Banking in SEE: moving into the spotlight
Euromoney Conference, Dubrovnik October 16th
Debora Revoltella
UniCredit Group CEE Chief Economist
2
EXECUTIVE SUMMARY
A region which continues to deliver strong growth with moderate risk, but with rising disequilibria
Strong banking growth and profitability. The retail segment remains the most dynamic at the regional level, with households financial penetration increasing both on the assets and the liabilities side
Banking sectors are generally well-capitalised and profitable with the widespread presence of foreign players having contributed to the significant improvement in market conditions. Prudential requirements are also strict
Although risks on the households’ side are still controlled, possible source of vulnerabilities remain connected to the fast pace of growth in credit - which is leading to widening external disequilibria, households’ exposure to FX risk and increasing financing gap
Intense monitoring and adequate policy responses are crucial to prevent major deviations from an healthy convergence pattern
3
Agenda
Persistently strong growth and rapid financial deepening…
…but increasing risks!
4
The SEE region continues to deliver strong growth and moderate risk…
GDP growth in SEE is well above EU driven by lively consumption and investment activity
Significantly improved risk profile: 82% of the Region’s GDP investment grade
Real GDP growth Risk profile - S&P rating weighted per GDP(1)
Sep 2007
> BBB- 81.7%
Sep 2004
> BBB- 36.0%
+45.7 pps
Note: SEE: Bulgaria, Romania, Croatia, Bosnia & Herzegovina and SerbiaSource: UniCredit Group New Europe Research Network
‘ BBB’ : Croatia, Bulgaria, Romania ‘BB’: Serbia(1) For Sep 2007 S&P ratings, GDP as per end of 2006 For Sep 2004 S&P ratings, GDP as per end of 2003
'BBB'
81.7%
'BB'
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2002 2003 2004 2005 2006 2007 2008 2009
SEE
EU-12
18.3%
'BBB'36.0%
'BB'
64.0%
5
… but shows increasing external unbalances
CA deficit and its financing (% of GDP) CA deficit and its financing (% of GDP) Strong consumption and investment lead to strong import demand and thus CA unbalances
This might be a natural phase in the transition process, amid the need of upgrading the country capital stock and households desire to increase living standards
In the short term, FDI inflows can help financing the saving gap
To evaluate sustainability in the long term, it is crucial to understand if the national saving gap is endangering the long term competitiveness of the country
Source: UniCredit New Europe Research Network
10.7
18.0
15.815.0
11.6 11.6
10.311.0
7.8 7.5
3.5
6.0
9.5
13.9
6.1
9.3
3.94.4
8.3
16.4
2006 2009f 2006 2009f 2006 2009f 2006 2009f 2006 2009f
Bosnia Bulgaria Serbia Romania Croatia
CA deficit
FDI inward
6
The financial deepening scenario is expected to continue…
Note: (1) Total loans/deposits include general gov.t, non-financial corporations, households and when available non-profit institutions serving households (NPISHs) and non-monetary financial institutions (Non-MFIs); SEE: Croatia, Bosnia, Serbia, Romania and Bulgaria; (2) European Monetary Union; (3) as of 2005. Source: UniCredit Group New Europe Research Network based on data from local Central Banks.
Banking penetrations in 2006Banking penetrations in 2006
(Loans+Deposits)/ GDP
EMU2
214%
SEE
Branches per mln inhabitants
EMU2,3
540
197
SEE
82%1
SEE Dep.’ volumes growth (2000 =100, in € terms)SEE Dep.’ volumes growth (2000 =100, in € terms)
SEE Loans’ volumes growth (2000 =100, in € terms)SEE Loans’ volumes growth (2000 =100, in € terms)
16% p.a.
19% p.a.
CAGR ‘06-’09
25% p.a.
23% p.a.
CAGR ‘06-’09
0
300
600
900
1,200
1,500
1,800
2000 2002 2004 2006 2008
Total loans Retail Corporate
0
350
700
2000 2002 2004 2006 2008
Total deposits Retail Corporate
20% p.a.
19% p.a.
7
16%
42%
22%5%
15%
0.0
5.0
10.0
15.0
20.0
25.0
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
0.0
1.0
2.0
3.0
4.0
5.0
2005 2006 2007F 2008F 2009F
…being supportive for still strong banks’ profitability
Euro bn
SEE PROFIT BEFORE TAXSEE PROFIT BEFORE TAX(1,2)(1,2)
Note: (1) SEE: BG, BiH, HR, SRB and RO; (2) Before tax and extraordinary itemsSource: UniCredit New Europe Research Network
CAGR+19%
Volumes
Spreads
Retail vs. corporate mix
Fees & Comm. vs. interest income mix
Impact on revenues
Croatia
Bosnia
Serbia
Romania Bulgaria
Lending volumes and revenues growth Lending volumes and revenues growth
CAGR revenues mkt growth (’06-’09)
CAGR total loans (’06-’09)Weight on SEE revenue pool (’07-’09) ~ 35bn €
8
Agenda
Persistently strong growth and rapid financial deepening…
…but increasing risks!
9
Is the current pace of lending growth sustainable?
Private sector loans penetration potential vs actual Private sector loans penetration potential vs actual (as a percentage of GDP)(as a percentage of GDP)11
Data still indicate the persistence of some penetration gap on the lending side, but this is shrinking in SEE
Good macroeconomic performance and further convergence in interest rate levels will be major drivers of future banking growth
Notes: (1) CEB: V4 and the Baltics; other: Russia, Turkey and Ukraine. Based on out-of-sample estimation by regressing the level of loans’ penetration on GDP per capita in PPS and real interest rates using Eurozone countries as a benchmark Source: UniCredit New Europe Research Network
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
CEB SEE Other
Potential
2006
10
Are households getting too much indebted?
Note: (1) Data for Serbia refer to share of credit to the non-government sector denominated or indexed in FXSource: UniCredit New Europe Research Network
Risks on the households side are still controlled…
… with rapid credit growth observed in the recent past reflecting, by and large, adjustments from very low initial levels in the context of a relaxation of liquidity constraints
Number of evidences show that on aggregate there are no major risks on the horizon…
… despite potential sources of vulnerability like the one connected to rising exposure to FX risk
Prudent macro policies and strict monitoring of risk remain crucial to prevent deviation from an healthy convergence pattern
3.9 2.3
15.3
0.5 2.0
44.4
23.019.7
39.0
12.1 9.8
54.2
Bosnia Bulgaria Croatia Romania Serbia EMU
2000 2006
76.0%
39.1%
~80.0%
17.8%
Bosnia Bulgaria Croatia Romania Serbia
Household indebtedness (% of GDP)Household indebtedness (% of GDP)
Loans denominated in FX (2006, % of total)Loans denominated in FX (2006, % of total)11
n.a.
11
0
50
100
gen-
06
mar
-06
mag
-06
lug-
06
set-
06
nov-
06
gen-
07
mar
-07
mag
-07
lug-
07
set-
07
0
125
250Croatia BulgariaRomania Serbia- RX
5Y Credit Default Swaps (USD, bps)
Reduced liquidity following the recent turbulence on the international markets and increases in credit spreads might determine some gradual credit squeeze in the medium to long term
The likelihood and extent of which is likely to be influenced by single countries macroeconomic unbalances and other institutional settings (relevance of foreign ownership in the banking sector)
In a generally benign scenario, we see some more risks of a possible credit squeeze for countries with higher external unbalances in the CA or where credit growth is increasingly being financed with banks´external borrowing
Source: UniCredit New Europe Research Network, Bloomberg
Is there a risk of a credit squeeze?
Banks’ financing gap (loans minus deposits, € bn)
-2.0
0.0
2.0
4.0
6.0
8.0
Croatia Romania Bulgaria Serbia Bosnia
2007 2008
12
Top Players in CEE
Total Assets (€ bn)
UniCredit
ERSTE
RZB
KBC
SocGen
IntesaSP
OTP
109
62
56
49
41
30
29
Contr. to Group’s profits
19%
75%
79%
16%
8%
9%
n.s.
Share of foreign ownership (% of total assets)
The presence of foreign banks with a strong commitment to the region could be a stabiliser effect in SEE…
91% 89%
81% 79%76%
48%
16%
Croatia Romania Bulgaria Serbia Bosnia CEE EMU
UniCredit
ERSTE
RZB
KBC
SocGen
IntesaSP
OTP
Source: UniCredit Group CEE Research
(i) 100% of total assets, revenues and profit after tax (before min.interests) for controlled Companies (stake > 50%) and share owned for non controlled companies
(ii) proforma results include also banks acquired during 2006 and until May 2007
13
… in the context of strenghtened prudential regulation and bank supervision
Throughout the region, credit risk procedures are clearly in place, banking supervision is strong – and has significantly improved in countries like Serbia
Prudential requirements are also strict with most of the countries having implemented credit bureaus and with deposit insurance mechanism already in place
To ensure sufficient capitalization, banks are also required to maintain capital adequacy ratios above Basel requirements
In light of risks associated with fast lending growth and significant ‘euroisation’, several CBs have recently tighten regulatory and prudential norms (like in Bulgaria, Croatia and Serbia)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Bosnia Bulgaria Croatia Romania Serbia Baselreq
Legal requirement Excess capitalisation
Source: UniCredit New Europe Research Network
Capital adequacy ratio (2006)
14
EXECUTIVE SUMMARY
A region which continues to deliver strong growth with moderate risk, but with rising disequilibria
Strong banking growth and profitability. The retail segment remains the most dynamic at the regional level, with households financial penetration increasing both on the assets and the liabilities side
Banking sectors are generally well-capitalised and profitable with the widespread presence of foreign players having contributed to the significant improvement in market conditions. Prudential requirements are also strict
Although risks on the households’ side are still controlled, possible source of vulnerabilities remain connected to the fast pace of growth in credit - which is leading to widening external disequilibria, households’ exposure to FX risk and increasing financing gap
Intense monitoring and adequate policy responses are crucial to prevent major deviations from an healthy convergence pattern