2015: A transition year

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1 CEE Banking Sector Report June : A transition year Upside on some CE/SEE markets Restructuring in HU and RO well advanced NPL improvements in CE/SEE, downside in EE 214 RoE in CEE at 6%, not much upside for Please note the risk notifications and explanations at the end of this document 1 IMPORTANT NOTICE: NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE US

2 Content Table of contents Executive Summary 3 Definition 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 Profitability (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 3 Slovakia 32 Slovenia 34 Croatia 36 Romania 38 Bulgaria 4 Serbia 42 Bosnia and Herzegovina 44 Albania 46 Russia 48 Ukraine 5 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 notifications and explanations 84 Disclaimer 86 2 Please note the risk notifications and explanations at the end of this document

3 Executive Summary Executive Summary CE/SEE: New lending cycle may start; balance sheet clean-up results in improved NPLs, but affects profitability 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 Dear reader of the CEE Banking Sector Report 215! The year 214 marked the 25 th anniversary of the fall of the Iron Curtain a historic event that laid the foundations for a success story in terms of economic development and political stability on the European continent. Yet, the celebrations were rather moderate, as 214 turned out to be quite challenging for the EU and Central and Eastern Europe (CEE) economically and politically. For one, 214 was characterized by great uncertainty stemming from the political tensions in the EE region. While the Ukrainian economy and banking sector saw a terrible year, Russia was still able to absorb the negative impacts from the economic nosedive, RUB collapse and Western sanctions. For 215, we expect a deterioration of key economic indicators with negative impacts gradually feeding into the banking sector performance. Moreover, the medium-term economic and banking sector outlook for Russia seems less favorable than anticipated some years ago. Hence, the largest foreign-owned banks may overthink their presence in Russia and consider more cautious business models, while stateowned banks might even increase their market share. Up until 216, we currently 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. Real GDP (% yoy) e 215f 216f CE/SEE EE Euro area Source: national sources, Eurostat, RBI/Raiffeisen RESEARCH Cross-border claims* The second major topic in 214 in European banking was the Asset Quality Review (AQR) and stress testing by the European Central Bank (ECB) and the European Banking Authority (EBA). The results were stricter regulations and requirements 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 negative effects stemming from the ultra-low interest rates environment resulted in profitability pressure in several key CE banking markets. Overall, the appeal of CE/ SEE banking markets, with the exception of Poland, the Czech Republic and possibly Slovakia, suffered compared to the euro area. Hence, our focus on the Deleveraging debate (page 11) discusses the current dilemma of Western banks in CEE. 5 Dec 7 Mar 1 Jun 12 Sep 14 CE/SEE EE Euro area * BIS-reporting Western European banks (Dec 27 = 1, latest data point Q4 214) Source: BIS, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 3

4 Executive Summary CEE: RoE & impact on foreign banks* (1) 1 (4) 11 (4) 12 (3) 13 (1) 14 (3) CEE RoE (right hand scale) Impact on foreign banks** * RoE and average market share loss-making CEE banking markets in %, loss-making in 214: Hungary, Romania, Ukraine ** Average market share foreign-owned banks on lossmaking CEE markets, number of loss-making markets - if any - in brackets on horizontal axis Source: national central banks, RBI/Raiffeisen RESEARCH CEE vs. EA profitability (RoE, %) CEE Euro area Long-term avg.* Max Min 214 * Source: national central banks, ECB, RBI/Raiffeisen RESEARCH 8 4 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 sustained basis. From a fundamental perspective, the turnaround markets of Hungary and Romania may be added to this group of countries. Both banking markets 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 215. 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 adjustment in recent years, we may see a return to growth and profitability based on a more constructive stance by Hungarian policymakers. In retrospective, 214 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 214, which is close to the number of loss making markets (four) seen in the aftermath of the global financial crisis in 28/9. The Russian banking market experienced a noticeable drop in profitability in 214 (RoE down from 15% to around 8% in 214, Q1 215 RoE at 4.8%). For 215, 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 optimization, 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 networks. Although we still expect 215 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 individual 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 215, 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 Please note the risk notifications and explanations at the end of this document

5 Subregions and economic overview CEE: GDP per capita (in % of European Union average)* Central Europe (CE) Eastern Europe (EE) 1 CZ HU PL SK SI AL BH BG HR RO RS BY RU UA f * at PPP; f: IMF forecasts Source: IMF WEO, RBI/Raiffeisen RESEARCH Key economic indicators Real GDP (%yoy) GDP (EUR bn) Southeastern Europe (SEE) Trade (% of GDP) Public debt (% of GDP) Unemployment (%) f Chg. (14-18f vs. -13) Poland Hungary Czech Republic Slovakia Slovenia CE Croatia Romania Bulgaria Serbia Bosnia and Herzegovina Albania SEE Russia , Ukraine Belarus EE , Euro area , Source: national sources, Eurostat, RBI/Raiffeisen RESEARCH Key institutional indicators Ease of Doing Business Rank* Getting Credit* Enforcing Contracts* Resolving Insolvency* Corruption Perception Index** Poland (EU) Hungary (EU) Czech Republic (EU) Slovakia (EU/EA) Slovenia (EU/EA) CE (avg.)*** Croatia (EU) Romania (EU) Bulgaria (EU) Serbia Bosnia and Herzegovina Albania SEE (avg.)*** Russia Ukraine Belarus EE (avg.)*** * out of 189 countries, ** out of 175 countries, *** regional aggregates unweighted averages Source: World Bank, Transparency International, RBI/Raiffeisen RESEARCH Key banking indicators Bank assets (EUR bn, 214) Assetsto-GDP (2) Assetsto-GDP (214) PL 36 61% 89% HU 12 67% 1% CZ % 126% SK 63 89% 81% SI 37 71% 1% CE % 98% HR 53 63% 123% RO 9 29% 61% BG 28 36% 14% RS 27 53% 85% BH 13 36% 92% AL % 98% SEE % 81% RU 1,136 32% 19% UA 68 23% 86% BY 33 28% 62% EE 1,238 31% 16% Source: national central banks, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 5

6 Banking trends in CEE Ownership structures and market concentration CEE: Presence of state-owned banks* CEE: Number of banks operating CE SEE EE (r.h.s.) * in % of total assets Source: national central banks, RBI/Raiffeisen RESEARCH 1,6 1,5 1,4 1,3 1,2 1,1 1, CE SEE EE (r.h.s.) Source: national central banks, RBI/Raiffeisen RESEARCH In the CE banking sectors, the secular trend of gradually decreasing foreign ownership ratios continued in 214. For the first time in over 15 years, the foreignownership share dropped slightly below 7% 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 8%, with a slight upward bias from 212 to 214. 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 failure of one fast growing local player. Hence, a modest correction in the SEE foreign ownership ratio could be in the cards for 215/16. In the EE countries, foreign ownership ratios are characterized by two very divergent trends. In Russia, the market share of 1% foreign-owned banks has been decreasing ever since 28. The 1% foreign ownership ratio in the Russian banking sector currently stands at 7.6%, the 5% foreign ownership ratio (which includes lenders with foreign participation and partially also Russian offshore-money) stands at some 14%. Compared to Russia, the market share of foreign-owned banks in Ukraine was on an uptrend in 214, 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 locally-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 1%, 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 213 to around 12% in 214. The overall state ownership in the CE region remains more stable at around 15%, mainly driven by Poland, Hungary and Slovenia (as state ownership is insignificant in the Czech and Slovak banking sector). In SEE, state ownership remains insignificant in all banking sectors, with the exception of Serbia where it stands at some 2%. With re- CEE: Presence of foreign-owned banks (% of total assets) 9 22 CEE: Average bank size (EUR bn)* CE SEE EE * Total assets divided by number of banks Source: national central banks, RBI/Raiffeisen RESEARCH Central Europe Southeastern Europe EE (5% foreign-owned Russian banks, r.h.s.) EE (1% foreign-owned Russian banks, r.h.s.) Source: national central banks, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document

7 Banking trends in CEE 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 214 and potential for further increases. The Russian Central Bank (CBR) expects the market share of state-owned banks to increase above 6% in the years ahead. Moreover, the de facto influence in the banking sector is even higher (and increasing) 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 214, while there was a further modest decrease in the state ownership ratio from very high levels in Belarus. Given the high fragmentation of the Russian and Ukrainian banking market, the challenges of 214 resulted as expected in an increased number of market exits and overall market consolidation. This trend comes as no surprise and is expected to continue in 215. 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 remained 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 concentration. In Ukraine, the high number of market exits (17 in 214 and at least 1 to 15 more as of May 215) may finally result in an improvement of overall market standards and practices. As a result, the market share of the Top 5 banks increased to 43% in 214 (up from the mid-3ies), which still leaves room for further 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 2 banks, while SEE continued to see a modest drop. Here, some 2 banks left the region in the past five to six years. However, as the SEE banking market is comparably small (total assets at some EUR 2 bn vs. EUR 75 bn in CE banking markets), the currently 17 banks operating in it still suggest more room for consolidation. That said, the overall profitability and margin pressure in CE and SEE (including core markets like Poland, Hungary and Romania) makes further consolidations in both regions likely. The Top 5 concentration in CE remains more or less constant at around 6%, with higher concentrations on the Czech and Slovak markets, but below average market 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 concentration 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 consolidating 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 market shares) in SEE to be concentrated in Romania and Serbia either in terms of organic growth or M&A. EE: Average bank size (EUR bn)* EE Russia Russia (excl. Sberbank, VTB) Ukraine * Total assets divided by number of banks Source: national central banks, RBI/Raiffeisen RESEARCH RU: Ownership & concentration (%)* Market share state-owned banks Market share Top 5 banks * in % of total assets Source: CBR, RBI/Raiffeisen RESEARCH CEE: Avg. market share Top 5 banks* CE SEE EE * in % of total assets Source: national central banks, RBI/Raiffeisen RESEARCH Financial analysts: Gunter Deuber, Elena Romanova, RBI Vienna Please note the risk notifications and explanations at the end of this document 7

8 Banking trends in CEE Focus on Russia: Harsh market and political trends to impact competitive landscape 214 was a challenging year for Russia, as its banking sector had to digest and adjust to multiple changes that also impacted its competitive 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 impact 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 214, it contracted by about 1% 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. Besides, along with the decreasing fragmentation of the Russian banking sector, there comes an increasing concentration within the remaining 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 214, we expect it to grow towards 6% in the course of the next couple of years. The current financial market turmoil, and the expected economic nosedive in 215/16, 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 volatility 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 distribute stabilization loans and other financial support to distressed systemic borrowers. In retail business, the recent state measures to support 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 support, 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 players, 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 banking 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 customers from foreign banks franchises, and respectively, all sorts of related business. RU: Market shares (% of total assets) 6% 5% 4% 3% 2% 1% 12% 1% 8% 6% 4% % 2% State-owned banks Foreign-owned banks (r.h.s.)* * 1% foreign ownership ratio Source: CBR, RBI/Raiffeisen RESEARCH Therefore, foreign banks, which kept their presence in Russia after the 28/9 crisis, have started to act towards de-risking in Russia. Whether accompanied by publicly declared programs, or just organically implemented on a routine basis, we expect the balance 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 contraction is hard to predict precisely. However, if today s trends in geopolitics stay approximately unchanged, without sudden significant worsening or improvement in the shortterm 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 22/3, 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 5 bn to 6 bn on the Russian market, while Russian assets of major foreign-owned banks stood at some EUR 5 bn to 1 bn some ten years ago. Financial analyst: Elena Romanova, RBI Vienna 8 Please note the risk notifications and explanations at the end of this document

9 Banking trends in CEE Financial intermediation levels, asset-to-gdp ratios Overall financial intermediation in CEE as measured by asset-to-gdp ratios increased from some 89% in 213 to well above 1% in 214. Hence, this ratio 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 modestly 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 214. Due to massive currency devaluation effects in the EE region (including the heavyweight Russia), tangible shares of assets in FCY as well as negative developments for the denominator (GDP), the increase of the 214 asset-to-gdp ratio in EE was stronger than the real asset growth. Moreover, Russian asset growth was also driven by other distorting effects, namely the strong banking sector expansion in the first half and state support to banks and corporates in the second half of 214 (which supported strong corporate loan growth). The average asset-to-gdp ratio in CE continues to remain more or less constant at around 98% a level that has not changed much since 28/9. For the SEE region, the year 214 was again characterized by another drop of the asset-to-gdp ratio, down by 2 pp to 8% in 214 about 6 pp below its peak in 21. The relative stability in the CE asset-to-gdp ratio masks stark and fundamentally backed intra-regional divergences, while the ratio s downward trend in SEE is more broad-based. In CE, the financial intermediation trends continue to remain more positive in Poland, the Czech Republic and Slovakia, while in recent years substantial drops in the asset-to-gdp ratio (by around 3 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 ratio in SEE, which was seen over the past few years, is well in line with our longheld view that some deleveraging was needed (and in some cases still is) following the brisk financial sector expansion that took place between the years 2 and 28/9. CEE: Asset-to-GDP ratios 11% 95% 8% 65% 5% 35% 2% CE SEE EE Source: national central banks, RBI/Raiffeisen RESEARCH CEE vs. EA: Total asset growth (% yoy) 35% 3% 25% 2% 15% 1% 5% % -5% -1% CEE* Euro area * EUR-based Source: national central banks, ECB, RBI/Raiffeisen RESEARCH CEE vs. EA: Long-term asset-to-gdp ratio trends 11% 1% 9% 8% 7% 6% 5% 4% 3% % 28% 26% 24% 22% 2% 18% CEE vs. EA: Asset-to-GDP catch-up 1% 1.4% 8% 1.%.6% 6%.2% 4% -.2% -.6% 2% -1.% % -1.4% CEE total assets (% of euro area) Change vs. euro area (pp, r.h.s.) Source: national central banks, ECB, RBI/Raiffeisen RESEARCH CEE total assets (% of GDP) Euro area total assets (% of GDP, r.h.s.)* * Excluding MFI-business Source: national central banks, ECB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 9

10 Banking trends in CEE Change total assets (EUR bn) Cross-border claims* , CEE* Euro area * EUR-based Source: national central banks, ECB, RBI/Raiffeisen RESEARCH 5 Dec 7 Mar 1 Jun 12 Sep 14 CE SEE RU TR EA * BIS-reporting Western European banks (Dec 27 = 1, latest data point Q4 214) Source: BIS, 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 215. Interestingly, the strongest deleveraging took place in Romania the one SEE country with possibly the least deleveraging needs from a fundamental point of view. Going forward, we see a chance that the asset-to-gdp ratio in CE continues its modest uptrend. In contrast, we do not see much near-term upside for the asset-to-gdp ratio in SEE. Although we see the Romanian banking sector ready for a new lending 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 countries are characterized by financial intermediation levels close to or even above thresholds that could be deemed as fundamentally backed and sound. A comparison of the wealth and financial intermediation levels with CE/SEE peers illustrates 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 11% of GDP) is about 11 pp above CE levels. A comparison to the still more leveraged SEE region is even clearer. On the one hand, GDP per capita levels in Russia 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 markets 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 outpacing GDP growth) without risks of accumulating too much threats to asset quality seems to be over. Hence and for the time being, Russia s banking sector cannot 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 increasing leverage of the Russian economy during the recent years of weaker economic 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 development 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 8% to 9%. 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 29 and 212, seems likely for the years ahead. This process will be supported by the massive banking restructuring as well as substantial write-offs (page 54). Cross-border claims* Dec 7 Mar 1 Jun 12 Sep 14 Czech Republic Romania Croatia Poland * BIS-reporting Western European banks (Dec 27 = 1, latest data point Q4 214) Source: BIS, RBI/Raiffeisen RESEARCH 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 214 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 2.4 bn to around EUR 2.2 bn in 214. Given slightly increasing banking assets inside the euro area the first increase in nominal terms since 211 overall CEE banking assets dropped from 9.7% of euro area banking assets to 8.6% in 214 (marking one of the strongest relative drops in recent years). That said, it seems that the (Western) 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 214. Financial analyst: Gunter Deuber, RBI Vienna 1 Please note the risk notifications and explanations at the end of this document

11 Banking trends in CEE 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 1% below their 28-levels, while overall international exposures or exposures to Western Europe (by Western European banks) were slashed by around 35% to 4% 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 7% from 28 to 214, 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 European 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 215, International Banking After the Crisis: Increasingly Local and Safer?, Chapter 2, pp ). A critical reflection of the success of the Vienna Initiative in stabilizing cross-border funding as well as crisis experience within Western 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 overall commitment of leading Western European banks to their large and locally embedded franchises in CEE can be seen by the development 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 divestments 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 challenging 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 overall 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. However, in the more challenging SEE markets, as well as in Hungary, Slovenia, Ukraine and since 214 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 reduction 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 providers of liquidity and financing to Russia, turned more conservative in terms of cross-border exposures to the country in 214, a clear decoupling of overall trends in emerging markets banking. Many drivers for the most recent reduction of cross-border exposures to Russia (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 216. This is why overall cross-border exposures to CEE are likely to see some downward pressure in 215, mainly driven by decreasing 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 certain dilemma for leading Western European CEE-lenders. On the one hand, they delivered 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 regular 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 substantial cross-border deleveraging. Given the modest deleveraging compared to their Western European peers, it comes as no surprise that most leading Western European CEE banks (still) have lower capitalization ratios than their peers (page 2) with a focus on non-cee markets (although there are other drivers for this development as well). Financial analyst: Gunter Deuber, RBI Vienna Cross-border claims* Dec 9 Feb 11 Apr 12 Jun 13 Aug 14 AT, IT, FR banks CEE European banks CEE AT, IT, FR banks Dev. Markets European banks Dev. Markets * Dec 29 = 1, latest data point Q4 214 Source: BIS, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 11

12 Banking trends in CEE Loan growth, growth by segments (retail, corporate) CEE: Loan-to-GDP ratio 6% 5% 4% 3% 2% 1% Loan-to-GDP ratio 75% 6% 45% 3% 15% % CE SEE EE Source: national central banks, RBI/Raiffeisen RESEARCH Hungary Romania CE-3 (PL, CZ, SK) SEE (excl. RO) Source: national central banks, RBI/Raiffeisen RESEARCH CE/SEE vs. EA loan growth (% yoy) Major trends in the regional CEE loan-to-gdp ratios are a reflection of the asset 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 214 (down from EUR 1.37 bn to EUR 1.2 bn). In relation to bank loans inside the euro area, the overall CEE loan stock dropped from 11.7% in 213 to 1.4% in 214 (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 214, at around EUR 55 bn or 4.7% of total loans inside the euro area. Hence, in terms of loan growth there was at least no significant underperformance of CE/SEE markets compared to the euro area in 214 (where total loan growth stood at.2% after two years of decline). Nevertheless, in 214 overall loan growth remained modest in CE and SEE as indicated 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 214 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 markets, reached some 3% yoy in 214, which has been the strongest level since 211 and quite decent given the subdued inflation developments. Therefore, the 214 loan-to-gdp ratios increased by several percentage points in the CE markets without adjustments needs (like in Hungary or Slovenia). Due to contracting 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 EURterms) dropped modestly from 5% to 48% in 214. Now the ratio stands some 5 pp below the peak levels of 53% (reached from 21 to 212) reflecting broad based regional deleveraging needs. As already mentioned, the strongest regional adjustment was observed in Romania, mainly driven by regulatory tightening 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. CEE vs. EA: Long-term loan-to-gdp ratio trends 3 5 6% 15% % 4% 14% 13% % 12% CE/SEE (total loans) Euro area (total loans, r.h.s.) 2% 11% Source: national central banks, ECB, RBI/Raiffeisen RESEARCH 1% % CEE total loans (% of GDP) Euro area total loans (% of GDP, r.h.s.)* * Excluding MFI-business Source: national central banks, ECB, RBI/Raiffeisen RESEARCH 12 Please note the risk notifications and explanations at the end of this document

13 Banking trends in CEE Hungary, Slovenia and Romania saw drops in their loan-to-gdp ratios by some 1 pp to 2 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 3% to 5% 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 211 to 214 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 cumulative LCY loan growth rates in relation to cumulative nominal GDP growth, the recent SEE deleveraging becomes even more obvious. From 211 to 214, nominal GDP growth in SEE stood at 2% (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 performance 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 currently remains geared towards more short-term transactions in corporate and retail 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 focused on working capital financing. The focus of many CEE banks on retail lending seems to be explained by still higher margins and better (risk-adjusted) return prospects. However, the recent substantially increased consumer protection on EU and CE/SEE banking markets should also support cautious business strategies in retail lending, in order to avoid unpleasant restructuring issues later on. Deleveraging Western Europe/EA* Spain Portugal Ireland UK Start credit cycle Peak 214 * Loan-to-GDP ratio (%), period from Source: national central banks, ECB, RBI/Raiffeisen RESEARCH Deleveraging CE/SEE* Hungary Romania Slovenia Start credit cycle Peak 214 * Loan-to-GDP ratio (%), period from Source: national central banks, RBI/Raiffeisen RESEARCH 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/mortgage lending has led to an increasing regulatory alertness. In some cases, like Slovakia, recommendations aiming 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 recommendations should be welcomed. This holds especially true as the mortgage loan penetration in CE and Croatia is not very low anymore and steadily increasing. Here mortgage loan-to- GDP ratios are currently hovering at around 2% of the GDP. At first sight such levels seem low compared to the average euro area mortgage loan-to- Mortgage loans (% of GDP) 5% 4% 3% 2% 1% % Poland Hungary Czech Rep. Slovakia Slovenia CEE * Larger EA countries with lowest mortgage loan-to-gdp ratios in 22 (AT, FR, BE, IT) ** Larger EA countries with highest mortgage loan-to-gdp ratios in 214 (NL, ES, FR, DE) Source: ECB, national sources, RBI/Raiffeisen RESEARCH Romania Bulgaria Croatia Russia Average Low* Euro area High** Please note the risk notifications and explanations at the end of this document 13

14 Banking trends in CEE CE: Loan growth LCY- vs. EUR-terms 35% 25% 15% 5% -5% CE loan growth (% yoy, LCY) CE loan growth (% yoy, EUR-based) Source: national central banks, RBI/Raiffeisen RESEARCH SEE: Loan growth LCY- vs. EUR-terms 5% 4% 3% 2% 1% % -1% SEE loan growth (% yoy, LCY) SEE loan growth (% yoy, EUR-based) GDP ratio at some 38% (some countries like Spain, France or the Netherlands even have a mortgage loan-to-gdp ratio of up to 4% to 6%). 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 2% (which are current mortgage loan penetration ratios in several CE/SEE economies). In Russia, overall loan growth, like the asset growth, looks inflated for 214. The Russian banking sector actually posted a higher loan growth rate in 214 yoy, although the overall economy was moving into a different direction. Even when corrected for FX effects, the overall 214 loan growth came in at fairly high levels of 12% to 15% yoy. This development is the result of a complex mix of various factors, while the overall market trends in Russia are definitely opposite to the picture in most other CEE banking markets. Corporate loans showed a striking increase, accelerating in the second half of 214. 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 indicated 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 activity 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 levels seen from 25 to 21, i.e. before the strong retail lending boom. A somewhat similar trend was visible in Ukraine, where the corporate loan stock in total loans also increased in 214, to a level of 8%. Therefore, the looming restructuring 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). Financial analyst: Gunter Deuber, RBI Vienna Source: national central banks, RBI/Raiffeisen RESEARCH Funding, deposit growth and L/D ratios EE: Loan growth LCY- vs. EUR-terms 75% 5% 25% % -25% EE loan growth (% yoy, LCY) EE loan growth (% yoy, EUR-based) Source: national central banks, RBI/Raiffeisen RESEARCH The past years trend in core funding dynamics in CEE, and its relation to the lending base, saw a continuation in 214 as well. The aggregated loan-to-deposit (L/D) ratio across the CEE banking markets remained stable at some 97% (i.e. notably below its peak at 114% in 28). Two general tendencies contributed to that in 214. 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 lending behavior of CE/SEE banks was going in parallel with still sanguine deposit dynamics within the banks. 214 was another good year for deposit funding growth in the entire CEE area, notwithstanding some countries headwinds, that left the respective banking systems in a tougher funding situation (e.g. Bulgaria, Russia and Ukraine). That said, 14 Please note the risk notifications and explanations at the end of this document

15 Banking trends in CEE 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-performance, we see sufficient room to finance a new, but more cautious, lending cycle going forward. In particular in those CE markets without secular deleveraging needs (i.e. the Czech Republic, Poland and Slovakia) the trend of loan and deposit growth continued in 214 at more or less similar levels, with a slightly stronger deposit growth in comparison to loan growth. Poland, for example, enjoyed deposit growth rates close to 1% yoy, the Czech Republic at 3% yoy and Slovakia at 4% yoy, all in LCY-terms. Banking markets with secular deleveraging needs (i.e. SEE as well as Hungary and Slovenia) continued to show a significantly 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 dynamics 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). CEE: FCY loans (% of total) CE SEE EE Source: national sources, Raiffeisen RESEARCH Across the CEE countries, the dynamics in EUR-terms were more diverse, as determined by the multidirectional trends in the local exchange rates, and in particular in Russia and Ukraine. As a result, the total deposit stock in the overall CEE area was significantly down by 1% (yoy, in EUR-terms) in 214. This includes a decline of 4% 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 26, with around 9% in 214. A similar pattern also revealed in Hungary and Slovenia, 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 deposit growth and L/D ratio posted decreases in 214. The L/D ratios in Russia have been gradually rising since the 28/9 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 214). CEE: Loan-to-deposit ratio 125% 115% 15% 95% 85% 75% CE SEE EE Source: national central banks, RBI/Raiffeisen RESEARCH CEE: Loan-to-deposit ratios at the country level (%) 16% 14% CEE vs. EA: Loan-to-deposit ratio 12% 12% 11% 1% 8% 1% 6% 4% 9% 2% % 8% Poland Hungary Czech Rep. Slovakia Slovenia* Romania Bulgaria Croatia Serbia Bosnia a.h. Albania Russia Ukraine* Belarus* CEE Euro area Source: national central banks, RBI/Raiffeisen RESEARCH CE SEE EE * Scale capped at 16%; Slovenia, Ukraine and Belarus in 28 with values above 16%; Sl: 166%, UA: 25%, BY: 171% Source: national central banks, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 15

16 Banking trends in CEE Profitability (Return on Assets, Return on Equity) CEE: Return on Equity (%) CE SEE EE CE (excl. Hungary) Source: national central banks, RBI/Raiffeisen RESEARCH Profitability in CEE banking was a mixed bag in 214. The overall CEE banking RoE has reached its lowest level at some 6.9% since the year 2. This disappointing performance can be attributed to several factors. First, in 214, three markets in the region, namely Hungary, Romania and Ukraine, turned negative, which is a significant worsening compared to 213, when only Slovenia made a loss and marks one of the worst years in CEE banking. Only in 21/11 the situation 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: -3%). 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 banking markets reached 61% in 214 (compared to 57% back in 211). CEE: Return on Assets (%) CEE: Loss-making banking markets* CE SEE EE Source: national central banks, RBI/Raiffeisen RESEARCH Number of countries with negative RoE * out of 14 CEE banking sectors covered in this report (loss-making 214: HU, RO, UA) Source: national central banks, RBI/Raiffeisen RESEARCH Second, in 214, the overall profitability pressure was notable also in profitable 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 1.3% to 9.2%; excluding Hungary, the regional RoE decreased from12% to 11.7%. Due to the relative maturing of the CE markets, the risk premium in the region went down, supporting the respective downwards pressure on profitability. Nevertheless, we want to emphasize 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 remained at meagre 3% and thus at a disappointing level ever since 29. Finally, the lower RoE margins in the CEE area reflect the new European regulatory 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 capitalization in their countries. CEE vs. EA: Return on Equity (%) CEE Euro area Source: national central banks, ECB, RBI/Raiffeisen RESEARCH 16 Please note the risk notifications and explanations at the end of this document

17 Banking trends in CEE Focus: Non-performing loans and NPL ratios Regarding NPL ratios, 214 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 214. Hence, on a regional level (whole CE aggregate) the NPL ratio dropped by.6 pp in 214 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 possible, 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). CEE: NPL ratios* CE SEE EE * % of total loans Source: national sources, RBI/Raiffeisen RESEARCH The regional SEE NPL ratio dropped by some 5 pp from 19.5% in 213 to 14.8% in 214. This turnaround follows an overall increase of 16 pp between 28 and 213. 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 improving 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 214 and in both markets we expect the asset quality either deteriorating further or stabilizing only very gradually in 215. In the SEE region, 3% of the NPL ratio increases of the years 28 to 213 were reversed in 214 three times as much as in the CE region. The boldness of the NPL ratio turnaround in SEE was reflected in a negative profitability performance of the overall SEE banking sector, largely driven by Romania, where the banking sector was once again loss-making in 214. In 214 and also in 215, 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 possible divestment and M&A transactions). As a first candidate for potential NPL sales transactions 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 jurisdiction 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 1% in 214. In contrast, NPL ratios inched up in all EE countries and we expect this trend to continue in 215. The NPL ratio in Russia increased from some 4.2% in January 214 to 5% in December 214. However, 214 was still characterized by modest asset quality deterioration, also supported by strong loan (which led to a downward bias in the NPL ratio). For 215, we expect a stronger deterioration of asset quality due to the looming recession of the Russian economy. The first months of 215 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 1% of total loans (depending on loan growth dynamics) in 215, while the overall restructured loans are expected at 2% to 3%. In Ukraine, we see IFRS-based NPL ratios once again at around 4%, while the recent adverse conditions may add 1 pp to 15 pp to this already high NPL stock. The looming structural banking sector clean-up (as requested by the IMF support package) may also add to NPL formation in 215. This may finally pave the way for a more sustained NPL resolution in 216 and beyond. In total, the diverging NPL ratio trends in the three CEE subregions were still somewhat offsetting each other in 214, resulting in a fairly stable overall CEE NPL ratio of 8.5%. However, in 215 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 215. Financial analyst: Gunter Deuber, RBI Vienna CEE: Markets with NPLs <1%* BY SK RU** CZ PL * year-end 214; ** RU: Latest data as of April 215 Source: national sources, RBI/Raiffeisen RESEARCH CEE: Markets with NPLs > 1%* HU RO SI BH BG HR RS AL UA* * UA: based on IFRS estimates, official ratio much lower; year-end 214 Source: national sources, RBI/Raiffeisen RESEARCH Overall CEE NPLs CEE NPLs (total EUR bn) CEE NPLs (% of total loans, r.h.s.) Source: national sources, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 17

18 Banking trends in CEE CE: Return on Equity (RoE, %)* 2% 15% 1% 5% % -5% -1% -15% HU SI** SK PL CZ * countries sorted by 214 RoE ** scale capped at -15%; Slovenia RoE 213: -31.6% 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 214 RoE marks a new 15-year low (previous lows were at around 9% in 29/1), 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 214, 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 214 there was a significant positive profitability gap between the CE RoE and the RoE in the EE banking sectors. In the second half of 214, the Russian banking sector RoE dropped to 7.9%, which is still well above the 4.9% crisis-driven slide recorded in 29. But given the further pressure on profitability, the expectations for 215 are still on the downside (Q1 215 RoE at 4.8%). The overall RoE in the EE banking markets stood at around 7% in 214, i.e. hardly above the average RoE on the CE/SEE banking markets, which bear a notably lower risk profile at the same time. SEE: Return on Equity (RoE, %)* 15% 1% 5% % -5% -1% -15% RO RS HR BH BG AL * countries sorted by 214 RoE Source: national sources, RBI/Raiffeisen RESEARCH EE: Return on Equity (RoE, %)* 2% 15% 1% 5% % -5% -1% UA** RU BY * countries sorted by 214 RoE; ** scale capped at -1%; Ukraine RoE 214: -3% Source: national sources, RBI/Raiffeisen RESEARCH Depending on the strength of the turnaround in larger CE/ SEE markets, in 215 the profitability of the CEE banking sector could fall below the one in Western European banking. This would be a first ever since the year 2, 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 perspective or in relation to funding costs), it will be difficult to sustain large and capitalconsuming franchises in some SEE markets, Russia or Ukraine. In 214, the aggregated RoA in CEE developed similarly to the RoE in the region. The RoA stood at fairly disappointing.8%, which is the same low level like back in 29. In the SEE and EE banking sectors, the 214 RoA readings were just at some 4% of their pre-crisis values, with the 214 RoE at just around 5% 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 longterm pre-crisis average and hence above the RoE (56% of its long-term pre-crisis average), which reflects the higher capitalization levels in the region. Excluding 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 215. In Romania, the plan to join the SSM is likely to result in further tough stress testing and possible 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 Russian market. Here the main factors will be the ability of the CBR to cut rates substantially without damaging the RUB stability, the pace of asset quality deterioration as well as the ability of Russian banks to cut costs and restructure their franchises. The previous credit growth cycle supported fairly expansionary and aggressive strategies, while cost inflation was a long-standing issue. Financial analysts: Gunter Deuber, Elena Romanova, RBI Vienna 18 Please note the risk notifications and explanations at the end of this document

19 Banking trends in CEE CEE banking growth and overall market outlook According to our current assessment, the prospects for CEE banking in 215 and 216 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 positive trends seen in major CE/SEE banking markets in recent years and in 214 in particular (e.g. deleveraging, improved L/D ratios, petering out of asset quality deterioration, increased tackling of NPL stocks). The increasing economic momentum 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 increasingly generated by domestic drivers. Such a situation should translate into growing demand for new lending and investment financing as well as longerterm transactions. Therefore, corporate lending and also SME lending may develop 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: Long-term banking growth outlook: Larger markets Average annual loan growth rate f (% yoy in LCY-terms) 14% 13% 12% 11% 1% 9% 8% 7% 6% Romania Czech Republic Russia Poland 5% Banking growth outlook (EUR- vs. LCY-terms) Current loan stock Loan stock growth* Avg. growth f EUR bn EUR bn % yoy, EUR Avg. growth f % yoy, LCY PL % 8.8% HU % 6.8% CZ % 6.6% SK** % 8.1% SI** % 4.% RO % 12.4% BG** % 3.8% HR %.1% RS % 7.6% BH** % 4.4% AL % 8.8% RU % 9.3% UA % 19.3% BY % 15.% Regions CE % 8.2% SEE % 8.1% EE % 1.3% CEE 1, % 9.5% * From f 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 arrangements Source: national sources, RBI/Raiffeisen RESEARCH Change in total loan volume year-end f (EUR bn) Source: national sources, RBI/Raiffeisen RESEARCH CEE: Long-term banking growth outlook: Smaller markets* Average annual loan growth rate f (% yoy in LCY-terms) 14% 12% 1% 8% 6% 4% 2% % Albania Croatia Bosnia and Herzegovina Serbia Bulgaria Slovenia Hungary Slovakia Change in total loan volume year-end f (EUR bn) * Ukraine and Belarus not shown due to expected decline in loan stock in EUR-terms Source: national central banks, Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 19

20 Banking trends in CEE Banking growth trough-the-cycle* Average loan growth f PL 15.2% 6.8% 8.8% HU 17.7% -4.7% 6.8% CZ 6.7% 4.8% 6.6% SK 1.9% 6.5% 8.1% SI 15.8% -8.8% 4.% RO 4.3%.6% 12.4% BG 34.%.9% 3.8% HR 16.2%.6%.1% RS 49.8% 4.4% 7.6% BH 16.7% 3.8% 4.4% AL 36.3% 8.8% 8.8% RU 38.% 22.1% 9.3% UA 48.1% 7.9% 19.3% BY 67.2% 36.7% 15.% Regions CE 13.% 4.5% 8.2% SEE 27.9% 1.5% 8.1% EE 39.7% 21.5% 1.3% CEE 31.2% 14.8% 9.5% * Loan growth rates in LCY-terms Source: national sources, RBI/Raiffeisen Research CET-1 ratios (%)*** Avg. large Avg. 3 leading Europ. banks** Western CEE banks* Year-end 214 Chg. CET-1 ratio 214 vs. 213 (bp, r.h.s.) * RBI, Erste, UniCredit ** Swedbank, SEB, Nordea, Danske, Intesa, Deutsche, HSBC, Standard Chartered, ING, SocGen, BNP, Commerzbank, Santander *** CET-1, fully loaded Basel III pro forma CET-1 ratios Source: company data, Bankscope, RBI/Raiffeisen RESEARCH and/or debt restructuring transactions. Given the fact that deleveraging and restructuring seem to be largely completed on larger CE/SEE markets, like Hungary and Romania, as well as the absence of restructuring and deleveraging needs in Poland, the Czech Republic and Slovakia, CE/SEE banking sector assets may develop in a fairly positive way over the next one to two years. As a result, deleveraging and restructuring needs in markets like Croatia, Serbia or Bulgaria 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 215. 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 215 and 216 (as indicated 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 pressure. 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 European 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 basis 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 banking sectors, e.g. via continuous ECB stress-testing or the continuous focus on capital 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 characterized by fairly low capitalization levels compared to major European peers and measured by current market standards, while doing business on CEE markets 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 214 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 cautious 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 215. Consequently, overall business strategies in CEE banking are likely to be dominated by balance sheet optimization, cost-cutting and very selective growth and investments strategies focusing on product optimization, modernization and operational efficiency. Hence, it is unlikely to see new market entries or large-scale expansions of ex- 2 Please note the risk notifications and explanations at the end of this document

21 Banking trends in CEE isting branch networks (page 55). Although we expect 215 to still 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 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 sustained 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 215. In several other CEE banking markets, such as Bosnia and Herzegovina, 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 increasing economic momentum and once again increasing inflation rates in CE/ SEE markets. On markets characterized by already elevated financial intermediation 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 financial 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 refinancing 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 Russian economy and banking sector to be weaker than following the strong hit seen in 28/9 (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 sector dynamics in Russia as well as the increased operational and legal risks resulting from having a larger local presence are likely to result in further strategic repositioning 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 order 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-scaling on the Russian market, as some of their customers (e.g. larger Western European corporates) are also taking a more conservative stance on Russia due to the tense EU-Russia relations and the outlook that Western-Russian economic relations are likely to have peaked. CEE: RoE vs. gov. bond yields (%)* CE SEE EE EA * Long-term LCY-yields if available for CEE countries, otherwise yields on long-term FCY instruments, for EA German Bund yields Source: national sources, RBI/Raiffeisen RESEARCH RU: Market footprint RBI, UniC, SocG 1, RU: Number of branches RU: Total assets (EUR bn, r.h.s.) Source: company data, RBI/Raiffeisen RESEARCH RU: Importance for RBI, UniC, SocG 24% 2% 16% 12% 8% 4% % 1% 5% % % RU: Total assets (% of total) RU: Number of branches (% of total, r.h.s.) * Compared to the whole CEE business at RBI, UniCredit and SocGen Source: company data, RBI/Raiffeisen RESEARCH Financial analysts: Gunter Deuber, Elena Romanova, RBI Vienna Please note the risk notifications and explanations at the end of this document 21

22 Poland Lending upswing, profitability may come under pressure Solid lending growth in 214 with a clear upturn in the corporate segment Sufficient domestic resources to fund growth at present; L/D ratio at lowest level for years Solution for CHF-loans may add to profitability pressure on highly competitive market Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Poland vs. all other CEE markets Source: NBP, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: NBP, RBI/Raiffeisen RESEARCH The Polish banking sector continued to profit from a solid macroeconomic development and GDP growth of 3.3% in 214. Moreover, the zero-inflation in 214 with its positive impact on nominal wage growth supported the increasing demand 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 finance themselves at very favorable conditions on the local bond market or internationally. Therefore, the Polish banking sector saw a modest financial deepening in 214, in line with the performance in other solid CE markets not characterized by fundamental deleveraging needs. Solid growth in new lending as well as fairly solid asset quality trends supported another modest drop of the NPL ratio to 8.1% in 214. In terms of refinancing, the trend of deposits growing faster than loans a development that has been characterizing the Polish banking sector since 212 continued in 214. The average L/D ratio reached about 15% the lowest reading since 27/8. Hence, there are sufficient domestic resources to finance the current decent loan growth and economic expansion. The banking sector s FCY exposure remains significant with some 3% of total loans. Consequently, the CHF shock in early 215 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, although 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 215. This will add to already increasing overall profitability and margin pressure. Key economic figures and forecasts Poland f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 9,463 9,95 1,144 1,43 1,842 11,218 11,92 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, RBI/Raiffeisen RESEARCH 22 Please note the risk notifications and explanations at the end of this document

23 Poland Profitability indicators were already a tad weaker in 214 compared to 213. It has to be stressed that, from a long-term perspective, overall profitability remains at fairly decent levels compared to the pressure recorded in other CEE markets. This holds especially true for the RoA as an indicator for core banking profitability. The increasing pressure on profitability is adding to a consolidation momentum on the highly competitive and still fairly fragmented Polish market. As large international banks, like Santander or BNP, are only present in Poland and no other CE/SEE markets, further M&A activity seems likely in 215 and beyond. Key banking sector indicators Market shares (214, eop) Others, 34,9% BOS, 1,3% Alior, 2,% Bank BPH, 2,1% Bank Handlowy Raiffeisen Polbank, (Citibank), 3,3% 3,5% Bank Millennium (BC Portugues), 4,% % of total assets Source: NBP, RBI/Raiffeisen RESEARCH PKO BP, 15,9% Bank Pekao (UniCredit), 1,9% mbank (Commerzbank), 7,7% ING Bank, 6,5% BZ WBK (Santander + Kredyt Bank), 7,9% 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 Balance sheet data Total assets (EUR mn) 292, ,1 33, ,95 359,52 growth in % yoy in % of GDP Total loans (EUR mn) 176, , ,23 22,242 21,17 growth in % yoy in % of GDP Loans to private enterprises (EUR mn) 55,472 59,888 66,593 67,24 7,614 growth in % yoy in % of GDP Loans to households (EUR mn) 12,48 12,447 13, , ,79 growth in % yoy in % of GDP Mortgage loans (EUR mn) 67,547 72,223 78,76 81,83 83,468 growth in % yoy in % of GDP Loans in foreign currency (EUR mn) 6,46 64,789 62,465 6,567 65,341 growth in % yoy (3.6) (3.) 7.9 in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 156, , ,97 186,97 2,387 growth in % yoy in % of GDP Deposits from households (EUR mn) 16,648 18,78 126, , ,271 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBP, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 23

24 Hungary Reconciliation between government and banks continues Government to cut banking tax and refrain from harmful measures Household FX-mortgage loans converted to HUF National Bank s funding scheme extended Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Hungary vs. all other CEE markets Source: MNB, national central banks, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) * in LCY-terms Source: MNB, RBI/Raiffeisen RESEARCH Key economic figures and forecasts The Hungarian economy left behind its long-lasting misery and a GDP growth of 3.6% surprised on the upside in 214. This growth was driven by strong exports, public sector investment activity, slowly recuperating household consumption demand, and the National Bank s Funding for Growth Scheme (FGS). After a long period of deleveraging (29 to 213), the first bright spots appeared in the Hungarian banking sector in the course of 214. 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-213, and by the end of 214, a total of HUF 1,3 bn was disbursed through commercial banks. Households were still in the process of paying back FX-loans, but net household lending in local currency turned positive in 214. Deposits increased by 1.7% due to corporate deposits, while household deposit depletion slowed compared to the massive outflow registered in 213 (-1% vs. -1%). After peaking at 14.% in 213, NPLs started to inch down to 13.3% in 214. 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 215. Due to the Settlement Act and the hefty banking levy, banking sector profitability turned negative in 214 (RoA: -1.3% and RoA: -13.2%), while the CAR stayed at an elevated level. For more details on regulatory measures affecting the Hungarian banking sector in recent years see pages In 214, the government purchased MKB from Bayerische Landesbank and announced its plan to purchase Budapest Bank form GE Finance in 215. It seems likely that these banks will be merged to become the country s second largest commercial bank. In early 215, 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 Hungary f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 9,771 1,48 9,938 1,147 1,459 11,85 11,418 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, RBI/Raiffeisen RESEARCH 24 Please note the risk notifications and explanations at the end of this document

25 Hungary Market shares (214, eop) Others, 31.3% BB (GE Money)*, 3.1% MFB*, 4.6% CIB (Intesa), 5.5% Erste, 5.9% MKB*, 6.1% % of total assets; * MFB and MKB state-owned, state ownership planned for BB Source: MNB, RBI/Raiffeisen RESEARCH OTP, 22.2% K&H (KBC), 7.6% UniCredit, 7.% Raiffeisen Bank, 6.7% the government and the EBRD, agreeing on a gradual cut of the banking tax starting in 216, to refrain from implementing any measures that could potentially damage the banking sector s profitability as well as on the privatization of recently acquired stateowned 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, consolidation and profitability pressure are likely to remain due to the strict regulation of retail lending fees as well as the possible pressure on margins from the growing market presence of stateowned 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 ( ), Raiffeisen Bank Zrt., Budapest Key banking sector indicators Balance sheet data Total assets (EUR mn) 121, ,934 17,899 14,589 11,652 growth in % yoy (2.9) (7.7) (3.6) (3.1) (2.8) in % of GDP Total loans (EUR mn) 59,964 53,678 5,3 46,149 42,935 growth in % yoy 3.2 (1.5) (6.8) (7.7) (7.) in % of GDP Loans to private enterprises (EUR mn) 27,369 24,842 23,757 22,496 21,486 growth in % yoy (2.4) (9.2) (4.4) (5.3) (4.5) in % of GDP Loans to households (EUR mn) 3,919 27,351 24,832 23,19 21,366 growth in % yoy 7.7 (11.5) (9.2) (7.3) (7.2) in % of GDP Mortgage loans (EUR mn) 24,699 22,159 2,55 18,488 17,286 growth in % yoy 11.1 (1.3) (9.5) (7.8) (6.5) in % of GDP Loans in foreign currency (EUR mn) 36,962 32,854 27,41 23,731 21,774 growth in % yoy 3.7 (11.1) (16.6) (13.4) (8.2) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 42,742 4,449 42,856 41,83 4,141 growth in % yoy (2.) (5.4) 6. (2.4) (4.) in % of GDP Deposits from households (EUR mn) 26,58 25,57 26,426 23,373 21,897 growth in % yoy (4.3) (5.7) 5.5 (11.6) (6.3) in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Market share of foreign-owned banks (ex. OTP, % of total assets) Profitability and efficiency Return on Assets (RoA).2 (.2) (.4).5 (1.3) Return on Equity (RoE) 2.3 (1.7) (3.8) 4.5 (13.2) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: MNB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 25

26 Hungary Focus: A big-picture view on Hungarian banking Sturdy leveraging and high (short-term) lucrativeness pre-crisis caused large-scale rebalancing Turnaround following very harmful policy against (foreign-owned) banks in 214, excessive bank tax to be cut Growth focus of government requests healthy banks, some implementation risks in more bank-friendly policy agenda Return on Equity (%) Hungary CE-3* * CE-3: PL, SK, CZ Source: national central banks, RBI/Raiffeisen RESEARCH Return on Assets (%) Hungary CE-3 Source: national central banks, RBI/Raiffeisen RESEARCH Pre-crisis boom and deleveraging phase From 2 to 28, the Hungarian banking market was a highly attractive and profitable place for (foreign-owned) banks. With an average RoE of 2% (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 certain overshooting (e.g. in terms of loan-to-gdp or L/D ratios). This holds especially true as lending growth was still strong in times of subdued economic expansion, 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 downsides 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 challenging legal and operational environment, it comes as no surprise that Hungary s banking market finally came to see a protracted deleveraging (from 29 to 214). 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 incountry risk positions, definitely added to a negative sentiment towards banks and foreign-owned lenders in particular. This in turn ultimately led to a vicious cycle of growing legal and operational risks and additional rounds of deleveraging on behalf of (foreign-owned) banks. GDP and total loans (LCY) GDP and total loans (EUR) 35, 18, , 25, 2, 15, 1, 5, Boom-Phase Deleveraging- Phase 15, 12, 9, 6, 3, Boom-Phase Deleveraging-Phase Nominal GDP (HUF bn) Total loans (HUF bn, r.h.s.) Nominal GDP (EUR bn) Total loans (EUR bn, r.h.s.) Source: national central banks, RBI/Raiffeisen RESEARCH Source: national central banks, RBI/Raiffeisen RESEARCH 26 Please note the risk notifications and explanations at the end of this document

27 Hungary Measures negatively influencing the Hungarian banking sector Banking sector levy:.53% based on total assets as at year-end 29, unchanged in the period from 21 to 215, 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 FXmortgage loans were repaid at the preferential exchange rate of CHF/HUF 18 (at a market rate of 22 to 23). The difference resulted in a loss of almost EUR 1 bn for the banking sector. Financial transactions levy: All financial transactions are taxed at.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 15, 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, causing a one-off loss of EUR 3 bn for the sector. Fair Banking Act: The National Bank of Hungary strictly regulates the terms and conditions of new household loans from 215 onwards. NPLs (% of total loans) Hungary CE-3 Source: national central banks, RBI/Raiffeisen RESEARCH Market share foreign-owned banks* 95 8 A very harmful policy turn for banks In light of the sketched up-and-down dynamics, the regulatory action seen in recent years was clearly aimed at punishing past behavior and reclaiming parts of earlier profits. Some measures were designed to hit banks that grew aggressively 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 21, namely to deliver an overhaul of the banking structures, finally resulted in a substantial drop of the foreign-ownership ratio (now in a range of 5% to 6% 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 Hungary (excl. OTP, % of total assets) CE-3 Romania * % of total assets Source: national central banks, RBI/Raiffeisen RESEARCH Basically, the current Fidesz/Orbán government, which has been in power since 21, has always had an explicitly negative attitude towards the banking sector. This stance was based on the generally quite negative feelings of the Hungarian public against banks, as well as on the attempts of the current government to differentiate itself from the previous (Socialist) administration labelled as a bankers government (partly because of the business background of several cabinet members and the IMF program that started in 28). As there was no room to increase budget deficits after the 21 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 previous austerity stance burdening mostly households. Therefore, putting an extra tax burden on the banking sector seemed to be a natural choice (later to be followed 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 indebted 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. Please note the risk notifications and explanations at the end of this document 27

28 Hungary Loan-to-GDP ratio (%) 75% 6% 45% 3% 15% % Hungary CE-3* Romania * CE-3: PL, SK, CZ Source: national central banks, RBI/Raiffeisen RESEARCH Change loan-to-gdp ratio (pp) Hungary CE-3 Romania Source: national central banks, RBI/Raiffeisen RESEARCH 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 5%. As a starter, the government purchased DZ Bank s stake in Takarékbank the central bank of saving cooperatives in 213 (the public stake was later sold to selected private participants of the saving cooperation system). The government also raised capital in small privately owned local lenders (Gránit Bank, Széchenyi Bank). In 214, it purchased MKB from Bayerische Landesbank and in 215, 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 1%. In February 215, 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.53% to.31% in 216 and further down later on, aligning it with general EU norms by 219), while the tax base is changed from total assets as at year-end 29 to year-end 214 (which is a more proper measurement given market shifts and deleveraging seen in recent years). The government also pledges not to purchase further stakes in systemically 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 policymaking (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 215? FCY loans (% of total loans)* Hungary CE-3* Romania * SK included until 29, afterwards average of PL and CZ Source: national central banks, RBI/Raiffeisen RESEARCH 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 protection 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 ownership and showing a paradigm shift towards banks. So, what is the explanation for the policy shift towards banks in 215? (1) The government achieved the above targets; (2) economic policy is shifting its emphasis on growth, for which it needs a supportive banking sector; and (3) the negative 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 related to the series of brokerage scandals erupting in early 215 with considerable losses (amounting to EUR 1 bn) and the government s attempt to make the financial sector pay the bill, disregarding the rules of the games set earlier. This is a continuation of the political routine witnessed between 21 and 214, and risks the violation of the MoU as well as halves the positive financial impact of the banking tax cut (for banks). 28 Please note the risk notifications and explanations at the end of this document

29 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 214 and 215. Several foreign players are exiting fully or partially. Moreover, the MKB-BB merger is seen to take place with an eventual privatization in 217 or 218. 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 selective 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 influence on some larger market players. This holds especially in corporate lending, while retail lending is expected to suffer from margin pressure resulting from increasing (fee) regulation. As things stand, it will be difficult to achieve doubledigit RoE numbers on the Hungarian market within the next three years. The outlook 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 213/14 as well as a more supportive government stance towards banks, the relative attractiveness 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 ultralow 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 segments 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 supply 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 ( ), Raiffeisen Bank Zrt., Budapest Loan-to-deposit ratio 15% 135% 12% 15% 9% 75% 6% 45% Boom-Phase Deleveraging- Phase Hungary CE-3 Romania Source: national central banks, RBI/Raiffeisen RESEARCH Cross-border claims* Dec 7 Mar 1 Jun 12 Sep 14 Hungary CE-3 Euro area Romania * BIS-reporting Western European banks (Dec 27 = 1, latest data point Q4 214) Source: BIS, RBI/Raiffeisen RESEARCH Cross-border claims* Dec 99 Dec 4 Dec 9 Dec 14 Hungary CE-3 * BIS-reporting Western European banks (Dec 2 = 1) Source: BIS, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 29

30 Czech Republic Slowly moving towards clear waters Economy expected to accelerate due to competitive FX rate, expansive fiscal policy and low oil price Meager lending recovery driven by household loans and mortgages Low level of interest rates promotes alternative investment decisions Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows the Czech Republic vs. all other CEE markets Source: CNB, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: CNB, RBI/Raiffeisen RESEARCH In 214, the Czech GDP posted a 2.% growth, following a decline of.7% in the year before. For 215, we forecast economic growth to accelerate to 2.4%. Despite the economic recovery and the labor market improvement, we expect inflation in 215 to remain low at.2%. After an excessive asset growth of 8.8% in 213, backed by the CNB FX interventions, the Czech banking sector s assets returned to a more conventional growth rate of 3.7% in 214. In 214, the growth rate of total loans followed the pattern and decelerated slightly to 4.8% from 6.5% in 213. Household loans remained the major growth driver, keeping 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, consumer credits decreased again, namely by.4% in 214. The development of corporate loans was below expectations with an increase of only.9% in 214. In line with our expectations, the deposit growth rate was decreasing to 2.9% in 214. This, however, was not a result of any significant withdrawals by households or corporations, which posted a healthy growth of 5.7% and 8.%, respectively. The decline came on the back of decreases in deposits from financial institutions (down 11% yoy) and the government (down 18% yoy). The L/D ratio thus rose slightly to 76.7%. In 214, 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 213. Therefore, the profitability of the banking sector remained stable in 214 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 capital requirements. The total CAR increased to 17.7% in 214, and the CAR Tier1 reached 17.3%. The quality of loan portfolio did not change significantly in 214. 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 6.4% as at year-end 214, mostly due to the base effect, i.e. resulting from the growing loan stock. Key economic figures and forecasts Czech Republic f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 14,949 15,61 15,348 14,976 14,75 15,179 16,67 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 3 Please note the risk notifications and explanations at the end of this document

31 Czech Republic The Czech banking sector operates in an extremely low interest rates environment. Although not dramatically, the impact still started to be reflected in the banks deposit structures. The total amount of term deposits declined by 13% in 214, 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 Market shares (Q3 214, eop) Air Bank, 1.1% Sberbank, 1.3% PPF banka, 2.2% J&T Banka, 2.3% GE Money, 2.6% Others, 27.5% Raiffeisen Bank, 3.9% UniCredit, 9.1% % of total assets Source: CNB, RBI/Raiffeisen RESEARCH CSOB (KBC), 18.4% KB (SocGen), 15.7% CS (Erste), 15.9% 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 current 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 ( ), Raiffeisenbank a.s., Prague Key banking sector indicators Balance sheet data Total assets (EUR mn) 173,191 18,458 19,777 19, ,677 growth in % yoy (.3) 2.3 in % of GDP Total loans (EUR mn) 86,99 9,26 94,221 91,992 95,2 growth in % yoy (2.4) 3.5 in % of GDP Loans to private enterprises (EUR mn) 31,217 32,416 33,351 31,726 31,66 growth in % yoy (4.9) (.4) in % of GDP Loans to households (EUR mn) 38,431 39,498 41,719 39,966 41,231 growth in % yoy (4.2) 3.2 in % of GDP Mortgage loans (EUR mn) 24,187 25,798 27,966 27,316 28,789 growth in % yoy (2.3) 5.4 in % of GDP Loans in foreign currency (EUR mn) 11,97 13,42 13,83 16,742 17,745 growth in % yoy in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 111, ,71 124, ,24 124,18 growth in % yoy (2.1) 1.6 in % of GDP Deposits from households (EUR mn) 61,457 62,48 65,898 61,725 64,441 growth in % yoy (6.3) 4.4 in % of GDP Total deposits (% of total credits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: CNB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 31

32 Slovakia Sober performance backed by retail banking Increase of aggregate loan volume due to accelerating retail loans Slovak banks passed AQR and stress test, confirming buffers for further expansion Low-interest rate environment had a negative impact on margins and profitability Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Slovakia vs. all other CEE markets Source: NBS, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) Source: ECB, RBI/Raiffeisen RESEARCH Key economic figures and forecasts* The Slovak economy experienced a strengthening of GDP growth to 2.4% in 214, coming from 1.4% in 213. The main driving force was domestic demand, 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 2% upswing. Although the growth rates are high, we do not see them yet as a matter of concern regarding 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 positive 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 mortgage loans, and more detailed checks regarding the borrower s income sustainability and credibility. However, this new policy and its goal to limit retail lending 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 already reached the level of France or the Netherlands. This makes us hesitant to expect that the growth of household loans would decrease in 215, and if at all, we expect the decrease to be only moderate. In contrast, corporate loans stagnated in 214. 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 214 despite the sustainable growth of the loan base. While in part possibly driven by accelerating consumer lending, the NPL ratio may also have been affected by a more conservative 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 increased to 91%, leaving substantial room for further loan growth in 215. 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 Slovakia f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 12,395 13,12 13,358 13,61 13,885 14,213 14,562 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) * Slovakia is a euro area member as of 1 January 29 Source: national sources, wiiw, Raiffeisen RESEARCH 32 Please note the risk notifications and explanations at the end of this document

33 Slovakia good profitability (RoE close to 1% in 214). We expect the sector s financial result in 215 to be further supported also from the legislative side. The bank levy has halved since the beginning of 215. Another supportive stance will be a lower contribution to the deposit protection scheme starting from 215 onwards. At the same time, we expect some negative pressure on the sector s financial standing from shrinking interest margins, as the Slovak banks cannot bring down the level of deposit interest rates in accordance with the decreased interest rates on loans. Interest rates on term deposits are currently above EURIBOR Market shares (214, eop)* OTP Banka, 2.5% Sberbank, 3.5% Prima Banka (Penta), 3.3% Postova banka, 7.2% Others, 23.% CSOB (KBC), 1.3% Slovenska Sporitelna (Erste), 22.3% % of total assets; * UniCredit not shown as operations in Slovakia are parts of Czech operations Source: NBS, RBI/Raiffeisen RESEARCH VUB Banka (Intesa), 19.2% Tatra Banka (Raiffeisen), 16.6% 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 negative effect on their gross income. Financial analyst: Juraj Valachy ( ), Tatra banka, a.s., Bratislava Key banking sector indicators Balance sheet data Total assets (EUR mn) 54,695 55,775 58,86 59,554 62,742 growth in % yoy in % of GDP Total loans (EUR mn) 33,452 36,624 37,87 39,99 42,534 growth in % yoy in % of GDP Loans to private enterprises (EUR mn) 15,688 16,677 16,277 16,317 16,23 growth in % yoy (2.4).2 (.7) in % of GDP Loans to households (EUR mn) 14,773 16,362 17,94 19,733 22,125 growth in % yoy in % of GDP Mortgage loans (EUR mn) 1,581 12,14 13,29 14,86 16,872 growth in % yoy in % of GDP Loans in foreign currency (EUR mn) growth in % yoy (9.5) (2.9) 57.7 (21.3) (2.2) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 39,642 4,426 42,98 44,823 46,668 growth in % yoy in % of GDP Deposits from households (EUR mn) 22,248 23,869 25,312 25,99 27,41 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBS, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 33

34 Slovenia Out of the negative territory, but restructuring needs remain 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 214, but structural risks remain Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Slovenia vs. all other CEE markets Source: BSI, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) Source: ECB, RBI/Raiffeisen RESEARCH Key economic figures and forecasts* After two years of decline in growth, the Slovenian economy grew again by 2.6% in 214. Our positive outlook for 215/16 is an indication that the recent 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 improvement in the major performance parameters. The main push for this positive development was the banking sector clean-up, which started in late 213. 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 Asset Management Company (BAMC) as well as the write-off of EUR 44 mn of non-performing debt and the unwinding of Probanka and Factor Banka. Following these measures, the share of non-financial private sector NPLs came down to 16% in the third quarter of 214 (as per an estimate of the European Commission). 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 214, due to low corporate demand, continual high leverage of large corporations, and the ongoing restructuring 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 28, thereof EUR 2.8 bn in 213 and about EUR 1 bn in 214. Although 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 214. External debt redemption demanded sizeable resources that hence could not be used for domestic lending, and as a result, the non-financial private sector loan stock decreased by 12%. Corporate lending growth declined by 19%, whereas retail loans remained flat. Government deposits are gradually losing their importance for the banking sector 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 deposits contracted by EUR.7 bn in 214. The sector s refinancing risk is gradually improving due to external debt redemption and moderate private deposits growth. As at year-end 214, the share of Slovenia f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 17,694 17,985 17,521 17,554 18,153 18,767 19,519 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) * Slovenia is an euro area member as of 1 January 27 Source: national sources, wiiw, Raiffeisen RESEARCH 34 Please note the risk notifications and explanations at the end of this document

35 Slovenia external debt has decreased to 16% of the banks total funding. The share of private 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 total liabilities as at year-end 214. These trends on the asset and liabilities sides resulted in a decline of the L/D ratio to 15% in 214 (excluding loans and deposits by MFIs). Compared to the L/D ratio of 15% back in 211/12, this development 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 21. In the third quarter of 214, profitability (in terms of pre-tax profits) 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 potential for an upside development in 215 and beyond. However, on the fundamental 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 4% of equity value of non-financial companies). Also, it is possible that, with the re-start of a new corporate lending cycle, a new wave of inferior asset quality will again be accumulated by the large (state-controlled) banks. Market share ranking as of 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 (stateowned) 5 Abanka Vipa (state-owned) Raiffeisen Bank Slovenia (RBI) Source: BSI, RBI/Raiffeisen RESEARCH Financial analyst: Elena Romanova, RBI Vienna Key banking sector indicators Balance sheet data Total assets (EUR bn)* growth in % yoy 1.1 (.4) (2.4) (11.) (5.6) in % of GDP Total loans (EUR bn)* growth in % yoy 3.4 (2.4) (3.9) (16.7) (12.1) in % of GDP Loans to private enterprises (EUR bn) growth in % yoy. (3.3) (7.4) (25.) (19.1) in % of GDP Loans to households (EUR bn) growth in % yoy (2.1) (4.3). in % of GDP Mortgage loans (EUR bn) growth in % yoy in % of GDP Total deposits (EUR bn)* growth in % yoy (2.) in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) n.a. Profitability and efficiency Return on Assets (RoA) (.2) (1.1) (1.6) (2.6).4 Return on Equity (RoE) (2.4) (11.7) (19.) (31.6) 3.8 Capital adequacy (% of risk weighted assets) Tier-1 capital adequacy (%) Non-performing loans (% of total loans) * excluding MFI business; Source: BSI, ECB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 35

36 Croatia Still waiting for the upturn Weak economic performance and overleverage kept banking activities subdued NPL ratio showed no improvement in 214 upside risks for 215 due to concerns over CHF-denominated loans Banking system remains well-capitalized despite stagnating economy Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Croatia vs. all other CEE markets Source: CNB, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-9 May-1 Sep-11 Jan-13 May-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: 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 environment, deteriorating asset quality, and shrinking cross-border funding possibilities, 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 214 due to the long-lasting deleveraging process in the household sector and the continued decrease of business activity in the corporate sector. Nevertheless, the aggregate Croatian leverage remains high by CEE standards. The volume of household loans is close to 4% of GDP, while the overall corporate indebtedness exceeds 8% of GDP. Only about a third of the latter, however, are domestically issued loans, while the majority is direct borrowing from abroad. NPLs have continued to rise also on the back of the loan base contraction in 214. At the end of the year, the share of NPLs in the total loan portfolio reached 17.%, with corporate NPLs exceeding 3%. In this segment, construction and real estate companies are suffering the most due to declining demand and prices following the economic downturn. Pressure on asset quality also comes from FCY-denominated lending to households, as CHF mortgage loans account for 36% of total mortgage loan volume. In January 215, 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 instalments maturing in 215. The financial burden of the resulting differences between 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 215 financial results and may well lead to deterioration of its profitability indicators, which posted an improvement in 214 (RoE at 3.3%, RoA at.6%). In 214, the Asset Quality Review was conducted for Croatian banks in line with the common European methodology. The results indicated that after asset reclassification, the sector-wide CAR of more than 21% was one of the highest capital- Key economic figures and forecasts Croatia f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 1,479 1,427 1,282 1,225 1,148 1,149 1,38 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 36 Please note the risk notifications and explanations at the end of this document

37 Croatia ization levels within the entire CEE region. The reason for this sound capitalization is the market domination of Western European banking groups, which can recapitalize their Croatian subsidiaries more easily than domestic players. Currently, about 9% of the assets in the 28 banks operating 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 takeovers of smaller banks by larger players as well as bank closures can therefore not be excluded. Market shares (214, eop) HPB, 4.3% OTP, 3.9% Hypo Alpe Adria Bank, 7.% Splitska Banka (SocGen), 7.1% Sberbank, 2.5% Raiffeisenbank, 7.8% % of total assets Source: CNB, RBI/Raiffeisen RESEARCH Others, 9.8% Erste, 14.9% Zagrebacka Banka (UniCredit), 25.4% Privredna Banka (Intesa), 17.1% Financial analyst: Anton Starcevic ( ), Raiffeisenbank Austria d.d., Zagreb Key banking sector indicators Balance sheet data Total assets (EUR mn) 53,958 55,137 54,32 53,116 52,688 growth in % yoy (2.) (1.7) (.8) in % of GDP Total loans (EUR mn) 37,459 38,93 38,18 37,91 36,984 growth in % yoy (2.3) (.3) (2.4) in % of GDP Loans to private enterprises (EUR mn) 11,948 12,664 11,474 11,94 1,997 growth in % yoy (3.6) 6. (9.4) (3.3) (.9) in % of GDP Loans to households (EUR mn) 17,549 17,379 17,118 16,619 16,449 growth in % yoy 4.9 (1.) (1.5) (2.9) (1.) in % of GDP Mortgage loans (EUR mn) 8,731 8,83 8,713 8,44 8,232 growth in % yoy (1.) (3.1) (2.5) in % of GDP Loans in foreign currency (EUR mn) 28,29 29,686 28,366 28,161 27,257 growth in % yoy (4.4) (.7) (3.2) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 36,539 37,348 36,157 36,837 37,459 growth in % yoy (3.2) in % of GDP Deposits from households (EUR mn) 21,449 22,11 22,99 23,484 23,89 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: CNB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 37

38 Romania Getting ready for a new lending cycle Lending activity showed signs of recovery with the new LCY-denominated loans taking off in 214 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 Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Romania vs. all other CEE markets Source: NBR, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: NBR, RBI/Raiffeisen RESEARCH The GDP growth of 2.9% in 214 was better than expected and mostly driven by increasing private consumption. Household spending picked up due to improving labor market conditions, but demand for loans stayed suppressed nevertheless. Corporate sector demand for borrowed funds remained low as well, as companies 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 214. The aggregate lending decline, however, masks the restructuring of the credit risk within the Romanian banking sector, which will in our opinion eventually lead to a healthier new lending take-off. 214 saw divergent trends in the FCY versus LCY lending segments: while the active de-risking across all business lines resulted in a decline of 1% 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 corporate lending declined by over 1% in 214, LCY corporate loans grew by 2.5% over the same period of time. In 214, 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 increase 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 29 of about EUR 1 bn, it also resulted in the intended sharp fall of the NPL ratio from 2.5% in April 214 to 13.9% at yearend. 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 Requirements (MRR) for local banks from 15% to 1% for RON liabilities and from 2% to 14% for FCY liabilities. This regulation helped to improve the sector s funding 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 214 (at year-end 28, this ratio had peaked at 3.7%). Key economic figures and forecasts Romania f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 6,276 6,634 6,685 7,235 7,563 8,5 8,582 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 38 Please note the risk notifications and explanations at the end of this document

39 Romania Market shares (214, eop) Others, 45.9% UniCredit, 7.9% % of total assets, preliminary data Source: Ziarul Financiar, RBI/Raiffeisen RESEARCH BCR (Erste), 16.2% Raiffeisen Bank, 7.9% BRD (Societe Generale), 12.4% Banca Transilvania, 9.8% Following several years of restructuring, Romanian banks are now well prepared to expand lending again. Supported by low interest rates, private 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 216, following an extensive local AQR in 215. 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 following the recent acquisition of Volksbank 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 ( ), Raiffeisen BANK S.A., Bucharest Key banking sector indicators Balance sheet data Total assets (EUR mn) 89,96 9,925 91,451 91,139 9,483 growth in % yoy (.3) (.7) in % of GDP Total loans (EUR mn) 49,28 52,125 51,562 49,77 47,547 growth in % yoy (1.1) (4.8) (3.1) in % of GDP Loans to private enterprises (EUR mn) 24,692 27,18 27,289 25,34 23,842 growth in % yoy (7.3) (5.8) in % of GDP Loans to households (EUR mn) 23,889 24,199 23,647 23,87 22,811 growth in % yoy (2.3) (2.4) (1.2) in % of GDP Mortgage loans (EUR mn) 6,776 7,753 8,393 9,132 1,9 growth in % yoy in % of GDP Loans in foreign currency (EUR mn) 31,131 33,183 32,351 3,27 26,989 growth in % yoy (2.5) (7.2) (1.1) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 44,843 46,866 47,612 51,174 55,225 growth in % yoy in % of GDP Deposits from households (EUR mn) 24,673 26,56 27,922 29,249 3,984 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) (.2) (.2) (.6). (1.3) Return on Equity (RoE) (1.7) (2.6) (5.9).1 (-12.5) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBR, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 39

40 Bulgaria Digesting the consequences of the bank crisis Lending activity and funding stance were impacted by the bank crisis in June 214 Regulator and government are processing the consequences of the crisis, targeting European regulation standards Despite the shake-up, 214 banking sector financial results were positive Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Bulgaria vs. all other CEE markets Source: BNB, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: BNB, RBI/Raiffeisen RESEARCH In 214, the Bulgarian GDP grew by 1.7% posting some improvement over 213. The increase came on the back of positive dynamics of all three major GDP components on the production side (services, industry and agriculture), which has happened for the first time since 29. The banking sector, however, could not fully benefit from the overall positive economic dynamics, as the behavioral patterns of both banks and customers were negatively affected by the banking crisis in June 214. After the spread of negative news regarding the shareholders of Corporate Commercial Bank (CCB), Bulgaria 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 2, 214, 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 Bulgarian National Bank (BNB). This step was followed by the revocation of CCB s banking license and the commencement of its liquidation at year-end 214. Obviously, the banking sector was affected by these developments. The banks total assets shrank by.7% as at year-end 214. Corporate loans contracted by 6.7%, while the retail segment recorded a decline of 1.2%. In total, the aggregated loan stock declined by almost 5.%. 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.% 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 sector registered a net profit of BGN 746 mn in 214, which is about 25% above the results of 213. That, on the back of a shrinking asset size, caused an improvement in both aggregate RoA and RoE figures. Key economic figures and forecasts Bulgaria f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 4,899 5,473 5,62 5,671 5,833 5,745 6,19 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg)* * Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH 4 Please note the risk notifications and explanations at the end of this document

41 Bulgaria In 214, the Bulgarian banking sector 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 sector s overall CAR increased to 22.%, and its liquidity ratio reached 3.1%. Second, and as a direct consequence of the crisis, the government introduced amendments to the legislation on bankruptcy for the banking sector. Market shares (214, eop) Piraeus Bank, 3.8% Alpha Bank, 4.3% Central Cooperative Bank, 4.9% Others, 2.3% Societe Generale Expressbank, 5.4% UniCredit Bulbank, 17.4% DSK Bank, 11.7% First Investment Bank, 1.2% 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 Raiffeisenbank, 7.% % of total assets Source: BNB, RBI/Raiffeisen RESEARCH emerge in the system that could be somehow related to the recent banking crisis. Eurobank, 7.2% United Bulgarian Bank, 7.7% Financial analysts: Emil S. Kalchev, Angel R. Kavrakov, Raiffeisenbank (Bulgaria) EAD, Sofia Key banking sector indicators Balance sheet data Total assets (EUR mn) 37,695 39,273 42,138 43,842 43,529 growth in % yoy (.7) in % of GDP Total loans (EUR mn) 27,535 28,655 29,573 29,95 28,423 growth in % yoy (5.) in % of GDP Loans to private enterprises (EUR mn) 18,36 19,189 2,158 2,444 19,71 growth in % yoy (6.7) in % of GDP Loans to households (EUR mn) 9,499 9,466 9,416 9,461 9,352 growth in % yoy (.5) (.4) (.5).5 (1.2) in % of GDP Mortgage loans (EUR mn) 4,739 4,79 4,827 4,8 4,757 growth in % yoy (.6) (.9) in % of GDP Loans in foreign currency (EUR mn) 16,876 18,267 18,937 18,297 16,196 growth in % yoy (3.4) (11.5) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 23,994 27, 29,275 31,818 32,574 growth in % yoy in % of GDP Deposits from households (EUR mn) 14,335 16,311 18,34 2,67 2,965 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: BNB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 41

42 Serbia Struggling with structural vulnerabilities Economic performance had negative impact on loan issuance and asset quality Banking sector profitability remained positive supported by banks investment in LCY-government bonds Capitalization remained solid, suggesting a decent resilience buffer against the economy s nosedive Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Serbia vs. all other CEE markets Source: NBS, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: NBS, RBI/Raiffeisen RESEARCH After an improvement and 2.6% GDP growth in 213, the Serbian economy shrunk by 1.8% in 214. 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 support 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 downtrend in corporate lending (corporate loans down 2.2% yoy in 214), the NPL ratio inched slightly lower recently, after a deterioration during mid-214 (corporate NPL ratio at 24.8% in Q1 215 vs. 27.4% mid-214). 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.% in 214 on the back of cash and mortgage lending, whereas all other retail loan categories were underperforming. 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 increased their exposure in LCY-government bonds. The same trends caused a fall of the L/D ratio from 116% in 213 to 111% in 214. In spite of the weak economy and low core margins, the banking sector posted an aggregate profit for H1 214, although there was a decline of about 8% compared to the results of the same period in the previous year. The H1 214 RoE reached 5%, however, we expect profitability to decline in both 214 and 215. 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 stateowned banks, results from sizeable (non-performing) loans to state-owned enterprises that are currently in a privatization or restructuring phase. Still, the banking sector s capitalization suggests decent resilience, with the CAR remaining well Key economic figures and forecasts Serbia f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 4,87 4,617 4,43 4,788 4,634 4,74 4,957 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 42 Please note the risk notifications and explanations at the end of this document

43 Serbia above the mandatory 12%, at 2.4% at H1 214, and NPLs are fully covered with loan loss reserves (off and on balance) at 116% because of restrictive regulation and tight credit policies of foreign-owned lenders. The banking sector currently experiences major restructuring. The second largest bank in the country, Komercijalna banka, is at the moment privatized 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 215. Furthermore, the Serbian banking market Key banking sector indicators Market shares (214, eop) Banka Postanska Stedionica, 3.3% Hypo Alpe-Adria, 3.9% Others, 26.4% Vojvodanska banka, 5.1% Eurobank, 5.3% % of total assets Source: NBS, RBI/Raiffeisen RESEARCH AIK banka, 6.% Societe Generale, 7.% Banca Intesa, 14.7% Komercijalna banka, 12.2% UniCredit, 8.7% Raiffeisen, 7.3% saw its first green-field investment since 28 in late 214. 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 ( ), Raiffeisenbank a.d. Serbia, Belgrade Balance sheet data Total assets (EUR mn) 25,984 27,732 27,775 27,467 27,352 growth in % yoy (1.1) (.4) in % of GDP Total loans (EUR mn) 15,166 16,452 16,615 15,84 15,47 growth in % yoy (4.88) (2.12) in % of GDP Loans to private enterprises (EUR mn) 8,696 9,218 9,419 8,514 7,89 growth in % yoy (9.61) (7.33) in % of GDP Loans to households (EUR mn) 5,373 5,72 5,686 5,82 5,934 growth in % yoy (.3) in % of GDP Mortgage loans (EUR mn) 2,621 2,835 2,94 2,899 2,975 growth in % yoy (1.4) 2.6 in % of GDP Loans in foreign currency (EUR mn) 9,991 11,615 11,885 11,394 1,618 growth in % yoy (4.1) (6.8) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 11,897 13,1 13,31 13,655 13,967 growth in % yoy in % of GDP Deposits from households (EUR mn) 7,515 8,173 8,694 9,112 9,39 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBS, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 43

44 Bosnia and Herzegovina Sector stable and profitable de spite economic slump Disastrous floods resulted in economic slump, deteriorated corporate lending Good level of profitability and capital adequacy preserved in 214 Banking sector performance in line with the real economy, higher potential expected for 215 Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Bosnia a.h. vs. all other CEE markets Source: CBBH, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Feb-11 Mar-12 Apr-13 May-14 Household loans (% yoy) Corporate loans (% yoy) * in LCY-terms Source: CBBH, RBI/Raiffeisen RESEARCH In 214, the uneven path of Bosnia and Herzegovina s economy was determined 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 decrease of.5% yoy in the second quarter and only a modest recovery of.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 major 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 214, 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 29. Corporate loans declined by 1.5% yoy. After the flood, the corporate segment s NPL ratio peaked at 2.7% 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 recovered at 17.3% as at year-end 214. The retail NPL ratio improved to 1.2% (the lowest figure since the third quarter of 211), bringing down the overall NPL ratio to 14.% as at year-end. At the same time, weakened corporate lending opportunities coupled with increased demand for retail loans to finance housing reconstruction 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 214 (the strongest since 211) and loans in that segment reaching 44.2% of total loan stock. On the funding side, total deposits continued to outperform lending growth, posting the strongest gain since 27 (7.9% yoy). The increase was driven by retail deposits, which surged by 8.1% in 214, accounting 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 27. Key economic figures and forecasts Bosnia and Herzegovina f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 3,264 3,387 3,388 3,465 3,5 3,666 3,936 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg)* * Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH 44 Please note the risk notifications and explanations at the end of this document

45 Bosnia and Herzegovina The local banking sector retained a decent level of profitability in 214, posting a RoE of 6.% and a RoA of.8%. The CAR remained practically stable at 16.3%, exceeding the regulatory requirements. Going forward, we expect the country s banking sector to develop in line with its real economy (215: 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 Herzegovina to be further strengthened by the EU initiatives for the country under Market shares (214, eop) Others, 29.4% Intesa Bank, 6.1% Sberbank, 7.4% % of total assets * UniCredit Bank & UniCredit Bank Banja Luka Source: CBBH, RBI/Raiffeisen RESEARCH NLB Group, 9.% UniCredit*, 21.6% Hypo Alpe Adria, 9.8% Raiffeisen Bank, 16.7% the Stabilization and Association Agreement (SAA). The SAA will allow the country to benefit from EU financial and technical 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 sector, this should result in notable growth in both the retail and the corporate segment. Financial analyst: Ivona Zametica ( ), Raiffeisen BANK d.d. Bosnia and Herzegovina, Sarajevo Key banking sector indicators Balance sheet data Total assets (EUR mn) 1,828 11,196 11,414 11,988 12,514 growth in % yoy in % of GDP Total loans (EUR mn) 7,436 7,828 8,151 8,388 8,626 growth in % yoy in % of GDP Loans to private enterprises (EUR mn) 3,545 3,641 3,83 3,846 3,767 growth in % yoy (2.1) in % of GDP Loans to households (EUR mn) 3,234 3,428 3,474 3,612 3,817 growth in % yoy in % of GDP Loans in foreign currency (EUR mn) growth in % yoy (27.2) (3.2) (1.5) (2.6) 1. in % of GDP Loans in foreign currency (% of total Loans) Total deposits (EUR mn) 6,46 6,643 6,814 7,286 7,94 growth in % yoy in % of GDP Deposits from households (EUR mn) 3,315 3,65 3,914 4,276 4,663 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) n.a. Market share of foreign-owned banks (% of total assets) n.a. Profitability and efficiency Return on Assets (RoA) (.6).7.6 (.2).8 Return on Equity (RoE) (5.5) (1.3) 6. Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: CBBH, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 45

46 Albania Positive signs in lending and asset quality Banking assets grew moderately compared to past five years Lending activity improved due to low rates, and demand-side recovery started to kick in NPL ratio remained high, requires regulatory management Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Albania vs. all other CEE markets Source: NBA, national sources, RBI/Raiffeisen RESEARCH Lending growth* Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: NBA, RBI/Raiffeisen RESEARCH Key economic figures and forecasts The Albanian economy grew by 2.% in 214, mainly due to increasing domestic demand, which gets support from the expansive monetary policy. Gradual recovery of lending activities was one of the positive patterns. During 214, lending activity increased by 5.% yoy, thereby recovering from the decrease of 2.3% in 213. The historically low interest rates, a moderate revival of consumption demand and business confidence were the main reasons to drive the lending recovery. In 214, about 93% of the volume of new loans came from corporate customers, increasing this segment by 6.3%. Despite the regulator s lower interest rates policy applied, total deposits increased by EUR 336 mn or 4.6%, indicating still suppressed investment demand. Corporate deposits grew by 18% yoy in 214, 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 214, which significantly exceeded the 12% minimum capital requirement demanded by the Bank of Albania. Furthermore, the capitalization is supported by banks decent earnings in 214, as the banking sector posted a total net profit of EUR 79.9 mn. This has been the best result since 27 and is largely a reflection of the renewed asset quality improvement and reduction in provisioning costs. As at year-end 214, the NPL ratio was 22.8% (coming down from 23.5% at year-end 213). 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 regulations. Because of this initiative, we are positive that the country s NPL ratio will continue to improve in 215. Looser monetary policies and an improved business confidence, which will support economic growth and lending activities, are expected for 215. 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 215, the repayment of government arrears to private lenders will continue in accordance with the IMF program. This should eventually improve the banks Albania f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 3,97 3,297 3,445 3,529 3,733 3,986 4,252 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 46 Please note the risk notifications and explanations at the end of this document

47 Albania balance sheets and increase their willingness to be more active in lending. The expected revival of the state activity on the Eurobond market and the disbursement of a EUR 25 mn loan (guaranteed by the World Bank) may lead to the reduction of the government borrowing from the domestic market and therefore also stimulate banks lending to the private sector. The escalation of the economic hardships in their home market had Greek banks to rethink their presence in Albania. One of the four Greek banks left the country, and as a result, the market share of Greek banks shrunk to 16% in 214 (compared to 28% in 28). Market shares (214, eop) Alpha Bank, 5.6% Tirana Bank (Pireaus Bank), 7.2% National Bank of Greece, 3.1% Procredit Bank, 2.8% Societe Generale, 5.4% Credins Bank, 1.2% % of total assets Source: NBA, RBI/Raiffeisen RESEARCH Others, 9.2% Intesa Sanpaolo Bank, 11.2% Raiffeisen Bank, 2.9% National Commercial Bank, 24.3% Financial analyst: Joan Canaj ( ), Raiffeisen Bank Sh.a., Tirana Key banking sector indicators Balance sheet data Total assets (EUR mn) 7,139 8,63 8,626 9,164 9,231 growth in % yoy in % of GDP Total loans (EUR mn) 3,537 4,76 4,139 4,45 4,246 growth in % yoy (2.3) 5. in % of GDP Loans to private enterprises (EUR mn) 2,379 2,858 2,887 2,788 2,956 growth in % yoy (3.4) 6. in % of GDP Loans to households (EUR mn) 1,65 1,72 1,71 1,67 1,81 growth in % yoy (.) (.3) 1.3 in % of GDP Mortgage loans (EUR mn) growth in % yoy (1.7) (.7) in % of GDP Loans in foreign currency (EUR mn) 2,47 2,766 2,67 2,547 2,649 growth in % yoy (3.5) (4.6) 4. in % of GDP Loans in foreign currency (% of total credits) Total deposits (EUR mn) 5,885 6,651 7,14 7,315 7,651 growth in % yoy in % of GDP Deposits from households (EUR mn) 4,987 5,743 6,225 6,388 6,556 growth in % yoy in % of GDP Total loans (% of total deposits) Structural information, profitability and efficiency Number of banks Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBA, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 47

48 Russia Challenges constrain business opportunities, earnings and capital 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 Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Russia vs. all other CEE markets Source: CBR, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-1 Mar-11 May-12 Jul-13 Sep-14 Household loans (% yoy) Corporate loans (% yoy) Mortgage loans (% yoy) * in LCY-terms Source: CBR, RBI/Raiffeisen RESEARCH Key economic figures and forecasts Aggregate banking sector data and individual banks financial releases for 214 and the first months of 215 reveal the hard hit of the fundamental challenges carried over from the second half of 214. The swift RUB devaluation and persisting financial market volatility, scarcity of funding from domestic and international market sources, negative news flow from rating agencies, and negative short-term expectations for the Russian economy put the entire local banking business under serious constraint. The first of that came through the weakened lending 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 213 if expressed in LCY-terms: 26% in 214 vs. 17% in 213. The dynamics of the individual lending components is more telling, however. Household loan growth in LCY dropped to 12% yoy as of January 215 (coming from 28% yoy in January 214), 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 3% yoy, the segment saw a decline of 13% if expressed in EURterms. According to our estimates, the actual market-based corporate lending dynamics is also masked by the state-funded loans to systemically important companies. 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 215. That is, the true market corporate loan growth figures were already below the inflation rate, and the Q1-215 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 expect the lending growth to fall below 1% yoy in LCY-terms in 215 (adjusted for RUB devaluation and state support to systemic borrowers), and NPLs to increase to up to 8% of total loans. Falling lending growth rates and the deterioration of asset quality weigh on the banks profits, as volumes and margins fall and provisioning costs go up. Besides, jumpy official and volatile money market interest rates leave no viable benchmark for the banks money pricing, implying a prolonged period of market re-adjustment. The resulting deterioration of the major earnings indicators versus 213 is notable. Q4 214 recorded a bank- Russia f 216f Nominal GDP (EUR bn) 1, , , , , , ,422.2 Nominal GDP per capita (EUR) 8,42 9,59 1,81 1,834 9,633 9,27 9,911 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 48 Please note the risk notifications and explanations at the end of this document

49 Russia ing sector RoE of 8% and an RoA of.9%, compared to 15% and 1.9%, respectively, in 213. In turn, limited earning capacity creates pressure on capital, which is why the capitalization ratios of 214 are fairly low by historical standards. The government has been strongly supportive to the banking sector, with measures aimed to boost banks liquidity and capitalization; bail-outs, and vast funding support to systemic borrowers. Private funding, however, continues to be difficult in 215, as the propensity of the private sector to save is declining and the extensive cut-off from international markets stays. Deposits showed two Market shares (214, eop) Others, 33.4% SocGen*, 1.5% Raiffeisenbank, 1.1% Promsviazbank, 1.4% UniCredit, 1.7% Otkrytie Financial Corporation, 4.5% Sberbank, 28.1% VTB Group*, 17.% Gazprombank, 5.9% RusAgro, 2.6% Alfa Bank, 2.7% * VTB Group = VTB, VTB 24, Bank of Moscow, Transcreditbank; SocGen = Rosbank, Rusfinance and Deltacredit; % of total assets; Source: RBC-Rating, RBI/Raiffeisen RESEARCH counteracting trends at end-214: 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. Financial analyst: Elena Romanova, RBI Vienna Key banking sector indicators Balance sheet data *** Total assets (EUR mn) 838, ,949 1,238,697 1,276,922 1,136,23 growth in % yoy (11.) in % of GDP Total loans (EUR mn) 449, , , , ,95 growth in % yoy (17.2) in % of GDP Loans to private enterprises (EUR mn) 348, , ,671 5, ,175 growth in % yoy (13.6) in % of GDP Loans to households (EUR mn) 11, ,26 193, , ,775 growth in % yoy (25.1) in % of GDP Mortgage loans (EUR mn) 32,119 38,992 52,838 61,496 53,46 growth in % yoy (13.2) in % of GDP Loans in foreign currency (EUR mn) 99, , ,38 129, ,954 growth in % yoy in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 52, ,19 748,58 766, ,113 growth in % yoy (18.) in % of GDP Deposits from households (EUR mn) 243, , ,55 377,86 271,446 growth in % yoy (28.) in % of GDP Total loans (% of total deposits) Structural information Number of banks 1, Market share of state-owned banks (% of total assets)** Market share of banks over 5% foreign ownership (% of total assets)* Market share of 1% foreign-owned banks (% of total assets)** Profitability and efficiency Return on Assets (RoA %) Return on Equity (RoE %) Capital adequacy (CAR % of risk weighted assets) Non-performing loans (% of total loans) * As reported by the CBR, ** RBI/Raiffeisen RESEARCH estimate; *** LCY depreciation against the EUR in 214: -38%; Source: CBR, RBC-Rating, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 49

50 Ukraine Exhausted by 214 crisis, longing for stabilization and reforms 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 Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Ukraine vs. all other CEE markets Source: NBU, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-9 May-1 Sep-11 Jan-13 May-14 Household loans (% yoy) Corporate loans (% yoy) * in LCY-terms Source: NBU, RBI/Raiffeisen RESEARCH Key economic figures and forecasts 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 shortage, enhanced by vast deposit outflow. During 214, the Ukrainian banking sector lost UAH 2 bn in deposits, which is about 15% of the banking sector s total 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 crisis, 44 banks were assimilated by the Deposit Guarantee Fund, thus leaving the market. It is likely that between 3 and 4 more financial institutions will do likewise in 215. 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 yearend 214. We expect the final figure to be even above this estimate and, based on experience from previous systemic crises, to climb to around 4% to 5% 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 provisioning for bad loans and FCY-denominated loans. As a result, the total banking sector loss reached UAH 53 bn as at year-end 214. According to IMF data, the system s RoE was minus 3.5% as of December 214, 14 banks failed to meet the Tier 1 CAR requirements (213: 8 banks), and 34 banks failed to meet prudential regulation requirements (213: 26). In March 215, 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 Ukrainian economy will eventually cease to feel the impact of the conflict and start performing again in 216 (after a deep recession in 215). Ukraine f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 2,245 2,573 2,979 3,153 2,36 1,944 1,776 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) Source: national sources, wiiw, Raiffeisen RESEARCH 5 Please note the risk notifications and explanations at the end of this document

51 Ukraine Key banking sector indicators Market shares (214, eop) Others, 4.3% VTB, 2.8% Alfa, 2.8% % of total assets Source: NBU, RBI/Raiffeisen RESEARCH Sberbank, 3.5% PrivatBank, 15.5% Oshadbank, 9.7% Ukreximbank, 9.6% Delta, 4.6% Prominvestbank, 4.% Ukrsotsbank (UniCredit), 3.7% Raiffeisen Bank Aval, 3.6% In addition, and this is most important, the IMF program provides assistance for urgently needed reforms of economic governance and the fight against corruption, for the energy sector, as well as optimizations in public spending and improvements in investment climate. It is partly related to the banking system and envisages a set of measures for its stabilization, aimed at providing general monetary stability 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-measures, if implemented as stated, should be strongly supportive to the Ukrainian economy and monetary system. However as it is always the case during crises there are major risks on the execution 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 ( ), Raiffeisen Bank Aval JSC, Kiev Balance sheet data ** Total assets (EUR mn) 88,167 11,788 16, ,627 68,469 growth in % yoy (4.3) in % of GDP Total loans (EUR mn) 67,89 76,268 76,353 81,155 51,39 growth in % yoy (37.1) in % of GDP Loans to private enterprises (EUR mn) 48,674 57,42 59,78 64,246 41,73 growth in % yoy (35.) in % of GDP Loans to households (EUR mn) 19,134 18,866 17,275 16,99 9,39 growth in % yoy (6.7) (1.4) (8.4) (2.1) (44.9) in % of GDP Mortgage loans (EUR mn) 8,686 7,526 6,174 3,455 2,82 growth in % yoy (4.8) (13.3) (18.) (44.) (18.9) in % of GDP Loans in foreign currency (EUR mn) 31,569 31,71 28,261 27,624 24,83 growth in % yoy (1.5) (1.6) (9.) (2.3) (12.8) in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 38,767 46,86 53,995 59,959 35,239 growth in % yoy (41.2) in % of GDP Deposits from households (EUR mn) 25,431 29,56 34,836 39,29 21,649 growth in % yoy (44.8) in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) (1.5) (.8).5.1 (4.1) Return on Equity (RoE) (1.2) (5.3) 3..8 (3.5) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans)* * Average of unofficial estimates based on IFRS estimates; **LCY depreciation against the EUR in 214: -41% Source: NBU, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 51

52 Belarus Weak economy tests the banking sector s resilience Slowdown of economy resulted in reduction of lending activity Banks stayed profitable amidst weakening economic environment Further increase of NPLs possible Total loans vs. GDP per capita Total loans (% of GDP) 1% 8% 6% 4% 2% 5, 15, 25, GDP per capita (EUR at PPP) Data for 214, red triangle shows Belarus vs. all other CEE markets Source: NBB, national sources, RBI/Raiffeisen RESEARCH Lending growth* Jan-9 May-1 Sep-11 Jan-13 May-14 Household loans (% yoy) Corporate loans (% yoy) * in LCY-terms Source: NBB, RBI/Raiffeisen RESEARCH In 214, 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 3% BYR depreciation. The situation in the Belarusian banking sector faced a steep deterioration at the end of 214. In December, on high devaluation expectations, the banking system 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 households amounted to USD 9 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 requirements for the mandatory sale of FCY revenues, which were lifted in April 215, and increased the key interest rate by 5 bp to 25% per annum. Subsequent to this and in order to reduce the negative impact on the local banks liquidity resulting from the BYR depreciation, the NBB reduced the minimum reserve requirement on FCY deposits from 13% to 1% in early 215. As the problems in the banking sector only started to accumulate towards the end of 214, its yearly performance statistics were not yet significantly affected. Until the liquidity problems started in December, the NBB s measures were aimed at the ongoing limitation of FCY lending and the reduction of interest rates on loans. As a result, retail loan growth dropped from 34% in 213 to 16% in 214, and corporate lending growth was down to 22% in 214 (compared to 27% in the previous year). The loan volume increased in line with deposit growth, resulting in an L/D ratio slightly below 15%, as the banks dependency on external funding continued. As a result, RoA and RoE also declined yoy to 1.7% and 13.1 %, respectively. The Belarusian banking sector remained decently capitalized, with an increased CAR of 17.4%. According to local standards, non-performing assets remained at the level of 4.4%, while NPLs increased slightly to.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 commercial banking sector. Key economic figures and forecasts Belarus f 216f Nominal GDP (EUR bn) Nominal GDP per capita (EUR) 4,378 4,315 5,213 5,689 6,52 6,18 6,171 Real GDP (% yoy) Consumer prices (avg, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/LCY (avg) 3, , , , , , ,364. Source: national sources, wiiw, Raiffeisen RESEARCH 52 Please note the risk notifications and explanations at the end of this document

53 Belarus The performance of the Belarusian banking sector in 215 is likely to remain subdued because of weaker Russian 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 funding stability. Loan and asset growth is set to moderate levels at best, in nominal terms. Effective January 215, the main change in the regulatory environment includes an increase of the income tax rate for banks and insurance companies from 18% to 25%. There were no Market shares (214, eop) Bank Bel (VEB), 5.1% Bank VTB Belarus, 2.5% Priorbank (Raiffeisen), 4.4% Belgazprombank, 4.7% Belinvestbank, 5.9% BPS-Sberbank, 1.4% % of total assets Source: NBB, RBI/Raiffeisen RESEARCH Belagroprombank, 16.3% Others, 9.% Belarusbank, 41.8% 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 214 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 (.25%). The main reasons for the acquisition were to avoid sanctions imposed on VTB group and to increase the bank s capitalization. Some potential for further M&A activity remains in place, given the tough competition between the market players. Financial analyst: Mariya Keda ( ), Priorbank Open Joint-Stock Company, Minsk Key banking sector indicators Balance sheet data Total assets (EUR mn) 32,14 24,19 28,328 3,211 33,486 growth in % yoy 58.3 (25.2) in % of GDP Total loans (EUR mn) 22,355 13,691 17,88 19,831 21,835 growth in % yoy 44.2 (38.8) in % of GDP Loans to private enterprises (EUR mn) 16,645 1,729 14,265 15,75 17,458 growth in % yoy 43.3 (35.5) in % of GDP Loans to households (EUR mn) 5,71 2,962 3,544 4,126 4,377 growth in % yoy 47. (48.1) in % of GDP Loans in foreign currency (EUR mn) 4,848 5,41 8,11 9,96 11,15 growth in % yoy in % of GDP Loans in foreign currency (% of total loans) Total deposits (EUR mn) 1,831 9,93 12,743 13,22 14,843 growth in % yoy 35.8 (16.) in % of GDP Deposits from households (EUR mn) 5,779 4,539 6,884 7,824 9,342 growth in % yoy 3.7 (21.5) in % of GDP Total loans (% of total deposits) Structural information Number of banks Market share of state-owned banks (% of total assets) Market share of foreign-owned banks (% of total assets) Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy (% of risk weighted assets) Non-performing loans (% of total loans) Source: NBB, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 53

54 Ukraine Focus on Ukraine: Key provisions of IMF program UA: Consolidation dynamics Number of banks Source: NBU, RBI/Raiffeisen RESEARCH UA: Profitability and consolidation RoE (%) Number of banks opened/closed (r.h.s.) Source: NBU, RBI/Raiffeisen RESEARCH Sectoral distribution domestic loans* 28% 72% Non-financial corporations Other** * % 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, government Source: NBU, IMF, RBI/Raiffeisen RESEARCH 5-5 The IMF/IFI support package (updated in March 215) 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 parties. The planned prudential review of related party lending (supported by international accounting firms to guarantee creditability) definitely offers some room for negative surprises, given the large corporate loan books in the Ukrainian banking sector (around 7% to 8% of total loans). Systemic risks in this field will be monitored by a special unit of the National Bank of Ukraine (NBU) focussing on mapping the largest industrial and financial groups in the country. Moreover, legislative changes have already been adopted and increased bank owners 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-215 as well as a strategy to monitor the largest banks in detail until September 215 (later the standards used here should be applied to the overall sector). Under the IMF framework Ukrainian authorities are also showing commitment to strengthen the NPL resolution framework 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 measure. NPL exposures from the last crisis (28/9) stayed within the banking system for too long (partially still burdening the banks). Moreover, the overall governance structure and banking sector monitoring capabilities at the NBU will be strengthened, while there will be also a detailed regular reporting to the IMF regarding banking sector issues. The latter may help to avoid worst case scenarios. Nevertheless, the IMF estimates that the total amount of funds needed to recapitalize the banking system in Ukraine will amount to some 9.25% of the GDP (in 214/15). 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 1 banks will be provided by the end of July 215. 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 partnering 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 215, an average UAH/USD rate of 21.7 in 215 as well as a an update expectation for a GDP drop by -9% (as of May 215, previously -5%). Macro-financial risks do remain with the Ukrainian banking sector given the still fragile situation in the first half of 215. Hence, we fully agree with the IMF s take that there are still exceptionally high risks down the road during the process of restoring economic and financial stability in Ukraine. Financial analysts: Gunter Deuber, RBI Vienna Ludmilla Zagoruyko, Raiffeisen Bank Aval JSC, Kiev 54 Please note the risk notifications and explanations at the end of this document

55 Market players in CEE CEE: Market presence and networks of international banks**** 214 PL HU CZ SK SI BG RO HR AL RS ME BH KO MK BY RU UA KZ MD GE No. of countries No. of branches 214 Sberbank , ,785 SocGen ,952 RBI ,851 UniCredit* 1, ,454 VTB 157 1, ,972 Erste ,828 OTP ,421 Intesa ,24 Santander** KBC*** NBG EFG Alpha Bank Commerzbank Number of branches per country Source: Company data, RBI/Raiffeisen RESEARCH * SK branches including in CZ ** including 173 SCB branches *** BG including insurance outlets (including CIBank and DZI Insurance) **** sorted by number of branc Please note the risk notifications and explanations at the end of this document 55

56 Market players in CEE Raiffeisen Bank International Substantial group transformation program launched in early 215 Exit from Poland and Slovenia as well as sale of direct banking unit ZUNO Targets CET1 of 12% by year-end 217 and a medium-term consolidated RoE of 11% Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data 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 management revealed a revised strategy in February 215. The clear group target is to further raise capital buffers (target CET1 ratio, fully loaded, of 12% by year-end 217 compared to 1% at year-end 214). The measures to be implemented 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 substantial 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. Asset quality in CEE* 2.5% 2.% 1.5% 1.%.5% 12.5% 12.% 11.5% 11.% 1.5% In addition, RBI s management plans to rescale its operations in Russia and targets an RWA reduction of 2% 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 foreseen in Ukraine, where RWAs will be decreased by about 3% in EUR-terms by year-end 217. In Hungary, a further optimization of the operation will be undertaken with focus on corporate and affluent retail banking. Overall, the targeted gross RWA reduction of about EUR 16 bn from 215 to 217 should give room for further growth in core CEE markets (EUR 7 bn business growth in RWA targeted for the next three years)..% % NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH 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 17% in 214 compared to 19% in 213. In the majority of countries, the asset quality (NPL ratio) improved in 214 (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 coverage in the CEE region by 81 bp to 71.5%. Key business position indicators in CEE Total assets (EUR mn) 76,189 78,949 84,41 8,936 78,667 Number of countries in CEE 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 3,93 3,1 2,851 Source: company data, calculation by RBI/Raiffeisen RESEARCH 56 Please note the risk notifications and explanations at the end of this document

57 Market players in CEE RBI s 214 results (EUR 493 mn net loss on group level, EUR 221 mn net profit in CEE) have been characterized by negative one-offs of about EUR 78 mn (EUR 36 mn goodwill impairments in Russia, Poland and Albania; EUR 251 mn impact from retail government measures in Hungary; EUR 196 mn deferred tax asset writedown and EUR 3 mn intangibles impairment in Ukraine). On a group level, the net interest margin slightly widened by 13 bp to 3.24% on repricing initiatives and higher margins in Russia, Ukraine and Belarus. Risk costs, however, jumped from 139 bp Countries of significant presence in CEE (% of total assets) Banks market share (%) in 213 to 21 bp driven by higher provisioning in Ukraine, Asia and Russia. On contrast, CE/SEE markets saw lower risk costs. Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Poland Hungary* Czech Republic Slovakia Romania Bulgaria Serbia Bosnia a.h Russia** * foreign-owned banks excl. OTP ** 1% of foreign-owned banks Source: company data, national sources, RBI/Raiffeisen RESEARCH For 215 and H2 in particular, RBI s management still expects net provisioning to remain elevated, but below the levels of 214. The consolidated result might still be negative, as the majority of restructuring costs (around EUR 55 mn) are expected to be booked in 215. After the implementation of the above mentioned strategic measures, RBI s cost base should be 2% below the level of 214 (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) Assets and loans Asset growth (% yoy) 1.3% 3.6% 6.4% -3.7% -2.8% Loans/total assets (%) 69% 69% 7% 7% 69% Retail loans/total loans (%) 47% 45% 5% 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) 1.8% 11.4% 12.% 12.3% 11.9% Loan loss reserves/non-performing loans (%) 55% 65% 65% 66% 71% Annual provisioning/customer loans (%) 2.% 1.8% 1.5% 1.6% 2.2% Funding Customer deposits/total assets (%) 59% 63% 64% 65% 65% Customer loans/customer deposits (%) 118% 11% 18% 19% 17% Deposit growth (% yoy) 5.2% 11.3% 8.7% -3.2% -2.3% Profitability 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, %) 1.8% 1.2% 1.23% 1.42%.52% Profit before tax (EUR mn, proportional) ,34 1, Total CAR ratio (%), at the group level 13.3% 13.5% 15.6% 15.9% 16.% Tier-1 ratio (%), at the group level 9.7% 9.9% 11.2% 11.2% 1.9% Core Tier-1 ratio (%), at the group level 8.9% 9.% 1.7% 1.7% 1.9% * adjusted for M&A ** 213; 214 transitional acc. to Basel 2.5 Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 57

58 Market players in CEE Erste Group Unchanged regional footprint; interest in Poland remains in the medium-term Significant impairments and risk provisions affected 214 results, turnaround penciled for 215 Hungarian government and the EBRD to acquire stake in Erste HU Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data 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 entering 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 Hungarian operations with the target to return to positive profitability in 215 (Romania) and 216 (Hungary). Also, on group level several restructuring steps have been undertaken with the target to transfer a larger part of the corporate business gradually to local banks. Asset quality in CEE* 4.% 3.% 2.% 1.% 2.% 15.% 1.% 5.% 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, ensuring 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 operation via the acquisition of a 15% stake each. Negotiations are in progress and the government has set aside HUF 15 bn in the 215 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..% % NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH Overall CEE lending volume was eroding by 3% attributable to FX retail loan conversion and muted lending activity in Hungary (down 2% 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 215, the management expects low single digit loan growth on group level with contributions from all countries (except Croatia). The NPL ratio in CEE improved from 14.2% in the fourth quarter of 213 to 12.3% in the fourth quarter of 214 (11.6% in the first quarter of 215) based on a 16% Key business position indicators in CEE Total assets (EUR mn) 83,625 84,28 83,839 79,322 75,178 Number of countries in CEE Market share in CEE (% of total assets) 4.1% 3.8% 3.4% 3.1% 3.1% Number of branches in CEE 2,16 2,14 1,937 1,861 1,828 Source: company data, calculation by RBI/Raiffeisen RESEARCH 58 Please note the risk notifications and explanations at the end of this document

59 Market players in CEE decline in NPL stock driven by significant NPL sales (mainly in Romania) and lower gross inflows on supportive trends overall (except Croatia). Countries of significant presence in CEE (% of total assets) Banks market share (%) Erste s 214 results (EUR 1,442 mn net loss on group level) were characterized by additional risk provisioning in Romania (EUR 4 mn) and impairment of intangibles in Romania (goodwill, brand, customer stock of about EUR 81 mn), the effect of the Hungarian 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 215 demonstrated a strong rebound (EUR 226 mn net profit) due to a significant decline in risk costs especially in Romania and Hungary. Targeting a ROTE of 8% to 1% for 215, translating into a net profit range of about EUR 7 mn to 9 mn, Erste s management also expects the significant earnings rebound in 215 based on a significant decline in risk costs towards a target range of EUR 1. bn to 1.2 bn. The operating result is expected to decline in the mid-single digits on the back of lower operating result in Hungary (FX mortgage conversion, consumer loan law) and Romania (lower unwinding impact post NPL sale) as well as NIM pressure given the low interest environment. Financial analysts: Text: Stefan Maxian, Raiffeisen Centrobank Data: Jovan Sikimic, Raiffeisen Centrobank Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Hungary* Czech Republic Slovakia Romania Croatia * foreign-owned banks excl. OTP Source: company data, national sources, RBI/Raiffeisen RESEARCH Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR) Assets and loans* Asset growth (% yoy) 5.8%.5% -.2% -5.4% -5.2% Loans/total assets (%) 62% 62% 62% 62% 64% Retail loans/total loans (%) 61% 61% 61% 57% 6% Corporate loans/total loans (%) 33% 33% 33% 43% 4% Credit risk Growth customer loans (% yoy)** 5.2% 1.5%.1% -5.3% -2.8% Gross non-performing loans (% of total loans) 1.2% 13.3% 14.9% 14.2% 12.3% Loan loss reserves/non-performing loans (%) 62% 62% 62% 66% 74% Annual provisioning/customer loans (%) 2.66% 3.3% 2.61% 2.7% 3.16% Funding Customer deposits/total assets (%) 63% 62% 65% 67% 69% Customer loans/customer deposits (%) 99% 11% 96% 93% 92% Deposit growth (% yoy) 5.7% -.8% 4.6% -3.% -1.1% Profitability and capitalization Cost/Income (%) 43% 44% 45% 44% 45% NII/total assets (%) 3.9% 3.9% 3.6% 3.5% 3.4% Return on Assets (pre-tax proportional, %) 1.14%.62%.97% 1.5%.% Profit before tax (EUR mn, proportional) 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% 1.6% Core Tier-1 ratio (%), at the group level***** 9.2% 9.4% 11.2% 11.4% 1.6% * 211 including Ukraine ** adjusted for M&A *** Basel 3 fully loaded; 213 Basel 2.5 on total risk; Basel 2 incl. participation capital **** Basel 3 fully loaded; 213 Basel 2.5 on total risk; Basel 2 (credit risk) incl. participation capital ***** Basel 3 fully loaded; acc. to Basel 2.5 on total risk; inlcuding participation capital Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 59

60 Market players in CEE 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 215 Strong capitalization allows for further M&A activity Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data Asset quality in CEE* 4.% 3.8% 3.6% 3.4% 3.2% 3.% % 2.% 15.% 1.% 5.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH OTP did not change the setup of its CEE presence over the past years. Still, the bank closed two smaller acquisitions in 214 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 215 CET1 ratio of 13.5% (13.% as of Q1) should provide room for further mid-scale M&A activity. In Russia, OTP s management 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 214, OTP had to swallow a HUF 156 bn P&L impact (after tax) of regulatory 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 1 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 installments. Several government initiatives to revive loan growth should support the clearly improving risk costs trend of the past quarters. Earlier in 215, the Hungarian government and the EBRD sealed an agreement to enhance the effectiveness 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 profitability 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 214. 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 consumer lending as well as a loan volume contraction of about 24% in Ukraine. Key business position indicators in CEE Total assets (EUR mn) 38,329 35,877 37,255 37,318 37,533 Number of countries in CEE Market share in CEE (% of total assets) 1.9% 1.6% 1.5% 1.5% 1.6% Number of branches in CEE 1,58 1,424 1,41 1,434 1,421 Source: company data, calculation by RBI/Raiffeisen RESEARCH 6 Please note the risk notifications and explanations at the end of this document

61 Market players in CEE On the other hand, loan growth was visible in Bulgaria (corporate lending), Slovakia (consumer lending) and Serbia (corporate and consumer lending). 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. Countries of significant presence in CEE (% of total assets) Banks market share (%) Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Hungary* Slovakia Bulgaria Croatia * foreign-owned banks excl. OTP Source: company data, national sources, RBI/Raiffeisen RESEARCH The 215 loan development should be impacted by FX conversion. Excluding this effect, loan volume should bottom-out low to mid-single digit in Hungary according to OTP. Apart from an upbeat outlook for OTP s core markets Hungary and Bulgaria, the bank s management still expects Ukrainian and Russian operations to remain in the red in 215, despite the already significant impairments of 214. 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) Assets and loans Asset growth (% yoy).3% -6.4% 3.8%.2%.6% Loans/total assets (%) 69% 68% 66% 64% 56% Retail loans/total loans (%) 64% 66% 68% 68% 69% Corporate loans/total loans (%) 31% 3% 29% 29% 28% Credit risk Growth customer loans (% yoy)* 2.% -8.2% 1.1% -3.3% -12.3% Gross non-performing loans (% of total loans) 13.7% 16.6% 19.1% 19.8% 19.3% Loan loss reserves/non-performing loans (%) 74% 8% 8% 84% 84% Annual provisioning/customer loans (%) 3.67% 3.37% 3.4% 3.6% 3.85% Funding Customer deposits/total assets (%) 54% 59% 61% 62% 65% Customer loans/customer deposits (%) 128% 126% 116% 19% 91% Deposit growth (% yoy) -1.8% 2.4% 6.3% 2.7% 4.3% Profitability and capitalization*** Cost/Income (%)** 43% 45% 46% 48% 5% NII/total assets (%) 5.7% 6.1% 6.% 5.8% 5.2% Return on Assets (pre-tax proportional, %) 1.86% 1.97% 1.8% 1.57% 1.2% Profit before tax (EUR mn, proportional) Total CAR ratio (%), at the group level 17.5% 17.3% 19.7% 19.7% 17.5% Tier-1 ratio (%), at the group level 14.% 13.3% 16.% 17.4% n.a. Core Tier-1 ratio (%), at the group level 12.1% 12.4% 15.1% 16.% 14.1% * not adjusted for M&A and FX ** operating cost/ NII+Fees+Other non-interest income *** from Q1 214 the Basel 3 regulation has been applied Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 61

62 Market players in CEE UniCredit CEE division posted good profitability in 214, 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 Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data 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 12 bn as at year-end 214 (the bank s CEE division and Poland, which is regarded as a separate division, taken together). The group remains committed to CEE and, although 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 214 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 214, albeit they were somewhat lower than in 213 (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 214 and profits in Poland contributed EUR 327 mn. Asset quality in CEE* 2.% 1.5% 1.%.5% 12.% 11.% 1.% In 214, UniCredit finalized the integration of its Czech and Slovak subsidiaries, completed the restructuring in the Balkans, and went on adjusting its branch networks and the cost efficiency across the regional divisions. The result of the latter was a 44% contraction of the number of branches in the CEE division, which has come down by about 45 branches (16%) between 21 and 214. The group s Cost/Income ratio in CEE division thus recorded at 41.5% in 214, which was one of the lowest among its peers (47% for Poland). In EE, UniCredit exited from Kazakhstan (sold to ATF bank in 213) and keeps its Ukrainian unit for sale..% % NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH The group s lending volume in the CEE region stayed approximately flat in 214. Country-wise, however, the dynamics were diverse. The group s lending (EURterms) saw the strongest momentum in Bulgaria (17% yoy growth), Poland (7% yoy), Serbia (6% yoy) and Romania (7% yoy). A lending contraction (in EURterms) 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 performance in 214. The major profit contributors were Poland, the Czech Re- Key business position indicators in CEE* Total assets (EUR mn) 11, , ,555 12,74 12,37 Number of countries in CEE Market share in CEE (% of total assets) 5.5% 5.2% 4.9% 4.7% 5.% Number of branches in CEE 2,93 2,861 2,658 2,522 2,454 * 214 including Ukraine (held for sale); Baltics treated as 1 country; Source: company data, calculation by RBI/Raiffeisen RESEARCH 62 Please note the risk notifications and explanations at the end of this document

63 Market players in CEE public, Slovakia and Russia. The latter was notwithstanding the headwinds of the second half of 214. On the core funding side, we see the group to be well-positioned to get ready to a (widely expected) economic upturn in the CEE region. Customer deposit 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. Countries of significant presence in CEE (% of total assets) Banks market share (%) Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Poland Czech Republic Hungary* Romania Croatia Bulgaria Serbia Bosnia a.h.** Russia*** * foreign-owned banks excl. OTP ** UniCredit bank and UniCredit bank Banja Luka *** 1% of foreign-owned banks Source: company data, national sources, RBI/Raiffeisen RESEARCH 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 notable decline, from 192 bp in 213 to 118 bp in 214, signaling an improved asset quality of the newly uploaded loan book. The progress was especially notable in Hungary, where the risk costs lowered from 27 bp in 213 to 114 bp in 214. The highest risk costs remain in SEE (e.g. Romania, Serbia) and Slovenia. The NPL ratios both in the group s CEE division and in Poland remain virtually flat, with 12% in the former and just-below 7% in the latter. Financial analysts: Text: Elena Romanova, RBI Vienna Data: Jovan Sikimic, Raiffeisen Centrobank Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR) Assets and loans Asset growth (% yoy) 2.7% 5.2% 4.6% -1.2%.2% Loans/total assets (%) 65% 65% 62% 65% 65% 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% -.5% 3.9%.5% Gross non-performing loans (% of total loans) 11.8% 11.8% 1.% 1.6% 1.7% Loan loss reserves/non-performing loans (%)** 54% 53% 56% 57% 59% Annual provisioning/customer loans (%) 1.77% 1.25% 1.15% 1.41% 1.% Funding Customer deposits/total assets (%) 63% 63% 63% 67% 68% Customer loans/customer deposits (%) 14% 13% 98% 98% 97% Deposit growth (% yoy) 4.9% 6.4% 4.4% 3.8% 1.9% Profitability and capitalization*** Cost/Income (%) 47% 46% 45% 44% 44% NII/total assets (%) 3.2% 3.1% 2.8% 2.7% 2.8% Return on Assets (pre-tax proportional, %) 1.7% 1.37% 1.37% 1.26% 1.25% Profit before tax (EUR mn, proportional) 1,185 1,589 1,661 1,512 1,56 Total CAR ratio (%), at the group level 12.7% 12.4% 14.5% 13.6% 13.6% Tier-1 ratio (%), at the group level 9.5% 9.3% 11.4% 1.1% 11.3% Core Tier-1 ratio (%), at the group level 8.6% 8.4% 1.8% 9.6% 1.4% * not adjusted for M&A ** incl. Turkey for *** 212, 213 transitional; 214 fully loaded Basel 3 Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 63

64 Market players in CEE Société Générale SocGen committed to Russia; expects loss in 215 there due to high risk costs Czech operations traditionally stable for the highly capitalized bank Management expects turnaround in Romania on lower risk costs Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data Asset quality in CEE* 2.5% 2.% 1.5% 1.%.5%.% % 1.% 5.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH 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 Republic, 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 214, 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 215, 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 214). 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 3 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 8% to 1% for the next two years. Romania (recovery): For the past couple of years, SocGen s BRD has been struggling to get rid of its largest challenge, namely high risk costs (exceeding 3 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 meaningful drop in risk cost to normalized levels close to approximately 15 bp in 215. Also, the statement of the head of the supervisory board of the Romanian Central Bank, who said that he was quite pleased with the level of provisioning, provides 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, 215 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 profitability in 214 was affected by the RUB depreciation and soaring (retail) risk provisioning resulting in a moderate EUR 28 mn net profit. SocGen underscores its Key business position indicators in CEE Total assets (EUR mn) 69,26 75,152 78,584 76,22 77,48 Number of countries in CEE Market share in CEE (% of total assets) 3.3% 3.3% 3.2% 3.% 3.2% Number of branches in CEE* 2,74 2,725 2,675 3,19 2,952 * 212 without Poland (n.a.); Source: company data, calculation by RBI/Raiffeisen RESEARCH 64 Please note the risk notifications and explanations at the end of this document

65 Market players in CEE strong cost efficiency in RUB-terms as well as the resilient revenue development. Following de-risking initiatives, the NPL ratio came down to 8.5%. The segmental performance was also impacted by the EUR 525 mn goodwill write-off that was booked in the first quarter of 214. In the course of the group s results release for the first quarter of 215, the management announced that it would probably post a loss in Russia in 215 in the amount of EUR 25 mn to 3 Countries of significant presence in CEE (% of total assets) Banks market share (%) mn, driven by a soaring risk cost outlook of 4 bp to 5 bp as NPLs will continue to rise amid a difficult macroeconomic situation and high inflation. Recently, the Deputy CEO confirmed SocGen s commitment to Russia as well as a continuous 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 measures of defense against falling profits, like the plan to cut about 2,5 jobs (out of 2,5 in total) during 215. Poland (potential expansion): SocGen is operating in Poland via its small subsidiary 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. Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Poland n.a Czech Republic Romania Croatia Bulgaria Serbia Russia* * 1% of foreign-owned banks Source: company data, national sources, RBI/Raiffeisen RESEARCH Financial analysts: Text: Jovan Sikimic, Raiffeisen Centrobank Data: Jovan Sikimic, Raiffeisen Centrobank Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR) Assets and loans Asset growth (% yoy) 6.2% 8.6% 4.6% -3.% 1.6% Loans/total assets (%) 65% 64% 64% 66% 58% 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)* 1.5% 6.7% 4.5%.6% -1.7% Gross non-performing loans (% of total loans)** 11.1% 11.6% 1.8% 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% 2.7% 1.98% Funding Customer deposits/total assets (%) 61% 59% 58% 63% 65% Customer loans/customer deposits (%) 1% 19% 111% 15% 9% Deposit growth (% yoy) 1.8% 4.% 2.9% 5.9% 4.1% Profitability and capitalization*** Cost/Income (%)** 56% 61% 61% 57% 6% NII/total assets (%) n.a. n.a. n.a. n.a. n.a. Return on Assets (pre-tax proportional, %)**.4%.6%.3%.4%.4% Profit before tax (EUR mn, proportional)** Total CAR ratio (%), at the group level n.a 11.9% 12.7% 13.4% 14.3% Tier-1 ratio (%), at the group level 1.6% 1.7% 12.5% 11.8% 12.6% Core Tier-1 ratio (%), at the group level 8.5% 9.% 1.7% 1.% 1.1% * adjusted for M&A ** only for CZ, RO, RU *** 213, 214 Basel 3 fully loaded Danish compromise; 211, 212 Basel 2.5 ; 21 Basel 2 Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 65

66 Market players in CEE 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 Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data Asset quality in CEE* 1.5% 1.%.5%.% % 6.% 4.% 2.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH 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 leading 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 subsidiaries 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 214, 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 8%, 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 5 bp, touching almost 6% as at year-end 214. 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 213) 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 214, the group s profit after tax was lower than the year before, as the oneoff charge in Hungary of EUR 231 mn (Supreme Court s decision on retail loans) decreased the total earnings to about EUR 6 mn (213: about EUR 8 mn). Key business position indicators in CEE Total assets (EUR mn) 67,315 64,312 53,6 51,238 47,85 Number of countries in CEE Market share in CEE (% of total assets)* 3.3% 3.% 2.1% 2.1% 2.% Number of branches in CEE** 1,62 1, * The number of branches 21/211 including NLB **Czech Republic includes CSOB Bank + Era Financial Centers; Source: company data, calculation by RBI/Raiffeisen RESEARCH 66 Please note the risk notifications and explanations at the end of this document

67 Market players in CEE Despite facing relatively high pressure on the NIM side in the Czech Republic, KBC has managed to keep its profitability stable on the wings of good cost management in the Czech Republic, lower impairment charges in Hungary, the Czech Republic and Slovakia as well as strong revenues in Slovakia. The country-wise profitability breakdown for 214 shows the highest rebound in Bulgaria (as a result of Countries of significant presence in CEE (% of total assets) Banks market share (%) the base effect from 213), 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 215, KBC s management expects to be able to maintain stable and solid returns from its Czech business unit. Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Czech Republic Hungary* Slovakia Bulgaria n.a * foreign-owned banks excl. OTP Source: company data, national sources, RBI/Raiffeisen RESEARCH Financial analysts: Text: Jovan Sikimic, Raiffeisen Centrobank Data: Jovan Sikimic, Raiffeisen Centrobank Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR) Assets and loans Asset growth (% yoy)* 3.8% -4.5% 1.5% -3.4% -8.1% Loans/total assets (%)** 51% 56% 54% 52% 6% 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% Gross non-performing loans (% of total loans) 6.2% 6.3% 5.2% 5.4% 5.9% Loan loss reserves/non-performing loans (%) n.a. n.a. n.a. n.a. n.a. Annual provisioning/customer loans (%) 1.4% 1.31%.47%.7%.41% Funding Customer deposits/total assets (%)** 61% 64% 68% 72% 77% Customer loans/customer deposits (%) 82% 87% 8% 75% 77% Deposit growth (% yoy)* -.6% -.9% 3.% 2.1% -.6% Profitability and capitalization**** Cost/Income (%) 57% 53% 6% 61% 6% NII/Total assets (%) 3.5% 3.2% 2.9% 2.9% 2.9% Return on Assets (pre-tax proportional, %) 1.2% 1.2% 1.6% 1.6% 1.3% Profit before tax (EUR mn, proportional) Total CAR ratio (%), at the group level n.a. 15.6% 15.8% 17.8% 18.3% Tier-1 ratio (%), at the group level 12.6% 12.3% 13.8% 12.8% 15.9% Core Tier-1 ratio (%), at the group level 1.9% 1.6% 11.7% 12.8% 14.3% * adjusted for M&A ** 21, 211 not including NLB *** only for CSOB **** 213, 214 fully loaded Basel 3 and acc. to Danish compromise; 21, 211, 212 Basel 2 Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 67

68 Market players in CEE Intesa Sanpaolo Good profitability in 214 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 Loans and deposits in CEE* Loans Deposits * EUR bn, aggregated data of CEE subsidiaries Source: company data Asset quality in CEE* 4.% 3.% 2.% 1.%.% % 1.% 5.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans * aggregated data of CEE subsidiaries Source: company data, calculation by RBI/Raiffeisen RESEARCH 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 214. The group has a significant footprint in CEE, and its geographic diversification also includes the Middle East and Africa. It also benefits from its diversified business lines, being predominantly a corporate bank, but also actively developing asset management, insurance, and pension businesses. The group is active 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 total assets originate in CEE. Intesa Sanpaolo ranks among the Top 3 in Serbia, Croatia, Slovakia and Albania, and among the Top 1 in Hungary, Bosnia and Herzegovina and Slovenia. Inferior asset quality has been the major jeopardy for the group s business performance over the past few years, predominantly stemming from the weakened Italian economy, but also from the crisis in CEE from 28 to 21. 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 portfolio so that the NPL ratio and cost of risk started to improve in 214. The new inflow of classified loans to the NPL stock declined significantly in 214, namely by over 2% according to the group s reporting, which resulted in a general decline of cost of risk on both the group level and in the CEE countries. The countries with the highest risk costs for the group in the area remain Hungary and Romania, while Russia saw escalated cost of risk starting 214. 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 214. The group showed good profitability in 214 as a whole, with its operating income flow growing by 4%, and pre-tax results significantly exceeding those of 213. The performance was supported by improved core income, but also largely benefitting from strong profits generated by its asset management and insurance business. CEE contributed over 1% of the group s operating income, although 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 regulations and charges, as well as the combined losses in Romania and Ukraine of Key business position indicators in CEE Total assets (EUR mn) 4,8 4,6 39,5 38, 37,2 Number of countries in CEE* Market share in CEE (% of total assets) 2.% 1.8% 1.6% 1.5% 1.6% Number of branches in CEE 1,542 1,446 1,32 1,268 1,24 * not including Ukraine since 213 (on sale); Source: company data, calculation by RBI/Raiffeisen RESEARCH 68 Please note the risk notifications and explanations at the end of this document

69 Market players in CEE EUR 75 mn. In total, these losses outweighed the positive results from the rest of the CEE markets. The group s funding remains definitely among its strong sides. Intesa Sanpaolo is rich with deposit funding, with retail deposits accounting for 75% of the groups deposits generated by the banking business. Deposits based on asset management and insurance business only enhance the Countries of significant presence in CEE (% of total assets) Banks market share (%) funding strength. In 214, the L/D ratio, calculated for only the banking business, stood at 94%. The group s capitalization is decent, comfortably exceeding regulatory requirements. Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Slovakia Hungary* Croatia Serbia Bosnia a.h * foreign-owned banks excl. OTP Source: company data, national sources, RBI/Raiffeisen RESEARCH Financial analysts: Text: Elena Romanova, RBI Vienna Data: Jovan Sikimic, Raiffeisen Centrobank Key performance indicators CEE business (aggregated data of CEE subsidiaries, all indicators in EUR) Assets and loans Asset growth (% yoy) 2.8% -.5% -2.7% -3.8% -2.1% Loans/total assets (%) 7% 69% 68% 66% 65% 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)* 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% Loan loss reserves/non-performing loans (%) 68% 66% 58% 62% 64% Annual provisioning/customer loans (%) 1.74% 2.33% 3.19% 3.% 2.1% Funding Customer deposits/total assets (%) 66% 66% 69% 71% 73% Customer loans/customer deposits (%) 16% 15% 99% 93% 9% Deposit growth (% yoy) 3.5% -.7% 2.2% -1.1% -.4% Profitability 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, %).98%.93% -.37% -.15%.23% Profit before tax (EUR mn, proportional) Total CAR ratio (%), at the group level 13.2% 14.3% 13.6% 15.1% 17.2% Tier-1 ratio (%), at the group level 9.4% 11.5% 12.1% 12.3% 14.2% Core Tier-1 ratio (%), at the group level 7.9% 1.1% 11.2% 11.9% 13.6% * adjusted for M&A ** 214 acc. to Basel 3 fully loaded; 213 pro-forma acc. to Basel 3 *** including past-due, restructured, sub-standard and doubtful loans Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 69

70 Market players in CEE Sberbank Political tension and sanctions impact Sberbank s positions in CEE 214 profitability 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 Loans and deposits* Loans Deposits * EUR bn Source: company data Asset quality 2.% 1.5% 1.%.5%.% % 6.% 4.% 2.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans Source: company data, calculation by RBI/Raiffeisen RESEARCH Sberbank s business is predominantly domiciled in Russia, with 86% of the bank s assets located in the country as of end-214. At the same time, the bank s CEE presence remains quite significant. As at year-end 214, Sberbank was present in ten CEE countries, which represented 3.6% of the total group s assets. Sberbank is still in the process of streamlining its CEE network operations, and the final strategy regarding the new shape is expected to be announced in the coming 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 212. 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 Russia and Ukraine, and the Western sanctions against Russia. Reportedly Sberbanks earlier plans to expand in CEE have been put on hold, and 215 has already seen a range of news for the group s CEE presence contraction. For example 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 215. While the bank has definitely felt a negative impact of the financial fundamentals volatility and FX depreciation, for 214 its NII and F&CI posted increases by 18% yoy and 3% yoy respectively, supported by sanguine performance within the first three quarters of the year. Nevertheless, net profit in 214 was down 2% 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 213. Thus, RoE decreased to 14.8% in 214 from over 2% a year ago. The bank s management expects for 215 a further deterioration of core margins and a further increase of risk costs, both leading to a RoE in the single-digits. The bank s asset quality is expected to come further under pressure in 215. In 214, the overdue loan stock increased to 3.2% of gross loans and total problem loans to 6% of gross loans, and this is notwithstanding a 37% loan book growth of the bank in 214 (this number refers to the loan portfolio expressed in LCY, and thus captures the revaluation of the FCY denominated loans in accordance with the depreciated RUB). Restructured loans surged to 13.2% of gross loan portfolio in 214. One of the measures to be undertaken to counteract Key business position indicators in CEE Total assets (EUR mn) 213,358 26, ,34 43, ,273 Number of countries in CEE Market share in CEE (% of total assets) 1.7% 12.1% 13.1% 14.8% 14.1% Number of branches in CEE 19,241 19,417 19,465 18,434 17,785 Source: company data, calculation by RBI/Raiffeisen RESEARCH 7 Please note the risk notifications and explanations at the end of this document

71 Market players in CEE the increasing credit risk, according to the bank s management, is to contract the retail loan portfolio in 215, and focus on the collateralized retail loan categories. Countries of significant presence in CEE (% of total assets) Banks market share (%) Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Russia Sberbank s capitalization exposure Ukraine n.a Belarus to the FX volatility came as the major negative surprise of the group s performance in 214. Tier 1 ratio decreased to 8.6% on FX asset mark-tomarket Czech Republic Slovakia Croatia Bosnia a.h. n.a. n.a. n.a. n.a revaluation as a result of the Source: company data, national sources, RBI/Raiffeisen RESEARCH sharp RUB depreciation. The drop of the capitalization ratio made Sberbank cut its dividend pay-out ratio to 3.5% of net profit of 214 in order to support its capital buffers. Besides, an option for Sberbank remains to convert a RUB 5 bn subordinated loan from the Central Bank of Russia. Funding conditions are expected to stay challenging in 215, as access to international capital markets remains restricted by the Western sanctions. Sberbank s L/D ratio increased to 114% in 214, 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 214, 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) Assets and loans Asset growth (% yoy) 21.4% 25.6% 39.3% 2.6% 38.4% Loans/assets (%) 63.6% 71.2% 69.5% 71.% 7.5% Retail loans/total loans (%) 21.3% 21.5% 25.4% 27.7% 26.% Corporate loans/total loans (%) 78.7% 78.5% 74.6% 72.3% 74.% Credit risk Growth of customer loans (% yoy) 12.9% 4.6% 36.% 23.2% 37.3% Gross non-performing loans (% of total loans) 7.3% 4.9% 3.2% 2.8% 3.2% 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.% 16.2% 144.8% Loan loss reserves/customer loans (%) 11.3% 7.9% 5.1% 4.5% 4.7% Funding Customer funds/liabilities (%) 87.% 82.9% 75.5% 73.9% 67.3% Customer loans/customer deposits (%)* 82.5% 97.3% 13.1% 17.2% 114.1% Deposit growth (% yoy) 22.3% 19.3% 28.3% 18.5% 29.% Profitability and capitalization Cost/Income (%) 42.4% 47.% 49.% 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 (%) 2.6% 28.% 24.2% 2.8% 14.8% Total CAR ratio (%) 16.8% 15.2% 13.7% 13.4% 12.1% Tier-1 ratio (%) 11.9% 11.6% 1.4% 1.6% 8.6% * based on net loans; Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 71

72 Market players in CEE VTB Business and financial standing jeopardized by inferior domestic market and Western sanctions Modestly positive profits in 214 due to state support; inferior performance expected for 215 Capitalization in 215 is likely to be maintained through ongoing state support Loans and deposits* Loans * EUR bn Source: company data Asset quality 3.% 2.% 1.%.% Deposits % 8.% 6.% 4.% 2.%.% NPL Ratio (r.h.s.) Annual provisioning/gross loans Source: company data, calculation by RBI/Raiffeisen RESEARCH VTB, Russia s second largest state-controlled bank (about 17% of the Russian banking system s assets) has around 9% of its business domiciled in Russia. The majority of the remaining 1% is spread in neighbouring countries, while the European 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 European Subholding with VTB Bank (Austria) as the parent company. The bank s CEE business is governed predominantly from its Austrian subsidiary. Since 215, VTB has been facing tighter regulation of its European business. ECB has announced earlier this year, that it intends to have the European businesses of Sberbank and VTB under supervision, and plans to complete stress tests and balance sheet reviews for both banks already in 215. In 214, 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 internationally. Domestically, the group, which was active in expanding its business in previous years, had to carry escalated cost of credit risk in 214, and experienced a significant deterioration of financial performance. VTB s NIM contracted by 4 bp to 4.1% in 214 and risk costs surged to 3.4% coming from 1.6% the year earlier. VTB s management expectations stay rather gloomy for 215 as well, possibly expecting a loss. NPL ratio was at 5.8% of gross loans in 214, which is 1.1 pp higher than in 213. The NPL ratio increase came on the back of the still strong loan growth in 214, suggesting a further increase of NPL ratio in 215, 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 1% in 215, predominantly on the consumer lending side. The de facto business performance by VTB in 214 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 214 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.5% annual interest rate by the state-owned Deposit Insurance Agency (DIA). The gap between this.5% and the at that time market interest rate was recorded by VTB as implicit revenue on its P&L account. Key business position indicators in CEE Total assets (EUR mn) 16,96 163,47 184,35 194, ,667 Number of countries in CEE Market share in CEE (% of total assets) 4.7% 7.3% 7.4% 7.6% 7.4% Number of branches in CEE* ,77 1,693 1,972 * excl. Armenia; Source: company data, calculation by RBI/Raiffeisen RESEARCH 72 Please note the risk notifications and explanations at the end of this document

73 Market players in CEE We are quite sceptical about the group s intention to have its Tier 1 ratio at targeted 1% as at year-end Banks market share (%) 215 without further state support. In 214, VTB has already completed the conversion of state-owned subordinated loans in the amount of RUB 214 bn into CT1 capital. VTB has already received RUB 1 bn subordinated deposits from the National Wealth Fund and has applied for another RUB 3 bn in subordinated capital from DIA in April 215. If the request succeeds, the funds would be sufficient to support the groups strained capitalization in our view. Despite the financial hardships, statecontrolled VTB kept its high dividend pay-out ratio at 15% in 214. We view VTB s refinancing needs as manageable, given the state support that the group receives. As at year-end 214, the group had RUB 695 bn in cash and equivalents, which compares well to the RUB 14 bn due in 215. Countries of significant presence in CEE (% of total assets) Overall market data Market share foreignowned banks (%) Market share Top 5 banks (%) Russia Ukraine Belarus Source: company data, national sources, RBI/Raiffeisen RESEARCH Its L/D ratio surged to a height of 142% in 214, however, in our take, by and large driven by the necessity to perform a supportive role to the systemically important 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 Key performance indicators in CEE (all indicators in RUB, IFRS-based) Assets and loans Asset growth (% yoy) 18.8% 58.2% 9.2% 18.3% 39.% 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% 8.6% 81.8% Credit risk Growth of customer loans (% yoy) 2.6% 54.4% 1.7% 25.4% 35.3% Gross non-performing loans (% of total loans) 8.6% 5.6% 5.7% 4.7% 5.8% Loan loss reserves/gross non-performing loans (%) 13.7% 111.3% 112.4% 115.5% 114.8% Loan loss reserves/customer loans (%) 9.% 6.% 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% Profitability and capitalization Cost/Income (%) 43.4% 49.8% 52.3% 49.2% 46.% NIM (%) 5.1% 5.% 4.6% 4.5% 4.1% Return on Assets (%) 1.5% 1.7% 1.3% 1.2%.% Return on Equity (%) 1.3% 15.% 13.6% 11.8%.1% Total CAR ratio (%) 16.8% 12.7% 14.4% 14.7% 12.% Tier-1 ratio (%) 12.4% 8.7% 1.1% 1.9% 9.8% * based on net loans; Source: company data, calculation by RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 73

74 Market players in CEE CEE: Regional asset allocation (%, year-end 214) 1% 8% OTP, UniCredit, Intesa, SocGen and RBI with most diversified regional asset allocation 6% 4% 2% % Santander Swedbank KBC Commerzbank ING Erste OTP UniCredit Intesa SocGen RBI Sberbank EFG Alpha Bank NBG VTB CE SEE EE Source: company data, national central banks, RBI/Raiffeisen RESEARCH CEE: Total assets of international banks, aggregated (EUR bn, 214) 14 UniCredit remains the largest Western CEE lender, SocGen now among Top 3 Western CEE banks Sberbank* 31.3 VTB 3.4 UniCredit 19.8 RBI 17.5 SocGen** 14.1 Erste 7.7 PKO BP 7.6 KBC 7. OTP Intesa ING Santander Commerzbank*** Swedbank BNP Paribas**** BCP EFG Eurobank NBG Alpha Bank * excluding Turkey ** HR as of 31 December 213 *** HU as of 31 December 213 **** including BGZ and Russia Source: company data, local central banks, aggregated data CEE subsidiaries CEE: Development of total assets, aggregated (EUR bn) No return to strong pre-crisis balance sheet expansion RBI OTP Intesa Erste UniCredit SocGen KBC Source: company data, aggregated data CEE subsidiaries 74 Please note the risk notifications and explanations at the end of this document

75 Market players in CEE CEE: Pre-tax RoA (proportional, , %) 3.% 2.5% 2.% 1.5% 1.%.5% No improvement in RoA as a result of NIM pressure, still high provisioning (RU, SEE) and one-offs in HU.% -.5% -1.% UniCredit* RBI KBC Erste OTP Santander Commerzbank** SocGen*** Intesa**** * Baltics, Kazakhstan and Ukraine not included since 213 ** considering only mbank *** calculation includes CZ, RO, RU and other CEE **** excl. Ukraine since 213 Source: company data; calculations by Raiffeisen RESEARCH CEE: Revenues per assets (21-214, %) 8.% 7.% 6.% 5.% 4.% 3.% NIM and fee squeezes plus subdued loan growth preventing recovery of revenues 2.% 1.%.% UniCredit* RBI KBC Erste * Baltics, Kazakhstan and Ukraine not included since 213 ** excl. Ukraine since 213 *** since 212 only contribution of mbank / BRE Bank Source: company data; calculations by Raiffeisen RESEARCH, aggregated data CEE subsidiaries OTP Santander Commerzbank*** SocGen Intesa** CEE: Provisioning per assets (21-214, %) 3.% 2.5% 2.% 1.5% 1.%.5% EE exposure and write-offs in RO main drivers for provisioning in 214, CE players benefited from improving asset quality (incl. HU).% UniCredit* RBI KBC Erste * Baltics, Kazakhstan and Ukraine not included since 213 ** excl. Ukraine since 213 *** calculation includes CZ, RO, RU **** since 212 only contribution of mbank / BRE Bank Source: company data; calculations by Raiffeisen RESEARCH, aggregated data CEE subsidiaries OTP Santander Commerzbank**** SocGen*** Intesa** Please note the risk notifications and explanations at the end of this document 75

76 Market players in CEE CEE: Loan book growth * (yoy, in EUR-terms) 1% 5% % -5% -1% -15% UniCredit SocGen RBI Santander OTP Commerzbank Erste KBC Intesa * adjusted for M&A activities Source: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries L/D ratios of CEE segments* 2% 18% 16% 161% Subdued loan growth supported further drop of L/D ratios, lowest L/D ratios at CE players 14% 12% 1% 8% 6% 77% 96% 92% 9% 97% 9% 12% 17% 91% 14% 4% 2% % KBC Santander Erste Intesa UniCredit SocGen Sberbank RBI OTP Commerzbank VTB * adjusted for M&A activities; based on gross loans Source: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries NPL ratios of CEE segments 2% 18% 16% 14% 12% NPL ratios: Positive momentum in CE, positive signals from HU and RO, partially offsetting deterioration in EE 1% 8% 6% 4% 2% % Sberbank VTB KBC Commerzbank ** Santander Intesa UniCredit SocGen* RBI Erste OTP * NPLs of CZ, RO, RU ** NPLs only in PL Source: company data, RBI/Raiffeisen RESEARCH, aggregated data CEE subsidiaries 76 Please note the risk notifications and explanations at the end of this document

77 Market players in CEE CEE: Finalized and ongoing transactions (sorted by total assets) Country Target Total assets (EUR bn) Comment Poland Czech Republic / Slovakia Hungary Romania Serbia Slovenia Ukraine Bank Millennium 14.2 Portuguese parent BCP sold a 15.4% stake in Q 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 8.5 After the IPO in late 212, 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 Potential buyers are PZU, SocGen and Leszek Czarnecki. BPH Bank 7.4 General Electric in talks to sell its Polish operations. Meritum Bank.8 Acquired by Alior Bank from a local private equity fund at about 1.2x BV at yearend 214. FM Bank.7 FM Bank was sold by Polish Abris Private Equity to AnaCap. ZUNO Bank.1 A direct bank owned by RBI up for sale as part of the RBI's restructuring program. CitiBank CZ n.a. MKB 6.2 CitiBank HU 3.1 Budapest Bank Erste Bank Hungary n.a. n.a. RBS retail operations.3 As part of the strategy to exit 11 consumer markets, Citibank has announced to abandon its Czech consumer operations. 1% stake held by BLB was sold to the Hungarian State for EUR 55 mn in September 214. Previously, BLB agreed to recapitalize the bank with EUR 27 mn. As part of the strategy to exit 11 consumer markets, Citibank has announced to dispose of its Hungarian consumer operations. In December 214, the Hungarian government signed a deal to buy the bank from its 1%-owner General Electric. 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 25 mn loan disbursement scheme, including a complete financial package for public sector employees, EUR 1 mn lending package for energy efficiency and a EUR 2 mn loan facility to primary agricultural producers. UniCredit took over the retail and private banking portfolio of RBS in Romania in spring 213. Nextebank.2 Three investment funds managed by Axxess Capital bought Nextebank from MKB (which is owned by BayernLB) in December 213. RIB.1 Polish Getin Holding bought the bank from two individuals in late 213. AIK Banka 1.4 MK Group increased the holding to 7% from 5.1% via a takeover bid in March 215. Cacanska Banka.3 Sold to Turkish Halk Bank for EUR 1 mn. Dunav Banka.1 Telekom Serbia acquired a majority stake (now 95%) in this small bank through a capital injection in December 214. KBM (Credy) Banka.1 Former subsidiary of Slovenian NKBM could be sold in the near future. NKBM 4.4 Raiffeisen Bank Slovenia 1.1 Pravex Bank.2 Raiffeisen Bank Aval n.a. Other Hypo Group Alpe Adria n.a. Source: banks, press articles, Bloomberg, RBI/Raiffeisen RESEARCH Advanced talks with private equity fund(s) for taking over 1% stake from the Slovenian State. Recently, the takeover multiple has been rumored at about.2x BV. RBI has announced to sell its Slovenian subsidiary as part of a program to reduce the group's RWA base. Subsidiary of Banca Intesa: Agreement of sale signed in January 214. The finalization is subject to regulatory approval. 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). 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. Please note the risk notifications and explanations at the end of this document 77

78 Market players in CEE CEE: Potential M&A candidates (sorted by total assets) Country Target Total assets (EUR bn) Comment Poland mbank 27.5 Getin Noble Bank 16.1 Bank Millennium 14.2 Bank Pocztowy 1.8 Despite CoBa s committment to Poland, mbank appears as a speculative long-term target, very much depending on its parent bank s standing. Owned by Leszek Czarnecki. There are currently no rumors at all, hence rather longterm takeover target. The bank appears to be a takeover candidate in the medium-term. BCP recently cut the stake from 66% to 5.1%. 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 Serbia BCR 13.9 Banca Transilvania 8 Volksbank Romania S.A. 2.8 Pireus Bank Romnaia 2.1 Banca Romaneasca 1.7 Intesa Sanpaolo Romania 1.1 Banca Carpatica.9 Marfin Bank.6 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. Bank of Cyprus sold its 1% stake through an accelerated private placement. After the deal for Volksbank Romania, EBRD is unlikely to sell its 14.5% stake in TLV. Banca Transilvania has acquired a 1% equity interest in Volksbank Romania and reimbursed all parent funding. The implied BV for the equity is.2x, while the BV for the whole transaction was.7x. 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. According to an agreement reached with the EC in H2 2124, its parent National Bank of Greece has to sell its operations in SEE, including Romania, by June 218. The 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. The management has proposed a merger with Nextebank, a small local player, to strenghen its capital position. So far shareholders have rejected this proposal. 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..6 OTP acquired 1% of Millennium Romania in H The implied BV of the transaction is considered to be around.6x. Credit Agricole Romania.3 Lacking scale in Romania, the French group is said to be looking for a buyer. RBS Romania.3 UniCredit announced in H2 214 that it had acquired the Romanian corporate portfolio of RBS, resulting in the British bank to leave the Romanian market. Komercijalna Banka 3.4 Serbia s second largest bank the EBRD holds 25% and the State 42%. The privatization procedure has started with a completion targeted for 217. KBM (Credy) Banka.1 The former subsidiary of Slovenian NKBM might be put on sale in the near future. Croatia HPB 2.3 Slovenia Russia / EE NLB Group 8.9 Banka Celje/ Abanka 4.3 UniCredit (Ukraine) 3.8 Banca Intesa (Russia) 1.5 Source: banks, press articles, Bloomberg, RBI/Raiffeisen RESEARCH Two 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. Largest bank in Slovenia and 1% state-owned. Remains rather a long-term privatization target. The two state-controlled banks should be merged in Q4 215, resulting in the second largest bank in Slovenia. Privatization of the merged entity is targeted for 217. UniCredit has announced the merger and sale of its two subsidiaries Ukrsotsbank and UniCredit Bank. Intesa Sanpaolo considers its rather small Russian subsidiary as non-core, therefore a divestment cannot be ruled out in the long run. 78 Please note the risk notifications and explanations at the end of this document

79 Market players in CEE Market shares in CEE (in % of total assets, 214) Sberbank, 14.1% VTB, 7.4% Other, 46.9% UniCredit, 5.% RBI, 3.3% SocGen*, 3.2% Erste Group, 3.1% Gazprombank, 2.9% RusAgro Bank, 1.2% Commerzbank**, 1.3% Santander, 1.3% Alfa Bank, 1.3% ING, 1.5% OTP, 1.6% PKO BP, 2.4% KBC, 2.% Intesa Sanpaolo, 1.6% CEE: CE + SEE + EE + MK, ME, KZ * HR as of 31 December 213 ** HU as of 31 December 213 Source: company data, national central banks, RBI/Raiffeisen RESEARCH Market shares in CE (in % of total assets, 214) UniCredit, 8.% PKO BP, 7.% Erste Group, 6.2% Other, 42.5% KBC, 5.5% RBI, 4.9% SocGen, 4.8% Santander, 3.8% Commerzbank*, 3.7% Sberbank, 1.% BCP, 1.7% Swedbank, 2.4% ING, 3.3% OTP, 2.9% Intesa Sanpaolo, 2.4% CE + Baltics * HU as of 31 December 213 Source: company data, national central banks, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 79

80 Market players in CEE Market shares in SEE (in % of total assets, 214) UniCredit, 14.1% Other, 36.5% Erste Group, 9.6% RBI, 8.7% SocGen*, 8.% KBC,.5% Sberbank, 1.2% ING, 1.7% Intesa Sanpaolo, 6.6% Alpha Bank, 2.8% NBG, 3.1% OTP, 3.9% EFG Eurobank, 3.1% SEE + ME + MK * HR as of December 213 Source: company data, national central banks, RBI/Raiffeisen RESEARCH Market shares in EE (in % of total assets, 214) Sberbank, 24.7% Other, 39.% VTB, 13.4% Gazprombank, 5.3% OTP,.3% Uralsib Bank,.4% Belarusbank,.8% PrivatBank,.9% RusAgro Bank, 2.3% Kazkommertsbank, 1.5% UniCredit, 1.4% SocGen, 1.3% RBI, 1.2% Otkritie*, 2.9% Alfa Bank, 2.4% Halyk Bank, 1.% Promsvyazbank, 1.2% EE + KZ * former Nomos Bank Source: company data, national central banks, RBI/Raiffeisen RESEARCH 8 Please note the risk notifications and explanations at the end of this document

81 Appendix Key CEE banking sector data Total assets (% of GDP) Poland 63% 64% 69% 71% 86% 84% 82% 85% 85% 86% 89% Hungary 8% 89% 98% 18% 123% 13% 125% 124% 11% 14% 1% Czech Rep. 99% 93% 93% 11% 18% 112% 11% 115% 118% 127% 126% Slovakia 84% 97% 87% 88% 9% 92% 83% 81% 79% 8% 81% Slovenia 9% 99% 19% 11% 116% 128% 129% 126% 126% 112% 1% CE 76% 78% 81% 86% 97% 99% 96% 98% 96% 98% 98% Romania 37% 45% 51% 62% 65% 71% 72% 7% 68% 64% 61% Bulgaria 63% 72% 81% 98% 1% 14% 13% 98% 13% 17% 14% Croatia 92% 96% 13% 17% 16% 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% 8% 86% 9% 94% 98% SEE 5% 58% 66% 76% 76% 84% 86% 84% 85% 82% 81% Russia 42% 45% 52% 61% 68% 76% 73% 75% 79% 87% 19% Ukraine 41% 51% 63% 83% 98% 96% 87% 81% 8% 89% 86% Belarus 29% 32% 37% 43% 49% 61% 78% 95% 61% 62% 62% EE 41% 45% 52% 62% 7% 77% 74% 76% 79% 86% 16% EA* 196% 215% 225% 242% 254% 258% 272% 274% 268% 25% 257% * Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH Total loans (% of GDP) Poland 24% 26% 3% 36% 46% 48% 49% 53% 51% 51% 52% Hungary 39% 44% 48% 53% 6% 61% 62% 6% 51% 46% 42% Czech Rep. 39% 38% 42% 49% 54% 56% 55% 57% 58% 62% 62% Slovakia 32% 37% 39% 44% 45% 46% 5% 5% 52% 52% 54% Slovenia 47% 53% 65% 77% 85% 92% 95% 91% 9% 75% 62% CE 31% 33% 37% 43% 51% 53% 54% 56% 54% 54% 53% Romania 16% 21% 27% 36% 38% 39% 39% 4% 38% 35% 32% Bulgaria 34% 4% 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% 3% 37% 39% 4% 44% 43% SEE 25% 3% 35% 44% 47% 51% 53% 53% 53% 5% 48% Russia 23% 25% 3% 37% 4% 42% 39% 42% 44% 49% 58% Ukraine 26% 32% 45% 59% 77% 79% 67% 61% 57% 63% 64% Belarus 18% 19% 25% 3% 34% 46% 54% 54% 38% 41% 4% EE 23% 26% 31% 38% 43% 45% 42% 44% 45% 5% 58% EA* 14% 11% 114% 12% 124% 128% 129% 127% 125% 119% 117% * Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH Loan-to-deposit ratios (%) Poland 77% 79% 86% 13% 121% 113% 113% 115% 112% 18% 15% Hungary 15% 113% 119% 126% 138% 133% 14% 133% 117% 11% 17% Czech Rep. 6% 64% 7% 75% 81% 78% 78% 79% 75% 75% 77% Slovakia 53% 67% 72% 76% 6% 84% 8% 83% 85% 84% 86% Slovenia 133% 149% 183% 147% 166% 164% 162% 155% 152% 125% 15% CE 77% 82% 89% 98% 16% 15% 15% 15% 11% 97% 95% Romania 72% 8% 96% 111% 124% 111% 11% 111% 18% 96% 86% Bulgaria 68% 9% 77% 98% 12% 121% 115% 16% 11% 94% 87% Croatia 83% 91% 94% 93% 1% 1% 13% 14% 15% 13% 99% Serbia 12% 124% 13% 98% 122% 115% 128% 126% 125% 116% 111% Bosnia a. H. 16% 11% 15% 98% 122% 116% 116% 118% 12% 115% 19% Albania 19% 29% 38% 46% 62% 65% 6% 61% 58% 55% 55% SEE 77% 87% 9% 98% 113% 18% 18% 18% 16% 98% 92% Russia 95% 94% 93% 1% 112% 94% 87% 9% 93% 94% 95% Ukraine 19% 17% 134% 152% 25% 219% 175% 163% 141% 135% 145% Belarus 123% 12% 135% 144% 171% 194% 26% 151% 14% 15% 196% EE 97% 96% 98% 16% 122% 15% 95% 96% 97% 98% 99% EA* 126% 126% 126% 125% 121% 118% 116% 115% 112% 17% 15% * Excluding MFI business, source: ECB, national sources, RBI/Raiffeisen RESEARCH Please note the risk notifications and explanations at the end of this document 81

82 Key abbreviations Key abbreviations Basic abbreviations bn bp eop mn pp r.h.s. tn vs. yoy billion basis point(s) end of period million percentage point(s) right hand side trillion versus year on year Key figures BV Book value CAR Capital adequacy ratio CT1 ratio Core Tier 1 ratio CET1 Common Equity Tier 1 F&CI Fee & commission income GDP Gross domestic product L/D ratio Loan-to-deposit ratio LTV Loan-to-value ratio NPL Non-performing loan NII Net interest income NIM Net interest margin Opex Operating expenditure P&L Profit & loss PPP Purchasing power parity RoA Return on assets RoE Return on equity ROTE Return on Tangible Equity RWA Risk-weighted assets Currencies FCY FX LCY foreign currency foreign exchange local currency BYR CHF CZK EUR HRK HUF RON RSD RUB UAH USD Belarusian ruble Swiss franc Czech crown Euro Croatian kuna Hungarian forint Romanian leu Serbian dinar Russian ruble Ukrainian hryvnia US dollar 82 Please note the risk notifications and explanations at the end of this document

83 Key abbreviations Institutions BB BIS BNB BNR BRD BSI CBR CBBH CBV CCB CNB DIA DIF EBA EBRD EC ECB EU FIB IMF KNF MFI NBA NBB NBP NBR NBS NBU SIFI SNB wiiw Budapest Bank Bank for International Settlement Bulgarian National Bank Romanian Central Bank (Banca Naþionalã a României) Banca Romana pentru Dezvoltare (see SocGen) Bank of Slovenia Central Bank of Russia Central Bank of Bosnia and Herzegovina Commercial Bank Viktoria (see Bulgaria) Corporate Commercial Bank (see Bulgaria) Czech National Bank Croatian National Bank Deposit Insurance Agency Deposit Insurance Fund European Banking Authority European Bank for Reconstruction and Development European Commission European Central Bank European Union First Investment Bank (see Bulgaria) International Monetary Fund Komisja Nadzoru Finansowego (Polish Financial Supervisory Authority) Monetary Financial Institution National Bank of Albania National Bank of the Republic of Belarus National Bank of Poland National Bank of Romania National Bank of Slovakia National Bank of Serbia National Bank of Ukraine Systemically Important Financial Institution Swiss National Bank Vienna Institute for International Economic Studies Others AQR CRD CRR FGS IFRS M&A MoU MRR POS SAA SME SRM SSM WEO Asset Quality Review Capital Requirements Directive Capital Requirements Regulation Funding for Growth Scheme (see Hungary) International Financial Reporting Standards Mergers and acquisitions Memorandum of Understanding Minimum Reserve Requirements (see Romania) Point of Sales Stabilization and Association Agreement Small and medium sized enterprises Single Resolution Mechanism Single Supervisory Mechanism IMF World Economic Outlook Please note the risk notifications and explanations at the end of this document 83

84 Risk notifications and explanations Risk notifications and explanations Warnings Figures on performance refer to the past. Past performance is not a reliable indicator of the future results and development of a financial instrument, a financial index or a securities service. This is particularly true in cases when the financial 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 deviate from the forecast. Consequently, forecasts are not a reliable indicator for the future results and development of a financial instrument, a financial index or a securities service. Raiffeisen Bank International AG is responsible for the information and recommendations in this publication which are prepared 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: Detailed information on sensitivity analyses (procedure for checking the stability of potential assumptions made in the context of financial analysis) can be found at: The distribution of all recommendations relating to the calendar quarter prior to the publications date, and distribution of recommendations, in the context of which investmentbanking services within the meaning of 48f (6) Z 6 Stock Exchange Act (BörseG) have been provided in the last 12 months, is available under: 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 84

85 Acknowledgements FINLAND NORWAY Osl o Helsinki SWEDEN Stockholm BALTIC SEA Riga Tallinn ESTONIA NOR TH SE A DENMARK Co penhagen LATVIA LITHUANIA RUSSIA Vilnius Moscow Dublin Minsk RUSSIA IRELAND UNITED KINGDOM London Amsterdam NETHERLANDS GERMANY BELGIUM Brussels Frankfurt LUXEMBOURG Berlin POLAND Prague CZECH REPUBLIC War saw BELARUS UKRAINE Kiev Paris SLOVAKIA KAZAKHSTAN PORTUGAL Lisbon Madrid FRANCE Vienna Bratislava SWITZERLAND MOLDOVA AUSTRIA Budapest Bern LIECHTEN- Chisinau STEIN Ma ribor HUNGARY SLOVENIA ROMANIA Zagreb CROATIA Belgrade BOSNIA AND Bucharest Sa rajevo SERBIA HERZEGOWINA Pristina ITALY MONTENEGRO Sofia Co rsica Podgorica KOSOVO BULGARIA Skopje Rome Tirana MACEDONIA Istanbul ALBANIA Sa rdinia GREECE Ankara BLACK SEA GEORGIA Tbilisi ARMENIA Yerevan Baku ASERBAIJAN CASPIAN SEA ARAL SEA UZBEKISTAN TURKMENISTAN SPAIN ME DITERRANEAN SE A Sicily Athens TURKEY Asgabat Algiers Tunis IRAN MOROCCO ALGERIA TUNISIA CYPRUS Nico sia SYRIA IRAQ Tehra n HEAD OFFICE AND NETWORK BANK S BRANCHES, REPRESENTATIVE OFFIC ES AN D OTHER UNITS Acknowledgements Published by: Raiffeisen Bank International AG Raiffeisen Bank International AG Am Stadtpark 9, 13 Vienna Phone: Fax: Published and produced in: Vienna Editing: Anja Knass, Raiffeisen Bank International AG Design: Birgit Bachhofner, Kathrin Korinek, Raiffeisen Bank International AG Printed by: AV+Astoria Druckzentrum GmbH, Faradaygasse 6, 13 Vienna This report was completed on 29 May 215. Raiffeisen Centrobank would like to thank Anca-Diana Morar for excellent research assistance. 85

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87 Imprint/Contacts Imprint Information requirements pursuant to the Austrian E-Commerce Act Raiffeisen Bank International AG Registered Office: Am Stadtpark 9, 13 Vienna Postal address: 11 Vienna, POB 5 Phone: ; Fax: Company Register Number: FN m at the Commercial Court of Vienna VAT Identification Number: UID ATU Austrian Data Processing Register: Data processing register number (DVR): S.W.I.F.T.-Code: RZBA AT WW Supervisory Authorities: As a credit institution pursuant to 1 of the Austrian Banking Act, Raiffeisen Bank International AG is subject to supervision by the Financial Market Authority and the Austrian Central Bank. Further, Raiffeisen Bank International AG is subject to legal regulations (as amended from time to time), in particular the Austrian Banking Act (Bankwesengesetz) and the Securities Supervision Act (Wertpapieraufsichtsgesetz). Additionally, Raiffeisen Bank International AG is subject to supervision by the European Central Bank (ECB), which ECB undertakes within the Single Supervisory Mechanism (SSM), which consists of the ECB on national responsible authorities (Council Regulation (EU) No 124/213). Membership: Austrian Federal Economic Chamber, Federal Bank and Insurance Sector, Raiffeisen Association Statement pursuant to the Austrian Media Act Publisher and editorial office of this publication: Raiffeisen Bank International AG, Am Stadtpark 9, A-13 Vienna Media Owner of this publication: Raiffeisen RESEARCH Verein zur Verbreitung von volkswirtschaftlichen Analysen und Finanzmarktanalysen, Am Stadtpark 9, A-13 Vienna Executive Committee of Raiffeisen RESEARCH Verein zur Verbreitung von volkswirtschaftlichen Analysen und Finanzmarktanalysen: Mag. Peter Brezinschek (Chairman), Mag. Helge Rechberger (Vice-Chairman) Raiffeisen RESEARCH Verein zur Verbreitung von volkswirtschaftlichen Analysen und Finanzmarktanalysen is constituted as state-registered society. Purpose and activity are (inter alia), the distribution of analysis, data, forecasts and reports and similar publications related to the Austrian and international economy as well as financial markets. Basic tendency of the content of this publication Presentation of activities of Raiffeisen Bank International AG and its subsidiaries in the area of conducting analysis related to the Austrian and international economy as well as the financial markets. Publishing of analysis according to various methods of analyses covering economics, interest rates and currencies, government and corporate bonds, equities as well as commodities with a regional focus on the euro area and Central and Eastern Europe under consideration of the global markets. Producer of this publication AV+Astoria Druckzentrum GmbH, Faradaygasse 6, 13 Vienna This report was completed on 29 May 215. Editors: Gunter Deuber, Elena Romanova, RBI Vienna Contacts Global Head of Research: Peter Brezinschek (ext. 1517) Top-Down CEE Banking Sector: Gunter Deuber (ext. 577), Elena Romanova (ext. 1378) Stocks: Helge Rechberger (Head, ext. 1533), Aaron Alber (ext. 1513), Connie Gaisbauer (ext. 2178), Christian Hinterwallner (ext. 1633), Jörn Lange (ext. 5934), Hannes Loacker (ext. 1885), Johannes Mattner (ext. 1463), Christine Nowak (ext. 1625), Magdalena Quell (ext. 2169), Leopold Salcher (ext. 2176), Andreas Schiller (ext. 1358), Christoph Vahs (ext. 5889) Research Sales: Werner Weingraber (ext. 5975) Economics, Fixed Income, FX: Valentin Hofstätter (Head, ext. 1685), Jörg Angelé (ext. 1687), Gunter Deuber (ext. 577), Wolfgang Ernst (ext. 15), Stephan Imre (ext. 6757), Lydia Kranner (ext. 169), Patrick Krizan (ext. 5644), Matthias Reith (ext. 6741), Andreas Schwabe (ext. 1389), Gintaras Shlizhyus (ext. 1343), Gottfried Steindl (ext. 1523), Martin Stelzeneder (ext. 1614) Credit/Corporate Bonds: Christoph Klaper (Head, ext. 1652), Michael Ballauf (ext. 294), Jörg Bayer (ext. 199), Martin Kutny (ext. 213), Peter Onofrej (ext. 249), Manuel Schreiber (ext. 3533), Lubica Sikova (ext. 2139), Jürgen Walter (ext. 5932) Quant Research/Emerging Markets: Veronika Lammer (Head, ext. 3741), Florian Acker (ext. 218), Björn Chyba (ext. 8161), Judith Galter (ext. 132), Thomas Keil (ext. 8886), Andreas Mannsparth (ext. 8133), Stefan Theußl (ext. 1593) Technical Analysis: Robert Schittler (ext. 1537), Stefan Memmer (ext. 1421) Layout: Birgit Bachhofner (ext. 3518), Kathrin Korinek (ext. 1518) 87

88 Contacts Raiffeisen Bank International AG Markets & Investment Banking Raiffeisen Bank International AG Group Capital Markets: Nicolaus Hagleitner P: Investmentbanking Products: Marcus Offenhuber P: Investmentbanking Products: Matthias Renner P: RB International Markets (USA) LCC Stefan Gabriele P: AL: Raiffeisen Bank Sh.a. Mirela Borici P: BH: Raiffeisen Bank d.d. Bosna i Hercegovina Reuf Sulejmanovic P: BG: Raiffeisenbank (Bulgaria) EAD Boyan Petkov P: BY: Priorbank JSC Treasury: Svetlana N Gulkovich P: Investmentbanking: Oleg Leontev P CZ: Raiffeisenbank a.s. Milan Fischer P: HR: Raiffeisenbank Austria d.d. Ivan Zizic P: Raiffeisen CENTROBANK AG Institutional Equity Sales, Vienna Head: Wilhelm Celeda P: Sales: Klaus della Torre P: Kathrein Privatbank Aktiengesellschaft CEO Susanne Höllinger P: Director Private Banking (Austria) Alexander Firon P: Commercial banks Raiffeisen Bank International AG, Vienna Corporate Customers: Joseph Eberle P: Financial Institutions: Axel Summer P: RBI London Branch Graham Page P: Matthias Renner P: International Desk AL: Raiffeisen Bank Sh.a. Jorida Zaimi P: HU: Raiffeisen Bank Zrt. Gabor Liener P: KO: Raiffeisen Bank Kosovo J.S.C. Berat Isa P: PL: Raiffeisen Bank Polska S.A. Miroslaw Winiarsczyk P: RO: Raiffeisen Bank S.A. Aurelian Mihailescu P: RU: AO Raiffeisenbank Capital Markets: Sergey Shchepilov P: Investmentbanking: Oleg Gordienko P: SI: Raiffeisen Banka d.d. Marko Stolica P: SK: Tatra banka, a.s. Peter Augustin P: SR: Raiffeisen banka a.d. Branko Novakovic P: UA: Raiffeisen Bank Aval Vladimir Kravchenko P: Merger & Aquisitions Gerhard Grund P: Henning von Stechow P: Director Private Banking (RU/EE) William Sinclair P: Director Private Banking (CE/SEE) Krisztian Slanicz P Institutional Clients Alexandre Loyoddin P: RBI Beijing Branch Terence Lee P: RBI Singapore Branch Klaus Krombass P: KO: Raiffeisen Bank Kosovo J.S.C. Anita Sopi P: AT: Raiffeisen Bank International AG Rudolf Lercher P: BH: Raiffeisen Bank d.d. Bosna i Hercegovina Vildana Sijamhodzic P: BG: Raiffeisenbank (Bulgaria) EAD Irena Krentcheva P: BY: Priorbank JSC Oksana Alekseychenko P: CZ: Raiffeisenbank a.s. Roman Lagler P: HR: Raiffeisenbank Austria d.d. Wolfgang Woehry P: HU: Raiffeisen Bank Zrt. Lászlo Volosinovsky P: PL: Raiffeisen Bank Polska S.A. Krzysztof Lubkiewicz P: RO: Raiffeisen Bank S.A. Reinhard Zeitlberger P: RU: AO Raiffeisenbank Maria Maevskaya P: SI: Raiffeisen Banka d.d. Simona Vizintin P: SK: Tatra banka, a.s. Mirco Ribis P: SR: Raiffeisen banka a.d. Sofija Davidovic P: UA: Raiffeisen Bank Aval Andreas Kettlgruber P: