prof. dr goran pitić, fefa

Opportunities and Challenges after the Crisis for Macroeconomic and Banking Sector Development in Serbia

Regional perspective

Goran PiticProfessor of Macroeconomics

President of the Board of Directors

May 2010 2

Content

� SEE Cross country comparison ….

Macroeconomics

� SEE Cross country comparison ….. … … ….

Banking

� CEE Banking outlook Competitive framework

� Cost and benefits of Banking crisis resolution

� Serbia Macroeconomic and Banking

environment

May 2010 3

SEE Cross Country Comparison

- Macroeconomics -

Sources:

Eurostat, European Commission Economic Forecast Autumn 2009, European Commission Reports on Candidate

Countries, IMF, World Economic Forum, Serbian Statistics Office, Serbian Ministry of Finance, National Bank of

Serbia

May 2010 4

SEE Macroeconomics - Contents

� Economic Activity– Growth In 2006-2008

– Contraction In 2009

– Gradual Recovery In 2010

– Adjustment of SEE Economies

� Labour Market

– Unemployment & Wages

� Capital Inflows

� Inflation

� New Growth Model– Future Growth Model

– Exports of SEE Countries

� Public Finances– Fiscal Positions

– Public Debt

May 2010 5

Growth In 2006-2008

Real GDP Growth (% chg, on previous year)

SEE Macroeconomics - Economic Activity

Serbia is one of the

few countries among

presented group

which improved

growth in 2008

compared to 2006.

Robust growth was

also due to very low

base, as Serbia

started transition with

a 10-year delay

compared to other

states.

Key contribution to

GDP growth in past

years in Serbia came

from services sector-

telecommunication,

financial services and

real estate.

� SEE economies have been posting robust growth rates over the last few years, but this growth was mainly domestic-demand

driven, fuelled by large capital inflows and strong credit growth.

2%

4%

5%

7%

6%

6%

5%

6% 6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Euroarea CEE Albania Bosnia Bulgaria Croatia FYROM Romania Serbia

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2006 2007 2008 Average

May 2010 6

Contraction In 2009

Growth reversal in Serbia

was less steep than in

most regional peers, and

less severe than in CEE

region and Euroarea.

Following a sharp 4.1%

contraction in H1/2009,

the economic activity in

Serbia stabilized by the

end of 2009 and full-year

GDP fall ended at 3%,

according to the data

from the Statistics Office.

Cabinet responded to

the crisis by securing

stand-by arrangement

with the IMF, introducing

economic stimulus

measures (state-

subsidized loans to

businesses and

individuals), while the

central bank has been

lowering the key policy

rate and easing reserve

requirements.


� As a result of slowing capital inflows and shrinking domestic and external demand due to global crisis, GDP growth turned to

negative in 2009. As the world economy started recovering in the second half of 2009, the declines in output of SEE countries

have been contained.

Real GDP Growth (% chg, on previous year)

-4.1%

-5.0%

0.7%

-3.0%

-5.9% -5.8%

-2.0%

-8.0%

-3.0%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

Euroarea CEE Albania Bosnia Bulgaria Croatia FYROM Romania Serbia

May 2010 7

Gradual Recovery In 2010

EBRD Projections For Real GDP Growth In 2010 and 2011

Serbian economy is

projected to grow by

1.5% this year, with

investments in large-

scale infrastructure

projects expected to

incite the economic

activity. The IMF has

recently raised upwards

Serbia’s GDP growth

projection for this year

to 2%.

Although return to pre-

crisis growth cannot be

expected in the mid-

term, according to

EBRD projections,

Serbia is projected to

post higher growth than

many of its SEE peers

in 2010 and 2011.


� The EU economy has emerged from recession with GDP growth turning positive again in the second half of 2009. As the initial

upturn in economic activity both in EU and other developed economies was largely driven by temporary factors, such as

positive impact of inventory adjustment and stimulus packages of the governments, the growth in 2010 is expected to be

sluggish. SEE economies are also expected to recover in 2010, on the back of international developments. Although the

growth in SEE will outpace the one in the EU and other developed economies, it would remain much below the pre-crisis

average recorded in the last few years.

-1.2%

2.2%

0.3%0.3%

1.4%

2.1%

0.0%

3.2%3.0%

2.5%

1.8%

3.0%

1.7%

3.1%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

Albania Bosnia Bulgaria Croatia FYROM Romania Serbia

2010 2011

May 2010 8

In Serbia, narrowing of

current account deficit

was larger than initially

expected, with

shrinkage of the trade

gap being the main

reason behind

improvement.

Serbia’s balance of

payment was

supported by the

stand-by arrangement

with the IMF worth

EUR 2.9bn, which has

helped the country to

address lower capital

flows and reassure

investors.

SEE Macroeconomics – Economic Activity

� Robust growth of SEE economies over the past few years has been accompanied by building up of their external imbalances,

which have increased their exposure to global economic downturn. Since the onset of the crisis, trade and current account

deficits started narrowing on the back of reduced capital inflows and contraction of domestic and foreign demand. In most of

the observed countries contraction of foreign trade was more pronounced on the import side, due to lower domestic and

foreign demand, as well as lower commodity prices thus resulting in current account deficit shrinkage.

Adjustment of SEE Economies

Current Account Balance (% of GDP)

-14.7%

-9.4%

-13.1%

-17.8%

-25.5%

-12.3%

-14.5%

-11.4%-10.6%

-5.5%-5.5%-6.1%

-8.8%-10.5%

-26.0%

-21.0%

-16.0%

-11.0%

-6.0%

-1.0%


2007 2008 2009 2010f 2011f

May 2010 9

Unemployment

Average Net Monthly Salary (EUR)

SEE Macroeconomics – Labour Market

Unemployment & Wages � High unemployment rate is one of the main problems in SEE countries, in many of which registered unemployment rate sits

above 20%. However, considering sizable grey economy that exists in SEE and employs part of the population, the actual

unemployment is lower. Nevertheless, unemployment calculated in line with international methodology is highest in Bosnia,

Macedonia, and Serbia. The recession has caused a deterioration in the labour market, with unemployment on the rise and

wage pressures dampening.

Unemployment rate in

Serbia has been

falling in 2006-2008,

on the back of strong

economic growth and

new investments.

However, due to

crisis, the

unemployment rose

by 2.6pps in 2009.

After strong growth in

the last few years,

particularly in 2008,

average net wage in

Serbia fell to EUR

333 at end-2009.

Public sector wages

have been frozen due

to crisis, while

salaries in the private

sector stayed frozen

or were cut to avoid

lay-offs.

* Data not available for Albania

13.7%

44.2%

9.0%11.2%

36.0%

7.3%8.0%9.8%

36.1%

8.7%

20.9%

12.7%

42.3%

18.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%


2006 2007 2008 2009 2010f

184

300

629

221

245

260

385

327

296

718

321

333

0 200 400 600 800

Bulgaria

Bosnia

Croatia

FYROM

Romania

Serbia

2006 2007 2008 2009

May 2010 10

SEE Macroeconomics – Capital Inflows

� Emerging Europe suffered the sharpest decline in net capital flows in 2009 among emerging market economies. After massive

slowdown in H2/2008 and Q1/2009, capital flows in Emerging Europe slightly recovered by the end of 2009. In Serbia, capital

inflows slowed down considerably in 2009 on the back of fall in FDI and other investments.

Capital inflows improved

compared from their

Q4/2008 lows and the

threat of another sudden

rise in investor risk

aversion has diminished.

Although capital inflows

were much lower yoy

through 2009, they were

sufficient to cover lower

current account deficit.

In April, the IMF

Executive Board gave

the green light for Serbia

to draw a third tranche

under the stand-by

arrangement, but the

NBS then said it

withdrew only a half of

the approved EUR 360

million instalment, in

what brought total

disbursements to some

EUR 1.3 billion.

Capital Inflows In Serbia

Capital Inflows In Serbia (in USD million)

-750

-250

250

750

1250

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209

Direct Investment Other Investment Portfolio Investment

11

CPI Annual AverageNBS had more success

in inflation targeting than

regional peers, for

example Romania where

inflation ended above

central bank's target for

2009.

End of period CPI in 2009

was at 6.6%, closer to the

lower end of the 6%-10%

target band. Average CPI

for 2009 was 8.3%.

Downward trend resumed

in 2010. According to the

latest projections of the

central bank, end-2010

inflation is expected at

5%.

The NBS has been

easing the monetary

policy in the course of

2009, cutting the key

policy rate from 17.75%

to 9.5%. The easing cycle

continued in 2010, with

key rate currently

standing at 8%.

Consumer Price Inflation

SEE Macroeconomics – Inflation

� In a recessionary, consumer price inflation has declined substantially in the course of 2009 across the SEE. In Serbia, both

headline and base inflation have eased since the beginning of 2009. High inflation rates in Serbia in the previous years have

been accompanied by robust growth rates. Lower inflation in 2009 was driven by decrease in aggregate demand, lower food

prices, as well as halt in regulated prices growth.

6.1%

8.3%7.9%

4.9%

2.2%

2.9%

7.6%

1.5%

2.9%

6.5%

3.4%

11.7%12.0%

7.4%

8.3%

-0.6%

2.6%2.4%

1.7% 0.9%

5.7%

3.0%

1.1%

5.1%

1.6%2.0%1.5%

2.3%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%


2007 2008 2009 2010f

12

More Balanced Future Growth Model

Serbia plans to achieve

1.5% -2% GDP growth in

2010 through

investments in large

infrastructure projects.

Around EUR 1bn in

international loans for

infrastructure

investments has been

secured from EBRD, EIB,

WB, and Chinese

government. Talks over

USD 800mn Russian

loan for railway

infrastructure projects

have not been finalized

yet.

Government has set

infrastructure upgrade as

one of its top priorities,

and plans to invest a total

of EUR 5bn in

infrastructure by 2012.

Major infrastructure

projects include

construction of transport

Corridor 10, and railway

and energy infrastructure

upgrade.

Quality of Infrastructure (transport, energy, telephony – country

rankings)

* 1=extremely underdeveloped infrastructure, 7= extensive and efficient infrastructure

According to Global Competitiveness Survey, Serbia is at

the bottom of the list of countries according to infrastructure quality, ranked

122nd among 132 countries.

SEE Macroeconomics – New Growth Model

� In line with the global economic recovery, SEE economies are expected to rebound this year, but the recovery will be slow.

GDP growth in the coming years will be considerably below the pre-crisis level across the whole region. As demand-driven

growth model is now hardly viable, SEE countries need to shift towards more balanced growth pattern.

1

2

3

4

5

6

7

France Germany Croatia FYROM Albania Bulgaria Serbia Romania Bosnia

5 6 48 88 97 115 122 127 132

Rank

Score

May 2010 13

Exports of SEE Countries

SEE Macroeconomics – New Growth Model

� Pre-crisis demand-driven growth in SEE should be replaced with more sustainable one. As far as Serbia is concerned, there

seems to exist a consensus among policy makers that economic growth in the coming years cannot be based on flows of

foreign capital or increasing domestic consumption, but rather on the implementation of all planned investments, and

increasing exports in mid-term.

Serbia is one of the

countries with the

lowest exports to GDP

ratio among the

observed group.

However, it is one of

the few SEE countries

that managed to

improve share of

exports in GDP in

2006-2008.

The efforts to boost

exports should be

aided by the recently

finalized deal with Fiat

which has announced

it would produce new

car models in Serbia

mainly intended for

US and EU markets.

The unfreeze of the

interim trade

agreement with the

EU will also lift

exports to the union.

Exports (as % of GDP)

64%

9%

37%

43%

47%

32%

28%

9%

32%

47%

37%

28%

41%

19%

0.0%

20.0%

40.0%

60.0%


2006 2007 2008 2009

May 2010 14

Fiscal Positions

Fiscal Deficits (as % of GDP)

The state budget for

2010 envisages a

deficit of RSD 107

billion or 3.5% of

GDP. The

consolidated budget

gap has been limited

to 4% of GDP in

2010 under the

arrangement with the

IMF.

Under the deal with

the IMF, Serbia

pledged to keep

pensions and public

sector wages frozen

in 2010, trim the

budget deficit after

2010, and reform the

public sector and the

pension system.

SEE Macroeconomics – Public Finances

� Sharp contraction across SEE has put public finances under strong pressure. Deterioration in fiscal positions in most countries

started in 2008, as public revenues started faltering along with the decline in economic activity, while spending pressures

remained high. In Serbia, fiscal targets for 2009 and 2010 have been set under the country’s stand-by loan deal with the

International Monetary Fund.

0.1%

4.0%

1.2%

3.5%

2.5%2.1%

2.5%2.5%

5.5%

1.0%

1.4%

5.5%

4.0%

4.7%

3.7%

6.4%

0.8%

7.8%

4.5%

3.9% 4.0%

3.0%

3.5%

6.8%

4.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Albania Bulgaria Bosnia Croatia FYROM Serbia Romania

2007 2008 2009 2010f

May 2010 15

Public Debt

Public Debt (% of GDP) Serbia’s public debt

stood at 31.3% of GDP

at 2009 and is currently

at 31.5% of the

projected GDP for

2010. Last year

Serbia’s public debt

rose some 10% or

EUR 884 million. Half

of this rise came from

domestic

Indebtedness.

Serbia is in the middle

of the scale according

to public debt to GDP

ratio in SEE. Albania,

Croatia and Bosnia

have higher

indebtedness ratios.

Public debt to GDP

ratio is lower in the rest

of SEE, but in Romania

and FYROM it grows at

a faster pace than in

Serbia.

SEE Macroeconomics – Public Finances

� Sharp increase in general government deficits amid economic and financial crisis have led to significant

increases in public debts across SEE countries. However, public debt ratios in SEE have not reached

unsustainable levels given low base.

29%

66%

53%

18%

30%33%

28%

13%

34%

84%

50%

16%

40% 39%

28% 27%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Euroarea Albania Bulgaria Bosnia Croatia FYROM Romania Serbia

2007 2008 2009 2010f

SEE Cross Country Comparison- Banking -

Sources:

National and Central Banks (NBS,BNR, BNB,HNB,CBBH), European Banking Federation, Bank for International

Settlement,

CEE Banking Outlook, Fitch Ratings Banks Special Report, EMIS IntelliNews Country Reports (Bulgaria, Croatia,

Romania,

Serbia), etc.

May 2010 17

SEE Banking – Contents

� Market Characteristics– Asset Size

– Market Structure

– Average Assets per Bank

– Market Concentration

� Market Dynamics– Loans

– Lending Dynamics

– Deposits

– Loans to Deposits Ratio

� Capital

� Risk Profiles– Risk Perception

– Non Performing Loans

– Cost of Risk

– Foreign Currency Risk

� Results

� Key Players

� Support Measures

May 2010 18

Assets Size� Reduced growth in assets has been evident in the last 2 years. It is expected that once the funding

costs are reduced and macro-economic stability and growth are regained, assets should continue their

strong growth as they grew before the onset of the crisis. Speed of growth for each country’s banking

sector will depending on the extent of asset quality weakening brought by the current crisis.

Assets

Compound annual growth

rate of 13% for the period

between 2006 and 2009, with

positive y-o-ygrowth provides

Serbia, as well as most of the SEE countries with a

good starting point for the after

crisis years to come.

SEE Banking – Market Characteristics

51.9

41.5

21.6

14.8

7.5

2.85.04.0

7.0

35.7

10.5

21.1

52.0

84.3

12%12%

12%

18%18%

8%

13%

0

20

40

60

80

100

Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania

Assets (EUR bn)

0%

5%

10%

15%

20%

CAGR

2006 2007 2008 2009f CAGR

May 2010 19

Market Structure

Number of Banks & Foreign Banks Market Share (%)

� After a wave of privatizations, consolidation in the sector slowed down due to the capital market conditions and future

profitability uncertainties brought by the crisis. However, several governments contemplate further decrease of state ownership

in respective banking systems, while a number of international players plan partial or full divestment from some of their core

and non core subsidiaries in the region. Few banks are looking to boost their organic growth with add on acquisitions.

� Foreign Banks have seized massive market shares in most of SEE countries. After a period of being the engine behind

modernization and growth of the sector, foreign banks now make SEE banking system vulnerable to “flight to quality”, closures

of non core businesses and reduced exposures towards SEE region, altogether becoming constraint for growth of the sector.


Serbian Government still

holds majority

stakes in 9 banks, while 5

banks are private (international

banks are not

majority owners).

The only large state owned bank

is the second

largest market player

Komercijalna Banka (10%

market share),

while other state banks mainly

occupying tail of asset size

ranking.

38

33

37

32 32

1917

42

34 34

3029

1816

78%

91%

75%

91%93% 93%

84%

0

10

20

30

40

50

Romania Croatia Serbia Bosnia Bulgaria Macedonia Albania

No.

60%

70%

80%

90%

100%

Share (Assets)

2006 2007 2008 2009 Foreign banks (% Assets '08)

May 2010 20

Average Assets per Bank

Average Assets (in Eur bn per

bank)

1,361,26

0,67

0,40

0,23

0,35

0,62

1,53

1,23

2,0122%

16%

14%

7%

14%

-

0,5

1,0

1,5

2,0

2,5

Romania Croatia Bulgaria Serbia Bosnia

0%

6%

12%

18%

24%

2006 2007 2008 2009f CAGR

Serbia posted

16% CAGR of average assets per bank while

EU 27 CAGR of average assets

per bank stand at 11%.

However,

average assets per bank stand at

EUR 620 m, which is

significantly

below EUR 5.77 bn of assets

managed by EU 27 banks on

average.

� Strong organic growth and investments from parent banks boosted assets level of foreign banks. Since foreign banks

dominate SEE markets, average assets per bank made a strong improvement in the last 4 years. It is expected that average

assets per bank will continue to grow further closing the gap between SEE countries and EU average of EUR 5.77 bn (end

2008), given that SEE countries post significantly stronger growth rates than EU. Possible further consolidation of the sector

could give further impetus to this ratio.


CAGR

May 2010 21

Market Concentration

Top 5 Banks market share (in % of total assets)Top 5 banks in

the Serbian

market hold approximately

46.6% of the total assets.

Serbian market is setting a stage for

international players to either

exercise their organic growth

models and strategies to a

stronger extent or

to pursue add on acquisitions

resulting in larger market shares.

However, it is important to note

that only one bank from the top 5 is not part of an

international group and whose acquisition would

significantly

reshape current market.

� Concentration of banking sectors vary across SEE. Apparently, different countries are going through different phases of their

banking sector development. Croatian market, for example, has been consolidated by several international and regional

players, while its growth is not particularly inviting and competitive for further Greenfield entries. Romanian market, however,

appears to be growing in number of institutions, and moreover in assets of banks which are not in the top five. Serbian

market is at the lower end of the list with less than 50% of the market share belonging to top 5 players, awaiting

consolidation surge from the present international players or less likely, strong Greenfield moves.


72.7%

59.3%

50.5%

60.3%

47.2%

66.1%

72.0%74.0%

57.9%

68.0%

75.0%

60.8%

54.3%

46.6%

40%

50%

60%

70%

80%

90%

100%

Croatia Bosnia Bulgaria Romania Serbia Macedonia (Top 3) Albania

Share (Assets)

2006 2007 2008 2009f

May 2010 22

Loans

Loans (in Eur bn)

Serbia has proven to be one

of the strongest

growing lending markets in the

period from 2006 to 2009.

Even with stagnation in

2010 and 2011, it should come out of crises with an

impressive growth track

record of 18% CAGR for 2006 to

2011 period.

� Stock of loans kept its growing trend throughout the crisis, however the forecast is not of growth but rather stagnation,

meaning that the stock of loans should weather the crisis with moderate growth rates for each country. Stagnation in the

period from 2009 to 2011 is due to the fact that the crisis manifested in strong risk aversion and drying up of capital inflows to

the SEE region.

SEE Banking – Market Dynamics

27 26

12

75

1 2

52

35

25

15

8

3 3

55

36

28

17

9

0 0

19%

18%

15%

7%

12%

0

10

20

30

40

50

60


Loans (EUR bn)

0%

5%

10%

15%

20%

25%

CAGR

2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011

May 2010 23

Lending dynamics

Loans as % of GDP

Lending activity in Serbia grew from

31% of GDP to estimated 47% of

GDP in 2009.

Further recovery of GDP should

make this growth less strong but

more stable.

It is expected that with the advance

of the economy

and reduced risk aversion, lending

activity should regain

momentum and

that it will alow for a much stronger ratio of loans to

GDP, thus reducing the gap

with EU countries (currently

standing at loans being 156.4% of

GDP

� Lending is generally to support GDP in times of growth, while now, it is expected that GDP, once its starts to recover after

crisis, is to pull the growth of lending. Although rapid loan growth was both global and SEE hype, most of SEE economies

avoided overheating in the lending sector, leaving room for further growth and convergence to the levels currently held by

some new EU members.


43%

40%

46%

66%

49%

31%

27%29%

22%

60%

54%

77% 77%

60%

47%

42% 43%

39%

60%56%

86%

79%

61%

48%

42%

13.2%

9.2% 9.0%

7.2%6.7%

3.6%

4.7%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CE SEE Bulgaria Croatia Bosnia Serbia Romania Macedonia Albania

Loans (% of GDP)

0%

2%

4%

6%

8%

10%

12%

14%

CAGR

2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011

24

Deposits

After last quarter of 2008 when both Serbia and other

countries suffered major deposit flee

from banking system, Serbia

recovered and is expected to

continue growing

throughout 2009 to 2011 period,

totaling to some 14% of CAGR over

the whole presented period.

This makes Serbia a SEE leader

regarding deposit

growth.

Long term prospects are also

supported by the fact that retail clients are still

regaining trust in the banking system.

Trust in banks was shattered during

the nineties, when many banks

collapsed and were

not able to return savings to retail

customers

Deposits (in Eur bn)

� Deposits were not in the center of attention of banks operating in SEE during the years before crisis. However, crisis also

manifested through serious liquidity pressures in the interbank market, making banks question current funding policies.

Those banks which had large deposits and savings pools are better positioned to defend their positions and to use the

opportunities ahead. A more balanced funding profiles, including amassing deposits is to be expected in the future.


29

23

14

75

24

27

20

12

7

35

48

27

23

13

8

43

11%

14%

10%

11%

4%

0

10

20

30

40

50

60

70


Deposits (Eur bn)

0%

5%

10%

15%

CAGR

2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011

May 2010 25

Loans to Deposits Ratio

Loans to Deposits ratio

� Loan to deposit ratios have surged in the last years all over the SEE. However, SEE is well below unprecedented levels

reached by the Baltic countries. A number of countries which were characterized by strong loan to deposit ratio, indicated

that either their banking sector was dependent on wholesale funding or foreign parent bank funding while more affordable

foreign currency lending dominated. Next few years should provide a decrease of this ratio making the average annual

growth over the period more modest.

Loan to Deposit ratio in Serbia

had a strong growth from 2006

(from 107% in

2006 to estimated 125%

in 2009).

This level of

loans to deposit ratio is not alarming.

Measures of NBS

which made retail lending less attractive as well

as strong promotion of

savings in 2009 should

successfully rebalance levels

of loans and

deposits.


86%

100%

169%

115%

107%

83%

106%

93%

73%

36%

102%

124%129% 131%

123%118% 120%

97%

66%

106%

121%

132%126%

121%117% 114%

213%

4%4%

3% 3%

8%

2%

4%

12%

30%

60%

90%

120%

150%

180%

210%

240%

CE SEE Baltic Croatia Serbia Bulgaria Bosnia Romania Macedonia Albania

L/D (as %)

0%

5%

10%

15%CAGR

2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011

May 2010 26

Capital Adequacy

SEE Banking - Capital

� Given the downgrade of asset quality and weaker profitability induced by the crises, capital stands under pressure. Capital

Adequacy Ratio and Tier 1 Capital Ratio, however, remain relatively high making SEE banking sectors well capitalized at the

moment. Depending on potential further deterioration of asset quality as well as decline in the value of collaterals, some

banking systems might need capital injections. Regulatory pressures might result in many countries increasing capital

requirements.

Capital Adequacy Ratio & Tier 1 Capital Ratio

Capital adequacy ratio for Serbian

banks remains exceptionally high providing a strong cushion, even for

very pessimistic scenarios

regarding non performing loans.

On average, Serbian banking

is more competitive to those banking

systems which would need to be

provided with more equity.

The same applies to international

players with subsidiaries

which are in need

of additional capital injections, which will be less

competitive.

24.7

14.5 14

17.7 18.1 18.3 18

10.6

15.2

8.8

21.3

17.3

15.9 15.8

13.7

16.417.3

16.3

13.8

20.8

14.213.7

7.0

9.3

0

5

10

15

20

25

30

CE SEE Baltic Serbia Bulgaria Croatia Bosnia Romania Macedonia Albania

CAR

0

5

10

15

20

25

Tier 1 ('09f)

2006 2007 2008 2009f Tier 1 - 2009f

May 2010 27

Risk Perception� Different SEE countries reacted differently to the crises. All of them suffered both macroeconomic downturn and scarcity of

available capital. Their banking systems, were additionally hit by the crisis of confidence. While deposit insurance schemes

and government help prevented larger bank runs, external funding became an issues as SEE countries have been assessed

as those which are to witness hardest times while their banking sector grew over the past years out of boundaries of

sustainability. CDS price reaction was very strong. However, multilaterals as well as national governments prevented an

even worse scenario by applying variety of measures reducing the overall effects.

CDS (bps)Serbia presents a

rare case

compared to most SEE countries.

Starting point for CDS price was much higher at

the brink of crisis while its growth,

although high, actually

repositioned Serbia much

better relative to

its neighbors.

However, SEE region is still

perceived as high

risk region due to many structural

issues which remain unsolved.

SEE Banking – Risk Profile

369

644

866

717640

486

551

28164273184816

579

650667

748

692

385

874

0

250

500

750

1.000

CE SEE Baltic Romania Bulgaria Serbia Croatia

5Y CDS (USD) before crisis Delta CDS since onset of crisis 5Y CDS (USD) at peak

as of 15/08/2007 as of 05/03/2009

May 2010 28

Non Performing Loans� Non Performing Loans are expected to peak in 2010, after an extreme speed of growth in 2008 and 2009. If the methodology

for calculating NPL would be the same across all countries, results for Serbia and Romania would be more in line with other

countries given that these two have strictest possible methodologies which made forecasted NPL as high as 15% for 2009.

NPLs are expected to slow down, but still increase in 2010 before they start to reduce in 2011. What is to influence current

perception is the “masking” effect of loan restructuring efforts and further devaluation of collaterals. Some comfort lies in

strong capitalization of banking sectors and announced moves by governments and IFC to provide guarantee schemes.

Non Performing Loans as % of total loans

Serbian banks

reported strong surge of non

performing loans over the

presented period

However, NPL significantly

varies across individual banks,

making those with stronger risk

policies less vulnerable and

more

advantageous to others.


5%4%

1%

4%

3%3% 3% 3%

11%

3%

6%

12%

13%

17%16%

8%

6% 6%

9%

12%

7%

13%

15%

14%

10%10%

5%

18%

8%

26%

86%

29%

39%

26% 26%

8%

0%

5%

10%

15%

20%

CE SEE Baltic Serbia Romania Croatia Bulgaria Bosnia Macedonia Albania

NPL (% Loans)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CAGR

2006 2007 2008 2009f 2010f 2011f CAGR 2006-2011

May 2010 29

Foreign Currency Risk

Share of Euro or Fx Clause Loans


� Foreign currency lending as dominant type of lending is a characteristic of most banking systems in SEE. As gradual

transition to local currency lending takes time, and Euro adoption is to take more time, this risk is likely to remain strong

characteristic of SEE. Combined effect of potential depreciation, devaluation of underlying assets and regulatory pressures

toward additional capital requirements for foreign currency lending make this structural risk a persistent pressure on the

profits.

Serbian banking system is

deemed as high

foreign currency lending one.

However, most of

the SEE countries are of

similar profile 29%

58%

69%

76%

85%

72%

45% 46%

55%

72%

29%

61%

79%

74%

70%

66%

57% 56%

51%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

CE SEE Baltic Bosnia Serbia * Croatia Bulgaria Romania Macedonia Albania

Fx Loans (% of Loans)

2006 2007 2008

* - Data for 2006 and 2007 estimated based on the SGS track record

May 2010

Profitability� Profitability of banking sector in SEE has been satisfactory, however due to rebalancing of further growth 2009 to

2010, it should show more modest result. Profitability will be pressured by higher cost of funding and cost of risk, but it

might be benefiting from a leaner cost structure and more balanced/less risky portfolio.

� ROA is expected to be show volatile result over the period for most of the countries. Some countries are to make

losses while other will be posting strong growth of ROA compared to other SEE countries.

� Given that Serbian banking system is well capitalized, ROE in Serbia for 2006-2008 period seems low compared to

several SEE countries. Bulgaria however, posted impressive 23% ROE over the same period.

SEE Banking - Results

ROA of Serbian banking

compared to other SEE in the period from 2006

and 2008 is

evaluated to be medium.

It is to be followed by a

period of stable ROA at the level of approximately 1%, unlike most other countries

where ROA is expected to be

volatile.

Serbian banking

sector average ROE for 2006 to 2008 period was

7.8%

ROA & ROE

1.6%2% 1.5% 1.4%

2.2%

1.3%

0.8%

1.8%

1.4%1.4%

2%1.7%

1.6%

2.2%

1.8%

0.5%

1.4%

0.9%

0.5%0.7%

1.1%

1%

3.0%

1.4%1.2%

0.9%

0.3%

17.3%

13.3%

23.0%

7.3%7.8%

12.9%12.3%

-1%

0%

1%

2%

3%

4%

CE SEE Romania Croatia Bulgaria Serbia Bosnia Macedonia Albania

ROA

-6.0%

0.0%

6.0%

12.0%

18.0%

24.0%

ROE

2006 2007 2008 2009f 2010f 2011f Av. ROE ('06-'08)

31

Key International Groups� Large international banking groups, active in SEE, have remained fairly committed to the region, keeping their widespread

presence. Among those players, Societe Generale, UniCredit, Intesa, and KBC emerge as highly diversified on a regional

perspective, with assets in CEE accounting for less than 20 % of total Group assets. Austrian Raiffeisen and Erste, as well as

Hungarian OTP are much more heavily dependent on the region. All players have been impacted by the crisis in terms of

market capitalisation, stock prices and cost of funding, while the key factor of difference was the exposure of groups to the

CEE and SEE market. Strong interventions from the Governments and multilaterals have successfully turned the sentiment

towards SEE during 2009 to a positive one.

SEE Banking – Key Players

Dynamics of Market Capitalization of international groups present in SEE

SG benefited from its

conservative

growth in the Emerging Europe and good choice

of geographic presence,

avoiding markets with strong

macroeconomic imbalances such

as Hungary,

Ukraine and Baltic States

Fine growth of

SG’s market capitalization

allows it to collect more capital and to restructure its

current obligations.

SG seems to be well positioned to

use the

opportunity unavailable to

many other groups and to

build up its

presence, leveraging on its

diversification and strong

funding positions

depending on the risk appetite.

Anti-Crisis Support Measures� As the international crisis intensified, each SEE country government and regulators resorted to both new regulations

and numerous regulation changes as well, aiming at reducing lack of confidence, increasing liquidity of banks,

supporting lending and decreasing costs related to financing.

• Multilaterals and Foreign Countries provided funding at both government and company levels.

SEE Banking – Support Measures

Top 10 foreign banks in Serbia,

signed a treaty (aka. Vienna

Initiative) with the

NBS, backed by IMF, to maintain their “end 2008”

level of exposure until end of 2010

and to ease loan repayment terms.

Further, banks

are available to use IFC risk

sharing facilities in their effort to reduce cost of

risk of their portfolio, or to

build capacity to take more risk in

building their

further exposures.

Bosnia Bulgaria Croatia Romania Serbia

1) Strengthening of deposit guarantee schemes √ √ √ √

2) Lowering reserve requirements. √ √ √ √ √

3) Subsidies and guarantee schemes for lending √ √ √

4) Tax easing related to different sectors of economy which were hard hit by the crisis √ √ √

5) Securing commitment of international banks present in the country √ √ √ √ √

6) Interventions to protect excessive volatility of exchange rate √ √ √

Bosnia Bulgaria Croatia Romania Serbia

1) IMF and World Bank have stepped in with strong backing of sovereigns in need of funding √ √ √

2) EBRD, EIB and World Bank also boosted their lending towards SEE √ √ √ √

3) EU members benefited from extensive help from the EU. √ √

4) National governments of developed countries supported and “bailed in” for the banks having

extensive networks and exposures in SEE. √ √ √ √

CEE - Banking Outlook -

May 2010 34

CEE Banking Outlook - Contents

� The Economic Framework

– Crisis Transmission to CEE Banks

– International Commitment to CEE Region

– Growth Model Rebalancing

– Outstanding Risks

� Banking Framework

� Challenges and Constraints for CEE Banks

– Rebalancing the Banking Model

� Competitive Framework

– International Players in CEE

– Government Aid to Banking Groups

– Profit Potential and Key Strategic Drivers For CEE Banks

� FX Lending in CEE

� Central Europe

� Baltics

� South-Eastern Europe

� Other CEE

May 2010 35

Crisis Transmission Channels to CEE Banks

CEE Banking Outlook – Economic Framework

� Macroeconomic transmission channel – poor economic performance and drying capital inflows in the CEE region

� International banking sector crisis of confidence transmission channel

� at a later stage sustainability of external funding became the issue

� lending growth has been financed through funding from their parent banks or

through access to international markets.

International Commitment to CEE Region

� Strong international commitment to the region has been the key for

alleviating the effects of crisis.

� Support packages IMF, EU and IFIs have helped to boost investors’

confidence

� Banks to sign bilateral agreements on maintaining their exposure

May 2010 36

CEE Banking Outlook – Economic Framework

� Strong growth across CEE has been fuelled by buoyant domestic consumption and

rising investments

� Need for rebalancing

Outstanding Risks

� Uncertain period of recovery

� New risks arising from fiscal pressures and financial volatility in western Europe.

� Crisis in Greece

� Renewed problems in the European banking sectors.

Growth Model Rebalancing

May 2010 37

� Availability of long-term funding and cost of borrowing remained a constraint for

� Funding cost for CEE remains high.

� CEE banks will have to rely more on deposits to finance their lending growth, but access to external

funding will remain a key competitive advantage for domestic players.

� Low demand for credit on one hand and rising concern for credit quality behind the credit crunch

� Slowdown in lending activity of both households and corporate sector

� Corporate sector was under pressure

� Substantial increase in distressed banking assets across the region, for both retail and corporate sector.

CEE Banking Outlook – Banking Framework

Credit Quality - New Challenge For Banking Business

6% 4%10%

18% 24%

50%

16%

55% 51%

35%

51%

6%6%

10% 15% 15%

1%

4%6%

4% 0.2% 2%1%8%

CE SEE Baltics Other

MFIs deposits External liabilites Customers' deposits Other liabilites Debt sec.issued Capital and reserves

May 2010 38

The Road Ahead-Rebalancing The Banking Model

� Lending volumes are likely to grow at a more moderate pace after the crisis, with lending growth more tied to ability to

generate deposits. Lending growth recovery will be led by the corporate sector, while retail lending will be more constrained

in the short run. Access to external funding at reasonable prices will remain key competitive advantage for market players.

� Banking profitability in the region is likely to stay subdued in the next two years due to higher bad loans provisioning costs as

credit quality remains key challenge. NPLs have been rapidly rising, and have not peaked yet in some of the CEE states,

while cost of risk is expected to stay high in 2010.

CEE Banking Outlook – Banking Framework

Non-performing loans (% of gross loans) Cost of risk (provisions over average loans)

0

5

10

15

20

25

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15


0

1

2

3

4

5

6

7

8

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15


Some rebalancing in the

model of growth for CEE banking

is required, but long-term

potential of the CEE banking

industry the industry remains

clear.

May 2010 39

International Players in CEE- Winners Are Those Players With Enough Risk Appetite

CEE Banking Outlook – Competitive Framework

The list of international

players in CEE region remained stable during the

previous period will all of them

remaining committed to the

market. UniCredit, KBC

and Societe

Generaleemerged as

highly diversified on a regional

perspective, with less than 20% of Group assets in CEE. RZB, OTP

and Erste are

much more dependent on the

region, with a significant portion of assets in CEE

and large part of their profit coming

from the region.

All players have

been affected by the crisis in terms

of stock prices and market cap,

as well as cost of

funding, as expressed by

CDS.

Data as of 2008Total Assets

(EUR bn)

Net Profit (EUR mn)

Nr of

Branches

Countries of

Presence

CEE, % Share In

Group Assets

Market Cap, EURmn *

Unicredit 121.6 2,557 4,005 19 12 44,977

Raiffeisen 85.4 1,078 3,231 16 54 7,141

Erste 79.3 1,569 2,099 7 39 9,729

KBC 71.6 309 1,940 12 20 12,355

Societe Generale 65.9 1,201 2,609 16 6 35,947

Intesa San Paolo 42.5 186 1,781 11 7 40,167

OTP 35.2 958 1,573 9 100 6,050

* data as of Ocotber 2009

Source: Unicredit Group CEE Strategic Analysis, Bloomberg

40

Government Aid to Banking Groups

CEE Banking Outlook - Competitive Framework

Country Government aid plan

Bailout program for distressed banks

Interbank Loan Guarantee and Assets Guarantee

Recapitalization of banks-EUR 40bn (of which EUR

10.5bn available in 2008 for Top 6 banks)

Interbank Guarantee - guarantees on bank papers-

EUR 320bn

Capital Injection - Capital Base Enhancement Fund -

HUF 300bn (EUR 1.1bn)

Interbank Guarantee - refinancing - Guarantee Fund -

HUF 300bn (EUR 1.1bn)

Ad Hoc Lending Facilites to 4 local banks (OTP, FHB,

MFB, Eximbank) for a total amount of EUR 2.5bn

Source: Unicredit group CEE Strategic Analysis

Piraeus received EUR 865mn of liquidity injection through special government bonds

Liquidity injection through the issuance of special

bonds - EUR 8bn

State guarantee for new medium to long-term bank

loans - EUR 15bn

NBG agreed to issue EUR 1bn of government guaranteed bonds

Eurobank EFG issued EUR 500mn of government guaranteed bonds, out of EUR 3.2bn agreed

NBG issued EUR 350mn preference shares to the Greek state

Eurobank EFG issued EUR 950mn preference shares to the Greek state

Piraeus issued EUR 370mn preference shares to the Greek state

Capital Injection - EUR 5bn

Eurobank EFG received EUR 1bn of liquidity injection through special government bonds, out of EUR

1.4bn agreed

Greece

France Soc Gen issued EUR 1.7bn of deeply subordinated notes plus EUR 1.7bn of non-voting preference

shares to the French government.

Soc Gen placed EUR 14.05bn of government guaranteed bonds, out of EUR 14.75 bn possible

Hungary

OTP received HUF 400bn (ca EUR 1.4bn) loan from the Hungarian government

Erste Group agreed to issue up to EUR 6bn of government guaranteed bonds.

Raiffeisen Group issued EUR 4.25bn of government guaranteed bonds, out of EUR 10bn agreed.

Interbank Guarantee-clearing house, able to issue

guaranteed bonds to stimulate interbank market -EUR

75bn

Austria

Belgium KBC issued non-voting equity securties to both the Belgian Federal State and the Flemish Regional

Government of belgium, totalling EUR 7bn.

KBC agreed to the purcahse of CDO-linked guarantee from Belgian Federal State in the amount of ca

EUR 20bn.

CEE Banking Group applying for government aid

Erste Group agreed to issue participation and hybrid capital up to EUR 2.7bn. Republic of Austria has

subsribed EUR 1.22bn of participation capital while EUR 540mn has been placed with institutional

investors.

Raiffeisen Group issued EUR 1.75bn participation capital to the Republic of Austria (part of an issue

totalling EUR 2.5bn, EUR 750mn of which subsribed by RZB shareholders (EUR 500mn of which

placed with new investors in public offering) .

Recapitalization of credit institutions and insurance

companies - EUR 15bn

May 2010 41

Profit Potential and Key Strategic Drivers For CEE Banks� Top banking players committed to CEE can reinforce their position in the region, leveraging on their existing network,

improved capital position and better access to international funding. Medium term winners in CEE banking business will be

either international players active in the region with enough risk appetite and ability to leverage on diversification and strong

funding position or new market entrants.


Profit Potential For Top Players * CEE International Players- Key Strategic Drivers

CEE, % Share

In Group

Assets

Group T1

Ratio in % 1

CEE Loans 2/Deposits

in %

CEE Gap 3 (CEE

Loans - CEE

Deposits) in % of

Group Assets

Group

CDS

bps

CEE Cost

Of Risk

bps

Unicredit 12 8.5 118 1.5 81 ~200

Raiffeisen 54 8.9 127 10.1 248 >300

Erste 39 8.1 95 3.8 128 ~200

KBC 20 10.8 98 1.4 157 n.a.

Societe Generale 6 9.9 96 0.5 84 n.a.

Intesa San Paolo 7 8.1 118 1.1 47 ~200

OTP 100 12.0 129 14.2 - >300

Note: T1 Ratio is pro forma Jun 2009, Cost of Risk of Jun 2009, other data as of Dec 2008

1) It inlcudes private and public T1 injections announced untill mid- Oct 2009

2) Net Loans

3) CEE gap= sum of various (loans - depostis) only if loans>depostis . Loans are net loans.

Source: Unicredit Group CEE Strategic Analysis

May 2010 42


Times of Change Bring Strong Opportunities

for Those Able to Take Advantage of Them

� OPPORTUNITIES

Long term growth potential

unchanged

Weaker competitive pressures in the local

market, with some competitors strongly

constrained by their strategies

� THREATS

State influence increased

New entrants might consider the market,

taking advantage of lower prices and

untapped long-term potential

� STRENGTHS

Incumbents with:

1) strong presence in the market

2) long term commitment and

3) adequate risk appetite that might turn

out to be clear winners

� WEAKNESSES

Credit quality problems eroding

profitability

Incumbents might be forced to retreat as

dealing with strict risk control

Funding constraint

Bankin

g E

nvironm

ent

CE

E P

layers

May 2010 43

� Predominance of FX lending has been particularly relevant in Hungary, Poland, Romania, Serbia and in the countries with fixed

or ‘stable’ exchange rate, like the Baltics, Bosnia and Croatia. FX lending was negligible in the Czech Republic and in Slovakia,

before euro introduction, mainly due to historical absolute low level of benchmark rates in the two countries and the introduction

in early ‘90s of mortgage finance and housing scheme which made lending in LC more appealing.

� Strong demand for FX lending has been determined by the lower level of interest rates applied, given the lower benchmark of

EUR, CHF, JPY or USD, versus that of local currencies.

CEE Banking Outlook – FX Lending In CEE

FX Lending In CEE

Total FX o/w EUR o/w other Total FX o/w EUR o/w other % of total 2009 growth

Central Europe

Poland 40 40 - 8 8 - 26 7

Hungary 66 4 63 0.3 107 -3 58 -0.1

Czech R. 0.1 0.1 0.01 -13 -14 4 17 -10

Slovakia 0.2 - 0.2 3 - 3 2 -17

Slovenia 17 - 17 -8 - -8 3 -24

Baltics

Estonia 83 83 - -1 -1 - 89 1

Latvia 89 89 - -1 -1 - 92 -0.3

Lithuania 67 66 1 5 6 -4 72 0.5

SEE

Bulgaria 30 30 1 5 5 0 74 2

Romania 60 48 13 3 4 0 58 2

Croatia 69 54 15 -1 5 -17 68 14

Bosnia 89 89 - -4 -4 - 64 0.3

Serbia 82 82 - 4 4 - 64 12

Other

Turkey 3 - 3 -5 - -5 48 -4

Ukraine 72 2 70 -9 -10 -9 44 -15

Russia 12 - 12 -4 - -4 29 2

Kazakhstan 40 - 40 12 - 12 58 35

Note: Other FX includes mainly loans denominated in CHF and USD ; growth rates are not adjsuted for FX movements

Source: Unicredit Group CEE Strategic Analysis

Corporate Loans (2009 growh)Retial Loans (% of total) Retial Loans (growh 2009)

May 2010 44

� Central Europe (CE) has been relatively more resilient to the crisis than the rest of the region. Poland is the only country in

Europe which managed to avoid a recession in 2009. The Czech Republic and Slovakia have seen a substantial contraction

but are expected to rebound, as well as Slovenia. As opposed to other CE countries, Hungary has been severely hit by the

crisis because of its high external and domestic imbalances at the time of its onset of the crisis.

CEE Banking Outlook – Central Europe

More Resilient But Recovery Of Banking Profitability Needs Time

Central EuropeLow demandand credit quality concerns will be the main factors behind subdued

lending activity.

Only in Hungary and Slovenia is

the gap between

loansand deposits

significant, meaning relative

dependency of

the localbanking industry

on external funding. In

Central Europe as a whole,

lending growth will be mostly driven by the

recovery of corporate

lending.

May 2010 45

CEE Banking Outlook - Central Europe

More Resilient But Recovery Of Banking Profitability Needs Time � Deposit growth will slow in 2010 still affected by modest economic recovery and fading effects from state support. Credit

quality remains the issue to watch. The non-performing loans ratio is expected to reach a peak in 2010 to more than double

the level observed at the end of 2008. The cost of risk is expected to remain high in 2010, stretching profitability. All CE

countries are, however, forecast to achieve profit both in 2009 and in 2010, due mainly to cost efficiency.

May 2010 46

CEE Banking Outlook - Baltics

Collapsing Economic Growth, With Impact On The Banks

� The Baltics were severely affected by the global credit crunch and recession. recession. In the first half of 2009, economic

activity was weaker than expected particularly in Lithuania, where GDP contraction deepened to -20.2 % yoy, worse than

those of Estonia and Latvia, which moved into recession earlier. The very first signs of credit squeeze that emerged in the

second half of 2007 particularly in Estonia and Latvia, became evident in 2008 driven by both demand and supply factors.

Credit demand was shrinking while at the same time, Nordic banks – which dominate the local banking system – gradually

reduced their funding to the local financial institutions.

Baltics

47

CEE Banking Outlook - Baltics

Collapsing Economic Growth, With Impact On The Banks � Lending growth is anticipated to remain in negative territory in all three Baltic countries in 2010, with some slower dynamic in

retail lending compared to the corporate side. The dynamic in customer deposits has also remained weak since mid 2008 with

some outflows from banks driven by residents’ withdrawals in late 2008. The cooling in refinancing from parent banks and the

relative high loan-to-deposits ratio (among the highest in the CEE region) will remain a key constraint for lending growth. Credit

quality is expected further to deteriorate looking ahead with the non-performing loans ratio most likely peaking around mid/end

of 2011.

May 2010 48

CEE Banking Outlook – South-Eastern Europe

More Adjustments in 2010, Credit Quality Key Constraint� The economic outlook deteriorated in the SEE region at the beginning of 2009 as the transmission channel passing through

lower capital inflows and the internationally induced credit squeeze took effect. A sharp contraction in domestic demand are

a common denominator in SEE. A clear credit crunch has materialised in the first months of 2009 in Romania, Bulgaria and

Bosnia, while some lending activity has been recorded in both Croatia and Serbia later in the year, mostly due to

government-guaranteed schemes or infrastructural projects

South-Eastern Europe

May 2010 49

CEE Banking Outlook - Central Europe

More Adjustments in 2010, Credit Quality Key Constraint� All countries in SEE feature a loans-to-deposits ratio well above 100 %, which indicates dependency on external funding.

Deleveraging in 2009 will be recorded only in Romania and Bosnia, though, while the loans-to-deposits ratio will continue to

increase in the other countries. With parent banks of the top local institutions having signed commitments with the local

central banks (as part of the IMF support packages) to maintain on their cross-border exposure to Serbia, Romania and

Bosnia, liquidity should not be an issue for the banks in those countries. The peak in terms of non performing loans in the

region is expected between the end of 2010 and the first half of 2011, with the peak in cost of risk in 2010.

The outlook for the SEE banking system remains challenging

with deterioration in credit quality and

slackeningvolumes growth expected to put

further pressures on banks’

profitability.

Some moderate

growth is expected for 2010 in Croatia,

Bulgaria and Bosnia, as

retail lending will

continue to be hampered by low

consumption demand

and corporate lending by weak

investment spending. In Serbiaand Romania some

more dynamic acceleration is

possible.

May 2010 50

CEE Banking Outlook – Other CEE Countries

Turkey Benefits From Solid Banking Sector, State Intervention Key In The CIS

Other CEE Countries

� Ukraine and Kazakhstan have been the first countries in the region experiencing a full fledged economic and banking crisis,

while decline in economic activity was evident in Turkey and Russia as well in 2009. As a result of the above-mentioned

macro trends, a credit crunch has materialised in all the countries in 2009.

May 2010 51

CEE Banking Outlook – Other CEE Countries

Turkey Benefits From Solid Banking Sector, State Intervention Key In The CIS

� Strong leveraged banking sector and dependency on external funding have been a key driver for banking sector correction

in Kazakhstan, Ukraine and Russia, together with rapidly mounting credit quality issues. In Turkey, the banking sector is

more balanced, with the loans/deposits ratio below 100 %, meaning no issues in terms of funding and no pressure for

deleveraging. Retail lending growth has been extremely weak in Russia, Ukraine and Kazakhstan, in contrast to Turkey. On

the corporate side, some more resilience has been recorded in Russia, thanks to a government stimulus program. Deposit

growth has remained relatively comfortable in Russia, Turkey and Kazakhstan.

In contrast to Russia, Ukraine and

Kazakhstan, the

Turkish banking sector proved to be

very resilient to the crisis. With no liquidity

issues and the

deterioration

in credit quality under control, profitability in

2009 is remaining

strong.

May 2010 52

� Banking crises

– 117 episodes of systemic crises and 51 cases of borderline or non-systemic crises

– Authorities need to take some remedial action

– Reduce the disruption to the payments system and damage to confidence in the financial system

– Knock-on effects and the supply of credit to the private sector

– Future moral hazard

– Governments limit the fiscal costs of crisis resolution

May 2010 53

Measures affecting the costs and benefits

of crisis resolution

� Private sector solutions

� Loss imposition

� The design of deposit protection schemes

� Transparency and disclosure

– Time-consistency problem provides a case for clear rules, violations of which are obvious to the private sector and carry some political cost

� Speed of resolution

May 2010 54

� Choice of resolution strategies

– At one extreme, a bank can be kept open through an

injection of capital

– Other extreme, a bank can be closed with its assets

sold and depositors and possibly other creditors paid off

May 2010 55

Bank insolvent

Bank status unchanged Bank status changed Liquidation

Financial injection from existing shareholders

or other parties

Unassisted private sector

merger/take-over (M&A)

Liquidate

bank

Assisted private sectormerger/P&A

Sell assets Compensate creditors

Bridge bank/

NationalisationGovernment assistance

(LOLR, open bank

assistance)

Privatesector

solutions

Governmentassisted

solutions

Government

solutions

May 2010 56

� Unassisted resolutions– Bank status unchanged

• Curtail lending• A request for additional capital• Management changes• Operational changes

– Bank status changed – private sector merger

� Liquidation• Bank is declared insolvent, closed, and depositors paid off

� Assisted resolutions– Bank status unchanged

• Lender of last resort (LOLR)• Open bank assistance

May 2010 57

� Bank status changed

• Assisted merger or acquisition

• Purchase and assumption transactions (P&A)

• Bridge banks are a form of temporary government

ownership

• Outright government ownership when a very large bank fails

May 2010 58

� Type of shock and resolution technique

– If the situation is non-systemic, merged with a healthy

bank or liquidated

– In a systemic situation guarantees are likely to be

given to liability holders at the failed bank(s), and perhaps to the financial system as a whole to avoid or

reduce panic

May 2010 59

Idiosyncratic CommonShock

(Small-medium bank)

A

BaringsBCCI

(Sectoral or regional Banks)

B

S&L (US)

(Isolated LCFI failure)

C

Continental Illinois

Small banks (UK)(System-wide crisis)

D

Nordic countries (early 90s)Japan (early 90s)

East Asia (late 90s)

No widespread

contagion

Potential

widespread

contagion

Transmissionof shock

Serbia- Macroeconomic and Banking Environment -

May 2010 61

Serbia – Macroeconomic and Banking Environment

� Macroeconomic Environment– Economic Activity

– Inflation

– Unemployment & Wages

– International Transactions

– Fiscal Balance & Public Debt

– External Debt

– Monetary and Financial Indicators

– Lending Activity

� Banking Environment– General Information

– Top Players in the Serbian Banking Industry

– Foreign vs. Domestically Owned Banks

� Equity

� Lending

� Deposits

� Results– Interest Earning Assets vs. Interest Bearing Liabilities

– Net Interest and Commission Income

– Operating Expenses vs. Net Interest and Commission Income

� Profitability– Profit Before Tax

– Return on Equity

� Perceived Market Direction of Competitors

� M&A

May 2010 62

Macroeconomic Environment


-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09

Real GDP Grow th yoy chg.

Industrial Output yoy chg.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

J-08 A-08 J-08 O-08 J-09 A-09 J-09 O-09

yoy mom repo rate

Industrial Production & Real GDP growth

Inflation and Repo Rate

Source: Statistics

Office

Source: Statistics Office, NBS

Trade balance, monthly figures

-800

-600

-400

-200

0

j-07 m-07 s-07 j-08 m-08 s-08 j-09 m-09 s-09 j-10

EUR mn

.

Source: Statistics

Office

Budget deficit, % of GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2007 2008 2009 2010f

Source: Finance

Ministry

Monetary Aggregates, annual growth

-13%

-8%

-3%

2%

7%

12%

17%

22%

J-09 M-09 M-09 J-09 S-09 N-09

M1 M2 M3

Source: NBS

Foreign reserves, imports coverage in months

0

3

6

9

2006 2007 2008 Q3/09

months

Source: NBS

May 2010 63

Economic Activity


Real GDP Growth Per Sectors

-20% -10% 0% 10% 20%

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

yoy growth

Agriculture Industry Construction

Trade Transport & Telecoms Financial Intermediation

Source: Statistics Office

Seasonally-Adjusted Industrial Output (monthly chg.)


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

O-08 J-09 A-09 J-09 O-09 J-10

Ind.prod.

growth

Total Industry Manufacturing

� Manufacturing, construction and trade were the sectors most affected by the crisis.

� The expectations for 2010 vary from central bank's 1.5% GDP growth projection to more optimistic 2% of the IMG and the

government and even 2.1% of the EBRD).

� Industrial output contracted by 12.1% yoy in the entire 2009 and returned to growth in January (3.7% yoy)

May 2010 64

Inflation


CPI Inflation & Base Inflation

Source: Statistics Office, NBS

-1.0%

-0.6%

-0.2%

0.2%

0.6%

1.0%

1.4%

1.8%

2.2%

D-08 F-09 A-09 J-09 A-09 O-09 D-09 F-10

Montlhy Inflation

Base Inflation

1.8

1.9

2.0

2.1

2001 2002 2003 2004 2005 2006 2007 Apr-

08

Oct-

08

Apr-

09

Oct-

09

mn

10

14

18

22%

Nr. of Employed

Unemployment Rate

Number of Employed & Unemployment Rate


Average net monthly salary in EUR

260

347

403

375

0 80 160 240 320 400

2006

2007

2008

2009


Serbia’s

employee

numbers

dropped 5.1% in

2009, and the

country had a

17.4%

unemployment

rate in October

2009.

Negative trends

are likely to

sustain in 2010

despite the

gradual recovery

of economic

activity.

Net wage

growth will

remain subdued

this year.

Consumer price inflation considerably

moderated to end-year 6.6% and average 8.4%

in 2009, falling closer to the lower end

of the targeted range (6% -10%) of the central

bank.

Unemployment & Wages

May 2010 65

International Transactions


Key Import Items In 2009

Key Export Items In 2009

Total Exports EUR 5.96 billion

Total Imports EUR 11.2 billion

Source: Statistics

Office

* % of total exports

* % of total imports

0 100 200 300 400 500

Iron&steel

Clothes

Cereals

Fruit&vegetables

Non-ferrous

metals

EUR mn

7.7% *

6.5%

5.7%

5.4%

5.3%

0 200 400 600 800 1000 1200

Oil& Oil derivatives

Road vehicles

Gas

Electical machinery

Industrial machinery

EUR mn

9.5% *

7.7%

5.0%

4.4%

4.5%

Current Account Deficit (% of GDP)

Source:

NBS

-13.1%

-16.2%

-17.8%

-5.5%

-8.0%

2006 2007 2008 2009 2010e

Serbia’s trade deficit narrowed by 36% yoy to

EUR 5.2bn in 2009.

The exports returned to 10.7% annual growth

in January 2010, but this largely reflects low

level from 2009. The imports were still lower

6% yoy in January.

The current account deficit narrowed by hefty

71% yoy to EUR 1.7bn in 2009, down from

EUR 6.1bn in 2008. The CA gap is likely to

reach 8% of GDP this year, according to the

projection of the NBS.

FDI were lower by 25% yoy at EUR 1.4bn in

Jan-Dec 2009.

May 2010 66

Fiscal Balance and Public Debt


Public Debt (% of GDP)

8,000

9,000

10,000

11,000

2007 2008 2009 2010

EUR mn

22

26

30

34

% of GDP

Source: Finance Ministry

The consolidated budget gap stood at over 4% of the

country GDP in 2009.

The 2010 budget law projects consolidated fiscal

deficit of 4% of GDP, in line with Serbia’s stand-by

arrangement with the IMF.

By end-December 2009, public debt reached EUR 9.9bn

(31.3% of GDP).

Serbia’s public debt is projected to rise to some 34%

of GDP at end-2010.

May 2010 67

External Debt


External Debt (as % of GDP)

98%

67%62%

54%

64% 63%60%

64%

72%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: NBS

External Debt By Sectors

0

3,000

6,000

9,000

12,000

31

.12.0

7.

31

.12.0

8.

31

.1.0

9.

28

.2.0

9.

31

.3.0

9

30

.4.0

9.

31

.5.0

9.

30

.6.0

9.

31

.7.0

9.

31

.8.0

9.

30

.9.0

9.

31

.10.0

9

30

.11.0

9

31

.12.0

9.

EUR mn Public Sector Corporates Banks

Source: NBS

EUR mn

0

400

800

1,200

1,600

2,000

2,400

31.12.00. 31.12.04. 31.12.08. 30.4.09. 31.8.09. 31.12.09

Short term debt

Short-term External Debt

Source: NBS

Gross external debt rose by 4.5% yoy in 2009 or

some EUR 760mn to EUR 22.8bn which stands at

over 72% of the country’s GDP for 2009.

In 2009, public sector was the major contributor to the

rise in gross foreign debt.

Serbia’s gross external debt stayed flat at EUR 22.8bn in

January 2010.

May 2010 68

Monetary and Financial Indicators


During 2009, the repo rate has been slashed by a

total of 825bps. The NBS said at the beginning of the

year that monetary policy easing is expected to be

more gradual in 2010. However, since late March the

rate has been cut three times to record low of 8%.

The NBS has poured over EUR 7500mn into the forex

market so far this year in attempts to bolster the

national currency.

The dinar lost over 7% against the euro last year.

Gradual weakening of the national currency is

expected in 2010 as investment inflow remains

scarce.

After shrinking or being almost flat in the course of

2009, M3 monetary aggregate has recovered in the

final quarter.

Key Rate Evolution

10.75%

15.75%15.00%

14.00%

13.00%

11.00%

9.50%

12.00%

16.50%

17.75%

9%

11%

13%

15%

17%

J-0

8

M-0

8

M-0

8

J-0

8

S-0

8

N-0

8

J-0

9

M-0

9

M-0

9

J-0

9

S-0

9

N-0

9

Repo Rate

Source: NBS

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2008 F-09 A-09 J-09 A-09 O-09 D-09RSD mn

M1 M2 M3

Monetary Aggregates

Source: NBS

-20%

0%

20%

40%

60%

80%

100%

J-09 M-09 M-09 J-09 S-09 N-09

yoy grow thDinar Reserve Money Currency In Circulation

Source: NBS

Monetary Aggregates

May 2010 69

Lending Activity


Bank lending was nominally up by 16% in Q3 compared

to Q4/2008.

Bank lending will remain stable thus year, rather than

increase.

The strongest growth in Q3 (20%) was recorded in

lending to the government which was the trend in the

entire 2009.

Bank lending to households and enterprises grew at

much lower rates.

At the end of Q3/ 2009, non-performing loans accounted

for 10.4% of all loans in Serbia.

Lending Activity (Annual Growth)

0

10

20

30

40

50

60

2007 2008 2009

%

Total Corporate Sector Households

Source: NBS

Placements in REPO Securities

8

10

12

14

16

18

10

2008

11 12 1

2009.

2 3 4 5 6 7 8 9 10 11 12 1

2010.

2

(%)

0

50

100

150

200

RSD bn

Outstanding balance of repo securities - right scaleNominal interest rate - left scale

Source:

NBS

0

3,000

6,000

9,000

12,000

31.12.08. 28.2.09. 30.4.09. 30.6.09. 31.8.09. 31.10.09. 31.12.09.

EUR mn

NBS Banks Total Reserves

Foreign Currency Reserves

Source: NBS

The foreign

currency

reserves held by

the central bank

increased by

EUR 2.4bn in

2009, hitting

EUR 10.6bn at

end 2009.

May 2010 70

General Information

� A total of 34 banks operate in Serbia,

– 20 banks are foreign owned (majority ownership),

– 9 are state-controlled and

– 5 are privately owned.

� Serbian banking sector is yet to undergo a major concentration phase, since share of the top five (46.6%) and top ten (69.4%) banks, by Total Assets, is still substantially below the average in other countries in CEE.

� Major international banks present on the market include (among others):

– Large Internationals - Banca Intesa, Unicredit and Societe General (KBC is present, but through an insignificant bank)

– Austrian regional Banks - Raiffeisen, Hypo Alpe-Adria, Erste and Volksbank.

– Greece regional Banks – National Bank of Greece, EFG and Alpha

� Banking sector employs around 31,500 people. Number of employees has been rising steadily since the major restructuring of the banking system in the period of 2000-2003, when the number was below 20,000. Assets per employee at the end of September where EUR 670 th. per employee.

� At the end of September all 34 banks in Serbia operate a network of 2,660 branches (any separate point of sale managed by the bank). This produces an average of 11.9 employees per branch, slightly below EU.

� National Bank of Serbia is the chief regulatory body which oversees banking industry and other financial services (insurance, pension funds). Since NBS is also in charge of monitoring and conducting the monetary policy of the country, banking sector provisions have been used at times more as a monetary policy tool, than for risk control and management of the stability of the banking system.

.

.

.


May 2010 71

3,130

2,1011,975

1,339 1,283 1,264

1,003 950 892719

0

1,000

2,000

3,000

4,000

5,000

6,000

Banca Intesa Komercijalna

banka

Raiffeisen

banka

Hypo Alpe-

Adria-Bank

Eurobank

EFG

Unicredit

bank

AIK banka Société

Générale

Vojvođanska

banka (NBG

Group)

Volksbank Other banks

EU

R M

2006 2007 2008 Sep-09

20.5%

17.5%2.7%

-1.9%

17.2%13.5% 27.4%

12.7%-1.4%

15.7%

14.7%

6,448

Top Players in the Serbian Banking� Total Assets as of September 2009 reached EUR 21.1 bn. In the observed period Banca Intesa managed to increase and

solidify its leading positions on the market, but still controls less than 15% of the market. Data shows that there is only one

more bank controlling 10% of the market, and another four over 5% market.

Since 2006 , Total Assets have

grown at an average of 12.5%

Average assets per bank are

EUR 620 m. Average assets

of foreign owned banks are EUR

788 m.

Top five banks control 46.6%

and top ten 69.34% of Total

Assets

*September figures were used as a end-of-the-year proxy for CAGR rates

14.8% 10.0% 9.4% 6.3% 6.1% 6.0% 4.8% 4.5% 4.2% 3.4% 30.6%

Market share

14.7%

Assets


May 2010 72

Foreign vs. Domestically Owned Banks

� Foreign owned banks account for eight of the ten top players on the market. After an entrance of a number of foreign owned

banks in Serbia it the beginning of this decade (mainly through acquisitions) by 2006 foreign owned banks achieved a

dominating position on the market. However, since 2006, remaining domestically owned banks have defended its position

well and even advanced in market share.

4.48%

79.04%

20.96%

4.19%

75.51%

24.49%

4.05%

75.34%

24.66%

4.50%

74.69%

25.31%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Société Générale Foreign Banks Domestic Banks

2006 2007 2008 Q3 2009

12.72%

19.86%

10.45% CAGR

over period

*September figures were used as a end-of-the-year proxy for CAGR rates

Market share of domestically

owned banks has increased at the

expense of Austrian banks.

In the observed period,

domestically owned banks

achieved almost

twice as fast growth rate.

Market Shares


May 2010 73

Equity� Equity invested by banks in Serbia is extremely high due to local regulations. Banks must at all times maintain a 12% Capital

Adequacy Ratio, compared to usual 8% in EU States. Also, Obligatory Reserve levels and bad loan provisioning system are

extremely strict, forcing banks to invest heavily into equity, just to meet these requirements.

186202

270

185195

122

214

140

160

91

519

286

503

338

403

248

398

213

242

168

0

100

200

300

400

500

600


banka

Raiffeisen

banka

Hypo Alpe-

Adria-Bank

Eurobank

EFG

Unicredit

bank

AIK banka Société

Générale

Vojvođanska

banka

Volksbank

EU

R M

2006 2007 2008 Sep-09

16.6% 13.6% 25.5% 25.2% 31.4% 19.6% 39.6% 22.4% 27.2% 23.3%Capital to Total Assets Ratio

*Ranked by Assets size

Komercijalna Banka has

arranged an equity investment of EUR 120 M for

the first quarter of 2010. Investors

will be EBRD, IFC, SwedFund,

KfW and JBIC.

State has two years to match

this investment in order not to loose controlling stake,

but the agreement also

envisages full privatization after

2015

Equity


May 2010 74

1,932

1,244

874 828 774 732 704596

491395

3,764

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


banka

Hypo Alpe-

Adria-Bank

Unicredit

Bank

Eurobank

EFG

Raiffeisen

banka

AIK banka Societe

Generale

Vojvođanska

banka

Volksbank Other Banks

EU

R M

2008 Sep-09

0.8%

1.23% 5.7% 51.7%-25.5% -25.3% 5.1%

19.22%-10.2%

3.0%

-2.15%

Loans and other lending (Cross-Border lending not included) � First nine months of 2009 have shown the results of the crisis and most of the banks achieved low or negative growth in

lending activity. Two exceptions to this rule were SGS and Unicredit, banks’ which were less shaken by the crisis and which

have the best access to international funding. Total Loans and other lending at September 2009 stood at EUR 12.3 b.

Both SGS and

Unicredit have benefited form

the situation, but Unicredit’s loans

on a local level

have risen faster due to, in part, local lending to

huge state controlled

companies. SGS has facilitated this

lending through cross-border

arrangements.

*Due to lack of precise data, lending has been calculated as a sum of two Balance Sheet positions – “Loans, Advances and Lending” and “Other

Lending”

**Cross-Border Loans are not included ** Ranked by the size of proxy loans

Market share

15.7% 10.1% 7.1% 6.7% 6.3% 5.9% 5.7% 4.8% 4.0% 3.2% 30.5%

Local Lending


May 2010 75

854

520

641704

9741,0501,078

1,1741,2321,244

2,032

0

500

1,000

1,500

2,000

2,500


banka

Raiffeisen

banka

Eurobank

EFG

Unicredit

Bank

Societe

Generale

Hypo Alpe-

Adria-Bank

AIK banka Vojvođanska

banka

Volksbank Alpha Bank

EU

R M

Local Cross Border

Loans and Other Lending including Cross Border� Estimated sum of all Cross Border Lending at the end of Q3 2009 was EUR 3.5 bn. Top 10 banks on the market provided

60% of all Cross Border lending, and together with Alpha bank from Greece 75% of all lending CB lending. Total Loans with

Cross Border lending as of September 2009 stood at EUR 15.7b.

When both local

and CB lending are calculated SGS is the six ranked bank in

Serbia.

An addition to the top 10 banks is

Greek Alpha

Bank, which had high CB lending

*Cross Border lending figures are unofficial estimates, but are considered to be representative. No similar data is available for end of 2008

** Ranked by the size of total lending for top 10 banks

Local Lending and Cross Border Lending (September 2009)

12.1% 7.9% 7.8% 7.4% 6.8% 6.7% 6.2% 4.5% 4.0% 3.3% 5.4% Market

share


May 2010 76

2,072

1,705

1,079

849

685604

542 525458 396

3,403

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


banka

Raiffeisen

bank

Eurobank

EFG

Unicredit

bank

Vojvođanska

banka

AIK banka Hypo Alpe-

Adria-Bank

A lpha Bank Société

Générale

EU

R M

Dec-08 Sep-09

29.3%

13.7%

1.7%-11.2%

8.02% -3.2% 5.4% -10.6%17.9%

-4.6.%

3.8%

Deposits – Transaction and Other Deposits� Local deposits have changed quite differently between banks in 2009. Generally in Serbia, deposits from general public are

drown through offering of extremely high interest rates, which even reach 8%-9% for term deposits in euros.

� Total deposits at September 2009 stood at EUR 12.3 bn.

SocieteGenerale’s policy

was not to overpay for

deposits, but to win customers by

offering safety above all. This is

achieved by conducting a

conservative and secure

investment policy.

Result is a small decline in overall

deposits, but it can be assumed

that the deposit base is more

secure for SGS, than for banks

which have

extreme interest rates as a main

selling point

*Due to lack of precise data, deposits are calculated as a sum of two Balance Sheet positions – “Transaction Deposits” and “Other Deposits”

** Ranked by the size of proxy deposits

16.8% 13.8% 8.8% 6.9% 5.6% 4.9% 4.4% 4.3% 3.7% 3.2%

27.6%Market share

Deposits


May 2010 77

2,338

2,778

1,453

1,662

1,487 1,451

771

1,188

1,0431,164 1,152

1,019

639

802

0

500

1,000

1,500

2,000

2,500

3,000

Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09 Dec-08 Sep-09

Banca Intesa Komercijalna banka Raiffeisen banka Unicredit bank Hypo Alpe-Adria-

Bank

Eurobank EFG Société Générale

EU

R M

Interest Bearing Liabilities Interest Earning Assets

Interest Earning Assets vs. Interest Bearing Liabilities� Interest Earning Assets and Interest Bearing Liabilities show that most of the banks have good structured balance sheets.

Only exemption to this rule was the sole state owned bank among top banks. Main reason behind this could be the fact that

Komercijalna Banka has one of the lowest Equity / Total Assets ratio and was forced to seek funding through borrowing

money.

SGS and Hypo

are the banks with the highest

Equity base among top banks

High IEA /IBL ratio also shows

that funds are well used and not

trapped unprofitably

109.0% 114.9% 95.8% 97.5% 123.9% 106.3% 105.8% 123.7% 136.7% 151.3% 119.8% 120.0% 124.2% 130.9%

IEA / IBL ratio

*Top international Banks and largest local state controlled bank

*IEA and IBL per bank are calculated by adding positions from unaudited banks statements published by NBS

IEA / IBL


May 2010 78

Net Interest and Commission Income (2006 – 2008)� Net Interest and Commission Income has grown at impressive rates over the period from 2006-2008. This was a result of

several factors. Main are the development of foreign owned banks which finished post acquisition restructuring of local

subsidiaries and turned to profit generation, rapid development of Serbian economy and relatively cheap international

funding.

Banca Intesastrongly benefited

from a leading place on the

market, wrapping up of

restructuring and an add-on

acquisition in

2007

103

82 85

3643

55

44 42 41

12

154

97

113

52

71

52

86

57 60

21

216

111

157

78

123

67

98

7266

34

0

50

100

150

200

250


banka

Raif feisen

banka

Hypo Alpe-

Adria-Bank

Eurobank

EFG

Unicredit

bank

AIK banka Société

Générale

Vojvođanska

banka

Volksbank

EU

R M

2006 2007 2008

CAGR over

period

44.7% 16.8% 35.6% 47.4% 69.3% 10.0% 49.3% 31.6% 26.9% 66.6%

Net Interest & Commission Income (2006 - 2008)


May 2010 79

160

83

116

58

88

50

78

52 54

24

156

74

104

53

83

4852 54

3429

0

20

40

60

80

100

120

140

160

180


banka

Raiffeisen

banka

Hypo Alpe-

Adria-Bank

Eurobank

EFG

Unicredit

bank

AIK banka Société

Générale

Vojvođanska

banka

Volksbank

EU

R M

Sep-08 Sep-09

Net Interest and Commission Income (Sep 2008 – Sep 2009)� Crisis has pushed incomes of local banks lower and this is visible at almost all banks. Societe Generale and Volksbank are

the only exemptions. Volksbank has achieved this at a generally lower level of income. SGS and its prudent selection of

client base through rigorous implementation of conservative standards have prepared the bank in the best possible way for

the ongoing turbulent times.

Change %

-2.8% -10.8% -10.0% -8.2% -5.5% -2.4% -33.4% 3.5% -36.8%20.7%

Net Interest & Commission Income (Sep. 2008 – Sep. 2009)

SGS continued to fair quite well in

2009 (Q3 results

showing y-o-ygrowth of 3.5% in

net interest and commission

income) as well

as in the previous years, unlike

most of the competitors

whose net

interest and commission

income decreased.


May 2010 80

0.0

50.0

100.0

150.0

200.0

250.0

2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008

Banca Intesa Raiffeisen banka Eurobank EFG Komercijalna banka Société Générale Hypo Alpe-Adria-

Bank

Unicredit bank

Operating Expenses Net Interest and Commisions Income

89.2% 61.5% 50.4% 68.2% 68.0% 57.8% 118.7% 78.6% 54.0% 81.8% 85.5% 81.5% 64.7% 60.4% 58.4% 89.9% 78.2% 58.2% 48.9% 58.7% 51.0%

Operating Expenses vs. Net Interest and Commission Income (2006 – 2008)� On a local level most of the top banks experienced high fluctuations of Operating Expenses (Employees, Depreciation and

Other) and Net Interest and Commission Income. Only Raiffeisen and SGS have simultaneously maintained a steady policy

of cost control which maintained favourable Costs to Income ratio and at the same time achieved a steady growth of income.

SGS has

improved its Cost to Income ratio in

each of the previous three years, while at

the same time strongly

expanding its retail network

Cost to Income Ratio

Opex vs. Net Interest & Commission Income (2006 - 2008)


May 2010 81

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09 Sep-08 Sep-09

Banca Intesa Raiffeisen banka Eurobank EFG Komercijalna banka Société Générale Hypo Alpe-Adria-

Bank

Unicredit bank

Operating Expenses Net Interest and Commisions Income

Operating Expenses vs. Net Interest and Commission Income (Sep 2008 – Sep 2009)� September 2009 on Sep 2008 figures mainly show that most of the key banks have maintained Cost to Income ratio at

relatively the same level. This was done by slashing cost to keep up with the declining income from banking activities. Only

exemption is SGS, which has at achieved growth in Net Banking Income and has avoided painful measures of reducing

staff, salaries or other operating expenses to control costs in a state of generally deteriorating revenues.

46.7% 45.8% 55.1% 58.3% 53.3% 51.1% 78.1% 85.1% 58.6% 61.0% 54.3% 57.3% 47.3% 48.5%

3.4%

Cost to Income Ratio

Among the top players, only

SGS has achieved growth

of revenues in first nine months

Opex vs. Net Interest & Commission Income (Sep. 2008 – Sep. 2009)


May 2010 82

Profit Before Tax (2006 – 2008)� In the period between 2006 and 2008, most of the top ten banks achieved strong growth through leveraging on high interest

rates on the market, cheap international financing and primarily low demands on the creditworthiness of clients. There could

have been an even larger expansion of lending, but the National Bank of Serbia intervened several times with raising of

obligatory reserve rates and even prohibiting of certain retail loan products.

Total profit for 2008 achieved by

all profitable

banks was EUR 542 M

Total loss recorded by all

unprofitable banks was EUR

113 M

Foreign owned banks recorded

EUR 375 M of profits and EUR

52 M of losses

CAGR

over period

1310

29

9

-4

17

51

27

16

7

42

36

56

19 18

26

63

20

26

4

79

35

85

30

51

38

74

27

8

12

-10

0

10

20

30

40

50

60

70

80

90

100


banka

Raiffeisen

bank

Hypo Alpe-

Adria-Bank

Eurobank EFG Unicredit bank AIK banka A.D.

Niš

Société

Générale

Vojvođanska

banka

Volksbank

EU

R M

2006 2007 2008

144.0% 83.8% 73.1% 78.8% 643.1% 49.5% 21.1% 0.1% -32.3% 28.8%

Profit Before Tax (2006 - 2008)


May 2010 83

ROE (2006 – 2008)

� Return on Equity achieved by leading ten banks on the market is very good. Average ROE of the top ten banks by assets

size in 2008 was 12.7%.

7.6%

5.4%

11.2%

5.5%

-2.2%

15.1%

25.2%

20.3%

11.0%

8.2%

11.7%

15.1%

12.9%

8.2%

6.3%

13.9%

17.2%

9.4% 9.7%

3.1%

15.9%

12.0%

17.2%

10.2%

12.8%

16.5%

19.3%

12.8%

3.1%

6.9%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


banka

Raiffeisen

banka

Hypo Alpe-

Adria-Bank

Eurobank EFG Unicredit bank AIK banka Société

Générale

Vojvođanska

banka

Volksbank

A.D. Beograd

2006 2007 2008

Decline in the

profit rate of SGS is partially

explained by strong growth of

equity in 2007,

which put pressure on the profit rate, since

overall profits

stagnated

*ROE is calculated based on Profit Before Tax, due to lack of precise data of After-tax Profit for

2008

ROE (2006 - 2008)


May 2010 84

Profit Before Tax (Sep 2008 – Sep 2009)� Crisis has hit strongly the Serbian banking industry in 2009 and this led to extensive fall of comparable profit to the previous

year. All top banks had a decline in profit compared to the previous period. Unicredit, SGS and Volksbank have recorded the

smallest decrease among the top banks.

78

26

71

24

39

29

52

17 16

12

53

13

29

18 19

26

32

13

58

-10

10

30

50

70

90


banka

Raiffeisen bank Hypo Alpe-

Adria-Bank

Eurobank EFG Unicredit bank AIK banka A.D.

Niš

Société

Générale

Vojvođanska

banka

Volksbank

Sep-08 Sep-09

-31.3% -50.6% -58.6% -24.8% -52.0% 12.0% -38.8% -26.1% -67.1% -27.3%-Change

%

Profit Before Tax (Sep. 2008 – Sep 2009)


May 2010 85

ROE (Sep 2008 – Sep 2009)� When 9 months results for 2008 and 2009 are compared, six among the top ten banks have achieved a major fall in

profitability, while four, including SGS have recorded smaller drop in overall profitability.

As seen on previous graphs, cost control and

relatively stable level of operating

costs to NBI within SGS, have

led to smaller

decrease in overall

profitability.

*ROE is calculated based on Profit Before Tax

13.67%

7.98%

12.53%

7.08%

8.68%

11.09%

12.23%

7.42%

5.57%5.94%

10.30%

4.45%

5.84%5.37%

4.69%

10.34%

8.05%

6.05%

2.23%

4.99%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%


banka

Raiffeisen

banka

Hypo Alpe-

Adria-Bank

Eurobank EFG Unicredit bank AIK banka Société

Générale

Vojvođanska

banka

Volksbank

A.D. Beograd

Sep-08 Sep-09

ROE (Sep. 2008 – Sep. 2009)


Perceived Market Direction of Competitors

Not perceived to have financial strength to pose a threat to major players in the medium future. If local market

and general conditions in Greece deteriorate further, some Greek banks might even consider divesting foreign subsidiaries.

Greek Banks (EFG, NBG, Alpha, Pireaus, Marfin), OTP (Hungary)

Due to current problems in the holding companies, sale can be expected in short to medium term for both Hypo and Volksbank.

While Hypo might be sold in peaces (country by country), Volksbank will probably be sold as a whole (Raiff. is a

potential suitor)

Hypo

Volksbank

Operates successfully for a number of years. Specialized bank for financing of small companies and

entrepreneurs.

ProCredit

Present through a small Bank (EUR 170 m Assets). Mulled selling in near future. On the other hand, KBC holds

30.6% of Nova Ljubljanska Banka – NLB (Slovenia), a relatively strong regional player (ex-Yu). NLB has a medium sized bank in Serbia (EUR 430m in Assets)

KBC

Entered the market through small private bank in 2005. Still not achieved profitability, do not seem to eager to

push.

Findomestic (BNPP)

Entered the market through small private bank in 2005. Still not achieved profitability, do not seem to eager to

push.

Credit Agricole

Managed to increase its market share in recent years, leveraging on the fact that it was the only strong state

owned bank. Lack of equity led to several increases of capital by EBRD and the State has agreed to privatize the

bank in the future. Strong organic growth can be expected in the meantime, fuel by new equity and easier access to funds.

Komercijalna

Since acquiring a relatively small state owned bank in 2005, Erste has not been able to strongly increase its

market share. Hypo is seen as a primary acquisition target for them, but they also seem to be interested in eventual privatization of Komercijalna

Erste

Has even achieved a leading position on the market in 2006, but has since lost share. However, they have now

stabilised and have a firm position among the top five banks, which they will probably try to maintain, maybe make small add-on acquisitions

Raiffeisen

Unicredit entered Serbia through merger with HVB, which acquired local private bank in 2005. Since present on

the market, achieved constant growth. Extremely interested in acquiring Komercijalna Banka and are actively monitoring its operations.

Unicredit

Achieved a leading role on the market in the previous few years through a combination of both organic and

acquisition driven growth. Their aim is to capture at least 25% market share in Serbia, which would provide for

stable and profitable operations in future

Banca Intesa


prof. dr goran pitić, fefa

Education

crisis growth

growth reversal

economiesrobust growth

higher growth

serbiareal gdp growth

robust growth rates

robust growth was5

strong credit growth