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CEE Banking Sector ReportCEE Banking Sector ReportJune 2017, annually

Banking Sector Convergence 4.0

CEE: Return of decent profi tability options

RoE back at 10%; NPLs well below 10%

Major players accomplished repositioning

Digital banking needs go beyond retail

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE US

Editor:

Gunter Deuber, Raiffeisen Bank International AG, [email protected]

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

Content

Executive Summary 3

Defi nition of subregions, economic overview 5

Banking trends in CEE

Ownership structures and market concentration 6

Focus on: Update on deleveraging and de-risking in CEE banking and EE markets 8

Focus on: AT banks – committed players; CEE exposure down due to UniCredit/BA asset transfer 9

Financial intermediation and asset growth 10

Loan growth, growth by segments (retail, corporate) 14

Funding, deposit growth, L/D ratios and capitalization 17

Asset quality (NPL ratios) 19

Profitability (Return on Assets, Return on Equity) 21

CEE banking growth and overall market outlook 23

Overview: Digital Banking in CEE 26

Focus on: MREL in CEE 30

Country Overviews

Poland 32

Hungary 34

Czech Republic 36

Slovakia 38

Slovenia 40

Croatia 42

Romania 44

Bulgaria 46

Serbia 48

Bosnia and Herzegovina 50

Albania 52

Russia 54

Focus on: Foreign banks in Russia 56

Ukraine 58

Focus on: Nationalization of Privatbank and outlook on re-privatization 60

Belarus 62

General regulation update 64

Market players in CEE 68

Key CEE banking sector data 93

Key abbreviations 94

Risk notifi cations and explanations 96

Disclosure 97

Disclaimer 98

Table of contents


Executive Summary

Dear Reader of the CEE Banking Sector Report 2017!

We dedicated last year’s report to the so-called "New Normal" of banking and focused on the burden on CEE banking prof-itability due to stricter capital requirements, the high degree of regulatory involvement and the ultra-low interest rate envi-ronment. Moreover, de-risking in CEE and the EE markets in particular had been the name of the game in recent years. This year’s report shows that the transition work of the past years finally starts to pay off across the region and outlines growth and business opportunities in the CEE banking sectors. However, this year’s title "Banking Sector Convergence 4.0" also indicates that the CEE banking sector is facing a new round of convergence, which is – this time – linked to numerous tech-nological challenges and opportunities. Hence, we have dedicated a section of this year’s report to an overview on digital banking in CEE (starting on page 26). The CEE region is an ideal "testing field" for cross-border digital banking solutions, as the size of some CEE banking markets is comparably small and the users seem to be quite open to accept new products and services as well as innovative retail and communications channels.

Overall, 2016 was characterized by a solid development of new net loans, stabilizing or improving asset quality as well as an ongoing recovery on several CEE key markets such as Russia, Romania or Hungary. On aggregate, Ukraine was the only loss-making banking market in 2016, due to massive one-offs related to the large-scale Privatbank nationalization. The regional CEE RoE stood at around 10% and was supported by an ongoing recovery in SEE, a rebound in Russia and overall decent profitability options in several CE banking sectors (mainly the Czech Republic, Slovakia and Hungary). All in all, the CEE region started to significantly outperform Western European banking profitability once again. Within the euro area, the banking sector RoE stagnated at around 5-6% in 2016. Therefore, the year 2016 ended years of down-trending profitability in CEE banking.

Following two years of partial setbacks with regards to total CEE banking assets (in EUR-terms), we saw solid asset growth (in EUR-terms) in 2016. On a regional level, total annual asset growth amounted to some 15% in the EE region (mainly Rus-sia), around 4-5% in CE and 2-3% in SEE. Due to overall higher balance sheet expansion compared to the euro area, the occurrence of relative banking sector catching-up returned. Hence, we think we are back in a sort of banking sector con-vergence trend: the "Banking Sector Convergence 4.0". The stock of CEE banking assets grew from some 8.3% of euro area banking assets in 2015 to around 9% in 2016, which translates into total CEE banking assets of some EUR 2,400 bn. Russian banking assets also recovered, with total assets at around EUR 1,200 bn currently just marginally (-1.7%) below their peak level in 2013. Due to the decent recovery in Russian banking, the share of CE/SEE assets in CEE banking assets once more inched closer to the 40% level. The return of growth on the Russian market opens up the question of how much appetite for asset growth Western players bring along.

To answer this question, one needs to look at another development of 2016: the noteworthy changes to the market structures of the CEE banking sector. The overall market share for foreign-owned lenders reached its lowest level in a decade, mainly due to the increasing market share of state-owned banks in the EE subregion (Belarus, Russia and Ukraine), but also due to growing local/state ownership in CE (mainly Poland and Hungary). In order to tackle recent market share developments in the EE region we dedicated two sections to this development: "Foreign banks in Russia" on page 56 and a special focus on the Ukrainian banking market in "Nationalization of Privatbank and outlook on re-privatization" on page 60. However, the ownership trends in CEE are also a reflection of more selective market strategies of leading Western banks, which are pur-suing much more risk-disciplined lending policies and are not in aggressive "market share buying mode". Since 2007/08 overall cross-border banking exposures on a global level and in Europe (euro area and CE/SEE) have been on a down-trend due to a mix of various factors: less cross-border risk taking, more local re-financing, overall balance sheet adjust-

Executive Summary

Downtrend in profi tability in CEE banking currently halted CEE returns to a healthy growth outlook CEE region as ideal "testing fi eld" for cross-border digital banking solutions


Executive Summary

ments of large international banks and European players in particular, re-focusing of international banks on core/home mar-kets. However, when looking at most recent developments we assume that the times with the most striking adjustments are definitely over. On aggregate, cross-border exposures in the euro area and CE/SEE remained largely constant in 2016. In Russia, we see that the share of Austrian, French and Italian banks in cross-border exposures towards Russia inched above the 50% level as of year-end 2016 (2015: 45%). As deleveraging and de-risking in CEE cross-border banking (especially with regards to Russia-related exposures) continues to be a relevant topic, we once again dedicated a section to it (page 8). In 2016, the regional CEE NPL ratio stabilized at around 8%. This development was supported by a decent improvement in the CE/SEE NPL ratio, while the asset quality deterioration in Russia has reached its peak somewhat earlier than ex-pected. In Russia, the NPL ratio inched down from 7.2% in 2015 to 7% in 2016. The regionwide NPL ratio improvement was also supported by a decent appetite for NPL selling transactions for retail and corporate NPL portfolios. This holds true for smaller transactions on niche markets (like Albania, Bulgaria or Serbia) as well as large transactions in key markets like Poland, Romania and partially Russia.

In line with a constructive macro-outlook there is room for another round of banking sector convergence. According to our estimations, current financial intermediation levels in all CEE subregions are below fundamentally-backed levels – a set-ting that implies a potential for banking sector growth somewhat above GDP growth going forward. Our furthermost con-structive financial deepening outlook for the CEE region since years has been backed by an overall stabilization in Euro-pean banking. Moreover, from a "big picture" point of view, the long-standing financial intermediation trend in CEE still looks much healthier than in large parts of the euro area. Hence, we see a fair chance for another round of financial deep-ening in CEE, with much less imbalances attached at the micro- and macro-level (e.g. more local refinancing, less aggres-sive growth, less dispersion among individual markets, less FX exposure, lower macroeconomic imbalances). We labelled this return to a decent financial deepening outlook "Banking Sector Convergence 4.0" – a scenario that comes along with a return of attractive profitability options in CEE banking. To learn more about current individual market players’ strategies within the "Banking Sector Convergence 4.0" setting in CEE, please read our overview about major Western CEE lenders and Russian banks starting from page 68, as well as the overview on (finalized and planned) M&A activities on page 89. Due to the de jure CEE asset transfer of UniCredit from Austria to Italy, we also included a special section to "Austrian banks in CEE" on page 9. In addition, you will learn more about the performance of Western European CEE banks through our analysis of the so-called "CEE-B7", a sample of seven Western banks (Erste, Intesa, KBC, OTP, RBI, SocGen and UniCredit), in the section "Banking trends in CEE" on pages 6-31. We introduced this sample in last year’s report in order to broaden our coverage (i.e. combining top-down and bottom-up coverage).

The by and large positive tone of our 2017 CEE Banking Sector Report in various fields of coverage suggests that a lot of growth and business opportunities remain in CEE banking. However, since the individual CEE banking markets develop quite differently, we also recommend reading through the specific country pages starting from page 32.

We hope you enjoy reading this year’s CEE Banking Sector Report and that you find it a reliable and insightful source of reference for CEE banking. Please contact us if you are interested in more regular research updates or have general ques-tions/comments on this report.

On behalf of the author team, Financial analysts: Gunter Deuber Elena Romanova

Vienna, June 2017


Subregions and economic overview

Central Europe (CE)

Southeastern Europe (SEE)

Eastern Europe (EE)

Key economic indicators

Real GDP (% yoy) CPI (% yoy, avg.) Public debt (% of GDP) Unemployment (%)

2016 2017e 2018f 2016 2017e 2018f 2012 2017e 2012 2017e

Poland 2.8 3.3 3.0 -0.6 1.9 2.2 54 53 12.8 8.3

Hungary 2.0 3.2 3.4 0.3 3.3 3.0 78 73 10.9 4.0

Czech Republic 2.3 2.7 2.5 0.7 2.4 1.5 45 37 6.8 5.3

Slovakia 3.3 3.3 4.0 -0.5 1.1 2.0 52 52 14.0 8.3

Slovenia 2.5 2.7 2.5 -0.2 1.5 1.9 54 80 8.9 7.3CE 2.6 3.1 3.0 -0.2 2.1 2.1 55 54 11.3 7.1

Romania 4.8 4.2 3.5 -1.5 0.9 2.9 37 39 6.8 5.4

Bulgaria 3.4 3.3 3.3 -0.8 1.3 2.0 17 29 12.3 6.4

Croatia 2.9 3.3 2.8 -1.1 1.9 1.6 71 83 15.9 12.2

Serbia 2.8 3.0 3.0 1.2 2.5 2.9 56 71 23.9 16.0

Bosnia and Herzegovina 2.5 3.0 3.5 -1.1 2.0 2.0 40 43 28.0 24.3

Albania 3.5 4.0 4.0 1.3 2.5 2.7 62 69 13.3 14.5SEE 3.9 3.7 3.3 -0.9 1.4 2.5 41 48 12.3 9.2

Russia -0.2 1.0 1.5 7.1 4.7 4.5 11 14 5.5 5.3

Ukraine 2.2 2.0 3.0 13.9 10.7 7.5 37 78 8.2 9.0

Belarus -2.6 -0.5 1.5 12.0 12.0 11.0 31 39 0.5 2.0EE -0.1 1.0 1.6 7.7 5.3 4.9 13 19 5.5 5.4Source: national sources, Eurostat, RBI/Raiffeisen RESEARCH

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Avg. 2000-2008 Avg. 2009-2016 Avg. 2017e-2022f

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

* at PPP; 2017-22f: IMF forecastsSource: IMF WEO, RBI/Raiffeisen RESEARCH

Key institutional indicators

Ease of Doing Business Rank*

Getting Credit*

Enforcing Contracts*

Resolving Insolvency*

Corruption Per-ception Index**

Poland (EU) 24 20 55 27 29

Hungary (EU) 41 20 8 63 57

Czech Republic (EU) 27 32 68 20 47

Slovakia (EU/EA) 33 44 82 35 54

Slovenia (EU/EA) 33 133 119 12 31CE (avg)*** 33 32 68 27 47

Croatia (EU) 43 75 7 54 49

Romania (EU) 36 36 7 26 57

Bulgaria (EU) 39 32 49 48 75

Serbia 47 44 61 47 72

Bosnia and Herzegovina 81 44 64 41 83

Albania 58 44 116 43 83SEE (avg)*** 45 44 55 45 74

Russia 40 44 12 51 131

Ukraine 80 20 81 150 131

Belarus 37 101 27 69 79EE (avg)*** 45 44 86 44 83* out of 190 countries (2017 Index), ** out of 176 countries (2016 Index), *** regional aggregates unweighted median Source: World Bank, Transparency International, RBI/Raiffeisen RESEARCH

Key banking indicators

Assets (EUR bn, 2016)

Assets-to-GDP (2008)

Assets-to-GDP (2016)

PL 387 86% 92%

HU 109 123% 97%

CZ 223 108% 128%

SK 71 85% 88%

SI 34 116% 85%CE 824 97% 100%

HR 52 106% 115%

RO 94 65% 56%

BG 28 100% 99%

RS 29 67% 83%

BH 13 81% 88%

AL 10 77% 94%SEE 227 77% 77%

RU 1,255 68% 93%

UA 47 98% 53%

BY 32 49% 68%EE 1,333 69% 90%Source: national central banks, RBI/Raiffeisen RESEARCH



Overall, the CEE banking sectors have been characterized by noteworthy changes in market structures since the publication of our last CEE Banking Sec-tor Report in 2016. Basically, we saw certain transactions that were adding to the longer standing tendencies of consolidation among foreign players as well as increasing local/state ownership. Two larger one-off transactions (Poland: Uni-Credit disposal; Ukraine: Privatbank nationalization) and the ongoing consoli-dation in Russia (increasing state and local ownership) have boosted both, local and state ownership in CEE banking. On the Russian market, the market share of foreign-owned lenders (100% foreign-owned) has reached 6.1% in 2016, its lowest level since decades and since we have been tracking this ratio. In case of the CE/SEE region, changes to the ownership structures are largely stemming from a downtrend of foreign ownership in CE to around 63% in 2016, which is some 10pp below the peak levels at around 75% from a decade ago. The rea-sons for this downtrend are recent rounds of market share reshuffling in Poland and Hungary. The moderate increase in foreign ownership in Slovenia could not compensate for the changes in these two markets. In contrast to developments in CE and EE, the foreign ownership ratio in the smaller SEE banking sectors re-mained elevated and constant at slightly above 85% over the past years.

In 2016, the overall market share of foreign-owned lenders in the CEE region has reached its lowest level since 2006. This downtrend was mirrored in an in-creasing market share of state-owned banks in the region. For the entire CEE re-gion, we estimate the market share of state-owned lenders at around 40%, which in fact has been the highest level of state-owned banks since the year 2000. The rise in state ownership is definitely driven by developments in the EE banking sec-tors, where the market share of state-owned banks now amounts to some 58% – an increase of around 20pp over the past decade. In the EE markets, we see the ongoing consolidation among large players in Russia and Belarus, as well as the Privatbank nationalization in Ukraine as major drivers behind the high and in-creasing share of state ownership. Although we would not expect another round of massively increasing state ownership in the EE banking sectors, we would also not see a substantive decline going forward. Privatization in Belarus remains an uphill battle, while a potential Privatbank privatization in Ukraine will only be feasible in 3-5 years. In Russia, we see state-near lenders in a more expansion-

0%

20%

40%

60%

80%

100%

BG RS BA AL HR RO

% of total assets2010 2016

SEE: Foreign ownership

Source: national sources, RBI/Raiffeisen RESEARCH

0%

10%

20%

30%

40%

50%

RU BY UA

% of total assets

2010 2016

EE: Foreign ownership


0%

20%

40%

60%

80%

100%

HU* SI PL HU CZ SK

% of total assets2010 2016

CE: Foreign ownership

* excluding OTPSource: national sources, RBI/Raiffeisen RESEARCH

20

30

40

50

60

5

10

15

20

25

04 06 08 10 12 14 16

CE SEE EE (r.h.s.)

CEE: Presence of state-owned banks*

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

6

8

9

11

12

50

60

70

80

90

03 04 05 06 07 08 09 10 11 12 13 14 15 16

CE SEE EE (r.h.s.)

CEE: Long-term foreign ownership trends (% of total assets)

Source: national central banks, RBI/Raiffeisen RESEARCH

Ownership structures and market concentration



ary mode than de jure state-owned lenders. On top of the developments in the EE region, some market share reshuffling in CE also contributed to sketched trend of increasing state ownership. In CE/SEE banking, the foreign ownership ratio inched down to some 63% in 2016, while the market share of state-owned banks inched up to 16% – a level last seen around 2003. On a subregional level state ownership now stands at around 20% in CE (where we have seen a decent in-crease over the past few years from some 10-11% in 2007/08) and around 7% in SEE. On a positive note, we have seen some progress in terms of re-privatiza-tion in Slovenia.

The ownership trends in CEE are a reflection of more selective market strategies of leading Western banks, certain market exits were seen over the past years, as well as certain political and regulatory ambitions to strengthen the footprint of lo-cal and/or state-owned players. In some cases, local-owned players are also more aggressively seizing certain business opportunities than some of the large Western players. Currently, Western banks operating in CEE are pursuing much more risk-disciplined lending policies and are not in "market share buying mode". In case of the EE markets, leading Western banks continue to stick to their well-established niche player strategies. Going forward, the massive banking sector clean-up in Russia and Ukraine, seen over the past few years, should support Western players with their prudent niche player strategies. Some 50% of the op-erating banks have been closed since 2007/08 – currently some 600 banks are still operating in Russia compared to 1,100 some years ago, in Ukraine some 90 banks are still active compared to some 200 during the peak times in 2007/08.

Outside of the EE region, we have not seen much banking sector consolidation regarding the number of operating banks and/or market share concentrations. It seems that most players are trying to benefit from the current positive dynam-ics in CEE banking through organic growth. However, we still think that there are several CEE banking markets where a certain consolidation would make sense from a long-term perspective. Hence, we still expect some consolidation once cer-tain one-off effects regarding profitability will peter out. Moreover, the increasing pressure of digitization might also support some degree of market share concen-tration. Therefore, we still see the trend for slightly increasing market shares at larger players (and a higher concentration at the top end of the market spectrum) in place and would even expect certain acceleration going forward. This holds especially true for markets, where we are well below relevant thresholds in terms of market concentration (i.e. market share of the Top 5 players). For smaller CEE banking markets, a Top 5 concentration level of at least 65-75% looks reasona-ble, while for larger markets we would suggest a reading of at least 55-65%. Re-garding this ratio and taking micro-level developments into account, we still see some room for consolidation in Poland and Romania (less in Russia) as well as in the smaller banking markets of Bulgaria, Serbia, Hungary and Ukraine.

Despite some signs of consolidation in foreign ownership ratios, the levels re-main still high from an international/European perspective. Moreover, we see that leading and well established (Western) banks in CEE are still committed to do business in the region, as e.g. indicated by recent and ongoing M&A activ-ity by KBC (Bulgaria) and OTP (Croatia). Therefore, we expect the trend towards declining foreign ownership ratios in CE/SEE markets to peter out. In Russia, the remaining dedicated Western banks (incl. the three majors RBI, SocGen and Uni-Credit, that represent some 60% of the 100% foreign-owned banks) continue to follow their well established and selective niche player strategies, while their overall market shares are likely to remain by and large constant (following recent declines) in the years to come.

Financial analysts: Gunter Deuber, Elena Romanova, RBI Vienna

600

800

1,000

1,200

1,400

1,600

140

170

200

230

260

00 02 04 06 08 10 12 14 16

CE SEE EE (r.h.s.)

CEE: Banks operating in subregions


16

17

18

19

20

21

22

23

07 09 11 12 13 14 15 16

Average market share largest bank (%)

Average market share largest bank*

* %, Based on data for PL, HU, CZ, SK, HR, RO, BG, RS, RU, UA (excl. BY)Source: national sources, company data, RBI/Raiffeisen RESEARCH

0

10

20

30

40

50

60

70

10 16 10 16 10 16

CE SEE EE

CEE: Market share Top 5 banks*

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

0.00.51.01.52.02.53.03.54.04.5

00 02 04 06 08 10 12 14 16CE SEE EE

CEE: Average bank size (EUR bn)




Focus on: Update on deleveraging and de-risking in CEE banking and EE markets

Since 2007/08 overall cross-border banking exposures on a global level and in Eu-rope (euro area and CE/SEE) have been on a downtrend due to a mix of various fac-tors: less cross-border risk taking, more local re-financing, overall balance sheet adjust-ments of large international banks and European players in particular, re-focusing of in-ternational banks on core/home markets. However, when looking at most recent devel-opments we assume that the times with the most striking adjustments are definitely over. On aggregate, cross-border exposures remained largely constant in 2016. This holds true for the euro area and CE/SEE markets. That said, we see our long-held view well confirmed that the adjustments of around -20% on aggregate, as seen in cross-border exposures in CE/SEE over the past few years, had been very moderate compared to other and more crisis-induced exposure cuts. For example in the euro area or in Russia, where over the past few years exposures had been cut by 50-70% on a cumulated ba-sis. That said, cross-border banking exposures towards Russia decreased massively in recent years from around USD 250-260 bn back in 2013 to around USD 100 bn as of year-end 2016. We have seen some bottoming out regarding the speed of decline in the course of 2016. Nevertheless, we may see some further moderate downward ad-justment going forward. However, such a correction is likely to be more driven by on-going external deleveraging rather than further forceful de-risking. Generally speaking, we observe striking relative changes in the CEE positions at West-ern banks in recent years, which were mainly driven by de-risking and a re-focussing on core markets. The share of the EE markets in overall consolidated cross-border expo-sures declined from some 24% in 2013 to around 14% in 2016 with the strongest de-clines in 2014/15. There were above average exposure cuts in Ukraine and Belarus. The share of both countries in overall EE exposures dropped from some 20% at peak levels in 2010 to around 10% in 2016. On a positive note, we see some tentative sta-bilization (in relative terms) for EE exposures in 2016. This holds especially true with re-gards to Russian exposures that are stabilizing at around 12-13% of overall CEE expo-sures in 2016, compared to some 20% in 2013. Moreover, it is worth highlighting that consolidated cross-border exposures of Western banks in SEE are gradually recovering following years of tough adjustments. We see this trend as a reflection of the fact that the SEE banking markets are gradually regaining some appeal due to their improving economic and banking sector situation. That said, the overall trend in the SEE region looks even healthier without taking the exposures towards the over-indebted Croatian economy into account. The exposure of Western banks towards SEE markets (excluding Croatia) inched up from some 14% to around 17% over the past 18-24 months. Mean-while, the gearing towards the CE region decreased a tad recently. This move seems to be mainly driven by exposure cuts in case of Poland (incl. disinvestments), which could be partially explained by the recent market reshuffling there. In all other CE markets, we observe (slightly) increasing consolidated cross-border exposures according to interna-tional banking statistics.In Russia, we see that Western banking sectors with "dedicated" Russian operations represent an increasing share in cross-border exposures. The share of Austrian, French and Italian banks in cross-border exposures towards Russia inched above the 50% level as of year-end 2016 (2015: 45%). This development is driven by sweeping exposure cuts out of several Western countries, like Germany or the Netherlands, that contin-ued in 2016. On an interesting note, we see that Russia-related exposures of US banks have started to stabilize in relative terms in 2016. The share of US banks in cross-bor-der exposures towards Russia inched up from some 8% back in 2014 to around 11% in 2016. Moreover, we see the broad-based exposure cuts also levelling off as indicated by certain individual exposure categories (e.g. potential exposures via credit commit-ments as well as sovereign exposures increased slightly in 2016). Given the stabiliza-tion in certain exposure categories, we see the strong cross-border deleveraging trend in Russia (in absolute and relative terms) bottoming out. Therefore, the trend of (strongly) increasing CE/SEE exposures at Western banks compared to EE exposures is likely to flatten going forward. However, for the time being we do not see substantial appetite to boost EE exposures significantly. This holds especially true for Ukraine and Belarus.

Financial analyst: Gunter Deuber, RBI Vienna

20

40

60

80

100

120

07 08 09 10 11 12 13 14 15 16

CE/SEE* Russia

Euro area

Cross-border claims (2008=100)

* CE/SEE according to RBI regional/country definitionSource: BIS, RBI/Raiffeisen RESEARCH

0

50

100

150

200

250

06 07 08 09 10 11 12 13 14 15 16

Cons. cross-border claims*

Other potential exposure**

RU: Cross-border claims (USD bn)

* international claims plus local claims in LCY** guarantees, credit lines, derivativesSource: BIS, RBI/Raiffeisen RESEARCH

10%

20%

30%

40%

50%

60%

04 06 08 10 12 14 16

AT, FR, IT banks (% of total)DE, UK, US banks (% of total)

RU: Rel. importance of AT, FR, IT banks*

* % share cross-border claims of major Western banking sectors (AT, FR, IT, DE, JP, NL, US, UK) representing some 80-85% of cross-border claims on RussiaSource: BIS, RBI/Raiffeisen RESEARCH

0%

4%

8%

12%

16%

20%

24%

75%

77%

79%

81%

83%

85%

87%

01 03 05 07 09 11 13 15

CE/SEE EE (r.h.s.)

Shares in cross-border exposures*

* consolidated BIS banking statistics, all BIS-reporting banking sectors; Source: BIS, RBI/Raiffeisen RESEARCH



Focus on: AT banks in CEE – committed players; CEE exposure down due to UniCredit/BA asset transfer

Despite sweeping adjustments in the Austrian banking sector (as indicated by a mas-sive downsizing in terms of total assets domestically, i.e. asset cuts by -10 to -20% since 2008) over the past few years, the CEE exposures of Austrian banks remained fairly stable during that period of time. On aggregate, the CEE assets of Austrian banks have even increased slightly over the past few years. This performance was definitely sup-ported by the overall solid and proven business models in CEE as well as a more con-structive development of CEE banking markets compared to Western European peers in recent years. A recent long-term study by the Austrian National Bank has clearly re-vealed the positive long-term profitability options for Austrian banks in the CEE region. From 2003 until 2015 (i.e. a period of time with strong growth up until 2008 and a fol-lowing consolidation), on aggregate, Austrian CEE banks had been profitable in nine out of twelve core markets (losses had been accumulated in Slovenia, Ukraine and Hun-gary). Moreover, the long-term RoA (on average assets) had been at or above the 1% level in six out of the nine profitable core CEE markets. Even in the more challenging years from 2008-2016 the average RoA of Austrian CEE operations had been at 0.9%, compared to 0.1% for domestic operations. The positive performance in the CEE busi-ness is also supported by healthy C/I ratios in the CEE business. Therefore, banking op-erations in the CEE region remain a strategic asset for large Austrian CEE banks (de-spite some refocussing on core CEE markets in recent years). Moreover, taking a long-term view Austrian CEE banks had been much more successful with their CEE opera-tions compared to some other international activities. However, it is worth noting that banking statistics for Austrian CEE assets (as of 2016) are characterized by a certain statistical one-off effect, i.e. the full transfer of the CEE assets of UniCredit Bank Austria to its Italian headquarters lead to a substantial downward ad-justment. Due to this effect CEE asset of Austrian banks dropped from some EUR 300 bn in 2015 to around EUR 180 bn of GDP (BIS statistics are not materially affected by this effect). Therefore, CEE assets of "pure" Austrian banks (mainly driven by Erste and RBI) are now "just" at 50% of the 2016 GDP. At peak levels in 2008, total CEE assets of Aus-trian banks (incl. UniCredit Bank Austria) amounted to 92% of the Austrian GDP, fuelling worries about (potentially) large spillovers to the Austrian economy and contingency lia-bilities for the sovereign balance sheet. Therefore, CEE exposures of Austrian banks (now-adays mainly driven by Erste and RBI) are providing a much fairer view on the potential Austria-related risk positions than before. Moreover, when looking at the CEE assets of "pure" Austrian banks over the past few years the dedication to their CEE business be-comes once again evident. From 2010-2016, CEE assets of Erste and RBI increased by some 4%, with a certain upward bias re-established since 2014. That said, the relation of CEE assets at RBI and Erste compared to the domestic assets of the Austrian banking sector has also inched up slightly in recent years, while Erste and RBI have also slightly in-creased their overall CEE-gearing at the group level. Those developments are clearly con-firming the outperformance of CEE operations with regards to balance sheet expansion and profitability compared to the domestic market.Despite the recent UniCredit asset transfer, the overall CEE gearing of large Austrian banks is still sufficiently large to justify national specific regulation with regards to cap-ital, (re-)financing etc. that has been implemented in recent years. This holds especially true, as the CEE exposures still contain large clustering and concentration risks in vari-ous dimensions (e.g. profitability, borrower concentration, sector concentration). More-over, larger parts of the Austrian CEE exposure (at least some 50%) are subject to cer-tain Emerging Market risk categories (economically, politically), while overall profitabil-ity of the CEE operations is largely dependent on two markets (Czech Republic and Rus-sia, historically around 56% of profits). Furthermore, future growth of Austrian banking sector assets is likely to be clustered more around the CEE businesses than in other activ-ities. Additionally, there is still a certain gap between the overall capitalization level in the Austrian banking sector and at large Austrian banks compared to banking sectors of smaller European countries with larger and/or internationally active banks. Therefore, some need to work on capitalization levels will remain at large Austrian (CEE) banks de-spite the decent improvement seen over the past few years and in 2016 in particular.


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AT banks: Profi tability CEE & AT

Source: national sources, ECB, RBI/Raiffeisen RESEARCH

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AT banks: Total CEE assets (EUR bn)


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* key markets, based on profitability figures for 2003-2015 and average asset numbersSource: national sources, RBI/Raiffeisen RESEARCH

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CEE AT banks (RBI/Erste)AT assets (r.h.s., incl. MFI business)*

CEE vs. total assets (EUR bn)

* incl. assets in business related to other Monetary Finan-cial Institutions (MFIs) Source: national sources, ECB, RBI/Raiffeisen RESEARCH



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CEE: L-t asset-to-GDP ratio trends


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00 02 04 06 08 10 12 14 16CEE total assets (% of euro area)CE/SEE total assets (% of euro area)

CEE vs. EA: Long-term catch-up


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Change total assets 2011-16 (EUR bn)

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

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Chg. fi nancial intermediation ratio*

* 1999 vs. 2016, in CE 2016 financial intermediation ratio (measured as credit-to-GDP ratio) is some 1.5 times higher than back in 1999 (33% vs. 54%)Source: national sources, ECB, RBI/Raiffeisen RESEARCH

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

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

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

Following a steep increase by 20-40pp in loan-to-GDP ratios in CEE (starting from the year 2000, i.e. also during times of strong GDP expansion), we have seen a much-needed consolidation in terms of financial intermediation levels in SEE and EE markets over the past 3-5 years. From its peak levels in 2011 and 2014 respectively, loan-to-GDP ratios have dropped by some 7-10pp in SEE and EE. In several countries this process went hand in hand with substantial changes in savings and spending/investment structures (i.e. more savings, less investments and/or consumption). Financial intermediation ratios are once again closer aligned with fundamentals such as wealth levels or economic structures. For all major CEE regions, we see current loan-to-GDP ratios once again below fundamentally backed levels, which must, however, not hold true for each and every individual market. Therefore, on aggregate, recent years of adjustment (that lasted more or less as long as the strong boom phase) offer now some up-side in terms of new lending. In line with a constructive macro-outlook there is room for another round of banking sector convergence, although deleveraging may still have some way to go in certain countries. This includes a financial deep-ening, in line with positive and sustainable economic developments and with less imbalances attached. Currently, we see loan-to-GDP ratios below a fundamen-tally backed level in eleven CEE banking markets, while we consider loan-to-GDP ratios to be elevated only in three markets (Croatia, Bulgaria and Bosnia). In con-trast to this currently favorable situation, we had several years (from 2010-2015) following the pre-crisis credit boom, where in total around eleven CEE countries had been at, or well above, sustainable loan-to-GDP ratios (though not the same countries in each year). Moreover, even in the three overexposed markets the de-gree of overleverage has eased with a positive loan-to-GDP gap coming down from some 20pp at peak levels to around 10pp.

Our furthermost constructive financial deepening outlook for the CEE region since years has been backed by an overall stabilization in European banking. Moreo-ver, the most recent round of consolidation in loan-to-GDP ratios in the CE/SEE re-gion is driven more by a faster nominal GDP growth than the overall loan growth than an outright stagnation or drop in total loans. From a "big picture" point of view, the long-standing financial intermediation trend in CEE still looks much healthier than in large parts of the euro area. In this context, it is worth mention-

Financial intermediation and asset growth



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EA: Loan-to-GDP ratio trends (%)*

* start, peak and current levels over the last financial cy-cle (1999-2016)Source: national sources, RBI/Raiffeisen RESEARCH

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% of CEE banking assets% cross-border claims West. banks

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CEE: Loan-to-GDP ratio trends (%)*

* Start, peak and current levels over the last financial cy-cle (1999-2016)Source: national sources, RBI/Raiffeisen RESEARCH

ing that recent years of rebalancing in CEE had been modest compared to the developments in Western Europe. This holds also true for the SEE region, where we have seen some of the toughest rebalancing in recent years. In CE, financial intermediation levels have dropped by some 3% (current loan-to-GDP ratio com-pared to peak levels), while in SEE and EE markets financial intermediation lev-els have dropped by some 17%. This number definitely points at a much needed rebalancing, but is still modest compared to the financial sector disintermedia-tion seen in Western Europe. Within the group of so-called euro area "periph-ery" countries, we have seen a drop in financial intermediation levels by some 44% from peak levels. Within the euro area, this ratio stands at some 15%, even in the so-called "core" euro area countries we have seen a drop in financial in-termediation levels of around 5%. In CEE, overall financial intermediation lev-els are still 1.5 to 3 times higher than at the beginning of the rapid banking sec-tor expansion some 10-15 years ago. Within the euro area, we have not seen a substantial and sustainable rise in financial intermediation levels over the last 15-20 years, a trend that now adds to challenging conditions (e.g. profit options or overcapacity) on Western European banking markets. Hence, unsurprisingly we also see the restoration of positive relative growth patterns in CEE banking vis-à-vis banking in Western Europe. In terms of the overall CE/SEE loan stock in relation to total euro area loans, we see a cautious catching-up continuing over the past few years, while the overall CEE loan stock also posted solid gains com-pared to the euro area in 2016. These gains follow the setbacks seen in the EE region, partially related to FX effects in recent years. Hence, total loans in CE/SEE now amount to some 5% of euro area loans (up from 3.5-4% in 2007/08), while the overall CEE loan stock now amounts to some 10.8% of euro area loans (up from 7-8% in 2007/08).

Although we expect a return towards a gradual financial deepening in most CEE banking markets going forward (and hence a continued catching up vis-à-vis more mature banking markets), we would expect a rather cautious financial deepening path for the region as a whole. We see this assumption backed by several factors at the micro and macro level. At the former level, we expect much more cautious business and refinancing strategies to prevail. Moreover, we see a much stronger regulatory awareness at the national and international level in the CE/SEE region. In Russia, the strong focus on banking sector clean-up and stability-oriented policies should also keep the banking sector expansion in a close relationship to nominal GDP growth rates. All in all, we see strong regula-tions driven to limit the pro-cyclicality of banking going forward. Whereas, at the macro levels we currently see nearly all CEE economies much closer to sustaina-ble financial intermediation levels (i.e. fundamentally backed loan-to-GDP ratios) compared to the situation some 15-20 years ago (which implies less strong an-nual catch-up potential). Therefore, a shallower financial deepening makes per-fect sense. Moreover, in the EE region we see challenging conditions in Belarus and Ukraine at the macro and micro level that are unlikely to support a mean-ingful increase in financial intermediation going forward. Overall, we expect the next lending and banking cycle to be much shallower than the previous one, which also implies a lower overshooting risk and hence lower risk profiles in the banking sector and at the macro level.

The basic idea of much shallower lending cycles is also well mirrored in devel-opments in more solid banking sectors, like the Czech Republic or Slovakia and partially Poland, that were not characterized by substantial structural weaknesses accumulated during the boom-and-bust phase in CEE banking. Here, we have not seen active deleveraging in recent years. Nevertheless, loan-to-GDP ratios are developing much shallower here as well, which means that loan growth is not

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CE est. equilibrium levelCE actual

CE: Loan-to-GDP ratios (%)*

* actual loan-to-GDP ratio vs. a fundamentally backed equilibrium level (based on large cross-country sample estimates)Source: national sources, RBI/Raiffeisen RESEARCH


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EE: Loan-to-GDP ratios (%)*


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2012 2013 2014 2015 2016

CEE-B7 total number of branches

CEE-B7: Branch network

CEE-B7: Erste, KBC, Intesa, OTP, RBI, SocGen, UniCreditSource: company data, RBI/Raiffeisen RESEARCH

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SEE est. equilibrium level

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SEE: Loan-to-GDP ratios (%)*


coming in very significantly above nominal GDP growth. However, such more cautious developments on aggregate may still translate into significant (catch-up) growth in certain market segments like we have seen in mortgage lending in se-lective CE countries like the Czech Republic or Slovakia. Due to strong growth seen in those segments, we do not see too much catch-up growth remaining here – an assessment that supports our view on a shallower CEE lending cycle going forward. However, through-the-cycle a scenario of less pronounced loan growth (on the up- and downside) must not be in itself a bad thing for all economic ac-tors operating in the region.

The loan-to-GDP ratio trends sketched previously are well reflected in total asset developments. The CE/SEE asset-to-GDP ratio has remained virtually flat in re-cent years at around 93% (with a certain downward bias in the SEE markets and more stability in the CE region), while a certain overshooting and consolidation in the CEE asset-to-GDP ratio (touching the 100% level in 2014 and coming back to around 90% currently) was mainly driven by the EE banking markets (including FX effects). Nevertheless, the trend of overall outperformance of balance sheet/asset growth in the CEE region compared to Western European markets remains intact. Therefore, following two years of partial setbacks with regards to total CEE banking assets (in EUR-terms), we saw solid asset growth in EUR-terms in 2016. In fact, total CEE asset growth in EUR-terms came in at around 11% in 2016, which is definitely above the post-crisis (2007/08) annual average asset growth at around 6-7% (and the meager euro area asset growth at around 2-3% during that period of time). On a regional level, total annual asset growth amounted to some 15% in the EE region (mainly Russia), around 4-5% in CE and 2-3% in SEE (in EUR-terms) in 2016. Due to overall higher balance sheet expansion compared to the euro area, the occurrence of relative banking sector catching-up returned. The stock of CEE banking assets grew from some 8.3% of euro area banking as-sets (2015) to around 9% in 2016 (which translates into total CEE banking as-sets of some EUR 2,400 bn). Hence, CEE banking assets grew with an annual catch-up rate of some 0.7pp vis-à-vis the euro area compared to a post-crisis an-nual average of some 0.4%. Therefore, our positive structural and cyclical finan-cial intermediation outlook is also well supported when looking at total banking assets. In this context, it is worth highlighting that banking asset growth in the CE/SEE region remains exceptionally strong (in EUR-terms). At year-end 2016, banking assets in the CE/SEE region amounted to some EUR 1,070 bn. Back in 2010/11, total CE/SEE banking assets stood at just EUR 900 mn (which equals a growth of around 20%). For comparison: banking assets in the euro area are currently just at their 2011-level in nominal terms, while the euro area asset-to-GDP ratio has dropped by some 20-25pp in recent years (compared to some 10% in CEE). Moreover, Russian banking assets also recovered, with total assets at around EUR 1,200 bn currently just marginally (-1.7%) below their 2013 peak level. Due to the decent recovery in Russian banking, the share of CE/SEE as-sets in CEE banking assets once more inched closer to the 40% level. The return of growth on the Russian market opens up the question of how much appetite for asset growth Western players bring along. However, much of the relative mar-ket share regaining in Russia can be attributed to FX effects. Going forward, we would expect that in EUR-terms the share of CE/SEE banking assets in CEE bank-ing assets will marginally inch up, closer to the 50% level, due to a single digit asset growth in Russia, and a certain chance for a modest long-term RUB weak-ening as a base case scenario.

Like in 2016, we continue to track the overall performance of the seven (West-ern) European Groups with a large CEE exposure (Erste, KBC, Intesa, OTP, RBI, SocGen and UniCredit). We call them "CEE-B7" cohort, and continue to see how

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CEE-B7: Assets and Loans




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CEE-B7: Loans and Deposits


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HU SK SI RO BG HR RS BA AL

RU BY UA

2015 2016

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CEE-B7: Assets by country (% yoy)


their performance in the countries of the region evolves, given the macro-trends and their individually taken strategic steps. We start with the total exposure anal-ysis (total assets pattern) and then move into details in the following sections.

All its political shocks aside, 2016 was a year that brought more positive light to the CEE business of the large (Western) European groups (our CEE-B7 sample). Macroeconomics in CEE – depending on the country – have either posted an im-provement, or at least delivered a stabilization. The large banking groups have more or less defined their vision of the business in the region and developed new strategies. Or – the front-runners – have already seen an evidence of profits due to strategic moves previously implemented. The year 2016 was characterized by one large market exit that has influenced the overall statistics in the region signif-icantly: the exit of UniCredit Group from the Polish market. This exit alone trig-gered a decline in the CEE-B7 assets in Poland by some EUR 39-40 bn, which, together with a contraction by other CEE-B7 players there (RBI, for example), has resulted in lowering the total cohort’s Polish exposure from some EUR 58 bn in 2015 to just around EUR 15 bn as of year-end 2016. It dragged the overall CE exposure of these groups down by 7% in assets and by 10% in loans. The respec-tive impact on the overall CEE performance, was a 2% contraction of the CEE-B7 asset base on aggregate.

Still, what is happening in Poland now stands apart from the moves in the other CE and remaining CEE countries. In order to have a fair picture we take a look further ahead in this report at what is going on with the overall large players’ ex-posure, Polish events aside. Already the first glance on the aggregate data sug-gests a much-increased optimism in the CE subregion (without Poland), which was reflected in 7% yoy asset growth for the CEE-B7 cohort in 2016 (3% in 2015). SEE, despite of the vast diversity of the markets that form the subregion, saw a 5% yoy CEE-B7 asset growth (after 4% in 2015 and 3% in 2014). EE dy-namics were also good: 6% yoy asset increase following two years of sharp con-traction by -14% and -21% (in EUR-terms) respectively, by and large on the re-vival of the Russian market. However, there are two aspects that should be taken into account when talking about Russia. The 2016 upswing was, by all means a statistical base effect, following severe deleveraging years, as well as a con-sequence of RUB appreciation. Therefore, we see limited upside to significantly boost asset growth further from current levels.


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

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

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

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CEE-B7: Asset and loan growth


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CEE-B7: Asset and loan growth*

* excluding PolandCEE-B7: Erste, KBC, Intesa, OTP, RBI, SocGen, UniCreditSource: company data, RBI/Raiffeisen RESEARCH



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CEE-B7: Loan growth in CEE (% yoy)

CEE-B7: Erste, Intesa, KBC, OTP, RBI, SocGen, UniCredit Source: company data, RBI/Raiffeisen RESEARCH


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CEE: Loan growth trends (% yoy)


Loan growth, growth by segments (retail, corporate)

In general, we see positive lending dynamics in the CEE region, with the over-all credit growth (in FCY-terms) back to some 8% in 2016. This reading is even slightly above the longer-term average regional loan growth in FCY-terms that has been prevailing in the region since 2008/09, i.e. the "New Normal" period with less aggressive loan growth. The pre-crisis average annual CEE FCY loan growth came in at around 23% yoy, the post-crisis average annual expansion stood at some 6% yoy. For the first time since 2013, the overall CEE loan growth performance in FCY-terms has been positive in 2016 due to more positive cur-rency developments in the EE region – even though the LCY loan growth in EE was negative which was mainly caused by the developments in Russia.

Nevertheless, positive regional banking trends are not just a result of FX move-ments. The overall CEE loan growth (i.e. a combined LCY and FCY loan growth rate) has also been inching up in recent years and reached its highest level since 2013 in 2016. Also, total loan growth came in at decent levels in CE/SEE in 2016, since improving overall CEE loan growth trends have just not been re-lated to a recovery in EE. In the CE/SEE region, loan growth averaged at around 3.5% yoy in nominal terms – more or less the same level as in 2015. Given low inflationary pressure (or even disinflation in some cases) real loan growth came in even higher at around 3.8-3.9%. From a regional perspective, it has to be stressed that overall loan growth in CE once again outperformed SEE. However, with the exception of Croatia, we see a clear trend to more positive lending dy-namics in the SEE region as well. Moreover, headline loan growth rates are cur-rently still distorted by NPL cleaning and write-offs. When corrected for such ef-fects, we estimate the "true" net lending growth in EUR-terms at around 3-4% yoy in CE and 2-3% in SEE compared to 2.9% yoy in CE and -0.1% in SEE based on actual loan stock figures.

From a broader European perspective, it has to be stressed that lending growth in CE/SEE continues to substantially outpace euro area lending growth. The lat-ter reached just some 1% yoy in 2016 despite all efforts to boost lending inside the euro area. On a cumulative basis, longer-term total loan growth in CE/SEE (2013-2016) stands at some 13% compared to around -1% inside the euro area during the same period of time. Regarding the relative positioning, the Czech and Slovak banking sectors remained among the high growth markets from an overall CEE perspective (when taking LCY and FCY loan growth into account), while loan growth continued to soften in Poland to more moderate but still decent levels. When looking at combined FCY and LCY loan growth, the Russian market confirmed its potential in challenging times. The less dynamic SEE markets in Ser-bia, Bosnia, Albania and Romania were among the still juicier markets in terms of moderate aggregated loan growth. The strongest upside in terms of lending recovery has been seen in Hungary and Ukraine. In contrast, challenging macro conditions and very selective lending policies caused a substantial lending con-traction in Belarus. Nevertheless, the overall dispersion among the CEE markets regarding their individual loan growth performance moderated in 2016. There-fore, a long-standing trend to more moderate but less varying loan growth rates in LCY- and EUR-terms – that was interrupted in 2014 and 2015 (especially when looking at EUR-based market growth rates) – has once again gained traction. In fact, the LCY loan growth rate dispersion has even reached its lowest level since we have started tracking this indicator. Given the outlook for a much shallower overall bank lending cycle in CEE and current macroeconomic projections, we


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expect the loan growth dispersion to remain moderate over the next one or two years. This should contribute to more stable overall conditions for banks operat-ing in the CEE region.

With regards to segments, we see a trend towards more expansion in retail lend-ing across the CEE region. Among the twelve CEE markets with a decent overall lending expansion in 2016, retail loan growth outpaced corporate loan growth in eight markets, while in four markets the corporate loan growth outpaced retail lending. In CE markets like the Czech Republic or Slovakia, retail lending growth came in once again substantially higher compared to corporate lending growth (this holds especially true for mortgage loan growth). In Poland, the softening in retail was at least not as pronounced as in corporate lending. The only remarka-ble exception from the regional trend in CE can be found in the Hungarian bank-ing sector. Here, expansion in the corporate segment outpaced retail lending considerably on the back of local policy measures. Across the SEE markets, retail outperformed corporate lending in Romania, Bulgaria, Serbia and Bosnia (when looking at 2016 growth rates, or the combined 2015 and 2016 growth). Only in Albania corporate lending expanded more strongly than retail. Substantial de-leveraging in Croatia resulted in a sharper contraction in retail than in corpo-rate lending in 2016 compared to previous years (where corporate lending vol-umes dropped more sharply than retail lending). In Russia, retail lending recov-ered substantially, following two years of tough adjustments – a result of the pre-vious unsustainable retail lending boom. Overall, the trend towards retail lend-ing is supported by several factors such as higher margins and still prevailing un-derpenetration in mortgage lending in several markets. However, in several CE markets we are somewhat cautious about the current pace of retail and mort-gage lending, and whether it can be sustained at the current pace – this holds especially true for Slovakia. However, there are also several markets like Hun-gary, Bulgaria, Serbia, Albania, Russia, Ukraine and Belarus where we still see more leeway for an expansion in retail compared to corporate lending from a structural point of view. In Romania, both the overall low level of financial inter-mediation (in the corporate and retail segment) as well as the continuous devel-opment of mortgage lending in recent years, have together offered some upside in retail. However, in this context it has to be stressed that in retail lending we see the strongest competition in terms of digitalization in more sophisticated CEE markets. Hence, it is not an easy ride to tap this market potential. Moreover, pru-dent standards in retail lending are key drivers as policy initiatives in recent years (e.g. with regards to FCY lending) have demonstrated.

While the overall 2016 loan patterns in CEE for the CEE-B7 banks taken together can be masked by a large one-off effect caused by UniCredit’s exit from Poland, this one-off should not mislead the judgements about the restarted trend in lend-ing – it is upwards now. A clearer picture of credit risk and its management, and recovering returns, finally started to push the CEE-B7 banks to tap the accumu-lated funding stock. (On details of the deposit growth and other sources of fund-ing dynamics please refer to the "Funding" section on page 17.) For the first time within the past five years or so, loan growth has outpaced the overall asset growth rate in many CEE countries. For the following examples we exclude the effect caused by UniCredit’s exit from Poland. In 2016, the Polish market stands apart from the overall trend in CEE, and we will consider it later, after describ-ing the general moves elsewhere. The CEE-B7 posted their strongest lending dy-namics in CE, where their aggregated lending growth stood at 8% yoy (exclud-ing Poland), while the total CEE-B7 asset growth stood at 7% yoy in this subre-gion. The SEE region also saw a lending increase of 4% yoy in 2016, while the total assets of the CEE-B7 surged by 5% yoy at the same time. Although in SEE


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loan growth still lags somewhat behind the asset growth (i.e. the funding there is still accumulating at a faster pace), the gap between the two rates in 2016 was way smaller than a year before. In 2015, the aggregated SEE loan growth for CEE-B7 banks was flat, while the assets grew by 4% yoy. In EE, the CEE-B7 to-tal loan portfolio posted a positive growth rate after being on a contracting trend for three years in a row. However, the 2016 upswing is by large an impact of the RUB appreciation.

But not only the results are proofing the changing lending patterns in 2016. In addition to the generally improved attitude towards the CEE perspective, as wit-nessed by the mentioned CEE-B7 lending dynamics, also the CEE-B7 banks’ lend-ing geography optimization have become more candid. In this context Poland, with UniCredit’s exit and RBI’s announced contractions, is just one example.

2016 revealed that the CEE-B7 banks have favorite CEE markets in common and some bank-specific "outliers". For example, the CEE-B7 cohort posted a clear ex-pansion of lending in the Czech Republic, Slovakia and a revival of business in Romania. In the latter, however, the dynamics across the CEE-B7 is very much dispersed, depending on each one’s positioning and outlook. The ones grow-ing at a faster pace are the Austrian banks, with all three boosting up the asset side by up to 7% yoy. Lending growth was much more modest for the three, how-ever, varying from just below zero (Erste Group) to 7-8% (UniCredit and RBI). The same holds true for Hungary which clarified and improved the political and credit risk in the previous years. In 2016, CEE-B7’s aggregated loan stock in Hungary grew by 6% yoy. Poland, as said, has turned from a place of growth for committed peers, to a country where active de-risking and exits have become pronounced.

The SEE subregion remains a mixed bag and so each of the CEE-B7 banks pursues and implements an individual strategy. However, Croatia seemingly emerges as a less popular market. Although the economy has turned up, a lend-ing upturn remains lagging momentum. Total loan stock surged just 3% yoy in 2016, after contracting in the previous four years. A targeted exit from the coun-try by SocGen (Splitska Banka) is a clear signal for the market’s lasting uncertain-ties and much needed consolidation (in Croatia and SEE banking in general). Bulgaria stays a mixed case, where lending dynamics show a ping-pong match for the CEE-B7 across the X-axis, shifting from positive to negative each year. 2016 was positive, with a 5% yoy loan growth (2015: -1% yoy; 2014: 4% yoy; 2013: -2% yoy). Within the CEE-B7 cohort, the most pronounced move in favour was the purchase of United Bulgarian Bank by KBC. The largest loan growth in 2016 was reported by SocGen in Bulgaria (over 7% yoy), while the exposed Austrian banks boosted their Bulgarian loan stocks by 4-5% yoy. The remaining SEE countries are characterized by very different business strategies of the CEE-B7 banks, depending on each group’s individual assessment of the country risks.

In EE, Russia is emerging from the clear outlier of the previous years to a more reasonable lending market. After the consequences of the crisis in 2014/15 have been more or less settled, and the political stance has become clearer, the CEE-B7 banks with an exposure in Russia started to gradually tap new lending more actively. Established corporate franchises, as well as possibilities in retail lending (with a certain gearing towards the upper market segment and mortgage lending) are the two major factors behind the, yet cautious, but gradual revival of the lending activity in Russia.


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2012 2013 2014 2015 2016CEE-B7 deposit growth (ex. PL, % yoy)CEE-B7 deposit growth (% yoy)

CEE-B7: Deposit growth


Funding, deposit growth, L/D ratios and capitalization

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CEE: Regional L/D ratio trends


Deposit collection has remained strong in 2016, continuing to outpace lending growth for another year. CEE deposit growth in EUR-terms stood at around 6-19% yoy, compared to loan growth rates at around 3-14% in EUR-terms. Therefore, L/D ratios continued to inch down across all CEE markets and subregions in 2016, with the overall CEE L/D ratio now at 86% (CE: 90%; SEE: 81%; EE: 85%). In terms of regional L/D ratios, we have now reached the level where banks were operat-ing some years ago, i.e. ahead of the massive boom prior to the years 2008/09. Moreover, currently there are just two CEE banking markets (Ukraine and Bela-rus) with an L/D ratio well above the 100% level, a similar situation as in 2004. Among all other CEE banking markets, only Serbia is still characterized by an L/D ratio at around 100%, all other markets are below 100% as of 2016.

The massive CEE L/D rebalancing since 2008/09 with an L/D ratio drop by 25 pp had been much more decisive than inside the euro area, where the L/D ratio dropped from some 112% to around 100% at present. On an interesting note, the L/D ratio rebalancing seems to peter out inside the euro area and we expect a similar tendency in several CEE banking markets. This holds especially true for CE/SEE banking markets. Due to massive banking sector restructuring and tight regulatory policies, L/D ratios in the more challenging banking markets of Belarus and Ukraine have improved substantially in recent years and also in 2016. Currently, both markets are characterized by L/D ratios at around 120%, well below longer-term averages at around 150%.

In light of current profitability readings it seems that the "New Normal" in CEE banking (with a higher degree of local and LCY refinancing and a lower lever-age in terms of L/D ratios) is reasonably profitable for lenders operating in the region, including major Western banks. Nevertheless, current L/D ratios are also increasing the need to put deposit at work and into interest bearing assets. In terms of overall capitalization levels, a lot has been achieved in recent years in the CEE banking sectors. This holds especially true in the CE/SEE markets, where average capitalization levels (total CAR) have boosted from levels around 11% back in 2008 to 18% in 2016 (in CE) and from some 15% to 19% in the SEE markets respectively. With the benefit of hindsight, it seems that capitalization lev-els had been "just" reduced a bit too aggressively before the game changing fi-nancial crisis in 2008/09. Therefore, aggregated capitalization levels in CE/SEE are currently just at or slightly above their long-term averages, while the sit-uation is completely different for Western European banking sectors and within the euro area. In this context, we see the regulatory focus on overall capitaliza-tion levels somewhat decreasing – a trend that we interpret as positive. Never-theless, the focus on quality and composition of capital (including loss absorb-ing instruments) should not be underestimated. This holds true for CE/SEE coun-tries as well. Somewhat in contrast to the developments in CE/SEE, overall cap-italization levels are still on the lower side in EE markets and Ukraine in particu-lar (less in Belarus). However, we see this issue being clearly addressed by local regulators – including local SIFI regulation in Russia and recapitalization plans in Ukraine and an overall banking sector clean-up.

Over the past few years, amidst their selective strategies in CEE operations (in-cluding selective downsizing and de-risking), the CEE-B7 banks have been post-ing, nevertheless, a non-diminishing core funding dynamics in CEE – the major factor of a mostly non-diminishing CEE asset base of the CEE-B7 in the past few


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years. The demand for private sector deposits with these banks remained robust, backed by strong franchise and well-recognized and trusted brands, which are traditionally seen in CEE as safe deposit places. Moreover, the banks enhanced their CEE core funding intentionally, while targeting increasingly self-financing business models for their CEE subsidiaries. Besides, the CEE-B7 banks pursued a declining RWA and enhancing liquidity policies amidst new global and local regulations, thus placing the funding from core deposits into the less risky asset classes. An evidence is that as s oon as the CEE-B7 players see the trade-off of risks and returns in various CEE countries becoming more appropriate, the new lending there gears up rather speedy. Thus, a certain boosting of the funding base was justified by a "wait-and-see" funding accumulation approach. There-fore, the 2016 deposit dynamics patterns followed the past few years’ trend. In the entire CEE region and especially the CE subregion, UniCredit’s exit from Po-land had a very strong impact on the overall CEE-B7 core deposit stock (8% yoy decline in CE and 2% yoy decline in the entire CEE area in 2016). However, in CE countries, excluding Poland, the deposit dynamics at the CEE-B7 went on moving upwards, and reached 8% yoy growth in 2016 after 6% and 2% yoy in the previous two years. The highest deposit growth was posted, as before in the Czech Republic and Slovakia – 8% yoy combined, and Hungary, where core funding surged by 11% yoy in the CEE-B7 cohort. In SEE, the CEE-B7 groups’ de-posits surged 7% yoy in 2016, which was still a rather robust indicator, following an 11% yoy growth in 2015 and 7% yoy growth back in 2014. In EE, the only clear funding move was recorded in Russia, as in Ukraine the banking system re-mains in distress, while in Belarus only one of the CEE-B7 banks, RBI, has a pres-ence. In Russia, the core funding of CEE-B7 banks increased by 10% yoy (in EUR-terms) after three years of decrease. This, however, like in the case of loan stock growth, has a large currency appreciation impact incorporated.

The L/D ratios aggregate for the CEE-B7 continued to inch down in 2016. The sim-ple aggregate L/D ratio for the CEE-B7 (taken as a total CEE-B7 loan stock divided into their total deposit stock in the region) declined from 90% in 2015 to 86% in 2016. The fastest L/D ratio decline was achieved, as before, in SEE, due to still sub-dued lending activity in a number of countries, while the deposit base kept growing well. In SEE, the L/D for the CEE-B7 lowered to 85% in 2016 from 90% in 2015. In CE, the L/D ratio stayed nearly unchanged within the past two years at about 88%. EE countries historically see the highest L/D ratios in the CEE region, but even there a notable decline from 113% in 2015 to 106% in 2016 was posted. The capitalization of the CEE-B7 has also improved in 2016, much supported by higher profitability in CEE, more pronounced asset quality improvement and an ongoing

accumulation of liquidity invested into lower-risk assets classes, which high-lighted the 2016 CEE-B7 banks perfor-mance. While the former pushed the nominal value of equity up, the latter pulled the base down, helping capitali-zation readings for all groups. While it is rather hard to get capitalization data on a country level for all CEE-B7 banks under consideration, we see a positive trend in place backed by the availa-ble reporting data at the group level at all CEE-B7 banks and at Austrian CEE lenders in particular.

Financial analysts: Gunter Deuber,

Elena Romanova, RBI Vienna

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In 2016, the regional CEE NPL ratio stabilized at around 8%. This development was supported by a decent improvement in the CE/SEE NPL ratio, while the as-set quality deterioration in Russia has reached its peak somewhat earlier than ex-pected. In Russia, the NPL ratio inched southwards in 2016, down from 7.2% (2015) to 7%. Moreover, the NPL ratio in recent years (i.e. from 2013 to 2016) has been fairly modest with an increase of some 4.5% to around 7% compared to the NPL levels seen during previous crisis. From 2007-2009, the NPL ratio in-creased from some 1.5% to around 6%, while the NPL ratio had even peaked at 17% during the last RUB crisis in 1998/99. That said, Russia belongs to the seven CEE banking markets with an NPL ratio below 10% (Slovakia, the Czech Repub-lic, Slovenia, Hungary, Romania, Poland plus Russia). The NPL ratio improvement in the CEE region was also supported by a decent appetite for NPL selling trans-actions for retail and corporate NPL portfolios. This holds true for smaller trans-actions on niche markets (like Albania, Bulgaria, Serbia) as well as large trans-actions in key markets like Poland, Romania and partially Russia. Therefore, CEE banks were able to sell NPL portfolios in a lot of markets and at decent prices (overall sales levels are estimated at EUR 6 bn over the past 24 months).

In the CE/SEE banking markets the average NPL ratio stands now at around 7% of total loans – the lowest reading since 2010 (CE: 6%; SEE: 12%) and even be-low its long-term average value of around 8%. Therefore, we would be cautious when speaking about a serious regional NPL problem. This holds especially true as we expect the NPL portfolio to inch downwards in 2017 due to the ongoing lending recovery and the decent appetite for NPL transactions. In SEE, we may see the NPL ratio to inch below the 10% level in 2017, coming down from lev-els of around 19% in 2013/14. The overall CEE NPL ratio still stands at around 8%, which is slightly above its long-term average. The slight underperformance of the CEE NPL ratio compared to the CE/SEE NPL ratio can be easily explained by the recent developments in the EE region. Belarus has changed the NPL meas-urement standards, which led to an increase of the NPL ratio to around 12% – previously it was in single digit territory. In Ukraine, the official NPL ratio remains close to 30%. Here we may see some stabilization in 2017, while the asset qual-ity situation in Belarus is likely to remain more challenging. Nevertheless, on ag-gregate we expect the CEE NPL ratio to inch down in 2017 due to solid asset quality improvements in CE/SEE and in Russia. That said, a recovery of the NPL ratio in Russia by at least 1-2pp in 2017/18 should also bring the overall CEE NPL ratios closer to a level of 6-7%. Nevertheless, the EE NPL ratio is likely to re-main above its long-term average in the next 2-3 years. This is a reflection of the challenging conditions in the banking sector of Ukraine, Belarus and much more limited new lending options in Russia.

In our 2016 Banking Sector Report we argued that one of the key challenges for 2016 will be to bring the NPL ratios well below 10% for the CEE-B7 banks. Over the past year, we have seen a lot of progress and we did not expect the NPL ra-tio improvement to happen so swiftly. However, there was a very active sell-off of NPL portfolios implemented by the CEE-B7 banks in the countries of highest ex-posure, predominantly Hungary and Romania, but also with some smaller trans-actions in Bulgaria, Croatia and Slovenia. We see this trend mainly driven by a mix of several factors: regulatory vigilance, also at the ECB level, active NPL ra-tio management in order to support bank issuer ratings as well as decent pricing conditions. Austrian banks were rather active in NPL sales deals in CEE. The re-

Asset quality (NPL ratios)

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ported scale of the values sold, was, for example, EUR 1.6 bn for Erste Group and EUR 1.2 bn for RBI. UniCredit was mostly active in resolving the NPLs sales on its home market in Italy, but CEE markets saw a pipeline for a range of trans-actions too, which have already been implemented at the beginning of 2017 (e.g. in Hungary, Bulgaria, Slovenia, for the total value around EUR 350 mn). Finally, the achieved stabilization of the economy and financial markets in Russia have added to NPL improvement there. For the key Western European players, NPL ratios improved, with a particularly notable progress for SocGen, which in 2016 posted an NPL ratio in Russia much closer to the market aver-ages. UniCredit’s Russian NPL ratio deteriorated a tad in 2016, mainly on base effect, as its LCY-expressed loan book posted a decline in 2016. (For more de-tails on this, please refer to our focus on "Foreign banks in Russia" on page 56. ) As a result, the NPL ratios have improved for the CEE-B7 banks in the entire CEE region, from 9.8% in 2015 to 8.1% in 2016. In CE, the average NPL ratio for the CEE-B7 banks decreased from 8.5% in 2015 to 7% in 2016. Asset improve-ment in all countries of the sub region contributed to that, particularly in Hun-gary. There, the average NPL range for the CEE-B7 banks decreased from 13-18% in 2015 to 9-13% by the end of 2016. It is worth noting that in the Czech Republic and Slovakia, the countries with the historically best performing NPL ra-tios, a further decline has been achieved from 4-5% in 2015 to 3-4% in 2016. This decline, however, rested mostly on an expanding loan base effect, and we take it as a potential source for possible future asset quality issues. Over the past four years, the loan stock of the CEE-B7 banks in these two markets on aggregate grew by 6-8% annually at an accelerating speed. The average NPL readings in SEE for the CEE-B7 also posted a decline, from some 13.5% in 2015 to 12% in 2016. By and large, this was the result of the sellout of the NPL portfolios by the Austrian banks, but also due to the restarted growth of lending. In EE, the asset quality situation in Ukraine remains rather distressed for the CEE-B7. The NPLs count for 40-50% of their loan stocks, while, on a positive note, being fully pro-visioned long ago already. In Russia, the largest and most diversified players out of the CEE-B7 have posted notably improved asset quality ratios in 2016, rang-ing within 6-8%. Banks with a smaller presence and more exposed to consumer lending, still remain with rather high NPL rations of 10-20%. As a result, the CEE-B7 aggregate NPL level in Russia lowered down, but not yet spectacularly, from about 10% in 2015, closer to the level of 9% in 2016.



Profi tability (Return on Assets, Return on Equity)

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Overall, the CEE region was characterized by decent profitability options for the banking sector in 2016. Positive earning dynamics were supported by a solid de-velopment of new net loans, stabilizing or improving asset quality as well as an ongoing recovery on several key markets such as Russia, Romania or Hungary. On aggregate, Ukraine was the only loss-making CEE banking sector in 2016. Due to massive one-offs related to the Privatbank nationalization, the Ukrainian banking sector posted huge losses for the third consecutive year with a RoE at around -100% and a RoA at -12%. Due to positive dynamics elsewhere, the av-erage profitability (RoE) in CEE recovered to around 10%, following two years with RoE readings below 10%, when corrected for the extreme one-off effects in Ukraine which were largely related to the Privatbank nationalization. That said, overall market developments in CEE banking are supportive for the goal to achieve a 10%+ RoE in the region, a profitability reading that secures lenders to earn their cost of capital. We estimate the cost of capital for major CEE lenders at around 9-11% depending on the individual business model. In this context, it is important to stress that in 2016 the sectoral RoE was at least above the 10% in eight out of the 14 banking markets we cover in this report. In 2015, a 10% RoE was only achieved in four markets.The return to decent profitability in CEE banking was supported by an ongoing recovery in SEE, a rebound in Russia and overall decent profitability options in several CE banking sectors (mainly the Czech Republic, Slovakia and Hungary). In the SEE region, the average RoE has inched up close to 10%, the highest read-ing since 2008. The Russian banking sector RoE also recovered to around 10%, up from some 2% in 2015. In the CE/SEE banking sectors, largely dominated by foreign players, the average profitability came in even slightly above the overall CEE profitability. The latter aspect points to decent profitability options for West-ern banks operating in CEE. That said, we think that a 10%+ RoE looks feasi-ble and reasonable in 2017/18 and possibly through the cycle. This holds espe-cially true as Western banks also have continued to outperform the sector profit-ability in Russia on the back of business models characterized by a high-degree of risk discipline. Moreover, several major foreign CEE lenders have turned more cautious on Poland, a market characterized by substantial consolidation and in-vestment needs as well as a down-trending profitability in recent years. All in all, the CEE region started to significantly outperform Western European banking profitability once again. Within the euro area, the banking sector RoE stagnated at around 5-6% in 2016. Therefore, the year 2016 ended years of down-trending profitability in CEE banking. Moreover, we see some positive trends beyond the headline RoE numbers. Frist of all, we see that banks operat-ing in CEE are successful in stabilizing their mid-term earnings potential as indi-cated by a decent stabilization in the RoA and the NIMs. Secondly, we see that a strong risk discipline prevails despite the ongoing recovery in lending. Thirdly, it seems that banks have digested a lot of down pressure on their profitability by hefty restructuring. The latter should pay off now in the early phase of a new lending cycle. Moreover, it has to be stressed that current decent profitability in CEE banking comes with a much lower risk profile at the micro and macro level than in the past. The rates of expansion in CEE banking are slower than in the past, refinancing has become more stable and locally, while capitalization lev-els have been boosted significantly, although higher capitalization eats into their RoE. Moreover, macro-financial imbalances at the country level are much lower or even non-existent in certain countries. Therefore, one may argue that on a risk-adjusted basis current profitability ratios have to be interpreted in an even more


favorable way. From a more structural point of view, Western CEE banks should also be in a position to earn their cost of capital going forward. Therefore, busi-ness models shall be considered as sustainable, while profitability can also con-tribute to a further capital build up (via retained earnings). This cannot be said about a lot of lenders operating in Western European markets. Therefore, we ex-pect the regulatory awareness regarding leading Western CEE banks to ease a tad going forward. However, the decent profitability in many CEE banking mar-kets was also supported by a lot of one-off factors, such as write backs of pro-visions, lower banking taxation or the sale of VISA shares. Therefore, mid-term earnings pressure and further consolidation/optimization pressure should not be underestimated.

For CEE-B7 banks, we have observed several key factors, partially acting into opposite directions, which have determined the profitability outcomes. Improved fundamentals practically everywhere in CEE have allowed the CEE-B7 banks to regain franchise, gear up in lending and continue with the restructuring of busi-ness and presence. Moreover, nominal profits saw a number of one-off boost-ing factors, such as large provisioning releases from NPL reductions or cash-ins on VISA Europe shares buy-backs, while progress in restructuring and streamlin-ing of the CEE-B7 groups’ business have led to operating cost reductions. How-ever, at some lenders margin pressure continued, while innovative business ap-proaches undertaken, like digitalization for example, forced cost base up in 2016. Nevertheless, on aggregate profit-driving factors seem to have over-com-pensated for trends that are eating into profitability. The overall flow of CEE-B7 profits in 2016 totaled to EUR 8.6 bn, a notable increase over and above the previous years’ results (2015: EUR 6.3 bn; 2014: EUR 4.7 bn). 60% of these 2016 profits came from CE, 27% from SEE and the the remaining 13% from EE.Also, profitability margins improved for the CEE-B7. Even though, the CEE-B7 had to push hard to improve their capitalization across the entire CEE region, the RoE ratios in 2016 appeared stronger than a year before. For the region as a whole, the CEE-B7 aggregated RoE (before tax) increased from 9.4% in 2015 to 13.3% in 2016, reaching 13.3% in CE (2015: 11.9%), 12.4% in SEE (2015: 6%) and 15% in EE (excluding Ukraine; 2015: 3 %). In CE, the key driver was a strong recovery in profitability in Hungary, from 10% to 18% on average for the CEE-B7 banks, and to some extent also in Slovenia. In SEE, the key perfor-mance upswing was in Romania, where returns (RoE before tax) on avergage in-creased from 6% to 12%. It is worth noting that, on average, there was no coun-try in CE/SEE, where the aggregated pre-tax RoE for the CEE-B7 cohort recorded

a decline. However, there were indi-vidual CE/SEE markets were the RoE did worsen a tad for some CEE-B7 banks. While these achievements of 2016 are undoubtedly sanguine, only time will tell how sustainable they are, given the strong impact of one-off ef-fects throughout the year. At the same time, however, the bulk of restructur-ing costs is already behind us. In par-ticular for those banks, which have al-ready implemented restructuring and streamlining plans several years ago.

Financial analysts: Gunter Deuber,

Elena Romanova, RBI Vienna

-5

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014 2016

CE SEE EE*

CEE: Return on Equity in the subregions (%)

* excl. Ukraine for 2016; Source: national sources, RBI/Raiffeisen RESEARCH


-1.0-0.50.00.51.01.52.02.53.0

00 02 04 06 08 10 12 14 16

CE SEE EE

CEE: Return on Assets trends (%)


2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

2012 2013 2014 2015 2016

CEE-B7 NII/total assets (%)

CEE-B7: Profi tability (implied NIM)


0.0%

0.5%

1.0%

1.5%

2.0%

2012 2013 2014 2015 2016

CEE-B7 RoA in CEE operationsCEE RoACE/SEE RoA

CEE-B7: Comparative RoA



The by and large positive tone of our 2017 Banking Sector Report in various fields of coverage suggests that a lot of growth and business opportunities do remain in CEE banking. Moreover, we see an increasing predictability returning with re-gards to growth of profit options. Firstly, overall the dispersion among the CEE markets is decreasing (e.g. with regards to profitability or loan growth, incl. FX developments). Therefore, we see an increasing room for a more individual posi-tioning for leading (Western) CEE banks compared to the situation of the past few years. Over the past few years, banks were largely chasing the same markets and clients. Secondly, there are no substantive deleveraging needs anymore within the region, while other legacy problems are also increasingly tackled (e.g. NPLs). Hence, the future banking sector growth will be once again increasingly linked to the economic potential. Therefore, the positive economic outlook for the CEE re-gion (solid real GDP growth at 3%+ in CE/SEE, return of inflation in CE/SEE; end of recession in EE countries, coupled with a decent disinflation) bodes well for the CEE banking sector outlook. In fact, there could be a new round of banking sec-tor convergence. Definitely, we do not expect a return to the very high growth rates seen during the first catch-up phase (e.g. as indicated by a LCY-loan growth of some 30% from 2000-2010). Nevertheless, we expect a solid expansion in CEE banking going forward. For the CE/SEE region we expect loan growth to in-crease somewhat going forward to around 6% in LCY-terms (up from around 4% from 2010-2016). This outlook implies that we expect a cautious financial deep-ening going forward. Moreover, beyond increasing financial intermediation lev-els there are a lot of other dimensions where we see potential for a convergence to more sophisticated standards (e.g. with regards to digitalization, overall busi-ness sophistication). As this new round of banking sector convergence is linked to a lot of technological challenges and opportunities, we labelled our 2017 Bank-ing Sector Report "Banking Sector Convergence 4.0".

Going forward, we would expect CEE loan growth (as a proxy for balance sheet growth) to come in at around 7% in LCY-terms and 4% in FCY-terms (expected average growth 2017-2022f). The highest combined LCY and FCY-growth rate is expected in the SEE region with some 7% or 6.8% respectively. The EE region may post a higher LCY- loan growth rate going forward (some 7.6%) than the SEE region, while the EUR-based growth rates shall be at around 3-4%. In the CE region, we are looking for a loan growth at around 5-5.7% (FCY-terms and EUR-terms respectively). For the largest markets Poland, the Czech Republic, Roma-nia and Russia (that represent some 80% of the expected balance sheet growth over the next few years) we expect a decent average growth of 7% in LCY-terms or 6.5% in FCY-terms respectively. The Romanian and Russian banking market should expand somewhat above this average, while we expect growth at around 5-6% in the Czech Republic and Poland. Overall, we have trimmed our growth expectations for the CE region partially based on strong growth seen in recent years, some regulatory actions to cap too strong growth as well as due to the mid-term outlook deterioration on the Polish market. Nevertheless, the CE bank-ing markets should contribute some 53% to the expected market growth over the next few years. The smaller CE markets (i.e. all market excl. Poland) are likely to represent 23% out of the 53% CE growth share, i.e. they are likely to expand over-proportionally (with a weight of 17% in the current CE banking aggregate). As already mentioned, we have turned somewhat more upbeat on the SEE mar-kets following the deleveraging seen in recent years. Hence, the SEE markets may contribute some 16% to the overall CEE banking growth in the years to come (up from some 12% in previous assumptions). The rest of the expected mar-

CEE banking growth and overall market outlook


0

1

2

3

4

5

00 02 04 06 08 10 12 14 16

CEE: No. loss-making markets*

* out of 14 CEE banking sector covered in this report (loss-making 2014: HU, RO, UA, SI; 2015: UA and HR; 2016: UA)Source: national sources, RBI/Raiffeisen RESEARCH

-40%-20%

0%20%40%60%80%

100%

00 02 04 06 08 10 12 14 16

Loan growth (% yoy EUR, max CEE)*Loan growth (% yoy EUR, min CEE)*CEE loan growth (% yoy, EUR-based)

CEE: Loan growth across markets

* min and max FCY loan growth rate across 14 CEE banking markets Source: national sources, RBI/Raiffeisen RESEARCH

0%

25%

50%

75%

100%

00 02 04 06 08 10 12 14 16

Difference max and min LCY growth rateDifference max and min EUR growth rate

CEE: Loan growth across markets


250

325

400

475

550

2012 2013 2014 2015 2016

CEE-B7 loans (EUR bn)

CEE B-7 assets (EUR bn)

CEE-B7: Loans and assets



ket growth (31%) should come from the EE markets, while the Russian market will constitute 30% on a stand-alone basis. The regaining appeal of the SEE region is reflected in the fact that Romania may see the strongest growth among all CEE markets in our forecast horizon, while Serbia and Albania shall be also among the CEE markets with the highest growth rates (i.e. a combined loan growth in LCY- and FCY-terms above the 5% level). Based on our cautious macro outlook (with a mid-term GDP growth expected at around 1.5%), the Russian banking market shall not be among the fastest growing CEE banking markets, but remain in the group of attractive markets where we expect a growth rate of at least 5% (i.e. a combined LCY and FCY loan growth rate).

Going forward, we would expect that the leading Western banks will try to ac-tively catch the re-emerging market opportunities in CE/SEE banking, while the more moderate growth outlook for the EE markets shall be also (implicitly) sup-portive for their niche player strategies there. The same holds true for the deci-sive banking sector clean-up seen in Russia and Ukraine. Whatever quirky (or too early) it may seem, but the overall story with business expansion and the race for grabbing market share seems to start again in CEE banking among the ma-jor Western European competitors. The rationale for that, looking at the past dec-ade’s experience again, is that only a sizeable presence in a CEE market gives sufficient room for manoeuvre. This relates primarily to flexibility in strategic ad-justment of the business should conditions on the market start changing again – be it business mix adjustment, product portfolio remix, market presence and weight, and even a possibility for moves that involve political decisions or exits (like, for example Erste in Hungary in 2015, UniCredit in Poland, intended exit of SocGen from Croatia). That said, we still think that on smaller CEE markets a market share of around 10%+ in needed in order to operate profitable with a uni-versal banking franchise. Another idea behind being sufficiently big in markets like Russia for example, is that a significant (SIFI-size) weight of a foreign bank on such markets serves as an insurance against some (possible) adverse actions against such a bank. It simply makes policy makers to consider a bank's market weight and involvement.

This time, however, the passion for upscaling is not covering a very wide geo-graphical area, as it was 15 years ago. The expansion will be much more ge-ographically selective and also more concentrated with respect to the business mix. The focus points become, first, the countries with predictable risks, and sec-ond – we think – those countries where retail banking potential is higher. For the

Poland; 6.1%

Russia; 7.3%

Czech Republic; 4.6%

Romania; 9.5%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

25 50 75 100 125Ave

rage

ann

ual l

oan

grow

th ra

te 2

017-

2022

f (%

yoy

in L

CY-

term

s)

Change in total loan volume year-end 2017-2022f (EUR bn)

CEE: Banking growth outlook larger markets


CEE: Banking growth trough-the-cycle; average loan growth

2000-10 2011-16 2017-2022f

Poland 15% 7% 6.1%

Hungary 18% -4% 5.8%

Czech Republic 7% 5% 4.6%

Slovakia 11% 7% 5.1%

Slovenia 16% -6% 2.2%

Romania 40% 2% 9.5%

Bulgaria 34% 0.6% 4.1%

Croatia 16% 0.6% 2.0%

Serbia 50% 7% 6.1%

Bosnia a. H. 17% 3% 4.3%

Albania 36% 6% 7.5%

Russia 38% 15% 7.3%

Ukraine 48% 2% 7.7%

Belarus 67% 30% 14.3%

CE 13% 5% 5.4%

SEE 28% 2% 7.0%

EE 40% 14% 7.6%

CEE 31% 9% 6.8%

Euro area 6% 0.1% n.a.Source: national sources, ECB, RBI/Raiffeisen RESEARCH

Growth outlook (EUR- vs. LCY-terms)

Country Current loan stock

Loan stock

growth*

Avg. growth

2017-22f

Avg. growth 2017-22f

(EUR bn) (EUR bn) (% yoy, LCY)

(% yoy, EUR)

PL 229 108 6.1% 6.6%

HU 37 12 5.8% 4.7%

CZ 109 45 4.6% 6.0%

SK** 50 17 5.1% 5.1%

SI** 22 4 2.2% 2.2%

RO 49 36 9.5% 9.7%

BG** 28 8 4.1% 4.1%

HR 35 4 2.0% 1.8%

RS 16 5 6.1% 4.5%

BA** 9 3 4.3% 4.3%

AL 4 2 7.5% 7.7%

RU 642 111 7.3% 3.0%

UA 37 2 7.7% 1.9%

BY 18 2 14.3% 2.3%Regions

CE 447 187 5.4% 4.8%

SEE 142 58 7.0% 6.8%

EE 696 116 7.6% 2.9%

CEE 1,285 360 6.8% 4.1%* from 2017-2022 in nominal EUR-terms** in SK, SI, BG and BA loan growth rates in LCY and EUR are matching due to EA membership or currency board arrangementsSource: national sources, RBI/Raiffeisen RESEARCH



time being, just resting on what the CEE-B7 peers’ data suggest, the retail bank-ing development potential is increasingly tapped in CE countries and Russia. However, as the SEE markets are offering once again decent margins we may see an increasing focus of foreign players on those markets. Moreover, a lot of consolidation potential remains in the SEE region, which might be now tapped more actively. That said, the increasing stability on CEE banking markets with regards to growth expectations and earnings may also offer more differentiated country strategies and may even open up the room for further consolidation and M&A, possibly including major CEE-B7 banks. With regards to the retail focus it has to be stressed that mid-term risks shall not be underestimated. We have seen a lot of painful "consumer protection measures" in CE/SEE banking markets in recent years. Moreover, within the EU regulatory and compliance the demands in retail increased substantially. Hence, a retail push also requires a tight man-agement of such aspects.

A distinguished thing about this (likely possible) new market share gaining game, is that this time – unlike in the previous expansion – it will come along with in-creasing investment into restructuring (incl. digitalization and further branch net-work optimization) and "self-perfection" by all banking groups, and increasing hunt for synergies between the business divisions. Again, dictated by the expe-rience of the past, but also by the new strategic objectives, those banks are set to gain higher returns, which are more innovative in business promotion and sales, but also, as mentioned, better organised and also much better controlla-ble internally. Besides, in the countries of selected presence and expansion, non-trivial projects are expected to emerge, to cement the market weight and addi-tional earning potential for the banks. Such an example is the ongoing digitali-zation transformation and also innovative banking projects targeting specific cli-ent groups (like low-income individuals, first-time entrepreneurs or NGOs/social organizations).


Hungary; 5.8%

Slovenia; 2.2%

Bulgaria; 4.1%

Serbia; 6.1%

Bosnia a.H.; 4.3%

Albania; 7.5%

Ukraine; 7.7%

Slovakia; 5.1%

Croatia; 2.0%

Belarus; 2.3%

0%

2%

4%

6%

8%

10%

- 5 10 15 20 25

Change in total loan volume year-end 2017-2022f (EUR bn)

Ave

rage

ann

ual l

oan

grow

th ra

te 2

017-

2022

f (%

yoy

in L

CY-

term

s)

CEE: Banking growth outlook smaller markets*

* for BY EUR-based annual growth rate is shown due to massive discrepancy between LCY and EUR-based growthSource: national sources, RBI/Raiffeisen RESEARCH

-10%

-5%

0%

5%

10%

15%

20%

UA RS AL

BH PL HR

RU SI BG RO BY SK HU CZ

RoE <= 10% RoE > 10%

Cost of Equity estimates

CEE: RoE and Cost of Equity* Western CEE banks (2016)

* 9-10% for more consolidated and CE/SEE focused lenders, 10-11% for more complex and fragmented lend-ers with more EE exposureSource: national sources, RBI/Raiffeisen RESEARCH

0%1%2%3%4%5%6%7%8%9%

10%

RU RS SK CZ HU PL AL RO

CEE: Growth markets*

* combined expected annual LCY and FCY growth rate (2017-2022f) higher than 5%; BY excluded due to strik-ing divergence between LCY and FCY loan growthSource: RBI/Raiffeisen RESEARCH

16%

18%

20%

22%

24%

26%

28%

10 11 12 13 14 15 16

CEE-B7 share in CEE banking assets

CEE-B7: Share in CEE banking assets


450

470

490

510

2012 2013 2014 2015 2016

CEE B-7 assets (EUR bn)*

CEE-B7: CEE banking assets*

CEE-B7: Erste, Intesa, KBC, OTP, RBI, SocGen, UniCredit * excl. one-off related to UniCredit Poland disposal to better reflected operating business environmentSource: company data, RBI/Raiffeisen RESEARCH


26

Overview: Digital Banking in CEE*

The entire European banking sector is currently undergoing a notable transfor-mation caused by regulatory changes, the rise of new technologies and shifting customer needs. This structural change is fueled by the liberalization of the mar-ket, which is driven by regulatory directives. Banking competitors, such as finan-cial start-ups (fintechs), benefit from these new dynamics and offer new products and services. The main focus of these start-ups is on the customer’s experience and the respective digital front end. Although this development could leave tra-ditional banks with the processing of the product, it also bears the risk to be de-graded to infrastructure providers only.

Besides transforming the front end and automating the back end, digitally avail-able products are more and more becoming the "New Normal" in banking. To-day, most banks are reinventing themselves for the digital age. From a banking perspective, the past ten years have been a regulatory challenge, while the next decade will focus again on real customers in a digital world.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

% o

nlin

e ba

nkin

g us

ers

in p

opul

atio

n

% internet users in population

Most CE countries follow the same curve as WE and some are likely to close the gap vs. WE by 2020 (e.g. CZ on par with AT).

Online banking is becoming increasingly important in Romania, Bulgaria and Serbia and may be expected to accelerate in the future (s-curve effect) while share of banked population grows.

Highly developed countries like Norway or The Netherlands suggest that penetration can reach close to 100%.

NL’20NO’20

NO’05

NL’05

CZ’20

RU’20

DE’20

HU’20

AT’20

SK’20

HR’07

AT’05

DE’06

RO’06

CZ’05

BG’06

RO’20

RS’20

BG’20RU’12SK’05

HU’05

HR’20

Serbia

Hungary

Netherlands

Croatia

Norway

RussiaBulgaria (urban)

Germany

Czech Republic

Slovakia

Romania (urban)

Austria

* typically in 5 year steps 2005/2010/2015/2020 (subject to data availability); Source: Correlation of data sources from Eurostat, eMarketer, Statista

Internet penetration and usage of online banking*


* This article "Overview: Digital Banking in CEE" constitutes a special article contributed by experts in digital banking, who are no financial analysts. The authors provided this article by invitation of Raiffeisen RESEARCH (an organizational unit of RBI responsible for producing financial analysis and objective investment recommendations within the meaning of the Aus-trian Securities Supervision Act (WAG) and Regulation (EU) No 596/2014 (MAR), respectively) without having been in-volved in the drafting or production of the parts of this CEE Banking Sector Report, other than this article.

This article does not contain any recommendation or other statement on financial instruments or issuers of financial instru-ments. Nevertheless, it shall herewith be clarified that this article has not been prepared in accordance with legal require-ments designed to promote the independence of investment research, and that it is not subject to any prohibition on deal-ing ahead of the dissemination of investment research.

27

Retail

One of the biggest changes in retail banking is the implementation of the up-dated European Payments Services Directive (PSD II) into national laws. The core of this directive is the liberalization of the banking market by making bank ac-counts available to third party providers via so called application programming interfaces (APIs; sets of clearly defined functions used for the communication be-tween various software components). In a next step, the General Data Protection Regulation (GDPR) will be implemented in order to strengthen consumer’s right to personal data. Opening the gateway to payment data requires the standardiza-tion of products and services as well as a mindset shift for financial institutions. Open banking is the key to leverage the advantages of the digital environment such as the minimal costs for product or service distribution and the almost un-limited scalability of digital business models. Today, the customers decide which channel they prefer and when they want to use it. Analytical systems support sales and product departments, with a clear focus on the customer’s experience. Hence, modern banking refocuses from multi-channel sales campaigns to an omni-channel experience. Venture capitalist and start-ups, that enter the bank-ing market as front end players, are currently winning new customers with inno-vative solutions and highly standardized services. Fintechs take advantage of the strong segmentation in banking and, in combination with their small and of-ten agile business model, can easily occupy small but highly profitable niches. In 2005, most CEE countries had an internet usage rate of 30-40%, however, on average only up to 10% of the population used online banking. As online bank-ing is getting more and more popular, some CEE countries will close the current gap to Western Europe within the next few years. In October 2016, Deloitte and the EFMA (European Financial Management Asso-ciation) evaluated the maturity of digital banking in 76 banks in eight CEE coun-tries (Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slova-kia and Slovenia) by analyzing 361 existing features for web and mobile applica-tions. The majority of the assessed features focused on basic operations like trans-fers or information on main banking products. One main finding of the study was that the maturity of digital banking is highly diverse across these eight CEE coun-tries with noticeable pioneers and laggards. Comparing the assessment of digital banking on country level in accordance with best practice, Poland and Slovakia are leading banking markets regarding their digital competencies.

Corporate (SME and large corporates)

Corporate business is mostly not yet in the direct spotlight of digitization, which profoundly neglects the importance of the segment to the banks’ balance sheets as well as digitization opportunities in this field. Challenging competitors, regu-latory cost pressure and an upward trajectory of capital requirements also lead to a transformation in corporate banking. While the requirements of SMEs rather resemble retail clients in their digital demands, multinationals already use the ser-vices of interconnected platforms.A recent 2017 study of Aite Group1 highlights the top priorities in corporate bank-ing and suggests that corporate digital initiatives should focus on digital lead gen-eration, corporate connectivity and end-to-end process automation. Another late 2016 study of EFMA/BCG2 further emphasizes the business opportunities for banks by digitizing their offerings especially for SMEs in order to improve reve-nues, reduce cost-to-serve and improve NPL ratios. According to this study, almost 70% of SME said that they would pay a premium if their bank would offer them a digital one-stop-shop for their financial needs. Both, SMEs and large corporates have a strong trend to so-called platformication. For the SME segment, this could result in customer portals that improve customer efficiency by providing aggre-gated account information, instant payments or lead generation based on industry

1 "Killer Corporate Banking Use Cases", Aite Group, 20172 "Getting Big in Small Business Banking", Boston Consulting Group / EFMA, November 2016


0 20 40

Increase revenue

Reduce costs

Build relationship

Key focus of mobile functionalities used

CE/SEE: Focus digital functionalities*

* %Source: Deloitte, CE Digital Banking Maturity Study No-vember 2016

0 10 20 30 40 50 60

PLSKCZROBGGRHUSI

Internet functionalities in line with bestpractices*

Mobile functionalities in line with bestpractices*

CE/SEE: Internet & mobile maturity

* best practices (100%) as all functionalities offered by Top 5 banksSource: Deloitte, CE Digital Banking Maturity Study No-vember 2016

0 10 20 30 40 50 60

PLSKCZROBGHRHUSI

Digital functionalities in line with bestpractices*

CE/SEE: Digital maturity (%)

* internet and mobile channel, best practices (100%) as all functionalities offered by Top 5 banksSource: Deloitte, CE Digital Banking Maturity Study November 2016

28

data insight. For large corporates, already existing platforms – especially in trade finance, FX, factoring and payments – will be further integrated into a true multi-channel and multi-platform experience that directly connects with the customers’ proprietary systems. Ultimately, this would result in the set-up of holistic transaction processes (e2e) by the banks in order to boost transaction speed and lower risk. Since the majority of CEE banking markets is only served by a few Western bank-ing groups and traditionally strong in cross-border transaction business, they would stand as perfect use cases for multinational banking platforms.

Digital mobile payments in CEE

A field of major significance for both, retail and corporate banking, are digital mobile payments. Ideally, future digital wallets enable the customer to transact any type of digital payment, supplemented by additional services. The potential range of services includes:

Proximity payments at POS via smartphones or wearables (such as smartwatches).

Person-to-person (P2P) payment and transfer of funds to exchange money be-tween private individuals online.

In-app payments for digital and physical goods. Browser payments for e- and m-commerce transactions in online shops or via

mobile devices. Value-added services, e.g. loyalty programs.

In order to understand the current status quo of mobile payments, several indica-tors have to be taken into account. Besides the general acceptance and adap-tation of contactless or mobile payments, as well the competitive landscape, the share of mobile operating systems on smartphones is suggestive.The predominant mobile operating system in CEE is Android, which is designed primarily for touchscreen mobile devices such as smartphones and tablets. An-droid represents on average 75% of all mobile operating systems in CEE. In con-trast, iOS has only an average market share of 20% throughout the region. Nev-ertheless, the structure is remarkably diverse among CEE countries and requires further individual assessment. With an approximate 30% iOS market share, Rus-sia and Albania show significantly more iOS users than other CEE countries. In contrast, Poland has a 92% Android coverage and only 2% of Polish mobile phones run on iOS.

Other key performance indicators, such as the mobile payment user penetration or the transaction volume per user per year are still in relatively early stages com-pared to Western European markets. According to projected values based on

IMF, World Bank, the United Nations and Eurostat3, in Russia 4.8% of the population will use mobile payments in 2017, which is the highest share in CEE. On average, only 1% of the CEE population will use mobile payments in 2017. When looking at the aver-age transaction value of mobile pay-ments per user per year in CEE, Croa-tia will rank first with an average trans-action value of USD 174.5. In compar-ison, the average transaction value in Bulgaria will be USD 27.4 only.

3 Statista (2016) FinTech: Digital Payments Outlook 2016; In: https://de.statista.com/statistik/studie/id/41116/dokument/fintech-digital-payments-outlook-2016/


0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250EUR mn

Investment in EUR

by capital investedby number of companies

Fintech segments division by number of companies/invested capital*

* and level of investment by segments (the markets of: Poland, Czech Republic, Slovakia, Hungary, Austria, Romania, Slovenia, Croatia and Bulgaria); Source: 2017 Pitchbook data

Highlights by country

Austria: One in four invoices is elec-tronic – twice as much as in CEE.

Croatia: Highest ratio of the utilization of cloud services by enterprises – 15% vs. 8% average for the CEE region.

Czech Republic: Strong e-commerce sec-tor, calculated as per capita spending on online shopping (2014: EUR 273 per capita – the second highest value in CEE).

Hungary: The level of ICT specialists (In-formation and Communication Technol-ogy) as a proportion of the employed population (4.9%) is the highest among CEE countries.

Poland: The government set up 14 spe-cial economic zones that offer preferen-tial conditions such as tax reliefs and the strong support of municipalities.

Romania: The government actively sup-ports domestic companies and foreign investors – state aid schemes, tax incen-tives, super deductions (150%) for R&D investments.

Slovakia: The regulation of banks (espe-cially for lending) is less restrictive than in other European banking markets.

Slovenia: Between 2010 and 2015, the number of private online buyers grew by 6% annually to 39% of the to-tal population (aged 16-74).

29

Over the past three years, the entire CEE region showed significant, two-digit growth rates regarding mobile payment user penetration and average mobile payment transaction volume indicating an increasing importance of mobile pay-ments in the region. Therefore, CEE offers market opportunities for mobile wal-let providers. In general, P2P integration in messenger services improves the cus-tomer convenience. In Russia, Slovakia, the Czech Republic and Romania, mo-bile wallets based on NFC payments, are offered by banks or by well-established cooperation partners.

The fi ntech ecosystem in CEE

"Fintech" as an innovation vertical refers to solutions in the following main subseg-ments: banking, insurance, asset management and capital markets, capital rais-ing and personal finance, payments, data and analytics as well as cybersecu-rity. Global indicators show an estimated annual fintech investment market growth of 55% yoy until 2020. According to a Deloitte report4, the total current market size of selected CEE countries (including Austria), in terms of potential revenue, is worth some EUR 2.2 bn. The most active fintech vertical in CEE, both by the num-ber of start-ups founded and by capital invested, is the payments segment. Current developments in this segment are supported by PSDII, which will allow new busi-ness models outside traditional banking schemes to rise. The payments segment is followed by the fintech segments banking, capital raising and personal finance as well as asset management and capital markets. According to PitchBook Data

(2017), these four subsegments constitute 85% of the total number of new fintech ventures and 81% of the total venture capital invested. Besides, the areas cyberse-curity and insurance are gaining momentum but most solutions in these segments are still rather provided by global players than by fintechs. The key barriers for fin-techs in CEE are disparities in regulations and comparably underdeveloped eco-systems. In terms of adoption to new technologies, CEE seems to be a very favora-ble market as users are quite open to accept new products. Future developments of the region’s start-up-ecosystems are pushed forward through initiatives by institu-tions such as the EU Commission and the EIF (European Investment Fund). The EIF, for example, co-invests in specialized venture capital funds, which in turn locally in-vest in start-ups. Currently, Warsaw is emerging as one of the leading fintech hubs in CEE. In Bulgaria, an innovation bound EIF investment of EUR 21 mn in 2012, re-sulted in a rise of innovative business models and new start-ups.

Conclusion

The digital transformation challenges banks to adopt their business models. Partly, banks are delayed in their innovative development due to their traditional mindset, but also due to the regulatory framework. However, banks have real-ized the trend of digitization as well as the importance of driving innovation further to boost their speed to market and being on a par with "new" competi-tors. As pointed out, there are three main accelerators for the digital transforma-tion: platform, analytics and the focus on customer experience. For banks the key to success will be the optimal alignment of these factors. For Western banks, the CEE region is an ideal "testing field" for cross-border digital banking solutions, as the size of some CEE banking markets is comparably small and the users seem to be quite open to accept new products and services as well as innovative retail and communications channels.

Authors*: Marcus Presich, Maximilian Schausberger, Christian Wolf, RBI Vienna* The authors are no financial analysts. Please see the statement at the beginning of this article.

4 FinTech in CEE, UK Department for International Trade, Deloitte, 2016

856m

190m

73m

119m

39m92m 83m

121m

588m

PL

SKCZ

RO

AT

SLHU

BG

HR

Fintech market size by country

Est. CEE fintech market size EUR 2.2 bn Source: Data from fintech in CEE, UK Department for In-ternational Trade, Deloitte, 2016



Focus on: Wait and see seems to be the name of the game when it comes to MREL in CEE

The financial crisis in 2008/09 led to numerous new pieces of regulation, starting with the Dodd-Frank Act in the US, via the Basel III regulation all the way to the Bank Recovery and Resolution Directive (Directive 2014/59/EU; BRRD) in Europe. New capital require-ments were constituted and new tools to resolve credit institutions were embedded into local law. One of the most important aspects of these reforms on the European level is the implementation of the BRRD – on 1 January 2016. The BRRD and its implemented resolution mechanism should make it possible to resolve banks in an orderly fashion. This has been done by the creation of a new instrument to resolve financial institutions – the so-called "bail-in". Over the course of a "bail-in", creditor participation (also senior creditors) is in-tended, in addition to subordinated creditors and owners who had already been used in the past. Successful "bail-in" implementation requires a sufficient amount of "bail-in"-eligible capital and liabilities to be on the balance sheets of banks. Therefore, updated mini-mum requirements such as TLAC (Total Loss Absorbing Capacity) and MREL (Minimum Requirement for Eligible Liabilities) were intro-duced on a global level (G-SIBs) and European level. On a global level, systemically important banks (G-SIBs) will have to comply with the minimum requirements according to TLAC from 2019 onwards. MREL in return is applicable to all financial institutions in the EU, and will come into full effect in 2020. With the implementation of MREL, a minimum level of own funds and eligible liabilities is sup-posed to be guaranteed on the balance sheets of affected institutions. Due to the, in comparison to TLAC, higher number of institutions to which MREL applies, the implementation of a completely standardized rulebook is far more difficult. The number of different financial institutions within the BRRD’s "sphere of control" makes the implementation of uniform MREL criteria extremely difficult and leads to the circumstance that minimum requirements are determined on an individual basis. Moreover, in such an individualized process one can easier account for issuer-specific circumstances. MREL requirements will therefore be determined on an individual basis by the respon-sible national resolution authority. Here, the idea of proportionality can play a role for the respective authority. For a larger number of smaller institutions, the resolution in accordance with BRRD might not appear to be reasonable and a regular bankruptcy declaration could be pursued by the resolution authority.

At this point of the individual basis, things get tricky. At present, only countries with G-SIBs banks have developed strategies to deal with TLAC and MREL. As the regulation of TLAC is far clearer and more detailed, it seems likely that TLAC will serve as an anchor point for MREL. The most important difference is that the TLAC regulation presupposes a kind of subordination in the senior segment. Without the subordination in bail-in cases, deposits of large corporates above EUR 100,000 would rank pari passu with outstanding senior bonds.

There are three ways to reach this subordination:

Structural subordination Contractual subordination Statutory subordination

Structural subordination is based on the role of the is-suer in the corporate structure. It occurs when issuers function purely as holding companies which transfer capital to the operating subsidiaries and, at the same time, generate their revenue mainly from the dividend payments of the subsidiaries. Because all debt obliga-tions of the subsidiaries must be serviced first in the case of insolvency before funds can be channelled to the holding company, the creditors of the holding company are subordinated in structural terms.

The creditor and issuer contractually agree that, in the case of insolvency, interest and principal payments can only be made on these liabilities once other, more senior liabilities have been serviced in full.

Statutory subordination is established through a statutory provision in national insolvency regimes. The legislation would state that, in the case of insolvency, interest and principal payments may only be paid on certain liabilities once other, more senior liabilities have been serviced in full.

Source: Deutsche Bundesbank, RBI/Raiffeisen RESEARCH

Based on TLAC, the European countries choose very different solution. While Germany and Italy opted for different statutory subor-dination forms, France and Spain chose contractual subordination, meaning they have to issue new senior bonds which are subordi-nated to the old outstanding senior bonds. These bonds are dubbed non-preferred senior bonds or Tier 3 bonds. EU authorities show a strong preference to harmonize TLAC and MREL standards, whereby it was made pretty clear that the French solution (contractual sub-ordination) is preferred. The European Parliament will most likely not be able to finalize its harmonization of the legal framework as ex-pected by July 2017. Given that the MREL rules are not finalized at this point either, there is still considerable uncertainty on the market.

MREL in CE/SEE

At the moment, this topic seems to be strongly driven by the G-SIBs. It is, in other words, not actually a hot topic in the CEE countries. Some of the CE/SEE countries are still involved with issues like national legislation for additional Tier 1 bonds or other regulatory top-ics, so the focus does not appear to be on MREL. If large EU banks with subsidiaries in CEE opt for single or multiple points of entry into MREL, this would constitute a main driver in the sector. The decision will be whether the bonds will be issued by the respective head of-fices or directly funded by subsidiaries. This factor will determine the general volumes of MREL funding in the CE/SEE region. In terms of capital situation and balance sheet structure, we expect moderate MREL requirements for CEE banks (compared to "pure" Western European banks), whereby each case needs to be looked at individually due to the diverging national interpretations. At present it ap-pears that most of the CEE banks will not engage in MREL driven issuance prior to 2018. The result may be more expensive funding in a potential scenario where Western European banks have already started implementation and are essentially only waiting for the in-terpretation of the respective national regulators. In such a scenario, a lot of potential investor demand would already have been met



by the time the first CEE banks enter the MREL bond market. From our point of view, the prospect of first mover ad-vantage will drive the MREL supply. We expect to see a marked over-sup-ply in the MREL bond segment in 2019 and 2020, which would result in wider spreads. Every institute out of our un-derstanding could theoretically profit from the first mover advantage than as the example of Banco Santander (Tier 3 issue) impressively demonstrated it is not necessary to wait till the national regulators or lawmaker finalize the re-quirements. It is also possible to do it in advance on a contractual basis.

MREL will be a game changer but at the moment it does not get the attention it deserves. MREL will change the way banks finance them-selves and the whole structure of the passive side of the balance sheet. To be early aware of the MREL consequences and react contem-porary will be a market advantage in the medium-term. In comparison to Western Europe MREL will play a minor role in CE/SEE. While we expect for the whole EU banking funding needs of MREL up to EUR 400 bn the needs for the CE/SEE area will be in total some-where between EUR 15-40 bn (influenced by the decision for single or multiple point of entry and by MREL targets set by national regu-lators). Nevertheless, challenges on the issuance front shall not be underestimated. A study by the Austrian National Bank conducted in 2016 was pointing to somewhat lower ratios of MREL eligible liabilities at the CE/SEE subsidiaries of Austrian banks compared to com-parable ratios in Austria (some 3pp below the Austrian MREL ratio at 17.6% at the solo level by then). Hence, even lower MREL ratios than in Western Europe may still translate into certain funding needs. Moreover, the composition of MREL-eligible liabilities differs a lot between the CE/SEE subsidiaries of Austrian banks and at a typical Austrian or Western bank. In CE/SEE, only 4% of MREL-eligible li-abilities are market instruments compared to some 19-20% at Austrian credit institutions (at a solo level). Moreover, capital markets in CE/SEE are rather shallow. Hence, it has to be tested to what extent local markets can absorb larger MREL-eligible deals and to what extent Western investors are willing to engage in such deals (also in terms of pricing). Details with regards to potential issuance needs in CE/SEE will largely depend on national MREL targets set in CE/SEE countries (where we would expect some news in 2017) as well as on the single or multiple point of entry decision.

Financial analysts: Jörg Bayer, CFA; Gunter Deuber, RBI Vienna

Assets Liabilities

MREL

Assets Liabilities

MREL

LossesLosses

Assets Liabilities

CET1

Bank balance sheet Post-losses Post-write-down /conversion

Loss absorption & recapitalization

Source: Deutsche Bundesbank, RBI/Raiffeisen RESEARCH

(2017) (2019)

Secured obligations Secured obligations Secured obligations Secured obligations

Retail and SME deposits <EUR100,000

under Deposit Guarantee Scheme (DGS)


under DGS


under DGS


under DGS

Retail and SME deposits >EUR100,000



Retail and SME Deposits >EUR100,000

Senior unsecuredLarge corporate deposits

DerivativesStructured notes

Interbank depositsOther unsecured senior claims

Large corporate depositsDerivatives

Structured notesInterbank deposits

Other unsecured senior claims

Large corporate depositsInterbank deposits Senior unsecured

Large corporate depositsDerivatives

Structured notesInterbank deposits

Other unsecured senior claims

Senior unsecuredDerivatives

Structured notesOther unsecured senior claimsNon-structured Senior unsecured,

incl. Senior Secured Deposits (SSD)

Tier2 capital Tier2 capital Tier2 capitalTier3 Capital / “non preferred

senior" bonds

Tier2 capital

AT1 capital AT1 capital AT1 capital AT1 capital

CET1 capital CET1 capital CET1 capital CET1 capital

MREL – How it works

Source: EBA, RBI/Raiffeisen RESEARCH



20%

40%

60%

80%

100%

5,000 15,000 25,000

GDP per capita (EUR at PPP)

Tota

l loa

ns (%

of G

DP)

Total loans vs. GDP per capita

Data for 2016, red triangle shows Poland vs. all other CEE marketsSource: NBP, national sources, RBI/Raiffeisen RESEARCH

Poland

Large scale reshuffl ing offers potential for gradual improvement

5%

7%

9%

11%

13%

15%

17%

0%

3%

5%

8%

10%

13%

15%

09 10 11 12 13 14 15 16Lending growth (% yoy, LCY)

Return on Equity (RoE, r.h.s.)

Lending and profi tability

Source: NBP, RBI/Raiffeisen RESEARCH

Key economic fi gures and forecasts

Poland 2012 2013 2014 2015 2016 2017e 2018f

Nominal GDP (EUR bn) 389.5 394.9 410.9 429.9 424.6 450.3 485.3

Nominal GDP per capita (EUR) 10,233 10,375 10,808 11,310 11,183 11,848 12,771

Real GDP (% yoy) 1.6 1.4 3.3 3.9 2.8 3.3 3.0

Consumer prices (avg, % yoy) 3.7 0.9 0.0 -0.9 -0.6 1.9 2.2

Unemployment rate (avg, %) 12.8 13.5 12.3 10.5 9.0 8.3 8.2

General budget balance (% of GDP) -3.7 -4.1 -3.4 -2.6 -2.6 -3.0 -3.2

Public debt (% of GDP) 53.7 55.7 50.2 51.1 52.8 53.2 53.7

Current account balance (% of GDP) -3.7 -1.3 -2.1 -0.6 -0.5 -0.8 -1.0

Gross foreign debt (% of GDP) 71.8 70.6 71.4 70.3 74.4 74.8 74.2

EUR/LCY rate (avg) 4.18 4.20 4.19 4.18 4.36 4.33 4.23

Source: national sources, wiiw, RBI/Raiffeisen RESEARCH

In 2016, balance sheet expansion softened in line with macroeconomics. The lending growth rate fell below the levels of 2014/15, while NPLs, the share of FCY loans and overall profitability, followed long-standing trends. Weaker loan growth, coupled with solid deposit collection, have pushed the aggregated L/D ratio below 100% for the first time since 2006. Given the improving household incomes, the recovering residential real estate market and selective NPL restruc-turing, the NPL ratio inched down in 2016 – with somewhat better performance in the corporate than the retail segment – a trend in place since 2013. Also, FCY loans continued to decline, which is a reflection of mortgage lending being now disbursed mostly in PLN. Profitability of the sector was once again pushed down by rising capitalization requirements, lower leverage, numerous regulatory initia-tives such as a tax on total assets and an O-SII capital buffer for certain institutions ranging from 0.25-0.75%, overall margin pressure, and lower loan growth. The aggregated RoE reached 8.5%, which has been the lowest level since the reces-sion in 2002/03. The RoA stood at rather depressing 0.79%, while the C/I ra-tio has reached some 58%, the highest level since 2005/06. Going forward, we may see some moderate recovery in headline profitability. Reshuffling effects, in-duced by regulatory changes, have most likely not fully materialized yet, and can reveal on profitability in the months going forward. Moreover, it seems that the de-terioration of the average interest rate spread and NIMs finally came to an end in 2016. That said, there remains a risk of certain one-off effects from FX/CHF loan restructuring/conversion, such as additional provisioning needs for conversion and/or litigations. Moreover, the creeping profitability deterioration is a strong boost for further consolidation of a still fragmented market. The leading insurance company PZU intends to form a new national champion with some 20% market share, based on the banking assets acquired. Pressure for consolidations also comes from the overall tendency for an increasing degree of digitalization among the key market players. This results in a need for massive investment for the remain-ing players. The recent market share reshuffling, with its increase of state and local ownership and the decrease of foreign ownership, is also a reflection of structural consolidation needs. Going forward, the number of banks operating with a coun-try-wide universal banking model may drop from ten to 13 players to around four to six. However, we would not be too concerned about further potential re-poloni-

Substantive market share reshuffl ing ("re- polonization") in 2016, foreign-owned banks more selective Balance sheet growth and profi ts down, but downtrend in profi tability likely to end Regulatory-induced profi tability drop and substantive investment needs to spur further consolidation


Key banking sector indicators

Balance sheet data 2012 2013 2014 2015 2016

Total assets (EUR mn) 330,267 338,950 359,428 375,423 386,825

growth in % yoy 12.7 2.6 6.0 4.5 3.0

in % of GDP 84.6 86.1 88.8 89.0 92.4

Total loans (EUR mn) 198,230 202,242 210,017 225,705 228,704

growth in % yoy 9.3 2.0 3.8 7.5 1.3

in % of GDP 50.8 51.4 51.9 53.5 54.6

Loans to private enterprises (EUR mn) 66,593 67,024 70,614 76,796 77,964

growth in % yoy 11.2 0.6 5.4 8.8 1.5

in % of GDP 17.1 17.0 17.5 18.2 18.6

Loans to households (EUR mn) 130,436 133,947 138,079 147,494 149,281

growth in % yoy 8.3 2.7 3.1 6.8 1.2

in % of GDP 33.4 34.0 34.1 35.0 35.6

Mortgage loans (EUR mn) 78,706 81,083 83,468 89,477 90,485

growth in % yoy 9.0 3.0 2.9 7.2 1.1

in % of GDP 20.2 20.6 20.6 21.2 21.6

Loans in foreign currency (EUR mn) 62,465 60,567 61,312 64,464 62,847

growth in % yoy (3.6) (3.0) 1.2 5.1 (2.5)

in % of GDP 16.0 15.4 15.2 15.3 15.0

Loans in foreign currency (% of total loans) 32 30 29 29 27

Total deposits (EUR mn) 177,097 186,970 200,387 220,295 232,380

growth in % yoy 12.0 5.6 7.2 9.9 5.5

in % of GDP 45.4 47.5 49.5 52.2 55.5

Deposits from households (EUR mn) 126,211 132,181 142,271 156,218 165,288

growth in % yoy 16.8 4.7 7.6 9.8 5.8

in % of GDP 32.3 33.6 35.2 37.0 39.5

Total loans (% of total deposits) 112 108 105 102 98Structural information

Number of banks 69 69 66 65 63

Market share of state-owned banks (% of total assets) 21 20 18 18 32

Market share of foreign-owned banks (% of total assets) 63 62 60 61 55Profi tability and effi ciency

Return on Assets (RoA) 1.22 1.13 1.00 0.94 0.79

Return on Equity (RoE) 14.3 12.5 12.0 10.4 8.6

Capital adequacy (% of risk weighted assets) 14.7 15.5 15.0 15.6 17.5

Non-performing loans (% of total loans) 8.8 8.6 8.1 7.5 7.0 Source: NBP, FSA, BFG, RBI/Raiffeisen RESEARCH

zation steps as long as there are some key pan-European banks, which may also have some appetite for upscaling. UniCredit’s decision to leave the mar-ket has to be seen more in a company specific context, while we see that a decent share of local ownership has been achieved. In 2016, the market share of foreign-owned banks stood at 55%, which has been the lowest ever since 1999. A further reshuffling is likely to be more gradual, through smaller M&A transactions or a refocus-sing of players with moderate or sub-scale market shares. Also, we expect less regulatory interventions, including some potential relief on the banking tax, as well as a constructive macroeconomic outlook.

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

Poland

PKO BP, 16.7%

Bank Pekao (UniCredit), 10.2%

mBank (Commerz-bank), 7.5%

ING Bank, 6.9%

BZ WBK (Santander + Kredyt Bank),

7.7%Raiffeisen Polbank,

3.1%Bank Millennium (BC

Portugues), 4.0%

Bank Handlowy (Citibank), 2.5%

Alior, 3.6%

BOS, 1.2%

Others, 36.7%

Market shares (2016, eop)

% of total assetsSource: company data, RBI/Raiffeisen RESEARCH


Hungary

20%

40%

60%

80%

100%

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

Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Hungary vs. all other CEE marketsSource: MNB, national central banks, RBI/Raiffeisen RESEARCH

Profi tability is back, but low rate environment is a challenge

-15%

-10%

-5%

0%

5%

10%

15%

-15%

-10%

-5%

0%

5%

10%

15%

20%




Source: MNB, RBI/Raiffeisen RESEARCH


Hungary 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -1.6 2.1 4.0 3.1 2.0 3.2 3.4

Consumer prices (avg, % yoy) 5.7 1.7 -0.2 0.0 0.3 3.3 3.0




Current account balance (% of GDP) 1.9 4.1 3.9 4.3 3.5 3.2 3.0


EUR/LCY rate (avg) 289.23 296.84 308.71 309.93 311.47 311.81 316.88


In Hungary, we forecast an above 3% annual average GDP growth for 2017 – 2019 – the economic upturn is driven by household consumption and investments. This is supported by the low interest rate levels. While the Central Bank (MNB) base rate is at 0.9%, the effective interbank rates are much lower than that.The lending activity is picking up, following a fairly long era of deleveraging from 2009 until 2016. In 2016, the volume of newly issued retail loans showed an in-crease of 37% yoy versus the new retail loans granted in 2015. New corporate loans grew by 26% yoy. The most dynamic segment in corporate lending was SME financing, rising on the MNB lending schemes (Funding for Growth - which is phased out by now - and Market Based Lending, which was introduced in 2016) is the central bank's tool to deliver SME lending growth."Due to the strong amortiza-tion of the loans disbursed in the pre-crisis period and the recent strong pick up of new lending, the positive net transactions trend in H2 2016 clearly points towards the increase of loan volumes. The Funding for Growth scheme is phased out by now. The Market Base Lending Scheme (introduced in 2016) is the central bank's tool to deliver SME lending growth. On the liability side, retail deposits increased by 3% yoy, and corporate deposits grew by 10% in 2016 – despite close-to-zero term-deposit interest rates. Looking ahead, growing investment activity should pre-vent similarly sizeable further growth of corporate sector deposits. Households in-creasingly put their savings into government bonds, as the incentive to put money in term-deposits has evaporated, current accounts keep rising though. There is an abundant excess liquidity in the Hungarian banking sector. The L/D ratio dropped further in the course of 2016 to below 80%. However, due to lend-ing and deposit trends described above, we expect the L/D ratio to bottom out and we forecast a cautious increase of the ratio starting from end-2017.The asset quality has been improving for several years now, but this trend accel-erated in the past 18 months. The banking sector’s total NPL ratio decreased from 12% at year-end 2015 to 6.4% at year-end 2016. Although the seasoning of the newly issued loans takes time, we expect them to be of a good quality, due to the elevated risk awareness of the banks in the post-crisis years. We expect the con-tinuation of the decreasing NPL trends, on the background of positive macro pic-ture and expect the NPL ratio to fall below 5% by the end of 2017.

Deleveraging is over, loan volume is expected to increase in 2017 Portfolio quality is improving due to benign macro environment and real estate market Market consolidation is postponed





growth in % yoy (3.6) (3.1) (2.8) 2.6 4.7

in % of GDP 109.7 103.2 98.8 96.1 97.0


growth in % yoy (6.8) (7.7) (7.0) (11.7) (1.2)

in % of GDP 50.8 45.5 41.7 34.9 33.3


growth in % yoy (4.4) (5.3) (4.5) (11.6) 0.1

in % of GDP 24.1 22.2 20.9 17.5 16.9


growth in % yoy (9.2) (7.3) (7.2) (12.0) (2.6)

in % of GDP 25.2 22.7 20.8 17.3 16.3


growth in % yoy (9.5) (7.8) (6.5) (12.7) (7.4)

in % of GDP 20.4 18.2 16.8 13.9 12.4


growth in % yoy (16.6) (13.4) (8.2) (59.2) (7.0)

in % of GDP 27.8 23.4 21.2 8.2 7.3



growth in % yoy 6.0 (2.4) (4.0) 7.9 7.8

in % of GDP 43.6 41.3 39.0 39.9 41.5


growth in % yoy 5.5 (11.6) (6.3) 2.8 3.8

in % of GDP 26.9 23.1 21.3 20.7 20.8



Market share of state-owned banks (% of total assets) 5.1 5.8 12.6 15.9 6.5

Market share of foreign-owned banks (% of total assets) 91 89 64 56 60

Market share of foreign-owned banks (excl. OTP, % of total assets) 68 67 44 36 40Profi tability and effi ciency

Return on Assets (RoA) (0.4) 0.5 (1.3) 0.2 1.5

Return on Equity (RoE) (3.8) 4.5 (13.2) 2.3 13.4


Non-performing loans (% of total loans) 13.7 14.1 13.2 10.6 6.4 Source: MNB, RBI/Raiffeisen RESEARCH

Hungary

As a result, the profitability of the Hun-garian banking sector improved signif-icantly in 2016 (RoA at 1.5% and RoE at 13.4%) supported, however, by a few significant one-off factors (provi-sioning recovery; as well as revenues from the VISA-transaction). Still, the net interest margin is suppressed by the extremely low interest rate environ-ment (0.2-0.3% effective rate, negative o/n Central Bank deposit rate). Expec-tations remain optimistic for the year ahead. No major hostile legislative ac-tions are in sight, the banking tax is to be reduced, and we foresee a friendly macro environment and rising demand for loans. Consequently, most current market players are not inclined to exit and therefore major market consolidation events are unlikely. Nevertheless, small scale transactions similar to last year's (i.e. Citibank’s retail business sale to Erste; purchase of Axa Bank by OTP) might come. The sale of state-owned Budapest Bank’s is a pending issue, which implementation in 2017 is yet uncertain in our view.

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

OTP, 21.3%

K&H (KBC), 7.5%

UniCredit, 7.9%

Raiffeisen Bank, 5.9%

MKB*, 5.7%Erste, 6.1%CIB (Intesa), 4.9%

MFB, 3.8%

Budapest Bank, 2.7%

Others, 34.3%


% of total assets; MFB and Budapest Bank are state-owned; * H1 2016 dataSource: MNB, RBI/Raiffeisen RESEARCH


Czech Republic

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows the Czech Republic vs. all other CEE marketsSource: CNB, national sources, RBI/Raiffeisen RESEARCH

Positive outlook for the Czech banking sector remains

12%

15%

18%

21%

24%

27%

30%

0%

3%

5%

8%

10%




Source: CNB, RBI/Raiffeisen RESEARCH

In 2016, the Czech GDP growth decelerated to 2.3% yoy after an exceptionally strong growth in 2015. The weaker economic growth was the result of less invest-ment activities, especially, from the government as a new program period from the EU funds had a rather sluggish start. Household consumption and strong for-eign trade remained the main economic drivers. The Czech banking sector grew in 2016 with an increase in total assets by 8.5% yoy. It has to be mentioned that this increase is to a large extent attributed to the FX interventions by the CNB, which have boosted the aggregate system’s bal-ance sheet. Despite the improving macroeconomic situation and the positive out-look, especially, for the labor market the growth of total bank deposits continues. The annual growth of 7.0% was driven by households’ savings that increased by 8.4% yoy. Due to the long lasting extremely low level of interest rates, nearly 80% of total deposits are held on demand accounts. This allowed the Czech banking sector to remain independent from external or alternative financial re-sources. On the contrary, the increasing share of short-term liabilities resulted in an increasing mismatch of balance sheets maturity. The total loans’ growth of 6.0% yoy in 2016 did almost entirely resulted from the loan growth with maturi-ties over one year (by 7.4% yoy, over 88% of total loan portfolio). The increased lending activity was reflected in all segments: corporate loans grew by 6.0% yoy; household loans by 7.7% yoy. Compared to the previous years, not only mortgage loans but also consumer credits grew in 2016. The new issuance in these two categories geared up nearly 30%. As a result, the stock of mortgages surged to almost 9% yoy in 2016.The system’s aggregated NPL ratio kept improving, which was a result of a rap-idly increasing loan base. In 2016, the NPL ratio lowered to 4.7%, and was sig-nificantly reflected in the profitability of the banking sector through the decline of risk costs of more than 30% yoy. Also, extraordinary income from dividends and the sale of big banks’ shares in a VISA card association supported the 12.6% an-nual growth of the Czech banking sector’s net profit in 2016. However, the core profits were a bit disappointing. Strong competition and the low interest rate en-vironment did not allow a continuation of the recent profit growth from the banks’ core business. The net interest income as well as the net fee and commission in-come declined notably to 1.0% and 6.5% yoy, respectively. In 2016, the Tier 1

Maturity mismatch of the banking system’s balance sheet continues to increase Declining NPL ratio rests on strong base effect, masking credit risk as the new portfolio seasons Regulation of the mortgage market has been strengthened to mitigate the risk of overheating


Czech Republic 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -0.8 -0.5 2.7 4.6 2.3 2.7 2.5

Consumer prices (avg, % yoy) 3.3 1.4 0.4 0.3 0.7 2.4 1.5


General budget balance (% of GDP) -3.9 -1.3 -1.9 -0.6 0.0 -0.2 0.0


Current account balance (% of GDP) -1.6 -0.5 0.2 0.2 1.1 1.1 1.2


EUR/LCY rate (avg) 25.14 25.98 27.54 27.28 27.03 26.50 25.53



Czech Republic




growth in % yoy 5.7 (0.3) 2.3 5.5 8.5

in % of GDP 118.2 127.6 126.4 124.0 127.9


growth in % yoy 4.5 (2.4) 3.5 8.2 6.0

in % of GDP 58.4 61.7 61.8 62.1 62.7


growth in % yoy 2.9 (4.9) (0.4) 7.8 6.0

in % of GDP 20.7 21.3 20.5 20.6 20.7


growth in % yoy 5.6 (4.2) 3.2 10.8 7.7

in % of GDP 25.9 26.8 26.8 27.6 28.3


growth in % yoy 8.4 (2.3) 5.4 11.4 8.9

in % of GDP 17.3 18.3 18.7 19.4 20.1


growth in % yoy 2.9 21.3 5.9 8.5 11.3

in % of GDP 8.6 11.2 11.5 11.6 12.3



growth in % yoy 9.5 (2.1) 1.6 5.0 7.0

in % of GDP 77.4 81.9 80.6 78.6 80.0


growth in % yoy 5.6 (6.3) 4.4 8.0 8.4

in % of GDP 40.8 41.4 41.9 42.0 43.3

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







Non-performing loans (% of total loans) 6.2 6.1 6.3 6.0 4.9 Source: CNB, RBI/Raiffeisen RESEARCH

CAR stabilized at a level of 17.9%, which means that the Czech banking sector has a surplus in capital of about EUR 10.5 bn.The regulatory framework of the Czech banking sector corresponds with the EU regulation and answers to any local developments as well. In particular, facing an ongoing over-heating of the mortgage lending, in 2016 the CNB introduced new rec-ommendations related to more re-strictive and risk-mitigating mortgage loan issuance standards, limiting LTV. For example, LTV of every single mort-gage loan should not exceed 90%. These recommendations were applied in June 2016 and became effective 1 April 2017. Besides, starting from 1 January 2017 additional capital buffer require-ments were imposed on the five systemically most important banks. Moreover, the CNB has imposed a countercyclical cap-ital buffer rate for the entire Czech Republic of 0.5% of the total risk exposure amount. This buffer will be effective starting 1 January 2018.

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

CSOB (KBC), 17.7%

CS (Erste), 16.8%

KB (SocGen), 14.6%

UniCredit, 10.3%


MONETA Money Bank, 2.5%

PPF banka, 2.3%

J&T Banka, 2.1%

Air Bank, 1.5%

Fio Banka, 1.4%

Others, 25.7%


% of total assetsSource: CNB, RBI/Raiffeisen RESEARCH


Slovakia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Slovakia vs. all other CEE marketsSource: NBS, national sources, RBI/Raiffeisen RESEARCH

Banking sector profi tability surged due to one-off effects

5%

8%

10%

13%

15%

18%

0%

3%

6%

9%

12%

09 10 11 12 13 14 15 16

Lending growth (% yoy, LCY)Return on Equity (RoE, r.h.s.)


Source: ECB, RBI/Raiffeisen RESEARCH

Decreasing unemployment and a robust growth of real wages contributed to a further acceleration of loans to households, which grew by 14% yoy in 2016. In comparison, corporate loans growth was more moderate at 3.5% yoy. The ongo-ing loan boom led to a few important consequences: interest rates for new loans declined, and the NBS had to react to the excessively rising stock of household loans by introducing a new set of counteracting measures, effective from Q2 2017. Predominantly, these were a cap on the share of loans with an LTV ratio of above 80% and obligatory calcultations of the consumer’s ability to repay the housing loan. The short-term impact was an anticipation of the new restrictions which came into force, the demand for the household loans spiked. The strong growth of mortgage loans has pushed their share in total loans to 40%. Never-theless, we expect the new measures to be rather efficient and to gradually frame the growth of mortgage loans. Volume of household deposits rose as well in 2016, by 8.3% yoy, with an increasing share of current accounts. We expect the strong growth of retail deposits to continue in 2017. The L/D ratio of the Slovak banking sector remained below 95% at year-end 2016, supporting the banks’ good self-financing capacity at least for the next year. However, the increase of deposits is mainly driven by short-term deposits, which resulted in increasing ma-turity gaps. To mitigate the expanding maturity gap, the regulator plans to issue a new mortgage bonds law, which would enable banks to be more flexible on their long-term funding options. Currently, the mortgage bonds cover just 25% of housing loans. The system’s liquidity stayed solid, as the banks are keeping good liquidity buffers, despite a bank levy of 0.2% on the deposit base. The sector’s capitalization stood at a very solid 16.5% Tier 1 ratio as of Q3 2016. The div-idend policy of most banks is rather generous, with a high dividend pay-out ra-tio. This dividend policy coupled with high assets growth points to a moderate decrease of the capitalization in the years to come. In 2016, the Slovak banking sector has posted a record-high net profit volume of EUR 750 mn – an increase of 19% yoy. However, this profitability surge was supported by two significant one-off effects: VISA shares buyback, which delivered more than EUR 100 mn of revenue to the sector, and VUB bank’s extraordinary profit (EUR 128 mn ex-traordinary dividends from a subsidiary company in consumer finance). On con-trast, the sector’s core business activities generated a revenue decrease, despite

Lending boom in retail sector continues NBS introduced more measures to cap overheating in lending Profi tability likely to weaken given decreasing margins

Key economic fi gures and forecasts*

Slovakia 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 1.7 1.5 2.6 3.8 3.3 3.3 4.0

Consumer prices (avg, % yoy) 3.6 1.4 -0.1 -0.3 -0.5 1.1 2.0




Current account balance (% of GDP) 0.9 1.8 1.2 0.2 -0.6 0.5 1.4


* euro area member as of 1 January 2009Source: national sources, wiiw, RBI/Raiffeisen RESEARCH





growth in % yoy 4.1 2.5 5.4 7.7 5.6

in % of GDP 80.5 80.9 83.4 86.5 88.1


growth in % yoy 3.4 5.4 6.6 9.0 8.9

in % of GDP 52.5 54.2 56.6 59.4 62.4


growth in % yoy (2.4) 0.2 (0.7) 5.3 3.5

in % of GDP 22.5 22.2 21.5 21.9 21.8


growth in % yoy 9.6 10.0 12.1 12.7 14.0

in % of GDP 24.9 26.8 29.4 31.9 35.1


growth in % yoy 10.6 11.8 13.5 13.7 14.3

in % of GDP 18.4 20.2 22.4 24.6 27.1

Loans in foreign currency (EUR mn) 520 408 638 279 279

growth in % yoy 57.7 (21.6) 56.5 (56.2) 0.0

in % of GDP 0.7 0.6 0.8 0.4 0.3

Loans in foreign currency (% of total loans) 1.4 1.0 1.5 0.6 0.6


growth in % yoy 6.3 4.3 4.1 9.3 4.7

in % of GDP 59.5 60.9 62.0 65.4 66.0


growth in % yoy 6.0 2.7 4.0 8.9 8.3

in % of GDP 35.1 35.3 36.0 37.7 39.4




Market share of foreign-owned banks (% of total assets) 98.6 98.5 98.5 98.7 98.7 Profi tability and effi ciency




Non-performing loans (% of total loans) 5.3 5.2 5.4 4.9 4.5 Source: NBS, RBI/Raiffeisen RESEARCH

the strong loan growth dynamics. The net interest income decreased by 4.6% yoy mainly due to the decrease of NIM, particularly in the mortgage loans segment. We expect this trend to continue in 2017, and coupled with the prolonged effect of declining yields of government bonds, to be-come a reason for the ongoing inter-est income decline in 2017.NBS has once more tightened its macro-prudential tools in H2 2016. In July 2016, Slovakia was the first country in the euro area to introduce a 0.5% countercyclical capital buffer from August 2017. Besides, obliga-tory guidelines for the assessment of customers’ ability to repay debt were introduced.In July 2017, the banking sector’s competitive landscape will be affected by the acquisition of Sberbank Slovensko by Prima Banka with market shares of 1.9% and 2.9% respectively. We expect the sector consolidation to continue, given the pres-sure on competition due to deceasing margins.

Financial analyst: Robert Prega (+421 2 5919 1303), Tatra banka a.s., Bratislava

Slovakia

Slovenska Sporitelna (Erste)20.7%

VUB Banka (Intesa)18.9%

Tatra Banka (Raiffeisen)15.6%

CSOB (KBC)10.5%

UniCredit7.3%

Postova banka6.0%

Prima Banka (Penta)3.0%

Sberbank Slovensko2.0%

OTP Banka2.2%

Others13.7%


% of total assets; Source: NBS, RBI/Raiffeisen RESEARCH


20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Slovenia vs. all other CEE marketsSource: BSI, national sources, RBI/Raiffeisen RESEARCH

-125%

-100%

-75%

-50%

-25%

0%

25%

-20%

-10%

0%

10%

20%

30%

40%

06 08 10 12 14 16Lending growth (% yoy, LCY)Return on Equity (RoE, r.h.s.)


Source: ECB, RBI/Raiffeisen RESEARCH

After a few years with tough structural issues, 2015 brought the first positive per-formance numbers for the Slovenian banking sector. 2016 confirmed this posi-tive trend that seems to be sustainable enough to continue in 2017. The funda-mentals were supportive for the Slovenian banking sector, with an economic growth of above 2% yoy. Also, the structural changes were favorable. First of all, the sector’s balance sheet saw a further clean-up, with the NPL ratio declin-ing to a rather moderate 6.3% – a level last observed in 2007. Second, the prof-itability of Slovenian banks improved further, with the RoE ratio exceeding 10%. Finally, the restructuring of the largest and most problematic state-controlled banks moved on. One of them, Nova KBM, was sold to private investors: EBRD and the US-based investment fund Apollo. Following its privatization, the restruc-turing process targets the improvement of the operational efficiency of the bank and its associated financial group, which make up for 11-13% of the total market share. This restructuring process has initiated a key trend in the competitive land-scape. The era of the dominance of state-controlled banks, with over 60% in the past, seems to come to an end, as the share of foreign-originated banking capi-tal is on the rise. The Nova-KMB privatization deal alone pushed this share from 33% in 2015 to about 44% as of year-end 2016. The country’s largest bank, NLB, is currently undergoing privatization too. At least 50% of the country's larg-est bank is to be ready for an IPO listing on the Ljubljana Stock exchange by mid-June 2017. Another 25% of the governmental stake in the bank are to be sold in 2018. The deal would announce further reduction of the state-controlled banking market share by up to 28%.

There are two more trends worth mentioning with respect to the structural im-provement of the Slovenian banking sector. The first trend is the ongoing vanish-ing of inefficient smaller banks and the consolidation in the sector. The number of banks operating in the market declined to 16 in 2016, which is more than one third less than five years ago. The second trend is the implementation of the EU BRRD in 2016, which aims to enhance banking supervision, foster clearer and more transparent procedures on winding-up problem banks, as well as to restrict state-induced capital support and bailouts. There seems to be a strong political

Slovenia

Ongoing restructuring sees positive results

Key economic fi gures and forecasts*

Slovenia 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -2.7 -1.1 3.1 2.3 2.5 2.7 2.5







* euro area member as of 1 January 2007Source: national sources, wiiw, RBI/Raiffeisen RESEARCH

Progress in sector restructuring, asset quality improvement continued in 2016 Banks’ profi tability proved sustainable, sector’s RoE exceeded 10% Trend towards foreign ownership amidst general CEE deleveraging and de-risking




Total assets (EUR bn)* 44.5 39.6 37.4 35.5 33.8

growth in % yoy (2.4) (11.0) (5.6) (5.1) (4.8)

in % of GDP 126.1 110.3 100.3 92.9 85.0

Total loans (EUR bn)* 31.7 26.4 23.2 21.9 21.6

growth in % yoy (3.9) (16.7) (12.1) (5.6) (1.5)

in % of GDP 89.8 73.5 62.2 57.3 54.2

Loans to private enterprises (EUR bn) 18.8 14.1 11.4 10.2 9.4

growth in % yoy (7.4) (25.0) (19.1) (10.5) (8.1)

in % of GDP 53.3 39.3 30.6 26.7 23.6

Loans to households (EUR bn) 9.3 8.9 8.9 8.8 9.2

growth in % yoy (2.1) (4.3) 0.0 (1.1) 4.4

in % of GDP 26.3 24.8 23.9 23.0 23.1

Mortgage loans (EUR bn) 5.3 5.3 5.5 5.5 5.8

growth in % yoy 1.9 0.0 3.8 0.0 4.7

in % of GDP 15.0 14.8 14.7 14.4 14.5

Total deposits (EUR bn)* 20.9 21.2 22.1 23.2 24.7

growth in % yoy (2.0) 1.4 4.2 5.0 6.5

in % of GDP 104.5 90.2 81.0 77.7 73.7





Return on Assets (RoA) (1.6) (7.7) (0.2) 0.5 1.3

Return on Equity (RoE) (19.0) (97.3) (1.9) 4.2 10.6


Tier-1 capital adequacy (%) 10.1 11.1 12.1 13.1 14.1

Non-performing loans (% of total loans) 15.2 13.3 11.7 10.0 6.3 * excluding MFI business; Source: BSI, ECB, RBI/Raiffeisen RESEARCH

will to follow the EU Directive, how-ever, its efficient implementation is yet to be carried out.

The restructuring of the past years re-sulted in a positive development and fewer vulnerability of the sector’s fun-damental indicators in 2016. On the funding side, the deposit-funded model started to prevail, as a vast share of external liabilities and debt has been gradually reduced. Pri-vate sector deposits have grown for the third year in a row, at accelerat-ing pace of 6.5% yoy in 2016. Cor-porate lending trends remain on the downside, which is mostly due to the de-risking and loan book clean-up. We take this as a healthy development preceding a possible new lending upturn. This view is also supported by an increasing profitability of the sector, which goes in parallel and largely is a consequence, of the de-risking trend. The c orporate loan segment declined by -8.5% yoy in 2016. However, this decline was counterbal-anced by an energetic upturn of retail lending of 4.4% yoy growth in 2016. As a result, the L/D ratio remained rather low at 87%, hinting to ample funding resources to back up potential growth in the years to come. In general, however, the econ-omy’s structural weaknesses and the vast share of large industrial groups remain a concern as this may eventually result in another asset quality issue of the Slovenian banking sector.

Financial analyst: Elena Romanova, RBI Vienna

Slovenia

NLB Group25.7%

NKBM12.1%

SID6.5%UniCredit

6.6%SKB Banka (SocGen)

7.4%

Abanka Vipa9.1%

Banka Koper (Intesa Sanpaolo D.D.)

5.8%

Others26.7%


% of total assetsSource: BSI, company data, RBI/Raiffeisen RESEARCH



Croatia 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -2.2 -1.1 -0.5 1.6 2.9 3.3 2.8





Current account balance (% of GDP) -0.1 1.0 2.1 4.8 2.6 2.5 2.2


EUR/LCY rate (avg) 7.52 7.58 7.63 7.61 7.53 7.45 7.46


Croatia

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Croatia vs. all other CEE marketsSource: CNB, national sources, RBI/Raiffeisen RESEARCH

Improved profi tability based on lower risk costs

-12%

-7%

-2%

3%

8%

13%

-5%-3%0%3%5%8%

10%13%15%




Source: CNB, RBI/Raiffeisen RESEARCH

In 2016, the accelerating economic growth and the consolidation of public fi-nances reinforced the business confidence in the sustainability of Croatia’s eco-nomic recovery. At the same time, increasing capital inflows from EU funds and FDIs supported the expansionary mode in monetary policy. Under the pressure of excessive liquidity in the financial system, the market interest rates kept fall-ing. Lowered yields on deposits reduced customers’ interest for term deposits and consequently also lowered the demand for Euro purchases, the currency that was traditionally preferred for long-term savings. In 2016, the demand for loans in-creased due to the economic recovery. However, the stock of total loans declined again as result of the temporary impact of factors, pushing in the opposite direc-tion. Firstly, in the household lending segment the implementation of the manda-tory conversion of CHF loans resulted in sizeable one-off impairments. Secondly, in the corporate segment, the sale of NPLs reduced the total amount of outstand-ing loans. The new tax regulations should further stimulate banks to clean up their balance sheets in 2017, as the write-offs of receivables are temporarily recog-nized as tax-deductible. We expect an increase in total loans to reveal in 2018 – as soon as the impact of these factors vanishes. Based on the decrease in loans and steadily positive deposit dynamics, the L/D ratio fell by 15pp within the past three years and reached 89% in 2016. Banks made use of the resulting excess liquidity and repaid their borrowings to foreign financial markets, which mostly referred to their parent banks. As a further reduction of the banks’ debt was al-most exhausted by the end of 2016, the excess liquidity could now be applied primarily towards the financing of lending. Besides, HRK appreciation pressure followed by the growth in LCY deposits improved the banks’ capability for lend-ing in HRK. Interest rates on HRK loans are levelled with the interest rates on EUR-denominated loans, also adding to a decline in customers’ motivation to borrow in FCY-terms. Moreover, in the corporate segment, the growing demand for HRK loans is also based on the intention to refinance the still-rolling EUR-denominated loans. This pattern creates a strong demand for HRK loans at domestic banks, since the corporate sector has directly been indebted to foreign markets by more than 50%. In the household lending segment, the EUR loans are paid off and pro-gressively replaced by new HRK loans without any significant impact on the out-standing level. Banks are speeding up the improvement of their asset quality by

Temporary tax benefi ts should postpone loan growth to 2018 Improved asset quality is based on economic recovery Banking system remains well-capitalized





growth in % yoy (2.0) (1.7) (1.0) (0.1) (0.2)

in % of GDP 123.4 123.1 122.8 120.2 115.5


growth in % yoy (2.3) (0.3) (2.4) (1.1) (3.7)

in % of GDP 86.8 87.8 86.4 83.7 77.6


growth in % yoy (9.4) (3.3) (0.9) (3.5) (1.6)

in % of GDP 26.2 25.7 25.7 24.3 23.0


growth in % yoy (1.5) (2.9) (1.0) (1.2) (4.7)

in % of GDP 39.1 38.5 38.4 37.2 34.1


growth in % yoy (1.0) (3.1) (2.5) (1.9) (10.4)

in % of GDP 19.9 19.6 19.2 18.5 15.9


growth in % yoy (4.4) (0.7) (3.2) (4.1) (11.3)

in % of GDP 64.8 65.3 63.6 59.8 51.1



growth in % yoy (3.2) 1.9 1.7 5.2 0.5

in % of GDP 82.6 85.4 87.5 90.1 87.2


growth in % yoy 4.1 2.5 1.7 3.0 1.1

in % of GDP 52.3 54.4 55.8 56.3 54.8





Return on Assets (RoA) 0.8 0.2 0.5 (1.3) 1.6

Return on Equity (RoE) 4.8 0.8 2.8 (8.8) 9.6


Non-performing loans (% of total loans) 13.9 15.7 17.1 16.6 13.8 Source: CNB, RBI/Raiffeisen RESEARCH

selling their NPLs, and thus achieving increased profitability levels. In con-trast, as the regulator has been tight-ening the rules for risk classification and provisioning since 2013, provi-sioning for NPLs has been growing gradually. On the relatively small Cro-atian banking market, the limited po-tential for economies of scale further increase the pressure on the consoli-dation of the banking sector. Cost effi-ciency is affected by the growing com-plexity in regulatory requirements for the banking business, and could be managed best by an increase in the income-bearing assets. In late 2016, the local OTP Bank (4% market share) announced an acquisition of Splitska Banka with a 7% share. But the biggest pressure remains for those 18 small banks with less than 1% of market share each. Despite favorable market conditions in 2016, small banks recorded yet another nega-tive RoE. In our view, small banks in Croatia will either have to act as a partner for large banks or merge with a small bank similar in size, or be acquired by one of the more competitive market players.

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

Croatia

Zagrebacka Banka (UniCredit), 26.6%

Privredna Banka (Intesa), 18.4%

Erste, 14.2%

Raiffeisenbank, 8.0%

Splitska Banka, 6.9%

Addiko, 5.3%

HPB, 4.9%

OTP, 4.0%

Sberbank, 2.3%

Others, 9.4%


% of total assetsSource: CNB, RBI/Raiffeisen RESEARCH



Romania 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 0.6 3.5 3.1 3.9 4.8 4.2 3.5







EUR/LCY rate (avg) 4.46 4.42 4.44 4.45 4.49 4.50 4.50


Romania

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Romania vs. all other CEE marketsSource: NBR, national sources, RBI/Raiffeisen RESEARCH

Lending expected to speed up due to economic recovery

-12%

-7%

-2%

3%

8%

13%

-5%

-3%

0%

3%

5%

8%

10%




Source: NBR, RBI/Raiffeisen RESEARCH

Economic growth in Romania accelerated in 2016. Real GDP increased by 4.8% yoy, with private consumption acting as the main growth engine. Lending dy-namics were modest in 2016, the total stock of loans to the private sector in-creased by just 1.1% yoy (adjusted for EUR/RON movements). The growth was completely attributed to LCY-lending. The stock of RON-denominated loans in-creased by 14.3% yoy, while the FCY loan stock contracted by 12.3% yoy. We expect the private sector’s propensity to borrow to further improve in 2017, sup-ported by ongoing economic growth and rising disposable incomes. At the same time, interest rates should remain low, also resulting in the improvement of lend-ing dynamics. We expect the LCY-denominated lending to outperform. The stock of RON loans should post gains in all segments, while the stock of FCY loans is likely to decline further. One of the key stimuli for this development is the ongoing state-guaranteed "First Home" program for housing loans, which already showed impact in previous years. The aggregated balance sheet of the Romanian banking sector continued its structural improvements in 2016. The asset side has become more balanced with the FX risk diminishing on the rapid FCY loans decline to 43.4% of total loans. We expect this decline to continue given the general trend in lending activity. The funding side also saw an improvement. Banks continued to reduce their de-pendence on external funding, as the share of external liabilities in total assets dropped from 15.5% in 2015 to 11.8% in 2016. Facing scarce opportunities to originate FCY loans, banks could continue to repay external credit lines. Liquidity in the banking sector stayed ample, as the L/D ratio declined further from 82% in 2015 to 77% in 2016. Moreover, a potential reduction of the minimum reserves requirements ratio for FCY liabilities in 2017 would release additional FCY li-quidity to the banks. Romanian banks are well capitalized, so we expect loos-ening of additional capital increase requirements. Finally, the asset quality im-proved on the aggregate level. The sale of NPLs continued, maintaining the NLP ratio on a downward trend from 13.5% in 2015 to 9.6% in 2016. We see fur-ther room for improvement and expect a gradual convergence of the current NPL levels towards the average 5-6% NPL level of CE countries. The Romanian banking sector recorded a net profit of around EUR 950 mn in 2016, which was a bit lower than the EUR 1 bn in 2015. Over the past year, the

Improvement of lending activity expected for 2017, driven by growing personal income Balance sheets cleanup to keep NPLs ratio further on a downward trend Regulatory initiatives hampered banking activity in 2016, but limited impact expected going forward


Romania




growth in % yoy 0.6 (0.3) (0.8) 1.9 2.2

in % of GDP 68.0 64.1 60.7 58.7 56.3


growth in % yoy (1.1) (4.8) (3.0) 2.3 0.9

in % of GDP 38.4 34.5 31.9 31.0 29.4


growth in % yoy 0.7 (7.3) (5.5) (0.7) (3.6)

in % of GDP 20.3 17.8 16.0 15.1 13.7


growth in % yoy (2.3) (2.4) (1.2) 4.7 4.3

in % of GDP 17.6 16.2 15.3 15.2 14.9


growth in % yoy 8.3 8.8 9.2 15.4 12.1

in % of GDP 6.2 6.4 6.7 7.3 7.7


growth in % yoy (2.5) (7.2) (10.0) (10.2) (12.3)

in % of GDP 24.1 21.1 18.1 15.4 12.7



growth in % yoy 1.6 7.5 7.9 7.5 7.0

in % of GDP 35.4 36.0 37.1 37.8 38.0


growth in % yoy 5.3 4.8 6.0 5.3 10.7

in % of GDP 20.8 20.6 20.8 20.8 21.6





Return on Assets (RoA) (0.6) 0.0 (1.3) 1.2 1.1

Return on Equity (RoE) (5.9) 0.1 (12.5) 11.8 10.4


Non-performing loans (% of total loans) 18.2 21.9 20.7 13.5 9.6 Source: NBR, RBI/Raiffeisen RESEARCH

profitability of the banking system was adversely affected by the adoption of the "Mortgage Walk Away" law. In 2016, its scope of application was limited by the Constitutional Court. Hence the law’s impact in upcoming years should be of a lower magnitude than initially expected. Also, in 2016 another law negatively affecting the activity of the banks was reverted be-fore coming into power: the law that aimed to convert CHF-denominated loans into RON at historical exchange rates. For the time being there are no other legislative initiatives imposing a FX mortgage conversion law or a spe-cific taxation on the Romanian bank-ing sector. While 2016 was quiet in terms of M&A activities further consolidation in the banking sector may increase its efficiency and profitability. In this context, we consider Greek-owned banks to be on top of the list with better chances for possible acqui-sition deals that might take place in 2017.

Financial analyst: Silvia Maria Rosca (+40 799 718-083) Raiffeisen BANK S.A., Bucharest

BCR (Erste), 16.3%

Banca Transilvania, 13.1%

BRD (SocGen), 12.9%

Raiffeisen Bank, 8.5%UniCredit, 8.3%

Others, 40.9%


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


Bulgaria

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Bulgaria vs. all other CEE marketsSource: BNB, national sources, RBI/Raiffeisen RESEARCH

Lending returns to growth track after prolonged decline

0%

3%

6%

9%

12%

-5%-3%0%3%5%8%

10%13%15%




Source: BNB, RBI/Raiffeisen RESEARCH

Against the backdrop of a deflationary environment the 2016 GDP growth of 3.4% yoy was higher than anticipated. The Bulgarian economy benefited from the weaker euro, the low oil prices and excessive supply of money. Moreover, the macro-economic environment was supportive for the banking sector and there were no negative shocks like in 2015. The sector remained stable, bolstered by a positive development of financial, capital and liquidity indicators. Since lend-ing has not yet fully recovered, Bulgarian banks invested increasingly in govern-ment bonds. Thus total (LCY) assets of the banking system rose by 5.2 % yoy up to BGN 92.1 bn in 2016. The growth was supported by ongoing growth of de-posits despite low interest rates. Positive tendency was observed in both the retail segment (LCY, 6.3% yoy up to BGN 47.2 bn) and in the corporate segment (LCY, 8.3% yoy up to BGN 26.9 bn). In 2016, the banks’ loan portfolio grew by 0.6% yoy (LCY) to BGN 54.5 bn. The sustainable economic activity also supported the growth of lending to the private sector, which was able to overcome the negative performance in 2015. This resulted in a 0.2% yoy growth of the banks’ corpo-rate loan portfolio to nearly BGN 36.0 bn. Retail loans rose by 1.4% yoy (LCY) to BGN 18.6 bn supported by the improving purchasing power.A few factors impacted the profitability of Bulgarian banks in 2016. First, the av-erage core funding price dropped sharply for all deposit categories in all curren-cies. The average deposit rate decreased from 1.4% in 2015 to 0.8% in 2016. Similar developments were also observed in average lending rates, as they de-creased from 7.5% in 2015 to 5.8% in 2016. Second, the credit risk consider-ations continued to set trends in the banking sector performance. The volume of NPLs (within the loans issued to the real economy) decreased to BGN 10.0 bn (2015: BGN 11.0 bn). Moreover, the 2016 Asset Quality Review (AQR) and stress test exercises confirmed (with modest transparency though) that the banks’ capital positions are stable and the sector’s ability to absorb shocks within unfa-vorable market conditions is adequate. .In 2016 with regard to the key performance indicators the CET1 ratio and the total CAR increased to 20.4% and 22.2%, respectively (2015: 20.0% and 22.2%). The proportion of liquid assets rose to 38.3 % from 36.7% in 2015. In turn, the RoA went up to 1.4% from 1.1% in 2015, and so did the RoE – up to 9.1% from 8.1% in 2015. The 2016 net profit saw a 40.5% yoy rise up to BGN

Turn-around in lending amid low interest rate environment The major banking sector indicators suggest upward trend, system’s asset quality improved Further consolidations expected


Bulgaria 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 0.0 0.9 1.3 3.6 3.4 3.3 3.3



General budget balance (% of GDP) -0.4 -1.8 -3.7 -2.8 1.6 -1.5 -2.0


Current account balance (% of GDP) -0.2 1.9 0.1 0.4 3.8 3.4 1.0


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

* currency Board to the EUR; Source: national sources, wiiw, RBI/Raiffeisen RESEARCH





growth in % yoy 7.3 4.0 (0.7) 2.8 5.2

in % of GDP 101.1 104.6 101.8 98.8 99.4


growth in % yoy 3.2 1.1 (5.0) (2.6) 0.6

in % of GDP 70.9 71.4 66.5 61.1 58.8


growth in % yoy 5.0 1.4 (6.7) (4.0) 0.2

in % of GDP 48.3 48.8 44.6 40.4 38.7


growth in % yoy (0.5) 0.5 (1.2) 0.1 1.4

in % of GDP 22.6 22.6 21.9 20.7 20.1


growth in % yoy 0.8 (0.6) (0.9) (7.7) 2.1

in % of GDP 11.6 11.5 11.1 9.7 9.5


growth in % yoy 3.7 (3.4) (11.5) (13.3) (9.8)

in % of GDP 45.4 43.7 37.9 31.1 26.7



growth in % yoy 8.4 8.7 2.4 8.7 7.0

in % of GDP 70.2 75.9 76.2 78.2 80.0


growth in % yoy 12.4 9.4 4.5 8.3 6.3

in % of GDP 44.0 47.9 49.0 50.1 50.9


Number of banks 31.0 30.0 28.0 28.0 27.0


Market share of foreign-owned banks (% of total assets) 73.6 69.8 76.3 76.4 76.5 Profi tability and effi ciency




Non-performing loans (% of total loans) 16.6 16.9 16.8 20.36 18.28Source: BNB, RBI/Raiffeisen RESEARCH

1.3 bn, mainly due to decreased pro-vision expenses and some one-off ef-fects during the year. The impetus to market consolidation, and partially clean-up, was preserved during 2016. In particular, the deal for the acquisition of the United Bul-garian Bank, a subsidiary of the Na-tional Bank of Greece, by the KBC Group was announced and is ex-pected to be closed in Q2 2017. Fur-thermore, the sale of Victoria bank to private investors (a failed CCB bank subsidiary, 100% of equity to be sold) is expected to be closed in 2017. Fol-lowing the merger between the Alpha Bank branch and Eurobank EFG, the number of banks operating in Bulgaria decreased to 27 in 2016.Overall challenges for the Bulgarian banking sector remain the political uncertainty, market volatility, declining interest mar-gins and the need for efficiency improvements. In addition, the implementation of IFRS9 and BNB’s additional buffer on the total risk exposure for systemically important institutions are putting a further strain on the banking sector until 2018.

Financial analysts: Emil S. Kalchev, Rositsa L. Rancheva, Raiffeisenbank (Bulgaria) EAD, Sofia

Bulgaria

UniCredit Bulbank, 20.2%

DSK Bank (OTP), 12.6%

First Investment Bank, 9.6%

United Bulgarian Bank, 7.4%Raiffeisenbank, 6.9%

Eurobank, 7.4%

SocGen Expressbank, 6.4%

Central Cooperative Bank, 5.4%

CIBANK, 3.4%

Others, 20.6%


% of total assetsSource: BNB, RBI/Raiffeisen RESEARCH


Serbia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Serbia vs. all other CEE marketsSource: NBS, national sources, RBI/Raiffeisen RESEARCH

Improved economy supports retail lending

-2%

0%

2%

3%

5%

6%

8%

-5%

0%

5%

10%

15%

20%

25%

30%




Source: NBS, RBI/Raiffeisen RESEARCH

Despite falling interest rates and an economy rebound, the Serbian loan stock re-mained flat in 2016. The corporate lending achieved only a moderate growth rate of 2.2% yoy. The asset quality of the corporate loan segment improved, mainly due to the settlement activity among corporate customers. As a result, the corporate NPL ratio fell to 19.7% in the first three quarters of 2016. The real sec-tor’s financial standing also improved, as seen in a significant corporate deposits increase of over 16% yoy (LCY-expressed). At the same time, this also signalled a still-suppressed investment activity in the corporate sector, which dampens the demand for corporate loans. Within the overall corporate loans issued, working capital loans went up by 8.6% yoy whereas investment loans only posted mod-erate growth of 3.2% yoy following the rebound in 2015 when they went up by 7.6% yoy. Retail lending dynamics was much more vivid though. Retail loan stock surged by 10.6% yoy in 2016, after 4.8% yoy growth in 2015. The key drivers were consumer lending (up 18.5% yoy) and to some extent mortgage lending (up 3.5% yoy). LCY-loans growth surged by 11.9% yoy, while the FCY and FCY-linked lending dropped by 1.4% y oy. The quality of the loan book im-proved on retail side as well, with the total NPL ratio falling to 19.5% in the first three quarters of 2016 down from 21.6% as of year-end 2015. Liquidity in the Serbian banking sector remained ample, and although the banks were heavily placing it into domestic bonds, the anticipated increase in US rates triggered an increase of banks’ deposits placed abroad. On the funding side a cer-tain structural adjustment was posted, too. The private deposits growth helped to reduce the dependence of domestic banks on their European parent groups’ fund-ing. This cross-border funding saw a decline of -10.6% yoy in 2016 compared to -6.9% yoy in 2015. With deposits growing at a faster pace than loans the system-wide L/D ratio moved to 99.7% in 2016 – down from 107.5% in 2015. Despite falling interest rates, RoE increased to 6.9% in the first three quarters of 2016 compared to 5.6% during same period in 2015. The profitability improve-ment was mainly driven by declines in loans loss provisions, economic growth, a stable FX rate, as well as the improving NPL ratios. Despite the overall loan growth, the moderate reduction of interest rates resulted in a drop of net interest income of -4.6% in the first three quarters of 2016. This reduction in revenues resulted in

Retail lending activity revived in 2016 Profi tability supported by provisioning recovery NPL trend turns downside


Serbia 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -1.0 2.6 -1.8 0.7 2.8 3.0 3.0







EUR/LCY rate (avg) 113.05 113.08 117.27 120.73 123.13 123.78 124.88



Serbia




growth in % yoy 0.2 (1.0) (0.6) 3.1 3.4

in % of GDP 88.1 81.3 85.2 85.4 83.4


growth in % yoy 1.0 (4.89) (1.78) 2.41 1.37

in % of GDP 52.7 46.7 48.4 48.2 46.1


growth in % yoy 2.2 (9.61) (8.41) 1.97 0.68

in % of GDP 29.9 25.2 24.3 24.1 22.9


growth in % yoy (0.3) 2.37 1.94 4.22 8.97

in % of GDP 18.0 17.2 18.5 18.7 19.3


growth in % yoy 3.7 (1.4) 2.6 1.9 1.9

in % of GDP 9.3 8.6 9.3 9.2 8.8


growth in % yoy 2.3 (4.1) (9.5) 8.8 (3.1)

in % of GDP 37.7 33.7 32.2 34.0 31.1



growth in % yoy 1.6 2.6 2.3 5.9 9.3

in % of GDP 42.2 40.4 43.6 44.8 46.3


growth in % yoy 6.4 4.8 2.2 2.9 6.3

in % of GDP 27.6 26.9 29.0 29.0 29.2





Return on Assets (RoA) 1.0 (0.1) 0.1 1.2 1.4

Return on Equity (RoE) 4.7 (0.4) 0.6 5.6 6.9


Non-performing loans (% of total loans) 18.6 21.4 21.5 21.6 19.5 Source: NBS, RBI/Raiffeisen RESEARCH

an increase of the Cost/Income ratio to 62.9% from January to September 2016, compared to 59.7% during the same period of 2015.There were a few events in the com-petitive landscape. The most signifi-cant move was related to Findomes-tik banka (0.3% market share), which was bought by Direct Bank from bnP Paribas. Poštanska štedionica, which is mainly a state-owned institution, cur-rently undergoes a restructuring and strategy adjustment. A newcomer to the Serbian banking market was Bank of China Serbia. It is currently financ-ing the business of the state-owned Chinese steel producer Hesteel Group, however, Bank of China targets also to expand its corporate franchise. Reportedly, starting from its Serbian subsidiary, Bank of China intends to cover the entire Balkans region and the neighbouring area, including Greece, Romania, Bulgaria and Alba-nia. The implementation of Basel III in Serbia is gradually moving forward. In 2016, the NBS adopted a number of new reg-ulations that are expected to come into force by mid-2017.

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

Banca Intesa, 16.7%

Komercijalna Banka, 12.9%

UniCredit, 10.0%

Raiffeisenbank, 8.0%SocGen, 7.3%AIK Banka, 5.5%

Eurobank, 4.5%

Banka Postanska Stedionica, 4.4%

Erste Bank, 4.2%

Vojvodjanska banka, 4.0%

Others, 22.5%


% of total assetsSource: NBS, RBI/Raiffeisen RESEARCH


Bosnia and Herzegovina

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Bosnia a.H. vs. all other CEE marketsSource: CBBH, national sources, RBI/Raiffeisen RESEARCH

Further consolidation of the market in sight

-6%

-3%

0%

3%

6%

9%

-4%

-2%

0%

2%

4%

6%

8%




Source: CBBH, RBI/Raiffeisen RESEARCH

The Bosnian economy saw a moderate growth in 2016 with 2.5% yoy real GDP growth. However, this provided limited potential for growth improvement, as well as an expansion of banking sector assets, revenues and profitability.Still, in 2016 the Bosnian banking sector experienced a year marked by stabil-ity and positive structural changes. This includes increasing levels of capitaliza-tion and liquidity, declining NPL levels and meager growth of assets and loans. The overall assets in the banking sector grew by 4.2% yoy, mostly driven by an increasing level of reserves at CBBH’s accounts and a rising share of foreign and local portfolio investments (EUR bonds and T-bills). Those appeared to be a di-rect result of growing liquidity in the system, while the core business (illustrated by growth of loan portfolio) have seen the weakest dynamics since the start of the financial crisis back in 2009. Hence, total loan growth bottomed out at the rate of just above 2% yoy in 2016. Retail, including mortgage loans, and corporate loans – the two major segments – grew at an almost similar pace of 3.8% yoy and 3.3% yoy, respectively. Loans to the public sector saw a significant decline of -17% yoy in 2016. In the retail segment, which has been targeted by all ma-jor players, the remaining and more or less solidly growing products were con-sumer loans and credit cards. Mortgage and investment loans were on a continu-ous downward trend. On the contrary, an improving loan quality and the revival of manufacturing and exports have resulted in the first positive growth rate in cor-porate loans since 2013. In the coming year, we expect a slight acceleration of economic dynamics, which should result in higher loan growth rates, but are still in a single-digit range. Deposits in the Bosnian banking sector should remain ro-bust, growing at an "accustomed" range of 5-7% yoy. A faster pace of deposit growth has improved local financing in the banking sector resulting in an L/D ra-tio below 100% since August 2016. At the end of the year, the L/D ratio stood at 97%. In addition, the CAR also advanced by 100bp to 15.8%, which is above the required 12% and directly correlated with improving NPL levels. The NPL ra-tio went down even more dramatically by 190bp to 11.8%, which has been the lowest level since 2011. Also, capitalization level should further improve sup-ported by the asset quality and profitability trends displayed in 2016.Despite suppressed interest margins and declining interest revenues, the ongoing process of scaling down NPLs, risks costs and Opex brought back good profita-

Scaled down NPLs, risks costs and Opex brought back good profi tability Better funding outlook backs improved L/D ratio Limited growth potential of banking sector stays a concern


Bosnia and Herzegovina 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) -0.9 2.4 1.1 3.0 2.5 3.0 3.5

Consumer prices (avg, % yoy) 2.1 -0.1 -0.9 -1.0 -1.1 2.0 2.0


General budget balance (% of GDP) -2.0 -2.2 -2.0 0.7 -1.5 -1.0 -1.0




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

* currency Board to the EUR; Source: national sources, wiiw, RBI/Raiffeisen RESEARCH





growth in % yoy 2.0 5.2 4.3 3.7 4.6

in % of GDP 83.7 86.3 88.1 87.5 87.8


growth in % yoy 4.3 3.1 2.8 2.4 2.0

in % of GDP 59.3 59.9 60.3 59.1 57.9


growth in % yoy 4.4 1.1 (1.4) (0.0) 3.8

in % of GDP 28.4 28.1 27.2 26.0 25.9


growth in % yoy 1.3 4.0 5.1 4.8 3.8

in % of GDP 25.9 26.4 27.2 27.3 27.2


growth in % yoy (20.8) 1.5 (11.3) (1.5) (5.9)

in % of GDP 1.0 1.0 0.8 0.8 0.7

Loans in foreign currency (% of total loans) 1.6 1.6 1.4 1.3 1.2


growth in % yoy 2.6 6.9 7.9 7.5 7.4

in % of GDP 50.9 53.3 56.3 58.0 59.8


growth in % yoy 8.6 9.3 8.1 9.1 8.1

in % of GDP 29.2 31.3 33.1 34.6 35.9





Return on Assets (RoA) 0.6 (0.2) 0.7 0.1 1.1

Return on Equity (RoE) 4.9 (1.4) 5.2 1.1 7.3


Non-performing loans (% of total loans) 13.5 15.1 14.2 13.7 11.8 Source: CBBH, RBI/Raiffeisen RESEARCH

bility readings. Hence, RoA and RoE stood at 1.1% and 7.3%, respectively.In the past couple of years, the limited potential for market growth pushed some of the market players in the di-rection of sizable consolidation. In 2016, there were two cases of liq-uidation of small players in the Bos-nian market: Bobar and Banka Srp-ske. These cases triggered the pro-cess of drafting the new "Banking Acts and Laws on Banking Agen-cies" to enhance the supervision. In addition, four smaller private-owned banks were consolidated through an M&A process: at first, Privredna and BOR banka merged into Privredna banka followed by Moja banka and IK banka merging into ASA banka. Hence, the overall number of banks went down to 23. The concentration stays high in the sector with a share of the Top 3 players close to 50%. Although the Bosnian banking sector proved to be quite resilient to political turmoil and crisis in the past, the political uncertainty is clearly one of the key obstacles for a more prominent re-vival of banking sector dynamics, as well as for the market’s general risk perception by investors.

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

Bosnia and Herzegovina

UniCredit Group*, 24.2%


NLB Group, 9.0%Sberbank Group, 8.3%

Intesa Sanpaolo Bank, 6.9%

Nova Banka, 6.8%

Others, 28.8%


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


Albania

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Albania vs. all other CEE marketsSource: NBA, national sources, RBI/Raiffeisen RESEARCH

Lending revival awaiting for better fundamentals

-4%

0%

4%

8%

12%

16%

-5%

-2%

1%

4%

7%

10%

13%

16%




Source: NBA, RBI/Raiffeisen RESEARCH

Following the reported economic growth of 3.5% as preliminary results of 2016, we expect the total economy to accelerate to 3.5% yoy for the full year 2016, and for 2017 we expect a GDP growth of about 4.0%. In 2016, the Albanian banking assets grew by 6.8% yoy (2015: 1.9% yoy). However, the fastest grow-ing asset category was investments into securities, which accounted for 68% of the new asset volume and was financed by the 5.2%yoy growth of customer’s de-posits. Customers deposits made up the majority of funding in the banks and ac-count for 82% of assets. Both, retail and corporate segments extended their de-posits volume in 2016, predominantly in FCY, and FCY deposits composed 53% of the total stock as of year-end 2016. The low interest rate environment was cap-tured by the 15% yoy growth of current accounts and demand deposits versus the decline of term deposits by -6% yoy in 2016.Coming from a 1.5 % yoy contraction in 2015, the lending activity recovered in 2016, albeit at a rather moderate pace of 2.5% yoy. In 2016, new loans were predominantly in LCY, reflecting the expansionary patterns in monetary policy. At the same time, FCY loans are following a declining dynamic. 97.9% of the new loans were retail loans, which grew by 9.1% yoy. The corporate segment lending remained almost flat at just 0.1% yoy growth. This was not just the conse-quence of low demand, but also the result of an increased risk aversion of com-mercial banks and to a certain extent a technical outcome of banks’ sizeable write-offs in 2016.For 2017, we see a better perspective for lending activity due to the expected ongoing economic recovery in Albania. Monetary conditions remain supportive for banks while business and consumer confidence are on the rise. Also, there is a positive trend regarding the asset quality. The NPL level of total loans lowered to 18.3% by year-end 2016 coming from its highest level of 21.3% in Septem-ber 2016. Nevertheless, asset quality and in particular the NPL stock remain in the focus of the regulator. The Albanian parliament has approved a package for the NPL treatment laws at the end of 2016, which includes a bankruptcy law and a number of procedures to intensify bailiff procedures, as well as revisions of the restructuring regulations. At the same time, a judiciary system reform implemen-tation, which we see as a necessary action to facilitate improvements in resolv-

Lending activity recovers moderately, predominantly in retail Legal and regulatory actions to improve the NPL situation Banking system remains decently capitalized albeit declining profi ts


Albania 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 1.6 1.1 2.0 2.6 3.5 4.0 4.0







EUR/LCY rate (avg) 139.04 140.30 140.00 139.72 137.33 136.90 139.38






growth in % yoy 7.0 6.2 0.7 4.0 8.4

in % of GDP 90.2 94.1 91.5 91.2 93.7


growth in % yoy 1.6 (2.3) 5.0 0.5 4.0

in % of GDP 43.3 41.6 42.1 40.6 40.0


growth in % yoy 1.0 (3.4) 6.0 (0.9) 1.8

in % of GDP 30.2 28.6 29.3 27.8 26.8


growth in % yoy (0.0) (0.3) 1.3 4.1 10.8

in % of GDP 11.2 11.0 10.7 10.7 11.2

Mortgage loans (EUR mn) 815 801 796 773 782

growth in % yoy 1.1 (1.7) (0.7) (2.9) 1.2

in % of GDP 8.5 8.2 7.9 7.3 7.0


growth in % yoy (3.5) (4.6) 4.0 (2.0) 0.3

in % of GDP 65.1 65.6 65.0 64.8 64.3

Loans in foreign currency (% of total credits) 65 63 62 61 59


growth in % yoy 6.8 3.0 4.6 4.8 6.8

in % of GDP 74.3 75.1 75.8 76.2 77.1


growth in % yoy 8.4 2.6 2.6 4.1 4.7

in % of GDP 65.1 65.6 65.0 64.8 64.3

Total loans (% of total deposits) 58 55 56 53 52Structural information, profi tability and effi ciency






Non-performing loans (% of total loans) 22.5 23.5 22.8 18.2 18.3 Source: NBA, RBI/Raiffeisen RESEARCH

Albania

ing the bad loan issue seems likely to be postponed after the next general elections.Amidst the remaining NPL-related flaws and the modest loan growth, the Albanian banking sector gained a net profit of EUR 68.6 mn in 2016, nearly 41% below the 2015 result, on increasing costs of provisioning. In 2016, RoA and RoE were down to 0.7% and 7.2% respectively, from 1.2% and 13.2% in 2015. The declin-ing profits, nevertheless, maintained the system’s capitalization at levels above the regulatory requirements. Banking sector aggregate CAR ratio stood at 15.7% in 2016.Not much is in sight with respect to any competitive landscape changes in Albania with the only exception related to the Greek banks’ position perhaps. Greek banks’ shares in Albanian banking market have lowered from 16.2% in 2015 to 14.6% in 2016. Besides, we see cautious potential for a consolidation within this group of banks in 2017 and beyond. In particular, we do not exclude NBG bank, a relatively small bank with only 2.7% of the total system’s assets, could even-tually become the subject for sale to other Greek groups operating in Albania, such as Pireus or Alpha Bank for example.

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


National Commercial Bank, 27.2%

Intesa Sanpaolo Bank, 10.6%

Credins Bank, 11.9%

Tirana Bank (Pireaus Bank), 5.4%

Alpha Bank, 5.0%

SocGen, 5.7%

Union Bank, 2.9%

National Bank of Greece, 2.7%

Others, 9.6%


% of total assetsSource: NBA, RBI/Raiffeisen RESEARCH


EU REGULATION NO 833/2014 CONCERNING RESTRICTIVE MEASURES IN VIEW OF RUSSIA’S ACTIONS Destabilizing THE SITUATION IN UKRAINEPlease note that research is done and recommendations are given only in respect of financial instruments which are not affected by the sanctions under EU regulation no 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine, as amended from time to time, i.e. financial instruments which have been issued before 1 August 2014. We wish to call to your attention that the acquisition of financial instruments with a term exceeding 30 days issued after 31 July 2014 is prohibited under EU regula-tion no 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine, as amended from time to time. No opinion is given with respect to such prohibited financial instruments.

Russia

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Russia vs. all other CEE marketsSource: CBR, national sources, RBI/Raiffeisen RESEARCH

System’s stabilization creates ground for a new upturn

0%3%6%9%12%15%18%21%

-8%-3%2%7%

12%17%22%27%

09 10 11 12 13 14 15 16Lending growth (% yoy, combinedLCY+FCY growth)Return on Equity (RoE, r.h.s.)


Source: CBR, RBI/Raiffeisen RESEARCH

2016 brought more signs of RU banking sector consolidation and stabilization Profi tability bounces, despite subdued lending dynamics Signifi cant regulatory sector reshaping and clean-up


Russia 2012 2013 2014 2015 2016 2017e 2018f

Nominal GDP (EUR bn) 1,677.1 1,678.8 1,551.7 1,223.8 1,158.3 1,470.1 1,523.6


Real GDP (% yoy) 3.5 1.3 0.7 -2.8 -0.2 1.0 1.5



General budget balance (% of GDP) 0.4 -1.0 -1.0 -3.6 -3.7 -2.6 -2.4




EUR/LCY rate (avg) 39.91 42.32 51.04 68.01 74.14 61.95 64.31


2016 has brought a continuation of the trends started in 2015 with a significant recovery of the banking sector´s profitability as the key trend. The RoE bounced from a near-zero level to above 10% by year-end. Moreover, unlike in 2015 when only the Top 5 state-owned banks made up the entire sector’s profit, posi-tive earnings were more equally divided throughout the sector in 2016.There were two main factors contributing to the recovery of the sector’s profitabil-ity. First, the Russian banking sector has managed to digest the risks and flaws of the crisis in 2014/15. At least the initial steps towards the lending portfolio re-structuring with less risk and more balanced returns were made with more than conservative corporate lending and a slowdown of the decline in retail lending in 2016. Since summer 2016, the overall loan growth expressed in LCY has vir-tually come into negative territory, which is a shift in trends given the accustomed positive growth in Russian lending. However, this could be seen as a healthy sign. The key reason behind this development is the vast decline in corporate lending. The corporate loan stock LCY-expressed has shown negative dynamics mom since the beginning of 2016, which have finally resulted in a 9.5% yoy de-cline for 2016. By large, however, this nominal decline should be attributed to the Rouble appreciation, as well as a "clean-up effect" from state interventions for the systemic borrowers back in 2015. Given the vast dominance of over 70% of corporate lending in the total Russian loan stock there is no surprise that the LCY-expressed loan dynamics as a whole was nominally bearish in 2016. At the same time the period of active de-risking on the retail lending side came to an end in 2016. These patterns were also reflected in the asset quality improvement. We view the quality of the system’s loan portfolio as emerging rather healthy now, as the NPL ratio in 2016 went notably down, amidst a declining base. That said, tor the year to come, we expect the lending growth to recover, and reach positive territory again. We expect single-digit growth in line with, or slightly ex-ceeding the inflation levels.The second major development of the Russian banking sector is the regulatory-induced reshaping of the domestic banking environment. The process is far ad-vanced and the newly emerged competitive landscape includes a new cohort


Key banking sector indicators***


Total assets (EUR mn) 1,238,697 1,276,922 1,136,230 1,041,438 1,254,692

growth in % yoy 24.0 3.1 (11.0) (8.3) 20.5

in % of GDP 79.4 86.8 109.5 103.2 93.2


growth in % yoy 24.2 4.1 (17.2) (7.7) 16.2

in % of GDP 44.4 49.0 57.6 53.0 51.1


growth in % yoy 17.5 0.1 (13.6) (3.3) 13.0

in % of GDP 32.0 34.0 41.6 40.1 37.6


growth in % yoy 45.3 14.4 (25.1) (19.1) 26.3

in % of GDP 12.4 15.0 16.0 12.9 13.5


growth in % yoy 35.5 16.4 (13.2) (5.2) 40.4

in % of GDP 3.4 4.2 5.1 4.9 5.7


growth in % yoy 3.4 9.3 14.4 18.8 (1.5)

in % of GDP 7.6 8.8 14.3 16.9 13.8



growth in % yoy 20.3 2.5 (18.0) 2.0 20.5

in % of GDP 47.9 52.1 60.6 61.6 61.6


growth in % yoy 25.2 5.8 (28.0) 7.3 30.2

in % of GDP 22.9 25.6 26.2 28.0 30.2


Number of banks 956 923 834 733 623

Market share of state-owned banks (% of total assets)** 53 54.7 55.0 56.3 56.0

Market share of banks over 50% foreign ownership (% of total assets)* 17.8 15.3 13.9 13.0 n/a

Market share of 100% foreign-owned banks (% of total assets)** 7.9 7.7 7.6 6.9 6.1 Profi tability and effi ciency




Non-performing loans (% of total loans) 4.8 4.5 5.2 7.2 7.0 * as reported by the CBR, ** RBI/Raiffeisen RESEARCH estimate; *** RUB depreciation vs. EUR 2014: -37.9%, 2015: -10.2%; RUB appreciation vs. EUR 2016: 23.2%Source: CBR, Interfax, RBI/Raiffeisen RESEARCH

Russia

of dominating key players of system-ically important banks. There is also a clear and important indication that the Russian regulator will no longer be tolerating any harsh violations of its macro-prudential norms even for the large banks. The regulator will now also be more reluctant to bail-out en-tirely on state expense (Deposit Insur-ance Agency). Hence, an additional stimulus for a market-induced improve-ment of the banking sector’s efficiency was created. Although we remain rather optimistic, yet the current achievements do not in-dicate a significant improvement of the situation – at least return-wise. The key return ratios still stand about twice as low as the readings achieved during the "quiet years" in 2012/13. Currently, we observe a basic post-crisis ground creating on the Russian banking sector, we think, which has the potential to be a starting point for positive dynamics in the future.


Sberbank, 27.6%

VTB Group*, 15.5%

Gazprombank, 6.0%

Otkrytie Financial Corporation, 4.0%

Russian Agricultural bank, 3.3%

Alfa bank, 2.8%

UniCredit, 1.4%

Promsvyazbank, 1.6%

Raiffeisenbank, 0.9%

SocGen*, 1.3%

Others, 35.6%


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


Russia

Focus on: Foreign banks in Russia – positive outlook on operations rebalancing, market stabilization

In 2016, the Western European banks operating in Russia could finally breathe in more relief, along with the ongoing market stabilization. Their strong inten-tions to reduce across all assets categories in 2014/15 are now seemingly turning to a softer stance and a more profit-seeking approach rather than the exposure cut standpoint of the past 2-3 years. In our view, there were several factors supporting this turn. First, the contractions in Russia by all major groups were already quite significant in the past three years. That resulted in shrink-ing lending portfolios, costs, and networks – all at the same time. Hence, the total branch network of the exposed banks from the CEE-B7 cohort (which is, in case of Russia represented by Intesa, OTP, RBI, SocGen and UniCredit), has contracted by around 25% in 2015/16. The total asset stock (in EUR-terms) went down by nearly 30% in 2014-2016 (including the RUB depreciation im-pact). It looks like the bottom level of exposure has been more or less achieved so far, and the movement in assets and lending started a moderate upwards trend in 2016 with about 7% yoy growth in both categories for the mentioned five banks. Second, 2016 finally brought certain relief for credit risk issues. In asset exposure, the spike in asset impairment has hit in 2014/15, and forced banks to sharply increase the provisioning costs and also reconsider their risk appetite and asset mix. Banks chose different approaches with an emphasis depending on each group's specialization. For example, diversified banks with the largest exposure put the most risky retail products on hold and imple-mented a cherry-picking loan issuance policy regarding their corporate cus-tomers. Banks, which historically targeted retail and consumer lending, had to carry on quite high NPLs and credit risk cost, sometimes even overshooting the operating revenue. Hence, these banks had to significantly reduce the ex-posure in total lending (by a third or even more) over the past three years. A few European banks with rather small exposure closed lending to non-finan-cial private sector customers completely. They only kept the least risky prod-ucts in the pipeline such as trade finance and money market operations. The strategies were diverse, but the motto was the same: to reduce risks and costs in Russia as much as possible.

As we have the 2016 results for most banking groups at hands, the evidence shows that, with the implemented restructuring over the past three years and the new asset and business mix achieved, the European lenders are now in a much more balanced position under the new Russian market realities. On aggregate, the European banks have adjusted themselves and their results on the Russian market are already showing improvements. However, the "price" for this development was paid with a reduction in market share – once the key priority for European banks in Russia and the major driver behind their pre-vious rapid asset base build-up. In 2016, the total market share of 100%-for-eign banks’ subsidiaries in Russia accounted for 6.1% of assets – five years ago these banks held 8.5%.

Nevertheless, the results of 2016 revealed the achieved efficiency from the new approaches to business. Although NIM went on squeezing on de-risking and general aversion of higher-yielding but riskier retail lending, the operat-ing expenditures went down faster. In 2016, the three groups with the largest exposure in Russia – RBI, SocGen and UniCredit –, posted a 9% yoy decline in Opex on aggregate, following more than 30% reduction in 2014/15 (in EUR-terms again, which snaps RUB depreciation in 2014/15). Moreover, significantly lower provisioning costs added to a surge of the ag-gregate (pre-tax) profits in 2016. Taken together, RBI, UniCredit and SocGen earned about EUR 700 mn in 2016, versus EUR 625 mn in 2015. Their av-erage RoE (pre-tax) stayed at 18% by far overshooting the market averages and average RoA (pre-tax) increased from 1.4% in 2015 to 1.6% in 2016.

Europ. Banks in RU*: Branch network

* RBI, SocGen, UniCreditSource: company data, RBI/Raiffeisen RESEARCH

600

700

800

900

1,000

1,100

1,200

11 12 13 14 15 16

Number of branches

European Banks in RU*: Credit risk


0%

5%

10%

15%

20%

25%

30%

0%

2%

4%

6%

8%

10%

12%

12 13 14 15 16NPL ratioProvisions (% of op. Revenue, r.h.s.)

Europ. Banks in RU*: Asset growth**

* RBI, UniCredit, SocGen, OTP, Intesa** % yoySource: CBR, RBI/Raiffeisen RESEARCH

-15%

-10%

-5%

0%

5%

10%

15%

11 12 13 14 15 16

Total assets (% yoy)


That, on the background of the streamlined business and operation models by these banks suggests a decent positioning for them on the Russian market for the time going forward, in our view. Besides, a feature of the balance sheet development, which we also take as an important start-up for the future is that the asset base of these banks expanded in 2016, alongside with the declining L/D ratio. That said, their core funding base kept on surging while the banks’ continued to benefit from their customers's brand loyalty and sufficient depos-itors’ demand. This ensures decent self-funding potential for them to recover the lending activity given the stabilization on Russian market proves sustaina-ble (which, we think, is). Therefore, we anticipate a more revived lending ac-tivity and a continuation of financials improvement from this group of commit-ted foreign players. However, no extra-high asset growth or inflows of reve-nues, and like-wise no rapid market share gain are to be expected. Like else-where in CEE, the "gold rush" in Russian banking is over. The new loan and asset growth rates should be much more moderate but also more sustainable, and should provide decent revenue flows given the deep capacity, diversifica-tion and remaining good potential of the Russian banking market.


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015 2016

CEE-B7 RU RoE (pre-tax) RoE market average (%)

CEE-B7 RU RoA (pre-tax, r.h.s.) RoA market average (%, r.h.s.)

European Banks in Russia*: Profi tability (RoA, RoE, %)


0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Private banks (out of Top 50) State-controlled banks 100% Foreign-owned banks

Banks in Russia: Market shares (by assets, %)


Europ. Banks in RU*: Implied NIM


3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2011 2012 2013 2014 2015 2016

NIM proxy (NII/Avg. assets)

Russia



Ukraine 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 0.2 0.0 -6.6 -9.9 2.2 2.0 3.0

Consumer prices (avg, % yoy) 0.6 -0.2 12.1 48.7 13.9 10.7 7.5






EUR/LCY rate (avg) 10.39 10.83 15.89 24.33 28.27 27.92 29.60


Ukraine

20%

40%

60%

80%

100%

5,000 15,000 25,000


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Ukraine vs. all other CEE marketsSource: NBU, national sources, RBI/Raiffeisen RESEARCH

The worst seems to be over

-125%

-100%

-75%

-50%

-25%

0%

25%

-20%

-10%

0%

10%

20%

09 10 11 12 13 14 15 16Lending growth (% yoy, combinedLCY+FCY growth)Return on Equity (RoE, r.h.s.)


Source: NBU, RBI/Raiffeisen RESEARCH

Despite a better macro environment with a sharp drop of inflation and a modest real GDP growth, the Ukrainian banking sector is still in a "balance sheet reces-sion", and assets declined by 15.7% yoy in 2016. Structural problems, accumu-lated in the past, stand in the way of a recovery. Nevertheless, a tough regula-tory-induced and in our view quite successful sector clean-up continued in 2016. Major lenders managed to comply with regulatory requirements, while others left the market. One of the three systemic banks in Ukraine, Privatbank, was nation-alized and recapitalized. As a result of the clean-up, the number of banks operat-ing in Ukraine decreased by another 21 institutions to 96 as of year-end 2016. At the same time, the banks’ capital base increased by almost 20%, while the CAR improved by 38bp to 12.7%. We expect the recapitalization process to continue in 2017 although at a less ambitious pace. In 2016, deposits increased by 10.8% yoy due to the UAH devaluation and growth of incomes. The lending activity stayed suppressed and the loan portfolio grew by 1.7% yoy which was mainly attributed to the UAH devaluation. The corporate segment showed a mod-est revival of loan activities, while retail lending continued to shrink. Structurally, the Ukrainian banking system remains insolvent. The total losses increased dra-matically to UAH 159.4 bn in 2016, and exceeded the size of the system’s cap-ital. Thus the RoA stood at -12.6% and the RoE reached -116.7%. However, de-cisive governmental su pport has kept the system afloat. When excluding Privat-bank’s losses of UAH 135 mn, following its nationalization, the situation in the banking sector does not look so desperate for the remeining banks which have already completed their provisioning in 2015. The returns have already turned positive. Also, banks with Western capital, following a risk-averse policy and en-joying parent bank support, managed to secure positive profitability. Overall, 63 Ukrainian banks were profitable in 2016.The structure of the Ukrainian banking sector changed significantly in 2016. With the nationalization of Privatbank, the state share in total assets is domi-nant with about 50%. Nevertheless, the government has an ambitious plan to re-duce its presence in the coming two to three years. In 2016, the market share of banks with foreign capital decreased to 33.9% of total assets from 34.8%. We expect it to decline further, particularly due to the expected re-scaling and/or exit of Russian banks from the market. However, the selling of banks with Russian

Tough and costly banking sector clean-up well advanced Deposits are growing, modest revival of corporate lending activity in sight Government became the dominant market player; Russian banks under pressure




Total assets (EUR mn) 140 155 83 52 47

growth in % yoy 6.4 10.7 (46.3) (37.4) (9.8)

in % of GDP 80.2% 88.0% 83.0% 63.0% 53.5%

Total loans (EUR mn) 101 111 65 41 37

growth in % yoy 1.5 9.9 (41.6) (36.7) (9.8)

in % of GDP 57.6% 62.7% 64.3% 49.4% 41.9%

Loans to private enterprises (EUR mn) 78 87 51 34 31

growth in % yoy 4.4 11.8 (41.2) (34.3) (8.1)

in % of GDP 44.6% 49.3% 51.0% 40.6% 35.1%

Loans to households (EUR mn) 23 23 13 7 6

growth in % yoy (7.2) 0.6 (42.9) (45.6) (17.0)

in % of GDP 13.0% 13.0% 13.0% 8.6% 6.7%

Mortgage loans (EUR mn) 8 5 3 2 0

growth in % yoy (16.8) (42.5) (27.1) (40.0) (100.0)

in % of GDP 4.7% 2.7% 3.4% 2.5% 0.0%


growth in % yoy (7.8) 2.4 (20.7) (24.0) (20.4)

in % of GDP 21.3% 21.6% 30.1% 27.7% 20.8%


Total deposits (EUR mn) 71 81 42 30 29

growth in % yoy 15.5 15.0 (47.7) (30.3) (1.7)

in % of GDP 40.4% 46.0% 42.3% 35.7% 33.0%

Deposits from households (EUR mn) 45 53 26 17 16

growth in % yoy 18.4 16.4 (50.8) (36.3) (4.3)

in % of GDP 26.0% 30.0% 25.9% 20.0% 18.0%


Number of banks 176 180 163 117 96


Market share of foreign-owned banks (% of total assets) 33 27 31 35 34

Market share of Western foreign-owned banks (% of total assets) 20 19 17 20 15Profi tability and effi ciency

Return on Assets (RoA) 0.4 0.1 (4.1) (5.5) (12.6)

Return on Equity (RoE) 3.0 0.8 (31.7) (51.9) (116.7)


Non-performing loans (% of total loans)* 8.9 7.7 13.5 23.3 26.7

Non-performing loans (% of total loans)** 37.0 35.0 30.0 28.0 31.0 * National Bank of Ukraine; ** IMF, IFRS-based estimates; *** UAH depreciation vs. EUR 2014: -40.8%, 2015: -26.7%; 2016: -8.7%Source: NBU, RBI/Raiffeisen RESEARCH

Ukraine

state-capital may not per se lead to a decrease of the Russia/foreign own-ership ratio and may not per se sup-port more transparent banking sector structures, as the enforced Sberbank sale in 2016 demonstrated. In 2017, we expect gradual improvements. The banking sector´s financial standing should stabilize, as the major losses were booked between 2014 and 2016. As soon as economy shows a sustainable recovery, lending resora-tion should follow this trend. However, political risks remain the major factor that can again jeopardize these de-velopments and remain hard to pre-dict for the time being. One should also not forget that the external debt position of the country seems unsustainable without ongoing and sizeable IFI support.

Financial analysts: Gunter Deuber, RBI Vienna; Sergeii Drobot (+380 44 5905621), Raiffeisen Bank Aval JSC, Kiev

PrivatBank, 17.6%

Oshadbank, 16.8%

Ukreximbank, 12.8%

Raiffeisen Bank Aval, 4.5%Ukrgazbank, 4.3%

Sberbank, 3.9%

Ukrsibbank, 3.6%

FUIB, 3.6%

Ukrsotsbank, 3.3%

Alfa, 3.1%

Others, 26.6%


% of total assetsSource: NBU, RBI/Raiffeisen RESEARCH


Focus on: Nationalization of Privatbank and outlook on re-privatization

Although Privatbank, the largest bank in Ukraine, was moderately profita-ble (on paper) in the past two years (up until most recent losses), there was enough evidence that a comprehensive restructuring is needed due to struc-tural problems. For example massive related party lending activities, expo-sure concentration in Eastern Ukraine and overall high borrower concentra-tion or substantial involvement in complex offshoring activities. Therefore, sev-eral restructuring plans were drafted in coordination with the National Bank of Ukraine (NBU), including a recapitalization agreement. However, in the course of 2016, Privatbank was increasingly behind schedule regarding the much needed restructuring. Therefore, at the end of December 2016, Privat-bank was wholly nationalized – officially following a request from its owners. The timing of the nationalization fits well into the long-term trends in Ukrain-ian banking. Privatbank did not follow the tightened regulatory requirements, while other important competitors fulfilled these requirements (partly with in-ternational support such as the EBRD). At the same time, it is noteworthy that the nationalization only took place after certain information about the true di-mension of the related party lending and asset quality had been "leaked" to the public. However, there was no alternative available given the systemic role of Privatbank with its 20 mn customers, including nearly 5 mn from the low-income spectrum. It operates around 2,500 branches with approximately 25,000 employees and over 7,500 ATMs in Ukraine. Privatbank is also a key pillar for payments on national and international level. About 50% of all transactions in national payments are settled with the involvement of Privat-bank. The market share for foreign transactions is around 20-30%. Although costly – with estimates for the Privatbank restructuring bill of at least 5-6% of the GDP – the overdue nationalization is an essential step for Ukraine. It fits very well the demands of the IMF and other supporters for more structural re-forming (including the limitation of shadow economy and corruption). That said, the position of the reform-oriented NBU was definitely strengthened by the move, as indicated by a partial relaxation of FX market restrictions follow-

ing the nationalization. Moreover, with the nationalization the overall positive view among external supporters regard-ing the banking sector restructuring remains in place.

From a macroeconomic and political perspective, it is now crucial that the much needed Privatbank restructuring (or par-tial wind-down), which is necessary from a business and regulatory point of view, takes place without elements of "vested interests" games. Today, almost 50% of the Ukrainian banking assets are state-owned (previously 20-25%). This setting, while justifiable in crisis times, bears certain risks given the institutional setting in Ukraine, including a return to related party lending. Therefore, the high degree of state ownership shall not be maintained for an unlimited period of time. How-

ever, a re-privatization is likely to remain an uphill battle and is likely to take years. We see limited appe-tite at larger Western European or non-Russian foreign banks for sub-stantial upscaling in Ukraine, as in-dicated by market exits of West-ern players in recent years (e.g. Commerzbank, Erste, Swedbank, SocGen, UniCredit). The remain-ing foreign banks are mostly fol-lowing narrowly defined business strategies. Recent actions to push out banks with Russian state cap-ital have definitely not supported the appetite among foreign banks to participate in a Privatbank re-privatization. It remains to be seen

37.7

59.5

22.2

26.540.1

14

0

10

20

30

40

50

60

70

80

90

100

2013* 2016*

State-owned banks (excl. Privatbank) Foreign banks Ukrainian private banks

Market shares deposits (%)

* 2013 market share Privatbank (24.4%) allocated to state-owned lenders (around 13 % in 2013), in 2016 market share Privatbank (34.4%) other state-owned lenders (25.1%) Source: NBU, company data, RBI/Raiffeisen RESEARCH

Privatbank: Market share*

* % of total assetsSource: NBU, company data, RBI/Raiffeisen RESEARCH

5

7

9

11

13

15

17

19

21

2004 2008 2010 2012 2014 2016

Privatbank: Client segmentation*

* % of totalSource: company data, RBI/Raiffeisen RESEARCH; data as of Q3 2016

86

21

14

79

0

20

40

60

80

100

Loans DepositsCorporate clients Retail clients

Focus on Ukraine


to what extent Ukrainian authorities would be willing to sell a large systemic bank to a non-bank investor (e.g. a private equity institution). In a more op-timistic scenario (including a longer period of macroeconomic stability and completion of the current IMF cooperation as the current external position of the country is unsustainable without IFI support), we would see a fair chance of a partial re-privatization in four to six years. In Slovenia, it took three to four years to re-privatize nationalized and troubles lenders. In such a case, a re-turn to Ukrainian (partial) ownership is most likely to happen, while a partici-pation of a foreign bank is rather unlikely or would depend on the political set-ting (e.g. as a speculative option a (private) Russian or Chinese credit institu-tion could be willing to enter the Ukrainian market). Moreover, we would ex-pect IFI participation (EBRD, IFC) to be a key aspect of a partial re-privatiza-tion. In this context, it is worth mentioning that with Oschad and Ukreximbank already two more sizeable credit institutions are in state ownership and should also be (partially) privatized. Therefore, there is a buyer’s market (with unfa-vorable conditions for the seller) for banking stakes, while investors could be interested in smaller entities, such as Oschad and Ukreximbank. Hence, a merger of Privatbank with the named entities and re-privatizing a new "na-tional champion" also remains an option. However, such a process would be complex and time consuming. An IPO could remain an option, but a (partial) listing on a foreign exchange would require a lot of restructuring beforehand. Ukrainian equity markets are likely too shallow for such an IPO, at least from a near-term perspective.

All in all, the comprehensive Privatbank restructuring and re-privatization are both economically and politically speaking Herculean tasks. Relevant actors have to prove that they are willing to follow a determined, professional and transparent restructuring – most likely including a partial wind down. It would hardly be possible to engage in any "vested interest" dramas or to mobilize much more state funding for restructuring. Particularly, given the recent nega-tive additional funding need news in February and April 2017 respectively, which are indications, that previous owners have left their problems for the Ukrainian taxpayers. That said, any negative surprises in the Privatbank re-structuring will be hard to sell to the population in Ukraine and to important cooperation partners such as the IMF, World Bank, EU and the EBRD as well.


0

10

20

30

40

50

60

Privatbank Next competitorUsage banking services population (retail banking)Usage banking services companies (corporate banking)

Systemic importance/usage Privatbank (% of total)*

* Data as of Q1 2016 (i.e. well before nationalization)Source: GfK Ukraine, RBI/Raiffeisen RESEARCH

UA: (state-owned) banks operating

Source: company data, RBI/Raiffeisen RESEARCH

-5

10

25

40

55

75

100

125

150

175

200

02 04 06 08 10 12 14 16Banks operatingMarket share state-owned banks (r.h.s.)

Profi tability UA banking sector*

* UAH bn, after tax, full-year 2016 dataSource: NBU, RBI/Raiffeisen RESEARCH

-200

-150

-100

-50

0

50

62 profitablebanks

31 loss-makingbanks

… thereof Privatbank

UA: RoE (%)*

* including Privatbank nationalization in 2016Source: NBU, RBI/Raiffeisen RESEARCH

-140

-120

-100

-80

-60

-40

-20

0

20

00 04 08 12 16

Focus on Ukraine


Belarus

20%

40%

60%

80%

100%


Tota

l loa

ns (%

of G

DP)


Data for 2016, red triangle shows Belarus vs. all other CEE marketsSource: NBB, national sources, RBI/Raiffeisen RESEARCH

Lending on recessionary environment risks

5%

8%

10%

13%

15%

-10%

0%

10%

20%

30%

40%

50%

09 10 11 12 13 14 15 16

Lending growth (% yoy, combined LCY+FCYgrowth)



Source: NBB, RBI/Raiffeisen RESEARCH

In 2016, the Belarusian economy was affected by low commodity prices, slug-gish demand in the Russian market and crude oil undersupplies from Russia. Therefore, the GDP contracted by another 2.6% yoy after a decline of 3.8% yoy in 2015. The recessionary environment took its toll on the banking sector and translated into a negative loan growth of 5% yoy, and a drop of the loans-to-GDP ratio from 43% to 38%. The asset-to-GDP ratio decreased from 72% to 68%. On the demand side, the decline in the loan book was due to elevated interest rates as well as falling household incomes. On the supply side, banks were more cau-tious and applied tougher risk policies due to the deteriorating balance-sheets of companies and growing NPLs. In line with the EFSD (Eurasian Fund for Stabiliza-tion and Development) program the Belarusian authorities continued a gradual phase-out of directed lending and transfer of such activities to a special purpose Development Bank of the Republic of Belarus. In contrast to the decline of 7% yoy in corporate loans – which accounted for 80% of total loans in Belarus – lending to private individuals increased by 4% yoy in 2016. The dollarization of loans remained high at 56% – the ratio increased from 45% in early 2013, as a re-sult of the ongoing BYN devaluation. In retail lending, FX lending to private indi-viduals is prohibited by the National Bank. The NPL ratio has almost doubled in the course of 2016 from 6.8% to 12.8%, according to the revised official data. Part of the NPLs were written off and transferred to a special-purpose Asset Man-agement Agency that was established in July 2016 following IMF’s recommen-dations. The total banking deposits showed a modest 1.4% increase, however, the deposit dollarization is still extremely high at 70% though decreased from 74% a year ago. As a result of the declining lending activity and slight deposit growth, the L/D ratio improved further to 120% from 128% a year ago. The in-terest rates gradually went down in line with declining inflation – the key rate was cut from 25% to 18% in 2016, and further to 14% by mid-April 2017. The average lending rate for BYN loans dropped from 32.2% in January 2016 to 19.1% in January 2017, and 15.8% in March 2017. The decline of the deposit rate was more pronounced – from 26.2% down to 8.1% and 7.1%, accordingly. At the same time, the regulator limited the credit flow into the real economy sec-tor by withdrawing excess BYN liquidity from the banking sector through continu-ous short-term bond offerings and deposits. Despite the sluggish economic devel-

Lending suppressed by deteriorated fundamentals, surge in NPLs Interest rate policies promote de-dollarization; but falling household incomes limit propensity to save State-owned banks still dominating, but several privatizations expected in the near future


Belarus 2012 2013 2014 2015 2016 2017e 2018f



Real GDP (% yoy) 1.7 1.0 1.7 -3.8 -2.6 -0.5 1.5



General budget balance (% of GDP) 0.5 0.2 1.0 1.8 1.5 0.0 0.0




EUR/LCY rate (avg) 1.07 1.18 1.36 1.77 2.20 2.11 2.50



Belarus




growth in % yoy 17.9 6.6 10.8 (7.3) 1.5

in % of GDP 60.9 62.1 61.9 72.5 68.3


growth in % yoy 30.1 11.4 10.1 (14.8) (5.8)

in % of GDP 38.3 40.7 40.4 43.4 38.0


growth in % yoy 33.0 10.1 11.2 (12.8) (7.8)

in % of GDP 30.7 32.3 32.3 35.5 30.4


growth in % yoy 19.6 16.4 6.1 (22.6) 3.3

in % of GDP 7.6 8.5 8.1 7.9 7.6


growth in % yoy 49.7 22.9 11.5 (4.2) (7.7)

in % of GDP 17.4 20.5 20.5 24.8 21.3



growth in % yoy 40.1 3.6 12.9 (2.4) 0.7

in % of GDP 27.4 27.1 27.5 33.9 31.7


growth in % yoy 51.7 13.7 19.4 1.6 (1.8)

in % of GDP 14.8 16.1 17.3 22.2 20.2








Non-performing loans (% of total loans) 5.5 4.5 4.4 6.8 12.8 *** BYR depreciation vs. EUR 2015: -34.3%, 2016: -2%, Source: NBB, RBI/Raiffeisen RESEARCH

opments, the Belarusian banking sec-tor managed to increase its earnings by over 50% in 2016 to EUR 400 mn. Also, the RoE improved from 8.4% in 2015 to 10.8% in 2016.The number of banks operating in the market further decreased from 31 in 2014 to 24 in 2016 due to a num-ber of licenses withdrawals and one bankruptcy case (Delta Bank). In addi-tion, there was a merger of Belarusian Bank of Small Business with the Polish Idea Bank in 2015, and a reorgani-zation of the Home Credit Bank into a non-bank credit institution in July 2016. State-owned banks continue to play a dominant role in the market, controlling almost 67% of total assets in 2016. However, there are some plans for the privatization of two state-owned banks (Belinvestbank and Moscow-Minsk) in 2017, as well as a sale of a minority stake in Belarusbank. Banks with foreign capital reduced their share in total banking assets by 1.5pp to almost 31% in 2016. Within that, 5 banks with Russian-owned capital account for almost a quarter of total banking assets. The Belarusian banking sector remains highly concentrated. The Top 5 banks account for 79.4% of total banking sector’s assets – three of them are state-owned and two banks are funded by Russian parental groups.

Financial analyst: Natalya Chernogorova (+375 17 289 9231), Priorbank JSC, Minsk

Belarusbank, 42.9%

Belagroprombank, 14.8%

BPS-Sberbank, 10.4%

Belinvestbank, 5.9%

Bank Bel (VEB), 5.5%

Belgazprombank, 5.0%

Priorbank (Raiffeisen), 4.3%

Bank VTB Belarus, 2.4%

Moscow-Minsk, 1.4%Minsk Transit Bank, 1.0%

Others, 6.2%


% of total assetsSource: NBB, RBI/Raiffeisen RESEARCH


General regulation update

Measure (Likely) date of implementation, phasing in Description, rationale

Austria

Loan-to-local stable funding ratio (LLSFR), loans to non-banks divided by local stable funding (i.e. deposits from non-banks + sup-ranational funding + capital from third par-ties + total outstanding volume of debt secu-rities with original maturity of one year or more issued to investors outside the group of consolidated companies) should remain below 110% in new business

as of 2012

speed-limit for expansion; LLSFR concept is along the lines of international regulation like the Net Stable Funding Ra-tio (NSFR); currently no constraint for AT banks in the CEE banking business, with transfer of UniCredit CEE assets to Italy this regualtion affects only Erste and RBI

Bank levy

2010/11, based on total assets (excl. deriva-tives), 0.085% of total assets with additional surcharge in order to generate certain nominal amount, had to be paid regardless of profitability, no possibility to net bank levy with contributions to deposit insurance fund constributions; changes to the bank levy in 2016/17: annual bank levy pay-ments shall drop to around EUR 100 mn (down from EUR 500-600 mn) in compensation for a one-off payment of EUR 1.1 bn budget (around 2 times an annual payment under the previous regime, payments could be made in four annual tranches, proceeds shall be used for educational purposes)

ongoing discussions about lowering high taxation by intra-EU standards finally brought some progress

additional capital buffers, Systemic Risk Buf-fer (SRB) and buffer for Other Systemically Important Institutions (O-SII) buffer endorsedby the Austrian Financial Market Stability Board (FMSB) are being phased in in the years to come

SRB buffer at 1% for a broader range of large and mid-sized lenders, O-SII buffer for top Aus-trian CEE banks/banking groups, 0.25% as of Jan 2016, 0.5% as of Jan 2017, 1.0% as of Jan 2018, 2.0% as of Jan 2019; for smaller O-SII requirements are lower (0.125%, 0.25%, 0.5%, 1%)

due to overall size of banking system and concentration in certain geographic areas (clustering risk, incl. high EM style risks in CEE)

Ongoing discussion about tightening of macro-prudential regulation with regards to domestic real estate market/lending; Coun-tercyclical Capital Buffer reminas at a rate of 0%

Austria remains among EU countries that recei-ved an ESRB warning with regards to residental property market overheating in 2016/17; Austri-an authorities introduced additional (borrower-re-lated) tools to limit systemic risks (i.e. sustainabilityrequirements for loan-to-value, debt service-to-income and debt-to-income ratio plus requirement for solid risk management and risk pricing processes in order to avo-id a potential collateral stretch in case of falling realestate prices)

Additional capital buffer, SRB

for Top 3 Austrian (CEE) banks/banking groups, 0.25% as of Jan 2016, 0.5% as of Jan 2017, 1.0% as of Jan 2018, 2.0% as of Jan 2019; for Sberbank Europe flat at 1% from Jan 2018

due to overall size of banking system and concentration in certain geographic areas (clustering risk, incl. high EM style risks in CEE)

Poland

Payments to the Bank Guarantee Fund since 2013

annual payment of 0.167% and an additional safety fee of 0.079% of assets (both set every year); apart from those regular payments additional ones could be requested like in the case of SK BANK at year-end 2015

Additional capital buffers as of 2015/16

Capital Conservation Buffer of 1.25% for all banks (100% in Tier 1 capital) as of Jan 2016; second buffer (75% of that in Tier 1 capital) as of Nov 2015 and applies to 14 banks, ranging from below 1% to 4.39% depending on the size of CHF retail mortgages loans

Bank levy February 2016

0.44% on assets > PLN 4 bn; paid monthly based on asset value at the end of the month (excl. sov. bonds and bills from tax base); due to low income so far taxation rules might be modified (e.g. adding bonds to tax base)

Payments to Debtor Support Fund February 2016

set individually for banks according to mortgage loans va-lue with payments overdue more than 90 days; loan taker may file for support that is given out as an interest free loan (to cover installments and interest up to PLN 1,500; for max. 18 months and due after 2 years)




Czech Republic

Countercyclical Capital Buffer (CCB)

CCB rate shall be set at 0.5% of total risk exposu-re amount pursuant to Article 92(3) of Regulation (EU) No. 575/2013; banks, credit unions and investment firms pursuant to Article 9aj(1) of the Capital Market Undertakings Act shall apply the rate referred calculating the combined buffer re-quirement as from 1 April 2017

CNB assessment is that the economy is currently in an up-ward phase of the financial cycle accompanied by an ea-sing of credit standards with growing systemic risk; hence the need to create a CCB; should the credit growth acce-lerate, credit standards ease further and investor optimism continue to grow, the CNB will be ready to increase the CCB further

Systemic Risk Buffer

Effective from 1 January 2017. Captures Top 5 banks – Different Czech banks have different de-grees of estimated systemic importance, and the systemic capital buffer rates required of banks by the Czech National Bank depend on this degree

Systemic Risk Buffer rates were set for four SIBs on 1 No-vember 2014. As a result of the first regular revision of the set of banks required to maintain the systemic risk buffer, which was conducted in 2016, the buffer was set for five SIBs with ÈSOB,ÈS,KB – 3%; UNIC – 2%, RBCZ – 1%.

CNB recommendation: compliance with LTV limits for new retail loans secured by resi-dential property

recommended that institutions ensure that new retail loans secured by residential property with an LTV between 80-90% do not exceed 15% of the total amount of such loans provided in any given quarter; it is also recom-mended that the LTV of no retail loan secured by residential property exceeds 90% (valid since 1 April 2017)

Other CNB recommendations

assessment of clients’ ability to service loans and withstand increased stress

preventing an easing of credit standards by setting excessive loan terms or non-standard repayment schedules

prudent approach to increasing the outstanding amount of principal when refinancing

Slovakia

Fixed and Illiquid Assets Ratio since December 2014

11 DECREE of NBS as of 27 May 2014 "The value of the fixed and illiquid assets ratio shall not exceed 1", NBS ratio is defined as : (Fixed Assets+Iliquid Assets)/(Selected Items of Liabilities) 1.00

Bank levy since November 2011

base for bank levy is total liabilities reduced by own funds & subordinated debt; revenues are collected in special account which is, however, part of public finances; tax rate was lowered from 0.4% to 0.2% in 2015 and should remain on that level up to 2020.

Countercyclical Capital Buffer (CCB) into force on 1 August 2017

the Bank Board's Decision to increase the CCB rate to 0.5% was based on developments in the domestic credit-to-GDP trend gap , as well as in the indicators of excessive credit growth and leverage.

Hungary

FCY funding adequacy ratio (FFR) & FCY mismatch ratio (FMR) 2016 manage FCY mismatch at the individual bank level in or-

der to strengthen the overall stability of the banking sector

Mortgage adequacy ratio 2017manage maturity mismatch of the banking sector (harmoni-ze long-term asset and liability profile of banks) – improve its overall stability of the banking sector

SIFI capital buffer as of 2017raising risk awareness and robustness of banking sector, buffer size is based on individual bank's percieved risk by MNB

IFRS reporting optional in 2017, obligatory from 2018 harmonize local reporting to international standards

Bank levy 2016-2018

bank levy cuts in 2016 (rate comes down from 0.53% to 0.24% based on 2009 total assets) and in 2017: max rate comes down from 0.53% to 0.21%; further cut is possib-le in 2018: donations for spectacle sports (like football, handball etc.) might decrease by max. 50% the amount of bank levy; MoU was signed (EBRD-Hungarian govern-ment) in order to improve Hungary's international evalu-ation and involve the sector more into stimulating growth

New standards for mortgage loans: MNB will introduce the "Qualified Consumer Friendly Mortgage Loan" notion

effective from June 2017

to increase transparency and service quality, by increa-sing competition to decrease prices. Those loans should fulfill the following criteria: ii.) fixed rates mortgages for 3/5/10 or end of maturity; i.) 3.5% max spread; iii.) max 15 days TTY; iv.) max 2 days TTC.

Lending for Growth Program (NHP) the program introduced in 2013 was terminated in March 2017

scope of the program: i.) to provide lending to SME seg-ment ;ii.) max 2.5% fix rate loans; iii.) max 10 year ma-turity



Transaction tax 2017

a lending stimulus; those banks which generated at least 20% increase in their lending from 2015 to 2017 can de-crease their tax burden by 0.6% of the loan volume incre-ase but max HUF 300 mn and max 80% of the transaction tax amount

Instant transfer effective from July 2019

a new domestic intant payment system will be introduced to stimulat e-commerce: i.) to decrease the dependence on card companies; ii.) to decrease prices by decreasing the number of involved parties in online payments

Romania

"Mortgage walk away" law, allowing bor-rowers to settle their liability by transferring the ownership right over dwellings used as collateral

effective from May 2016

the law aplies to all existing contracts, except those originated under "First Home" program; a ceilling of EUR 250,000 equiv. on the size of the loan at the origina-tion time was set; a debtor could benefit from the provisi-ons of the law only if a judge assesses and establishes the existence of the hardship situation within the loan contract; hardship existence required according to Constitutional Court' rulling from October 2016

Law for the conversion in RON of the household loans in CHF using historical ex-change rates

the law was attempted for introduction and voted in Parliament in Oct 2016; revisited and declared unconstitutional in Feb 2017

the law has not been put in effect; it wad declared uncon-stitutional after being challeged at the Constitutional Court by the government

CRD IV capital buffers

effective as of Jan 2016; Capital Conservation Buffer: gradual phased 0.625%/year during 2016-2019; SII buffer at 1%; Systemic Risk Buffer at 1.0% from 31 March 2016 (temporarly suspen-ded)

Law for private individuals insolvency voted by Parliament; suspended until August 2017

Croatia

"The law on the procedure of extraordinary management in companies with systemic importance for the Republic of Croatia" (a so-called "Lex-Agrokor")

effective since April 2017

the law allows the government taking upon the manage-ment functions in strategically important "systemic com-panies" facing financial problemsputs ; in part related to the indebtedness of such, the law allows to put on halt repayment of all debt of a such a company that is consi-dered of a systemic importance and undergoes a period of restructuring (currently – Agrokor). The law captures the debt issued by all creditors and suppliers, not only by local banks. The period of halting debt repayments may last up to 15 months.

Bulgaria

Law on Deposit Insurance in Banks since 2017

entirely new Law on Deposit Insurance in Banks. Accor-ding to it, the Deposit Insurance Fund (DIF) sets annual premium for each bank, taking into account its risk profile and the amount of guaranteed deposits in the bank for the previous year. The new text of the law expands the scope of insured deposits since some groups of non-guaranteed deposits under the repealed act are dropped. The guaran-teed amount remains at BGN 196,000, however an ex-ception is introduced for certain categories of deposits for which the amount is BGN 250,000. The period in which the DIF is obliged to start paying back insured deposits is significantly shortened from 20 days under the repealed act to 7 days under the new one. The DIF is obliged to car-ry out regular stress tests to the system of deposit insurance as well as to banks when information on problems, which could lead to the activation of the scheme for deposit insu-rance, is presented by the BNB.




Russia

Additional capital & liquidity requirements effective as of Jan 2016 in accordance with Basel III; CCB starting Jan 2016, increasing from 0.625% of RWA to 2.5% of RWA by Jan 2019; CCB foreseen too, but value still held at 0; 10 SIB (incl. foreign lenders RBI, SocGen, UniCredit besides large state-controlled or state-near lenders) selected in July 2015; for SIFIs special capital buffer set at 0.15% increasing to 1% by 2019; short-term liquidity ratio for SIFIs at 70% in 2016, to increase to 100% by 2019

starting from Jan 2016, the values of capital buf-fers are revised predominantly on annual basis and increase from year to year until reaching their target values in 2019

for Top 10 lenders, including the local subsidiaries of the Top 3 Western European banks that were acknowledged as SIFIs, the local SIFI regulation implies tighter capital and liquidity standards compared to the rest of the market; in Russia it has to be seen to what extent de facto influence (beyond the tighter official norms imposed by the new re-gulation) may come along with the SIFI status (e.g. in part that higher capital and liquidity requirements for the lar-gest lenders may also impact profitability readings within this banking sector cohort, etc.); tightened regulation for largest banks boosts de facto responsibility of official sec-tor for those lenders; positive from a systemic perspective as this limits systemic risks

A 20% of capital restrictions on related-par-ty lending (Norm H25 of the CBR); More stringent scale for risk weights for unsecured retail loans.

effective since January 2017 and March 2017 respectively

both measures are in line with the regulator's intention to curb the credit risk buren over banks' capital

Ukraine

SIB regulation and additional capital buffers

Top 3 locally-owned banks (SIBs), Capital Conser-vation Buffers and CCB (applying to all banks); SIB surcharge (1-2%) as of 2020; single-party ex-posure limit (20% of capital) and increased instant liquidity ratio limit (from 20% to 30%) for SIBs as of 2019

measure should increase resilience of the system and lower related party lending exposure significantly

Increased min. capital requirements

higher statutory min. capital requirements; target at UAH 450 mn to be reached until 2018/19, i.e. 3-4 years ahead of previous schedule (currently not fulfilled by a large number of banks)

measure should support banking sector clean-up

A new system for comprehensive banks' assessment is introduced (CAMELSO) effective since December 2016

CAMELSO (NBU's rating rating system) serves to as-sess the financial condition of banks, its ability to meet its payment obligations, sufficiency of capital, quality of management and corporate governance, the transparency of operations and efficiency of internal controls, and risk management. This helps identify shortcomings that could potentially lead to bankruptcy and require tighter control from the banking supervisory authorities

A Law on simplification of procedures for banks' recapitalization and restructuring voted by parliament and signed by the president supports consolidation of banking sector

Amendments regarding protection of inves-tors' rights 1 May 2016

more stringent personal liability of the top management, new requirements to public JSCs (e.g. mandatory listing of shares), new rules for SB members elections, etc.

Belarus

De-dollarization measures introduced: loan loss provisioning requirements to FCY loans tightened; reserve requirements on deposits changed.

2017

should the borrower’s FX proceeds be not sufficient to cover its FX obligations and FX loan repayments, addi-tional loan loss provisioning is to be booked by banks. Banks are set to revise their loan portfolios and comply with the new provisioning requirements stagewise in the course of the following couple of years. Reserve require-ments brought down to 4% on BYN deposits, up to 11% on FCY deposits.



Market players in CEE

Raiffeisen Bank International (RBI)

Major targets in RBI’s transformation program achieved; capitalization improved CEE: stronger performance due to improved fundamentals; business streamlining Structural changes (RBI/RZB merger, geographical optimization) support future growth

With aggregated assets of EUR 80 bn in CEE, Raiffeisen Bank International (RBI) is the third largest Western bank in the region by asset size (closely following Uni-Credit and Erste Bank) and is currently present in 14 CEE markets. Since 2015, RBI has been implementing a comprehensive transformation program for stream-lining and optimizing its business and structure, enhancing capitalization and im-proving the efficiency of its domestic Austrian and CEE operations. As of to-date, RBI has accomplished the overall targets of its transformation program (includ-ing improvement of capital ratios and selective exits from international banking and leasing activities). The targeted CET1 ratio of at least 12%, which was orig-inally planned to be reached by year-end 2017, was already achieved by year-end 2016 when RBI announced a CET1 ratio of 13.6% (fully loaded) and a to-tal CAR of 18.9% (fully loaded). This progress in capitalization performance was supported by overall healthy conditions in CEE banking, improving risk costs and rebounding SEE and EE markets in particular. A favorable macro stance, cou-pled with RBI’s credit risk steering, the streamlining of its CEE loan portfolio and franchise, allowed RBI to boost profits in the region. In 2016, RBI was able to se-lectively grow its lending base and significantly improve its overall asset quality performance. The 2016 pre-tax CEE profits for the group increased by 23% yoy, on progressed performance across the CEE region, but particularly in such coun-tries like Bulgaria, Croatia and Hungary, as well as the turn-around in Ukraine.

At group level, RBI reported an overall consolidated net profit of EUR 574 mn (+32% yoy) in 2016. However, NII deteriorated by 12% yoy, given the still sup-pressed NIM environment and de-risking in the most vulnerable markets. The CEE loan volumes were still subject to focused growth on a number of beneficial mar-kets. For example, RBI saw 14% yoy loan growth in the Czech Republic, in Ro-mania 8% yoy based on enhancing corporate franchise, in Slovakia 5% yoy due to a retail lending boost and 12% yoy in Russia, although largely based on 25% RUB appreciation. At the same time, the optimization and rebalancing of the risk profile on some markets resulted in, for example, a contraction of loan books in Hungary and Croatia. Moreover, the exposure in the US was significantly re-duced and the exit from Asia is nearly completed. Overall, RBI’s Opex declined by 2% yoy in 2016, while provisioning costs saw a notable 40% yoy decline, supported by an improved credit risk profile. The overall NPL ratio declined from 11.9% in 2015 to 9.2% in 2016. In total, RBI sold EUR 1.2 bn of bad loans, which contributed to the improvement of the group’s credit risk profile.

Key business position indicators in CEE

2012 2013 2014 2015 2016


Number of countries of presence in CEE 15 15 15 15 14

Market share in CEE (% of total assets) 3.6% 3.4% 3.5% 3.7% 3.3%

Number of branches in CEE 3,093 3,010 2,850 2,691 2,493Source: company data, calculation by RBI/Raiffeisen RESEARCH

0

20

40

60

2014 2015 2016

Loans Deposits

Loans and deposits in CEE*

* EUR bn, aggregate data of CEE subsidiariesSource: company data, calculation by RBI/Raiffeisen RESEARCH

0%

5%

10%

15%

0%

1%

2%

3%

2012

2013

2014

2015

2016

NPL ratio (r.h.s.)Annual provisioning/gross loans (%)

Asset quality in CEE*

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


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

2012 2013 2014 2015 2016

Assets and Loans

Asset growth (%, yoy) 6.5% -3.7% -3.7% 0.7% 1.9%

Loans/total assets (%) 70% 70% 70% 66% 65%

Retail loans/total loans (%) 50% 52% 51% 53% 54%

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

Growth of customer loans (% yoy) 7.1% -2.8% -4.3% -4.8% 0.4%

Gross non-performing loans (% of total loans) 12.0% 12.3% 12.0% 10.9% 9.1%

Loan loss reserves/gross non-performing loans (%) 67.2% 66.1% 71.7% 76.3% 76.6%Funding

Customer deposits/total assets (%) 64% 65% 65% 70% 73%

Customer loans/customer deposits (%) 108% 109% 108% 95% 89%

Deposit growth (% yoy) 8.7% -3.2% -3.7% 8.7% 6.1%Profi tability

Cost/Income (%) 58% 57% 56% 55% 54%

NII/total assets (%) 3.8% 3.7% 3.9% 3.4% 3.1%

Return on Assets (pre-tax, %) 1.3% 1.4% 0.6% 1.5% 1.8%

Profit before tax (EUR mn) 1,055 1,171 464 1,146 1,413Capitalization - data on the group level**

Total CAR ratio (%) 15.6% 15.9% 15.1% 16.8% 18.9%

CET I ratio (%) 10.7% 10.7% 10.0% 11.5% 13.6%* numbers and ratios in 2016 do not account for remaining residual exposure on Slovenian market** until 2013 Basel 2, 2014, 2015, 2016 Basel 3Source: company data, calculation by RBI/Raiffeisen RESEARCH

On the structural side, the success-ful merger of the RBI CEE franchise with RZB (the merger was entered in the commercial register on 18 March 2017) will support the reduction of complexity and future growth for the entire group. The merger also sup-ports a more active tapping of mar-ket opportunities in CEE banking. All in all, RBI is now better prepared to refocus on expansions in its most at-tractive CEE markets, while growing selectively elsewhere. For 2017, an IPO of RBI’s Polish operation (15% of Raiffeisen Polbank) is on the agenda, while the overall Polish franchise should be actively restructured to-wards a more selective universal banking model with a focus on C/I ratio improvements. This includes a streamlining of the branch network too, i.e. more than 20% out of 299 branches shall be closed by 2018 and up to about a third shall be con-verted to more cost-efficient formats by year-end 2019.

Across the rest of the region and given RBI’s target to achieve a C/I ratio of 50-55% in the medium term, RBI’s network and operational optimization continuous. In the past three years, RBI’s branch network was reduced by about 17%. RBI has no-tably resized its presence in Russia, exited from its Russian car financing operations and sold its Russian pension fund busi-ness and reduced the number of branches to 181 by year-end 2016. In Ukraine, the local entity underwent a major restruc-turing process too. RBI reduced the branch network further by 80 outlets in 2016 (after cutting 93 outlets in 2015) and fo-cused on the least-risky operations.

Financial analysts: Gunter Deuber, Elena Romanova; RBI Vienna


PL, 15%

SK, 14%

RU, 15%

CZ, 15%

RO, 10%

Other, 32%

Regional asset allocation, key markets (%, 2016)

Source: company data; calculation by RBI/Raiffeisen RESEARCH



Erste Group

Unchanged regional footprint; no appetite for signifi cant M&A Cautious outlook on bank revenues, but low risk cost environment should persist Regulatory capital requirement targets exceeded; dividend payout increased

Since exiting Ukraine four 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 had expressed interest in enter-ing the Polish market in the past, it ruled out major M&A activity for the moment. Instead, Erste Group is rather concentrating on bold-on acquisitions like the pur-chase of a consumer loan portfolio and the asset management business of Citi Hungary in 2015 with closing of the transaction in H2 2016. Also, given Erste’s small footprint in Serbia we expect interest in the upcoming privatization of the country’s largest retail bank Komercijalna Banka. Based on Erste’s current capi-tal position such an acquisition should be digestible without a capital increase.

Management sets its current strategic priority in creating a regional digital plat-form based on a unified data backbone across Erste’s regional subsidiaries. George, Erste Group’s new digital front-end, was launched in Austria in 2015 and is to be rolled out in other CEE subsidiaries.

Erste Group’s net profit in 2016 amounted to EUR 1,265 mn after EUR 968 mn in 2015. The improvement was driven by significantly lower risk costs of only 14bp on gross loans, and a EUR 139 mn one-off gain from Erste’s stake in Visa Europe, overall more than compensating the one-off banking tax payment in Aus-tria of EUR 201 mn. The operating result, however, dropped by 8% yoy as rev-enues have been impacted by the low interest rate environment and F&C price pressure, while Opex expanded by 4% yoy.

Overall, Erste expanded its CEE gross loans by 3.2% yoy in EUR-terms mainly attributable to strong volume growth at Ceska sporitelna (8%), and at Sloven-ska sporitelna (9%), which was predominantly driven by mortgages, while gross loans contracted in Romania by 7% yoy due to NPL sales. In Hungary, gross loans remained flat and were supported by the acquired consumer portfolio of Citi as well as the government subsidized mortgages. However, they faced head-winds from early mortgage repayments. Erste’s funding position in CEE remains favorable with a regional L/D ratio of 82%. Asset quality improved with the group’s NPL ratio in CEE dropping from 9.8% in 2015 to 6.3% in 2016 due to lower NPL inflows across all major busi-ness lines and ongoing NPL sales in Croatia, Romania and Hungary.


2012 2013 2014 2015 2016





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* EUR bn, aggregated data of CEE subsidiariesSource: company data, calculation by RBI/Raiffeisen RESEARCH

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9%

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4%

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2012

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NPL ratio (r.h.s.)

Annual provisioning/gross loans (%)





For 2017, Erste’s management again estimates 5% net loan growth with the strongest volume dynamics in the Czech Republic and Slovakia, and further improving trends in Hungary. On the group level, management tar-gets RoE at more than 10%, which, according to our calculations, should translate into a net profit of above EUR 1.1 bn in 2017. Given further NIM pressure from the maturing bond portfolio, increasing price pressure in corporate lending and pricing head-winds on the F&C front, Erste foresees at best flat revenues. Current digital-ization projects and new regulatory standards, such as MiFID II, should cause a1-2% operating cost inflation, while the significant reduction of the Austrian and further drop of the Hungarian bank tax should contribute to a positive swing in other operating result. Risk costs should increase from the very low 2016 level, but should remain at historically low levels of around 30bp.

As of year-end 2016, Erste reported a CET1 ratio of 12.8% on a fully loaded basis (13.4% phased-in) surpassing the CET1 SREP requirement of 10.9% for 2019 by 190bp (excl. pillar 2 guidance). Erste Group issued two tranches of contin-gent convertible AT1 capital of EUR 500 mn each. While the first benchmark issue was priced at a coupon of 8.875% in H1 2015, the second tranche was priced at a coupon of 6.5%. Erste’s management proposed to increase the dividend from EUR 0.50 per share to EUR 1.0 per share for 2016 results indicating a 34% payout ratio.

Financial analyst: Stefan Maxian, Raiffeisen Centrobank

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

2012 2013 2014 2015 2016

Assets and loans

Asset growth (%, yoy) -0.2% -5.4% -5.2% 5.5% 8.0%




Growth of customer loans (% yoy) -1.5% 2.7% -2.7% 3.3% 3.2%


Loan loss reserves/gross non-performing loans (%) 63% 66% 74% 71% 79%Funding



Deposit growth (% yoy) 5.2% -3.5% -1.1% 8.0% 10.1%Profi tability

Cost/income (%) 44% 43% 44% 48% 50%

NII/total assets (%) 3.5% 3.4% 3.3% 3.1% 2.8%


Profit before tax (EUR mn) 784 966 -13 960 1,578Capitalization - data on the group level*

Total CAR ratio (%) 15.5% 16.3% 15.7% 17.2% 18.2%

CET I ratio (%) 11.2% 11.4% 10.6% 12.0% 12.8%* 2011, 2012 Basel 2; 2013 Basel 2.5, 2014, 2015, 2016 Basel 3 fully loadedSource: company data, calculation by RBI/Raiffeisen RESEARCH

CZ, 46%

SK, 17%

RO, 17%

HR, 10%

HU, 8%

RS, 1%





OTP

Increased M&A efforts to increase market share in subscale markets Low risk costs, but continuing NIM pressure Visible turn-around in Russia and Ukraine in 2016

The Hungarian-based OTP did not change the setup of its CEE presence over the past years, but followed its strategy to expand in markets where it still holds a subscale position. The bank closed two smaller acquisitions in 2014/15 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. At the end of 2016, OTP announced the acquisition of a 100% shareholding of Split-ska banka from SocGen Group (the disclosed deal price is EUR 425 mn). OTP Hrvatska is the 8th biggest player on the market with total assets of HRK 15.9 bn (EUR 2.1 bn) and a market share of slightly below 4%. Splitska banka is the 5th biggest player on the Croatian banking market with total assets of EUR 3.6 bn as of 2016 and a market share of around 7%. Splitska banka is a universal bank with gross loans of HRK 18.7 bn (EUR 2.5 bn) with a 55% share in corporate loans and 45% in retail loans.

The reported capitalization of OTP Group with a CET1 ratio of 13.5% (CET1 ra-tio at 15.8% as OTP claims if including 2016 profits) provides room for further RWA expansions. OTP’s management remains committed to increase its market share to more than 10% in markets where it currently has less than that, how-ever, excluding Russia. Therefore, the bank is eying acquisition targets in Bela-rus, Bulgaria, Romania, Serbia, Slovakia, Ukraine and also Russia although here a 10% market share is not realistic. OTP made a binding bid for NBG’s Banca Româneascã and is also said to be interested in NBG’s Serbian Vojvoðanska banka. We also assume interest in the upcoming privatization of Komercialna banka in Serbia, while the bank was outbid by KBC for United Bulgarian Bank, which was sold by NBG in late 2016. The management does not seek to acquire a bank in Poland, but may attempt to enter the market via an internet bank. While a Hungarian bank is not on the shopping list, OTP does not exclude to acquire loan portfolios similar to the asset deal with AXA closed in 2016. In this deal OTP acquired AXA Hungary’s retail portfolio mainly consisting of mortgage loans thus expanding its mortgage footprint in Hungary by around 20%.

Adjusted for FX effects, OTP’s gross loan volume was up 3% yoy in 2016, com-pared to a 5% decline in 2015. The increase was to a large extent driven by Hungarian operations due to the acquisition of the AXA portfolio in Hungary and the dynamic development of corporate loans (+12% yoy) in 2016. In Bulgaria, OTP’s second largest market, loan volumes were flat impacted by an erosion of mortgage volumes (-7% yoy), while corporate loans showed a dynamic growth of


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NPL ratio (r.h.s.)






9% yoy. In Russia, where OTP focuses on consumer lending volumes bot-tomed out at 3% yoy, while its Ukrain-ian subsidiary reported a decline in loan volume on an FX adjusted basis.

OTP group’s 2016 net profit stood at HUF 202 bn (EUR 0.65 bn) deliver-ing a RoE of 15%. Results have been impacted by a significant drop in risk costs from 315bp to 112bp, a reduc-tion in Hungarian bank tax burden and a one-off gain from selling OTP’S stake in VISA Europe. Bank revenues were slightly eroding by 2% yoy and were impacted by a continuing down-ward trend in NII given low reinvest-ment yields in some core countries and increasing pressure on lending margins. Current initiatives by MNB, to introduce a "certification" for banks that commit to a cap in mortgage margins for new mortgages, might trigger further pressure on NIM.

OTP’s management restated its 2017 RoE target of above 15%, which is based on a theoretic 12.5% CET1 ratio. Accord-ing to our calculation, this implies a bottom-line of above HUF 190 bn (EUR 0.6 bn). Performing loan volume growth is ex-pected to accelerate further (without M&A effects), but to remain single digit. NIM is forecasted to drop further by around 15-20bp, but credit quality trends should remain favorable with total risk costs expected below 2016. Opex are guided to increase by 3-4% fuelled by wage inflation and costs for the digital transformation.

Financial analyst: Stefan Maxian, Raiffeisen Centrobank


2012 2013 2014 2015 2016

Assets and loans

Asset growth (%, yoy) 4.1% -0.2% 0.6% -3.1% 7.2%









Deposit growth (% yoy) 10.5% 2.9% 5.3% 4.0% 9.3%Profi tability

Cost/income (%) 46% 48% 50% 50% 53%

NII/total assets (%) 6.1% 5.8% 5.3% 4.8% 4.4%


Profit before tax (EUR mn) 685 613 455 496 796Capitalization - data on the group level**

Total CAR ratio (%)* 19.7% 19.7% 17.5% 16.2% 16.0%

CET I ratio (%)* 16.5% 17.4% 14.1% 13.3% 13.5%* as reported by OTP the ratio does not include FY 2016 profits** 2011, 2012 Basel 2, 2013-2015 Basel 3Source: company data, calculation by RBI/Raiffeisen RESEARCH

HU*; 62%

BG; 15%

HR; 5%

RO; 5%

RU; 5%

Other; 9%


* HU inlcuding MerkantilSource: company data; calculation by RBI/Raiffeisen RESEARCH



UniCredit

UniCredit’s CEE business saw broad-based re-shuffl ement of governance and presence CEE performance robust on selective loan growth and effi ciency gains CEE asset quality improved albeit NPL ratio remained at 10% level

UniCredit’s CEE operations that accounted to some 11% of the bank's total as-sets by year-end 2016 (2015: 15%), underwent a broad-based transformation in 2016, along with the strategic changes on the group level. One of the main changes within that transformation related to the positioning and business gov-ernance of the group’s CEE division. At year-end 2016, the group’s CEE busi-ness, which used to be governed by UniCredit Bank Austria, was transferred un-der the group’s direct management in its Italian headquarters. According to Uni-Credit the move aimed not only to streamline the governance and optimize cap-ital allocation towards the CEE region, it also targeted greater emphasis on fu-ture organic growth in CEE. Also, the goal was to enhance efficiency, particu-larly, by introducing innovative approaches and digitalization into the group’s CEE business. At the same time, UniCredit implemented a strategic revision of its CEE presence which was in frame with the group’s general business mix optimi-zation. One result of this optimization process was the exit from the Polish bank-ing market at year-end 2016. The sale of Pekao in Q4 2016 was a quite notice-able move, since UniCredit’s Polish subsidiary has accounted for about 30% of the total group’s CEE business with about EUR 38 bn of assets as of Q3 2016. Hence, UniCredit’s total CEE assets declined to EUR 93 bn as of year-end 2016 compared to EUR 127 bn a year prior.

The second significant action within the transformation process was the balance sheet clean-up by UniCredit SpA. Predominantly, this clean-up concerned the Ital-ian NPL portfolio, but the CEE business was also affected. The group created a total of EUR 8.1 bn in additional provisions in 2016, which was the main rea-son for the recorded loss of more than EUR 11 bn in 2016. At the same time, the group also managed to implement significant NPL reductions that summed up to EUR 18 bn at the group level. In CEE, UniCredit’s balance sheet clean-up started later in the year, and a few actions have already been implemented in spring 2017. The NPL portfolio sales took place in Bulgaria, Hungary, Slovenia and Tur-key, for example, and for these countries approached EUR 500 mn in total value.

Finally, UniCredit managed to strengthen its capital base by issuing additional equity of EUR 13 bn in spring 2017, in order to achieve a CET1 ratio of 12.5% (fully loaded) following the fully subscribed capital increase. Given these strate-gic transformation steps, UniCredit aims to reach net income of EUR 4.7 bn in 2019 of which we assume CEE business can and should deliver its part. Based on the 2016 results the group has managed to achieve a performance improve-


2012 2013 2014 2015 2016**




Number of branches in CEE* 2,658 2,566 2,454 2,278 1,950* branches number from Poland is accounted for; since UA branches were still included by the group reporting in 2015Source: company data, calculation by RBI/Raiffeisen RESEARCH

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4%

8%

12%

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NPL ratio (r.h.s.)



* NPL ratio as reported by UniCredit Group (CEE+PL numbers) until 2016; provisioning ratio aggregated data of CEE subsidiariesSource: company data; calculation by RBI/Raiffeisen RESEARCH



2012 2013 2014 2015 2016*

Assets and Loans*

Asset growth (%, yoy) 9.1% -0.6% 2.5% 3.1% -26.6%


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 of customer loans (% yoy) 4.3% 1.3% -0.3% 1.9% -32.8%


Loan loss reserves/gross non-performing loans (%) 52% 57% 59% 63% 68%Funding*



Deposit growth (% yoy) 11.6% 0.5% 3.4% 5.8% -31.4%Profi tability**

Cost/Income (%) 46% 44% 42% 41% 40%

NII/total assets (%) 2.9% 2.9% 2.8% 2.6% 2.5%


Profit before tax (EUR mn) 2,080 1,834 1,952 1,706 1,853

Capitalization - data on the group level***

Total CAR ratio (%) 14.5% 13.6% 13.6% 14.2% 11.7%

CET I ratio (%) 10.8% 9.6% 10.4% 10.6% 8.1%* accounting for Polish subsidiary sell-out in 2016** proceeds from running PL business accounted for 9m 2016, ratio’s base adjusted accordingly for assets including 9m standing in PL unit*** 2013 Basel 2.5; 2014 onwards Basel 3 fully loaded; end-2016 capitalization ratios before additional equity issuanceSource: company data, calculation by RBI/Raiffeisen RESEARCH


ment in the region backed by more sanguine fundamentals, a network op-timization, and lowered provisioning costs.

In CEE (excluding Poland), UniCredit has expanded 5-6% yoy on aggre-gate in assets and loans in 2016. The group’s fastest growing lending mar-kets were the unit of the Czech Repub-lic and Slovakia (10% yoy), Romania and Hungary (8% yoy each), Bulgaria (6% yoy) and Serbia (9% yoy). At the same time, the group’s loan stock saw a contraction of 4% yoy in Russia, but that could be largely due to the impact of the RUB appreciation; and Croatia with a decline of 4 % yoy. The total pre-tax profit in CEE surged to almost 30% yoy, and reached EUR 1.7 bn in 2016. A certain improvement was recorded in the group’s asset quality, as the aggregated CEE NPL ratio (excluding Poland) de-clined from 11.3% in 2015 to 9.8% in 2016.We expect the CEE NPL ratio to go further down in 2017, partly due to the reduction of the NPL stock following the recent sale of NPL portfolios in several CEE markets.

The group has also optimized its CEE network over the past few years, and has finally reached CEE C/I ratio at 40% in 2016 by our estimates, compared to 46-47% three years ago (Polish results are included for consistency here). The recent restructuring of UniCredit’s CEE network undertaken within 2014-2016 resulted in a contraction of its branch network by about 10% (excluding Poland). When taking the group’s exit from Poland into account, the branch network even declined by some 28%.


CZ+SK, 24%

RU, 20%

HR, 18%

BG, 11%

HU*, 9%

Other, 17%


* HU assets data as of 30 June 2016Source: company data; calculation by RBI/Raiffeisen RESEARCH



Sóciété Générale (SocGen)

SocGen sold its Croatian subsidiary to OTP Weaker earnings but strong loan growth in the Czech Republic Management accomplished further cuts of risk costs in Romania

Following several years with substantial CEE presence, SocGen decided to sell its Croatian subsidiary Splitska Banka to Hungarian OTP in 2016. With that stra-tegic decision, SocGen gave up on approximately 7% of the market share, and a TOP 10 ranking in Croatia. As in previous years, the most important markets for SocGen are still the Czech Republic, Russia and Romania. Bulgarian and Ser-bian operations are seen as "second tier subsidiaries" while the other markets are of insignificant importance to the group.

In the Czech Republic, Komerèní banka reported a solid 7% net profit growth in 2016, however, at the somewhat subordinated earnings quality, as the recur-ring bottom-line contracted by 7% yoy. The lion’s share came from the one-off gain from the VISA transaction, while the sound cost discipline contributed to a somewhat fewer extent. Both items could neutralize ongoing pressure on NIM by 8-10bp, as a consequence of low rate environment, weak F&CI as well as a vis-ible increase of the risk costs. Komerèní banka demonstrated more than healthy loan growth of 9% yoy fuelled by another double-digit expansion of 12% of mort-gages, as well as a strong consumer loan uptick by 8% yoy. Risk provisioning was negatively affected by a few corporate cases with risk costs appreciating from 21 bp to 35bp. The bank managed to maintain its excellent capitalization and its funding profile. However, it is worth mentioning that the new dividend policy is assuming 60% pay-outs versus ~90% in previous years. With regards to 2017, the management forecasts a mid single-digit loan growth. The low inter-est rate environment will continue to pressure NII/NIM in a similar magnitude as in 2016, while on the F&CI front there is some room for recovery. Overall, Soc-Gen’s management estimates stable recurring profit for 2017.

In Romania, the recovery in profitability continued in 2016. The net profit reached RON 758 mn – an increase of 63% yoy. The main positive contribution came from the continued decline in CoR, which was down by 57bp to 151bp, despite incurring general provisions for the walkaway law (RON 90 mn). How-ever, this negative one-off was more than mitigated by the gain from VISA. NIM also showed signs of revival, as it reached 328bp in Q4 2016, a surge of 10 bp versus year-end 2015. All in all, RoE climbed towards 12% in 2016, closer to a recurrent level in our view.


2012 2013 2014 2015* 2016*




Number of branches in CEE** 3,096 2,875 2,855 2,676 2,574* numbers are missing for ME, MK, AL, these countries are excluded for estimations; data on 2015/16 now include reported values for HR; PL data in 2016 are taken from the latest available results presentation of the PL subsidiary** number of branches for 2015 and previous years recalcualted, adjusted by values missing from the previous calculations; MK, ME, AL not available in 2016, latest available takenSource: company data, calculation by RBI/Raiffeisen RESEARCH

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Loans Deposits


* EUR bn, aggregate data of CEE subsidiaries; 2015/16 numbers are missing for ME, MK, AL; these countries are excluded in the 2015/16 calculationsSource: company data, calculation by RBI/Raiffeisen RESEARCH

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2012

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NPL ratio (r.h.s.)



* aggregate data of CEE subsidiaries; NPL numbers are not available for MK, ME, AL; 2015/16 numbers are not available for ME, MK, AL; calcutlation are adjusted for missing dataSource: company data; calculation by RBI/Raiffeisen RESEARCH



For 2017, we expect consumer and housing loans to remain buoyant sup-ported by the growth in salaries while the SMEs portfolio is expected to re-sume growth. Given our expectations for an upward trend in RON interest rates, we could see an improvement in NIM for 2017. We expect no fur-ther pressure on CoR coming from the regulatory side. Moreover, we might see some reversals of general provi-sions for the walkaway law as soon as in Q1 2017, which might provide some upside to our current net profit estimate of RON 784 mn for the full year.SocGen Russia comprises of Ros-bank (consumer finance), Delta Credit (mortgage lender) and Rusfinance (car loans unit). Out of total EUR 84 bn loan exposure of SocGen to international mar-kets, Russia’s portion takes 11%, compared to the Czech Republic (25%) and Romania (8%). In the breakdown of the Rus-sian EAD worth EUR 15.7 bn large corporates take 27%, while retail accounts for 36% (o/w mortgages highest share of 51%). SocGen’s management highlighted the good momentum on the corporate, mortgage and car loans segments. Ros-bank’s profitability turned positive in 2016 with EUR 8 mn compared to the loss of EUR -156 mn in 2015, performing "much better" than initially expected. The main reason behind this recovery was the sharp decline of risk costs (-42% yoy), strict cost control, and a solid revenue growth of 8% yoy (all metrics when using constant exchange rate EUR/RUB). SocGen is making a "huge effort" in terms of cost cutting and the improvement of the asset quality of its Russian business, and hence sees a positive environment for the years to come. That said, the French parent plans to allocate additional capital for or-ganic growth in Russia, however, it is not considering any acquisitions.

Financial analyst: Jovan Sikimic, Raiffeisen Centrobank


2012 2013 2014 2015* 2016*

Assets and Loans

Asset growth (%, yoy) 4.6% -0.6% -0.6% -5.7% 4.7%


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


Gross non-performing loans (% of total loans)** 10.8% 12.9% 10.3% 9.9% 7.8%

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



Deposit growth (% yoy) 3.1% 6.2% 1.6% -1.1% 5.6%Profi tability***

Cost/Income (%) 58% 53% 58% 62% 55%

NII/total assets (%) 3.8% 3.7% 3.4% 2.9% 2.9%


Profit before tax (EUR mn) 956 996 893 729 1,146Capitalization - data on the group level****

Total CAR ratio (%) 12.7% 13.4% 14.3% 16.3% 17.9%

CET I ratio (%) 10.7% 10.0% 10.1% 10.9% 11.5%* numbers are missing for ME, MK, AL, these countries are excluded for estimations; data on 2015/16 include reported values for HR; PL data in 2016 are taken from the latest available results presentation of the PL subsidiary** NPL numbers for 2016 and some of the previous years are not available for MK, ME, AL;*** profitability measures 2012 without PL**** 2011/12 Basel 2.5; 2013-2016 Basel 3 fully loadedSource: company data, calculation by RBI/Raiffeisen RESEARCH

CZ, 46%

RU, 18%

RO, 15%

BG, 4%

HR, 5%

Other, 11%

Regional asset allocation, key markets (%, 2016)*

* without MK, ME, AL as numbers are not available for 2015/16Source: company data; calculation by RBI/Raiffeisen RESEARCH



KBC

KBC stays committed to its core markets to increases its market share by M&A Earnings from CEE units improved by 10% yoy in 2016 Continuingly strong loan growth in the Czech Republic, Slovakia and Bulgaria, as well as recovery in Hungary

Belgium-based KBC’s operations encompass four core markets in the CEE region which account for about 22.5% of the group’s outstanding loans (as of year-end 2016, stable yoy). In late 2016, KBC group acquired United Bulgarian bank (UBB) and will, therefore, increase its market share in Bulgaria from current 3% to presumably above 10%. KBC is the leading bank in the Czech Republic and among the Top 5 banks in Hungary and Slovakia. In terms of local size KBC al-locates 15% of its total capital base to the Czech Republic underscoring the high-est importance of that international market for the entire group (total international markets account for 34%). Along with its known bank assurance franchise KBC also runs insurance subsidiaries in CEE, both in the life and the non-life segment, complementing its banking operations. Back in 2015, KBC was rumored to be interested in Sberbank’s unit in Slovakia, and its management announced plans to set up a mortgage bank in Hungary. After the acquisition of UBB KBC will be-come the largest ban k-insurance group in Bulgaria with a substantial increase in profit contribution to the group. The transaction is expected to be closed in Q2 2017.

In 2016, the aggregated loan growth in CEE amounted to a strong 12% yoy with all subsidiaries including a remarkable recovery in Hungary, managing to repeat the sound growth rate from 2015 (excluding FX effect): the Czech Repub-lic (2016: 9%; 2015: 8%), Hungary (2016: 5%; 2015: -7% ), Slovakia (2016: 12%; 2015:16% ) and Bulgaria (2016: 15%; 2015: 9% ). One of the major drivers for the strong business growth was again the uptick in mortgage lending, particularly visible in the Czech Republic (even better than strong 2015; 2016: 12%; 2015: 9%) and Slovakia (2016: 26%; 2015:15%). CEE deposits per-formed strongly in a similar way as in 2015 growing by 8% yoy enabling KBC to keep its superior funding profile among international banks in the CEE region. The L/D ratio appreciated fractionally from 78% to 82%.

On the asset quality front, 2016 was another good year for KBC as the aggre-gated segmental CEE NPL ratio dropped by 90bp to 3.5% as of year-end 2016. Being perceived as low-risk markets the Czech Republic and Slovakia performed diversely. While the Czech Republic reduced its NPL ratio by 60bp to 3.0%, Slo-vakia slightly increased its NPL ratio by 40bp to 3.2%. KBC’s subsidiary in Hun-gary reported a further decrease of its NPL ratio from 13.3% to 12.5%. The Bul-garian subsidiary stood out, similarly to 2015, with a clear progress and a de-cline in NPLs down to about 16% from 21% at year-end 2015. As a result, after


2012 2013 2014 2015* 2016*




Number of branches in CEE* 777 771 761 760 723* 2015 data restated in 2016 reportingSource: company data, calculation by RBI/Raiffeisen RESEARCH

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2012

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*

2016

*

NPL ratio (r.h.s.)



* aggregate data of CEE subsidiaries; NPL numbers taken from credit risk section, including all payment credit, guarantee credit, standby credit and credit deriv-atives, granted by KBC to private persons, companies, governments and banksSource: company data; calculation by RBI/Raiffeisen RESEARCH


an already good momentum in 2014 and 2015, cost of risk for KBC’s un-derlying CEE exposure has contin-ued to erode significantly in 2016. This was mainly due to net releases in Hungary (12bp in 2015), and im-provements in Bulgaria down to 32bp compared to 131bp in 2015. KBC’s Czech subsidiary managed to push down the cost of risk to 11bp (-7bp yoy) and its Slovakian subsidiary to 24bp (-8bp yoy).

In 2016, the aggregated CEE busi-ness units profit after tax was decent, rising 10% yoy to EUR 840 mn with balanced contributions to the growth coming from non-Czech units and its Czech subsidiary. Despite the low interest rates in the Czech Republic, KBC managed to defend the local NIM at the prior’s year level of 3.0%. On the contrary, the level of F&CI has marginally declined com-pared to 2015 and was neutralized by lowering expenses (mainly in administrative expenses area) and the aforementioned declining of the cost of risk.

Financial analyst: Jovan Sikimic, Raiffeisen Centrobank


2012 2013 2014 2015* 2016*

Assets and Loans

Asset growth (%, yoy) -22.8% 1.8% -8.0% 9.9% 12.9%

Loans/total assets (%) 54.8% 47.7% 53.6% 53.1% 53.0%

Retail loans/total loans (%)* 62.1% 62.5% 60.1% 62.4% 60.5%

Corporate loans/total loans (%)* 37.9% 37.5% 39.9% 37.6% 39.5%Credit risk

Growth of customer loans (% yoy) -23.4% -11.3% 3.4% 8.8% 12.8%

Gross non-performing loans (% of total loans)* 5% 5% 5% 5% 3%

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



Deposit growth (% yoy) -10.1% -11.6% -0.4% 7.1% 8.3%Profi tability

Cost/Income (%) 56% 56% 62% 55% 53%

NII/total assets (%) 2.6% 2.8% 2.8% 2.7% 2.5%


Profit before tax (EUR mn) 844 826 631 945 1,046 Capitalization - data on the group level

Total CAR ratio (%)** 15.8% 17.8% 18.3% 19.0% 20.0%

CET I ratio (%)** 11.7% 12.8% 14.3% 14.9% 15.8%* 2015 data restated in 2016 reporting** fully loaded for 2013-16Source: company data, calculation by RBI/Raiffeisen RESEARCH


CZ, 69%

BG, 3%

HU, 16%

SK, 13%




Intesa Sanpaolo

CEE exposure saw a moderate growth in 2016 CEE profi tability surging, more countries turning profi table Asset optimization measures result in reduced overall credit risk

In 2016, CEE exposure stayed at around 6% of total assets, 7% of loan book and 8% of operating revenues for Intesa Sanpaolo Group. The banking group is one of the leading groups in Italy with about 17% market share in loans, to-tal assets of EUR 725 bn and customer loans of EUR 365 bn. Even though its CEE performance has only a moderate share in the group’s total assets, Intesa Sanpaolo stays a notable player in the region. It takes about 18-20% of market share in assets in Croatia and Slovakia, ranks among the Top 3 in Serbia and Albania, and among the Top 10 in Hungary, Bosnia and Herzegovina and Slo-venia. In addition to its footprint in CEE, the group’s geographical diversification includes the Middle East and Africa. Currently, Intesa is reporting results for nine CEE countries of presence: Hungary, Slovakia, Slovenia, Croatia, Serbia, Bos-nia, Albania, Romania and Russia. A bank in Ukraine (Pravex bank) although still under Intesa’s ownership, has been excluded from the group’s financial re-porting. The group intended to sell its Ukrainian unit in 2014/15, but then af-ter the deal had lacked a regulatory approval the business was technically trans-ferred to a "Capital Light Bank" – Intesa’s special vehicle in charge of non-core assets, non-performing assets and the sale of non-strategic investments. Since 2014, the branch network in Ukraine has been reduced to 95 units as of year-end 2016. Among the countries of reporting the largest CEE exposures are in Slovakia (EUR 14 bn in assets) and Croatia (EUR 10 bn) – both countries saw a growth in assets in 2016 of 10% yoy and 5% yoy respectively. The Serbian sub-sidiary posted a 12% yoy asset growth, with a more moderate market presence of EUR 4.6 bn in assets. The balance sheet developments of Intesa’s remaining CEE units stayed broadly even with just one notable exemption of loan book con-traction in Russia. Here, the group has incurred rather high risk costs in previous years and, therefore, presumably implemented a significant portfolio cleanup. This assumption is backed by the fact that the group’s provisioning costs in Rus-sia returned to a rather moderate level of EUR 13 mn in 2016 following the spike to EUR 75 mn in 2015. That, as well as Opex reductions, have allowed Intesa to turn profitable on the Russian market in 2016 – a distinguished feature for In-tesa in 2016 in general – its profitability on several CEE markets showed an up-swing. By and large, however, this has been attributed to the two extraordinary non-core patterns – a strong recovery of provisioning costs in CE/SEE and Rus-sia, as well as one-of revenue fall coming from sales of ISP Card and equity in Visa Europe. All in all, along with posting a 7% increase in its total CEE asset vol-



2012 2013 2014* 2015** 2016

Total assets (EUR mn)* 39,500 38,000 37,200 37,400 40,000



Number of branches in CEE*** 1,320 1,268 1,204 913 895* pravex-Bank is included in discontinued operations following the sale agreement signed in January 2014** excluding the Ukrainian subsidiary Pravex-Bank; balance sheet figures for HU incorporate the Hungarian "bad bank" which is included in the Capital Light Bank*** branches in UA not included in 2016Source: company data, calculation by RBI/Raiffeisen RESEARCH

0

5

10

15

20

25

30

35

2014* 2015** 2016

Loans Deposits


* EUR bn, aggregated data of CEE subsidiaries; 2015 balance sheet figures for HU incorporate the Hungarian "bad bank"Source: company data; calculation by RBI/Raiffeisen RESEARCH

0%

2%

4%

6%

8%

10%

0%

1%

2%

3%

4%

5%

2012

2013

2014

*

2015

**

2016

NPL ratio (r.h.s.)



* aggregate data of CEE subsidiaries; NPL ratio includ-ing past-due, restructured, sub-standard and doubtful loans; balance sheet figures for HU incorporate the Hun-garian "bad bank"Source: company data; calculation by RBI/Raiffeisen RESEARCH


ume in 2016 the pre-tax profits of the group have more than doubled and reached EUR 544 mn in 2016. The subsidiaries in Hungary, Russia and Romanian turned profitable from be-ing loss-making in 2015. Intesa’s Cro-atian unit saw a boost too with the net profit surging from EUR 36 mn in 2015 to EUR 198 mn in 2016. In Slo-vakia, the net result deteriorated a tad by 4% yoy in 2016 to EUR 157 mn.

The asset quality issues, which are still pending on the group’s level due to the Italian exposures, saw a notable improvement in Intesa’s CEE division in 2016. Overall and based on the re-porting, we see Intesa’s NPL level attributable to CEE subsidiaries as going down from the peak levels of 9% in 2013/14 to rather comfortable 5-6% by the year-end 2016. The two main drivers for this were the rather sanguine asset quality sus-tainable in Slovakia (NPL ratio levels at 3%), and significant reduction of the impaired loans in Croatia, Hungary and Ro-mania. Only in Russia the NPL levels showed an upwards trend and hit the 10% level in 2016. Still, given the compara-tively low weight of Russian business in the group’s total CEE portfolio this increase resulted in an only marginal impact on the overall asset quality of the group in CEE.




2012 2013 2014* 2015** 2016

Assets and Loans

Asset growth (%, yoy) -2.7% -3.8% -2.1% 0.5% 7.0%


Retail loans/total loans (%)*** 47% 48% 49% 50% 51%

Corporate loans/total loans (%)*** 53% 52% 51% 51% 49%Credit risk

Growth of customer loans (% yoy) -3.9% -5.9% -4.3% -0.8% 6.3%

Gross non-performing loans (% of total loans)**** 9.7% 9.5% 8.3% 6.8% 4.6%

Loan loss reserves/gross non-performing loans (%)**** 58% 62% 64% 66% 65%Funding



Deposit growth (% yoy) 2.2% -1.1% 0.0% 4.4% 7.4%Profi tability

Cost/Income (%) 52% 52% 52% 48% 48%

NII/total assets (%) 3.5% 3.4% 3.2% 3.2% 2.9%

Return on Assets (pre-tax, %) -0.2% -0.1% 0.9% 1.1% 1.9%

Profit before tax (EUR mn) -93 -42 351 392 740Capitalization - data on the group level

Total CAR ratio (%) 13.6% 14.8% 17.2% 16.6% 17.0%

CET I ratio (%) 11.2% 11.3% 13.5% 13.1% 12.9%* Pravex-Bank is included in discontinued operations** excluding the Ukrainian subsidiary Pravex-Bank; balance sheet figures for HU incorporate the Hungarian "bad bank" which is included in the Capital Light Bank*** includes only performing loans, not accounting for any impaired loans structure**** including past-due, restructured, sub-standard and doubtful loansSource: company data, calculation by RBI/Raiffeisen RESEARCH

SK, 35%

HR, 25%

HU, 13%

RS, 12%

SI, 6%

Other, 10%

Regional asset allocation, key markets (%, 2016)*

* balance sheet figures for HU incorporate the Hungarian "bad bank"Source: company data; calculation by RBI/Raiffeisen RESEARCH


Sberbank

Consolidated profi t surged due to the stabilization in Russia European business is under optimization, HO stays committed Credit risk remains one of the key challenges

Sberbank, the largest Russian bank with 29% market share in assets and 47% in retail deposits, keeps the lion share of about 84% of its assets domestically. Sberbank operates in nine CEE markets: the Czech Republic, Hungary, Slovenia, Serbia, Bosnia and Herzegovina, Croatia, Belarus, Ukraine, and its home mar-ket Russia. Following the acquisition in 2012, Sberbank holds also a 4% mar-ket share in Turkey via DenizBank where 9% of the group’s assets are allocated.

Excluding Russia, CEE operations make up about 3% of the consolidated assets of the group and are managed through Sberbank Europe AG, a wholly-owned unit based in Vienna. In total, this European sub-holding runs 228 branches with around 4,300 employees.

The ongoing sanctions regime and the increased focus on domestic operations forced the bank to rescale and optimize its CEE business outside Russia. The most visible step in this context was the divestment of its Slovakian subsidiary with to-tal assets of EUR 1.7 bn in July 2016. In spring 2017, Sberbank also decided to exit Ukraine due to the high regulatory pressure on Russian-owned banks. Mean-while, Sberbank keeps searching for a business momentum within its remaining CEE units, which is indicated, inter alia, by new CEO appointments and other changes in its CEE management.

Fundamentally, without opting for direct external funding the bank demonstrated a rather swift recovery from its crisis in 2014, and reported a robust net profit of RUB 541.9 bn (2.4x up yoy in RUB-terms) for 2016. In addition to the general economic stabilization in Russia, the bank’s performance was supported by active funding cost management and good Opex discipline. Also, the group’s foreign business as a whole saw a positive pre-tax result of RUB 48.6 bn (EUR 0.7 bn) compared to a loss of RUB 5.9 bn (EUR 0.1 bn) in 2015.

Sberbank’s NIM saw a return to a pre-2014 range of 5-6%, which outperformed the majority of its Russian peers and was supported by the CBR key rate decrease as well as the bank’s quick pricing adjustment. Sberbank’s funding side highly benefits from its systemic importance status and the historical "safe haven" role during difficult times. By year-end 2016 customer’s funds accounted for 83%



2012 2013 2014 2015 2016





0

50

100

150

200

250

300

350

2014 2015 2016Loans Deposits

Loans and deposits*

* EUR bnSource: company data; calculation by RBI/Raiffeisen RESEARCH

0%

2%

3%

5%

6%

0%

1%

2%

3%

4%

5%

2012

2013

2014

2015

2016

NPL ratio (r.h.s.)*


Asset quality

* overdue 90+ daysSource: company data, calculation by RBI/Raiffeisen RESEARCH



(2014: 67%) of the bank’s non-equity funding sources with about 70% skew to sticky retail accounts.

Despite the reported normalization of risk costs (1.2% in Q4 2016 com-pared to 2.3% in Q4 2015) and non-growing loan portfolio we see the credit risk to remain one of the major challenges for the bank in the short- and medium-term.

The stabilization of overdue 90+ loans at 4.4% in 2016 was signifi-cantly backed by the restructuring of impaired loans: at year-end 2016 the distressed renegotiations reached 6.5% of the gross loan portfolio. Outside Russia the most outspoken case of this kind was perhaps the exposure to the Cro-atian food producer and retailer Agrokor. According to media sources Sberbank is the largest lender to the troubled com-pany with more than EUR 1 bn credit facilities outstanding. On a positive note, the loss-absorption capacity is bolstered by strong banking earnings which allowed the consolidated Tier 1 ratio to rise further to 12.3% in 2016 (Basel I). Sberbank Europe AG also saw a CET1 ratio strengthening to 15.4% in 2016 (year-end 2015: 10.6%), on the back of EUR 370 mn subordinated loans from the parental group that were converted into equity in Q1 2016. The European unit remains under ECB supervision and is subject to additional 1.8% capital buffer, which is gradually phased-in to be fully implemented by January 2019. Hence, the continuing parental support will remain of crucial importance for Sberbank Europe AG.

Financial analyst: Ruslan Gadeev, RBI Vienna


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

2012 2013 2014 2015 2016

Assets and loans

Asset growth yoy, % 44.3% 7.3% -13.7% -0.7% 15.4%

Loans/assets (%) 70% 71% 70% 69% 68%

Retail loans/total loan book (%) 26% 28% 26% 25% 27%

Corporate loans/total loan book (%) 74% 72% 74% 75% 73%Credit risk

Growth of customer loans (% yoy) 36.7% 8.9% -14.2% -2.1% 16.5%

Gross non-performing loans/customer loans (%) 3.2% 2.8% 3.2% 5.0% 4.4%


Customer funds/total assets (%) 76% 74% 67% 79% 83%


Deposit growth yoy, (%) 32.9% 5.4% -19.5% 16.4% 17.3%Profi tability

Cost/income (%) 49% 46% 43% 44% 40%

NIM (%) 6.1% 5.9% 5.6% 4.4% 5.7%

Return on Assets (%) 2.7% 2.2% 1.4% 0.9% 2.1%Capitalization - data on the group level*

Total CAR ratio (%) 13.7% 13.4% 12.1% 12.6% 15.7%

CET I ratio (%) 10.4% 10.6% 8.6% 8.9% 12.3%

* Basel ISource: company data, calculation by RBI/Raiffeisen RESEARCH

RU, 84.1%

TR, 9.1%

Sberbank Europe, 3.2%

KZ, 1.2% BY, 0.4%Others, 2.0%




VTB

European business faces streamlining and consolidation Profi tability metrics recover on one-off non-core items Partial medium-term privatization plans, but state control remains

VTB is Russia’s second largest state-controlled banking group with about 17% market share in assets, which includes commercial banking, leasing, insurance, and investment banking arms. With 26% domestic market share in corporate de-posits the bank is historically biased to corporate clientele, but still intends to ex-pand into retail banking, as the joint venture created with Post Bank of Russia (now called Post Bank) in 2015 showed. About 90% of the group’s assets are in Russia with the remaining 10% being divided between the group’s investment banking unit VTB Capital plc (UK) and its CEE operational arm VTB Bank (Austria) AG sub-holding, and smaller subsidiaries in Central Asia and elsewhere. VTB Bank (Austria) is in charge of VTB’s operations in Germany, Austria and France, and employs about 300 people. The bank also runs a number of small units in neighbouring CIS countries. In Ukraine where VTB like other Russian-owned com-mercial banks now faces a regulatory pressure that may result in its exit from the market. Since the beginning of 2017, the group has initiated its overseas busi-ness restructuring. The subsidiaries in Austria, Germany and France are set for a merger into a single-license entity named VTB Bank (Europe) SE which will be based in Frankfurt. The subsidiaries in Austria and France will be converted into branches. VTB expects about EUR 50 mn per year of cost-saving from the restruc-turing. In Russia, VTB continues its transformation into a single-brand universal bank targeting a legal merger with its retail arm VTB24 by 2018.

On the asset side, VTB saw significant loan book contraction in Q1 2016 of about 6% within the quarter in LCY terms, adjusted to FX rate differences, which later led to a nearly flat loan book dynamics for the entire year. This decline was predominantly caused by sizeable repayments by large borrowers, which assum-ingly used VTB’s loans that were issued as part of the state-funded distressed sys-temic borrowers support during the crisis in 2014/15.

While peaking at 7.2% during the course of 2016 the overdue 90+ ratio re-verted to 6.4% at year-end due to large write-offs mainly in the project finance portfolio and consumer loans. Meanwhile, we think that potential asset quality is-sues may remain in the stock of not yet overdue but impaired loans and non-core assets such as for example VTB’s investment activities across various markets and industries like in real estate, telecommunication or the transport sector.



2012 2013 2014 2015 2016




Number of branches in CEE* 1,707 1,693 1,972 2,119 9,148* the increase in 2016 is a result of the launch of Post Bank, a JV with Post of RussiaSource: company data, calculation by RBI/Raiffeisen RESEARCH

0

20

40

60

80

100

120

140

160

2014 2015 2016Loans Deposits

Loans and deposits*

* EUR bnSource: company data; calculation by RBI/Raiffeisen RESEARCH

0%1%2%3%4%5%6%7%

0%

1%

2%

3%

4%

5%

2012

2013

2014

2015

2016

NPL ratio (r.h.s.)*Annual provisioning/gross loans (%)

Asset quality

* overdue 90+ daysSource: company data, calculation by RBI/Raiffeisen RESEARCH



After an almost break-even profit and loss level in 2015, the group’s re-sults saw an improvement in 2016 al-though it only recorded a single-digit RoE of 3.7%. VTB’s NIM stays be-low its pre-crisis level of 4-5%, which raises concerns over the sustainabil-ity of its core banking income amid the cost of risk recurrently approach-ing the 3% level (incl. off-balance pro-visions though). Essentially, the group remains notably reliant on non-bank-ing and one-off income, which made up close to 70% of overall profits in 2016. Amongst them were for exam-ple the sales of construction and real estate projec ts, as well as a mark-to market re-evaluation of VTB’s investment assets and properties. Given the generally conservative view on further NIM im-provement VTB’s management tends to give more emphasis to the group’s insurance and leasing segments, and continues to focus on retail banking. Due to VTB’s systemic role the bank feels rather secure in corporate and retail deposits. However, VTB experiences higher volatility in government bodies’ funds around the crisis and post-crisis times, as well as a sizeable reliance on CBR-provided facilities (8% of total assets as of year-end 2016).On a positive note, VTB has managed the sanc-tions-related refinancing risk well due to gradual maturing and buy-backs of the outstanding market debt.

After about EUR 5 bn equity injection by the Russian state in 2015, VTB’s Tier 1 ratio (Basel I) has stagnated in a 12-13% range midst almost full distribution of generally modest profits. The governmental support commitment remains, as confirmed by the strategic objective to maintain the controlling shareholding of VTB and despite a probable partial medium-term pri-vatization of the bank.

Following the EUR 200 mn subordinated loan that got converted into equity in 2015, the ECB-supervised VTB Bank (Aus-tria) AG did not require additional support to comply with the regulatory capital requirements in 2016. As an integral part of VTB group, the European units remain fully backed by the parent entity with certain success in self-funding efforts mostly through the online retail deposits collection by VTB’s Direktbank branch in Germany.

Financial analyst: Ruslan Gadeev, RBI Vienna


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

2012 2013 2014 2015 2016

Assets and Loans

Asset growth yoy, % 13.1% 5.2% -13.3% 2.4% 14.7%

Loans/assets (%)* 72% 75% 75% 74% 75%

Retail loans/total loan book (%) 21% 23% 21% 19% 23%

Corporate loans/total loan book (%) 79% 77% 79% 81% 77%Credit risk

Growth of customer loans (% yoy) 15.5% 10.5% -13.8% 1.1% 16.7%

Gross non-performing loans/customer loans (%) 5.4% 4.7% 5.8% 6.3% 6.4%


Customer funds/total assets (%) 55% 55% 51% 60% 66%


Deposit growth yoy, (%) 5.7% 6.1% -19.3% 17.3% 25.7%Profi tability

Cost/Income (%) 52% 49% 46% 54% 46%

NIM (%) 4.6% 4.5% 4.1% 2.6% 3.7%

Return on Assets (%) 1.3% 1.2% 0.0% 0.0% 0.4%Capitalization - data on the group level**

Total CAR ratio (%) 14.4% 14.7% 12.0% 14.3% 14.6%

CET I ratio (%) 10.1% 10.9% 9.8% 12.4% 12.9%* gross loans here and below** Basel ISource: company data, calculation by RBI/Raiffeisen RESEARCH

European sub-holding (VTB

Austria AG); ~4%

RU; ~90%

UK (VTB Capital plc); ~4% Others; ~2%





397.

6

197.

2

92.9

85.7

80.0

74.0

58.4

40.0

39.9

0

50

100

150

200

250

300

350

400

Sber

bank

VTB

Uni

Cre

dit

Erste RB

I

SocG

en*

KBC

Inte

sa**

OTP

B7-CEE: Total assets of international banks, aggregated (EUR bn, 2016)

* 2016 numbers are not available for ME, MK, AL** excluding the Ukrainian subsidiary Pravex-BankSource: company data, RBI/Raiffeisen RESEARCH

0

20

40

60

80

100

120

140

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

UniCredit Erste RBI SocGen* KBC OTP Intesa**

CEE-B7: Development of total assets, aggregated (EUR bn)

* 2016 numbers are missing for ME, MK, AL** excluding the Ukrainian subsidiary Pravex-Bank; balance sheet figures for HU incorporate the Hungarian "bad bank" which is included in the Capital Light BankSource: company data, RBI/Raiffeisen RESEARCH

CEE-B7, Sberbank, VTB: Total assets

CEE-B7 comparative statistics: Roundup of deleveraging; selective

and cautious expansion started taking place

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2004 2006 2009 2011 2012 2013 2014 2015 2016UniCredit** Erste RBI SocGen***KBC OTP Intesa****

CEE-B7: Market share in CEE banking assets*

* trend decreasing market share up until 2012/13 reflects strong growth of Russian market and large Russian banks (a trend that partially reversed in 2014)** UniCredit data account for PL sell-off in 2016 *** 2015/16 numbers are missing for ME, MK, AL**** excluding the Ukrainian subsidiary Pravex-Bank; balance sheet figures for HU incorporate the Hungarian "bad bank" which is included in the Capital Light BankSource: company data, RBI/Raiffeisen RESEARCH

CEE-B7: Market shares in the region pushed down over the past few years on de-risking and business optimization


CEE-B7 comparative statistics: Profi tability improves, backed by effi ciency enhancing measures, lower cost of credit risk

CEE-B7 comparative statistics: Branch networks were notably reduced


-5%

0%

5%

10%

15%

20%

25%

KBC RBI

Uni

Cre

dit*

Erste

SocG

en**

OTP

Inte

sa**

*

2012 2013 2014 2015 2016

CEE-B7: Pre-tax RoE in the region (2012-2016, %)

* Baltics not included; UA not included after 2013** 2016 numbers are not available for ME, MK, AL*** 2016 excl. UASource: company data, calculations by RBI/Raiffeisen RESEARCH

400

800

1,200

1,600

2,000

2,400

2,800

3,200

2004 2006 2009 2011 2012 2013 2014 2015 2016

RBI UniCredit* SocGen** Erste OTP Intesa KBC

CEE-B7: Number of branches over time

* exluding branches in PL in 2016 ** 2016 numbers are missing for ME, MK, ALSource: company data, RBI/Raiffeisen RESEARCH

0%

5%

10%

15%

20%

KBC

Sber

bank

VTB

Inte

sa*

SocG

en**

Uni

Cre

dit

Erste RB

I

OTP

2012 2013 2014 2015 2016

CEE-B7: NPL ratios in CEE (2012-2016)

* including past-due, restructured, sub-standard and doubtful loans ** NPL numbers for 2016 and some of the previous years are not available for ME, MK, MD, AL; estimated NPL ratio in CEE is made with the latest reported NPL values for these countries Source: company data, calculations by RBI/Raiffeisen RESEARCH

CEE-B7 comparative statistics: Credit risk pressure eases remarkably over the past two years


7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

2011 2012 2013 2014 2015 2016

CEE-B7 avg NPL ratio

CEE-B7: Average NPL ratios (2011-2016)*

* including past-due, restructured, sub-standard and doubtful loans CEE-B7: Erste, Intesa, KBC, OTB, RBI, SocGen, UniCredit Source: company data, RBI/Raiffeisen RESEARCH

0.0%

4.0%

8.0%

12.0%

16.0%

2011 2012 2013 2014 2015 2016

CEE-B7 avg RoE

CEE-B7: Average RoE (2011-2016, %)

CEE-B7: Erste, Intesa, KBC, OTB, RBI, SocGen, UniCredit Source: company data, calculations by RBI/Raiffeisen RESEARCH

CEE-B7: A notable progress reached in bad loans settlement

CEE-B7: Returns supported by lower risk costs, improved macro-

fundamentals

300

350

400

450

500

550

600

10,000

11,000

12,000

13,000

14,000

15,000

16,000

2006 2009 2011 2012 2013 2014 2015 2016

CEE-B7 branches CEE-B7 total assets (EUR bn, r.h.s.)

CEE-B7: Assets (total EUR bn) and number of branches

CEE-B7: Erste, Intesa, KBC, OTB, RBI, SocGen, UniCredit Source: company data, RBI/Raiffeisen RESEARCH




CEE: Finalized and ongoing transactions

Country TargetTotal assets

in the country(EUR bn)

Comment

PolandBank Pekao 39.5 Polish insurer PZU and PFR Fund (development fund) aquired a 33% stake from

UniCredit. The transaction should be finalized in Q2 2017.

Raiffeisen Bank Poland 14.5 RBI has announced its intention to list its Polish subsidiary.

Czech Republic / Slovakia

PSA Finance CZ/SK n.a. Banque PSA Finance SA sold 100% stake in both its Slovakian and Czech subsi-diary.

Sberbank 2.0 Sberbank has completed the disposal of its Slovakian subsidiary to Prima Banka (Penta).

Hungary MKB 6.2The Hungarian state has sold a 100% stake for HUF 37 bn to a consortium of private equity funds. The deal had a size of EUR 118 mn and was completed in June 2016.

Romania

Banca Comerciala Carpatica 0.7

Patria Bank (former Nextebank) gained a controlling stake of 64.2% through subscription to a share capital increase and acquisition of shares. However, the merger of the two banks is still pending.

UniCredit (Romania) 6.4 The local businessman Ion Tiriac sold a 45% stake in the bank to UniCredit group. The deal was closed in June 2016.

Bulgaria United Bulgarian Bank n.a. KBC Group acquired 99.9% in the bank for EUR 610 mn in December 2016.

Croatia Splitska Banka 2.1 OTP Bank signed a deal with SocGen to acquire 100% in the bank. The acquisition price amounted to EUR 425 mn which is about 0.9x of the book value.

Serbia Alpha Bank 0.6 In January 2017, MK Group (majority shareholder in AIK Banka) signed the deal with Alpha Bank to acquire the bank.

SloveniaGorenjska Banka 1.5 In January 2016, the bank raised EUR 13 mn fresh capital as Serbian AIK Banka

acquired a stake of 13.9%.

Raiffeisen Bank Slovenia 0.8 RBI has completed the sale of Slovenian subsidiary to Apollo.

Russia

MDM Bank 16 (group)incl. 4 (MDM) The bank's merger with B&N Bank was finalized in 2016.

Orient Express 2.1 The bank was merged with Uniastrum Bank to form a specialized SME lender.

Peresvet Bank 1.7 The first large bail-in in Russia. Russian Regional Development Bank (controlled by Rosneft) was assigned as a turnaround investor.

Tatfondbank 2.9 Licensed revoked.

Vneshprombank 2.5 Licensed revoked.

Ukraine UniCredit Ukraine 1.7

In 2016, ABH Holdings (Luxembourg-based investment holding company, owner of several banks in the EE region, including Alfa-Bank in Russia, Ukraine and Kazakhstan) and UniCredit Group closed the deal to transfer 99.9 % of shares in UniCredit (Ukraine) in exchange for a minority 9.9% stake in ABHH.

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



CEE: Potential takeover candidates

Country TargetTotal assets

in the country(EUR bn)

Comments

Poland

Bank Millennium 15.6 The bank could be a takeover candidate in the mid-term. Portuguese BCP Millen-nium holds 50.1%.

Deutsche Bank Polska ~8.0 During 2016, the bank was rumored to be mulling an exit from Poland.

Getin Noble Bank 15.1 Owned by Leszek Czarnecki, no active rumors, rather long-term takeover target (after the ongoing restructuring has been finalized).

mBank 30.3 mBank could be a speculative long-term target, very much depending on its parent bank's standing.

Hungary

Budapest Bank ~2.9 After acquiring a 100% stake in December 2014 from GE, the Hungarian govern-ment considers to sell the bank.

Sberbank HU ~1.3 Market has been rumoring since early 2015 that Sberbank might be interested in selling its Hungarian assets.

RomaniaBanca Româneascã 1.5 Based on local media reports, National Bank of Greece, its parent, is expected to

try to divest the Romanian subsidiary.

Bancpost 2.5 The subsidiary of the Greek Eurobank might be put up for sale.

Serbia

Eurobank, NBG, Pireus ~2.8 Several Greek banks operating in Serbia could be subjects of sector consolidati-on.

Komercijalna Banka 3.4 Second largest bank in Serbia with EBRD holding of 25% and the Serbian state of 42%. The privatization procedure has been targeted for 2017.

Sberbank RS 0.9 As in some CEE countires, Sberbank is rumored to be interested to exit the Serbi-an market.

Croatia Sberbank HR ~1.4 Market has been speculating for some time that Sberbank mulls an exit from Croatia.

Slovenia

Abanka 3.8 After the merger with Banka Celje, creating the second largest bank in Slovenia, the privatization of the entity is targeted for 2017.

NLB Group 11.8 Slovenia's largest bank and 100% state-owned. According to the latest speculati-ons, up to 50% of shares should be sold through an IPO in H2 2017.

Sberbank 1.8 The bank might start selling procedures for its Slovenian subsidiary.

Russia / EE

Bank BFA 0.8 The bank is to be integrated into Russian Uralsib Bank.

Renaissance Credit 1.5 Reportedly, the bank's owners intend to sell it.

Rosgosstrakh Bank 2.1 Russian media sources name Otkritie Group as a candidate to acquire selective insurance and banking assets of the local insurance market leader Rosgosstrakh.

Sberbank Ukraine 0.2 Sberbank intends to sell its Ukrainian subsidiary to a consortium of investors, which include Norvik Bank (Latvia) and a Belarussian private company.

Sviaz-Bank (RU)Globex Bank (RU)Prominvestbank (UA)

4.3In the course of the assets restructuring, VEB is looking for investors for its commer-cial banking subsidiaries.2.4

1.2

VTB Ukraine 0.8 The bank may consider to exit the Ukrainian market due to the intense regulatory pressure.

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


CEE largest banks: Market presence and network2016

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123

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287

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159

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1,45

255

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1,64

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367

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Sberbank, 1.0% Intesa, 2.7%OTP, 3.3%

Pekao, 5.0%

Commerzbank, 3.7%

Santander, 3.8%

SocGen, 5.1%

RBI, 5.3%

KBC, 7.2%

Erste Group, 7.7%

PKO BP, 8.2%UniCredit, 4.3%

Other, 42.8%

Market shares in CE (in % of total assets, 2016)

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

KBC, 0.6%Sberbank, 1.2%

OTP, 4.1%

Intesa, 7.1%

SocGen, 8.2%

RBI, 9.2%

Erste Group, 10.0%

UniCredit, 16.4%

Other, 43.1%

Market shares in SEE (in % of total assets, 2016)


Intesa, 0.1%OTP, 0.2%

SocGen, 1.1%

Belarusbank, 1.1% RBI, 1.2%

UniCredit, 1.4%

Otkrytie, 3.9%

Gazprombank, 6.0%

VTB, 15.2%

Sberbank, 27.1%

Other, 42.5%

Market shares in EE (in % of total assets, 2016)



Key CEE banking sector data

Total assets (% of GDP)2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poland 64% 69% 71% 86% 84% 82% 85% 85% 86% 89% 89% 92%Hungary 88% 98% 107% 123% 130% 124% 124% 110% 103% 99% 97% 97%Czech Republic 93% 93% 101% 108% 107% 110% 115% 118% 128% 126% 124% 128%Slovakia 97% 87% 88% 90% 92% 83% 81% 79% 80% 81% 83% 88%Slovenia 99% 109% 110% 116% 128% 129% 126% 126% 110% 100% 93% 85%CE 78% 81% 86% 97% 97% 96% 98% 97% 98% 98% 97% 100%Romania 45% 51% 62% 65% 71% 72% 70% 68% 64% 61% 59% 56%Bulgaria 72% 81% 98% 100% 97% 100% 96% 101% 105% 102% 99% 99%Croatia 96% 103% 107% 106% 114% 121% 125% 123% 123% 123% 120% 115%Serbia 44% 54% 61% 67% 76% 80% 88% 88% 81% 85% 85% 83%Bosnia a.H. 69% 72% 85% 81% 83% 82% 82% 84% 86% 88% 87% 88%Albania 61% 71% 77% 77% 77% 80% 86% 90% 94% 91% 91% 94%SEE 58% 65% 75% 77% 83% 85% 84% 84% 82% 80% 79% 77%Russia 45% 52% 61% 68% 76% 73% 75% 79% 87% 109% 103% 93%Ukraine 48% 63% 83% 98% 96% 87% 81% 80% 88% 83% 63% 53%Belarus 32% 37% 43% 49% 61% 78% 95% 61% 62% 62% 72% 68%EE 45% 52% 61% 69% 77% 74% 76% 79% 86% 106% 100% 90%CE/SEE 73% 77% 83% 92% 93% 93% 94% 94% 94% 94% 93% 94%CEE 58% 64% 72% 80% 84% 83% 84% 86% 90% 100% 96% 91%

Non-performing loans (% of total)2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poland 11.0 7.4 5.5 4.7 7.1 7.8 7.5 8.8 8.6 8.1 7.5 7.0Hungary 2.3 2.6 2.3 3.0 5.9 7.8 11.5 13.7 14.1 13.2 10.6 6.4Czech Republic 3.9 3.7 2.6 3.3 5.4 6.5 6.2 6.2 6.1 6.3 6.0 4.9Slovakia 5.0 3.2 2.5 3.2 5.5 6.1 5.7 5.3 5.2 5.4 4.9 4.5Slovenia 2.5 2.5 1.8 4.2 5.8 8.2 11.8 15.2 13.3 11.7 10.0 6.3CE 7.3 5.3 4.0 4.0 6.4 7.4 7.8 8.9 8.7 8.3 7.4 6.2Romania 8.3 8.4 1.7 2.8 7.9 11.9 14.3 18.2 21.9 20.7 13.5 9.6Bulgaria 2.2 2.2 2.0 2.4 6.1 11.9 14.9 16.6 16.9 16.8 20.4 18.3Croatia 6.2 5.2 4.8 7.9 7.8 11.2 14.4 13.9 15.7 17.1 16.6 13.8Serbia 23.8 4.1 11.3 11.3 15.7 16.9 19.0 18.6 21.4 21.5 21.6 19.5Bosnia a.H. 5.3 4.0 3.0 3.1 5.9 11.4 11.8 13.5 15.1 14.2 13.7 11.8Albania 2.3 3.1 3.4 6.6 10.5 14.0 18.8 22.5 23.5 22.8 18.2 18.3SEE 8.4 6.2 3.3 4.5 8.5 12.4 15.0 17.4 20.0 19.5 16.0 12.9Russia 1.4 1.5 1.5 2.5 6.2 5.7 5.0 4.8 4.5 5.2 7.2 7.0Ukraine* 16.6 17.8 7.3 9.9 21.6 26.6 24.8 23.0 21.4 21.8 25.7 28.8Belarus 3.1 2.8 1.9 1.7 4.2 3.6 4.2 5.5 4.5 4.4 6.8 12.8EE 2.4 2.6 1.5 2.5 6.4 5.9 5.3 5.1 4.7 5.7 8.2 8.5CE/SEE 7.0 5.1 3.6 3.8 6.3 7.8 8.6 9.9 10.3 9.9 8.6 7.1CEE 4.8 3.9 2.5 3.2 6.5 7.1 7.3 7.8 7.9 8.2 8.8 8.1

Profi tability (RoE, %)2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poland 20.8 23.1 22.9 23.6 13.3 13.7 14.6 14.3 12.5 12.0 10.4 8.6Hungary 26.6 24.7 20.1 15.2 10.1 2.3 -1.7 -3.8 4.5 -13.2 2.3 13.4Czech Republic 25.2 23.4 25.4 22.7 27.0 22.5 19.8 21.8 18.6 16.8 16.8 17.9Slovakia 17.7 18.7 16.5 14.1 6.5 12.3 14.2 9.1 11.7 10.3 11.1 13.3Slovenia 13.8 15.1 16.3 8.1 3.9 -2.4 -12.7 -19.0 -97.3 -1.9 4.2 10.6CE 21.9 22.6 22.1 20.6 14.6 13.1 12.1 11.3 7.4 8.8 10.4 11.7Romania 12.6 10.4 9.4 17.0 2.9 -1.7 -2.6 -5.9 0.1 -12.5 11.8 10.4Bulgaria 22.1 24.4 23.8 20.5 9.3 6.7 5.8 5.3 5.3 6.9 8.1 10.6Croatia 15.1 12.4 10.9 9.9 6.4 6.5 6.9 4.8 0.8 2.8 -8.8 9.6Serbia 5.6 7.0 8.5 9.3 4.6 5.4 6.0 4.7 -0.4 0.6 5.6 6.9Bosnia a.H. 6.2 8.4 8.6 4.2 0.8 -5.5 5.8 4.9 -1.4 5.2 1.1 7.3Albania 22.2 20.2 20.7 11.4 4.6 7.6 0.8 3.8 6.4 10.5 13.2 7.2SEE 13.6 12.6 12.0 14.9 4.5 1.6 1.4 -0.8 1.1 -4.5 7.2 9.8Russia 23.9 25.3 19.0 13.3 4.9 12.5 17.6 18.2 15.2 7.9 2.3 10.3Ukraine 10.4 13.5 12.7 8.5 -32.5 -10.2 -5.3 3.0 0.8 -31.7 -51.9 -116.7Belarus 6.8 9.6 10.7 9.6 8.9 11.8 14.9 12.7 13.8 13.1 8.4 10.8EE* 21.7 23.1 17.5 12.2 3.8 11.0 15.7 16.5 13.7 6.2 2.9 10.4CE/SEE 19.8 20.1 19.6 19.2 12.1 10.2 9.5 8.3 5.8 5.5 9.6 11.3CEE 20.3 21.1 17.9 15.1 7.4 10.3 12.3 12.2 9.7 5.6 5.9 10.5

* excl. Ukraine in 2015/16 as losses had been dramatic by historical/regional standardsSource: national sources, ECB, Eurostat, RBI/Raiffeisen RESEARCH


Key abbreviations

Geographic regions

CE Central EuropeCEE Central and Eastern EuropeEA Euro areaEE Eastern EuropeSEE Southeastern EuropeWE Western Europe

Basic abbreviations

avg averagebn billionbp basis point(s) eop end of periodmn millionpp percentage point(s)r.h.s. right hand scale (when two scales are used in one chart)vs. versusyoy year on year

Key economic fi gures

CAR Capital adequacy ratioCET1 Common Equity Tier 1C/I ratio Cost income ratioCoR Cost of revenueCT1 ratio Core Tier 1 ratio F&CI Fee & commission incomeGDP Gross domestic productL/D ratio Loan-to-deposit ratioLTV ratio Loan-to-value ratioNPL Non-performing loanNII Net interest income NIM Net interest marginOpex Operating expenditurePPP Purchasing power parityRoA Return on assetsRoE Return on equityRWA Risk-weighted assets

Other abbreviations

BRRD Bank Recovery and Resolution DirectiveCCB Countercyclical Capital Buffer CPI Consumer Price IndexDGS Deposit-Guarantee Dchemes (see MREL)EAD Exposure at DefaultFDI Foreign Direct InvestmentIFRS International Financial Reporting StandardsIPO Initial Public OfferingM&A Mergers and acquisitionsMiFID Markets in Financial Instruments DirectiveMREL Minimum Requirement for Eligible LiabilitiesPOS Point of Sales

Key abbreviations


Key abbreviations

PSD Payment Service DirectiveSME Small and medium sized enterprisesSREP Supervisory Review and Evaluation ProcessTLAC Total Loss Absorbing CapacityWEO IMF World Economic Outlook

Currencies

FCY foreign currencyFX foreign exchangeLCY local currency

BYR Belarusian rubleCHF Swiss francEUR EuroHRK Croatian kunaHUF Hungarian forintRON Romanian leuRUB Russian rubleUAH Ukrainian hryvniaUSD US dollar

Institutions

BIS Bank for International SettlementBNB Bulgarian National Bank CBR Central Bank of RussiaCBBH Central Bank of Bosnia and Herzegovina CNB Czech National Bank | Croatian National BankEBRD European Bank of Reconstruction and Development ECB European Central BankEU European UnionIMF International Monetary FundMFI Monetary Financial InstitutionMNB Magyar Nemzeti Bank (Hungarian National Bank)NBA National Bank of AlbaniaNBP National Bank of PolandNBR National Bank of RomaniaNBS National Bank of Slovakia | National Bank of SerbiaNBU National Bank of UkraineSIB Systemically Important Bank (G-SIB: on a global level)SIFI Systemically Important Financial Institutionwiiw Vienna Institute for International Economic Studies

Sources

Company data includes annual reports, quarterly reports, investor presentations, rating agency dataNational data includes Central bank statistics, other institutions involved in banking sector surveillance, gen-

eral national statistical data, Financial Stability Reports, IMF country data, ECB data

96

Risk notifi cations and explanations

Risk notifi cations and explanations

Warnings

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

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

The return on an investment in a financial instrument, a financial or securities service can rise or fall due to exchange rate fluctuations.

Forecasts of future performance are based purely on estimates and assumptions. Actual future performance may devi-ate from the forecast. Consequently, forecasts are not a reliable indicator for future results and the development of a fi-nancial instrument, a financial index or a securities service.

Any information and recommendations designated as such in this publication which are contributed by analysts from RBI’s subsidiary banks or from Raiffeisen Centrobank ("RCB") are disseminated unaltered under RBI’s responsibility.

A description of the concepts and methods used in the preparation of financial analyses is available under: www.raiffeisenresearch.com/concept_and_methods

Detailed information on sensitivity analyses (procedure for checking the stability of potential assumptions made in the con-text of financial analyses) is available under: www.raiffeisenresearch.com/sensitivity_analysis

Disclosure of circumstances and interests which may jeopardise the objectivity of RBI:www.raiffeisenresearch.com/disclosuresobjectivity

The distribution of all recommendations relating to the 12 months prior to the publications date (column A), as well as the distribution of recommendations in the context of which services of investment fi rms set out in Sections A (investment services and activities) and B (ancillary services) of Annex I of Directive 2014/65/EU of the European Parliament and of the Council ("special services") have been provided in the past 12 months (column B).

Investment recommendation Column ABasis: All recommendations for all fi nancial instruments

(last 12 months)

Column BBasis: Recommendations for fi nancial instruments of all issuers, for which special services were rendered in the last 12 months

Buy recommendations 41.9 % 50.0 %

Hold recommendations 48.7 % 25.0 %

Sell recommendations 9.3 % 25.0 %

Detailed information on recommendations concerning financial instruments or issuers disseminated during a period of 12 month prior to this publication (acc. to Art. 4 (1) i) Commission Delegated Regulation (EU) 2016/958 of 9.3.2016) is available under: https://raiffeisenresearch.com/web/rbi-research-portal/recommendation_history

97

Company Disclosure

Alior None

Banca Transilvania None

Bank Millenium None

BRD (SocGen) None

Erste Group 3

European Investment Bank (EIB) 4

European Bank for Reconstruction and Development (EBRD) 4

Intesa Group None

KBC Group None

Moneta Money Bank None

Company Disclosure

Otkrytie Finanical Corporation 4

OTP None

OTP Group None

Pekao None

PKO None

Sberbank None

Societe Generale None

UniCredit None

VTB None

Disclosure

Disclosure aspects which may jeopardise the objectivity of RBI:

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98

Disclaimer

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Please note that research is done and recommendations are given only in respect of financial instruments which are not affected by the sanctions under EU reg-ulation no 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, as amended from time to time, i.e. fi-nancial instruments which have been issued before 1 August 2014.

We wish to call to your attention that the acquisition of financial instruments with a term exceeding 30 days issued after 31 July 2014 is prohibited under EU regulation no 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, as amended from time to time. No opinion is given with respect to such prohibited financial instruments.

INFORMATION REGARDING THE PRINCIPALITY OF LIECHTENSTEIN: COMMISSION DIRECTIVE 2003/125/EC of 22 December 2003 implementing Direc-tive 2003/6/EC of the European Parliament and of the Council as regards the fair presentation of investment recommendations and the disclosure of conflicts of interest has been incorporated into national law in the Principality of Liechtenstein by the Finanzanalyse-Marktmissbrauchs-Verordnung.

If any term of this Disclaimer is found to be illegal, invalid or unenforceable under any applicable law, such term shall, insofar as it is severable from the re-maining terms, be deemed omitted from this Disclaimer. It shall in no way affect the legality, validity or enforceability of the remaining terms.

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Imprint/Contacts

ImprintInformation requirements pursuant to the Austrian E-Commerce Act

Raiffeisen Bank International AG

Registered Offi ce: Am Stadtpark 9, 1030 Vienna

Postal address: 1010 Vienna, POB 50

Phone: +43 1 71707-0 Fax: + 43 1 71707-1848 E-mail: [email protected]

Company Register Number: FN 122119m at the Commercial Court of Vienna

VAT Identifi cation Number: UID ATU 57531200

Austrian Data Processing Register: Data processing register number (DVR): 4002771

S.W.I.F.T.-Code: RZBA AT WW

Supervisory Authorities: As a credit institution (acc. to § 1 Austrian Banking Act; Bankwesengesetz) Raiffeisen Bank International AG is sub-ject to the supervision of the Austrian Financial Market Authority (FMA, Finanzmarktaufsicht) and the National Bank of Austria (OeNB, Oe-sterreichische Nationalbank). Additionally, RBI is subject to the supervision of the European Central Bank (ECB), which undertakes such su-pervision within the Single Supervisory Mechanism (SSM), which consists of the ECB and the national responsible authorities (Council Re-gulation (EU) No 1024/2013 - SSM Regulation). Unless set out herein explicitly otherwise, references to legal norms refer to norms enac-ted by the Republic of Austria.

Membership: Austrian Federal Economic Chamber, Federal Bank and Insurance Sector, Raiffeisen Association

Statement pursuant to the Austrian Media Act

Publisher and editorial offi ce of this publication: Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna

Media Owner of this publication: Raiffeisen RESEARCH – Verein zur Verbreitung von volkswirtschaftlichen Analysen und Finanzmarktana-lysen, Am Stadtpark 9, A-1030 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-regis-

tered society. Purpose and activity are (inter alia), the distribution of analysis, data, forecasts and reports and similar publications rela-

ted to the Austrian and international economy as well as fi nancial 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 utilizing various methods of analyses covering economics, interest rates and currencies, government and corpo-

rate bonds, equities as well as commodities with a regional focus on the euro area.

Printed by: AV+Astoria Druckzentrum GmbH, Faradaygasse 6, 1030 Vienna Completed: 31 May 2017, 4:18 PM CEST; First dissemination: 8 June 2017, 09:00 AM CEST

100

Contacts for business inquiries

Raiffeisen Bank International AG

CEO: Wilhelm Celeda T: +43 1 51520-402Head of Global Equity Markets: Klaus della Torre T: +43 1 51520-472

Head of Company Research: Bernd Maurer T: +43 1 51520-706Head of Investment Services: Andrea Lerch T: +43 1 51520-411

Raiffeisen CENTROBANK AG

International Desk

CEOSusanne Höllinger T: +43 1 53451-333

Director Private Banking (Austria)Alexander Firon T: +43 1 53451-213

Director Private Banking (RU/EE)William Sinclair T: +43 1 53451-231

Director Private Banking (CE/SEE)Krisztian Slanicz T: +43 1 53451-603

Institutional ClientsHerwig Wolf T: +43 1 53451-261

Kathrein Privatbank AG

Raiffeisen Bank International AGGroup Capital Markets: Nicolaus Hagleitner T: +43 1 71707-1467Group Investment Banking: Matthias Renner T: +43 1 71707-2123

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

AL: Raiffeisen Bank Sh.a.Christian Canacaris T: +355 4 2275519-2629

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

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

BY: Priorbank JSCTresary: Svetlana N. Gulkovich T: +375 17 2899-080Investment Banking: Oleg Leontev T: +375 17 2899-251

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

HR: Raiffeisenbank Austria d.d.Robert Mamic T: +385 1 4695-076

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

KO: Raiffeisen Bank Kosovo J.S.C.Berat Isa T: +38 1 3822 2222-229

PL: Raiffeisen Bank Polska S.A.Miroslaw Winiarczyk T: +48 22 585-3710

RO: Raiffeisen Bank S.A. Aurelian Mihailescu T: +40 213 061-221

RS: Raiffeisen Banka a.d. Capital Markets: Branko Novakovic T: +381 11 2207-131Joko-Lola Tomic T: +381 11 2207-145

RU: AO RaiffeisenbankCapital Markets: Sergey Shchepilov T: +7 495 721-9977Investment Banking: Oleg Gordienko T: +7 495 721-9900

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

UA: Raiffeisen Bank Aval JSCVladimir Kravchenko T: +380 44 49542-20

Markets & Investment Banking

Commercial BanksRaiffeisen Bank International AG, ViennaCorporate Customers: Joseph Eberle T: +43 1 71707-1487Financial Institutions: Axel Summer T: +43 1 71707-1476

RBI London BranchMatthias Renner T: +44 20 7933-8001

RBI Beijing BranchTerence Lee T: +86 10 8531-9007

RBI Singapore BranchKlaus Krombass T: +65 6305-6024

AL: Raiffeisen Bank Sh.a.Jorida Zaimi T: +355 4 2381-445

AT: Raiffeisen Bank International AGRudolf Lercher T: +43 1 71707-3537

BG: Raiffeisenbank (Bulgaria) EADIrena Krentcheva T: +359 2 9198-5826

BH: Raiffeisen Bank d.d. Bosna i HercegovinaVildana Sijamhodzic T: +387 33 287-283

BY: Priorbank JSCNatalya Selickaya T: +375 172 899-355

CZ: Raiffeisenbank a.s.Roman Lagler T: +420 234 40-1728

HR: Raiffeisenbank Austria d.d.Wolfgang Woehry T: +385 1 4566-462

HU: Raiffeisen Bank Zrt.Gaspar Tiszai T: +36 1 484-4421

KO: Raiffeisen Bank Kosovo J.S.C.Valerija Mustafa T: +38 1 38 222 222-413

PL: Raiffeisen Bank Polska S.A.Krzysztof Lubkiewicz T: +48 22 347-7155

RO: Raiffeisen Bank S.A.Aurel Voicescu T: +40 764 601-847

RS: Raiffeisen banka a.d.Sofija Davidovic T: +381 11 220-7807

RU: AO RaiffeisenbankMaria Maevskaya T: +7 495 775-5230

SK: Tatra banka, a.s. Mirco Ribis T: +421 2 5919-1846

UA: Raiffeisen Bank Aval Andreas Kettlgruber T: +380 44 495-4110

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