 951 519 810 829 3

Total CAR ratio (%)*** 13.5% 14.4% 15.5% 16.3% 15.7%

Tier-1 ratio (%), at the group level**** 11.8% 12.2% 13.5% 11.8% 10.6%

Core Tier-1 ratio (%), at the group level***** 9.2% 9.4% 11.2% 11.4% 10.6%* 2011 including Ukraine** adjusted for M&A*** 2014 - Basel 3 fully loaded; 2013 Basel 2.5 on total risk; 2010-2012 Basel 2 incl. participation capital**** 2014 - Basel 3 fully loaded; 2013 Basel 2.5 on total risk; 2010-2012 Basel 2 (credit risk) incl. participation capital***** 2014 - Basel 3 fully loaded; 2010 - 2013 acc. to Basel 2.5 on total risk; 2010-2012 inlcuding participation capitalSource: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Hungary* 8.5 5.9 69.2 60.8 50.0Czech Republic 20.3 15.9 87.1 83.5 63.0Slovakia 21.7 22.3 98.8 98.5 63.2Romania 19 16.2 85.3 89.9 54.1Croatia 13.7 14.9 90.9 88.3 75.4* foreign-owned banks excl. OTPSource: company data, national sources, RBI/Raiffeisen RESEARCH



OTP

Agreement with EBRD and banks should provide a more bank-friendly environment in Hungary Ukrainian and Russian operations expected to be loss making in 2015 Strong capitalization allows for further M&A activity

OTP did not change the setup of its CEE presence over the past years. Still, the bank closed two smaller acquisitions in 2014 and increased its market share in Croatia and Romania by buying Croatian assets from Italy’s Banco Populare and the Romanian entity of Portuguese BCP. The management continues to look at markets where OTP has subscale operations and opportunistically looks at other targets. The targeted year-end 2015 CET1 ratio of 13.5% (13.0% as of Q1) should provide room for further mid-scale M&A activity. In Russia, OTP’s manage-ment targets to reduce loan volumes and gradually shift operations from a POS/consumer credit focused bank towards a retail direct bank by launching a new direct bank (Touch Bank) with the focus on affluent and mass affluent segments.

In 2014, OTP had to swallow a HUF 156 bn P&L impact (after tax) of regula-tory changes related to consumer contracts in Hungary. On a retroactive basis, the use of FX conversion margins as well as several unilateral consumer contract amendments were declared unfair and void. Banks had to treat “overpayments” as principal pre-payments and adjust installments ahead of the conversion of FX mortgage loans. Besides the above mentioned one-off impact, OTP assumes that the new regulation will impact the bank’s NII by around HUF 10 bn to 12 bn annually. However, we expect at least some compensation of the NII impact by lower risk costs as the fading FX-related credit risk and reduced mortgage install-ments. Several government initiatives to revive loan growth should support the clearly improving risk costs trend of the past quarters. Earlier in 2015, the Hun-garian government and the EBRD sealed an agreement to enhance the effective-ness of the Hungarian banking sector via a series of measures to be implemented over the short- to medium-term, including a significant reduction of the banking tax, assurance of no further costs for FX mortgage conversion and the promise of no new laws or measures that may have a negative impact on the profitabil-ity of the banking sector. Also, the implementation of an enhanced Funding for Growth Scheme with cheap funding and partial risk sharing provided by the Central Bank should help to revive corporate lending and improve the sentiment among banks in Hungary.

Adjusted for FX effects, OTP’s gross loan volume dropped by 6% at group level in 2014. This drop was driven by a 12% loan volume decrease in Hungary due to the state bundling of municipal loans and further erosion of mortgage and con-sumer lending as well as a loan volume contraction of about 24% in Ukraine.


2010 2011 2012 2013 2014





19

20

21

22

23

24

25

2012 2013 2014Loans Deposits



0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

2010

2011

2012

2013

2014






On the other hand, loan growth was visible in Bulgaria (corporate lend-ing), Slovakia (consumer lending) and Serbia (corporate and consumer lend-ing). OTP’s funding profile improved on 11% deposit growth, which was mainly driven by 13% volume growth in Hungary (driven by institutional fund deposits and retail) and a 14% increase in Bulgaria.

The 2015 loan development should be impacted by FX conversion. Excluding this effect, loan volume should bottom-out low to mid-single digit in Hungary ac-cording to OTP. Apart from an upbeat outlook for OTP’s core markets Hungary and Bulgaria, the bank’s management still expects Ukrainian and Russian oper-ations to remain in the red in 2015, despite the already significant impairments of 2014.




2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 0.3% -6.4% 3.8% 0.2% 0.6%




Growth customer loans (% yoy)* 2.0% -8.2% 1.1% -3.3% -12.3%



Annual provisioning/customer loans (%) 3.67% 3.37% 3.40% 3.60% 3.85%Funding



Deposit growth (% yoy) -1.8% 2.4% 6.3% 2.7% 4.3%Profi tability and capitalization***

Cost/Income (%)** 43% 45% 46% 48% 50%

NII/total assets (%) 5.7% 6.1% 6.0% 5.8% 5.2%




Tier-1 ratio (%), at the group level 14.0% 13.3% 16.0% 17.4% n.a.

Core Tier-1 ratio (%), at the group level 12.1% 12.4% 15.1% 16.0% 14.1%* not adjusted for M&A and FX** operating cost/ NII+Fees+Other non-interest income*** from Q1 2014 the Basel 3 regulation has been appliedSource: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Hungary* 18.2 22 69.2 60.8 50.0Slovakia 2.7 2.5 98.8 98.5 63.2Bulgaria 12.5 11.7 83.5 76.3 54.3Croatia 3.5 3.9 90.9 88.3 75.4* foreign-owned banks excl. OTPSource: company data, national sources, RBI/Raiffeisen RESEARCH



UniCredit

CEE division posted good profi tability in 2014, supported by the group’s business streamlining in the region NPL ratio virtually unchanged in CEE, albeit credit risk costs decline Sober core funding supports further lending potential

UniCredit Group’s presence in the CEE region is one of the largest among the Western European banks, with total assets in the region over EUR 120 bn as at year-end 2014 (the bank’s CEE division and Poland, which is regarded as a separate division, taken together). The group remains committed to CEE and, al-though it implements certain downscaling adjustments in the most risky countries, it keeps its CEE assets and market shares high. The group’s CEE performance in 2014 was strong, as the restructuring and streamlining of the past years has started to pay off. Additional support comes from the macro upturn in the region as well as visible improvement of risk costs in most CEE countries. The group’s divisions in CEE and Poland delivered more than half of the group’s profits in 2014, albeit they were somewhat lower than in 2013 (profit before tax was down 4% yoy in the CEE division and 2% down yoy in Poland). Nevertheless, in nominal terms the consolidated profit of the CEE division exceeded EUR 1 billion in 2014 and profits in Poland contributed EUR 327 mn.

In 2014, UniCredit finalized the integration of its Czech and Slovak subsidiaries, completed the restructuring in the Balkans, and went on adjusting its branch net-works and the cost efficiency across the regional divisions. The result of the lat-ter was a 44% contraction of the number of branches in the CEE division, which has come down by about 450 branches (16%) between 2010 and 2014. The group’s Cost/Income ratio in CEE division thus recorded at 41.5% in 2014, which was one of the lowest among its peers (47% for Poland). In EE, UniCredit exited from Kazakhstan (sold to ATF bank in 2013) and keeps its Ukrainian unit for sale.

The group’s lending volume in the CEE region stayed approximately flat in 2014. Country-wise, however, the dynamics were diverse. The group’s lending (EUR-terms) saw the strongest momentum in Bulgaria (17% yoy growth), Poland (7% yoy), Serbia (6% yoy) and Romania (7% yoy). A lending contraction (in EUR-terms) was posted in Russia (down 7% yoy, while LCY-denominated loans saw growth largely due to the LCY depreciation), and Slovenia (down 8% yoy). The consolidated CEE RWA were still on the rise, with total RWA growth of 3% yoy in Poland, and 9% yoy in the CEE division.

Country-wise the group was by and large cash-flow positive in its CEE division countries, with only one market – Slovenia – posting a moderately negative per-formance in 2014. The major profit contributors were Poland, the Czech Re-

Key business position indicators in CEE*

2010 2011 2012 2013 2014




Number of branches in CEE 2,903 2,861 2,658 2,522 2,454* 2014 including Ukraine (held for sale); Baltics treated as 1 country; Source: company data, calculation by RBI/Raiffeisen RESEARCH

72

74

76

78

80

82




9.0%

10.0%

11.0%

12.0%

0.00%

0.50%

1.00%

1.50%

2.00%

2010

2011

2012

2013

2014






public, Slovakia and Russia. The latter was notwithstanding the headwinds of the second half of 2014. On the core funding side, we see the group to be well-positioned to get ready to a (widely expected) economic up-turn in the CEE region. Customer de-posit growth posted a sanguine 4% yoy growth in the CEE division and 2% yoy growth in Poland. As a result, the L/D ratio in the CEE division was 111% and 89% in Poland, allowing sufficient room for further expansion in case the macro-stance appears to be supportive.

Risk costs, one of the major weak points of UniCredit in the previous years, continue to be a main concern for the group’s financial performance, as they stay particularly high in Italy, the group’s home market. In the CEE region, however, the aggregate risk costs posted a no-table decline, from 192 bp in 2013 to 118 bp in 2014, signaling an improved asset quality of the newly uploaded loan book. The progress was especially no-table in Hungary, where the risk costs lowered from 270 bp in 2013 to 114 bp in 2014. The highest risk costs remain in SEE (e.g. Romania, Serbia) and Slove-nia. The NPL ratios both in the group’s CEE division and in Poland remain virtu-ally flat, with 12% in the former and just-below 7% in the latter.

Financial analysts: Text: Elena Romanova, RBI Vienna



2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 2.7% 5.2% 4.6% -1.2% 0.2%


Retail loans/total loans (%) n.a. n.a. n.a. n.a. n.a.

Corporate loans/total loans (%) n.a. n.a. n.a. n.a. n.a.Credit risk

Growth customer loans (% yoy)* 5.8% 5.1% -0.5% 3.9% 0.5%


Loan loss reserves/non-performing loans (%)** 54% 53% 56% 57% 59%




Deposit growth (% yoy) 4.9% 6.4% 4.4% 3.8% 1.9%Profi tability and capitalization***

Cost/Income (%) 47% 46% 45% 44% 44%

NII/total assets (%) 3.2% 3.1% 2.8% 2.7% 2.8%


Profit before tax (EUR mn, proportional) 1,185 1,589 1,661 1,512 1,506



Core Tier-1 ratio (%), at the group level 8.6% 8.4% 10.8% 9.6% 10.4%* not adjusted for M&A** incl. Turkey for 2010-2012 *** 2012, 2013 transitional; 2014 fully loaded Basel 3Source: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Poland 10.6 5.9 62.9 59.5 49.0Czech Republic 6.4 9.1 87.1 83.5 63.0Hungary* 5.2 7 69.2 60.8 50.0Romania 6 7.9 85.3 89.9 54.1Croatia 25.3 25.4 90.9 88.3 75.4Bulgaria 16.3 17.4 83.5 76.3 54.3Serbia 5.8 8.7 74.3 74.5 50.0Bosnia a.H.** 16.4 21.6 95.0 90.0 64.5Russia*** 2.1 1.7 8.6 7.6 56.4* foreign-owned banks excl. OTP** UniCredit bank and UniCredit bank Banja Luka*** 100% of foreign-owned banksSource: company data, national sources, RBI/Raiffeisen RESEARCH



Société Générale

SocGen committed to Russia; expects loss in 2015 there due to high risk costs Czech operations traditionally stable for the highly capitalized bank Management expects turnaround in Romania on lower risk costs

SocGen’s footprint in CEE has been unchanged over the past twelve months. The bank remains committed to the region (including Russia) and would be ready to take expansionary steps in Poland. Its largest presence is still in the Czech Re-public, Russia and Romania, followed (with quite a gap) by Croatia, Serbia and Poland. The Czech Republic (capital, growth): Komerèní banka delivered a moderate 4% net profit growth in 2014, driven by a visible improvement of risk provisioning (minus 25%), while the low interest rate environment curbed income (minus 1%) despite a 5% loan growth. The bank managed to maintain its solid cost efficiency as well as its excellent capitalization and funding profile. With regard to 2015, management forecasts a loan growth of 5% to 6% with accelerating trends in consumer lending, SME and large corporates, while deposit growth should come down to 3% (from 8% in 2014). The outlook for revenues remains muted with net interest income remaining flat given pressure on NIM – which should shrink from 2.6% to 2.4% – and slightly eroding F&CI due to ongoing re-pricing effects. On the other hand, management expects flat Opex and at the current stage does not see any reason for weakening credit quality, keeping the risk cost guidance at 5 bp to 45 bp for corporate loans and at 30 bp to 45 bp for retail business. Given the group’s strong capitalization – targeting a CET1 range of 15% to 16% – Komerèní banka will likely keep up its generous dividend pay-out ratios of 80% to 100% for the next two years. Romania (recovery): For the past couple of years, SocGen’s BRD has been strug-gling to get rid of its largest challenge, namely high risk costs (exceeding 300 bp). After aggressively allocating provisions and writing off NPLs, there is more confidence in the balance sheet which could pave the way to the first meaning-ful drop in risk cost to normalized levels close to approximately 150 bp in 2015. Also, the statement of the head of the supervisory board of the Romanian Cen-tral Bank, who said that he was quite pleased with the level of provisioning, pro-vides some tailwind. Separately, BRD’s management expects revenue growth of 3% yoy on a flat NIM-development and slightly higher fees and commissions that will be fuelled by a 4.5% loan growth, while Opex is forecasted to increase by a marginal 1.5% yoy. Consequently, 2015 should be the year in which the group could return to the profitable path after three years of losses.Russia (challenge): SocGen Russia comprises Rosbank (consumer finance), Delta Credit (mortgage lender) and Rusfinance (car loans unit). The operations’ profita-bility in 2014 was affected by the RUB depreciation and soaring (retail) risk pro-visioning resulting in a moderate EUR 28 mn net profit. SocGen underscores its


2010 2011 2012 2013 2014




Number of branches in CEE* 2,740 2,725 2,675 3,019 2,952* 2012 without Poland (n.a.); Source: company data, calculation by RBI/Raiffeisen RESEARCH

42

44

46

48

50

52

2012 2013 2014

Loans Deposits



0.0%

5.0%

10.0%

15.0%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2010

2011

2012

2013

2014






strong cost efficiency in RUB-terms as well as the resilient revenue develop-ment. Following de-risking initiatives, the NPL ratio came down to 8.5%. The segmental performance was also impacted by the EUR 525 mn good-will write-off that was booked in the first quarter of 2014.

In the course of the group’s results re-lease for the first quarter of 2015, the management announced that it would probably post a loss in Russia in 2015 in the amount of EUR 250 mn to 300 mn, driven by a soaring risk cost outlook of 400 bp to 500 bp as NPLs will con-tinue to rise amid a difficult macroeconomic situation and high inflation. Recently, the Deputy CEO confirmed SocGen’s commitment to Russia as well as a contin-uous liquidity improvement but also announced changes in the lending criteria. Management expects less activity on the retail side while the corporate situation remains good overall. On top of that, the bank said to have introduced meas-ures of defense against falling profits, like the plan to cut about 2,500 jobs (out of 20,500 in total) during 2015.Poland (potential expansion): SocGen is operating in Poland via its small subsid-iary Eurobank (about EUR 3 bn in total assets). Recent comments from the French group seem to point to a rising appetite for an increased presence, as SocGen has confirmed its interest in a minority stake in Alior Bank, a local retail bank.

Financial analysts: Text: Jovan Sikimic, Raiffeisen Centrobank



2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 6.2% 8.6% 4.6% -3.0% 1.6%




Growth customer loans (% yoy)* 10.5% 6.7% 4.5% 0.6% -10.7%

Gross non-performing loans (% of total loans)** 11.1% 11.6% 10.8% 11.4% 8.3%

Loan loss reserves/non-performing loans (%) n.a. n.a. n.a. n.a. n.a.

Annual provisioning/customer loans (%)** 1.98% 1.35% 1.77% 2.07% 1.98%Funding



Deposit growth (% yoy) 1.8% 4.0% 2.9% 5.9% 4.1%Profi tability and capitalization***

Cost/Income (%)** 56% 61% 61% 57% 60%

NII/total assets (%) n.a. n.a. n.a. n.a. n.a.

Return on Assets (pre-tax proportional, %)** 0.4% 0.6% 0.3% 0.4% 0.4%

Profit before tax (EUR mn, proportional)** 262 417 216 291 308

Total CAR ratio (%), at the group level n.a 11.9% 12.7% 13.4% 14.3%


Core Tier-1 ratio (%), at the group level 8.5% 9.0% 10.7% 10.0% 10.1%* adjusted for M&A** only for CZ, RO, RU*** 2013, 2014 Basel 3 fully loaded Danish compromise; 2011, 2012 Basel 2.5 ; 2010 Basel 2Source: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Poland n.a. 0.8 62.9 59.5 49.0Czech Republic 16.4 15.7 87.1 83.5 63.0Romania 13.1 12.4 85.3 89.9 54.1Croatia 7.5 7.1 90.9 88.3 75.4Bulgaria 4.2 5.4 83.5 76.3 54.3Serbia 4.3 7 74.3 74.5 50.0Russia* 1.9 1.5 8.6 7.6 56.4* 100% of foreign-owned banksSource: company data, national sources, RBI/Raiffeisen RESEARCH



KBC

After divestments in previous years, KBC now focuses on four core markets Czech operations by far the strongest contributor to group earnings Improving asset quality in Hungary, but impact from one-off charge

After several divestments made over the past years in Poland (sold Kredyt Bank to Santander), Russia, Slovenia (minority share in the largest local bank NLB sold to the state) and Serbia, KBC’s footprint did not change over the past twelve months. Today, KBC operates in four core markets in the region. It is the lead-ing bank in the Czech Republic and among the Top 5 banks in Hungary and Slovakia. On the fourth market, Bulgaria, KBC only holds a minor market share. KBC allocates 14% of its total capital base to the Czech Republic, underscoring the highest importance (by far) of that international market for the whole group. Along with its known banc-assurance franchise, KBC also runs insurance subsidi-aries in CEE, both in the life and the non-life segment, complementing its banking operations and making it one of the top foreign players in that segment.

In 2014, KBC’s aggregated loan growth in CEE amounted to about 5% yoy with all subsidiaries managing to increase their respective lending volumes (excluding FX effect): the Czech Republic (4%), Hungary (5%), Slovakia (8%) and Bulgaria (9%). With the exception of Hungary, the major driver for the loan growth was the clear uptick of mortgage lending, particularly visible in the Czech Republic (9%) and Slovakia (16%). Despite the fact that deposits remained unchanged on aggregate, as some outflows from managed funds in Hungary were neutralized by inflows in Slovakia, with L/D of below 80%, KBC was able to keep up one of the best funding profiles among international banks in the CEE region.

On the asset quality front, the aggregated CEE NPL ratio increased by about 50 bp, touching almost 6% as at year-end 2014. While the low-risk markets in the Czech Republic and Slovakia adjusted upwards from low bases (3% to 4%), a certain improvement in Hungary (NPL ratio down to 13.6% coming from 15% in 2013) could offset the still quite risky Bulgarian market (28%). Nevertheless, risk provisioning for assets in CEE was lower yoy, thanks to certain positive effects in Hungary and the Czech Republic.

In 2014, the group’s profit after tax was lower than the year before, as the one-off charge in Hungary of EUR 231 mn (Supreme Court’s decision on retail loans) decreased the total earnings to about EUR 600 mn (2013: about EUR 800 mn).


2010 2011 2012 2013 2014



Market share in CEE (% of total assets)* 3.3% 3.0% 2.1% 2.1% 2.0%

Number of branches in CEE** 1,602 1,419 777 771 761* The number of branches 2010/2011 including NLB **Czech Republic includes CSOB Bank + Era Financial Centers; Source: company data, calculation by RBI/Raiffeisen RESEARCH

0

10

20

30

40




0.0%

2.0%

4.0%

6.0%

8.0%

0.00%

0.50%

1.00%

1.50%

2010

2011

2012

2013

2014





Despite facing relatively high pressure on the NIM side in the Czech Repub-lic, KBC has managed to keep its prof-itability stable on the wings of good cost management in the Czech Repub-lic, lower impairment charges in Hun-gary, the Czech Republic and Slova-kia as well as strong revenues in Slo-vakia. The country-wise profitability breakdown for 2014 shows the high-est rebound in Bulgaria (as a result of the base effect from 2013), an improvement in Hungary (adjusted for one-offs, lower provisioning and flat revenues), a stable performance in Slovakia and a deterioration in the Czech Republic. For 2015, KBC’s management expects to be able to maintain stable and solid returns from its Czech business unit.

Financial analysts: Text: Jovan Sikimic, Raiffeisen Centrobank



Assets and loans

Asset growth (% yoy)* 3.8% -4.5% 1.5% -3.4% -8.1%

Loans/total assets (%)** 51% 56% 54% 52% 60%

Retail loans/total loans (%)*** 58% 57% 57% 56% 55%

Corporate loans/total loans (%)*** 41% 43% 43% 44% 45%Credit risk

Growth customer loans (% yoy)* 2.3% 5.2% 4.1% -5.4% 4.8%


Loan loss reserves/non-performing loans (%) n.a. n.a. n.a. n.a. n.a.


Customer deposits/total assets (%)** 61% 64% 68% 72% 77%


Deposit growth (% yoy)* -0.6% -0.9% 3.0% 2.1% -0.6%Profi tability and capitalization****

Cost/Income (%) 57% 53% 60% 61% 60%

NII/Total assets (%) 3.5% 3.2% 2.9% 2.9% 2.9%



Total CAR ratio (%), at the group level n.a. 15.6% 15.8% 17.8% 18.3%


Core Tier-1 ratio (%), at the group level 10.9% 10.6% 11.7% 12.8% 14.3%* adjusted for M&A** 2010, 2011 not including NLB *** only for CSOB**** 2013, 2014 fully loaded Basel 3 and acc. to Danish compromise; 2010, 2011, 2012 Basel 2Source: company data, calculation by RBI/Raiffeisen RESEARCH






2009 2014 2009 2014 2014

Czech Republic 20.3 18.4 87.1 83.5 63.0Hungary* 9.6 7.6 69.2 60.8 50.0Slovakia 10.9 10.3 98.8 98.5 63.2Bulgaria n.a. 2.9 83.5 76.3 54.3* foreign-owned banks excl. OTPSource: company data, national sources, RBI/Raiffeisen RESEARCH


Intesa Sanpaolo

Good profi tability in 2014 supported by improved core revenues, strong asset management and insurance business NPLs remain high at the group level, although asset quality sees certain improvement Funding is solid on the group’s retail business position, backed by asset management and insurance business arms

The Intesa Sanpaolo Group is one of the leading financial groups in Italy with total assets of EUR 646 bn and customer loans of EUR 339 bn as at year-end 2014. The group has a significant footprint in CEE, and its geographic diversi-fication also includes the Middle East and Africa. It also benefits from its diversi-fied business lines, being predominantly a corporate bank, but also actively de-veloping asset management, insurance, and pension businesses. The group is ac-tive in nine CEE countries (and currently in the process of exiting from the tenth, Ukraine). About 8% of the group’s loan business and approximately 6% of its to-tal assets originate in CEE. Intesa Sanpaolo ranks among the Top 3 in Serbia, Croatia, Slovakia and Albania, and among the Top 10 in Hungary, Bosnia and Herzegovina and Slovenia.

Inferior asset quality has been the major jeopardy for the group’s business per-formance over the past few years, predominantly stemming from the weakened Italian economy, but also from the crisis in CEE from 2008 to 2010. This resulted in quite high cost of risk that the group had to carry, which has pushed down its bottom-line results in the previous years. On the positive side, Intesa Sanpaolo has implemented the streamlining and clean-up of its Italian and global loan port-folio so that the NPL ratio and cost of risk started to improve in 2014. The new inflow of classified loans to the NPL stock declined significantly in 2014, namely by over 20% according to the group’s reporting, which resulted in a general de-cline of cost of risk on both the group level and in the CEE countries. The coun-tries with the highest risk costs for the group in the area remain Hungary and Ro-mania, while Russia saw escalated cost of risk starting 2014. Ukraine’s business is set to be sold out, amidst remaining very high risk costs. The total groups’ stock of doubtful, sub-standard and restructured loans stood at 8.4% of total loans for the CEE area as at year-end 2014.

The group showed good profitability in 2014 as a whole, with its operating income flow growing by 4%, and pre-tax results significantly exceeding those of 2013. The performance was supported by improved core income, but also largely benefitting from strong profits generated by its asset management and in-surance business. CEE contributed over 10% of the group’s operating income, al-though the net profit stemming from the area was in negative territory. That was a result of the loss of EUR 337 mn in Hungary due to the country’s new regula-tions and charges, as well as the combined losses in Romania and Ukraine of



2010 2011 2012 2013 2014


Number of countries in CEE* 10 10 10 9 9


Number of branches in CEE 1,542 1,446 1,320 1,268 1,204* not including Ukraine since 2013 (on sale); Source: company data, calculation by RBI/Raiffeisen RESEARCH

22

23

24

25

26

27

28




0.0%

5.0%

10.0%

15.0%

0.00%

1.00%

2.00%

3.00%

4.00%

2010

2011

2012

2013

2014





EUR 75 mn. In total, these losses out-weighed the positive results from the rest of the CEE markets.

The group’s funding remains defi-nitely among its strong sides. Intesa Sanpaolo is rich with deposit fund-ing, with retail deposits accounting for 75% of the groups’ deposits gener-ated by the banking business. Depos-its based on asset management and insurance business only enhance the funding strength. In 2014, the L/D ratio, calculated for only the banking busi-ness, stood at 94%. The group’s capitalization is decent, comfortably exceeding regulatory requirements.

Financial analysts: Text: Elena Romanova, RBI Vienna




2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 2.8% -0.5% -2.7% -3.8% -2.1%




Growth customer loans (% yoy)* 3.3% -1.8% -3.9% -6.7% -3.6%

Gross non-performing loans (% of total loans)*** 8.2% 8.1% 9.7% 9.2% 8.4%





Deposit growth (% yoy) 3.5% -0.7% 2.2% -1.1% -0.4%Profi tability and capitalization**

Cost/Income (%) 49% 47% 52% 53% 51%

NII/total assets (%) 3.7% 3.8% 3.5% 3.5% 3.4%

Return on Assets (pre-tax proportional, %) 0.98% 0.93% -0.37% -0.15% 0.23%

Profit before tax (EUR mn, proportional) 400 379 -146 -55 85



Core Tier-1 ratio (%), at the group level 7.9% 10.1% 11.2% 11.9% 13.6%* adjusted for M&A** 2014 acc. to Basel 3 fully loaded; 2013 pro-forma acc. to Basel 3 *** including past-due, restructured, sub-standard and doubtful loansSource: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Slovakia 18.7 19.2 98.8 98.5 63.2Hungary* 8.1 5.5 69.2 60.8 50.0Croatia 19.4 17.1 90.9 88.3 75.4Serbia 13.1 14.7 74.3 74.5 50.0Bosnia a.H. 5.6 6.1 95.0 90.0 64.5* foreign-owned banks excl. OTPSource: company data, national sources, RBI/Raiffeisen RESEARCH


Sberbank

Political tension and sanctions impact Sberbank’s positions in CEE 2014 profi tability and capitalization hit by risen cost of risk as well as RUB depreciation trend Loan quality is on a downsize trend, as indicated by growing NPL, restructured loans

Sberbank’s business is predominantly domiciled in Russia, with 86% of the bank’s assets located in the country as of end-2014. At the same time, the bank’s CEE presence remains quite significant. As at year-end 2014, Sberbank was present in ten CEE countries, which represented 3.6% of the total group’s assets. Sber-bank is still in the process of streamlining its CEE network operations, and the fi-nal strategy regarding the new shape is expected to be announced in the com-ing months. The group has also a significant presence in Turkey with 8% of the group’s assets and almost 5% market share, after the acquisition of DenizBank in 2012. The CEE ambitions of Sberbank, the largest Russian bank (above 28.1% of total assets in RU), were notably affected by the ongoing conflict between Rus-sia and Ukraine, and the Western sanctions against Russia. Reportedly Sber-banks’ earlier plans to expand in CEE have been put on hold, and 2015 has al-ready seen a range of news for the group’s CEE presence contraction. For exam-ple according to various media sources, Sberbank may contract its branches in Europe, by possible sales of its Slovak and Hungarian units. Besides Sberbank faces increasing regulatory pressure in Europe. The ECB has announced earlier this year, that it intends to have European business of Sberbank and VTB under supervision, and plans to complete stress tests and balance sheet reviews for both banks already in 2015.

While the bank has definitely felt a negative impact of the financial fundamen-tals volatility and FX depreciation, for 2014 its NII and F&CI posted increases by 18% yoy and 30% yoy respectively, supported by sanguine performance within the first three quarters of the year. Nevertheless, net profit in 2014 was down 20% yoy on the escalated risk cost and sharply increased provisioning costs. The decrease came mostly on the back of an inferior performance in the fourth quarter, when the group’s profit halved in comparison with the respective period of 2013. Thus, RoE decreased to 14.8% in 2014 from over 20% a year ago. The bank’s management expects for 2015 a further deterioration of core mar-gins and a further increase of risk costs, both leading to a RoE in the single-dig-its. The bank’s asset quality is expected to come further under pressure in 2015. In 2014, the overdue loan stock increased to 3.2% of gross loans and total prob-lem loans to 6% of gross loans, and this is notwithstanding a 37% loan book growth of the bank in 2014 (this number refers to the loan portfolio expressed in LCY, and thus captures the revaluation of the FCY denominated loans in accord-ance with the depreciated RUB). Restructured loans surged to 13.2% of gross loan portfolio in 2014. One of the measures to be undertaken to counteract



2010 2011 2012 2013 2014





0

50

100

150

200

250

300

350


Loans and deposits*

* EUR bnSource: company data

0.0%

2.0%

4.0%

6.0%

8.0%

0.00%

0.50%

1.00%

1.50%

2.00%

2010

2011

2012

2013

2014


Asset quality

Source: company data, calculation by RBI/Raiffeisen RESEARCH


the increasing credit risk, according to the bank’s management, is to contract the retail loan portfolio in 2015, and focus on the collateralized retail loan categories.

Sberbank’s capitalization exposure to the FX volatility came as the major negative surprise of the group’s per-formance in 2014. Tier 1 ratio de-creased to 8.6% on FX asset mark-to-market revaluation as a result of the sharp RUB depreciation. The drop of the capitalization ratio made Sber-bank cut its dividend pay-out ratio to 3.5% of net profit of 2014 in order to sup-port its capital buffers. Besides, an option for Sberbank remains to convert a RUB 500 bn subordinated loan from the Central Bank of Russia. Funding conditions are expected to stay challenging in 2015, as access to international capital mar-kets remains restricted by the Western sanctions. Sberbank’s L/D ratio increased to 114% in 2014, albeit remaining better than of its Russian peers. On a positive note, Sberbank strongly benefits from its customers’ loyalty and is considered the most secure bank in its home market. Its deposit base is RUB 2.3 tn as at year-end 2014, which corresponds to an overwhelming 45% market share.

Financial analysts: Text: Michael Ballauf, Elena Romanova, RBI Vienna

Data: Key performance indicators: Michael Ballauf, RBI Vienna

Key business position indicators: Jovan Sikimic, Raiffeisen Centrobank


Key performance indicators in CEE (all indicators in RUB, IFRS-based)

2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 21.4% 25.6% 39.3% 20.6% 38.4%

Loans/assets (%) 63.6% 71.2% 69.5% 71.0% 70.5%

Retail loans/total loans (%) 21.3% 21.5% 25.4% 27.7% 26.0%

Corporate loans/total loans (%) 78.7% 78.5% 74.6% 72.3% 74.0%Credit risk

Growth of customer loans (% yoy) 12.9% 40.6% 36.0% 23.2% 37.3%


FCY-denominated loans/total loans (%) 21.3% 21.3% 26.5% 27.5% 35.6%

Loan loss reserves/gross non-performing loans (%) 155.3% 162.6% 161.0% 160.2% 144.8%

Loan loss reserves/customer loans (%) 11.3% 7.9% 5.1% 4.5% 4.7%Funding

Customer funds/liabilities (%) 87.0% 82.9% 75.5% 73.9% 67.3%

Customer loans/customer deposits (%)* 82.5% 97.3% 103.1% 107.2% 114.1%

Deposit growth (% yoy) 22.3% 19.3% 28.3% 18.5% 29.0%Profi tability and capitalization

Cost/Income (%) 42.4% 47.0% 49.0% 46.1% 43.4%

NIM (%) 6.6% 6.4% 6.1% 5.9% 5.7%

Return on Assets (%) 2.3% 3.2% 2.7% 2.2% 1.4%

Return on Equity (%) 20.6% 28.0% 24.2% 20.8% 14.8%

Total CAR ratio (%) 16.8% 15.2% 13.7% 13.4% 12.1%

Tier-1 ratio (%) 11.9% 11.6% 10.4% 10.6% 8.6%* based on net loans; Source: company data, calculation by RBI/Raiffeisen RESEARCH





2009 2014 2009 2014 2014

Russia 24.7 28.1 8.6 7.6 56.4Ukraine n.a. 3.5 46.6 31 43.3Belarus 5.9 10.4 19.4 35.4 79.4Czech Republic n.a. 1.3 87.1 83.5 63.0Slovakia n.a. 3.5 98.8 98.5 63.2Croatia n.a. 2.5 90.9 88.3 75.4Bosnia a.H. n.a. 7.4 95.0 90.0 64.5Source: company data, national sources, RBI/Raiffeisen RESEARCH


VTB

Business and fi nancial standing jeopardized by inferior domestic market and Western sanctions Modestly positive profi ts in 2014 due to state support; inferior performance expected for 2015 Capitalization in 2015 is likely to be maintained through ongoing state support

VTB, Russia’s second largest state-controlled bank (about 17% of the Russian banking system’s assets) has around 90% of its business domiciled in Russia. The majority of the remaining 10% is spread in neighbouring countries, while the Eu-ropean presence takes only a very modest share of the group’s assets. In the euro area, VTB operates banks in Austria, Germany and France as part of VTB Euro-pean Subholding with VTB Bank (Austria) as the parent company. The bank’s CEE business is governed predominantly from its Austrian subsidiary. Since 2015, VTB has been facing tighter regulation of its European business. ECB has an-nounced earlier this year, that it intends to have the European businesses of Sber-bank and VTB under supervision, and plans to complete stress tests and balance sheet reviews for both banks already in 2015.

In 2014, VTB’s financial and business standing suffered from Russia’s economy weakening, and the Western sanctions, which has led to restricted international funding possibilities, and worsened business opportunities at home and interna-tionally. Domestically, the group, which was active in expanding its business in previous years, had to carry escalated cost of credit risk in 2014, and experi-enced a significant deterioration of financial performance. VTB’s NIM contracted by 40 bp to 4.1% in 2014 and risk costs surged to 3.4% coming from 1.6% the year earlier. VTB’s management expectations stay rather gloomy for 2015 as well, possibly expecting a loss. NPL ratio was at 5.8% of gross loans in 2014, which is 1.1 pp higher than in 2013. The NPL ratio increase came on the back of the still strong loan growth in 2014, suggesting a further increase of NPL ratio in 2015, as the group targets a more conservative lending. In order to mitigate the negative impact of Russia’s economic nosedive at least partially, VTB targets to contract its RWA by 10% in 2015, predominantly on the consumer lending side.

The “de facto” business performance by VTB in 2014 turned negative. Sizeable provisioning costs, together with falling margins were the major reason for that. The possibility of the group to record a modestly positive bottom-line result in its 2014 IFRS statements was largely because of the state support. A RUB 99 bn gain (about USD 2 bn at year-end FX rate), was granted to the bank based on implicit revenue estimates on the state-funded deposit placed in VTB at 0.5% an-nual interest rate by the state-owned Deposit Insurance Agency (DIA). The gap between this 0.5% and the at that time market interest rate was recorded by VTB as implicit revenue on its P&L account.



2010 2011 2012 2013 2014




Number of branches in CEE* 820 983 1,707 1,693 1,972* excl. Armenia; Source: company data, calculation by RBI/Raiffeisen RESEARCH

0

50

100

150

200

2012 2013 2014

Loans Deposits

Loans and deposits*

* EUR bnSource: company data

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.00%

1.00%

2.00%

3.00%

2010

2011

2012

2013

2014


Asset quality

Source: company data, calculation by RBI/Raiffeisen RESEARCH


We are quite sceptical about the group’s intention to have its Tier 1 ra-tio at targeted 10% as at year-end 2015 without further state support. In 2014, VTB has already completed the conversion of state-owned subordi-nated loans in the amount of RUB 214 bn into CT1 capital. VTB has already received RUB 100 bn subordinated deposits from the National Wealth Fund and has applied for another RUB 300 bn in subordinated capital from DIA in April 2015. If the request succeeds, the funds would be sufficient to support the groups’ strained capitalization in our view. Despite the financial hardships, state-controlled VTB kept its high dividend pay-out ratio at 15% in 2014. We view VTB’s refinancing needs as manageable, given the state support that the group receives. As at year-end 2014, the group had RUB 695 bn in cash and equiva-lents, which compares well to the RUB 140 bn due in 2015.

Its L/D ratio surged to a height of 142% in 2014, however, in our take, by and large driven by the necessity to perform a supportive role to the systemically im-portant borrowers.

Financial analysts: Text: Michael Ballauf, Elena Romanova, RBI Vienna

Data: Key performance indicators: Michael Ballauf, RBI Vienna

Key business position indicators: Jovan Sikimic, Raiffeisen Centrobank






2009 2014 2009 2014 2014

Russia 6.7 17 8.6 7.6 56.4Ukraine 3.3 2.8 46.6 31 43.3Belarus 2.3 2.5 19.4 35.4 79.4Source: company data, national sources, RBI/Raiffeisen RESEARCH

Key performance indicators in CEE (all indicators in RUB, IFRS-based)

2010 2011 2012 2013 2014

Assets and loans

Asset growth (% yoy) 18.8% 58.2% 9.2% 18.3% 39.0%

Loans/assets (%) 64.9% 63.4% 64.2% 68.1% 66.2%

Retail loans/total loans (%) 17.7% 13.9% 17.2% 19.4% 18.2%

Corporate loans/total loans (%) 82.3% 86.1% 82.8% 80.6% 81.8%Credit risk

Growth of customer loans (% yoy) 20.6% 54.4% 10.7% 25.4% 35.3%


Loan loss reserves/gross non-performing loans (%) 103.7% 111.3% 112.4% 115.5% 114.8%

Loan loss reserves/customer loans (%) 9.0% 6.0% 6.1% 5.5% 6.7%Funding

Customer funds/liabilities (%) 59.6% 58.3% 55.2% 55.3% 51.3%

Customer loans/customer deposits (%)* 125.9% 119.6% 129.6% 136.2% 142.4%

Deposit growth (% yoy) 41.1% 62.5% 2.1% 19.3% 29.3%Profi tability and capitalization

Cost/Income (%) 43.4% 49.8% 52.3% 49.2% 46.0%

NIM (%) 5.1% 5.0% 4.6% 4.5% 4.1%

Return on Assets (%) 1.5% 1.7% 1.3% 1.2% 0.0%

Return on Equity (%) 10.3% 15.0% 13.6% 11.8% 0.1%

Total CAR ratio (%) 16.8% 12.7% 14.4% 14.7% 12.0%

Tier-1 ratio (%) 12.4% 8.7% 10.1% 10.9% 9.8%* based on net loans; Source: company data, calculation by RBI/Raiffeisen RESEARCH



OTP, UniCredit, Intesa, SocGen and RBI with most diversifi ed regional

asset allocation

No return to strong pre-crisis balance sheet expansion

0%

20%

40%

60%

80%

100%

Sant

ande

r

Swed

bank

KBC

Com

mer

zban

k

ING

Erste

OTP

Uni

Cre

dit

Inte

sa

SocG

en RBI

Sber

bank

EFG

Alp

ha B

ank

NBG VT

B

CE SEE EE

CEE: Regional asset allocation (%, year-end 2014)

Source: company data, national central banks, RBI/Raiffeisen RESEARCH

337.

9

177.

7 120.

3

78.7

77.4

75.2

57.8

47.1

37.5

37.2

36.1

31.3

30.4

19.8

17.5

14.1

7.7 7.6

7.0

0

20

40

60

80

100

120

140

Sber

bank

*

VTB

Uni

Cre

dit

RBI

SocG

en**

Erste

PKO

BP

KBC

OTP

Inte

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Sant

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Swed

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BNP

Parib

as**

** BCP

EFG

Eur

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NBG

Alp

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ank

CEE: Total assets of international banks, aggregated (EUR bn, 2014)

* excluding Turkey ** HR as of 31 December 2013*** HU as of 31 December 2013**** including BGZ and RussiaSource: company data, local central banks, aggregated data CEE subsidiaries

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

RBI OTP Intesa Erste UniCredit SocGen KBC

CEE: Development of total assets, aggregated (EUR bn)

Source: company data, aggregated data CEE subsidiaries

UniCredit remains the largest Western CEE lender, SocGen now among Top 3 Western CEE banks



No improvement in RoA as a result of NIM pressure, still high provisioning (RU, SEE) and one-offs in HU

NIM and fee squeezes plus subdued loan growth preventing recovery of revenues

EE exposure and write-offs in RO main drivers for provisioning in 2014, CE players benefi ted from improving asset quality (incl. HU)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Uni

Cre

dit* RBI

KBC

Erste

OTP

Sant

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Com

mer

zban

k**

SocG

en**

*

Inte

sa**

**

2010 2011 2012 2013 2014

CEE: Pre-tax RoA (proportional, 2010-2014, %)

* Baltics, Kazakhstan and Ukraine not included since 2013** considering only mBank*** calculation includes CZ, RO, RU and other CEE**** excl. Ukraine since 2013Source: company data; calculations by Raiffeisen RESEARCH

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Uni

Cre

dit* RBI

KBC

Erste

OTP

Sant

ande

r

Com

mer

zban

k***

SocG

en

Inte

sa**

2010 2011 2012 2013 2014

CEE: Revenues per assets (2010-2014, %)

* Baltics, Kazakhstan and Ukraine not included since 2013** excl. Ukraine since 2013*** since 2012 only contribution of mBank / BRE BankSource: company data; calculations by Raiffeisen RESEARCH, aggregated data CEE subsidiaries

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Uni

Cre

dit* RBI

KBC

Erste

OTP

Sant

ande

r

Com

mer

zban

k***

*

SocG

en**

*

Inte

sa**

2010 2011 2012 2013 2014

CEE: Provisioning per assets (2010-2014, %)

* Baltics, Kazakhstan and Ukraine not included since 2013** excl. Ukraine since 2013*** calculation includes CZ, RO, RU **** since 2012 only contribution of mBank / BRE BankSource: company data; calculations by Raiffeisen RESEARCH, aggregated data CEE subsidiaries



-15%

-10%

-5%

0%

5%

10%

Uni

Cre

dit

SocG

en RBI

Sant

ande

r

OTP

Com

mer

zban

k

Erste

KBC

Inte

sa

2011 2012 2013 2014

CEE: Loan book growth 2011-2014* (yoy, in EUR-terms)

* adjusted for M&A activitiesSource: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries

77% 96

%

92%

90%

97%

90%

120%

107%

91% 10

4%

161%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

KBC

Sant

ande

r

Erste

Inte

sa

Uni

Cre

dit

SocG

en

Sber

bank RB

I

OTP

Com

mer

zban

k

VTB

2010 2011 2012 2013 2014

L/D ratios of CEE segments*

* adjusted for M&A activities; based on gross loansSource: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Sber

bank

VTB

KBC

Com

mer

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k**

Sant

ande

r

Inte

sa

Uni

Cre

dit

SocG

en*

RBI

Erste

OTP

2010 2011 2012 2013 2014

NPL ratios of CEE segments

* NPLs of CZ, RO, RU** NPLs only in PLSource: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries

Subdued loan growth supported further drop of L/D ratios,

lowest L/D ratios at CE players

NPL ratios: Positive momentum in CE, positive signals from HU and RO, partially offsetting deterioration in EE



CEE: Finalized and ongoing transactions (sorted by total assets)

Country Target Total assets (EUR bn) Comment

Poland

Bank Millennium 14.2 Portuguese parent BCP sold a 15.4% stake in Q1 2015.

Raiffeisen Polbank 13.7 RBI has announced its intention to sell its Polish subsidiary. The deal might be structured including a parallel IPO.

Alior Bank 8.5After the IPO in late 2012, a 25% stake held by Carlo Tassara Group should be sold to a strategic investor. The deadline set by the regulator was extended to mid-2016. Potential buyers are PZU, SocGen and Leszek Czarnecki.

BPH Bank 7.4 General Electric in talks to sell its Polish operations.

Meritum Bank 0.8 Acquired by Alior Bank from a local private equity fund at about 1.2x BV at year-end 2014.

FM Bank 0.7 FM Bank was sold by Polish Abris Private Equity to AnaCap.

Czech Republic / Slovakia

ZUNO Bank 0.1 A direct bank owned by RBI up for sale as part of the RBI's restructuring program.

CitiBank CZ n.a. As part of the strategy to exit 11 consumer markets, Citibank has announced to abandon its Czech consumer operations.

Hungary

MKB 6.2 100% stake held by BLB was sold to the Hungarian State for EUR 55 mn in Sep-tember 2014. Previously, BLB agreed to recapitalize the bank with EUR 270 mn.

CitiBank HU 3.1 As part of the strategy to exit 11 consumer markets, Citibank has announced to dispose of its Hungarian consumer operations.

Budapest Bank n.a. In December 2014, the Hungarian government signed a deal to buy the bank from its 100%-owner General Electric.

Erste Bank Hungary n.a.

Erste sold minority stake in Erste Hungary to Hungarian government and EBRD (each a 15% stake in Erste Bank Hungary via a capital increase); Erste Bank Hungary will introduce several initiatives to support the Hungarian economy, e.g. EUR 250 mn loan disbursement scheme, including a complete financial package for public sector employees, EUR 100 mn lending package for energy efficiency and a EUR 200 mn loan facility to primary agricultural producers.

Romania

RBS retail operations 0.3 UniCredit took over the retail and private banking portfolio of RBS in Romania in spring 2013.

Nextebank 0.2 Three investment funds managed by Axxess Capital bought Nextebank from MKB (which is owned by BayernLB) in December 2013.

RIB 0.1 Polish Getin Holding bought the bank from two individuals in late 2013.

Serbia

AIK Banka 1.4 MK Group increased the holding to 70% from 50.1% via a takeover bid in March 2015.

Cacanska Banka 0.3 Sold to Turkish Halk Bank for EUR 10 mn.

Dunav Banka 0.1 Telekom Serbia acquired a majority stake (now 95%) in this small bank through a capital injection in December 2014.

KBM (Credy) Banka 0.1 Former subsidiary of Slovenian NKBM could be sold in the near future.

SloveniaNKBM 4.4 Advanced talks with private equity fund(s) for taking over 100% stake from the Slo-

venian State. Recently, the takeover multiple has been rumored at about 0.2x BV.

Raiffeisen Bank Slovenia 1.1 RBI has announced to sell its Slovenian subsidiary as part of a program to reduce

the group's RWA base.

UkrainePravex Bank 0.2 Subsidiary of Banca Intesa: Agreement of sale signed in January 2014. The finali-

zation is subject to regulatory approval.

Raiffeisen Bank Aval n.a. RBI is in talks with EBRD about cooperation in Ukraine, which may involve selling a stake in the business to EBRD (e.g. via a capital increase).

Other Hypo Group Alpe Adria n.a.

The finalization of the deal is pending on the final regulator approval in Austria. The US private equity fund Advent and the EBRD have signed an agreement with the Austrian State to buy the SEE Holding with operations in HR, RS, BH, SL and ME.

Source: banks, press articles, Bloomberg, RBI/Raiffeisen RESEARCH



CEE: Potential M&A candidates (sorted by total assets)

Country Target Total assets (EUR bn) Comment

Poland

mBank 27.5 Despite CoBa’s committment to Poland, mBank appears as a speculative long-term target, very much depending on its parent bank’s standing.

Getin Noble Bank 16.1 Owned by Leszek Czarnecki. There are currently no rumors at all, hence rather long-term takeover target.

Bank Millennium 14.2 The bank appears to be a takeover candidate in the medium-term. BCP recently cut the stake from 66% to 50.1%.

Bank Pocztowy 1.8 PKO BP might decide to dispose of its 25% stake via the announced IPO of the small bank that is controlled by Poczta Polska.

Hungary Sberbank HU 1.7 There are market rumors that the Hungarian State might be interested in acquiring Sberbank’s Hungarian assets.

Slovakia Sberbank SK 2 Market speculates that Sberbank mulls exit from Slovakia.

Romania

BCR 13.9 Negotiations between Erste Group and SIF Oltenia for the 6% stake in BCR have not progressed, but a buy-out of the Romanian fund is expected in the future.

Banca Transilvania 8 Bank of Cyprus sold its 10% stake through an accelerated private placement. After the deal for Volksbank Romania, EBRD is unlikely to sell its 14.5% stake in TLV.

Volksbank Romania S.A. 2.8Banca Transilvania has acquired a 100% equity interest in Volksbank Romania and reimbursed all parent funding. The implied BV for the equity is 0.2x, while the BV for the whole transaction was 0.7x.

Pireus Bank Romnaia 2.1 The parent has a similar agreement with the EC which says that it has to scale down its foreign assets. Hence, the Romanian subsidiary might be up for sale.

Banca Romaneasca 1.7 According to an agreement reached with the EC in H2 20124, its parent National Bank of Greece has to sell its operations in SEE, including Romania, by June 2018.

Intesa Sanpaolo Romania 1.1The Italian group said that it would rethink its strategy for some markets where it lacked scale, including Romania, although local representatives expressed commitment for the local market.

Banca Carpatica 0.9 The management has proposed a merger with Nextebank, a small local player, to strenghen its capital position. So far shareholders have rejected this proposal.

Marfin Bank 0.6 The bank is owned by the Cyprus Popular Bank and is expected to be sold given an agreement with the EC.

Millennium Bank S.A. 0.6 OTP acquired 100% of Millennium Romania in H2 2014. The implied BV of the tran-saction is considered to be around 0.6x.

Credit Agricole Romania 0.3 Lacking scale in Romania, the French group is said to be looking for a buyer.

RBS Romania 0.3 UniCredit announced in H2 2014 that it had acquired the Romanian corporate portfo-lio of RBS, resulting in the British bank to leave the Romanian market.

SerbiaKomercijalna Banka 3.4 Serbia’s second largest bank – the EBRD holds 25% and the State 42%. The privatiza-

tion procedure has started with a completion targeted for 2017.

KBM (Credy) Banka 0.1 The former subsidiary of Slovenian NKBM might be put on sale in the near future.

Croatia HPB 2.3Two bids for the country’s seventh largest bank came from Erste and OTP but were rejected last year. Still a mid-term takeover candidate, rumored to receive a capital injection in the near future.

SloveniaNLB Group 8.9 Largest bank in Slovenia and 100% state-owned. Remains rather a long-term privatiza-

tion target.

Banka Celje/ Abanka 4.3 The two state-controlled banks should be merged in Q4 2015, resulting in the second largest bank in Slovenia. Privatization of the merged entity is targeted for 2017.

Russia / EEUniCredit (Ukraine) 3.8 UniCredit has announced the merger and sale of its two subsidiaries Ukrsotsbank and

UniCredit Bank.

Banca Intesa (Russia) 1.5 Intesa Sanpaolo considers its rather small Russian subsidiary as non-core, therefore a divestment cannot be ruled out in the long run.

Source: banks, press articles, Bloomberg, RBI/Raiffeisen RESEARCH



Sberbank, 14.1%VTB, 7.4%

UniCredit, 5.0%

RBI, 3.3%

SocGen*, 3.2%

Erste Group, 3.1%

Gazprombank, 2.9%

PKO BP, 2.4%

KBC, 2.0%

Intesa Sanpaolo, 1.6%OTP, 1.6%

ING, 1.5%Alfa Bank, 1.3%

Santander, 1.3%

Commerzbank**, 1.3%

RusAgro Bank, 1.2%

Other, 46.9%

Market shares in CEE (in % of total assets, 2014)

CEE: CE + SEE + EE + MK, ME, KZ* HR as of 31 December 2013** HU as of 31 December 2013Source: company data, national central banks, RBI/Raiffeisen RESEARCH

UniCredit, 8.0% PKO BP, 7.0%

Erste Group, 6.2%

KBC, 5.5%

RBI, 4.9%

SocGen, 4.8%

Santander, 3.8%

Commerzbank*, 3.7%

ING, 3.3%

OTP, 2.9%

Intesa Sanpaolo, 2.4%Swedbank, 2.4%

BCP, 1.7%

Sberbank, 1.0%

Other, 42.5%

Market shares in CE (in % of total assets, 2014)

CE + Baltics* HU as of 31 December 2013Source: company data, national central banks, RBI/Raiffeisen RESEARCH


UniCredit, 14.1%

Erste Group, 9.6%

RBI, 8.7%

SocGen*, 8.0%

Intesa Sanpaolo, 6.6%

OTP, 3.9%

EFG Eurobank, 3.1%

NBG, 3.1%Alpha Bank, 2.8%

ING, 1.7%

Sberbank, 1.2%

KBC, 0.5%

Other, 36.5%

Market shares in SEE (in % of total assets, 2014)

SEE + ME + MK* HR as of December 2013Source: company data, national central banks, RBI/Raiffeisen RESEARCH

Sberbank, 24.7%

VTB, 13.4%

Gazprombank, 5.3%

Otkritie*, 2.9%

Alfa Bank, 2.4%RusAgro Bank, 2.3%

Kazkommertsbank, 1.5%UniCredit, 1.4%

SocGen, 1.3%RBI, 1.2%

Promsvyazbank, 1.2%Halyk Bank, 1.0%

PrivatBank, 0.9%

Belarusbank, 0.8%

Uralsib Bank, 0.4%

OTP, 0.3%

Other, 39.0%

Market shares in EE (in % of total assets, 2014)

EE + KZ* former Nomos BankSource: company data, national central banks, RBI/Raiffeisen RESEARCH



Appendix

Total assets (% of GDP)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Poland 63% 64% 69% 71% 86% 84% 82% 85% 85% 86% 89%Hungary 80% 89% 98% 108% 123% 130% 125% 124% 110% 104% 100%Czech Rep. 99% 93% 93% 101% 108% 112% 110% 115% 118% 127% 126%Slovakia 84% 97% 87% 88% 90% 92% 83% 81% 79% 80% 81%Slovenia 90% 99% 109% 110% 116% 128% 129% 126% 126% 112% 100%CE 76% 78% 81% 86% 97% 99% 96% 98% 96% 98% 98%Romania 37% 45% 51% 62% 65% 71% 72% 70% 68% 64% 61%Bulgaria 63% 72% 81% 98% 100% 104% 103% 98% 103% 107% 104%Croatia 92% 96% 103% 107% 106% 114% 121% 125% 123% 123% 123%Serbia 41% 53% 69% 74% 65% 84% 93% 88% 94% 83% 85%Bosnia a. H. 59% 69% 75% 89% 85% 86% 85% 85% 87% 89% 92%Albania 57% 61% 71% 77% 77% 77% 80% 86% 90% 94% 98%SEE 50% 58% 66% 76% 76% 84% 86% 84% 85% 82% 81%Russia 42% 45% 52% 61% 68% 76% 73% 75% 79% 87% 109%Ukraine 41% 51% 63% 83% 98% 96% 87% 81% 80% 89% 86%Belarus 29% 32% 37% 43% 49% 61% 78% 95% 61% 62% 62%EE 41% 45% 52% 62% 70% 77% 74% 76% 79% 86% 106%EA* 196% 215% 225% 242% 254% 258% 272% 274% 268% 250% 257%* Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH

Total loans (% of GDP)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Poland 24% 26% 30% 36% 46% 48% 49% 53% 51% 51% 52%Hungary 39% 44% 48% 53% 60% 61% 62% 60% 51% 46% 42%Czech Rep. 39% 38% 42% 49% 54% 56% 55% 57% 58% 62% 62%Slovakia 32% 37% 39% 44% 45% 46% 50% 50% 52% 52% 54%Slovenia 47% 53% 65% 77% 85% 92% 95% 91% 90% 75% 62%CE 31% 33% 37% 43% 51% 53% 54% 56% 54% 54% 53%Romania 16% 21% 27% 36% 38% 39% 39% 40% 38% 35% 32%Bulgaria 34% 40% 44% 63% 72% 77% 75% 71% 72% 73% 68%Croatia 51% 58% 65% 67% 71% 77% 84% 88% 87% 88% 86%Serbia 22% 28% 31% 35% 37% 45% 54% 52% 56% 48% 48%Bosnia a. H. 37% 44% 47% 54% 58% 58% 58% 59% 62% 62% 64%Albania 6% 7% 9% 16% 22% 30% 37% 39% 40% 44% 43%SEE 25% 30% 35% 44% 47% 51% 53% 53% 53% 50% 48%Russia 23% 25% 30% 37% 40% 42% 39% 42% 44% 49% 58%Ukraine 26% 32% 45% 59% 77% 79% 67% 61% 57% 63% 64%Belarus 18% 19% 25% 30% 34% 46% 54% 54% 38% 41% 40%EE 23% 26% 31% 38% 43% 45% 42% 44% 45% 50% 58%EA* 104% 110% 114% 120% 124% 128% 129% 127% 125% 119% 117%* Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH

Loan-to-deposit ratios (%)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Poland 77% 79% 86% 103% 121% 113% 113% 115% 112% 108% 105%Hungary 105% 113% 119% 126% 138% 133% 140% 133% 117% 110% 107%Czech Rep. 60% 64% 70% 75% 81% 78% 78% 79% 75% 75% 77%Slovakia 53% 67% 72% 76% 60% 84% 80% 83% 85% 84% 86%Slovenia 133% 149% 183% 147% 166% 164% 162% 155% 152% 125% 105%CE 77% 82% 89% 98% 106% 105% 105% 105% 101% 97% 95%Romania 72% 80% 96% 111% 124% 111% 110% 111% 108% 96% 86%Bulgaria 68% 90% 77% 98% 120% 121% 115% 106% 101% 94% 87%Croatia 83% 91% 94% 93% 100% 100% 103% 104% 105% 103% 99%Serbia 120% 124% 103% 98% 122% 115% 128% 126% 125% 116% 111%Bosnia a. H. 106% 110% 105% 98% 122% 116% 116% 118% 120% 115% 109%Albania 19% 29% 38% 46% 62% 65% 60% 61% 58% 55% 55%SEE 77% 87% 90% 98% 113% 108% 108% 108% 106% 98% 92%Russia 95% 94% 93% 100% 112% 94% 87% 90% 93% 94% 95%Ukraine 109% 107% 134% 152% 205% 219% 175% 163% 141% 135% 145%Belarus 123% 120% 135% 144% 171% 194% 206% 151% 140% 150% 196%EE 97% 96% 98% 106% 122% 105% 95% 96% 97% 98% 99%EA* 126% 126% 126% 125% 121% 118% 116% 115% 112% 107% 105%* Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH

Key CEE banking sector data


Key abbreviations

Basic abbreviations

bn billionbp basis point(s) eop end of periodmn millionpp percentage point(s)r.h.s. right hand sidetn trillionvs. versusyoy year on year

Key fi gures

BV Book valueCAR Capital adequacy ratioCT1 ratio Core Tier 1 ratio CET1 Common Equity Tier 1F&CI Fee & commission incomeGDP Gross domestic productL/D ratio Loan-to-deposit ratioLTV Loan-to-value ratioNPL Non-performing loanNII Net interest income NIM Net interest marginOpex Operating expenditureP&L Profit & lossPPP Purchasing power parityRoA Return on assetsRoE Return on equityROTE Return on Tangible EquityRWA Risk-weighted assets

Currencies

FCY foreign currencyFX foreign exchangeLCY local currency

BYR Belarusian rubleCHF Swiss francCZK Czech crownEUR EuroHRK Croatian kunaHUF Hungarian forintRON Romanian leuRSD Serbian dinarRUB Russian rubleUAH Ukrainian hryvniaUSD US dollar

Key abbreviations


Institutions

BB Budapest BankBIS Bank for International SettlementBNB Bulgarian National BankBNR Romanian Central Bank (Banca Naþionalã a României) BRD Banca Romana pentru Dezvoltare (see SocGen)BSI Bank of Slovenia CBR Central Bank of RussiaCBBH Central Bank of Bosnia and Herzegovina CBV Commercial Bank Viktoria (see Bulgaria)CCB Corporate Commercial Bank (see Bulgaria)CNB Czech National Bank | Croatian National BankDIA Deposit Insurance Agency DIF Deposit Insurance FundEBA European Banking AuthorityEBRD European Bank for Reconstruction and Development EC European CommissionECB European Central BankEU European UnionFIB First Investment Bank (see Bulgaria)IMF International Monetary FundKNF Komisja Nadzoru Finansowego (Polish Financial Supervisory Authority)MFI Monetary Financial InstitutionNBA National Bank of AlbaniaNBB National Bank of the Republic of BelarusNBP National Bank of PolandNBR National Bank of RomaniaNBS National Bank of Slovakia | National Bank of SerbiaNBU National Bank of UkraineSIFI Systemically Important Financial InstitutionSNB Swiss National Bank wiiw Vienna Institute for International Economic Studies

Others

AQR Asset Quality ReviewCRD Capital Requirements DirectiveCRR Capital Requirements RegulationFGS Funding for Growth Scheme (see Hungary)IFRS International Financial Reporting StandardsM&A Mergers and acquisitionsMoU Memorandum of UnderstandingMRR Minimum Reserve Requirements (see Romania)POS Point of SalesSAA Stabilization and Association Agreement SME Small and medium sized enterprisesSRM Single Resolution MechanismSSM Single Supervisory MechanismWEO IMF World Economic Outlook

Key abbreviations

84

Risk notifi cations and explanations

Raiffeisen Bank International network support and contributions

Albania Joan Canaj Raiffeisen Bank Sh.a., Tirana Valbona Gjeka

Belarus Mariya Keda Priorbank JSC, Minsk

Bosnia and Herzegovina Ivona Zametica Raiffeisen Bank d.d. Bosna i Hercegovina, Sarajevo Srebrenko Fatusic

Bulgaria Tsvetanka Madjounova Raiffeisenbank (Bulgaria) EAD, Sofia Emil Kalchev

Croatia Anton Starcevic Raiffeisenbank Austria d.d., Zagreb

Czech Republic Lenka Kalivodova Raiffeisenbank a.s., Prague

Hungary Zoltán Török Raiffeisen Bank Zrt., Budapest

Poland Dorota Strauch Raiffeisen Polbank, Warsaw

Romania Ionut Dumitru Raiffeisen Bank S.A., Bucharest Nicolae Covrig

Serbia Ljiljana Grubic Raiffeisen banka a.d., Belgrade

Slovakia Robert Prega Tatra banka a.s., Bratislava Juraj Valachy

Ukraine Ludmilla Zagoruyko Raiffeisen Bank Aval JSC, Kiev

Risk notifi cations and explanations

Warnings

Figures on performance refer to the past. Past performance is not a reliable indicator of the future results and develop-ment of a financial instrument, a financial index or a securities service. This is particularly true in cases when the finan-cial instrument, financial index or securities service has been offered for less than 12 months. In particular, this very short comparison period is not a reliable indicator for future results.

Performance of a financial instrument, a financial index or a securities service is reduced by commissions, fees and other charges, which depend on the individual circumstances of the investor.

The return on an investment can rise or fall due to exchange rate fluctuations. Forecasts of future performance are based purely on estimates and assumptions. Actual future performance may devi-

ate from the forecast. Consequently, forecasts are not a reliable indicator for the future results and development of a fi-nancial instrument, a financial index or a securities service.

Raiffeisen Bank International AG is responsible for the information and recommendations in this publication which are pre-pared by analysts from subsidiary banks who are listed in this publication or from Raiffeisen Centrobank.

A description of the concepts and methods which are used in the preparation of financial analyses can be found at: www.raiffeisenresearch.at/conceptsandmethods

Detailed information on sensitivity analyses (procedure for checking the stability of potential assumptions made in the con-text of financial analysis) can be found at: www.raiffeisenresearch.at/sensitivityanalysis

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85

Budapest

KAZAKHSTAN

Istanbul

Tbilisi

Yereva nBaku

Asga ba t

Tehra nNico sia

Athens

BLACK SEA CASPIAN SEA

ARALSEA

BALTICSEA

NOR TH SE A

SkopjePodgorica

Osl o

Stockholm

Co penha gen

Fra nkfurt

Berlin

Brussels

Amsterda m

London

Dublin

Paris

Bern

Rome

Lisbon

M a drid

Sicily

Vienna

Ma ribor

Zagreb

Sa rajevo

Tirana

Tunis

Belgrad e

PristinaSofia

Bucha rest

Kiev

War sa w

Minsk

Vilnius

Algiers

Pra gue

Bra tislava

Helsinki

Mosc ow

Ankara

Co rsica

Sa rdinia

Tallinn

Riga

ME DITERRANEAN SE A

MOROCCO ALGERIA TUNISIA

NORWAY

SWEDEN

DENMARK

GERMANY

LUXEMBOURG

BELGIUM

NETHERLANDS

UNITED KINGDOMIRELAND

FRANCE

SWITZERLAND

LIECHTEN-STEIN

ITALY

PORTUGAL

SPAIN

AUSTRIA

SLOVENIA

CROATIA

BOSNIA ANDHERZEGOWINA

HUNGARY

ALBANIA

MONTENEGRO

SERBIA

MACEDONIA

BULGARIA

ROMANIA

MOLDOVA

UKRAINE

POLAND BELARUS

LITHUANIA

RUSSIA

SLOVAKIA

LATVIA

FINLAND

ESTONIA

RUSSIA

GEORGIA

ARMENIA

ASERBAIJAN

TURKEY

TURKMENISTAN

IRAN

UZBEKISTAN

IRAQSYRIA

GREECE

CZECH REPUBLIC

CYPRUS

KOSOVO

Chisinau

BRANCHES, REPRESENTATIVE OF FIC ES AN D OTHER UNITSHEAD OFFICE AND NE TW ORK BANK Swww.rbinternational.com

Acknowledgements

Published by: Raiffeisen Bank International AG

Raiffeisen Bank International AG Am Stadtpark 9, 1030 Vienna Phone: +43-1-717 07-5905 Fax: +43-1-717 07-1715 www.rbinternational.com

Published and produced in: ViennaEditing: Anja Knass, Raiffeisen Bank International AGDesign: Birgit Bachhofner, Kathrin Korinek, Raiffeisen Bank International AGPrinted by: AV+Astoria Druckzentrum GmbH, Faradaygasse 6, 1030 Vienna This report was completed on 29 May 2015.

Raiffeisen Centrobank would like to thank Anca-Diana Morar for excellent research assistance.

Acknowledgements

86

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RB International Markets (USA) LCCStefan Gabriele P:+1 212 835 2328

AL: Raiffeisen Bank Sh.a.Mirela Borici P: +355 4 2381000-1074

BH: Raiffeisen Bank d.d. Bosna i HercegovinaReuf Sulejmanovic P: +387 33 287-449

BG: Raiffeisenbank (Bulgaria) EADBoyan Petkov P: +359 2 91985-635

BY: Priorbank JSCTreasury: Svetlana N Gulkovich P: +375 17 2899080Investmentbanking: Oleg Leontev P. +375 17 2899251

CZ: Raiffeisenbank a.s.Milan Fischer P: + 420 234 40-1145

HR: Raiffeisenbank Austria d.d.Ivan Zizic P: +385 1 4695-076

HU: Raiffeisen Bank Zrt.Gabor Liener P: +36 1 484-4304

KO: Raiffeisen Bank Kosovo J.S.C.Berat Isa P: +381 38 222222 229

PL: Raiffeisen Bank Polska S.A.Miroslaw Winiarsczyk P: +48 22 585 3710

RO: Raiffeisen Bank S.A.Aurelian Mihailescu P: +40 21 3061221

RU: AO RaiffeisenbankCapital Markets: Sergey Shchepilov P: +7 495 721 9977Investmentbanking: Oleg Gordienko P: +7 495 721 9900

SI: Raiffeisen Banka d.d.Marko Stolica P: +386 22293183

SK: Tatra banka, a.s. Peter Augustin P: +421 2 5919-1313

SR: Raiffeisen banka a.d. Branko Novakovic P: +381 11 2207131

UA: Raiffeisen Bank Aval Vladimir Kravchenko P: +380 44 49542 20

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