banking in cee: the new growth model - bank austria · 1/19/2011 · the cee convergence model...

BANKING IN CEE: THE NEW GROWTH MODEL

Vienna, 19 January 2011

Gianni Franco Papa, Head of CEE Division

Debora Revoltella, Head of CEE Strategic Analysis

2

CEE banking study 2011: key findings

The CEE convergence model holds

CEE banking holds as an opportunity, with some reshaping of the banking model

2011 is the year of (moderate) recovery for CEE banking, with continued focus on

efficiency and risk control

The competitive environment is changing in the context of increasing regulatory

risk, opening opportunities for re-positioning and some newcomers

UniCredit is strongly committed to CEE and well positioned to take the upside,

having enough capital, liquidity, risk appetite and good franchise

333

AGENDA

CEE economic outlook: convergence model vs short term risks

CEE banking: an opportunity, with some rebalancing

2011 the year of (moderate) recovery

Changing competitive environment and regulatory risk

UniCredit in CEE

Conclusions

4

CEE economic convergence holds – long term potential growth at 4% abovemore mature economies but below pre-crisis

SOURCE: UniCredit Group CEE Strategic Analysis, UniCredit Research, Eurostat

Long term economic trends CEE vs Eurozone(GDP yoy growth %)

Economic growth model based on the “convergence story”

Standards of living

Productivity and competitiveness

Per capita GDP in PPS(2009, % EU-25)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Slove

nia

Cze

chR.

Slova

kia

Hun

gary

Cro

atia

Eston

ia

Polan

d

Lith

uania

Latvia

Turke

y

Rom

ania

Bulga

ria-6

-4

-2

0

2

4

6

8

201520142013201220112010200920082007200620052004

EUROZONE

CEE Averages

CEE_17

-6

-4

-2

0

2

4

6

8

201520142013201220112010200920082007200620052004

EUROZONE

CEE Averages

CEE_17

5

Countries differ in terms of timing of recovery, focus towards sustainablestrategies and exposure to risk

3.8

5.3

4.3

5.0

4.1

2.7

1.8

1.6

2.8

1.7

3.9

3.9

3.7

2.5

3.1

1.8

2.5

4.4

2011f

4.23.6CEE-17

5.56.0Kazakhstan

4.13.4Russia

5.04.0Ukraine

5.17.4Turkey

3.51.8Serbia

2.50.5Bosnia

2.0-1.5Croatia

3.50.1Bulgaria

3.4-2.5Romania

4.02.4Estonia

4.0-0.9Latvia

3.60.9Lithuania

2.81.2Slovenia

4.53.9Slovakia

3.32.3Czech R.

3.41.2Hungary

3.93.8Poland

2012f2010eReal GDP % Yoy

1. EMU Core: AT, BE, DE, FI, FR, NL, FI; EMU Periphery: GR, ES, PT, IE, IT; CE: CZ, HU, PL, SK; SEE:BG, HR, SRB, RO; Other: RU, KZ, TK, UA

SOURCE: UniCredit Group CEE Strategic Analysis, World Bank, Bloomberg

CEE Macroeconomic forecasts Quality of the business environment

145

123110

8984706559635651464241

242317

UASKLVLT RUBHSRBHRPLTKKZCZROBGHUSIEE

World Bank Ease of doing business rank in 2010Positioning out of 183 countries in the world

Cost of country risk by sub-regions(1)

5Y CDS USD

0

50

100

150

200

250

300

350

400

450

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

EMU Core EMU Periphery CE SEE Other

666

AGENDA





UniCredit in CEE

Conclusions

77

CEE banking holds as an opportunity, provided some rebalancing

1. EMU average refers to 2005-20082. 2005-07; EMU proxy including AT, DE, IT (2005-2008)SOURCE: UniCredit Group CEE Strategic Analysis, ECB

CEE expected to recover towards a lower growth path…

CEE-17 total CEE banking revenues - bn euro

… yet maintaining a significant advantage vs.Western Europe(1)

Post-crisis scenario

Pre-crisis scenario

-20

20

60

100

140

180

220

260

300

2004 2005 20062007 2008 20092010 2011 20122013 2014 2015

Pre-crisis‘05-’08Pre-crisis‘05-’08

CEE Cost ofrisk (bp)(2)

CEE ROA (%)

Post-crisis‘12-’15Post-crisis‘12-’15

CEE Lendinggrowth (%)

CEE Cost-to-income (%)

16

32

EMU Ø 9

156142

EMU Ø 55

4852 EMU Ø 62

1.52.0

EMU Ø 1.0

106101 EMU Ø 122CEE Loan-to-depo ratio (%)

CEE CDS (bp)158148

88

Financial products penetration gap holds as a base for the upside in CEEbanking, but strategies towards new services and new segmentspenetration become a must

1.EMU-12 as of 20092.CEE-9: PL, TK ,RU, HR, BG, CZ, HU, RO, SK3.Sample of banks including UCG and CommerzbankSOURCE: UniCredit Group CEE Strategic Analysis

Banking penetration and profitability drivers Financial penetration (2010e, % GDP)(1)

As of 2009

Funding costs of banks vs large corporations

Mortgageloans(2)

Corporateloans

Poland(3)

Consumerloans(2)

0

50

100

150

200

250

300

O-0

8

D-0

8

F-0

9

A-0

9

J-0

9

A-0

9

O-0

9

D-0

9

F-1

0

A-1

0

J-1

0

A-1

0

O-1

0

Banks

Telekomunikacija Polska SA

Netin

tere

stin

com

e+

Netfe

eand

com

mis

sio

nin

com

e(%

ofavg

volu

mes)

1

2

3

4

5

6

7

0 50 100 150 200 250 300 350 400

FR

FI

ES

DEBE

AT

SK

CZHU

PL

SRB

BG

HR

RO

SI

EE

KZ

LT

LV

TKUA

RU

Financial penetration (loans+deposits, % GDP)

IT

IE

GR

PT

NL

40

8

EMUCEE

78

EMUCEE

52

26

CEE EMU

9

Ukraine

DE

AT

Bosnia-H.

Slovenia

Latvia

Estonia

Lithuania

Hungary

Slovakia

IT

Romania

Poland Serbia

Czech R.

Kazakhstan

Turkey

Bulgaria

Russia

Croatia

0

20

40

60

80

100

0.0 0.5 1.0 1.5 2.0 2.5

9

In a medium to long term view, banking systems in the region differ, interms of risk/return opportunities

1. Market Attractiveness is an index ranked between 0 (low attractiveness) and 100 (high attractiveness). It is obtained by considering growthpotential (50% weight) and profitability (50% weight). Growth potential is measured in terms of volumes growth, while profitability in terms of ROA.2. Long Term Volatility of Banking Sector Profitability means the standard deviation of banking system ROA.SOURCE: UniCredit Group CEE Strategic Analysis

Market Attractiveness (1)

Long term market attractiveness, risk and size of CEE Profit pool

Long Term Volatility of Banking Sector Profitability (2)

Banking system NetProfit (bn €, 2015F)

101010

AGENDA





UniCredit in CEE

Conclusions

11

-15%

-10%

-5%

0%

5%

10%

15%

20%

2009

2010E

2011F

2009

2010E

2011F

2009

2010E

2011F

2009

2010E

2011F

Central Europe Baltics SEE Other

Provisions/avg gross loans

OPEX/avg gross loans

Revenues/avg gross loansProfits bef. Taxes and extr.items/avg gross loans

11

2011 is the year of the recovery, but the recovery path is going to bemoderate

1. Central Europe: PL, HU, SK, CZ, SI; SEE: BG, BiH, HR, RO, SRB; Other: RU, KZ, UA, TKSOURCE: UniCredit Group CEE Strategic Analysis

CEE banking profitability, revenues generation capacity and cost of risk (in %)(1)

-35%

30%

Kazakhstan - Profitsbef. taxes and extr.items (% avg loans)

1212

Out from a clear credit crunch – mostly demand driven

1. CE: CZ, HU, PL, SK, SI; SEE: BG, BiH, HR, RO, SRB;Other: TK, UA, RU, KZ

SOURCE: UniCredit Group CEE Strategic Analysis

Lending activity gradually restarting

(yoy % growth, not adjusted for FX movements)

Develeraging not any more a must

A demand driven credit crunch

Banks’ loans-to-deposits ratio (%)(1)

(Correlation between corporate loans and industrial production, %)

RU

UATK

HR

SK

SI

ROPLHU

LT

LV EE

CZ

BG

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-10% -5% 0% 5% 10% 15% 20% 25%

Corporate loans, YTD growth (Sep 2010, adj for FX movements)

Industr

ialP

roduction

(Sep

2010

vs

Dec

2008)

0

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

-10

-20

10

20

30

40

50

60

Mar-08

Dec-07

Corporate Loans

Retail Loans

Total Loans

50

60

70

80

90

100

110

120

130

0

50

100

150

200

250

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Other

SEE

Baltics - RS

CE

1313

Peak for non performing loans expected for end 2010/1H 2011with cost of risk already decelerating

Forecast

Year of the peak in Cost of Risk:

2009: PL,TK,RU,HU,SK,SRB,UA,KZ,BALTICS

2010: HR,BG,RO,BH,SI

CEE Cost of Risk and Non performing loans ratio (bps)

Year of the peak in NPL ratio:

2009: TK,LT

4Q10/1H 2011: Rest of CEE


134146167177206238

509

251136

9481,0091,123

1,2101,355

1,485

1,281

775

561

20082007 2009 201520142013201220112010

NPL

Cost of Risk

14141.CEE including BG, CZ, EE, LT, LV, HU, PL, RO, SK, SI, TK2.EU as of 2009SOURCE: UniCredit Group CEE Strategic Analysis

Efficiency is a must, but so are investment for future growth

CEE Inflation (% yoy) and OPEX (% yoy)(1)

During the crisis, banks in CEE strongly focused on cost efficiency measures

Cost control will remain a focus in the medium-term in the context of a dynamic business

environment

While efficiency remains an important driver for future profitability, it is clear that those players

who want to experience the region’s upside, need to restart some investment activities

Cost-to-income ratio (2010e)(2)

3

UASK LV EUSRB LTKZ EERO BH SI

18

26

25 23

2723

26

33

4

24

23

27

23

19

24

23

31

28

39

19

27

2826

28

25

RU BG HUPL TK HR CZ

18

3130

24

26

42

28

27

29

32

non HR

HR

-15

-10

-5

0

5

10

15

20

25

30

0

1

2

3

4

5

6

7

8

9

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

Mar-08

CPI avg - RS

OPEX

151515

AGENDA





UniCredit in CEE

Conclusions

16

Number ofBranches

2,959

2,158

1,225

2,653

1,599

1,507

3,854

Countries ofpresence (2)

19

7

12

20

11

9

19

UniCredit with the best franchise network in CEE, also benefitingfrom Group diversification

1. 100% of total assets for controlled companies (stake > 50%) and pro rata for non- controlled companies (stake < 50%), except for OTP and RaiffeisenInternational (Group reported data). 2. Including direct and indirect presence in the 25 CEE countries, excluding representative offices. 3. excludingsubsidiaries in Russia, Serbia and Slovenia, except in countries of presence. 4. Data as of FY09, apart from total assets in CZ, RO, SRB, BG and AL.Excluding Rusfinance in RussiaSOURCE: UniCredit CEE Strategic Analysis

OTP

KBC

Raiffeisen

Erste

UniCredit

IntesaSP

SocGen

1H10 Data

(4)

(3)

Total Assets (1)

EUR bn

78

83

66

66

36

41

12423

38

79

36

16

100

12

CEE, % share inGroup Revenues

1717

Possibility to leverage on a solid funding and capital base, as well as goodpositioning will increasingly become key competitive factors


CEE funding gap vs. Group Core Tier 1 ratio(June.10)

Presence in attractive countries(June.10)(2)

6

5

24

15

25

0

50

OTP

ISP

SocGen

KBC

RZB

Erste

UCG

1. Group relevance of CEE funding gap is the total CEE funding gap (when L>D) in % of group total assets2. % of assets in Russia, Turkey and Poland

0

1

2

3

4

5

6

7

8

9

10.07.5 11.09.08.57.0

OTP

10.59.56.5

ISP

8.0

Group Core Tier 1 ratio

SocGen

11.5

KBC

RZB

Erste

UCG

Group Relevance of CEE Funding gap(1)

Size of thebubble: fundinggap (bn €) inbanks when L>D

18

Regulatory developments to be closely monitored – the risk is to penalisethe cross-border banking model, which was the base for CEE economicand financial convergence

FX lendingregulation

Impact on CEE banking

Basle III

In the context of lack of long term funding in local currency and Euro convergence, FX lendingwas the driver of economic and financial convergence in the region

Development of local capital markets and long term local funding is a pre-condition for a fullswitch to local currency lending

No fix ban - but development of constructive solutions to strengthen local currency markets,based on countries specificities

Regulatory Initiatives

Tax on Banks

The introduction of a leverage ratio is also most probably not binding

The impact from new liquidity standards should instead be stronger:

for short-term liquidity requirement, few countries, namely BG, RO, SRB and SK,should be significantly impacted in case of serious financial distress due to therelatively shorter-term liability base

for LT structural liquidity standard, the impact looks milder supported by thegenerally high capital base. Few countries could be more affected, namely RO,BG and HU, due to particularly low availability of LT funding and shorter termloan maturity structure

Still, the CEE region might end up being indirectly affected in case of shortfall or toobinding constraints in terms of capital and funding (including limitations on optimal intra-group allocation) affecting international players active in CEE

European bank levy and coordination issue with local initiatives

Purpose of the tax, size of the tax and possible double taxation are sensitive matters

Hungarian case

The direct impact on CEE from Basel III to be clearly perceivable but ‘not a game changer’:

On the quality and level of capital not a dramatic impact:

CEE banks benefit from a stable oriented retail deposit base, low complexity of theasset structure in the context of high capital ratios and unused capital

relevance of preferred shares and hybrid instruments is limited

191919

AGENDA





UniCredit in CEE

Conclusions

20

UniCredit is the Leading Player thanks to its Unique Franchise with aFull Coverage

The leading player in the region, #1 by assets, branches and net profit

Strong market positioning:

6.4% market share in total assets, 6.1% in revenues as of Sep10

Leadership in AUM (~12 bn), Credit Cards (~8 mln), and leasing (~2 bn new business in 2009)

(1) Ranking by total assets as of Sep10 (CZ, RO and Baltics as of Dec09); Branches and FTEs at 100% as of Sep10; Deposits market share as ofSeptember 10 (Poland as of June 10)

Serbia, #6813 employees72 branches

Presence also in:Kyrgyzstan & Azerbaijan

Czech Rep., #41,626 employees69 branches

Hungary, #71,982 employees135 branches

Slovenia, #4505 employees25 branches

Croatia, #14,789 employees146 branches

Slovakia, #51,286 employees87 branches

Bosnia, #21,869 employees148 branches

Baltics, #7- #10200 employees7 branches

Russia, #83,634 employees123 branches

Ukraine, #57,964 employees506 branches

Romania, #62,967 employees253 branches

Bulgaria, #13,835 employees243 branches

Kazakhstan, #54,340employees146 branches

Turkey, #616,441 employees889 branches

Poland’s Markets, #220,270 employees1,030 branches

5.7%

6.9%

25.8%

3.2%

22.1%

5.2%

12.5%

5.2%

0.8%- 1.5%

1.7%

5.6%

4.0%

15.0%

8.3%

7.1%









Baltics, #7- #10200 employees7 branches


Ukraine, #57,964 employees506 branches



Kazakhstan, #54,340employees146 branches

Turkey, #616,441 employees889 branches

Poland’s Markets, #220,270 employees1,030 branches# 1 Franchise in CEE

~76 bn depositsfrom customers

~3,860 branches

~72,000 employees

Within top 5 in 11Countries(1)









Baltics, #7-#10204 employees7 branches


Ukraine(2), #57,540 employees499 branches



Kazakhstan, #53,848 employees167 branches

Turkey(3), #516,500 employees915 branches

Poland’, #219,863 employees1,018 branches

5.9%

6.8%

25.4%

2.5%

23.1%

4.9%

13.7%

6.4%

0.8%- 1.5%0.8%- 1.5%

1.4%

5.0%

4.1%

14.7%

8.8%

7.8%

% Deposits mkt share

(3) Including 41 branches in Kyrgyzstan

(2) Including 7 branches in Azerbaijan

Overview

Ranking, Employees and Branches by Country(1)

21

Revenues(Eur 4.8 bn)

Profit before Tax(1)

(Eur 1.4 bn)Deposits from Customers &Securities in issue (Eur 78.9 bn)

Revenues and PBT Loans and Deposits

Loans to Customers(Eur 83.2 bn)

(CEE as % of Total UniCredit – 9M10)

CEE is a key pillar of UniCredit’s diversified and balanced business model

~25% of revenues, ~15% of loans to customers, ~13% of deposits from customers

Strong contribution to UniCredit profitability

Balanced loans / deposits structure: Loans/Deposits ratio at ~1.1x as of Sep10

23%

51%

CEE is a Key Driver for Group Profitability

(1) Poland included at 100%; excluding minorities would be 52%. In calculating the ratio, corporate centers cost are not rebated over CEE countries

24%

56%

15% 13%

Overview

(CEE as % of Total UniCredit – 9M10)

22

CEE Strategy: Key Messages

Higher Capital Allocation in the Region

Country portfolio managed to Capture Higher Growth Opportunities

Room to growth in Retail, leveraging on branch expansion andmultichannel

CIB/CEE cooperation to maximize business opportunities

23

More Capital Allocation to Exploit UniCredit Engine for Growth

(1) Italy, Germany, Austria(2) Excluding Kazakhstan

2010 2015

UniCredit Profitability Ratio

51%

Group RWAs - CEE as % of Total UniCredit

UniCredit’s commitment to the region fully confirmed

Even under the current environment, CEE risk/return in 2010 (bottom of the cycle) is stillabove Western Europe in 2007 (top of the cycle)

CEE weight to be gradually increased to exploit growth opportunities

5.0%

1.7%

0.9%

6.9%

2.3%

1.5%

REV/RWAs PBT/RWAs NOPAT/RWAs

WE 2007 CEE 2010(1) (2)

CEE CEE

24

Lead

ing

Low market attractiveness High market attractivenessMedium market attractiveness

Mid

-siz

ed

Su

b-s

cale

UC

GC

OM

PE

TIT

IVE

PO

SIT

ION

ING

Mapping UniCredit presence in high growth markets(1)

Banking sector gross profit 2015ESize € 2bn

POLAND

TURKEY

RUSSIA

CROATIABULGARIA

CZECHREPUBLIC

HUNGARY

ROMANIA

SLOVAKIA

BOSNIA

SERBIA

SLOVENIA

UKRAINE

ESTONIA

LATVIA

LITHUANIA

KAZAKHSTAN

Country Portfolio Managed to Capture Higher Growth Opportunities

(1) Market Attractiveness is an index ranked between 0 (low) and 100 (high), obtained by considering volumes growth (50% weight) andrisk-adj revenues over volumes (50% weight).Competitive positioning based on UniCredit raking by total assets as of Sept10. Leading: ranking #1-4; mid-sized: ranking #5-8; sub-scale: ranking #<8

Source: UniCredit CEE Strategic Analysis

25

300 300

120

180

Turkey Romania Hungary OtherCountries

Retail: Branch Expansion and Multi-channel Banking

Loans and Deposits/GDP, 2009

70.2%

44.3%

EMU - 16 CEE - 17

Number of branches per 1 mln inhabitants(3)

569

236

508482

Italy Germany Austria CEE

New opening: ~900 branches(1 ) mainly in

Countries where we have a proven track

record in branch opening

Source: UniCredit CEE Strategic Analysis(1) Not included the optimization network process of ~ 100 branches in overlap or misplaced(2) Mainly Russia, Bulgaria and Serbia(3) 2008 figures for Italy, Germany and Austria; 2009 figures for CEE (2008 Slovenia, 1H09 Croatia)

Banking Penetration: Still room for growth Network Development Plan

Retail

Corporate

117.6%

45.1%

In combination with physical Network widening

Reduce cost to serve

Increase customer satisfaction/retention

Reach a widespread coverage

Multi-channel Banking

(2)

26

Corporate & Investment Banking: Leveraging on Group’sProduct Lines Product Capabilities

CIB Product Lines

Financing &Advisory

Markets

GlobalTransaction

Banking

Leasing

Selected Recent Achievements

UniCredit’s Product Factories Will Enable to Fully Capture BusinessOpportunities in the CEE Region

Best Overall Bank for Cash Management in CEE 2010 (Global Finance)

Best Trade Bank in Eastern Europe (Trade Finance)

Best Sub-Custodian Bank in CEE 2010 (Global Finance)

Best Equity House CEE 2010

Best Overall EMEA Research 2009

Best Investment Bank CEE 2009

M&A CEE (excl. Russia and Turkey):

#1 by Volume of deals (2005-1H 2010) (Dialogic)

Top 3 positions in 11 CEE countries(1)

“Best Banking & Finance Online Application - Czech Republic,2010” Internet Effectiveness Awards (IEA)

(1) Austria, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Italy, Latvia, Romania, Serbia, Slovakia, Turkey and Ukraine

27

Two Landmark Transactions Emphasize the Potential of theCooperation CEE/CIB

Lukoil

USD 2,380,000,000Structured Equity

Transaction

ArrangerRussia – Sep 2010

Lukoil

USD 2,380,000,000Structured Equity

Transaction

ArrangerRussia – Sep 2010

High profile transaction, showing our ability to develop strong

cooperation among central CIB product expertise and CEE

local coverage, in order to perfectly meet customer’s needs

Clearly one of the most important Strategic Equity

transactions globally this year …

… proving UniCredit’s superior skills in those transactions

especially when they require coordination and effectiveness

amongst different offices

UniCredit’s played the Role of Coordinator and Mandated

Lead Arranger

Strong knowledge and long lasting relationship with the

client were key drivers of the success of the deal

Excellent coordination between Syndication, Corporate

Structured Finance and local teams enabled a timely closing

Agrokor

EUR 352.000.000

Syndicated TermLoanLoan

Croatia - July 2010

282828

AGENDA



2011 the year of recovery


UniCredit in CEE

Conclusions

29

CONCLUSIONS

The CEE convergence model holds

CEE banking holds as an opportunity, based on remaining financial convergence

potential. A new and more balanced banking model is emerging

2011 is the year of recovery of banking activities, but this is a pattern of moderate

recovery, with still focus on efficiency and risk control

The competitive environment is changing, with opening opportunities for re-

positioning and some newcomers. Regulatory risk is increasing, with the main

threat being limitations to the cross-border banking model which was the base of

financial convergence so far

UniCredit strongly committed to CEE, which remains the market for growth.

UniCredit is well positioned to take the upside, having enough capital, liquidity, risk

appetite and good franchise

banking in cee: the new growth model - bank austria · 1/19/2011 · the cee convergence model...

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