Need for Liberalization in legal Legislation The Focus on Money Market Funds (MMFs)

UAIB ConferenceJune 18 - 21, 2009, Yalta

Sándor SzalaiDeputy CEO – regional operation

OTP Fund Management Ltd.

22

Motto

„Without differences im opinions there would not be even horse race…”

Mark Twain

Pudding Headed Wilson

33

Nature of the current crises – Is it severe?

Notes: 122 recession on OECD since 1970Source: IMF working paper “What happens during recessions, crunches and busts”, December 2008

The current crises is the 5th from the last 132 where all the 3 dimensions as reasons are present

Real estate bubble based

Equity bubble based

Credit crises

10

3118

41

9

3

Breakdown of crises by their nature from 1970 to date

Others = 46

44

Was the impact on equity markets serious also in historical comparison?

20072005199419921987 20061984 20041978 19931970 19881960 19861956 19791948 19721947 19711923 19681916 1965

2000 1912 19641990 1911 19591981 1906 19521977 1902 1949 20031969 1899 1944 19991962 1896 1926 19981953 1895 1921 19961946 1894 1909 1983

2001 1939 1892 1905 19821973 1934 1889 1901 19761966 1932 1888 1900 19671957 1929 1882 1897 1963 19971941 1914 1881 1886 1961 19951940 1913 1875 1878 1951 19911920 1910 1874 1872 1943 19891903 1887 1870 1871 1942 19851893 1883 1869 1864 1925 19801890 1877 1867 1858 1924 19751884 1873 1866 1855 1922 19551876 1861 1865 1850 1919 1950

2002 1873 1860 1859 1849 1918 1945 19581974 1854 1853 1856 1848 1898 1938 19351930 1841 1851 1844 1847 1891 1936 19281917 1837 1845 1842 1838 1885 1927 19081907 1831 1835 1840 1834 1880 1915 1879 1954

2008 1857 1828 1833 1836 1832 1852 1904 1863 19331931 1937 1839 1825 1827 1826 1829 1846 1830 1843 1862

-50 -40 -40 -30 -30 -20 -20 -10 -10 0 0 10 10 20 20 30 30 40 40 50 50 60

2008 was the second worst year in the last 183 yearsSource: Bloomberg, OTP Fund Management Ltd.

55

And how much the financial industry was hit?

66

Start-up statements and thoughts

One of the most serious crises in capital markets’ history with severe real economy effects

Heavy impact on all the higher risk capital market segments and asset classes like equities

Banking industry is especially under fire: lack of liquidity, expensive funding, worsening profitability and many bad performing, capital market related productv

Shaking confidence of clients in financial institutions and products

Sharply increasing risk aversion, turning towards cash as „safe heaven”

Pressure on supervision authorities and on codifiers for restriction and more transparency

Liberalization of capital market related products is reasonable at these times at all?

It depends… Have a look at a certain practical problem in our region:

77

The crisis pushed CEE local equity markets into heavy sell-off in 2008

Size of fall exceeded decrease of developed markets (S&P500-DAX-NIKKEI: -38-42%; Hang Seng-India: -49-52%), mainly driven by significant jump in risk premiums

New EU members + Croatia clearly underperfomed to CETOP20 markets – lower liquidity, higher valuation

What happened on CEE equity markets in 2008? – deep fall …

88

… and serious decreases in fund market sizes

Data source: EFAMA, Bamosz

Former EU accessors with larger market size suffered less, except for the Poland as the largest

Group of new EU members and Croatia lost 2/3 if their total market, except for Romania as the best performer

99

Data source: EFAMA, Bamosz

Critical points: strong preference of local equity investments

Croatia-Bulgaria-Poland: correlation between high proportion of equity funds and the deep fall of fund market sizes

Romania as exception: high ratio of institutionals, seed money, money market funds’ saving collection

Czech Republic and Hungary: law risky fund exposure – moderate decline in fund market sizes

1010

And how it was going on in Ukraine?

Mutual funds’ money market related investment limits till January, 2009

Up to 30% of the prevailing NAV in cash and cash equivalents, and gold

Due to unsufficient availability of bonds and restrictions on any foreign assets, derivatives and alternative assets local equities became „obligatory” elements of local funds’ investments

As a result of it there was no „safe heaven” alternative fund vehicles available when the crises came

Crises caused dramatic losses at almost all the running mutual funds

Consequences

Market of local mutual securities funds was hit at its infant stage of development

Investors’ initial confidence broken

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Which solution was missing? - money market funds for sure…

Key characteristics of EU/CEE+ MMF tools

Reasons why MMF’s segment is not develop in many of the CEE+ countries ?

Early (infant) stage of development on mutual fund markets: Bulgaria, Romania, Ukraine

Low risk – moderate performance attribution: no serios attractivity compared to equities

Legal environment led the market towards higher risk investments: Poland, Ukraine

Temporarily overperforming local equity markets attracted savings: Bulgaria, Ukraine, Poland, Croatia

High central depositary fees ruined the preformance of MMFs: Bulgaria

Concrete legal restrictions in investment limits: Ukraine

Mutual fund, usually as UCITS (stricter diversifications limits – 5/10/40 as general + 20% for deposits)

Investments mainly in deposits, different bonds with shorter maturity, repo transactions

As a result of it low volatility with moderate expected return (close to term deposits’ performance)

Low cost vehicles: moderate or zero distribution fees, low additional fees

Short settlement period (usually T+1/2 days or even T+0), low face value of investment

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What do we love MMFs?

Why are MMFs benefitial solutions for our customers? Because they provide easily understandable and usable investment solution for the households’ everyday savings

are optimal also for corporates’ liquidity management

are low risk investments and thus, well adjusted to CEE’s financial culture

can serve as proper start-up education tools for mutual fund investments

provide good „safe heaven” type investment opportunities when riskier asset classes are falling

Are MMFs benefitial also from the banking system point of view?

In case of consequent legal legislation and related risk&liquidity management MMFs are safe solutions without serious reputation risk when offered, even in case of critical market conditions

Benefitial supplementary element of the product offering: good for client retention and acquisition

Funding tools for banks: fund collection at reasonable price

Direct revenue through management fee income

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International experiences – MMFs in Europe

* Figures contain only UCITS fund related numbers

Equity Funds: significant decrease of AUM during the crisis – net cash outflow + revaluation MMFs: clear safe heaven function - attracting flows from other funds, mainly from equity funds MMFs as basic saving instrument: its market share is ususally 30-50% on the total mutual fund market MMF as the only fund type which could generate net cash inflowsin 2008, supported by positive yields

Fund categories on the UCITS fund market - 2003-2008 Market share of MMF from the total fund market – 2008Q4

33% 35% 39% 41% 40%30%

19% 21% 18% 16% 16%25%

2003 2004 2005 2006 2007 2008

Equity Bond Balanced MM FoF Other

12%

33%30%

12%

34%

52%

27%

47%

36%

0%

10%

20%

30%

40%

50%

60%

Bulgaria Romania Greece* Italy* Poland* Hungary Croatia CzechRepublic*

Slovakia*

Source: EFAMA report

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Domestic experiences – MMFs in Hungary

Clear process of securitisation within households savings, compared to 1995 weight of weight of securities type investments increased from 24% to 50%; stabil weight even in critical years (2003, 2008)

Increasing diversification on fund market in terms of fund types: widening sortiment of higher risk solutions, however, MMF’s became the leading instrument and remained stable even in critical years

Structured guaranteed funds became popular, thanks to their limited risk – higher potencial yield attribution

Share of cash vs. Securities type investments in households savings in Hungary

Development of mutual funds in Hungary 1997-2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Cash, Bank deposits Securities Investments

76%

24% 50%

50%

Source: Hungarian National Bank Source: Association of Hungarian Investment Fund and Asset Management Companies

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In-house experiences – fund assets diversification within OTP Bank Plc.

30.04.2009 Very intensive product development, extension

in product offering

Launch of HUF mone market product (pure deposit fund) – January 2005

MMF takes over the role of base product

Thanks to conscious product development and education clear move ahead of equity and capital protected funds

31.12.2004. Moderate width of product range

No previous regular training of sales staff for diversifiaction and „fund portfolio” concept

Very high concentration of assets in one single fund type: (short) bond funds

Law awerness level both on sales and buy side regarding product knowledge

High risk of non-diversified product portfolio both on OTP and client side

Breakdown of fund classes by clientele types

52% 52%

11% 12%

20%28%

9% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PB NAV (%) Retail NAV (%)

Fund of FundsPortfolios

Equity Funds

Absolute ReturnFunds

Capital-protectedFunds

Bond Funds

Money MarketFunds

96% 97%

3% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PB NAV (%) Retail NAV (%)

Fund of FundsPortfolios

Equity Funds

Absolute ReturnFunds

Capital-protectedFunds

Bond Funds

Money MarketFunds

Source: OTP Bank DataWarehouse

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0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

EUR

mn

0%

2%

4%

6%

8%

10%

12%

14%

MMF OTP Bond+Mortgage bond Sight deposit

Term deposit OTP Optima bond fund Base rate

Start of crisisCapital gain tax introduction

Sept. 2005 – to date: steady growth of MMF while deposit volumen remains stable - no serious cannibalization

August 2006: introduction of capital gain tax resulted in immediate inflow into products with fixed interest, with longer

maturity – OTP bonds and mortgage bonds

October 2008: significant demand for products with fixed interest rate and increased deposit guarantee – term

deposits, OTP bonds, mortgage bonds; paralell withrawals from OTP MMF

EUR

mn

OTP MMF – becoming key instrument without cannibalization

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„Close to” term deposit performance with daily liquidity

OTP MMF 3M p.a. past yield was close to but 1-2% below the best prevailing retail deposit offer of OTP Bank Plc.

Difference between peformances of the 2 key instruments can be considered as price of liquidity

Investors are tend to pay this price as they are compensated through the daily liquidity

Retail term deposit volumes and interest rate vs. OTP MMF AUM and past yield

0

1

2

3

4

5

Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

EUR

bn

0%

2%

4%

6%

8%

10%

12%

14%

AUM of OTP MMF Volume of retail term depo3M p.a. past yield of OTP MMF Best retail deposit offer*

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Close and remove of inactive accounts from the account

keeping system

Around 330 000 active retail clients with securities account in OTP Bank Plc. – ca. 10% of total clientele 120 000 clients have MMF – ca. every 25th retail client has MMF within OTP Bank Plc. The numbers of clients having OTP Bonds and Mortgage Bonds is also constantly growing as a clear result in

strengthening risk aversion due to the credit crises and related capital market impacts

Source: OTP Bank DataWarehouse

Development of OTP MMF penetration in retail clientele

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Conclusions: „We need…

to do efforst and bring new innovations

to think of opportunities for modernization and adjustment of legal legislation

to educate ourselves, our sales staff and our clients permanently and

to intoduce new ideas and products through simple ans easy understandable basic solutions

…in order to avoid…

2020

…these kind of situations…

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Thank you for your attention!