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CFA Society Romania Alexandru Ioan Cuza University of Iasi

Current Price: RON 1.737 Recommendation: HOLD

EUR/RON: 4.5239 Price Target: RON 1.7

2012 A 2013 A 2014 F 2015 F 2016 F 2017 F 2018 F

Profit for the year 320.4 374.9 441.7 520.8 649.1 776.4 896.4

ROaE 12.78% 12.98% 13.37% 13.76% 14.86% 15.28% 15.15%

ROaA 1.16% 1.22% 1.32% 1.42% 1.64% 1.84% 1.98%

Source: Company data, team estimates Highlights

We issue a hold recommendation with a target price of RON 1.7 per share. We consider

TLV shares to be fairly priced by the market at the current level of RON 1.737, as the future

positive evolution of the bank is already taken into account by investors.

Competitive positioning. Banca Transilvania (“BT”) is third bank in Romania by market

share. It declares that it applies conservative provisioning – we have our doubt here and we are

concerned about underprovisioning, but given the improving economic perspectives of Romania,

we believe BT can smooth out the actual underperforming loans – and reports lower Deposits/Loan

ratio than the Romanian banking sector, which is a clear positive point. BT is a stable bank

emphasizing organic growth: 14% CAGR in deposits in 2009-2013 years, which is higher than the

banking sector (7.5%). Also it is a blue chip on Bucharest Stock Exchange, and this helps with the

public perception. BT outperformed market index for both short-term and long-term for 1997-2013

period.

Financial position. The preliminary results for 2013 show a net profit of RON 374.9m, a 17%

yoy increase. With a new CEO focused on growth rather than on restructuring, BT is one of the few

banks in Romania that can accelerate loans generation due to less constraints from a parent bank

bound to tighter capital requirements. Nonperforming loans ratio increased for the last 2 years, but

for now it remains below sector’s average.

Main risk issues. Competition risk is high due to existence of other dominant players in the

market, but BT position is strong in their core market – SMEs. Macroeconomic factors are also

sources of risk, as there are important factors of financial intermediation development. However, as

economic growth in Europe recovers, the peripheral countries as Romania should benefit both in

terms of real trade flows and on investors’ perception.

Source: Team estimates

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8Banca Transilvania S.A. daily stock prices (RON)

Closing priceCurrent priceTarget price

2.13% downside

Alexandru Ioan Cuza University of Iasi

Student Research

This report is published for educational

purposes only by students competing in the

CFA Institute Research Challenge.

[Financial Intermediation/Banking] Banca Transilvania S.A. Ticker: TLV Exchange: BSE

Date: 20.02.2014

Market Profile

52-week price

range 1.1610 – 1.7480

Average daily

volume 277,947,581

Shares

outstanding 2,206,436,324

Market

Capitalization 3,830,373,458.46

Book value per

share 1.00

Return on

Equity (2014F) 13.37%

P/BV 1.42

Source: Team estimates, BSE

Valuation

Residual

Income

model

Justified

P/BV

model

Estimated

price 1.68 1.72

Weights 50% 50%

Target

Price 1.7

Source: Team Estimates

1.7

1.737

CFA Institute Research Challenge 20.02.14

2

Business Description

Banca Transilvania S.A. was incorporated in Romania in 1993 and started its activity in 1994. Its

main operations involve banking services for companies and individuals. The Bank carries its

activity through its Headquarters in Cluj-Napoca and 63 branches, 445 agencies, 31 bank units, 10

Healthcare Division units located throughout the country and 1 regional center located in

Bucharest. Banca Transilvania S.A. is the parent company in Banca Transilvania Financial Group

created in 2003. The group’s core business is run through Banca Transilvania S.A. (generating

92.4% of the Group Net Income and 93.7% of Operating Income in year 2012). In 1997 Banca

Transilvania became the first Romanian banking institution listed on the Bucharest Stock

Exchange. In 2012 BT was ranked #3 in the banking system of Romania with a market share 8.08%

in terms of assets (this ranking is distorted due to the fact that major banks with foreign holding

companies use securitization or transferred a part of their loans abroad in order to optimize the

balance sheet), #3 largest issuer of credit/debit cards in Romania, #1 Visa card issuer in Romania,

#1 in premium cards.

Business lines of BT are Corporate Banking, Retail Banking, Small and Medium Enterprises

(SMEs) and Healthcare Division (“HD”). Corporate Clients portfolio is well diversified in terms of

type and industry exposure. Trade industry is slowly declining while manufacturing and agriculture

are advancing. In 2012 the Corporate loan portfolio increased by 15% reaching 49% of bank’s total

loans. Retail banking client portfolio share is the biggest one and increased by 8% in 2012.

SME banking is a business line which generates new product packages, so it is attracting more and

more clients. In 2012 the “First Year Free Account”, “Offer for self-employed” and “Fast

factoring” packages were successfully launched. Retail Banking has a dominant share of

customers, while SME and Corporate Banking have only 10% of customers, however their

operating margin (based on total expenses less net impairment losses for assets, other contingencies

and loan commitments) is higher than in Retail Banking by 10% (see Figure 2).

Healthcare Division has virtually no competition from other banks in offering specialised banking

services for the medical sector. Healthcare Division’s active clients are exceeding 25,000, making

up for about 45% of market share. This position is due to a dedicated team for doctors, 9

specialised units, a Special Credit Scoring System and the first credit card only for doctors.

BT Current strategy is based on the following main cornerstones:

Bank for entrepreneurial people. BT’s main strategy is to keep its image of having the widest

range of products and services for SMEs. The main pillars of BT approach from this

perspective are stable relationships with customers, flexibility and diversity of the credit

portfolio. (See Appendix 7 for the dispersion of loan portfolio of BT).

Conservatism. BT declares that it applies conservative provisioning policy emphasizing

stability, high liquidity and organic growth. BT’s loan/deposit ratio is lower than Romanian

banking sector’s average (See Figure 3), below 75% objective was set for year 2013 by BT

management.

Visibility. Despite the tendency to reduce marketing budgets for cost control, BT has increased

its input in this field. During 2012 BT moved from 8th to 5th position in TV advertiser’s

ranking. BT’s visibility increased by nearly 60% during the year 2012, as BT’s communication

share increased from 5% (year 2011) to 8% in year 2012.

Innovations. BT and especially the retail banking business line acts in accordance with a

leader’s position in technology and innovation. BT was first to launch Western Union money

transfer service through Internet banking in Romania. BT and Western Union were first to

launch money transfer service through ATM in the world. In 2012 BT started the

implementation process of a new core-banking system, Flexube by Oracle. The new system,

started to work successfully in January 2013 (See Appendix 8 for advantages of the new

system).

Shareholders structure. The bank’s strategy is supported by a solid shareholder bases: the

European Bank for Reconstruction and Development, holding 14.61% of the bank’s share capital,

the Bank of Cyprus (9.98%) and IFC – the Investment Division of the World Bank – holding

3.53%. Romanian investors hold 45.03% of shares, while foreign investors hold 54.97%. Romanian

individual investors hold 20.2% of shares. A Romanian institutional investor who holds more than

5% is Investment Company SIF MOLDOVA S.A. Another investment company, SIF OLTENIA

S.A. holds 4.96% of shares.

Figure 1: BT Clients Structure

Retail Banking

Corporate Banking

Healthcare Division SME

Source: Company data

Figure 2: Income & Expense

distribution in BT business lines

Total Income

Total Expense Operating Margin


Figure 3: Loans as % of Deposits

BT Romanian Banking Sector Source: Company data, National Bank

of Romania (NBR)

Figure 4: Shareholders structure

Romanian individual investors Romanian institutional investors Foreign individual investors Foreign institutional investors


1%

89%

1% 9%

52% 52%42%

40%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

Co

rpo

rate

Ban

kin

g

SME

Ret

ail

He

alth

care

Div

isio

n

110% 111% 107%

0%

20%

40%

60%

80%

100%

120%

2010 2011 2012

20.2%

24.8%

02.4%

52.6%


3

Industry Overview and Competitive Positioning

Macroeconomic analysis

Real GDP growth rate is a dominant factor of financial intermediation development. First 3

quarters of 2013 showed a stable economy expansion, which is positive sign for banking sector

both from loans and deposits growth perspective. (See Figure 5, Appendixes 9, 10, 11 for details).

Inflation. The National Bank of Romania’s (NBR) primary objective is to ensure and maintain

price stability. The NBR shifted to direct inflation targeting in August 2005. The annual Consumer

Price Index (CPI) reached 24-year low at the end 2013 Q4, falling close to the lower bound of the

target range which is 1.5 – 3.5% (See Figure 6).

Unemployment rate in Romania is lower than that of the neighboring countries. The stability of

the country from the perspective of labor market can be considered as satisfactory, as the rate was

stable for 2012 and 2013 (7% and 7.2% respectively), whereas median for EU countries for 2012

and 2013 was 10.15% and 10.2% respectively (See Appendix 12 and 13 for details).

Exchange rate regime in Romania is classified as managed floating. Exchange rate EUR/RON is

an important factor in the banking industry as loans to the private sector in foreign currency are

prevailing in Romania’s banking sector. The historical data shows fluctuation of exchange rate in

certain limits which are observable and controllable (See Appendix 14 and 15 for details).

Investments and Savings. Investment rate and saving rate are important macro drivers of the

banking industry. High investment rate indicates high rate of lending to the private sector and high

saving rate will bring opportunity of deposit increase. From this view Romania is in a healthy

position because the investment rate was higher than the average in EU in 2012. It was the highest

among EU countries from 2009 to 2012 (See Appendix 16 and 17 for details).

Money supply. Money supply has increased. Broad Money M3 increased by 8.8% during 2012-

2013, Narrow Money M1 increased by 12.7 % and its component Currency in Circulation by

10.5% (See Appendix 18).

Analysis of Romanian macro climate leads to the conclusion that the banking system is not only

stable, but also has good perspectives of growth along with the overall economic activity.

Industry overview

Regulations. The National Bank of Romania (“NBR”) is the authority in charge of the regulation,

licensing and prudential supervision of credit institutions including banks, credit cooperative

organizations, saving banks for housing and mortgage banks. NBR sets up regulations regarding

the minimum amount of funds, capital and risk management, operations etc. NBR shall not grant

authorization to a credit institution if the credit institution does not possess own funds or initial

capital no less than an amount equivalent in RON of EUR 5 million. A credit institution’s own

funds may not fall below the amount of initial capital required at the time of its authorization.

Credit Institutions should provide own funds that are at all times equal to or exceeding the sum of

capital requirements established for the mitigation of the following risks: credit risk, including the

counter-party credit risk, position risk, settlement/delivery risk, foreign exchange risk, commodities

risk and operational risk, as applicable. The required capital for credit risk in respect of all of their

business activities with the exception of their trading book business is 8% of the risk-weighted

exposure.

Banking coverage. Romania is the 8th among the European Union countries by population,

however banking coverage is low. The number of banks per 100,000 people is 0.19 and is the

lowest among EU countries where the average and median are respectively 3.45 and 1.62.

Meanwhile the network of branches is not the lowest one, there are 27 branches per 100,000

inhabitants and EU-27 median is 33. BT has 2.57 branches per 100,000 inhabitants meaning

approximately 10% of banks network. This is a significant result taking into consideration the

number of credit institutions in Romania which is 40 (2012) from which 39 are banks. The number

of branches and bank employees show dramatic increase until December 2008, however in last 3

years the tendency of cost control brought decreases in the number of employees and branches.

Currently the number of bank employees is lower than the pre-crisis level, however the number of

branches is equal with the pre-crisis one (See Appendixes 19, 20 and 21 for details).

Concentration of banks. According to the Herfindahl-Hirschmann index calculated for banking

sector, the sector can be described as non-concentrated. According to the index by assets, the

banking sector can be described as a composition of approximately 12 banks of the same size. The

value of this index for Romania is lower than EU average. The share of the top five banks in

banking sector by assets, loans and deposits is 54%, 55.9% and 53.5% respectively (See Appendix

22 and 23 for details).

Shareholding structure of the banking system. The Romanian banking sector is dominated by

foreign capital. By Aug 2013 the assets of foreign-owned credit institutions represented a 90.8%

share of the total assets of the Romanian banking sector. This fact speaks both about attractiveness

Figure 5: Real GDP Growth Rate

of Romania

Source: NIS

Figure 6: CPI annual change %

Annual inflation rate Upper bound

Lower bound

Source: NIS

Figure 7: Capital Adequacy

indicators

Solvency ratio (%)

Tier 1 capital ratio for credit risk (%)

Minimum requirement for

Solvency ratio (%)

Source: NBR

Figure 8: Banking sector performance

Net Profit/Net Loss (RON bn.)

ROE (%)

Source: NBR

%

-10

-5

0

5

10

01234567

4

8

12

16

20

24

2004

2006

Mar

/200

8

Sep

/200

8

Mar

/200

9

Sep

/200

9

Mar

/201

0

Sep

/201

0

Mar

/201

1

Sep

/201

1

Mar

/201

2

Sep

/201

2

Mar

/201

3

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Bln. RON


4

of banking sector for foreign investments and about the sensitivity of banking sector to abroad

changes. The capital share of the banking industry by country of origin is concentrated in the

following countries: Austria, France, Greece and The Netherlands. The international shareholders’

base means a knowhow injection from more developed banking systems. The number of banks

with a majority of foreign capital is 36 from the total of 41 credit institutions by Aug 2013 (See

Appendix 24 for details). The liabilities of the banking sector are less exposed to foreign sources.

The main source of financing are household and corporate deposits which with capital and reserves

add up to app. 70% of liabilities (See Appendix 25)

Loans, Deposits, Assets. The transmission of GDP growth to banking sector will be lower if the

country has a low level of financial intermediation. Romania has the lowest level of financial

intermediation calculated by 3 main ratios: Assets/GDP, Loans/GDP and Deposits/GDP. This is

mainly due to a large share of the population living in rural areas with limited access to banking

services, so probably this measure is not relevant at country level and it should be measured

separately for rural and urban areas. However, Deposit/GDP ratio is stable, with growth

perspectives (See Appendix 26 for details). The total value of loans to households is stable for the

last two years; however, the components differ in their evolution. The amount of consumer loans is

showing a decreasing trend, meanwhile mortgages are increasing due to Government “First Home”

Program (See Appendix 27).

Capital Adequacy indicators of the banking sector are satisfactory. Solvency ratio as per Basel

rules had a stable dynamic during the last 2 years. The banks distribution based on solvency ratio

shows that the biggest concentration is within 12-16% interval with total assets of 69% as of June

2013 (See Appendix 28 for details). Capital adequacy is a strong characteristic of the Romanian

banking system, which is ready for implementation of the Basel III regulations. The level of Tier 1

capital ratio is very close to that of the solvency ratio, which reflects the high quality of own funds

of the banks, as well as their capacity to withstand shocks. Non-performing loan ratio is calculated

as a ratio of loans overdue for more than 90 days to total loans. This ratio is definitely high for the

Romanian banking – 20.3% as of June 2013 (See Appendix 29). The return on equity of credit

institutions comes back to positive territory during 2013, reporting 5.9% on Aug 2013 and overall

the industry reported net income of 1.53 billion RON. The distribution of credit institutions’ assets

by ROA level for year 2012 shows concentration of 60% assets with negative ROA, however the

results for 2013 should be more satisfactory, as ROA for Sep 2013 was 0.55% (See Appendix 30).

Banking sector statistics relating to the daily transactions of banks are growing for the last 5 years

(See Appendix 31 for details).

Competitive positioning

BT is in the top 5 Romanian banks, which control over 54% of the banking sector. The peer group

selected for comparison consists of BCR, BRD and UniCredit Tiriac Bank, based on the position

within the banking system and data availability.

Assets comparison. BT has the lowest Loan/Deposit ratio among the banks. This fact can be

viewed as an advantage, on the other hand BT has less sources of funding than other 3 banks which

are part of international groups, so it needs to be more cautious – BRD and BT have increased their

deposits in H1 2013 by 4.27% and 4.012% respectively.

Performance comparison. Four banks reported net profit as of June 2013. The two leading banks,

BCR and BRD, did not have Net Interest Income (NII) increases as of June 2013 compared to Dec

2012, and BT and UniCredit Tiriac Bank had respectively 9.19% and 12% increases. Operating

income of the leading 3 banks decreased in H1 2013 yoy, BT minimizing this decrease by higher

increase in NII. BT has the highest NII/ Total operating Income ratio by H1 2013 counting 70.63%.

This is a negative situation as banks try to diversify their income sources away from NII so they are

not so exposed to interest rate risk. Cost to Income ratio for the peer group is within the range of

45-53%. BRD has the largest network distribution (See Figure 12). BCR, BRD and BT have

decreased their advertising expenses in H1 2013 while UniCredit Tiriac Bank had a significant

increase of 12%. BT and BRD motivate their staff by distributing stocks for productivity and

fidelity: allocating for this 14.48 % and 5.69% respectively of personnel expenses.

Stock market BT is the first bank to be listed in Bucharest stock exchange. BT contributes to BET

index by weight 21.15% that is the highest by January 2014. Three other banks (Society Generale

BRD, Banca Comerciala Carpatica S.A. (“BCC”) and Erste Group Bank AG (“EBS”) that controls

BCR) are listed on BVB. However, from this perspective, only BRD is a relevant comparison term

for BT, as BCC only holds 1.29% of all banking sector assets and Erste Group Bank AG represents

Austrian Group with operations in 7 countries. BT outperformed the market both in long-term and

short-term. It outperformed BRD since BRD’s listing in terms of returns and for the last 52 weeks

BT traded 12.59% of all it shares, showing higher liquidity than BRD, BCC and EBS which traded

respectively 9.34%, 9.05% and 0.79% of their shares. However, the comparison is not entirely

relevant for Erste as it is listed also on Vienna (main market) and Prague stock exchange (See

Appendixes 33, 34 and 35 for details).

Figure 9: Assets, Loans and

Deposits of Banking sector

Assets/GDP

Loans/GDP

Deposits/GDP

Source: NBR

Figure 10: Cost to income

ratio

BCR

BRD

UniCredit Tiriac Bank

BT


Figure 11: Loans and deposits

relation

Loan/Deposit ratio

Deposits from customers/Total Liabilities ratio


Figure 12: Branches


0%

20%

40%

60%

80%

48.10%

45.40%45.02%

46.80%

46.10%

52.91% 52.22%

49.50%

2013 2012 2013 2012 2013 2012 2013 2012

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

BCR BRD BT UniCreditTiriacbank

602889

550

189

BCR BRD TLV UnicreditTiriac


5

Investment Summary

Fundamentals based valuation indicate a HOLD recommendation Based on our valuation of the bank, we issue a HOLD recommendation for BT, with a target price

of RON 1.70. We consider that TLV shares are fairly priced by the market at the current level of

RON 1.71, as the future positive evolution of the bank is already taken into account by investors. In

the last 12 months, TLV share price increased from RON 1.42, outperforming the BET Index.

Valuation methods

Our 12M TP price was determined by combining Residual Income and Justified P/BV models with

equal weights. In our opinion, these models are the most appropriate for valuing BT, since the bank

does not pay dividends.

Ambitious growth objectives

With a new CEO focused on growing the company, BT has a market share target of 10-11% for

2015-2016. This growth is expected to come mostly from new business, as BT continues lending

while many of its peers are deleveraging. BT has positioned itself as the SME Bank in Romania,

offering over 20 specialized products for this sector and gaining a 15% market share with over

200,000 active clients. There is significant growth potential on this client base, as only 10% of

SMEs currently have loans. BT has also a well-diversified portfolio of corporate clients, in terms of

both type and industry exposure. While financing for trade is declining, manufacturing and

agriculture are advancing. In the retail sector, the bank’s objective is to consolidate its Top 3

position in cards and to generate more revenues from operational products and value added

services.

BT has a good geographical coverage in terms of branches, being able to serve new and existing

clients without making significant new investments in fixed assets. BT has especially good

coverage in the Transylvania region, which was less affected by the financial crisis and where the

economy is developing at a faster pace than the rest of the country. The bank’s strategy for growth

includes opening branches outside Romania, in countries like Italy and Spain, where the numerous

Romanian immigrants form a large potential client base.

In the 2009-2013 period, BT has been consistently growing at a much faster rate than the Romanian

economy, with a CAGR of 13.4% for total assets and a CAGR of 11.8% for gross loans. In order to

sustain this growth rates, BT has not paid cash dividends since 2009, preferring stock dividends as

a solution for organic growth. The solvency ratio has increased as a consequence, but it remains

below the banking system average, due to the even faster increase in gross loans.

Nonperforming loans ratio below sector’s average

The nonperforming loans ratios reported by BT have increased in the past 3 years, up to 12.57% of

gross loans for 12/2013, however still below the sector’s average. The coverage ratio has also

increased to 122.4%, the value of net impairment losses on assets having a significant impact on

the size of the reported net profit. BT officials declared that the bank is very well provisioned,

which will increase net profits in future years, if economic conditions improve and some of the

nonperforming loans will be repaid. On the other hand, if NPL ratio continues to increase and

catches up with the sector’s average ratio, the profitability of BT will be drastically affected, as the

bank is currently very sensible to the cost of risk.

Deposits from customers provide the necessary financing

Customer deposits provide most of the funds needed for the banks operations. In 2013, deposits

from customers accounted for over 80% of total assets and over 89% of total liabilities. Most

deposits and loans are in RON, so there is only a small mismatch between the available and

necessary financing resources, limiting the bank’s foreign exchange exposure.

BT corporate governance is rated high

BT receives a score of 9 out of 10 related to the Principles of Corporate Governance as developed

by the Organization for Economic Cooperation and Development. The main issues identified are

the fact that the Board of Directors does not include any independent members and that these

members are elected for a period of 4 years, instead of just one year as recommended.

Figure 13: Market share by assets

Market share by assets Dec-12 Market share by assets Q1-2013


Figure 14: Geographic coverage


19.0%

12.7%

8.5%6.7%

6.5%7.1%

4.3%

4.6%3.8%

3.3%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%


6

Valuation

We evaluated BT using two models: Residual Income Model (RIM) and Justified P/BV Model.

The Residual Income valuation model

This approach is suitable for BT as the company does not pay dividends. Other advantages of the

model are that it is driven by publicly available accounting data and the terminal value is less

significant when compared to other models, therefore it is providing greater certainty in the

valuation.

This model is built on the assumption that the value of a company is equal to the capital invested

plus what is created in excess of the cost of equity. The larger the difference between the ROE and

the required rate of return given the risk of the company, the higher the value of the firm. Therefore

this model shows the opportunity cost of investing in a share of BT. According to our detailed RIM

analysis we determined the target price of RON 1.68 (See Appendix 4 for details).

The Justified P/BV model

The model uses long-term sustainable figures of ROE, growth and cost of equity. The model is

based on Gordon’s growth model and its results depend on the total equity value from the last

forecasted year and the P/BV ratio computed using the long-term values mentioned earlier. We

estimated a target price of RON1.72 (See Appendix 4 for details).

Key drivers and outlook

We have constructed our models by incorporating estimations for 2014-2018F, following

2013 IFRS preliminary individual (only the bank) financial results released by BT. Models

are mostly sensitive to the following factors:

Loans/deposits ratio is estimated to be maintained below 75% for 2014-18F.

Significant growth of clients’ loans, but at a lower rate than in previous years.

Interest rates are expected to decrease for both loans and deposits.

A sustainable growth rate (g) of 3%, which approximates Romania’s long-term GDP growth.

We assume that the bank will not pay dividends

Cost of Equity

The Cost of Equity was calculated with CAPM model. Our risk-free rate is based on YTM

Romanian government bonds for the explicit forecast (2014-2018F) and on YTM 30yrs German

Government bond plus an estimated inflation differential between Germany and Romania for

perpetuity. We calculated a beta of 1.16 from the regression between TLV and BET index and then

adjusted it using Bloomberg formula, obtaining the value of 1.11 (See Appendix 36 for details).

The expected market return of 9.13% is the sum of market and country risk premium (based on

Damodaran’s estimation1). Thus, we have computed the cost of equity, which ranges between

13.77% and 14.84% and a perpetuity cost of equity of 13.36% (See Appendix 6 for details).

Sensitivity analysis for Justified P/BV

We examined the sensitivity of Justified P/BV model to changes in key long-term assumptions. A

100bp change in the long-term ROE affects the 12M target price by ca. 9%, while a change in the

long-term growth rate has a lesser impact on the 12M target price, all other factors being constant.

The estimated long-term ROE has a value which is not significantly higher than the perpetuity cost

of equity, so growing the company in the long term is not expected to increase its value, unless the

efficiency of operations is improved first.

Analyzing the variation in target price as a function of ROE and perpetuity cost of equity shows

that a 50bp change in the cost of equity affects the 12M target price by ca. 5%, all other factors

being constant.

Table 1: Justified P/BV sensitivity analysis

LT ROE LT growth rate Cost of equity - perpetuity

1.00% 2.00% 3.00% 4.00% 5.00% 12.36% 12.86% 13.36% 13.86% 14.36%

11.5% 1.44 1.42 1.39 1.36 1.32 1.54 1.46 1.39 1.33 1.27

12.5% 1.58 1.57 1.55 1.54 1.52 1.72 1.63 1.56 1.48 1.42

13.5% 1.71 1.72 1.72 1.72 1.72 1.90 1.81 1.72 1.64 1.57

14.5% 1.85 1.87 1.88 1.90 1.93 2.08 1.98 1.88 1.80 1.72

15.5% 1.99 2.01 2.05 2.08 2.13 2.26 2.15 2.05 1.95 1.87


Weighting of the models

We treat both RIM and Justified P/BV equally in our valuation as we consider them equally

relevant. The price we obtained is RON 1.70 per share.

1 Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University, best known as the author of several widely used academic and

practitioner textson Valuation

Figure 15: Components of Cost

of Equity

2015-18e

Risk-free rate 3.67 – 4.74%

ERP 9.13%

Adjusted β 1.11

Cost of equity 13.77 – 14.84%


Figure 16: Components of

Perpetuity Cost of Equity

Perpetuity

YTM 30yrs DE bond 2.53%

LT inflation diff. 0.73%

Risk-free rate 3.26%

ERP 9.13%

Adjusted β 1.11

Cost of equity 13.36%



7

02000000400000060000008000000

10000000 Traded volume

RON 0.0

RON 0.2

RON 0.4

RON 0.6

RON 0.8

RON 1.0

RON 1.2

RON 1.4

RON 1.6

RON 1.8

RON 2.0

Robert Rekkers

resigns as CEO

2013 gross profits

increase by 30% over

2012

Rumors of taking

over Bank of

CyprusBT borrows $45

mln from EBRD

and IFC to finance SMEs

16 new shares issued

for every 100 held by

stockholdersBuyback of

1,166,000

shares

Issue of

295,735,713 new

shares

Omer Tetik officialy

named as new CEO

Figure 17: BT share price and news flow since 2011

Financial Analysis

Profits are steadily increasing

The preliminary results for 2013 show a profit before tax of RON 443.1m (+30% yoy) and a net

profit of RON 374.9m (+17% yoy). The last quarter of 2013 had a significant contribution to the

bank’s net profit, with RON 134.7m, more than double the result for 3Q13. The management of the

bank declared that their main objective for 2014 is to increase revenues and the efficiency of

operations, so even higher profits are expected. From our estimations, the net profit for 2014 will

be RON 441.7m (+17.8% yoy).

BT is among the few banks in Romania that can accelerate new loans generation BT reported for 2013 a 9.0% increase in gross loans to customers, much higher than the average for

the banking system, but lower than the 11.9% increase realized in 2012. Q413 was the best quarter

in terms of loans given in the last years, with a value of RON 743.6m, representing almost 50% of

the increase in total gross loans for 2013. Growth was registered in all business lines, in retail

lending relying mostly on clients refinancing their loans from other banks, while in the SME

segment growth came from new business.

In August 2013, BT appointed a new CEO, focused on growth rather than restructuring. While

many large banks with foreign shareholders are expected to continue deleveraging (due to

European Union Bank regulations), BT with its status of independent bank can step in and increase

its market share to the target level of 10-11% for 2015-2016. Based on our estimates, we expect the

increase in loans to continue, although at a less spectacular pace of around 6-8% per year.

Growing customer base

The number of active clients of the bank increased during 2013 from 1.67m to 1.76m, while the

number of account operations increased with over 8%. BT reported a portfolio of 2.1m debit and

credit cards (a 10% increase over the end of 2012, but below the target of 2.17m), generating a 13%

higher transaction volume. The bank’s market share regarding transaction volume reached 17%,

with the target of obtaining no. 1 ranking in terms of credit cards.

Figure 18: Main items of gross

operating revenues

Net Interest income (RON m)

Net fee and commision income (RON m)

Gross operating income (RON m)


Figure 19: Gross operating income

and credit risk provision

Gross operating income (RON m)

Net impairment losses on assets (RON m)

Net profit (RON m)


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13


8

Customer deposits are a reliable financing resource for BT

BT controlled at the end of 2013 total assets of RON 23.0m, an 8.4% yoy increase, versus previous

14.5% yoy increase in 2012. Asset growth was mostly achieved on the back of local funding.

Deposits from customers reached the value of RON 25.8m, an increase of 11.1% yoy (14.6% in

2012). The ratio of gross loans to deposits is 74.25%, similar to the 2012 level (76% in 2011),

while the sector average exceeds 100% (120.12% in 2012 and 116.7% in 2011). The bank does not

have to struggle for deposits gathering, enjoying reasonable financing costs. The bank’s clients

have a stable behavior, with no significant withdrawals happening so far.

Higher net interest income in spite of decreasing interest rates

Net interest income increased 27.3% yoy in 2013, due to a simultaneous 4.0% increase in interest

income and a 16.3% decrease in interest expense. This decrease was caused mainly by a significant

reduction of interest rates paid for deposits from customers. For loans and advances to customers,

the interest rate suffered only a small decrease. We consider this situation to be temporary and we

expect the gap between the interest rates for loans and deposits to narrow in the following years.

Net interest income will continue to increase, but the growth rate will be around 5-6%, much lower

than in 2013.

On a quarterly basis, net interest income increased steadily since 4Q12 (with less than 10% qoq)

and jumped 30% qoq in 4Q13. The increase of net interest income in the last quarter is explained

by a 6% qoq increase in interest earning assets, which have been maintaining an almost constant

level during the rest of the year. Net interest margin has been slowly decreasing during 2012 and

this trend was expected to continue in 2013. However, starting in 4Q12, net interest margin started

increasing and spiked to 5.0% (annualized) in 4Q13. The bank continues to lend predominantly in

RON, and this should help to improve net interest margin, as RON yields are higher than for FX

placements. We expect net interest margin to suffer a small correction during the first semester of

2014 and then to stabilize for 2014 and 2015. Expectations regarding net interest margin are based

on more stable funding costs, lower reserves requirements and the consolidation of the banking

system.

Nonperforming loans ratio increases, but remains below sector’s average

At the end of 2013, nonperforming loans represented 12.57% of gross loans, an increase from the

previous values of 11.31% (2012) and 8.62% (2011), but significantly below the sector’s average

ratio. The coverage ratio reached a new high, with a level of 122.4%, versus the previous ratio of

108.0% for 2012. Since most nonperforming loans are coming from the past and the average

maturity of corporate loans (the most affected ones) is 2 years, it is unlikely that the bank will need

significant additional provisions booking. However, many loans have been restructured in order to

avoid provisioning, and some of them may still be losses. In addition, the increase in NPL ratio

supports the theory that BT will eventually catch up with the sector level of provisioning, with a

significant impact on profitability.

Net impairment losses on assets increased in 2013 to RON 407m (+9% yoy), mostly during the last

2 quarters, but without exceeding the target. Total allowance for loan losses reached RON 2,493m,

an 18% yoy increase from the 2012 level of RON 2,111m. The solvency ratio increased to a

comfortable level of 13.78% (including net profit for 2013) from the previous value of 12.16%

(including net profit for 2012). Although above the National Bank of Romania’s requirement, the

solvency ratio is below the banking system average and we expect it to remain so, given the

increase in new loans. The bank will probably continue its no dividend policy, transferring the net

profit to share capital.

Net fee and commission income expected to increase due to higher business volumes

Net fee and commission income decreased to RON 361.7m in 2013 (-14.8% yoy), due to a 10.8%

yoy decrease in fee and commission income coupled with a 16.5% yoy increase in fee and

commission expense. On a quarterly basis, net fee income suffered a downward correction in 1Q13

and then slowly increased for the rest of the year. The net fee income margin maintained an almost

constant value of around 1.5% during 2012, decreasing sharply in 1Q13. Net fee income margin

started increasing in 2Q13 and we expect it to continue this trend, as higher business volumes

should push up net fee income. The management of the bank declared that fees and commissions

are rather below market, so this could be a source of additional income in the future. The bank

grants start-ups a grace period of one year not to pay fees and commissions for some of the bank’s

products. This diminishes income in the short term, but increases customer base and net fee income

after the grace period expires.

Cost to income ratio falls below 50%

BT managed to reduce its cost/income ratio in 2013 to 48.7%, from previous values of 53.13%

(2012) and 51.65% (2011). Personnel expenses increased 7.7% yoy in 2013 (+11% yoy in 2012)

due to higher remuneration for employees in line with the better performance of the bank. The

migration to a new IT core banking system plus other measures to be implemented by the new CEO

are expected to reduce the yoy increase of personnel and other expenses. We consider that the

target of 45% for the cost/income ratio can be reached, but rather by increasing revenues than by

cutting cost further.

Figure 20: IEA, NII and NFI

Interest earning assets (RON m)

Net interest income (%, qoq)

Net fee and commission income (%, qoq)


Figure 21: NIM and NFI annualized

evolution

NII (annualized*)/Avg. IEA (%)

NFI (annualized*)/Avg. Total Assets (%)

*NII and NFI annualized based on quarterly figures

Figure 22: Balance sheet growth

Loans growth

Deposits growth

2010-2018E average loan growth 2010-2018E average deposit growth

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

32,000

1Q122Q123Q124Q121Q132Q133Q134Q13

3.65%3.48%

3.29% 3.20%3.43%

3.62%3.96%

5.01%

1.49% 1.53% 1.50% 1.51%

1.07% 1.16% 1.22% 1.32%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

201

8E


9

Corporate Governance and Social responsibility

Corporate governance. In order to measure the general condition of BT’s corporate governance,

we used the Principles of Corporate Governance as developed by the Organization for Economic

Cooperation and Development (OECD). We illustrate the factors that are taken into account and

their respective weigh (See Appendix N). Each criterion was graded from 1 to 10, leading to a final

score of 9 for BT (See Appendix 38 for details). This is a high score, but it does allow for some

improvement. The issues that keep the score from being a perfect 10 could be: The European Bank for Reconstruction and Development (EBRD) owns almost a 15% share

of the stocks, which is an exception to an internal rule stating that no shareholder can own

more than 10%;

The EBRD also has a veto power, being able to turn down any proposal, even if all other

shareholders have agreed on it;

The Board of Directors is elected for 4 years. Recommendations are that elections take place

yearly, so that members of the Board take decisions with caution;

The Board does not include any independent members. While the law does not forbid this, it

is recommended in practice in order to ensure independence and competence.

Environmental protection. Although the area of activity isn’t known for notable damages to the

environment, BT partnered with the European Bank for Reconstruction and Development with the

purpose of ensuring the efficiency and the reduction of power consumption. BT has also

implemented a system by which to identify and track the social and environmental risk of the

project financed by the bank. Therefore it is important that potential clients of the bank demonstrate

that they respect the legislation regarding the social and environment aspects.

Investment Risks Market risk: currency risk

BT is exposed to currency risk by transactions in foreign currency against RON. In the last 2 years

we have witnessed numerous shocks of different sizes on the exchange rates of main foreign

currencies against RON due to Romania’s political instability. The best example would be the

change of Government in the summer of 2012. While apparently the political situation has become

more stable, it is a risk we cannot rule out.

Market risk: Trading losses

Although BT’s trading has not lead to losses due to a careful process of monitoring the portfolio,

we must take into account the possibility of systemic risk that could hinder trading gains on a wide

scale, inevitably leaving a mark on BT’s results from this area.

Market risk: Romania enters the EURO zone

Even though Romania does not fulfill all required criteria, it has announced not long ago that it

aims to enter the Eurozone in 2018-2019. Joining the Eurozone would decrease exchange rate risk

significantly with other currencies too since their exchange rate with the EURO is much less

volatile than against RON.

Operational risks: Increase in energy and labor costs.

An increase in the costs of labor and energy can affect the future margins of BT. Labor costs have

risen in Romania in 2013 by an average of 7% for government employees, with the private sector

lagging behind at 2%. We believe this gap will be recovered partly in the coming year. An

advantage for BT is that its employees are not part of any union. Energy costs are also expected to

rise in 2014, as well as other utilities prices.

Public Image risk: Company identity

The BT name and logo are present within all subsidiaries of the group. It can work well to promote

each of the group’s entities but it can also present a public image risk if one of the companies

performs in a poor or unlawful manner. Public opinion will most likely associate such actions with

the entire group, regardless of the entity’s autonomy.

Non-Performing Loans Ratio

Romania currently has the highest NPL ratio in the region with 21.6%. While BT has done well to

avoid the NPLs of the real estate sector in the last few years, it can still be affected by shocks

originating from other companies that can no longer pay their suppliers, which in turn can be BT

clients, resulting in NPLs on BT’s balance sheet. The high NPL ratio for Romania makes us believe

this is a risk worth considering.

Competition risk: BT’s competitors on the Romanian Market

BT’s competitors on the Romanian market are mainly banks with foreign capital. This poses a

series of risks since these companies can access a larger amount of capital and can secure foreign

currency at cheaper rates. This is noteworthy in the current situation where the majority of loans are

in euros. However, being a Romanian based company, BT can access cheaper RON sources and,


10

most importantly, can take decisions faster, since they are not depending on a parent company for

approval.

Valuation risks

Two main assumptions which were considered for valuation were: Long-term Growth rate and

Return on Equity ratio. Long term growth rate is main assumption for Residual Income Model

where it is stated as 3%. In addition to sensitivity analysis we perform Monte Carlo simulation to

check how changes in long-term growth rate will influence our target price. Variation interval of

long term growth rate is within [1% – 5%], with Standard deviation 1.37% and Median 1.5% based

on Romanian Real GDP growth rates historical data. We assume that long-term growth rate follows

normal distribution. Results have 90% significance. 10,000 Economic scenarios were simulated and

considered. Results of stock price and relating probabilities were plotted on the graph. The mean is

1.67 which supports our hold recommendation for Residual Income model (See Appendix 40). We

perform Monte Carlo analysis for Justified P/BV model checking the effect of perpetuity rate

change on our recommendation. We assume that perpetuity rate will change in [12.36% -14.36 %]

with 90% significance having normal distribution with 0.5 % standard deviation. The results for

stock prices are plotted on graph. The mean is 1.72 which supports our hold recommendation for

Justified P/BV model.

Team disclosure:

We assign a BUY rating when a security is expected to deliver returns of 15% or greater over the next

twelve months. A SELL rating is given when the security is expected to deliver negative returns over

the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Figure 23: Monte Carlo

Simulation for Justified P/BV.

Sell area -13.56%

Hold area - 60.24%

Buy area - 26.2%


1.4

31

.48

1.5

31

.58

1.6

31

.68

1.7

31

.78

1.8

31

.88

1.9

31

.98

2.0

3

BT stock price


11

Appendix 1: Statement of financial position

FY 09 A FY 10 A FY 11 A FY 12 A FY 13 A FY 14 F FY 15 F FY 16 F FY 17 F FY 18 F

Assets

1. Cash and cash equivalents 3,183.3 3,696.8 4,546.5 5,576.3 4,102.3 4,138.6 4,469.7 4,144.9 4,074.8 4,319.2

2. Placements with banks 1,520.7 1,221.5 769.4 1,383.1 1,758.5 1,924.0 1,929.0 1,911.4 2,038.6 2,188.0

3. Investment securities 2,645.2 3,865.7 5,933.6 6,568.9 8,947.6 10,289.7 11,524.5 12,792.2 14,071.4 15,197.1

4. Loans and advances to

customers 11,542.3 12,264.8 14,035.3 15,457.5 16,667.2 18,106.4 19,666.7 21,282.5 22,920.5 24,295.8

5. Property and equipment 276.6 260.5 266.6 290.0 289.0 294.8 299.8 304.3 310.4 316.6

6. Intangible assets 10.2 47.4 69.1 80.1 82.9 85.4 88.0 91.0 94.2 97.5

7. Equity investments 95.8 105.5 70.0 74.1 74.0 74.0 74.0 74.0 74.0 74.0

8. Other assets 94.1 82.0 127.3 142.1 144.6 160.3 175.4 172.0 175.3 175.0

Total assets 19,368.3 21,544.2 25,817.8 29,572.0 32,066.0 35,073.2 38,227.0 40,772.3 43,759.2 46,663.2

Liabilities

1. Deposits from banks 259.1 333.2 251.2 46.0 419.0 350.7 382.3 407.7 437.6 466.6

2. Deposits from customers 15,059.2 17,324.4 20,280.2 23,232.9 25,803.9 27,590.8 29,798.0 31,883.9 33,956.4 35,993.7

3. Loans from banks and other

financial institutions 1,865.1 1,401.4 2,469.0 2,969.3 2,067.3 2,981.2 3,249.3 3,057.9 3,063.1 3,033.1

4. Other subordinated

liabilities 254.9 257.6 260.1 288.8 337.9 350.7 382.3 407.7 437.6 466.6

5. Other liabilities 99.9 155.7 237.5 340.1 355.5 275.5 370.0 320.8 393.9 336.0

Total liabilities 17,538.4 19,472.2 23,498.0 26,877.1 28,983.5 31,548.9 34,181.9 36,078.0 38,288.5 40,296.1

Equity

1. Share capital 1,176.2 1,560.5 1,860.2 1,989.5 2,292.9 2,645.7 3,061.1 3,551.0 4,161.4 4,891.6

2. Own shares 0.0 0.0 (1.9) (7.8) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)

3. Share premium 97.7 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4. Retained earnings 369.8 300.4 235.0 376.1 430.1 496.9 576.0 704.3 831.6 951.6

5. Revaluation reserve 21.2 26.9 34.1 38.1 29.0 29.0 29.0 29.0 29.0 29.0

6. Other reserves 165.0 184.3 191.7 298.9 331.3 353.5 379.8 410.8 449.4 495.6

Total equity 1,829.9 2,072.0 2,319.8 2,694.9 3,082.6 3,524.3 4,045.1 4,694.3 5,470.7 6,367.1

Total liabilities and equity 19,368.3 21,544.2 25,817.8 29,572.0 32,066.0 35,073.2 38,227.0 40,772.3 43,759.2 46,663.2

Source: Company data, Team estimates


12

Appendix 2: Income Statement (RON million)


Interest income 2,060.9 1,862.7 1,804.2 2,012.4 2,093.7 2,130.7 2,177.4 2,278.1 2,367.1 2,440.4

Interest expense (1,341.5) (890.9) (932.4) (1,074.5) (899.7) (874.9) (852.7) (832.9) (808.3) (774.0) Net interest income 719.3 971.8 871.9 937.9 1,194.0 1,255.8 1,324.7 1,445.2 1,558.8 1,666.4

Fee and commission income 396.6 401.2 441.0 487.7 435.1 487.3 545.8 605.9 666.4 726.4

Fee and commission expense (43.6) (44.2) (51.7) (63.0) (73.4) (80.0) (87.2) (94.2) (100.8) (106.8) Net fee and commission income 353.1 357.0 389.3 424.7 361.7 407.3 458.6 511.7 565.7 619.6

Net trading income 138.9 119.0 117.1 131.2 128.8 137.9 148.9 161.5 175.3 191.0

Other operating income 29.8 18.5 24.4 42.8 39.2 41.1 43.2 45.3 47.6 50.0

Operating income 1,241.1 1,466.2 1,402.7 1,536.5 1,723.7 1,842.1 1,975.3 2,163.7 2,347.3 2,527.0

Net impairment losses on assets (415.8) (652.1) (380.8) (379.4) (407.4) (417.2) (427.0) (436.8) (446.6) (456.4)

Personnel expenses (326.1) (350.9) (368.9) (409.6) (441.3) (463.4) (481.9) (498.8) (513.7) (529.2)

Depreciation and amortization (61.2) (54.2) (49.3) (46.4) (56.8) (45.6) (42.7) (39.5) (36.4) (37.3)

Other operating expenses (266.6) (280.0) (325.4) (360.3) (375.1) (390.1) (403.8) (415.9) (426.3) (436.9)

Operating expenses (1,069.6) (1,337.2) (1,124.4) (1,195.8) (1,280.6) (1,316.3) (1,355.3) (1,391.0) (1,423.0) (1,459.8)

Profit before income tax 171.5 129.0 278.2 340.8 443.1 525.9 620.0 772.8 924.3 1,067.2

Income tax expense (23.3) (20.2) (49.7) (20.3) (68.2) (84.1) (99.2) (123.6) (147.9) (170.8)

Taxation rate 13.6% 15.7% 17.9% 6.0% 15.4% 16.0% 16.0% 16.0% 16.0% 16.0%

Profit for the year 148.2 108.7 228.5 320.4 374.9 441.7 520.8 649.1 776.4 896.4

Source: Company data, Team estimates


13

Appendix 3: Operating model


Investment Securities

Investment Securities 2,645.2 3,865.7 5,933.6 6,568.9 8,947.6 10,289.7 11,524.5 12,792.2 14,071.4 15,197.1

% growth

46.1% 53.5% 10.7% 36.2% 15.0% 12.0% 11.0% 10.0% 8.0%

Placements with banks

Placements with banks 1,520.7 1,221.5 769.4 1,383.1 1,758.5 1,924.0 1,929.0 1,911.4 2,038.6 2,188.0

% of total assets

6.3% 3.6% 5.4% 5.9% 6.0% 5.5% 5.0% 5.0% 5.0%

Loans

Loans and advances to

customers, gross 12,234.0 13,542.7 15,694.6 17,568.5 19,160.3 20,693.1 22,348.5 23,912.9 25,467.3 26,995.3

% growth

10.7% 15.9% 11.9% 9.1% 8.0% 8.0% 7.0% 6.5% 6.0%

Fixed assets

Property and equipment 276.6 260.5 266.6 290.0 289.0 294.8 299.8 304.3 310.4 316.6

% growth

-5.8% 2.3% 8.8% (0.3%) 2.0% 1.7% 1.5% 2.0% 2.0%

Intangible assets 10.2 47.4 69.1 80.1 82.9 85.4 88.0 91.0 94.2 97.5

% growth

364.4% 46.0% 15.8% 3.5% 3.0% 3.0% 3.5% 3.5% 3.5%

Other assets 94.1 82.0 127.3 142.1 144.6 160.33 175.37 172.02 175.32 175.04

% of total assets

0.4% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4%

Deposits Loans and advances to

customers, net 11,542.3 12,264.8 14,035.3 15,457.5 16,667.2 18,106.4 19,666.7 21,282.5 22,920.5 24,295.8

Allowance for loan losses (692) (1,278) (1,659) (2,111) (2,493) (2,587) (2,682) (2,630) (2,547) (2,700) % of loans and advances to

customers 6.0% 10.4% 11.8% 13.7% 15.0% 12.5% 12.0% 11.0% 10.0% 10.0%

Loans and advances to customers, gross 12,234.0 13,542.7 15,694.6 17,568.5 19,160.3 20,693.1 22,348.5 23,912.9 25,467.3 26,995.3

Deposits from customers 15,059.2 17,324.4 20,280.2 23,232.9 25,803.9 27,590.8 29,798.0 31,883.9 33,956.4 35,993.7

Ratio of loans / deposits 81.2% 78.2% 77.4% 75.6% 74.3% 75% 75% 75% 75% 75%

Deposits from banks 259.1 333.2 251.2 46.0 419.0 350.7 382.3 407.7 437.6 466.6

% of total assets 1.3% 1.5% 1.0% 0.2% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% Loans from banks and other

financial institutions 1,865.1 1,401.4 2,469.0 2,969.3 2,067.3 2,981.2 3,249.3 3,057.9 3,063.1 3,033.1

% of total assets 9.6% 6.5% 9.6% 10.0% 6.4% 8.5% 8.5% 7.5% 7.0% 6.5%

Other subordinated liabilities 254.9 257.6 260.1 288.8 337.9 350.7 382.3 407.7 437.6 466.6

% of total assets 1.3% 1.2% 1.0% 1.0% 1.1% 1.0% 1.0% 1.0% 1.0% 1.0%

Cash, deposits from customers

Cash and cash equivalents 3,183.3 3,696.8 4,546.5 5,576.3 4,102.3 4,138.6 4,469.7 4,144.9 4,074.8 4,319.2

% of deposits from customers 21.1% 21.3% 22.4% 24.0% 15.9% 15.0% 15.0% 13.0% 12.0% 12.0%

Net interest income

Interest income

Loans and advances to customers 1,638.0 1,537.2 1,436.3 1,425.7 1,498.5 1,502.8 1,514.3 1,553.6 1,604.4 1,652.1

% of loans and advances to

customers 14.2% 12.5% 10.2% 9.2% 9.0% 8.3% 7.7% 7.3% 7.0% 6.8% Current accounts held with

banks 98.7 44.4 39.4 36.8 33.1 27.3 29.1 24.9 24.4 21.6

% of cash and cash equivalents 3.1% 1.2% 0.9% 0.7% 0.8% 0.7% 0.7% 0.6% 0.6% 0.5%

Available for sale securities 274.9 254.4 294.0 520.1 534.5 565.9 599.3 665.2 703.6 729.5

% of investment securities 10.4% 6.6% 5.0% 7.9% 6.0% 5.5% 5.2% 5.2% 5.0% 4.8%

Placements with banks 49.3 26.7 34.6 29.8 27.6 34.6 34.7 34.4 34.7 37.2

% of placements with banks 3.2% 2.2% 4.5% 2.2% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7%

Total interest income 2,060.9 1,862.7 1,804.2 2,012.4 2,093.7 2,130.7 2,177.4 2,278.1 2,367.1 2,440.4


14

Interest expense

Deposits from customers 1,119.1 816.4 834.7 916.7 812.5 786.3 774.7 765.2 747.0 719.9

% of deposits from customer 7.4% 4.7% 4.1% 3.9% 3.1% 2.9% 2.6% 2.4% 2.2% 2.0%

Loans from banks and other financial institutions 216.1 70.7 70.0 113.3 82.8 83.3 72.6 62.4 56.0 49.0

% of loans from banks and

other financial institutions 10.2% 4.3% 2.6% 3.5% 3.4% 2.5% 2.0% 1.8% 1.6% 1.4%

Available for sale securities 0.0 0.0 22.4 33.6 0.0 0.0 0.0 0.0 0.0 0.0

% of investment securities 0.0% 0.0% 0.4% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Deposits from banks 6.3 3.8 5.3 11.0 4.4 5.3 5.4 5.3 5.3 5.1

% of deposits from banks 2.4% 1.1% 2.1% 23.9% 1.1% 1.5% 1.4% 1.3% 1.2% 1.1%

Total interest expense 1,341.5 890.9 932.4 1,074.5 899.739 874.9 852.7 832.9 808.3 774.0

Net fee and commission income

Fee and commission income 396.6 401.2 441.0 487.7 435.1 487.3 545.8 605.9 666.4 726.4

% growth

1.1% 9.9% 10.6% (10.8%) 12.0% 12.0% 11.0% 10.0% 9.0%

Fee and commission expense 43.6 44.2 51.7 63.0 73.4 80.0 87.2 94.2 100.8 106.8

% growth

1.5% 16.9% 21.9% 16.5% 9.0% 9.0% 8.0% 7.0% 6.0%

Net trading income 138.9 119.0 117.1 131.2 128.8 137.9 148.9 161.5 175.3 191.0

% growth

(14.3%) (1.6%) 12.0% (1.8%) 7.0% 8.0% 8.5% 8.5% 9.0%

Other operating income 29.8 18.5 24.4 42.8 39.2 41.1 43.2 45.3 47.6 50.0

% growth

(38.1%) 32.1% 75.3% (8.5%) 5.0% 5.0% 5.0% 5.0% 5.0%

Operating expenses

Net impairment losses on assets 415.8 652.1 380.8 379.4 407.4 417.2 427.0 436.8 446.6 456.4

% of loans and advances to customers 3.6% 5.3% 2.7% 2.5% 2.4% 2.4% 2.4% 2.3% 2.3% 2.2%

Personnel expenses 326.1 350.9 368.9 409.6 441.3 463.4 481.9 498.8 513.7 529.2

% growth

7.6% 5.1% 11.0% 7.7% 5.0% 4.0% 3.5% 3.0% 3.0%

Depreciation and amortization 61.2 54.2 49.3 46.4 56.8 45.6 42.7 39.5 36.4 37.3

% of fixed assets 21.3% 17.6% 14.7% 12.5% 15.3% 12.0% 11.0% 10.0% 9.0% 9.0%

Other operating expenses 266.6 280.0 325.4 360.3 375.1 390.1 403.8 415.9 426.3 436.9

% growth

5.0% 16.2% 10.7% 4.1% 4.0% 3.5% 3.0% 2.5% 2.5%



15

Appendix 4: Residual income model


Profit for the year 148.2 108.7 228.5 320.4 374.9 441.7 520.8 649.1 776.4 896.4

Total equity 1,829.9 2,072.0 2,319.8 2,694.9 3,082.6 3,524.3 4,045.1 4,694.3 5,470.7 6,367.1

Residual Income

(160.0) (73.9) (24.9) (23.0) (13.3) (0.5) 39.8 49.9 17.8

ROE

5.57% 10.41% 12.78% 12.98% 13.37% 13.76% 14.86% 15.28% 15.15%

Valuation 31-12-2014 (RON million)


Residual income

(0.5) 39.8 49.9 17.8

Continuing value

177.4

Discount factor

0.879 0.771 0.675 0.588

Present value of RI and CV

(0.4) 30.7 33.7 114.7

Sum of PV of Residual Income

178.7

Total equity

3,524.3

Value of equity

3,703.0

Number of shares (millions) 2,206.44

TLV value / share 1.68


Appendix 5: Justified P/BV model

FY 18 F

Total equity 6,367.1

Justified PB 3,790.9

Number of shares (millions) 2,206.4

TLV value / share 1.72

FY 15 F FY 16 F FY 17 F FY 18 F Perpetuity

Cost of equity 13.77% 13.94% 14.29% 14.84% 13.36%

Discount rate 0.879 0.771 0.675 0.588

CV assumptions

ROE 13.5%

Long-term growth rate 3.0%

Source: team estimates


16

Appendix 6: Cost of equity

FY 15 F FY 16 F FY 17 F FY 18 F Perpetuity

YTM Romanian government bond 3.67% 3.84% 4.19% 4.74%

YTM 30yrs German government bonds

2.53%

Long-term inflation differential

0.73%

Risk-free rate

3.26%

Equity risk premium 9.13% 9.13% 9.13% 9.13% 9.13%

Adjusted β 1.11 1.11 1.11 1.11 1.11

Cost of equity 13.77% 13.94% 14.29% 14.84% 13.36%

Total ERP 9.13%

Country risk premium 3.38%

Equity risk premium 5.75%

Raw β 1.16

Bloomberg adjusted β 1.11

Differential inflation

Long-term target

CPI Romania 2.50%

CPI Germany 1.77%

Source: team estimates


17

Appendix 7: BT loans and Advances to customers

In RON thousands 31-Dec-12 31-Dec-11 2011-2012 % increase

Individuals 6,325,313 5,819,493 8.69%

Trading 2,882,807 2,712,410 6.28%

Manufacturing 2,507,113 2,196,027 14.17%

Construction 990,287 838,050 18.17%

Services 941,908 829,219 13.59%

Transport 702,256 632,995 10.94%

Real Estate 526,755 474,057 11.12%

Agriculture 729,524 560,453 30.17%

Free Lancers 382,202 340,535 12.24%

Chemical Industry 315,305 322,707 -2.29%

Energy Industry 322,277 249,034 29.41%

Financial Institutions 312,254 197,103 58.42%

Telecommunication 125,484 108,477 15.68%

Mining Industry 170,697 142,517 19.77%

Fishing Industry 7,255 4,607 57.48%

Government Bodies 31,030 27,560 12.59%

Others 296,018 239,398 23.65%

Total loans and Advances to customers before

impairment allowance 17,568,485 15,694,642 11.94%

Less allowances for impairment losses on loans (2,111,004) (1,659,352) 27.22%

Allowances for impairment losses on loans as a

% of Total loans and Advances to customers

before impairment allowance

12.02% 10.57%

Total loans and advance to customers, net of

impairment allowance 15,457,481 14,035,290 10.13%

Source: NBR

Appendix 8: Advantages of Flexube core-banking system

For the customer For the bank

Client enrollment is just a matter of signing

the form

Process automation and optimization

Customer electronic files (ID scan included) Account attachments are automatically posted

Customer info update for all

agencies/branches

Centralization of IT infrastructure

24/7 available e-channels: a key ingredient for

self-banking

Account statements available in all branches

and Internet Banking

Reconciliation and automatic transfer of bill

payments

End of day/month processes considerably

faster



18

Appendix 9 Real GDP growth rate of EU countries

Source: Eurostat

Appendix 10: GDP per capita of Romania.

Source: Eurostat

-8

-6

-4

-2

0

2

4

6

Latv

ia

Esto

nia

Lith

uan

ia

Po

lan

d

Slo

vaki

a

Mal

ta

Au

stri

a

Swed

en

Bu

lgar

ia

Ge

rman

y

Ro

man

ia

Un

ited

Kin

gdo

m

Irel

and

Fran

ce

Bel

giu

m

Luxe

mb

ou

rg

Den

mar

k

Cze

ch R

epu

blic

Fin

lan

d

Ne

the

rlan

ds

Spai

n

Hu

nga

ry

Cro

atia

Cyp

rus

Ital

y

Slo

ven

ia

Po

rtu

gal

Gre

ece

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2005 2006 2007 2008 2009 2010 2011 2012


19

Appendix 11: GDP per capita of EU countries

Source: Eurostat

Country 2004 2005 2006 2007 2008 2009 2010 2011 2012

Serbia 2,500 2,700 3,100 3,900 4,400 4,000 3,800 4,400 4,100

Bulgaria 2,600 3,000 3,400 4,000 4,600 4,600 4,800 5,200 5,400

Romania 2,800 3,700 4,500 5,800 6,500 5,500 5,800 6,200 6,200

Hungary 8,100 8,800 8,900 9,900 10,500 9,100 9,600 9,900 9,800

Poland 5,300 6,400 7,100 8,200 9,500 8,100 9,200 9,600 9,900

Croatia 7,400 8,100 8,900 9,800 10,700 10,100 10,100 10,400 10,300

Latvia 4,900 5,800 7,200 9,600 10,500 8,600 8,600 9,800 10,900

Lithuania 5,400 6,300 7,400 8,900 10,100 8,400 8,900 10,200 11,000

Estonia 7,200 8,300 10,000 12,000 12,100 10,400 10,700 12,100 13,000

Slovakia 6,300 7,100 8,300 10,200 11,900 11,600 12,100 12,800 13,200

Czech Republic 9,000 10,200 11,500 12,800 14,800 13,600 14,300 14,800 14,600

Portugal 14,200 14,600 15,200 16,000 16,200 15,900 16,300 16,100 15,600

Malta 11,600 12,200 12,800 13,700 14,600 14,400 15,400 16,000 16,300

Greece 16,700 17,400 18,700 19,900 20,800 20,500 19,600 18,500 17,200

Slovenia 13,600 14,400 15,500 17,100 18,400 17,300 17,300 17,600 17,200

Cyprus 17,300 18,400 19,500 20,700 21,800 20,900 21,000 21,100 20,700

Spain 19,700 21,000 22,400 23,500 23,900 22,800 22,700 22,700 22,300

European Union (28 countries) 21,600 22,400 23,600 24,900 25,000 23,400 24,400 25,100 25,500


Italy 24,000 24,500 25,300 26,200 26,300 25,200 25,700 26,000 25,700

Euro area (18 countries) 24,300 25,000 26,200 27,500 28,000 26,900 27,500 28,200 28,400

Euro area (EA11-2000, EA12-2006, EA13-

2007, EA15-2008, EA16-2010, EA17-2013,

EA18)

24,900 25,600 26,800 28,000 28,400 27,100 27,700 28,400 28,500




United Kingdom 29,900 31,000 32,700 34,200 29,900 25,700 27,800 28,200 30,300

France 26,500 27,300 28,400 29,600 30,100 29,300 29,900 30,700 31,100

Germany (until 1990 former territory of the

FRG) 26,600 27,000 28,100 29,500 30,100 29,000 30,500 31,900 32,600

Iceland 36,500 44,300 43,800 48,000 32,200 27,200 29,800 31,600 32,900

Belgium 28,000 29,000 30,200 31,600 32,400 31,600 32,700 33,600 34,000

Finland 29,100 30,000 31,500 34,000 34,900 32,300 33,300 35,000 35,500

Ireland 36,900 39,200 41,600 43,100 40,100 35,800 34,700 35,500 35,700

Netherlands 30,200 31,500 33,100 34,900 36,200 34,700 35,300 35,900 35,800

Austria 28,700 29,800 31,300 33,000 34,000 33,100 34,100 35,700 36,400

Sweden 32,400 33,000 35,000 36,900 36,100 31,500 37,300 40,800 42,800

Denmark 36,500 38,300 40,200 41,700 42,800 40,500 42,600 43,200 43,900

Switzerland 40,400 41,300 42,700 43,200 46,400 47,100 53,300 60,300 61,900

Norway 45,600 52,900 58,100 61,100 65,300 56,500 65,000 71,300 77,500

Luxembourg 59,900 65,000 71,700 78,000 76,400 71,400 77,400 80,300 80,700


20

Appendix 12: Unemployment rate of EU countries

Country 2012 2013

Austria 4.3 :

Luxembourg 5.1 5.9

Netherlands 5.3 6.7

Germany 5.5 5.3

Malta 6.4 6.5

Czech

Republic 7 7

Romania 7 7.2

Denmark 7.5 7

Belgium 7.6 8.4

Finland 7.7 8.2

United

Kingdom 7.9 :

Sweden 8 8

Slovenia 8.9 10.2

Poland 10.1 10.4

Estonia 10.2 :

France 10.2 10.8

Italy 10.7 :

Hungary 10.9 :

Cyprus 11.9 16

Bulgaria 12.3 12.9

Lithuania 13.4 11.8

Slovakia 14 14.2

Ireland 14.7 13.1

Latvia 15 :

Croatia 15.9 17.6

Portugal 15.9 16.5

Greece 24.3 :

Spain 25 26.4

: Missing data

Source: Eurostat

Appendix 13: Labor force demand

Period Vacancies Hiring

thousand; monthly averages

2011Q1 39.2 30.8

2011Q2 42.4 31.2

2011Q3 38.3 30.4

2011Q4 36.7 26.5

2012Q1 36.9 26.4

2012Q2 37.9 26.3

2012Q3 37.8 26.6

2012Q4 38.6 26.8

2013Q1 39.0 26.5

2013Q2 39.6 26.4

2013Q3 41.5 27.0

2013 Oct.-Nov 43.0 26.5

Source: NIS, NBR


21

Appendix 14: USD/RON and EUR/RON exchange rate dynamics.

Source: NBR

Appendix 15(9): Private sector loans in domestic and foreign currencies

Source: NBR

2.5000

2.7500

3.0000

3.2500

3.5000

3.7500

4.0000

4.2500

4.5000

4.7500

USD/RON EUR/RON

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Dec

/20

01

May

/200

2

Oct

/20

02

Mar

/20

03

Au

g/2

003

Jan

/20

04

Jun

/20

04

No

v/2

004

Ap

r/20

05

Sep

/20

05

Feb

/20

06

Jul/

20

06

Dec

/20

06

May

/200

7

Oct

/20

07

Mar

/20

08

Au

g/2

008

Jan

/20

09

Jun

/20

09

No

v/2

009

Ap

r/20

10

Sep

/20

10

Feb

/20

11

Jul/

20

11

Dec

/20

11

May

/201

2

Oct

/20

12

Mar

/20

13

Au

g/2

013

loans to private sector in domestic currency percent

loans to private sector in foreign currency


22

Appendix 16: Total investment % of GDP of EU countries

Country 2008 2009 2010 2011 2012

Romania 31.92 24.43 24.71 25.97 27.125

Estonia 30.31 21.19 18.97 23.59 25.22

Czech Republic 26.8 24.64 24.55 24.13 23.09

Latvia 29.65 21.58 18.22 21.33 22.79

Austria 21.63 20.7 20.16 21.22 21.44

Bulgaria 33.6 28.87 22.8 21.55 21.4

Norway 21.18 21.64 18.94 19.61 20.75

Belgium 22.31 20.81 20.1 20.72 20.36

Slovakia 24.8 20.74 21.02 23.14 20.11

France 21.31 19.49 19.47 19.98 19.77

Finland 21.36 19.73 18.85 19.41 19.59

Luxembourg 21.44 19.22 17.36 18.54 19.29

Spain 28.69 23.63 22.23 20.71 19.19

Poland 22.26 21.17 19.86 20.2 19.15

Sweden 20.03 17.99 18.03 18.7 18.99

Euro area (17 countries) 21.79 19.66 19.23 19.32 18.66

EU (28 countries) : : : : 18.29

Italy 20.99 19.39 19.42 19.07 17.91

Slovenia 28.63 23.06 19.71 18.59 17.76

Germany 18.58 17.21 17.44 18.13 17.65

Hungary 21.7 20.69 18.56 17.91 17.4

Denmark 21.03 18.07 16.92 17.35 17.39

Netherlands 20.5 18.98 17.36 17.84 17.02

Lithuania 25.35 17.18 16.29 18.03 16.65

Portugal 22.46 20.55 19.57 17.99 16.03

Malta 18.42 16.84 17.62 15.11 14.76

United Kingdom 16.79 14.9 14.89 14.36 14.37

Cyprus 22.94 20.54 19.14 16.64 13.71

Greece 22.56 19.88 17.64 15.15 13.14

Ireland 21.98 16.06 12.17 10.63 10.69

Switzerland 21.27 19.92 20.08 20.56 :

: Missing data

Source: Eurostat, NBR


23

Appendix 17: Investment and Savings Rates, Current account deficit of Romania

Period Investment rate Saving rate Current account

deficit/GDP

Quarters' average (%)

2011Q1 25.5 21.8 3.7

2011Q2 26.1 22.1 4.0

2011Q3 26.8 22.5 4.3

2011Q4 26.9 22.4 4.5

2012Q1 27.0 22.1 4.8

2012Q2 27.1 22.7 4.4

2012Q3 27.4 22.9 4.5

2012Q4 27.0 22.6 4.4

2013Q1 26.4 22.8 3.6

2013Q2 25.0 23.2 1.8

2013Q3 24.5 23.3 1.2

Domestic investment rate is the ratio of gross capital formation to GDP.

Domestic saving rate is the difference between national gross disposable income and final consumption as

a share of GDP.

Source: NBR, NIS

Appendix 18: Money aggregates

Source: NBR

0.0

50,000,000.0

100,000,000.0

150,000,000.0

200,000,000.0

250,000,000.0

300,000,000.0

Jan

. 20

07

May

. 20

07

Sep

. 200

7

Jan

. 20

08

May

. 20

08

Sep

. 200

8

Jan

. 20

09

May

. 20

09

Sep

. 200

9

Jan

. 20

10

May

. 20

10

Sep

. 201

0

Jan

. 20

11

May

. 20

11

Sep

. 201

1

Jan

. 20

12

May

. 20

12

Sep

. 201

2

Jan

. 20

13

May

. 20

13

Sep

. 201

3

M3 (Broad money) (RON thousand)

0.0

10,000,000.0

20,000,000.0

30,000,000.0

40,000,000.0

50,000,000.0

60,000,000.0

70,000,000.0

80,000,000.0

Jan

. 20

07

May

. 20

07

Sep

. 200

7

Jan

. 20

08

May

. 20

08

Sep

. 200

8

Jan

. 20

09

May

. 20

09

Sep

. 200

9

Jan

. 20

10

May

. 20

10

Sep

. 201

0

Jan

. 20

11

May

. 20

11

Sep

. 201

1

Jan

. 20

12

May

. 20

12

Sep

. 201

2

Jan

. 20

13

May

. 20

13

Sep

. 201

3

M1 (Narrow money)

M1 (Narrow money) currency in circulation (RON thousand)

M1 (Narrow money) overnight deposits (RON thousand)


24

Appendix 19: Number of banks and population of EU countries

Country Population Nr of banks Banks/100,000

citizens

Romania 20,121,641 39 0.193821

Greece 10,815,197 40 0.369850

Bulgaria 7,364,570 30 0.407356

Slovakia 5,410,836 28 0.517480

Czech Republic 10,513,209 56 0.532663

United Kingdom 63,181,775 358 0.566619

Spain 46,704,314 290 0.620928

Croatia 4,284,889 35 0.816824

Belgium 11,099,554 103 0.927965

France 66,616,416 623 0.935205

Slovenia 2,055,496 23 1.118951

Italy 59,685,227 694 1.162767

Portugal 10,487,289 151 1.439838

Netherlands 16,819,595 253 1.504198

Sweden 9,633,490 168 1.743916

Poland 38,186,860 691 1.809523

Hungary 9,908,798 189 1.907396

Germany 80,585,700 1842 2.285765

Estonia 1,311,870 31 2.363039

Denmark 5,602,536 161 2.873699

Lithuania 2,955,986 91 3.078499

Latvia 2,005,200 63 3.141831

Finland 5,454,444 303 5.555103

Malta 452,515 27 5.966653

Austria 8,414,638 731 8.687242

Cyprus 1,117,000 101 9.042077

Ireland 4,593,100 458 9.971479

Luxemburg 537,853 147 27.330888

Source: European Banking Federation


25

Appendix 20: Number of branches

In EU countries

Country

Branches per

100,000

inhabitants

Austria 53

Bulgaria 52

Czech Republic 20

Estonia 13

France 59

Germany 44

Greece 32

Italy 53

Latvia 20

Lithuania 23

The Netherlands 15

Poland 39

Portugal 59

Slovakia 20

Slovenia 34

Spain 83

Hungary 33

EU-27 average 43

Romania 2011 30

Romania 2012 28

Romania 2013

Q2 27

Source: European Banking Federation

Appendix 21: Number of branches in Romania

Source: NBR

525456586062646668707274

4,8005,0005,2005,4005,6005,8006,0006,2006,4006,6006,800

Dec

/20

07

Ap

r/20

08

Au

g/2

008

Dec

/20

08

Ap

r/20

09

Au

g/2

009

Dec

/20

09

Ap

r/20

10

Au

g/2

010

Dec

/20

10

Ap

r/20

11

Au

g/2

011

Dec

/20

11

Ap

r/20

12

Au

g/2

012

Dec

/20

12

Ap

r/20

13

branches thou. employees


26

Appendix 22: Concentration of Romanian banking system

Period Assets of top five banks as a

share in total assets (%)

Loans of top five banks as

a share in total loans (%)

Deposits of top five banks as

a share in total deposits (%)

2008 54.3 53.3 54.0

2009 52.4 53.4 52.0

2010 52.7 51.5 55.4

2011 54.6 52.3 58.0

2012 54.7 54.4 54.9

Aug/2013 54.0 55.9 53.5

Source: NBR, ECB (Statistical Data Warehouse)

48.0

50.0

52.0

54.0

56.0

58.0

60.0

2008 2009 2010 2011 2012 Aug/2013

Assets of top five banks as a share in total assets percent

Loans of top five banks as a share in total loans

Deposits of top five banks as a share in total deposits


27

Appendix 23: Herfindahl-Hirschmann index values for EU countries

Country Market share of

top five banks (%) HH index (point)

Austria 36 395

Bulgaria 50 738

Czech Republic 61 999

Estonia 90 2,493

France 45 545

Germany 33 307

Greece 79 1,487

Italy 40 410

Latvia 64 1,027

Lithuania 84 1,749

The Netherlands 82 2,026

Poland 44 568

Portugal 71 1,191

Slovakia 72 1,221

Slovenia 58 1,115

Spain 51 654

Hungary 54 806

EU-27 average 59 1,066

Romania* 54 834

Source: ECB (Statistical Data Warehouse)

The Herfindahl index (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to

the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O.

Hirschman, it is an economic concept widely applied in competition, antitrust and also technology management. It is defined as the

sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are fewer than 50) within the

industry, where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by

market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer.

Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases

indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 "points".

0

500

1,000

1,500

2,000

2,500

3,000

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Industry

http://en.wikipedia.org/w/index.php?title=Orris_C._Herfindahl&action=edit&redlink=1

http://en.wikipedia.org/wiki/Albert_O._Hirschman

http://en.wikipedia.org/wiki/Albert_O._Hirschman

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Antitrust

http://en.wikipedia.org/wiki/Market_share

http://en.wikipedia.org/wiki/Market_power


28

Appendix 24: Credit institutions and branches with foreign capital in EU countries

Country Assets of foreign-owned credit

institutions as a share in total

assets. (%)

Credit institutions (branches and subsidiaries)

with foreign capital. (Number)

Estonia 96.40 13

Lithuania 94.43 12

Czech Rep. 92.68 38

Romania* 90.80 36

Slovakia 88.36 26

Bulgaria 73.58 22

Poland 61.93 56

Latvia 61.32 16

Hungary 58.13 27

Slovenia 29.48 10

Austria 27.16 64

Portugal 22.49 35

Greece 15.42 27

The Netherlands 10.17 62

Italy 8.66 102

Spain 7.44 128

Germany 4.09 145

France 3.33 204

Aug. 2013

Source: ECB (Statistical Data Warehouse)

Appendix 25: Liability structure of credit institutions operating in Romania

Liabilities Dec.

2008

Dec.

2009

Dec.

2010

Dec.

2008

Dec.

2011

Jun.

2012

Aug.

2012

Dec.

2012

Mar.

2013

Aug.

2013

Domestic Liabilities, of which 69.3* 73.6 73.2 73.5 75.2 76.1 76.8 77.8 78.0 78.6

-Interbank deposits 2.1 5.4 3.4 3.4 5.0 4.7 4.6 2.5 2.2 1.9

-Government sector deposits 3.1 2.1 1.7 1.4 1.5 1.4 1.3 1.3 1.3 1.4

-Corporate deposits 20.2 19.3 19.0 19.0 17.7 18.3 18.5 18.9 19.1 19.5

-Houshold deposits 24.4 26.7 27.0 28.7 29.2 29.5 30.2 31.7 31.6 31.8

-Capital and reserves 10.6 12.0 14.2 16.2 16.9 17.3 18.0 18.8 19.3 19.7

-Other liabilities 8.9 8.1 7.9 4.8 4.9 4.9 4.2 4.6 4.4 4.3

-Foreign liabilities 30.7 26.4 26.8 26.5 24.8 23.9 23.2 22.2 22.0 21.4

*-percent of total liabilities

Source: NBR


29

Appendix 26: Financial intermediation, international comparison

Country Assets/GDP (%) Loans/GDP (%) Deposits/GDP (%)

Austria 315.50 112.44 104.66

Bulgaria 114.45 70.84 69.07

Czech Republic 125.86 55.35 75.04

Estonia 115.89 78.83 58.83

France 397.38 105.99 95.35

Germany 311.12 98.09 118.86

Greece 228.23 118.30 86.66

Italy 269.52 112.19 95.70

Latvia 128.49 65.59 37.74

Lithuania 74.25 48.99 38.95

The Netherlands 415.79 177.98 149.38

Poland 93.05 53.72 52.83

Portugal 337.13 152.32 127.45

Slovakia 83.54 49.54 56.81

Slovenia 143.23 84.59 58.93

Spain 341.21 156.76 145.02

Hungary 114.26 53.85 48.63

EU-27 351.72 120.03 113.43

Romania 68.93 38.44 33.58

Source: NBR, ECB (Statistical Data Warehouse)

Assets/GDP

Loans/GDP

Deposits/GDP

Max

Max

Max

The Netherlands 415.79 The Netherlands 177.98 The Netherlands 149.38

Min

Min

Min

Romania 68.93 Romania 38.44 Romania 33.58

Median

Median

Median

143.23

84.59

75.04

EU-27 351.72

120.03

113.43



30

Appendix 27: Credit to households; lending for house purchase; RON

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

3,500,000.0

4,000,000.0

Jan

. 20

07

May

. 20

07

Sep

. 20

07

Jan

. 20

08

May

. 20

08

Sep

. 20

08

Jan

. 20

09

May

. 20

09

Sep

. 20

09

Jan

. 20

10

May

. 20

10

Sep

. 20

10

Jan

. 20

11

May

. 20

11

Sep

. 20

11

Jan

. 20

12

May

. 20

12

Sep

. 20

12

Jan

. 20

13

May

. 20

13

Sep

. 20

13

Ro

n T

ho

usa

nd

s

20,000,000.0

40,000,000.0

60,000,000.0

80,000,000.0

100,000,000.0

120,000,000.0

140,000,000.0

Jan

. 20

07

Ap

r. 2

007

Jul.

200

7

Oct

. 20

07

Jan

. 20

08

Ap

r. 2

008

Jul.

200

8

Oct

. 20

08

Jan

. 20

09

Ap

r. 2

009

Jul.

200

9

Oct

. 20

09

Jan

. 20

10

Ap

r. 2

010

Jul.

201

0

Oct

. 20

10

Jan

. 20

11

Ap

r. 2

011

Jul.

201

1

Oct

. 20

11

Jan

. 20

12

Ap

r. 2

012

Jul.

201

2

Oct

. 20

12

Jan

. 20

13

Ap

r. 2

013

Jul.

201

3

Oct

. 20

13

Ro

n T

ho

usa

nd

s

Credit to households (RON thousand) Deposit from households


31

Appendix 28: Bank distribution in terms of solvency ratio

Period 8 - 10% 10 - 12% 12 - 16% 16 - 20% 20 - 24% 24 - 30% above 30%

Number of banks

Dec/2008 2 6 9 4 2 3 6

Dec/2009 0 2 14 7 2 2 4

Dec/2010 0 2 16 7 0 3 4

Dec/2011 2 3 8 9 5 1 4

Jun/2012 1 4 10 7 6 0 4

Dec/2012 1 2 15 4 4 2 3

Mar/2013 1 4 15 6 0 1 4

Jun/2013 1 5 14 5 0 1 5

Source: NBR

Appendix 29: NPL ratio of credit institutions (%)

Source: NBR

Appendix 30: Distribution of credit institutions’ market share based on ROA

Source: NBR

0.00

5.00

10.00

15.00

20.00

25.00

Mar

/20

08

May

/20

08

Jul/

20

08

Sep

/20

08

No

v/2

00

8

Jan

/20

09

Mar

/20

09

May

/20

09

Jul/

20

09

Sep

/20

09

No

v/2

00

9

Jan

/20

10

Mar

/20

10

May

/20

10

Jul/

20

10

Sep

/20

10

No

v/2

01

0

Jan

/20

11

Mar

/20

11

May

/20

11

Jul/

20

11

Sep

/20

11

No

v/2

01

1

Jan

/20

12

Mar

/20

12

May

/20

12

Jul/

20

12

Sep

/20

12

No

v/2

01

2

Jan

/20

13

Mar

/20

13

May

/20

13

Period ROA<0 0≤ROA<1 1≤ROA<2 2≤<=ROA<3 ROA≥3

2008 9.9 22.8 32.2 6.7 28.3

2009 21.0 47.7 30.1 0.1 1.0

2010 21.9 53.6 21.7 2.8 0.0

2011 44.7 28.8 24.8 1.6 0.0

2012 59.8 18.2 19.8 2.2 0.0


32

Appendix 31: Romanian banking sector everyday transactions activity

Source: NBR

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

Mar

. 20

08

Sep

. 200

8

Mar

. 20

09

Sep

. 200

9

Mar

. 20

10

Sep

. 201

0

Mar

. 20

11

Sep

. 201

1

Mar

. 20

12

Sep

. 201

2

Mar

. 20

13

Sep

. 201

3

Active cards (units)

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Mar

. 20

08

Au

g. 2

008

Jan

. 20

09

Jun

. 20

09

No

v. 2

00

9

Ap

r. 2

010

Sep

. 201

0

Feb

. 201

1

Jul.

201

1

Dec

. 20

11

May

. 20

12

Oct

. 20

12

Mar

. 20

13

Au

g. 2

013

ATMs (units)

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

Mar

. 20

08

Au

g. 2

008

Jan

. 20

09

Jun

. 20

09

No

v. 2

00

9

Ap

r. 2

010

Sep

. 201

0

Feb

. 201

1

Jul.

201

1

Dec

. 20

11

May

. 20

12

Oct

. 20

12

Mar

. 20

13

Au

g. 2

013

POS terminals (units)

11,500,000

12,000,000

12,500,000

13,000,000

13,500,000

14,000,000

14,500,000

Mar

. 20

08

Au

g. 2

008

Jan

. 20

09

Jun

. 20

09

No

v. 2

00

9

Ap

r. 2

010

Sep

. 201

0

Feb

. 201

1

Jul.

201

1

Dec

. 20

11

May

. 20

12

Oct

. 20

12

Mar

. 20

13

Au

g. 2

013

Cards in circulation (units)


33

Appendix 32: Porter Analysis

Threat of Entry

1. Capital Requirements

2. Product differentiation for overcoming customer

loyalty

3. NBR supervision

4. Existence of economies of scale

Bargaining power of suppliers

1. Specialized labor force required

2. Limited number of input sources

3. Strong position of labor unions

Bargaining power of customers

1. Undifferentiated product

2. Price sensitivity of customers

3. Large volume customers

Threat of Substitute Products

1. No perfect substitute for loans

2. Substandard product

3. Government programs existence

Competition in the industry

1. Relatively large competitors

2. Law product differentiation.

3. Fixed costs are high

4. The rivals are diverse in strategies

5. High exit barriers

Source: Team Estimates

Threat of Entry

Bargaining power ofsuppliers

Bargaining power ofcustomers

Threat of SubstituteProducts

Competition in theindustry

Scale of interaction

0 No interaction

1 Insignificant

2 Low

3 Average

4 High

5 Very high

Forces Points

Threat of Entry 3

Bargaining power of suppliers 3

Bargaining power of customers 2

Threat of Substitute Products 2

Competition in the industry 4

Final rating 2.2


34

Appendix 33: BT and BRD equity comparison

Source: Bloomberg

Appendix 34: BET2, BET-C3, CECEBNK4, SX7E5 Index comparison with BT

2 Bucharest Stock Exchange Trading Index 3 BET-composite 4 The CECE Banking Index consists of blue chip stocks of the banking sector which are traded on stock exchanges in the region of

Central, Eastern and South-eastern Europe 5 SX7E – Euro STOXX Banks index

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

TLV RO equity BRD (Reference date 01.03.2013 )

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

BET-C Index (Reference date 01.03.2013 ) TLV RO equity

SX7E Index (Reference date 01.03.2013) CECEBNK Index (Reference date 01.03.2013)

BET Index ( Referrence date 01.03.2013)


35

Appendix 35: BET, WIG6, BUX7 and FTASE8 Index comparison

Source: Bloomberg

Appendix 36: Regression Analysis

We have conducted simple regression analysis between BT returns and BET index returns in order to identify the value

Beta.

Dependent Variable: TLV_CLOSE_PRICE_RETURN

Method: Least Squares

Sample: 1 271

Included observations: 271

Variable Coefficient STd. Error t-Statistics Prob.

BET_INDEXRETURN 1.166806 0.091560 12.74367 0.0000

R-squared 0.372131 Mean dependent var. 0.104347

Adjusted R-squared 0.372131 S.D dependent var. 1.406576

S.E of regression 1.114546 Akaike info criterion 3.058454

Sum squared residuals 335.3974 Schwarz criterion 3.071746

Log likelihood -413.4206 Hannan-Quinn criterion 3.063791

Durbin-Watson statistics 1.918392


6 WIG – Warsaw stock exchange index 7 BUX-Budapest stock exchange index 8 FTASE – FTSE/Athens stock exchange large cap index

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

Dec

-12

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

BET (RO) WIG (PL) BUX (HU) FTASE (GR)


36

Appendix 37: Objectives and results of BT (2013

Objectives of BT for 2013 Results (based on Dec 2013)

Total assets: 8% increase + 8.4%

Total credits: 8% increase + 7.83%

Total resources from clients: 10% increase + 11.07 %

Credits / Deposits: 74.63% 74.25%

Cost / Income: maximum 52% 48.7%


Appendix 38: Corporate Governance

OECD Criteria BT’s score for

each criteria

BT’s score

after applying

weights

Ensuring the Basis for an Effective

Corporate Governance Framework 10 1

The Rights of Shareholders and Key

Ownership Functions 9 1.8

The Equitable Treatment of

Shareholders 8 1.6

The Role of Stakeholders in

Corporate Governance 10 1

Disclosure and Transparency 9 1.8

The Responsibilities of the Board 9 1.8

SUM 9


10%

10%

20%

20%

20%

20%


37

Appendix 39: Risk matrix

Increase in

energy and

labor costs

Currency

risk

BT’s

competitors

Trading

losses

Non-

Performing

Loans

Romania

enters

Eurozone

Company

identity


Appendix 40: Monte Carlo Simulation for Residual Income model based on long-term growth rate changes


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Market risk Economic

risk

Operational

risk

Insignificant Moderate Severe

Lo

w

Mo

der

ate

H

igh

IMPACT

PP

RO

BA

BIL

IT

Y

Disclosures: Ownership and material conflicts of interest:

The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company.

The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content

or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The authors or a member of their household do not serve as an officer, director or advisory board member of the subject company.

Market making:

The authors do not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be

reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is

not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice,

nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any

individual affiliated with CFA Society Romania or the CFA Institute Research Challenge with regard to this company’s stock.

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