erste group cmd11 - romania: making progress

Erste Group – 8th Capital Markets Day

9 December 2011, Vienna

Romania: Making progressDominic Bruynseels, CEO, Banca Comercială RomânăFrank-Michael Beitz, CRO,

Banca

Comercială

Română

9 December 2011Vienna

8th CMDRomania: Making progress22

Disclaimer – Cautionary note regarding forward-looking statements

−

THE INFORMATION CONTAINED IN THIS DOCUMENT HAS NOT BEEN INDEPENDENTLY VERIFIED AND NO REPRESENTATION OR WARRANTY EXPRESSED OR IMPLIED IS MADE AS TO, AND NO RELIANCE SHOULD BE PLACED ON, THE FAIRNESS, ACCURACY, COMPLETENESS OR CORRECTNESS OF THIS INFORMATION OR OPINIONS CONTAINED HEREIN.

−

CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT MAY BE STATEMENTS OF FUTURE EXPECTATIONS AND OTHER FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT’S CURRENT VIEWS AND ASSUMPTIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR EVENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH STATEMENTS.

−

NONE OF ERSTE GROUP OR ANY OF ITS AFFILIATES, ADVISORS OR REPRESENTATIVES SHALL HAVE ANY LIABILITY WHATSOEVER (IN NEGLIGENCE OR OTHERWISE) FOR ANY LOSS HOWSOEVER ARISING FROM ANY USE OF THIS DOCUMENT OR ITS CONTENT OR OTHERWISE ARISING IN CONNECTION WITH THIS DOCUMENT.

−

THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR INVITATION TO PURCHASE OR SUBSCRIBE FOR ANY SHARES AND NEITHER IT NOR ANY PART OF IT SHALL FORM THE BASIS OF OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT WHATSOEVER.



Presentation topics

−

Macroeconomic snapshot

−

BCR business performance review

−

Credit risk management−

History of asset quality deterioration−

Loan origination history−

Restoring BCR’s asset quality

−

Business roadmap −

Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



Romania – Potential still promising – from a more stable basis

−

Romanian economy slowly returning to steady growth rate−

Highly correlated with eurozone developments - exports and investments are main transmission channels

−

Likely to rise above its long-term potential (3.5%) as early as 2015−

Public reform and policy stability remain prerequisite for boosting investors confidence−

In the medium term, capital investments and private consumption should reinstate their role as main growth engines

Romania - GDP/capita vs % of eurozone GDP/capita

4.1 4.5

1.21.8 1.9 2.0 2.1 2.2 2.3 2.4

3.22.83.7

5.25.8 6.1 6.5

6.05.5 5.6 5.7 5.9 6.1

2.6

0

2

4

6

8

10

12

14

1995

2000

H1

0120

01H

1 02

2002

H1

0320

03H

1 04

2004

H1

0520

05H

1 06

2006

H1

0720

07H

1 08

2008

H1

0920

09H

1 10

2010

H1

1120

11

2012

f

2013

f

2014

f

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

in E

UR

thou

sand

0

5

10

15

20

25

30

35(%)

GDP/capita % of eurozone (rhs)



GDP formation - positive evolution in expenditure

-16 -12 -8 -4 0 4 8 12 16

2007

2008

2009

2010

2011e

-16 -12 -8 -4 0 4 8 12 16

Household consumption GovernmentGross capital formation Net exports

Macroeconomic environment – Agriculture and construction driving GDP growth in Q3 11

−

Excellent performance of agriculture (+22% yoy) pushed Q3 GDP up by 4.4% yoy, the fastest rate in the last 3 years

−

Romania is among world’s top 5 corn producers−

Domestic demand consolidated, private consumption and investments positively contributed to GDP formation

−

Construction returned to positive in Q3 (+7% yoy)−

Main support from commercial and infrastructure−

Residential segment slightly positive due to strong base effect and continuation of Prima Casa Program

−

Industry kept up a good pace (+6% yoy), external demand still a driving force in Q3

−

Exports at all-time high in Sep (EUR 4.2bn)−

Domestic demand on rebound helped industry in Q3

−

Annual inflation down to 3.5% all-time low in Sep−

Effects of the agricultural bumper crop fading away−

CPI within central bank’s target range (3%±1pp)−

Monetary policy eased, key rate cut by 25bps to 6%

GDP formation - broad recovery in incomes

-6 -4 -2 0 2 4 6 8

2007

2008

2009

2010

2011e

-6 -4 -2 0 2 4 6 8

Industry Agriculture ConstructionServices Indirect taxes



0123456789

10

25 50 75 100 125 150

Public debt to GDP (2012e)

Fisc

al d

efic

it to

GD

P (2

012e

) Ireland

PortugalBelgium

Hungary

Slovakia

Romania Austria

Italy

France

UK

Germany

PolandCzech Rep

Public deficit and debt*

United States

Croatia

Macroeconomic environment – The IMF’s model pupil

−

Public finances in a much better shape−

Romania tackled the structural problems in public finance at an early stage

−

Government committed to bring fiscal deficit down to 3% of GDP in 2012 and keep public debt at ~34%

−

High level of intl. reserves (EUR 36bn, covering 9 months of imports)

−

Precautionary deal with the IMF (EUR 5bn) −

Local banks able to provide RON liquidity

−

Rating actions 2011−

Fitch: upgraded to investment grade BBB- with stable outlook (July)

−

S&P: rating affirmed at BB+ (LT FC); stable outlook−

Moody’s: country ceilings affirmed at A1 (LT FC debt) and Baa3 (LT FC bank deposits), stable outlook (July)

−

CAD significantly down to 3.5% of GDP in Q3−

Positive growth differential export-imports contributed to shrinking foreign trade deficit (4% of GDP)

−

Net current transfers up 9% y/y in 9M on better EU funds absorption

*

* Net private capital inflows (FDIs, current transfers & remittances)

Private capital inflows vs current account balance*

-13.6%-13.6%-9.7%

-5.2% -5.1% -4.8% -3.6% -3.5%

6.7%10.2%

5.5%2.0%4.4%

16.5% 15.2%10.8%

2.8%3.0% 1.1% 1.5% 0.8%

-20%

-10%

0%

10%

20%

Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11

as %

of G

DP

CA balance External assistance (IMF&EU) Net private capital inflows

* Bubble size indicates public debt per capita



Presentation topics

−


−


−





−


Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



Operating income & GDP growth per quarter

0

50

100

150

200

250

300

350

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

in E

UR

mill

ion

-10%

-5%

0%

5%

10%

15%

Real GDP growth (%, y/y)

BCR: business performance review – Operating income performance overview

* NII impacted in Q4 09 by changes in EIR method for the loan portfolio prior to 2006, leading to an increase of interest-like income and first time amortisation of transaction fees related to customer loans, recognised as deferred instead of cash-based as previously

Operating income & GDP growth per quarter

109127 134 141

167190 186

207 195 196 200

246213 202 207

177 186169 163

44

5872

7565

64 6444

38 39 36

51

35 44 29

2635

31 3213

38

7 30

13

8

29

-1

41

18 197.5

211.9 219.7

239.5

261.3 258.3 254.1

233.4 240.3

248.4 240.7

274.9

235.1

206.3

221.8 217.8

206

6

95

-8

215

306.2

159

0

50

100

150

200

250

300

350

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

in E

UR

mill

ion

-10%

-5%

0%

5%

10%

15%

Net interest income Net fee and commission income Net trading result Real GDP growth (%, y/y)

*Pre-crisis growth Consolidation



YTD net interest margin vs. T-bills avg. yield *

5.46%

7.24% 6.73%5.41%

6.80%11.3%

0%

2%

4%

6%

8%

2007 2008 2009 2010 1-9 110%2%4%6%8%10%12%

YTD NIM T-bills (avg. yield)

9

BCR: business performance review – Successful cost control but pressure on NIM

−

NIM pressured by overall decreasing interest rates−

Lower asset margins on retail due to Prima Casa, weak RON consumer business and loan portfolio repricing

−

Refinancing gained speed, following the alignment to EUR consumer protection stds.

−

Pressures on liabilities margins due to increased competition for liquidity

−

Additional impact on margins from placements in lower yielding government securities than historically

−

Continued strong focus on cost effectiveness−

Actively managed cost base through efficiency programs and project prioritisation

−

Continued focus on alternative channels and cards, IT development

−

Cost savings on network optimisation

Operating expenses and CIR

516.9 457.6

383.3 375.2

282.765.6%

45.2%37.3% 39.2%

43.2%

0

100

200

300

400

500

600

2007 2008 2009 2010 1-9 11

in E

UR

mill

ion

0%

20%

40%

60%

80%

100%

* Source: BNR, avg. yield on T-bills primary market (maturities <1Y)

▲



Presentation topics

−


−


−





−


Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



BCR: Credit risk management – History of asset quality deterioration (local view)

2.6% 2.2%4.6%

12.3%

16.8%

20.8%56.5%

50.3%

21.0%

7.3%2.1%

1.3%0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 1-9 11

% N

PL

0%

20%

40%

60%

NPL ratio Net loan growth

Confirmatory DD & Transformation

Closing 10/2006

x

x

x

Due diligence

Financial Crisis

x

x

Split Risk/ Financialx

New Top Mgmt.

Phase 1 -

Transition Phase 2 -

Pre-crisis Phase 3 -

Crisis & recession



BCR: Credit risk management – History of actions taken (local view)

Phase 1 -

Transition Phase 2 -

Pre-crisis Phase 3 -

Crisis & recession

% N

PL



Origination of loans (Segment)

1,039

2,346

1,098

1,569

1,413

1,327

2,252

0

2,000

4,000

6,000

8,000

10,000

12,000

12005≤ 2006 2007 2008 2009 2010 1‐9 11

11,044

1-9 11

12%10%

20%

21%

10%

14%

13%

Origination of NPLs (Segment)

306

712

160146 70

348

690

0

500

1,000

1,500

2,000

2,500

12005≤ 2006 2007 2008 2009 2010 1‐9 11

2,432

1-9 11

14%

13%

28%

29%7%

6% 3%

BCR: Credit risk management – Loan origination history

−

Phase I ~ Transition−

Almost 55% of BCR’s NPLs (and 42% of loans) were generated during the transition period and prior to Erste’s takeover

−

Phase II ~ Pre-crisis−

2008 pre-crisis year contributed with 29% to NPLs and with 21% to loans origination

−

Phase III ~ Crisis & recession−

Only 16% of NPLs (and 37% of loans) were generated after 2008, whereby retail contributed only 4pp and corporate 12pp

−

Phase IV ~ Recovery−

Risk under controlEU

R m

illio

nEU

R m

illio

n

Phase 1 Phase 3Phase 2

Phase 1 Phase 3Phase 2



BCR: Credit risk management – Restoring BCR’s asset quality

−

Enforce prudent cash-flow oriented lending policies−

Debt/EBITDA ratio, debt service coverage ratio, interest coverage ratio−

Industry guidance looks at various industries considering the expected economic viability of the industry and not the collateralisation degree

−

Centralise loan and collateral documentation for SMEs until 2012

YE

−

The measure applies to 48 corporate centers, 3,763 clients and RON 9bn loan volumes−

Operational risk (human processing errors, legal documents missing, contract obligation breaches) is estimated to decrease by RON 13.6m in 2012 and by RON 20.5m in 2013 and 2014

−

Improve asset protection−

Focus on collateral management−

Increase NPL coverage

−

De-risk the loan book



BCR: Credit risk management – Restoring BCR’s asset quality in retail business

−

De-risk the loan book –

reduce DPDs in retail business−

Collection software upgraded (integrated auto dialer), 90+ DPD (<180 DPD) decreased from 3.5% (Dec 09) to 2.5% as of Sep 11

−

EUR 390m unsecured consumer loans sold during 2010 and 2011

Comparison of PI overdue loans (DPD>1 day)

20.3%20.5%

21.0%21.2%24.8%24.6%23.0%22.2%

21.3%21.4%

20.1%19.1%20.4%18.8%17.6%16.2%

7.5%8.1%7.8%7.1%6.1%6.0%5.6%5.3%5%

10%

15%

20%

25%

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

Total BCR by BNR Banking system by BNR BCR new (granted in 09&10)Total overdue portfolio contaminated:- contaminated at client level- DPD > 1- exposure > RON 20,000



No. of clients(1,370)

Loans exposure (EUR 1,899

m)

o/w NPL(EUR 1,265 m)

FTE-2011 YE(130)

130 46 1,194

- -775 464 660

16 16 41 36 21

- -

455 197 613 - -

BCR: Credit risk management – Restoring BCR’s asset quality in corporate business

−

De-risk the loan book –

reduce NPLs in corporate business−

Regular portfolio screening and enhanced watchlist management−

Change workout strategy from “Restructure & Hold” to “Restructure & Sell”−

Structure of newly set up Corporate Remedial & Recovery Division



Presentation topics

−


−


−





−

Business roadmap−

Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



BCR: business roadmap – Segment Romania

−

Operating income set to improve on fee income

−

Strategy to activate customers, cross-sell & increase transactional banking volume−

Main NCI driver in retail business will be current accounts

−

Very strict cost discipline to improve competitiveness

−

Still elevated risk provisions

−

Prioritising

of business opportunities and strict control of RWA

development−

Focus on Prima Casa, EU-funds related projects and infrastructure



BCR: business roadmap – Measures to improve retail results

−

Strong focus on customer retention to increase value of existing

customer base (client activation)−

Redesign products/ bundles to match better customer expectations, priority on daily banking−

Simplify processes and documentation for better quality of services and customer satisfaction −

Align retail performance evaluation and business profitability

−

Deposits−

Sight deposits: focus on increasing active main relationships −

Term deposits: focus on stable deposits with long tenor and customers with regular savings −

Micro & corporate clients: acquisition of payroll clients through dedicated employee benefit packages

−

Secured lending−

Increased focus on local currency lending −

Continued support for Prima Casa Program−

Pricing aligned to profitability of the customer relationship

−

Unsecured lending−

Pricing based on profitability across the product range

−

New lending rules will not significantly impact BCR’s retail business due to current conservative approach on FX lending



−

Increase transaction banking income, focus on cross-selling−

Supply chain finance – implement a standard value proposition and launch vendor financing solution −

Improve internet banking capabilities & service availability, develop electronic platforms−

Increase cross-selling with sales campaigns on cash management, trade and treasury products, or client categories RWA optimization

−

Strict control of RWA development: new business prioritising, repricing, improve collateral coverage, and adjust offering−

Focus on core customers to develop EVA positive business relationships−

Continue focusing on co-financing EU infrastructure loans and increase usage of guarantee schemes

−

Lending process improvement−

Develop specific product structures, processes and dedicated competence centers for targeted industries: agribusiness, infrastructure, renewable energy, healthcare

−

Improvement of the loan approval process for prolongations and small amount increases −

Centralisation of loan and collateral documentation and monitoring−

Centralisation of the process flow for issuing cash collateral LGs

−

Sales process optimisation−

Improve quality of customer service on each process through staff training and certification, internal monitoring of service quality, continuously monitoring of client experience on specific products and processes

BCR: business roadmap – Measures to improve local corporate results



Infrastructure investments – Projects totalling EUR 7.8bn signed between 2007-2011

Top 5 projects by value (EURmn)Cernavoda – Constanta highway (part of Pan-European Corridor IV to Black Sea) 432

Constanta city road belt 226 Water systems expansion and rehabilitation (Cluj and Salaj counties) 197

Water system rehabilitation (Brasov city) 189 Expansion and rehabilitation of water network (Teleorman county) 122

Total 1,166

Top 5 projects by value (EURmn)Orastie – Sibiu highway (Corridor IV) 746 Nadlac – Arad highway (Corridor IV) 308 Rehabilitation and modernisation of water and sewage systems (Prahova county) 163

Expansion and rehabilitation of water and waste water networks (Dolj county) 150

Expansion and modernisation of water and waste water networks (Arad county) 140

Total 1,506

Projects signed 2007-2009

Total project value: EUR 1,929m58% from EU funds

Number of projects:

18

Avg. implementation status: 32%

Projects signed 2010-2011

Total project value: EUR 5,876m 68% from EU funds

Number of projects:

71

Avg. implementation status: 5%



Presentation topics

−


−


−





−


Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



−

Dominant market share in deposits (~21%)−

Stable retail deposits (both RON and EUR)−

Strong performance in RON corporate deposits (both sight and term)

−

Overall L/D ratio of 135%, expected to decline further on improvement in EUR L/D ratio−

RON L/D ratio of 76%−

EUR L/D ratio of 253%

−

EMTN program -

flexible funding tool (EUR 250m issued so far)

−

Strong liquidity buffer -

eligible collateral approx. RON 13.2bn

−

Medium to long-term funding sources well- diversified by lenders & geographic areas

(partnerships with IFIs)

38,385

Customer deposits, main funding source

30.133.0

35.6 37.8 39.1

48%48% 51% 51% 52%

0

10

20

30

40

2007 2008 2009 2010 Sep-11

in R

ON

bill

ion

0%

20%

40%

60%

80%

100%

Amounts owed to customers in % of balance sheet

39,050

Balance sheet as of Sep 2011 (in RON million)

9,2761,249

47,305

13,244

3,382Other assets

Financial assets

Trading assets

Loans and advancesto credit institutions

Loans and advancesto customers + Riskprovisions

39,050

21,553

10,667

1,1572,029

Other liabilities + Totalequity

Subordinated capital

Debt securities in issue

Amounts owed to creditinstitutions

Amounts owed tocustomers

Balance sheet as of Sep 2011 (in RON million)

9,2761,249

47,305

13,244

3,382Other assets

Financial assets

Trading assets



39,050

21,553

10,667

1,1572,029






9,2761,249

47,305

13,244

3,382Other assets

Financial assets

Trading assets



9,2761,249

47,305

13,244

3,382Other assets

Financial assets

Trading assets



39,050

21,553

10,667

1,1572,029






39,050

21,553

10,667

1,1572,029






BCR: Funding and liquidity – Robust core deposit base



Presentation topics

−


−


−





−


Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



Conclusion – Outlook

−

Long-term story Romania remains intact –

from a more stable basis

−

Optimism about operating income−

Infrastructure projects to be key revenue driver−

BCR ideally positioned to benefit−

Strong municipalities and contractor contacts−

Profitability in retail will track the recovery of consumer confidence and wage rises

−

Risk costs will stay elevated for some time−

Efforts to improve risk/reward of underlying business will pay off mid-term

−

Firm cost management was and will be a pillar of strength

−

More sustainable bank and model from where to grow with the market and benefit from competitor weakness



Presentation topics

−


−


−





−


Retail−

Local corporate

−

Special topic

−

Outlook

−

Appendix



Appendix: Romania – Significant competitive advantage in terms of labour cost

Productivity adjusted hourly labour costs

11.514.2 15.0 16.1

21.2 21.4

28.3

35.232.4

0

5

10

15

20

25

30

35

40

Romania Poland Bulgaria Hungary CzechRepublic

Slovakia Slovenia EU27 Austria

in E

UR

Source: Eurostat, Erste Research



−

New prudential rules adopted at end-October, aiming to limit the risks associated with consumer lending, mainly in FX −

Max. 5 year tenor for new unsecured and secured consumer loans, irrespective of currency−

No max. tenor previously imposed, max. 10 years for unsecured and 25-30 years for secured according to market practice

−

Debt to income limit and stress parameters adopted−

Min.133% coverage by collateral for FX home equity loans−

Corresponding to max. 75% LTV, no min. level of coverage by collateral previously stipulated−

Lower LTV for FX mortgage loans−

Loans under Prima Casa and refinancing of loans contracted before the new regulation entered into force exempted from current tenor and down payment limitations

−

BCR’s own rules well ahead of BNR’s new guidelines−

Lower impact on BCR’s retail business as compared to the market, due to conservative approach on FX lending

−

Higher collateralization, lower debt to income and LTV ratios, max. tenor for unsecured consumer limited to 5 years since early 2010, FX unsecured loans cancelled from BCR offer starting H2 11

−

Estimated impact on new sales in 2012: −

-10% in standard mortgage (~EUR 9m)−

-20% in unsecured consumer (~EUR 92m)−

-65% in secured consumer (~EUR 66m)−

Estimated impact on NII in 2012: EUR -11.5m

Appendix: business roadmap – Retail: new lending rules adopted by the Central Bank



Appendix: Special topic – Update on Erste shareholding in BCR

−

4 SIFs have signed transaction documents−

Issue of 16,102,263 EGB shares (thereof until 8.12.2011: 8,275,312; thereof 4,025,566 issuance pending)

−

Cash contribution of RON 494.4m (thereof until 8.12.2011: RON 244.5)−

Erste Group will increase stake in BCR to 93.54%

−

Up to date 12.4% of BCR shares have been acquired

−

Movement in Erste share price has no influence on deal structure−

Shares are exchanged at fixed exchange ratio of 127.9583 BCR shares for one EGB share

# of Shares # of SharesNumber of BCR Shares total 10,856,364,880 100.00% 10,856,364,880 100.00%SIF Oltenia 652,033,303 6.01% 652,033,303 6.01%SIF Muntenia 651,381,927 6.00% 241,744,625 2.23%SIF Banat Crisana 651,381,927 6.00% 366,373,358 3.37%SIF Moldova 651,381,927 6.00% 515,104,582 4.74%SIF Transilvania 651,381,927 6.00% 136,277,240 1.26%Erste Group 7,547,067,344 69.52% 8,895,423,653 81.94%Others 51,736,525 0.48% 49,408,119 0.46%

SIFs shareholding before transaction Status quo of transaction

erste group cmd11 - romania: making progress

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