THE BANKING CHALLENGES AND OPPORTUNITIES IN CENTRAL AND EASTERN EUROPE

Robert Wright Chief Executive Officer Raiffeisen Bank Kosovo November 26th 2015

Agenda

• Current environment

- who, where, what?

- macro economic data

• The banking challenges and opportunities

- costs

- competition

- customers

• Q & A

11/24/2015 Chapter 2

Geographic Footprint

3

Leading regional player

with CEE presence of over 25

years

Covering 16 markets (incl.

Austria), of which nine are EU

members and Serbia and

Albania have candidate status

Top 5 market position in

10 countries

Strong market position with

Austrian corporates focusing

on CEE

Note: Position based on loans and advances to customers as of Q3 2014. All loan data in EUR.

Additionally, RBI operates leasing units in Moldova and Kazakhstan.

Croatia, #4

Loans: 3.2 bn

Customers: 463,552

Business Outlets: 77

Bosnia & Herzeg., #2

Loans: 1.2 bn

Customers: 499,973

Business Outlets:

96

Albania, #1

Loans: 0.9 bn

Customers: 723,451

Business Outlets: 92

Kosovo, #1

Loans: 0.5 bn

Customers: 278,432

Business Outlets:

52

Romania, #4

Loans: 4.3 bn

Customers: 2,089,544

Business Outlets: 529

Poland, #8

Loans: 9.8 bn

Customers: 689,676

Business Outlets: 351

Czech Republic, #5

Loans: 6.3 bn

Customers: 481,804

Business Outlets: 127

Hungary, n.a.

Loans: 4.7 bn

Customers: 580,052

Business Outlets: 114

Austria, #3

Loans: 23.5 bn

Customers: 8,040

Business Outlets: 3

Slovenia, #12

Loans: 0.8 bn

Customers: 63,426

Business Outlets: 14

Bulgaria, #6

Loans: 2.2 bn

Customers: 761,894

Business Outlets: 156

Serbia, #5

Loans: 1.1 bn

Customers: 640,337

Business Outlets: 85

Russia, #10

Loans: 8.4 bn

Customers: 2,940,532

Business Outlets: 212

Belarus, #6

Loans: 1.0 bn

Customers: 744,935

Business Outlets: 97

Ukraine, #5

Loans: 2.7 bn

Customers: 2,940,593

Business Outlets: 671

Slovakia, #3

Loans: 7.5 bn

Customers: 926,903

Business Outlets: 178

Central Europe (CE)

Southeastern Europe (SEE)

Russia

CEE Other

Corporate Presentation 011/24/2015

CE /SEE/EE Countries

Central Europe South East Europe Eastern Europe

Hungary Poland Czech Republic Slovakia Slovenia

Romania Bulgaria Croatia Bosnia and Herzogovina Serbia Albania Kosovo

Russia Ukraine Belarus

11/24/2015 Chapter 4

Market data from Thomson Research and Raiffeisen Bank

International Research (June 2015)

Loans

11/24/2015 Chapter 5

-10

-6

-2

2

6

10

14

2010 2011 2012 2013 2014

CE household loans (% yoy) CE corporate loans (% yoy)

%

Central Europe loan growth - household and business segments

Loans

11/24/2015 Chapter 6

-8

-6

-4

-2

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

SEE household loans (% yoy) SEE corporate loans (% yoy)

%

South East Europe loan growth household and business segments

Loans

11/24/2015 Chapter 7

0

15

30

45

60

75

HU PL RO BG HR RS AL RU UA BY

CE SEE EE

2013 V 2014

Foreign Currency Loans (% of total)

Non Performing Loans

11/24/2015 Chapter 8

0

5

10

15

20

25

30

35

40

HU RO SI BH BG HR RS AL UA*

CEE: Markets with NPLs < 10% CEE: Markets with NPLs > 10%

0

1

2

3

4

5

6

7

8

9

10

BY SK RU** CZ PL

Non Performing Loans

11/24/2015 Chapter 9

0

5

10

15

20

04 05 06 07 08 09 10 11 12 13 14

Central Europe Southeastern Europe Eastern Europe

CEE: NPLs (% of total loans)

Average Loan Growth

11/24/2015

Chapter 10

2000-10 2011-14 2015-2019f

Poland 15.2% 6.8% 8.8%

Hungary 17.7% -4.7% 11.4%

Czech Republic 6.7% 4.8% 6.6%

Slovakia 10.9% 6.5% 8.1%

Slovenia 15.8% -8.8% 4.0%

Romania 40.3% 0.6% 12.4%

Bulgaria 34.0% 0.9% 3.8%

Croatia 16.2% 0.6% 0.1%

Serbia 49.8% 4.4% 7.6%

Bosnia and Herzegovina 16.7% 3.8% 4.4%

Albania 36.3% 8.8% 8.8%

Russia 38.0% 22.1% 9.3%

Ukraine 48.1% 7.9% 19.3%

Belarus 67.2% 36.7% 15.0%

CE 13.0% 4.5% 8.2%

SEE 27.9% 1.5% 8.1%

EE 39.7% 21.5% 10.3%

CEE 31.2% 14.8% 9.5%

Source: national sources, RBI/Raiffeisen Research * Loan growth rates in LCY-terms

Return on Equity

11/24/2015 Chapter 11

-15%

-10%

-5%

0%

5%

10%

15%

20%

HU SI** SK PL CZ

2013 2014

Central Europe

-15%

-10%

-5%

0%

5%

10%

15%

RO RS HR BH BG AL

2013 2014

South East Europe

-10%

-5%

0%

5%

10%

15%

20%

UA** RU BY

2013 2014

Eastern Europe

Return on Equity

11/24/2015 Chapter 12

0

2

4

6

8

10

12

2013 2014

CEE CE/SEE Euro area

CEE vs Euro area profitability (RoE, %)

Reduced income

• Regulation on capital, liquidity and structure is also causing shrinkage and distraction. Basel III 200 pages Basel IV 1000 pages!

• EBA – EUR 800bn reduction in loans outstanding 2011 – 2014 and EUR 1trn reduction in RWAs*

• Return on Equity 3.6% December 2014* – better but still too low.

• Non performing loans - NPLs peaked in 2013 at 13.8% in CEE. 9.5% Q1 2014 but forbearance introduced by EBA and IFRS9 may necessitate more provisions.

• Foreign currency loans – haircuts – Poland, Hungary, Croatia, Serbia.

*(EBA Risk Assessment Of The European Banking System June 2015)

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Reduced income

• Narrowing net interest margins

11/24/2015 Chapter 14

% 2011 2012 2013 2014

SEE 6.6 6.2 6.5 6.4

CE 3.4 4.0 3.9 3.4

EE 4.1 1.3 2.4 2.9

(World Bank Report - Interest Rate Spread for PI customers)

Cost reduction • Revenue decline drives a faster move to digital banking, branch

closures (5300 shut or sold in 2013), 65,000 more branches closed by 2020 (40%). Head Office downsizing. 80,000 staff (3.6%) reduction in 2013. (Cap Gemini June 2014)

• Is the region overbanked? 201 banks in SEE.

• Banks are focusing on cost reduction as RoEs fall – expansion is stopped. Retrench to core markets and core competencies.

• Interest rates will rise in the next few years making the cost of funding more expensive and banks are not always able to pass this on in higher loan rates.

• A decade of under investment due to distractions and costs of the crisis. Back office systems are struggling.

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Change….

• Customer trust - Libor rigging, illegal FX dealing, PPI miss selling, CEO bonuses. Lack of punishment and penalties. Tax payer bail outs.

• Staff quality deteriorating – experienced bankers retiring or leaving the industry and bright young graduates not interested.

• Millennial generation (18 – 34) do everything on the internet.

• New entrants - have lower barriers to entry

- no branches, no back office operations, no legacy systems diverting attention and resources.

- smart phones and cheap data processing

• Competition with positive brand images – Apple, Google. P2P. Fintechs – flexible systems, lower costs, can operate with narrower margins.

• 1.5bn euros invested by FinTechs in 2014 ($12bn in the US)

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Top 15 European FinTechs

11/24/2015 Chapter 17

It’s not all doom and gloom…

• Traditional banks have brand strength and heritage.

• Regulation will come to the new players.

• New entrants yet to experience an economic downturn.

• Traditional banks still get the salaries – the primary relationship.

• Banks will have the savings relationship as new entrants don’t want the regulatory obligations.

• Loans and investments need to be face to face.

• The banks will respond – compete or cooperate with the new players and specialist suppliers.

• Customer peace of mind with longevity and bricks and mortar.

11/24/2015 Chapter 18

Customer opportunities

• Demographics

• Affluent Customers

• The “Unbanked”

11/24/2015 Chapter 19

Demographics

11/24/2015 Chapter 20

Generation Y

• Born mid 80s to mid 90s

• Deloitte refers to them as ‘catalysts of change’,

• KPMG predicts that they will be “tomorrow’s accumulators of

wealth” and “the generation that banks cannot afford to ignore.”

• Banks will need to use an approach distinctly different from

anything that they have been accustomed to in the past.

• Gen Y use internet and mobile technologies in their daily lives

and demand that these be used for banking as well.

• The use of social media is also key – facebook, Twitter etc.

Generation Z

• Born after 1995.

• Future employees.

• Never known life without a mobile phone and the internet.

• Expect instant answers.

• Socially aware, care for the environment, global perspective, - sensitivities beyond their years.

• What criteria will influence their

choice of bank?

11/24/2015 Chapter 22

Affluent Banking

11/24/2015 Chapter 23

• A growth segment in CEE in the next decade

• Expectations of a truly distinctive experience which cannot be branch based.

• Re-invent the proposition – digital, branch minimal

• “Cash rich, time poor”

- they will pay for convenience

- not price sensitive

- multiple product relationship

- recognise and acknowledge the relationship

The Unbanked

• 19m people between the age of 18 and 65 (approximately 18% of the adult population) in CEE do not have a banking relationship. (Standard Chartered 2014)

• Challenge for customers and banks.

• Need to serve profitably and with full Know Your Customer process.

• Banks want electronic banking solutions but

are they accessible for the target

market?

11/24/2015 Chapter 24

In summary….

• The “golden” days of 2003 – 2007 are gone for good. Regulation, supervision, bank management and customer awareness will not permit repetition.

• Through the worst but NPLs still need resources and attention.

• We need to make up for lost time – systems, products, customer experience, reputation.

• Watch out for Fin Techs and new entrants with strong brands and no legacy systems / baggage. If you can’t beat them join them.

• Traditional banks still have a lot of positives.

• New and significant opportunities are out there.

11/24/2015 Chapter 25

11/24/2015 Chapter 26