CEE Banking
Transcription
CEE Banking
CEE Banking Sector Report October 2004 • • • • Trends in CEE Banking Country Overviews Market Players Company Updates Contents Table of Contents Summary 3 Trends in CEE banking Introduction Definition of sub-regions Banking sector reform and ownership structure Market concentration Financial intermediation and the structure of lending Deposits 4 5 7 9 10 14 Market overviews Poland Hungary Czech Republic Slovakia Slovenia Estonia Latvia Lithuania Bulgaria Romania Croatia Bosnia and Herzegovina Serbia Albania Kosovo Russia Ukraine Belarus 16 18 20 22 24 26 28 30 32 34 36 38 40 42 43 44 46 48 Market players in CEE 49 Ratio analysis 59 Market consolidation 63 Valuation 66 Company updates BACA Erste Bank Bank BPH Bank Pekao OTP Komercni Banka BRD Banca Transilvania 68 72 76 80 84 88 92 96 Key abbreviations 101 Acknowledgements 102 Disclaimer 103 Contacts 104 2 Summary CEE Banking Sector Report Summary The banking sector in Central and Eastern Europe (CEE) has displayed a remarkable development during the last 15 years of transition. Nevertheless, even in some of the most advanced countries, bank restructuring and the subsequent privatisation process was completed only recently or is still ongoing. The vast majority of banks operating in the eight new EU member countries and the three countries that are scheduled to join the EU in the next accession wave are now in private hands and mostly foreign-owned. Clearly the banking sectors in the other CEE markets are still at an earlier stage of development, which is reflected both in the higher market share of state-owned banks and the lower market share of foreign-owned banks. The CEE banking sector has displayed remarkable development over the last 15 years The most dynamic field of banking in the CEEC-20 over the last few years has been consumer loans. Credits to households displayed exceptionally high growth rates in EUR terms, and given the still low ratio to GDP in most cases, are likely to retain strong growth for years to come. However, this growth has already raised concerns about macroeconomic stability in a number of countries in the region, triggering restrictive measures by some of the central banks. Another emerging business field in a number of the countries is mortgage loans. The most dynamic field of banking in CEE over the last few years has been consumer loans Deposits of households show a clear negative effect from the credit fueled consumption spree, decreasing in percent of GDP in the first and second wave accession countries, while growing strongly in the other regions where there are still substantial savings hidden under the mattresses. There the lack of trust in the banking sector has only recently started to improve in the course of bank restructuring and privatisation. Deposits grew strongly in countries with substantial savings hidden under the mattresses Western European banks have dominated the consolidation process to date and control local markets to a large extent. Austrian and Italian banks in particular have used the opportunity to "go east" and offer the highest CEE exposure in terms of total group assets. Some international players (HSBC, Deutsche Bank, etc.) are still under-represented in the region. Russia, Ukraine and Belarus are to a large extent untapped by international banks. While KBC ranks number one in terms of assets in the region, Erste Bank, with its clear focus on retail, offers the largest branch network in the region. Raiffeisen International, the CEE holding of the RZB Group ranks number one in terms of country presence. Western European banks have dominated the consolidation process to date and control local markets A peer group comparison among listed banks based on both our own and consensus estimates reveals that pure CEE players trade at a premium versus their Western peers with a lower exposure towards CEE markets. Obviously markets expect these banks to report superior earnings growth in the medium/long term. Only Erste Bank (Neutral) already trades at multiples close to pure CEE players, as it offers the highest exposure among Western European listed banks. While Bank Austria Creditanstalt (Overweight) trades in line with its Western peers we would consider a premium justified given the above average CEE exposure and the current dynamics of its target market Poland. While the Polish banks, Bank BPH (Neutral) and Pekao S.A. (Neutral), as well as Czech Komercni Banka (Neutral) are valued in line or at a slight premium towards other CEE banks, the Hungarian OTP (Buy) still trades at a significant discount. Pure CEE players trade at a premium versus their Western peers with a lower exposure towards CEE markets 3 Banking trends A region set in motion Booming banking development in CEE Introduction Study includes 20 CEE countries Back in 1999 RZB Group-Research took part in a joint study1 for the European Capital Markets Institute (ECMI) together with the Center for European Economic Studies in Mannheim (ZEW), which was in part dedicated to the development of the financial sectors in the CEEC-5 and Russia. This study can be seen as the pioneering research in this particular area. Subsequently RZB banking reports have had a stronger focus on the banks listed on the local stock markets. With this latest report we not only wanted to continue RZB's tradition of banking sector research, but to take a further step forward by including all 20 countries that we consider to be part of the Central and Eastern European (CEE) region. Before starting we need to address a word of caution to our readers. Gathering comparable data for the CEE banking sector is among the most excruciating tasks an economist can face. Figures are often revised and the methodology and structure of published data can vary to a considerable degree. It would have been impossible to provide the extensive data you will find in the country sections without the profound support of our colleagues throughout RZB's banking network in the region. While we have put great effort in processing all information, we can only provide the data to the best of our knowledge. Since the majority of the data was collected in early summer 2004 we restricted ourselves to year-end figures of 2003. Any data revisions since then might not be accounted for. We are certain, however, that you will find our analysis interesting and useful A huge market to be tapped, population in mn New EU member countries 73.1 2nd wave accession countries 33.9 SE European transition markets 23.2 EU-15 379.5 Russia 144.2 Ukraine, Belarus 57.5 Data as of year-end 2003 Source: WIIW, RZB Group Research Region remains underbanked The CEEC-20 is a large and highly dynamic region with an outstanding prospect of growth and prosperity. Despite the rapid growth of the banking sector the people living and working in the CEEC-20 remain 1) "The New Capital Markets in Central and Eastern Europe"; Michael Schröder (ed), Springer Verlag 2001 4 Banking Trends vastly underbanked, offering ample opportunities to the banks in the region to tap this vast potential to meet the demand for a full range of banking services. In this first part we analyse the general developments of the banking sector in the CEEC-20, focusing on the key regional trends and characteristics. This is followed by a country section in which we will provide a detailed overview of the banking sector in the individual countries. The third part of the publication focuses on the international banks active in the region, particularly those that are listed on the respective stock exchange. Definition of sub-regions In order to facilitate our analysis and to deduce meaningful results we have divided the 20 countries we consider to be part of CEE into five regions. By categorizing the countries into regions we tried to not only reflect the stage of integration with the EU and economic development, but also the degree of financial intermediation and the development of the banking sector. The five regions to which we refer in the rest of this publication are defined as follows: Countries divided into five sub-regions for analytical purposes NMC-8: The eight new member countries that joined the EU in May 2004, namely Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia and Lithuania. After being forced to take over the acquis communautaire before entering the EU, these countries are clearly the most advanced in terms of legal and institutional reforms in the region. These are also the countries that boast the highest GDP per capita, that have the smallest share of the state both in the industrial sector and banking, the highest share of foreign investors, and the highest degree of financial intermediation. While being the most advanced region in the CEEC-20, as well as the largest in terms of total assets, the overall size of the banking sector in the NMC-8 is still very small compared to the Eurozone and the degree of intermediation is also rather low. Clearly there is a huge potential and need for growth, not only for the economies in the NMC-8 but also for the banking sector. The eight countries that joined the EU in May 2004 CC-3: The three candidate countries that will join the EU in the coming years. Bulgaria already completed its membership negotiations in June 2004 and is expected to join the EU in 2007 together with Romania, which hopes to finish its negotiations by the end of 2004. Croatia will only start its membership negotiations in early 2005 and the lengthy institutional procedure including negotiations, the take over and implementation of the acquis communautaire, the establishment of the necessary institutional framework, the translation of the membership treaty and the ratification by all EM member states is generally considered to exceed the time available until Bulgaria and Romania will probably join the EU in 2007. The Croatian banking sector is clearly much more developed and considerably larger than those of Bulgaria and Romania, but all three countries have been facing similar problems resulting from particularly high growth of consumer loans, which has threatened the health of external balances and brought about restrictive measures by the central banks. While the growth potential for the banking The three candidate countries that will join the EU in the coming years 5 Banking trends sector might be limited for some time in Croatia following several years of dynamic growth, this certainly should not be the case for Bulgaria and Romania, both coming from a very low degree of financial intermediation with strong growth having only started recently. Of the three countries only Romania still has a considerable share of majority state-owned banks. The remaining six markets of South East Europe SEEC-6: The remaining six markets of South East Europe, who are all in an earlier stage of transformation, economic development and EU-integration. We also included Kosovo separately as there has been a independent banking sector developing. While being small in size, the banking sector in this region is still in an early stage of development with a number of opportunities for international banks to participate in the privatisation of the sector. Due to the small size of the individual markets the large international banks active in CEE have had a tendency to overlook this region, giving in particular the Austrian banks the opportunity to position themselves as market leaders. Russia deserves a category of its own Russia: Clearly Russia deserves a category of its own. With a population of 143 mn it is by far the largest market in terms of potential customers, and also the largest individual market in terms of total assets. Russia has come a long way since the crisis in 1998, not only in economic terms but also with regard to the development of the banking sector. While banking regulation still has some shortcomings and the sector as a whole is in need for further consolidation, there have been signs of more dynamic growth starting in 2003. After the crisis in 1998 many foreign banks abandoned the Russian market. Thus the market share of majority foreign owned banks was less than 4% of total assets by the end of 2003. Ukraine and Belarus FSR-2: Ukraine and Belarus are the two former Soviet republics that have become neighbouring countries of the enlarged EU. This is a large region with a population of 57.7 mn. After suffering through a particularly severe and lengthy recession caused by the transformation from the soviet planned economic system and further economic and political crises, GDP per capita at PPP in the Ukraine has yet to reach the level of 1991. Belarus has remained a planned economy to this day. Both countries have recorded exceptional economic growth recently, as well as rapid growth of the banking sector particularly in Ukraine. So far foreign banks have been playing only a minor role with a market share of about 10% 6 Banking trends Total assets of the banking sector, in EUR bn FSR-2 18.8 Russia 152.5 NMC-8 312.6 SEEC-6 15.0 CC-3 50.6 Data as of year-end 2003 Source: Local central banks, RZB Group Research The size of the banking sectors of the respective sub-regions, such as the size of their economies, varies to a great degree. With GDP per capita as well as financial intermediation being by far the highest in the NMC-8, the overall size of the banking sector (expressed as assets in EUR bn) is twice the size of the one of Russia, despite the fact that Russia has a population about twice as large. With less than half the population the combined banking sector of the CC-3 reaches only about one sixth of that of the NMC-8. The size of the banking sectors of the SEEC-6 and FSR-2 are much smaller even, reflecting particularly low ratios for GDP per capita and financial intermediation. Banking sector reform and ownership structure The early stages of banking sector reforms in the region were profoundly discussed in great detail by Thomas Reininger2 in the above mentioned ECMI joint study between the ZEW and RZB. It is useful, however, to remind ourselves of the situation at the outset of transition. The situation at the outset of transition At the start of transition the CEE countries faced the difficult task to transform their financial system, which had been little more than a book-keeping mechanism for recording the authorities' decisions about the allocation of resources among various sectors and enterprises under central planning. The key reforms implemented at the outset of transition included the introduction of a two-tier banking system, lifting sectoral restrictions on special banks, the permission of privately owned banks, allowing foreign banks to enter the market, the liberalization of the licensing policy, and the implementation of a legal framework and a supervisory system. 2) also "The Financial Sector in five Central and Eastern European Countries"; Thomas Reininger and Franz Schardax, OeNB Focus on Transition 1/2001 7 Banking trends These early banking sector reforms often resulted in a liberal licensing policy coupled with weak supervision and shortcomings in the legal framework. Adequate bankruptcy laws either did not exist or simply were not enforced. A large number of newly founded banks often engaged in unsound practices, while the state-owned commercial banks, which emanated from the specialized financial institutions under the old monobank system, suffered from an inherited burden of bad loans and an insufficient initial capital base. The banking systems generally lacked capital and banking skills, and political intervention coupled with the uncertain economic and institutional environment in the state-owned banks leading to a quick accumulation of bad loans and a number of banking crises. During the ensuing large-scale bank recapitalisation programmes, substantial public funds had to be put up to prepare the state-owned banks for privatization. Share of majority state-owned banks, in % of total assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PL HU CZ SK SL ES LT LI NMC-8 RO BG HR SR BH AL RU UA BY CC-3 SEEC-6 FSR-2 Data as of year-end 2003 Source: Local central banks, RZB Group Research Vast majority of banks in the NMC-8 and CC-3 are now private and mostly foreign-owned Banking sectors in the SEEC-6 are still at a much earlier stage of development 8 Within the NMC-8 this bank restructuring and subsequent privatisation process took up to 2001 for the Czech Republic, Slovakia and Lithuania. As a result the vast majority of banks operating in the NMC8 are now private and mostly foreign-owned. There is one large majority state-owned bank left in Poland's PKO and only two large private domestic owned banks in Hungary's OTP and Latvia's Parex Banka. The situation is very similar in the CC-3, particularly in Croatia and Bulgaria. While in Bulgaria bank privatisation was finally finished in 2003, there remain two large majority state-owned banks in Romania, BCR and CEC, both scheduled for privatisation in the near future. Clearly the banking sectors in the SEEC-6 are still at a much earlier stage of development, which is reflected both in the higher market share of state-owned banks and the lower market share of foreignowned banks. While the banking sector basically had to be set up from scratch in Bosnia and Herzegovina, bank restructuring and the subsequent privatisation has only recently started in Serbia. On the other hand, privatisation in Albania was basically completed in early 2004 Banking trends with the sale of the Savings Bank to Raiffeisen International. Russia, Ukraine and Belarus are different stories altogether. The particularly high share of state-owned banks in Belarus, which is not entirely surprising given its central planned economy, underpins the perception that the process of reform and restructuring of the banking sector is only in its earliest stages. There are only two state-owned banks left in Ukraine, Oshadbank and Ukreximbank, with a total market share of about 10%, both are scheduled for eventual privatization. The economic recovery helped reducing the share of bad loans to fairly low levels according to the official statistics and to stabilize the return on average assets (RoA) for the whole banking sector. State-owned Sberbank is by far the largest bank in Russia, accounting for close to 28% of total assets. While the overall number of banks in Russia steadily declined over the last few years, the consolidation of the banking sector has barely begun. Strong economic growth over the last years has allowed the bank to reduce the share of bad loans in their portfolios and to post very impressive performances. Russia, Ukraine and Belarus are each different stories altogether Share of majority foreign-owned banks, in % of total assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PL HU CZ SK SL ES LT LI NMC-8 RO BG HR SR BH AL RU UA BY CC-3 SEEC-6 FSR-2 Data as of year-end 2003 Source: Local central banks, RZB Group Research Market concentration Market concentration is naturally higher in small countries and with the CEE countries ranging from being very small (Baltic States, some of the SEE countries) to very large (in particular Russia) a comparison within the CEEC-20 cannot be expected to yield meaningful results. Thus, we have only looked at the market concentration, defined as the market share of the five largest banks on total assets, of the individual countries in comparison to their peers in the same sub-region. Within the NMC-8 the small Baltic countries display the highest market concentration as expected, while Poland shows the least market concentration. It is worthy to note that the relatively low market concentration in Hungary. In the case of Hungary, however, this is a sign of the intense competition in which several foreign-owned banks and OTP are Small Baltic countries display the highest market concentration Low market concentration in Hungary a sign of the intense competition 9 Banking trends engaged. Market concentration is also high in Croatia, where the competition for being the third largest bank is particularly fierce between four foreign-owned banks. In comparison the market is somewhat more fragmented in Bulgaria and Romania. The relatively low market concentration in Serbia points to the need for further restructuring and consolidation. While the banking market is quite fragmented in Ukraine, with no bank accounting for more than 10% of total assets by the end of 2003, the market concentration ratio is somewhat higher for Russia. One reason for this, however, is the position of Sberbank. The second largest bank in Russia, Vneshtorgbank, accounted for hardly more than 5% of total assets by the end of 2003. The exceptionally high market concentration of Belarus can be explained with the fact that only five banks are authorized to fund the national programmes. Belarusbank alone commanded a share of 44% of total assets. Market concentration 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PL HU CZ SK SL ES NMC-8 LT LI RO BG HR SR BH AL RU UA BY CC-3 SEEC-6 FSR-2 Market share of top five banks in % of assets as of year-end 2003 Source: Local central banks, RZB Group Research Financial intermediation and the structure of lending Relative size of the banking sector is by far the largest in the NMC-8 10 The relative size of the banking sector, measured by total assets in % of GDP, is by far the largest in the NMC-8. As pointed out above, bank restructuring and privatisation in the NMC-8 was completed by 2001 and much earlier in a number of countries. The vast majority of the banks are now majority owned by foreign banks, and can be characterised by efficient management, aggressive market penetration and prudent lending. As could be expected given their earlier stage in transition and banking sector reforms the CC-3, the SEEC-6, Russia and the FSR-2 all show somewhat smaller sizes of their respective banking sectors in that order. However, unlike the NMC-8 where total assets in % of GDP stagnated and even declined over the last few years, total assets recorded a steady and substantial growth in those regions. The reason for the decline in the NMC-8 was the late restructuring of the Czech and Slovak banking sectors, which led to a pronounced decline Banking trends in total assets in these two markets. This more than leveled out the strong growth of total assets in the Baltic countries and Hungary in 2003. Even the NMC-8's ratio of total assets in % of GDP pales against the ratio of the Eurozone, which exceeded 200% of GDP by the end of 2003. Clearly there is a lot of room left for the banks in the CEEC20 to grow strongly for many years before coming anywhere close to this ratio. However, one of the necessary preconditions for this growth to take place is that the economies themselves must be able to gradually converge to the income and productivity levels of the Eurozone. The banking sector will play an important role in this process if it can provide loans to enterprises to invest into modernizing its production. Total assets of the banking sector, in % of GDP 90% Eurozone: 201% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1999 NMC-8 2000 CC-3 2001 SEEC-6 2002 Russia 2003 FSR-2 Source: Local central banks, RZB Group Research With respect to total credits in % of GDP the lead of the NMC-8 over the other regions decreases. Again total credits decreased in the Czech Republic and Slovakia in the course of bank restructuring, leading to a stagnant aggregate figure for the NMC-8, while the other regions displayed strong growth. It is important to keep in mind that while the clean up of loan portfolios is basically complete in the NMC-8, the same can probably not be said for a number of countries in the other CEE regions. Again the distance to the ratio of the Eurozone, which reached 110% of GDP by the end of 2003, is substantial. The clean up of loan portfolios is basically complete in the NMC-8, the same can probably not be said for a number of other countries 11 Banking trends Total credits of the banking sector, in % of GDP 40% Eurozone: 110% 35% 30% 25% 20% 15% 10% 5% 0% 1999 NMC-8 2000 CC-3 2001 2002 SEEC-6 Russia 2003 FSR-2 Source: Local central banks, RZB Group Research Loans to small and medium sized enterprises appear on the verge of significant growth in the upcoming years Looking more closely at the structure of lending, we first turn to credits to private enterprises. This is where we can clearly see the clean up of the loan portfolios of the large Czech and Slovak state-owned banks before their privatization. Within the NMC-8 only Slovenia, Latvia and Lithuania recorded a strong increase of credits to private enterprises in % of GDP over the last few years. A particularly strong expansion of company loans has also been evident in Bulgaria, Bosnia and Herzegovina, Russia and Ukraine, while this segment is about to take off in Romania. Loans to small and medium sized enterprises, a segment that has been greatly neglected in the past and where there is a huge need and potential ramifications for the overall economy, appear on the verge of significant growth in the upcoming years. The most dynamic field of banking in the CEEC-20 over the last few years has been consumer loans The most dynamic field of banking in the CEEC-20 over the last few years has been consumer loans. Credits to households displayed exceptionally high growth rates in EUR terms, albeit coming from very low levels in % of GDP. There were only a few exemptions with moderately growing or even declining consumer loans. In Poland credits to households decreased in EUR terms but increased in % of GDP in 2003, due to the strong depreciation of the Zloty against the EUR. However, consumer loans have been stagnant also in % of GDP from 2000 to 2002. While the growth rate in this segment increased in Slovenia in 2003, the ratio of credits to households in % of GDP has been virtually unchanged since 1999. This is even more puzzling given the low level of consumer loans in % of GDP and Slovenia's high GDP per capita (by far the highest in all of the CEEC-20). An explanation could be that due to the high wealth of Slovenia's households there is less urge to make up in terms of consumption. The third country breaking the trend of booming credits to households is Serbia, where the banking system as a whole is amid a process of restructuring. In all other countries consumer loans have expanded at a high pace in recent years and given the still low ratio in % of GDP in most cases, will very likely retain strong growth for years to come. 12 Banking trends Credits to households, in % of GDP 14% Eurozone: 49% 12% 10% 8% 6% 4% 2% 0% 1999 2000 NMC-8 CC-3 2001 2002 2003 SEEC-6 Russia FSR-2 Source: Local central banks, RZB Group Research However, the recent development has already raised concerns about macroeconomic stability in a number of countries in the region, triggering restrictive measures by some of the central banks. With loans often being used to buy imported consumer goods, the deficits of the trade and current account balance have markedly increased. High current account deficits are especially troublesome if they cannot be financed by non-debt creating inflows (i.e. foreign direct investment), and can seriously threaten a currency's stability. The central banks of Croatia, Bulgaria and Romania all have introduced a number of different measures to restrict credit growth. However, monetary policy in general has to rely on rather blunt instruments (interest rates, reserve requirements) and it is almost impossible to curb the growth of consumer loans without also negativly affecting credits to enterprises, something that the CEE countries cannot afford. If anything the economies need more corporate lending, particularly to small and medium-sized enterprises, in order to raise productivity and improve quality. The deficits of the trade and current account balances have markedly increased, triggering restrictive measures by some of the central banks Credits to households, in % of GDP Credits to households in % of GDP vs. GDP per capita 60% Eurozone 50% 40% 30% HR 20% BH LT BG MD KO UA MK RU SR RO 10% 0% 0 5,000 PL LI 10,000 ES SK HU CZ 15,000 SL 20,000 25,000 GDP per capita (at PPP), in EUR Source: Local central banks, RZB Group Research 13 Banking trends Mortgage loans have displayed exceptional growth rates in a number of countries Another emerging business field in a number of countries is mortgage loans, which have displayed exceptional growth rates over the last few years. There is in general a huge demand for financing the construction and the renovation of apartments and houses in the region, which is evident from the rapid expansion of the segment wherever the necessary legislative framework is put into place. So far this has only been the case in the NMC-8 and Croatia. For the banks mortgage loans involve relatively low risk and provide a channel to diversify the bank portfolios away from state securities, corporate credits and consumer loans. It can be expected that the mortgage market will continue to grow in importance in the upcoming years also in some of those countries that have not created the legal preconditions yet. Mortgage loans, in % of GDP 12% 10% 8% 6% 4% 2% 0% 1999 Poland Slovakia 2000 2001 Hungary Croatia 2002 2003 Czech Republic Source: Local central banks, RZB Group Research Deposits With the credit boom evident, deposits have shown a much more moderate development 14 With the credit boom evident in virtually all of the CEEC-20, deposits have shown a much more moderate development. Still total deposits in % of GDP increased in all of our sub-regions. In general the gap between the ratio of total deposits in % of GDP in the CEEC-20 and that of the Eurozone is much smaller than the gap in all credit categories, and is particularly high in Hungary, the Czech Republic, Slovakia and Croatia. Deposits remain much lower in Russia, the FSR2, in parts of the SEEC-6 and also in Romania, reflecting the lack of trust in the banking sector that has started to improve only recently in the course of bank restructuring and privatization. This is underpinned by the strong recent growth of deposits in these regions. Deposits of households also show a clear negative effect from the credit fueled consumption spree, decreasing in % of GDP in the NMC-8 and CC-3 while growing strongly in the other regions where there are still substantial savings hidden under the mattresses. Banking trends Deposits from households, in % of GDP 35% Eurozone: 55% 30% 25% 20% 15% 10% 5% 0% 1999 NMC-8 2000 CC-3 2001 2002 2003 SEEC-6 Russia FSR-2 Source: Local central banks, RZB Group Research The ratio of total deposits in % of total credits shows a substantial and stable overhang of deposits in the NMC-8. Banks have to allocate substantial funds to state securities, something that has been very profitable in the past but has become less attractive in recent years due to the steady decrease of interest rates and yields. In the past the overhang of deposits was much higher even in the CC-3 and the SEEC-6, but decreased significantly due to the rapid credit growth. The situation has been different in Russia and the FSR-2, where total deposits do not suffice to cover total credits. While the trust in the banking system should have improved in recent years, the ratio deteriorated further due to the fast credit expansion. Total deposits in % of total credits 350% Eurozone: 81% 300% 250% 200% 150% 100% 50% 0% 1999 NMC-8 2000 CC-3 2001 2002 SEEC-6 Russia 2003 FSR-2 Source: Local central banks, RZB Group Research 15 Poland More rosy days ahead? Polish banks look to recover from slump Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 Poland 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: NBP, RZB Group Research Classified credits, Cost income ratio and RoE 35 75 30 70 25 65 20 60 15 55 10 50 5 45 0 1999 2000 2001 2002 40 2003 Classified loans, in % of total credits Cost income ratio Return on Equity (RoE) Source: NBP, RZB Group Research By the end of 2003, there were 60 banks operating in Poland, a number that has steadily decreased over the last couple of years due to a number of mergers both in Poland and in Western Europe. The Polish banking sector shows a relatively high degree of concentration with the top five banks accounting for almost 50% of total assets. Among the top ten banks there are still two domestically owned banks, both owned by the state. A 30% stake in PKO, the market leader, is scheduled to be sold via the Polish stock exchange in a public offer in October 2004. In the case of Bank Gospodrky a 35% stake is held by Rabobank and less than 15% by the EBRD, while the state treasury will remain the majority owner at least for the time being. Banking assets in EUR declined over the last two years due to the depreciation of the Polish zloty, but were also stagnant in % of GDP. The same applies to credits due to banks restructuring their loan portfolios mainly in 2002 but also in 2003. By the end of 2003, classified credits still accounted for over 20% of total outstanding credits, the highest ratio in the NMC-8. As a result of banks consolidating their balance sheets, return on assets of the overall banking sector was substantially lower than in the other new EU member countries, which in general have experienced a credit boom. Credit growth finally recovered in the first half of 2004, but remains limited to credits to households with mortgage loans being the main driver. Corporate loans, on the other hand, have continued to decline as companies appear to be still hes- Key economic figures and forecasts Population: 38.2 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate PLN/EUR (avg) Exchange rate PLN/USD (avg) 145.5 8,410 4.1 6.8 5.2 3.6 12.0 7.3 5.7 (3.2) 40.3 (8.1) 44.7 27.2 4.23 3.97 170.9 8,960 4.0 2.7 2.7 6.7 14.0 10.1 7.9 (3.0) 36.6 (6.3) 43.7 29.5 4.01 4.35 204.6 9,550 1.0 (8.8) 2.0 0.6 16.2 5.5 1.6 (5.1) 36.7 (2.9) 39.8 30.1 3.67 4.10 200.2 9,900 1.4 (5.8) 3.3 1.4 17.9 1.9 1.0 (6.4) 41.2 (2.7) 40.4 28.5 3.85 4.08 185.3 10,370 3.8 (0.9) 3.1 8.8 19.9 0.8 2.6 (6.0) 45.4 (2.0) 44.4 27.4 4.40 3.89 190.9 10,981 6.0 5.0 4.0 15.0 19.5 3.8 8.5 (6.0) 49.1 (1.5) 44.5 27.3 4.71 3.83 208.5 11,772 5.0 5.0 4.0 6.0 19.0 4.2 8.0 (5.0) 50.3 (2.7) 43.2 27.7 4.73 3.75 Source: Thomson Financial Datastream, WIIW, RZB Group Research 16 Poland Market share, % of total assets itating with new investments. The trend in deposits is naturally the exact opposite, with deposits from households continuing its downward trend while deposits from private companies increase. Raiffeisen Bank 1.6% BGZ 3.2% Due a regulatory change from 1 January 2004 and the overall improved financial standing of the corporate sector, the quality of the loan portfolios of Polish banks should improve more significantly this year. Already in the first half of 2004 a significant improvement was recorded for the profitability of the banking sector, with net profits having doubled. If the positive development can be sustained in the second half of this year, which is not unlikely, the Polish banking industry could be in for the best result in its history. growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (PLN) average lending rate average deposit rate PKO 16.4% Bank Pekao (UniCredit ) 12.0% Bank Millennium (BC Portugues ) 3.7% Kredyt Bank Bank (KBC ) Zachodni BRE Bank 4.4% (Allied Irish (Commerzbank ) Bank ) 4.6% 5.2% PBK (BACA ) 8.9% Bank Handlowy ING Bank (Citibank ) 6.3% 5.6% Data as of year-end 2003 Source: NBP, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn Others 26.6% 1999 2000 2001 2002 2003 91,371 116,994 141,565 124,757 111,830 12.4 61.9 28.0 65.8 21.0 66.4 (11.9) 64.3 (10.4) 64.7 39,955.9 50,353.4 59,382.3 54,087.2 49,346.2 22.5 27.1 26.0 28.3 17.9 27.9 (8.9) 27.9 (8.8) 28.6 18,297.2 23,559.1 27,588.3 25,679.8 22,896.3 24.9 12.4 28.8 13.3 17.1 12.9 (6.9) 13.2 (10.8) 13.3 13,754.8 18,697.7 23,475.1 22,322.0 21,613.2 36.0 9.3 35.9 10.5 25.6 11.0 (4.9) 11.5 -3.2 12.5 6,576.9 8,260.0 9,752.8 8,817.9 8,643.8 12.3 4.5 25.6 4.6 18.1 4.6 (9.6) 4.5 (2.0) 5.0 16.5 53,396.6 16.4 66,757.3 16.4 82,114.3 16.3 69,921.3 17.5 61,660.4 13.9 36.2 25.0 37.6 23.0 38.5 (14.8) 36.0 (11.8) 35.7 40,177.6 52,193.2 63,731.2 53,963.7 45,074.4 11.7 27.2 29.9 29.4 22.1 29.9 (15.3) 27.8 (16.5) 26.1 133.6 132.6 138.3 129.3 125.0 77 10,428 24.9 49.3 74 11,470 23.9 72.5 71 10,721 24.6 72.0 62 9,965 26.4 70.9 60 9,163 25.8 71.6 0.9 12.9 64.5 13.2 13.7 7.4 1.1 14.5 62.8 12.9 15.5 7.2 1.0 12.8 61.9 15.1 18.6 8.8 0.5 5.2 62.9 13.8 22.0 7.4 0.5 5.9 68.0 13.6 21.8 6.7 20.3 12.9 21.5 14.3 16.8 8.0 11.6 4.2 9.6 2.9 Source: NBP, RZB Group Research 17 Hungary Profitability and competitiveness need not be contradictory Credits to households vs. GDP per capita Credits to households, in % of GDP 60% Eurozone 50% 40% 30% 20% Hungary 10% 0% 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: MNB, RZB Group Research IR spread, RoE and cost income ratio 25 70 20 65 15 60 10 55 5 50 0 1999 2000 2001 2002 Average interest rate spread 45 2003 Cost income ratio Return on Equity (RoE) Source: MNB, RZB Group Research The Hungarian banking sector is one of the most profitable and at the same time most competitive markets in the CEEC-20. By the end of 2003, 36 banks were active in the market, with foreignowned banks accounting for over 80% of total assets. The largest bank, however, is the Hungarian owned OTP Bank. OTP had a market share of more than 18% according to total assets by the end of 2003, almost twice that of the second largest bank. Besides OTP there are five foreign-owned banks with a significant market share of 5% or more according to total assets, engaging in a fierce competition for a growing share in this highly dynamic market. The figures for banking sector development in EUR terms that we use for our comparisons must be taken with care for the year 2003. In the course of the Forint turbulences of 2003 the exchange rate against the EUR weakened by 12.3% from 235.9 by the end of 2002 to 264.8 by the end of 2003. When looking at the ratios in % of GDP, one can see that the real growth dynamic in 2003 was much higher than in previous years. Credits to households remained the fastest growing segment, increasing by more than 40% in EUR terms despite the Forint's weakening. After two years of decline in % of GDP, credits to private enterprises also increased, underpinning the growing importance of loans to small and medium-sized enterprises. Due to the high interest rates in Hungary, which are the result of the currency turbulences in 2003 and the staggering twin deficits in the budget and current account balance, credits in foreign currency recorded a particularly strong growth during 2003 and made up a quarter of all outstanding credits. Key economic figures and forecasts Population: 10.1 mn Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate HUF/EUR (avg) Exchange rate HUF/USD (avg) 1999 2000 2001 2002 2003 2004e 2005f 45.1 10,200 4.5 5.9 5.4 10.4 7.0 10.0 5.1 (3.7) 61.2 (7.8) 64.8 10.9 252.8 237.2 50.6 11,030 5.2 7.7 4.4 18.1 6.4 9.8 11.8 (3.4) 55.4 (8.6) 64.4 12.1 260.1 282.2 57.9 12,020 3.8 5.0 5.7 4.1 5.8 9.2 5.5 (4.2) 53.5 (6.2) 64.6 12.2 256.6 286.5 68.9 12,840 3.5 8.0 10.3 2.0 6.0 5.3 (1.8) (9.8) 57.1 (7.0) 55.8 9.9 242.9 255.7 72.8 13,680 2.9 3.0 7.6 6.4 5.7 4.7 2.4 (5.9) 59.1 (8.9) 60.6 10.1 253.8 224.2 80.0 14,200 3.7 10.0 4.5 8.8 5.8 6.7 3.9 (5.0) 58.7 (8.7) 61.2 10.5 255.2 207.5 91.3 14,800 4.1 6.5 4.0 9.0 5.8 4.5 2.5 (4.5) 58.0 (7.1) 62.0 11.0 253.6 201.3 Source: Thomson Financial Datastream, WIIW, RZB Group Research 18 Hungary Market share, % of total assets Due to the boom in consumer loans, deposit growth naturally lagged behind. Total deposits still accounted for more than 200% of total credits. Given the high interest rates and yields for government securities, banks can put their funds into the safe, albeit somewhat volatile, local money market and bond market. Strong credit growth and high interest rates and yields of government securities have helped the Hungarian banking sector to remain one of the most profitable in the region, despite the tough competition for market shares. Another important factor has been the continued streamlining of banking operations, reflected in the gradual decrease of the cost income ratio of the sector. The recent hike of the corporate tax rate for banks by 8% to 24%, which is planed fo 2005, reflects the underlying concerns about political and macroeconomic stability. OTP Bank 18.3% Others 36.6% K&H Bank (KBC ) 9.4% Citibank 2.4% Budapest Bank (GE Capital ) 3.0% MKB (Bay. LB ) 7.6% CIB (Intesa ) 6.9% HVB Bank (BACA ) 4.4% Raiffeisen Bank 5.4% Erste Bank 5.9% Data as of year-end 2003 Source: MNB, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn 1999 2000 2001 2002 2003 30,799.1 33,839.1 41,214.6 49,172.6 54,797.1 growth in % yoy 13.6 9.9 21.8 19.3 11.4 in % of GDP 68.1 68.5 68.4 69.3 78.1 26,107.8 Total credits, EUR mn 11,367.3 14,463.9 17,984.0 22,339.1 growth in % yoy 21.6 27.2 24.3 24.2 16.9 in % of GDP 25.1 29.3 29.8 31.5 37.2 16,692.7 Credits to private enterprises, EUR mn 9,313.4 12,001.1 14,154.0 15,635.8 growth in % yoy 20.1 28.9 17.9 10.5 6.8 in % of GDP 20.5 23.8 24.5 22.7 22.8 1,845.5 2,245.6 3,537.0 6,219.1 8,864.2 32.9 21.7 57.5 75.8 42.5 4.1 4.5 6.1 9.0 12.1 3,208.8 4,640.2 4,707.7 5,132.9 6,535.1 28.9 44.6 1.5 9.0 27.3 7.0 9.2 8.1 7.5 8.9 28.2 30,799.1 32.1 33,839.1 26.2 41,214.6 23.0 49,172.6 25.0 5,4797.1 Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy 13.6 9.9 21.8 19.3 11.4 in % of GDP 68.1 68.5 68.4 69.3 78.1 17,350.4 Deposits from households, EUR mn 11,057.4 12,117.3 15,031.9 16,995.3 growth in % yoy 12.4 9.6 24.1 13.1 2.1 in % of GDP 24.5 24.5 24.9 23.9 24.7 270.9 234.0 229.2 220.1 209.9 40 65.3 39 66.7 38 63.0 37 78.3 36 1159 81.9 0.6 6.4 15.0 4.4 3.7 1.3 13.8 65.1 15.2 3.1 3.4 1.6 15.7 61.8 15.6 2.8 3.1 1.7 18.3 61.4 12.2 3.6 2.8 1.9 21.1 55.7 11.9 3.2 2.5 Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of foreign owned banks, in % of capital Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread HUF) Source: MNB, RZB Group Research 19 Czech Republic Severe competition in spite of high market concentration Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 Czech Republic 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: CNB, RZB Group Research Share of state-owned assets and RoE of whole banking sector 30 25 20 15 10 5 0 -5 -10 -15 -20 100 90 80 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 Market share of state owned banks, in % of total assets Return on Equity (RoE) Source: CNB, RZB Group Research Key economic figures and forecasts Population: 10.2 mn Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate CZK/EUR (avg) Exchange rate CZK/USD (avg) 1999 2000 2001 2002 2003 2004e 2005f 51.6 12,700 0.5 (1.0) 1.9 (3.0) 8.6 2.1 1.0 (2.6) 14.5 (2.7) 44.1 12.7 36.9 34.6 55.7 12,490 3.3 5.4 2.3 5.4 9.0 3.9 4.9 (4.0) 16.7 (5.3) 41.8 14.0 35.6 38.6 63.8 14,100 2.6 5.4 2.8 6.7 8.6 4.7 2.9 (4.9) 18.6 (5.7) 39.8 16.1 34.1 38.0 73.9 14,920 1.5 3.4 2.7 4.8 8.2 1.8 -0.5 (6.4) 19.5 (6.0) 34.8 22.6 30.8 32.7 75.7 15,400 3.1 7.4 4.9 5.8 9.9 0.1 -0.3 (5.4) 23.0 (6.5) 36.5 21.3 31.8 28.2 80.9 16,800 3.5 9.0 4.0 7.5 10.3 3.3 4.0 (5.2) 27.3 (6.3) 37.1 22.1 32.1 26.1 89.2 17,700 3.6 7.0 5.0 7.0 9.9 3.2 3.0 (4.2) 31.8 (5.7) 35.9 24.4 31.3 24.8 Source: Thomson Financial Datastream, WIIW, RZB Group Research 20 The transformation and consolidation of the Czech banking sector is now history. Since finishing the bank privatisation programme in 2001, the role of the state as an owner in the banking sector is limited to two standard specialized institutions, the development bank (administering and financing in particular the government's SME programmes) and the Exim bank. The rest of the banking sector is owned by foreign banks or non-banking financial institutions. Only two small banks have domestic private owners. Czech banking, hence, is considerably internationalised from a worldwide perspective. As regards banking performance, the post-privatisation consolidation and re-engineering of former state-owned banks, i.e. Ceskoslovenska obchodni banka (CSOB), Ceska sporitelna (CS) and Komercni banka (KB), was completed in 2002. These "Big Three" are still the dominant players in the market. Their combined market share in terms of assets is about 55% and they have extensive retail branch networks. A number of banks, which originated in the early nineties as foreign greenfield ventures, are the other important segment of Czech banking. These institutions mostly play an important role as strong and dynamic niche players. Rapid development of alternative channels and changes in the behavior of clients towards a preference of direct banking in recent years has also enabled many banks of this group to expand into retail banking. The corporate banking and treasury markets are consolidated and stable. Demand for and supply of new products and financial innovations are moderate and mainly driven by developments in the global banking industry. However, the degree of financial intermediation is only about half the level in the Czech Republic Market share, % of total assets Eurozone. Thus, there is natural room for fast organic growth of the market. Retail banking, and recently also the SME segment, is very vibrant, and the market for many products such as credit cards or mortgage credits is still underdeveloped. Therefore, this is the area where competition is heating up, growth rates are double-digit, and where most banks concentrate their business efforts. The Czech banking industry has reached a comparably strong level of financial efficiency on an international level with RoE around 20%. The strong presence of numerous global or international banks with significant market shares provides a degree of competition that exceeds many mature banking markets where domestic banking institutions play a dominant role with only a limited or negligible presence of foreign rivals. ING Bank Ziv.banka 1.6% (UniCredit ) 1.9% growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (CZK) average lending rate average deposit rate CSOB (KBC ) 20.1% GE Capital 2.2% CS (Erst e) 18.2% Raiffeisenbank 2.4% Citibank 2.7% Commerzbank 3.6% HVB Bank (BACA ) 5.1% KB (SocGen ) 17.5% Data as of year-end 2003 Source: CNB, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn Others 24.6% 1999 2000 2001 2002 2003 74,587.3 81,889.5 88,533.7 81,212.4 79,454.7 1.4 141.7 9.8 144.8 8.1 130.2 -8.3 112.8 -2.2 106.8 24,072.7 24,689.3 25,777.0 25,332.4 26,635.1 (6.1) 45.7 2.6 43.6 4.4 37.9 (1.7) 35.2 5.1 35.8 17,633.1 16,861.3 13,262.1 10,915.5 10,588.2 (8.4) 33.5 (4.4) 29.8 (21.3) 19.5 (17.7) 15.2 (3.0) 14.2 2,112.4 2,671.7 3,620.6 4,955.3 6,494.2 18.8 4.0 26.5 4.7 35.5 5.3 36.9 6.9 31.1 8.7 6,775.9 6,249.5 5,172.2 4,103.8 3,819.3 (4.8) 12.9 (7.8) 11.0 (17.2) 7.6 (20.7) 5.7 (6.9) 5.1 28.1 28,333.7 25.3 30,042.7 20.1 38,827.1 16.2 46,432.6 14.3 46,299.9 (2.9) 53.8 6.0 53.1 29.2 57.1 19.6 64.5 (0.3) 62.3 18,432.4 20,144.4 24,421.4 24,895.4 25,557.9 (2.2) 35.0 9.3 35.6 21.2 35.9 1.9 34.6 2.7 34.4 117.7 121.7 150.6 183.3 173.8 34 1,993 38.5 - 32 1,795 24.3 75.4 30 1,736 3.7 93.3 29 1,701 4.5 94.2 27 1,670 3.1 95.9 (0.3) (5.3) 56.6 13.6 32.2 4.2 0.7 13.1 54.1 14.8 28.9 3.8 0.7 16.6 53.6 15.4 20.8 4.1 1.2 27.4 51.7 14.3 15.8 4.0 1.2 23.7 52.7 14.5 11.1 3.9 8.7 4.5 7.2 3.4 7.0 3.0 6.2 2.2 5.3 1.4 Source: CNB, RZB Group Research 21 Slovakia Dynamic development as competition increases Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Slovakia 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: NBS, RZB Group Research Credits to households, in % of GDP and growth yoy 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 50 45 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to households, growth % yoy Source: NBS, RZB Group Research Competitiveness in the Slovak banking sector has significantly increased after the restructuring and the subsequent privatisation in 2001 of the two largest banks, Slovenska Sporitelna and VUB. At the same time other foreign banks or their affiliates are also trying to get a foothold in the Slovak market. The top three banks, which also includes Raiffeisen International's Tatra banka, dominate the market, accounting for two thirds of total banking assets by the end of the first quarter 2004. With competition heating up and margins being squeezed, banks have increasingly turned to retail business and more advanced products that yield higher margins. Credits to households experienced a boom in 2003, growing by more than 40% yoy in EUR terms. However, overall oustanding credits to households remain low at 7.1% of GDP , even when compared with the 11% average of the eight new EU member countries from CEE (NMC-8), where only Lithuania has a lower percentage. The comparable ratio for the Eurozone is 49% of GDP. Assets under management in mutual funds again more than doubled in 2003, reaching EUR 820 mn, while pension funds also continued to grow strongly. Clearly these are the major growth markets for banks in the upcoming years. Both the surge of private loans and the emergance of mutual funds have put a break on the growth of overall deposits. Deposits received from households even decreased to 27% of GDP in 2003, down from levels around 32% in the period 1999-2001. Still, total deposits fell only to a level of just below 200% of total credits in 2003, underlining the banks' reliance on T-bills and T-bonds that today yield rather low interest rates. Key economic figures and forecasts Population: 5.4 bn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg. %) Consumer prices (avg. % yoy) Producer prices (avg. % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate SKK/EUR (avg) Exchange rate SKK/USD (avg) 19.1 9,160 1.5 (19.6) 2.7 (2.7) 17.5 10.6 3.8 (3.6) 43.8 (4.8) 54.8 3.4 44.1 41.4 21.9 9,910 2.0 (7.2) (0.9) 8.4 18.2 12.2 9.8 (10.4) 49.9 (3.5) 53.1 4.3 42.6 46.2 23.3 10,480 3.8 13.9 4.9 7.4 18.2 7.1 6.7 (7.3) 48.7 (8.4) 53.7 4.6 43.3 48.4 25.7 11,330 4.4 (0.9) 5.3 6.7 17.8 3.3 2.1 (5.7) 43.3 (8.0) 49.2 8.5 42.7 45.3 28.8 11,730 4.2 (1.2) (0.6) 5.5 15.2 8.5 8.3 (3.5) 42.8 (0.9) 50.9 9.4 41.5 36.7 34.0 12,400 5.4 4.5 3.2 6.5 14.5 7.7 3.3 (3.8) 45.0 (2.1) 48.5 11.3 40.1 32.6 36.9 13,000 4.9 9.0 4.3 7.5 14.1 3.3 2.8 (3.4) 46.0 (2.8) 49.5 11.8 39.3 31.2 Source: Thomson Financial Datastream, WIIW, RZB Group Research 22 Slovakia Market share, % of total assets Credits to private companies increased in EUR terms in 2003 for the first time in three years, but continued to decrease in % of GDP. In 2003 the total stock of credits to private enterprises reached only about half of the level of 1999, and it is no surprise that gross fixed capital formation in the Slovak economy fell in four out of five years from 19992003. The clean up of the loan portfolios of the two large state banks ahead of their privatisation has reduced the percentage of classified loans down by more than a half from a level of 36.4% in 1999. Capital adequacy of the Slovak banking sector has been the highest in the NMC-8 since privatisation in 2001. Thus, credits to small and medium-sized enterprises should become a more important factor in the upcoming years and contribute to a much needed acceleration of fixed capital investment. Istrobanka (BAWAG ) 2.8% growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (SKK) average lending rate average deposit rate Others 15.3% Slovenska sporitelna (Erste ) 21.1% Dexia banka Slovensko 2.9% VUB Banka (Intesa ) 19.6% ING Bank 4.8% UniBanka (UniCredit ) 5.0% HVB bank (BACA ) 5.0% CSOB (KBC ) 7.1% Tatra banka (Raiffeisen ) 13.6% Data as of year-end 2003 Source: NBS, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn Ludova banka (ÖVAG ) 2.7% 1999 2000 2001 2002 2003 18,130.0 19,250.7 21,721.4 24,304.1 (1.4) 91.2 6.2 90.7 12.8 92.0 11.9 92.5 23,941.5 (1.5) 9,671.2 9,266.5 (4.2) 7,910.7 (14.6) 8,423.9 9,768.8 43.6 33.5 6.5 32.1 16.0 33.6 7,183.6 6,804.3 5,005.4 5,006.3 5,252.4 3.0 36.1 (5.3) 32.0 (26.4) 21.2 0.0 19.1 4.9 18.1 846.6 996.5 1,213.1 1,469.7 2,067.8 38.2 4.3 17.7 4.7 21.7 5.1 21.2 5.6 40.7 7.1 1,422.6 1,269.4 (10.8) 1,361.7 1,438.2 1,985.4 6.0 7.3 5.8 5.6 5.5 38.0 6.8 14.7 12,038.7 13.7 13,855.5 17.2 15,861.4 17.1 18,489.6 20.3 19,347.6 14.8 60.6 15.1 65.3 14.5 67.2 16.6 70.4 4.6 66.6 6,567.9 6,917.3 7,562.6 7,752.1 7,851.6 12.3 33.0 5.3 32.6 9.3 32.0 2.5 29.5 1.3 27.0 124.5 149.5 200.5 219.5 198.1 25 1,153 62.2 37.8 23 1,101 59.4 40.6 21 1,052 9.5 90.5 21 1,020 4.4 95.6 22 1,057 1.5 96.3 (2.3) 108.2 12.6 36.5 6.4 1.5 9.5 104.8 12.5 27.9 4.6 1.0 14.4 107.3 19.8 32.3 4.1 1.2 13.6 82.6 21.3 21.8 4.5 1.2 12.9 83.8 21.7 17.7 4.3 16.9 10.5 11.8 7.2 9.3 5.2 9.1 4.6 7.6 3.3 5.3 48.6 6.1 7.2 (30.2) 82.4 Source: NBS, RZB Group Research 23 Slovenia Consumer loans to take off foreign-owned banks on the fast lane Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Slovenia 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: BSI, RZB Group Research Credits to households and private enterprises, in % of GDP 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to private enterprises, in % of GDP Source: BSI, RZB Group Research Key economic figures and forecasts Population: 2.0 mn Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate SIT/EUR (avg) Exchange rate SIT/USD (avg) 1999 2000 2001 2002 2003 2004e 2005f 18.8 14,330 5.2 21.0 5.9 (0.5) 13.6 6.1 2.1 (0.6) 25.1 ( 3.5) 42.6 3.2 193.6 181.8 20.7 15,150 4.1 0.6 0.3 6.2 12.2 8.9 7.6 (1.3) 26.7 (2.9) 46.1 3.4 205.0 222.7 21.9 15,920 2.9 4.1 2.3 2.9 11.6 8.4 8.9 (1.3) 26.9 0.2 47.7 4.8 217.2 242.5 23.4 19,720 2.9 2.6 0.3 2.5 11.6 7.5 5.1 (2.9) 27.8 1.4 49.3 6.5 227.0 240.1 24.5 17,500 2.3 5.4 2.9 1.4 11.2 5.5 2.5 (1.8) 28.6 0.1 53.3 7.3 234.0 206.8 25.6 18,100 3.0 6.0 3.5 4.0 10.5 4.0 4.0 (1.7) 29.0 (0.2) 55.0 8.1 239.0 194.3 27.3 18,700 3.5 7.0 3.5 5.0 10.0 3.5 3.5 (1.5) 29.5 (0.5) 56.5 8.4 240.0 190.5 Source: Thomson Financial Datastream, WIIW, RZB Group Research 24 There were 20 banks operating in Slovenia by the end of 2003, the same number as a year ago. Of those 20 banks, five were subsidiaries of foreign banks and one was a branch office of a foreign bank. In addition to these six banks under majority foreign ownership, there were seven fully domesticowned banks and a further seven under majority domestic ownership (of the seven banks under majority domestic ownership, three had less than 1% foreign equity capital). Only at the end of 2003 the environment for some Slovenian banks had been rather depressed, as the growth of the balance sheets especially in the largest banks in Slovenia slowed down, and partially came to a complete halt. However, those worries are certainly forgotten. In the first half of 2004, bank assets have again recorded solid growth (5.8%) and should increase by around 10% in 2004. Unlike two years ago, when the asset growth was mainly artificial through the purchase of central bank securities, the traditional buoyant borrowing activities of the corporate sector were recently accompanied by significant volumes of loans to retail customers, the latter fueled by an increasing consumption fever. Slovenia has by far the highest level of credits to private enterprises among the new EU member countries, underlining the fact that the economy is the most developed in the region and pointing to a relatively high degree of bank intermediation. Credits to households, on the other hand, are still at a rather low level and have only shown a very moderate growth in recent years, in particular compared with the development in virtually all the countries in the region. However, the most recent development points to a more dynamic development of Slovenia Market share, % of total assets this segment and there now appears plenty of room for all of the 20 Slovenian banks to grow. With interest margins continuing to shrink again during the first part of this year, there have been increasing efforts of the banks to control growing operational costs. Some positive results are already apparent and in turn total profit of the banking system has increased over the last year. However, this is just the aggregate picture of the banking system as a whole. If we look at the individual development of banks in the first half of this year, we can find that things have not changed very much. Austrian banks continue to expand their market shares and while local banks still have above average results the biggest banks are mostly busy with the question of how to defend their market position. Raiffeisen Krekova 2.5% BACA 4.6% growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (SIT) average lending rate average deposit rate Others 11.4% NLB 33.6% Gorenjska banka 5.0% Banka Koper (San Paolo IMI ) Banka 6.2% Celje 6.7% SKB (Societe Generale ) 7.7% NKBM 11.0% Abanka Vipa 9.1% Data as of year-end 2003 Source: BSI, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn Hypo Alpe Adria 2.2% 1999 2000 2001 2002 2003 13,587.5 15,040.5 17,489.1 20,092.7 21,553.0 9.4 73.7 10.7 75.6 16.3 81.8 14.9 87.6 7.3 89.9 7,019.4 7,709.4 8,635.2 9,482.6 10,640.6 19.9 38.1 9.8 38.8 12.0 40.4 9.8 41.4 12.2 44.4 5,147.1 5,734.5 6,589.8 7,353.0 8,321.1 19.9 27.9 11.4 28.8 14.9 30.8 11.6 32.1 13.2 34.7 1,872.3 1,975.0 2,045.4 2,129.7 2,319.5 19.7 10.2 5.5 9.9 3.6 9.6 4.1 9.3 8.9 9.7 - 1,332.2 1,606.3 2,302.6 2,996.0 - 6.7 20.6 7.5 43.4 10.0 30.1 12.5 9,398.4 17.3 10,163.5 18.6 12,457.7 24.3 13,685.9 28.2 13,919.6 6.7 51.0 8.1 51.1 22.6 58.3 9.9 59.7 1.7 58.1 5,131.6 5,999.7 7,809.7 8,448.1 8,865.6 9.0 27.8 16.9 30.2 30.2 36.5 8.2 36.8 4.9 37.0 133.9 131.8 144.3 144.3 130.8 25 578 4.8 25 501 15.3 21 643 40.7 15.6 20 638 24.9 23.1 20 - 0.8 7.7 61.9 14.0 11.0 - 1.1 11.4 55.6 13.5 12.4 6.4 0.4 4.7 60.1 11.8 12.8 4.9 1.1 13.0 55.3 11.9 13.3 5.1 1.0 12.8 62.4 11.6 13.6 4.5 - 14.6 8.2 12.7 7.8 12.2 7.1 9.3 4.8 Source: BSI, RZB Group Research 25 Estonia Credit boom fueling staggering current account deficit Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 Estonia 0.2 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: EB, RZB Group Research Credits to households, in % of GDP and growth yoy 20 50 40 15 30 10 20 5 10 0 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to households, growth % yoy Estonia has the most highly concentrated banking sector of the whole CEE region with the top three banks, all owned by Nordic banking groups, making up 90% of total assets. Hansabank alone had a market share of almost 58% in terms of total assets by the end of 2003. Up to the end of 2003 there have been seven licensed banks with only the two smallest ones not being foreign majority owned. After three years without change, two new banks have entered Estonia's banking market in 2004. In March, Parex Banka, the market leader in Latvia whose interests lie in financing transit-related business activities in Estonia, was issued a permit to set up a branch. Then in April, Vereins- und Westbank AG submitted an application to open a subsidiary to offer project and trade financing services. Hansabank also is a major player in Latvia and Lithuania, being the second largest bank in those markets. Also the border regions of Russia, particularly the St. Petersburg area, have become an increasingly important playing field for Estonian banks. Hansabank already established a leasing company in Russia in 2002 and Ühispank announced that it also intends to re-launch leasing operations in St. Petersburg. Given the small domestic market and a rather high degree of financial intermediation relative to Estonia's GDP per capita, the expansion beyond Estonia's borders has been seen as crucial for sustaining growth and profitability. Total assets of the Estonian banking sector have been growing by around 20% yoy for the last two Source: EB, RZB Group Research Key economic figures and forecasts Population: 1.4 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate EEK/EUR (avg) Exchange rate EEK/USD (avg) 5.2 8,040 (0.1) (15.6) (2.7) (2.7) 5.2 3.3 (1.2) (2.8) 6.5 (4.4) 54.9 0.9 15.65 14.69 5.9 9,010 7.8 14.3 8.5 8.6 5.9 4.0 4.9 (0.3) 5.0 (5.5) 54.6 1.0 15.65 16.98 6.7 9,610 6.4 13 5.9 6.9 6.1 5.8 4.4 0.3 4.7 (5.6) 55.6 0.9 15.65 17.48 7.5 10,450 7.2 17.2 9.9 6.5 5.4 3.6 0.4 1.8 5.7 (11.3) 60.1 1.0 15.65 16.61 8.0 10,860 5.1 5.4 5.4 5.3 4.9 1.3 0.2 2.6 5.8 (12.6) 69.1 1.1 15.65 13.86 8.5 11,450 5.5 6.0 5.5 6.5 5.0 2.8 1.0 0.0 5.5 (9.8) 71.0 1.1 15.65 12.7 8.9 12,100 6.0 5.5 5.5 7.0 4.5 3.1 1.5 0.6 6.0 (9.2) 72.5 1.2 15.65 12.4 Source: Thomson Financial Datastream, WIIW, RZB Group Research 26 Estonia Market share, % of total assets years and reached a level of 85.1% of GDP in 2003. The growth of credits has been even more dynamic, particularly credits to households, which expanded by almost 50% in 2003. With 59.3% Estonia has the highest level of total credits in % of GDP in the whole region and the level of credits to households is the second highest after Croatia with 16.6% of GDP. The boom of consumer loans also contributed to a widening of the already high current account deficits to staggering levels in 2002 and 2003. With Estonia having already entered the ERM2 exchange rate mechanism and being seen on track for entering the Eurozone in 2007, the relatively high and rising levels of external debt are not regarded as an immediate threat to the stability of the currency board. Krediidipank 1.6% growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (EEK) average lending rate average deposit rate Preatoni Bank 0.1% Sampo Bank 7.1% Nordea Bank 8.2% Hansabank (Swedbank ) 57.7% Eesti Ühispank (SEB ) 24.7% Data as of year-end 2003 Source: EB, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn Business Bank 0.7% 1999 2000 2001 2002 2003 3,008.1 3,684.1 4,372.3 5,220.7 6,314.3 14.7 61.7 22.5 66.2 18.7 69.9 19.4 75.6 20.9 85.1 1,696.1 2,150.9 2,683.9 3,423.6 4,405.6 9.5 34.8 26.8 38.6 24.8 42.9 27.6 49.6 28.7 59.3 944.1 1,015.4 1,133.4 1,239.7 1,490.4 -2.0 19.3 7.5 18.2 11.6 18.1 9.4 18.0 20.2 20.1 344.6 439.6 590.4 830.7 1229.6 26.3 7.1 27.6 7.9 34.3 9.4 40.7 12.0 48.0 16.6 1,297.3 1,700.1 2,047.3 2,638.4 3,604.3 11.5 26.6 31.0 30.4 20.4 32.7 28.9 38.2 36.6 48.6 76.5 1,687.8 79.0 2,215.5 76.3 2,727.8 77.1 3,115.3 81.8 3,415.3 22.9 34.6 31.3 39.8 23.1 43.6 14.2 45.1 9.6 46.0 748.4 990.5 1,234.5 1,375.7 1,502.5 30.7 15.3 32.4 17.8 24.6 19.7 11.4 19.9 9.2 20.2 99.5 103.0 101.6 91.0 77.5 7 273 7.9 90 7 222 0.0 97 7 205 0.0 98 7 203 0.0 98 7 215 0.0 99.2 1.4 9.2 16.1 1.7 5.4 1.2 8.0 72.5 13.2 1.1 4.0 2.7 20.7 53.3 14.4 1.3 7.1 1.6 11.9 61.6 15.3 0.8 2.8 1.7 14.2 53.0 14.5 0.4 3.2 8.6 3.3 8.4 4.5 9.8 2.7 5.9 3.1 5.4 2.2 Source: EB, RZB Group Research 27 Latvia Need to re-peg the currency before entering the ERM II in 2005 Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 Latvia 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: Bank of Latvia, RZB Group Research Credits in foreign currency, in % of total credits 25 100 20 80 15 60 10 40 5 20 0 0 1999 2000 2001 2002 2003 Credits in foreign currency, in % of GDP Credits in foreign currency, in % of total credits Source: Bank of Latvia, RZB Group Research Latvia is one of only a few countries in the region where a domestic, private-owned bank - Parex Banka - remains the market leader. Similar to the other Baltic countries, the Nordic banks Hansabanka owned by Swedbank and SEB's Unibanka - command a significant market share. With a combined market share of the top three banks of only slightly less than 50% of total assets the market concentration is rather high, even though it is still considerably lower than in neighbouring Estonia and Lithuania. With 22 banks and one branch of a foreign bank - Nordea Bank - operating in Latvia, market consolidation is also less pronounced than in the neighboring Baltic countries. With 53.9% of total assets the market share of majority foreign-owned banks is well below that of most of the new EU member countries and has even gradually decreased in recent years. This is even more remarkable since restructuring and privatisation of the banking sector is basically completed, with the state maintaining a majority in only one bank - Latvijas Hipoteku un zemas banka, accounting for less than 5% of total assets. Despite interest rates being squeezed, the performance of the banking sector has been very good and stable over the last two years. One of the reasons for this is that bank assets have been growing very strongly, a development that continued in the first half of this year. Total assets almost matched GDP by the end of 2003, one of the highest ratios in the region and second only to the Czech Republic among the NMC-8. Total credits increased by over 40% in 2003 and have shown no signs of slowing down in 2004. The develop- Key economic figures and forecasts Population: 2.3 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate LVL/EUR (avg) Exchange rate LVL/USD (avg) 6.8 6,990 3.3 (6.8) 3.7 (5.4) 9.1 2.4 (4.0) (5.3) 13.7 (9.0) 55.6 0.8 0.62 0.58 8.4 7,690 6.9 10.2 7.4 4.7 7.8 2.6 0.6 (2.7) 13.9 (6.4) 60.4 0.9 0.56 0.61 9.2 8,370 8.0 11.4 7.8 9.2 7.7 2.5 1.7 (1.6) 16.2 (8.9) 68.6 1.3 0.56 0.63 9.8 9,180 6.4 13 6.9 5.8 8.5 1.9 1.0 (2.7) 15.5 (7.0) 69.1 1.2 0.58 0.62 9.9 9,970 7.5 7.4 8.0 6.5 8.6 2.9 3.2 (1.8) 15.6 (8.6) 74.3 1.2 0.64 0.57 10.6 10,600 7.0 12.0 6.5 8.5 9.0 4.0 3.5 (2.5) 16.0 (9.0) 77.5 1.2 0.64 0.52 11.5 11,300 6.5 12.0 6.0 8.0 8.5 4.0 3.0 (2.0) 16.0 (8.5) 80.0 1.3 0.63 0.50 Source: Thomson Financial Datastream, WIIW, RZB Group Research 28 Latvia Market share, % of total assets ment of credits to households was even more staggering with above 60% growth in the last two years. Despite growing steadily, deposits could not quite keep the pace of credits and reached less than two thirds of total credits by the end of 2003. Thus, banks have to raise funds through alternative channels in order to meet the continued high demand for loans. Others 24.7% Parex Banka 18.1% NORD/LB Latvija 4.1% Hansabanka (Swedbank ) 15.9% LATEKO banka 4.6% The boom of consumer loans has also contributed to a widening of the already high current account deficits. Latvia aims at re-pegging the lat to the EUR at the end of this year in order to be able to join the ERM II waiting room for entry to the Eurozone early 2005. Currently the lat is still pegged to the SDR ("special drawing right"), an artificial unit of account that was created by the IMF in 1969. Nordea Bank 4.7% Aizkraukles Bank 4.7% Unibank (SEB ) 15.4% Rietumu Banka 7.7% Data as of year-end 2003 Source: Bank of Latvia, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (LVL) average lending rate average deposit rate 1999 2000 2001 2002 2003 3,424.2 4,886.5 5,973.8 6,967.4 8,413.7 32.0 51.5 42.7 64.7 22.3 70.5 16.6 83.6 20.8 96.1 1,122.9 1,571.1 2,384.7 2,967.3 3,790.2 31.8 16.9 39.9 20.8 51.8 28.1 24.4 35.6 27.7 43.3 907.9 1,202.4 1,818.4 2,093.8 2,524.4 26.2 13.6 32.4 15.9 51.2 21.5 15.1 25.1 20.6 28.8 162.4 277.5 423.4 693.1 1,135.3 68.2 2.4 70.9 3.7 52.6 5.0 63.7 8.3 63.8 13.0 622.0 751.5 1,276.4 1,539.4 2,019.6 39.1 9.3 20.8 9.9 69.8 15.1 20.6 18.5 31.2 23.1 55.4 1,060.5 47.8 1,473.8 53.5 1,859.3 51.9 2,120.7 53.3 2,471.1 21.6 15.9 39.0 19.5 26.2 21.9 14.1 25.4 16.5 28.2 443.8 713.4 1012.0 1204.2 1412.8 29.5 6.7 60.8 9.4 41.9 11.9 19.0 14.4 17.3 16.1 94.4 93.8 78.0 71.5 65.2 24 160 2.6 66.2 22 184 2.9 69.9 23 193 3.2 67.8 23 199 4.0 54.4 23 4.1 53.9 1.0 11.2 16.4 6.8 7.6 1.6 18.6 14.3 4.5 4.5 1.5 19.0 14.2 2.8 4.3 1.5 16.4 13.1 2.0 4.0 1.4 16.7 11.7 1.4 2.9 13.8 6.1 10.8 6.4 10.6 6.3 8.6 4.7 7.2 4.2 Source: Bank of Latvia, RZB Group Research 29 Lithuania Growing strongly from low levels Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Lithuania 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: Lietuvos Bankas, RZB Group Research Credits to households, in % of GDP and growth yoy 80 70 60 50 40 30 20 10 0 -10 -20 10 9 8 7 6 5 4 3 2 1 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to households, growth in % yoy Like the other Baltic countries, Lithuania has a highly concentrated banking sector. There are only 10 banks and four branches of foreign banks operating in Lithuania, with the top five banks accounting for 83% of total assets. By the end of 2003, almost 90% of the capital in the banking sector was owned by foreign investors. Similar to Estonia and Latvia the Nordic banks also dominate the Lithuanian banking sector with Swedbank's Hansabankas and SEB (Vilniaus bankas) being major market players in all three markets. Bank assets recorded a steady growth over the last years by about 30% annually and the dynamics even increased in 2003 on the back of a significant acceleration of credit growth. Both credits to private enterprises and credits to households increased by more than 50% in 2003, albeit in both cases from rather low levels. The amount of outstanding credits to households still reached only 3.4% of GDP by the end of 2003, by far the lowest ratio of the NMC-8; thus leaving ample potential to grow in the coming years. Credit growth continued to accelerate to 60.5% yoy in the first half of 2004. As a result of the credit boom, deposit growth slowed to less than 20% yoy. Consequently the ratio of total deposits in % of total credits decreased to 125.5% in 2003 from 160% only two years previously. Given the current pace of credit growth banks will soon have to find alternative channels to raise additional funds. Growth and profitability of the banking sector have been supported by strong economic growth in the last few years. In 2003 Lithuania recorded the high- Source: Lietuvos Bankas, RZB Group Research Key economic figures and forecasts Population: 3.5 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate LTL/EUR (avg) Exchange rate LTL/USD (avg) 10.2 7,440 (1.7) (6.1) 3.2 (9.9) 10.0 0.8 1.7 (5.7) 23.4 (11.0) 44.3 1.2 4.27 4.00 12.3 8,110 3.9 (9.0) 6.4 2.2 12.6 1.0 16 (2.6) 24.3 (5.9) 42.4 1.4 3.70 4.00 13.5 8,850 6.4 13.5 4.0 16.0 12.9 1.3 -3 (2.1) 23.4 (4.7) 44.2 1.8 3.58 4.00 14.9 9,580 6.8 8.7 6.2 3.1 10.9 0.3 (2.8) (1.4) 22.8 (5.2) 39.8 2.3 3.46 3.67 16.2 10,600 9.0 11.4 11.1 16.1 7.7 (1.2) (0.5) (1.7) 21.9 (6.6) 42.7 2.7 3.45 3.06 17.4 11,500 7.5 12.0 6.0 10.0 7.5 0.2 1.0 (3.0) 23.0 (6.5) 45.0 2.9 3.45 2.80 18.4 12,300 6.0 10.0 5.0 8.0 7.0 2.0 2.0 (2.5) 23.5 (6.0) 47.0 3.2 3.45 2.74 Source: Thomson Financial Datastream, WIIW, RZB Group Research 30 Lithuania Market share, % of total assets est real GDP growth in the whole region with 9.0%. With double digit growth of industrial output and fixed capital investment, GDP growth was clearly not limited to household consumption demand. The more than 50% increase of credits to private companies underpins the growing importance of the banking sector for corporate funding. Others 17.5% Vilniaus bankas (SEB ) 36.8% Ukio Bankas 4.4% Bankas Snoras 6.2% As in the other Baltic countries, the boom of consumer loans also contributed to a widening of the current account deficit. Unlike some of the other countries in the region, the high credit growth is not seen as a problem for macroeconomic stability as it is coming from a very low base. Lithuania, together with Estonia and Slovenia, already entered the ERM II exchange rate mechanism and is being seen on track to enter the Eurozone in 2007. Nord/LB Lietuva 11.7% Hansabankas (Swedbank ) 23.5% Data as of year-end 2003 Source: Lietuvos Bankas, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn 1999 2000 2001 2002 2003 3,187.2 3,747.1 4,279.6 4,913.6 6,301.7 growth in % yoy 26.2 17.6 14.2 14.8 28.3 in % of GDP 30.0 31.5 32.1 33.5 39.7 3,921.3 Total credits, EUR mn 1,473.8 1,575.7 2,044.7 2,584.2 growth in % yoy 34.4 6.9 29.8 26.4 51.7 in % of GDP 13.9 13.2 15.3 17.6 24.7 962.0 989.6 1,276.6 1,650.2 2,504.0 - 2.9 29.0 29.3 51.7 9.1 8.3 9.6 11.2 15.8 164.6 152.6 200.5 352.2 534.5 - -7.2 31.4 75.7 51.7 1.5 1.3 1.5 2.4 3.4 907.8 1052.9 1240.6 1321.0 2,152.8 Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn - 16.0 17.8 6.5 63.0 8.5 8.8 9.3 9.0 13.6 61.6 1,857.6 66.8 2,443.9 60.7 3,274.8 51.1 3,905.7 54.9 4,920.1 growth in % yoy 30.8 31.6 34.0 19.3 26.0 in % of GDP 17.5 20.5 24.5 26.6 31.0 975.9 1,317.8 1,748.6 1,952.7 2,284.7 52.7 35.0 32.7 11.7 17.0 9.2 11.1 13.1 13.3 14.4 126.0 155.1 160.2 151.1 125.5 15 33.6 34.6 14 28.6 57.7 13 8.3 81.1 14 0.1 88.1 13 0.1 88.7 0.1 1.1 17.4 11.9 8.5 0.4 4.0 16.3 10.8 9.7 -0.1 -1.1 15.7 7.4 7.3 0.9 8.5 14.8 5.8 6.3 1.4 13.4 13.2 2.6 5.6 Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Market share of state owned banks, in % of capital Market share of foreign owned banks, in % of capital Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (LTL) Source: Lietuvos Bankas, RZB Group Research 31 Bulgaria Privatisation complete but concerns about rapid credit growth Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 Bulgaria 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: BNB, RZB Group Research Credits to households, in % of GDP and growth yoy 100 90 80 70 60 10.0 9.0 8.0 7.0 6.0 50 40 30 20 10 0 5.0 4.0 3.0 2.0 1.0 0.0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to households, growth in % yoy Source: BNB, RZB Group Research Currently there are 35 commercial banks in Bulgaria, of which 29 have a license to operate locally and internationally and six are branches of foreign banks. The privatisation of the banking sector was practically completed in 2003 after the sale of the State Savings Bank (DSK Bank) to Hungarian OTP. Following this landmark privatisation deal, over 97% of total assets in the banking system are now controlled by private entities, while the market share of foreign-owned banks has reached 83% of the total assets. According to Bulgarian National Bank’s (BNB) data, banking assets and deposits also continued to grow strongly in 2004. A high and stable capital adequacy ratio (21.28% in Q1 2004) indicates stability of the banking sector. Bank lending also continued its rapid growth and even accelerated in the first five months of 2004, despite the restrictive measures introduced by the BNB and the government. Although the prevailing opinion is that credit expansion contributes to the positive economic development, the IMF and government officials agreed on a number of measures aiming to slow down the credit growth to a target level of 30% yoy. In June 2004, fiscal reserves of the state, which had been held with commercial banks, were withdrawn and deposited with the central bank. A Central Credit Registry at the BNB became operational in July 2004. It will serve as an information system for banks, providing data for all outstanding credits. This is aimed at facilitating and reducing the costs for evaluating credit applications, the supervision of credit portfolios and risk management. Also mini- Key economic figures and forecasts Population: 7.8 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate BGN/EUR (avg) Exchange rate BGN/USD (avg) 11.6 5,120 2.3 20.8 (1.1) (12.5) 13.8 2.6 3.1 (0.9) 86.7 (4.8) 89.2 3.2 1.96 1.84 13.7 5,560 5.4 15.4 0.2 2.3 18.1 10.3 17.2 (1.0) 77.1 (5.6) 86.9 3.7 1.96 2.12 15.2 6,080 4.1 23.3 6.8 2.2 17.5 7.4 3.6 (0.9) 69.9 (7.3) 78.6 4.1 1.96 2.18 16.5 6,360 4.9 9.3 3.1 4.6 17.5 5.8 1.3 (0.6) 55.9 (5.6) 65.1 4.5 1.96 2.08 17.6 6,830 4.3 13.8 7.1 15.3 14.2 2.3 4.9 0.0 46.2 (8.6) 59.5 5.3 1.96 1.73 19.6 7,200 5.0 18.0 5.0 15.0 13.0 6.5 6.5 (0.3) 45.0 (8.0) 60.0 5.6 1.96 1.59 21.6 7,600 5.5 15.0 6.0 18.0 12.5 5.0 5.5 (0.7) 42.5 (8.0) 61.0 6.0 1.96 1.55 Source: Thomson Financial Datastream, WIIW, RZB Group Research 32 Bulgaria Market share, % of total assets mum statutory reserves (MSR) of 4% on long-term deposits (exceeding two years) were introduced, which could be raised to 8%. In this context, half of the cash in bank vaults will no longer be counted as MSR as of September 2004. Again this could be raised to exclude total cash in vaults if deemed necessary. In addition, stricter monitoring of the liquidity ratio for the local banks acting as primary securities dealers has been introduced as of September 2004. The BNB also postponed its plans to reduce minimum reserve requirements. If the impact of the above listed measures is regarded as insufficient, other potentially more drastic steps may include raising the MSR on all deposits to 11%, imposing certain rigid liquidity ratios, or introducing mandatory ceilings on the growth of loan portfolios of the banks. Bulbank (UniCredit ) 17.5% Others 28.3% Hebros Bank 3.2% DZI Bank 3.4% DSK Bank (OTP Group ) 14.8% SG Expressbank (SocGen ) 3.9% Raiffeisenbank 5.3% Bulgarian Post Bank (EFG Eurobank ) 5.6% First Investment Bank 6.4% United Bulgaria Bank (NBG ) 10.7% CB Biochim (BACA ) 7.3% Data as of year-end 2003 Source: BNB, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn* growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (BGN) 1999 2000 2001 2002 2003 4,204.4 4,997.1 6,248.5 7,442.9 8,857.4 - 18.9 25.0 19.1 19.0 34.6 36.5 41.1 45.0 50.3 1,226.8 1,545.1 2,119.7 3,085.1 4,609.0 - 25.9 37.2 45.5 49.4 10.1 11.3 14.0 18.7 26.2 822.5 1,192.8 1,615.4 2,358.4 3,514.2 - 45.0 35.4 46.0 49.0 6.8 8.7 10.6 14.3 20.0 253.2 290.9 425.6 618.3 1,082.3 - 14.9 46.3 45.3 75.0 2.1 2.1 2.8 3.7 6.2 796.5 991.9 1,340.4 1,732.2 2,009.7 - 24.5 35.1 29.2 16.0 6.5 7.3 8.8 10.5 11.4 64.9 3,122.1 64.2 3,638.4 63.2 4,885.7 56.1 5,768.5 43.6 6,950.3 - 16.5 34.3 18.1 20.5 25.7 26.6 32.2 34.9 39.5 1,508.7 1,806.8 2,572.7 2,815.2 3,454.6 - 16.5 34.3 18.1 20.5 12.4 13.2 16.9 17.0 17.5 254.5 235.5 230.5 187.0 150.8 34 583 48.7 28.4 35 789 17.2 71.5 35 719 17.6 70.6 35 673 14.2 72.4 35 1035 0.4 82.2 2.4 20.9 41.3 11.7 10.3 3.0 21.9 35.6 8.2 7.9 2.7 20.5 31.3 7.0 8.6 2.0 15.6 25.2 5.5 7.1 2.4 18.7 22.0 7.3 6.4 Source: BNB, RZB Group Research 33 Romania Privatisation underway early stages of a dynamic development Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Romania 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: NBR, RZB Group Research Credits to households, in % of GDP and growth yoy 6.0 250 5.0 200 4.0 150 3.0 100 2.0 50 1.0 0 0.0 -50 1999 2000 2001 2002 2003 Credits to households, in % of GDP Credits to households, growth in % yoy Source: NBR, RZB Group Research Key economic figures and forecasts Population: 21.7 mn Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate ROL/EUR (avg) Exchange rate ROL/USD (avg) 1999 2000 2001 2002 2003 2004e 2005f 33.5 4,980 (1.2) (4.8) (1.1) (2.4) 11.4 45.8 42.2 (2.8) 24 (4.0) 26.1 0.8 16,296 15,333 40.3 5,230 2.1 5.5 0.2 7.1 11.2 45.7 53.4 (4.0) 23.9 (3.7) 27.4 2.7 19,956 21,693 44.8 5,700 5.7 10.2 6.8 8.4 9.0 34.5 43.2 (3.3) 23.2 (5.5) 30.1 4.4 26,027 29,061 48.4 6,360 5.0 8.2 3.1 6.0 10.2 22.5 23.0 (2.5) 23.3 (3.4) 30.3 5.9 31,255 33,055 50.3 6,730 4.9 9.2 7.1 3.1 7.6 15.3 19.5 (2.3) 21.8 (5.8) 30.6 6.4 37,576 33,200 56.2 7,100 6.5 9.0 7.0 6.0 7.0 12.0 18.0 (1.7) 23.0 (6.0) 31.0 10.2 40,908 33,259 63.8 7,500 5.0 10.0 6.0 5.5 7.0 8.2 15.0 (1.3) 24.0 (5.8) 31.5 12.6 42,312 33,581 Source: Thomson Financial Datastream, WIIW, RZB Group Research 34 Although the Romanian banking system still plays the most important role in financial intermediation and its total assets increased to EUR 15 bn in 2003, it proves to be small relative to the size of the economy (32.6% of GDP in 2003). The major driver of the recent growth has been the dynamism of the loan portfolio. In 2003, the weight of loans in total assets increased to 49.5% from 37.6% in 2002. Foreign currency loans (55.4% of private sector loans by the end of 2003) have become a major concern for the National Bank of Romania (NBR), which in turn raised the reserve requirements on foreign currency funds from 25% to 30%. Most new products and services developed in 2003 had their focus on the retail market, which still remains underdeveloped. Loans to households boomed in 2003, increasing by 204.8% in EUR terms and accounting for 24.8% of total loans by the end of 2003. However, the amount of loans to households is still very low at below 4% of GDP, providing ample room for the retail sector to grow. Competition on the corporate market is rather fierce, with loans to private companies representing only 9.5% of GDP by the end of 2003. Although loans had a large growth in 2003, overdue and doubtful loans accounted for only 0.32% of total loans and the overall solvency ratio was much above the 12% NBR limit (20% by the end of 2003). In recent years, some major foreign banks entered the market or increased their local presence in Romania. The top three banks (BCR, BRD-SocGen and Raiffeisen) account for half of the market. Romania sold 25% of BCR to EBRD and IFC, and the privatisation should be finalised with selecting a strategic investor by 2006. Erste Bank and HVB Romania Market share, % of total assets have already announced their interest in the privatisation of CEC. Romania also wants to sell its remaining 7.3% stake in BRD-SocGen by the end of 2004. Banking regulations have been improved in line with EU legislation and the NBR has been approved a new status which emphasizes its independence with. Due to the low level of banking intermediation and given the overall economic development, the Romanian banking system is expected to grow rapidly (a maximum real growth of 35% for non-government credits was agreed with the IMF for 2004). The increased competition will lead to a reduction of interest rate margins as well as boost the development in retail banking. Foreign currency lending will still be preferred as long as the interest rate differential with the Eurozone remains high. Others 22.2% CitiBank 2.7% BC Ion Tiriac 3.0% BCR 28.9% HVB Bank 3.4% Banc Post 4.1% ING 4.2% ABN Amro 5.0% CEC 6.5% BRD (SocGen ) 13.2% Raiffeisen Bank 6.9% Data as of year-end 2003 Source: NBR, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn* growth in % yoy in % of GDP Credits in foreign currency, in % of total credits* Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (ROL) average lending rate average deposit rate 1999 2000 2001 2002 2003 9,938.2 9,647.3 12,630.3 13,694.3 15,011.6 (14.1) 34.9 (2.9) 29.2 30.9 30.5 8.4 31.6 9.6 32.6 3,148.7 3,110.0 4,241.4 5,118.4 7,368.8 (31.9) 11.1 (1.2) 9.4 36.4 10.2 20.7 11.8 44.0 16.0 2,402.5 2,389.2 3,224.8 3,615.5 4,366.3 (28.8) 8.4 (0.6) 7.2 35.0 7.8 12.1 8.3 20.8 9.5 160.1 176.6 286.6 598.5 1,824.4 (32.4) 0.6 10.3 0.5 62.3 0.7 108.8 1.4 204.8 4.0 1,553.2 1,484.5 1,987.2 2,551.4 3,313.9 (32.4) 5.5 (4.4) 4.5 33.9 4.8 28.4 5.9 29.9 7.2 49.3 6,369.0 47.7 6,605.8 46.9 8,424.2 49.8 9,397.0 45.0 9,795.8 0.5 22.4 3.7 20.0 27.5 20.4 11.5 21.7 4.2 21.3 3,329.2 (0.1) 11.7 202.3 3,252.1 -2.3 9.8 212.4 4,419.2 35.9 10.7 198.6 4,534.7 2.6 10.5 183.6 4,667.4 2.9 10.1 132.9 41 3,274 50.3 43.6 41 2,669 46.1 43.1 41 2,758 41.8 47.3 39 2,848 40.4 49.0 38 41.5 50.7 (1.5) (15.3) 17.9 75.4 20.5 1.5 12.5 62.4 23.8 6.4 20.7 3.1 21.8 57.8 28.8 3.9 18.7 2.6 18.3 62.0 25.0 2.8 16.5 2.6 15.6 63.9 20.0 33.1 14.6 65.9 45.4 53.5 32.7 45.1 26.4 35.2 18.7 25.4 10.8 * to private sector; Source: NBR, RZB Group Research 35 Croatia Slow down after years of high growth Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 Croatia 0.2 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: CNB, RZB Group Research Credits to households and external debt, in % of GDP 40 80 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 2000 2001 2002 2003 Credits to households, in % of GDP External debt, in % of GDP The overall size of the Croatian banking system (in terms of total assets) surpassed the GDP for the first time last year. Despite restrictive measures by the central bank, total assets still grew by 14.3% yoy in EUR terms last year. New measures to curb credit growth were introduced in 2004 and should further slow down the growth of the banking system. Commercial banks still account for around 85% of the whole financial system, although the competition of other institutions is slowly growing. In 2003, exceptionally high growth was recorded in the leasing industry as alternative to ordinary credits. At the same time the competition in the collection of savings is shaping up in the form of investment funds, pension funds and building societies. Competition among the largest banks has increased over the last few years, even though the number of banks operating in the Croatian banking system fell significantly in the course of the consolidation process (rehabilitation in the 1990's, privatization, M&A's). The top six banks (and banking groups) accounted for almost 85% of total banking assets in 2003. Currently the top two banks (Zagrebacka and Privredna) are still ahead of the next four banks (including Raiffeisenbank) that are growing strongly and competing for the third place. Almost 92% of banking assets in Croatia are controlled by banks in foreign ownership. The banks’ assets in Croatia have two major characteristics. Almost 70% of liabilities are denominated in foreign currency or indexed to foreign currency (predominantly EUR), which results in loan portfolios also largely indexed to foreign currency. The second characteristic is the high share of retail loans (around 48% of all loans). Credits to house- Source: CNB, RZB Group Research Key economic figures and forecasts Population: 4.4 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate HRK/EUR (avg) Exchange rate HRK/USD (avg) 18.7 7,510 (0.4) (3.9) (2.9) (12.5) 19.1 4.2 2.6 (6.4) (7.0) 53.1 3.0 7.58 7.11 20.0 8,050 2.9 (3.8) 4.2 1.7 21.2 6.2 9.7 (6.9) 51.1 (2.5) 59.3 3.9 7.64 8.28 22.2 8,600 3.8 7.1 4.5 6.4 22.0 4.9 3.6 (6.8) 51.6 (4.2) 57.8 5.3 7.47 8.34 24.2 9,270 5.2 10.1 6 5.5 22.3 2.2 (0.4) (6.0) 51.6 (6.9) 62.2 5.6 7.41 7.83 25.5 9,890 4.3 16.8 4.1 4.1 19.5 1.8 1.9 (5.0) 52.7 (7.3) 75.3 6.5 7.56 6.68 27.4 10,200 3.5 6.0 2.5 3.6 18.4 2.4 2.7 (4.5) 54.0 (5.4) 76.0 6.8 7.48 6.08 29.0 10,600 4.0 7.0 3.0 3.8 18.0 2.7 2.8 (4.0) 55.0 (4.9) 76.5 6.5 7.55 5.99 Source: Thomson Financial Datastream, WIIW, RZB Group Research 36 Croatia Market share, % of total assets holds increased to almost 30% of GDP, growing significantly faster than credits to private enterprises. Croatia has the highest ratio of retail loans in % of GDP among all CEE countries, but is still well below the EU average. Credit growth has decreased in 2004 due to restrictive monetary policy and a slower growth of deposits and, unlike in the past, both retail and corporate loans have been demonstrating similar dynamics. Bank profits increased in 2003, but due to continued asset growth the return on average assets recorded a slight decrease, although the return on average equity increased. As credits increased, the quality of assets has improved, which is evident from the decreasing share of classified credits in the banking system during the past years. HPB (Post Bank ) Nova 2.7% banka, Dubrovacka banka (Regent Fund ) 4.3% Volksbank Others 1.3% 13.5% Zagrebacka banka (UniCredit) 24.2% Privredna banka (Intesa ) 18.3% Raiffeisenbank 9.1% Hypo Alpe- Adria, Splitska Slavonska banka banka (BACA ) 9.2% 9.3% Erste 9.5% Data as of year-end 2003 Source: CNB, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (HRK) average lending rate average deposit rate 1999 2000 2001 2002 2003 12,179.0 14,718.7 20,139.4 23,398.6 26,743.3 (7.8) 66.1 20.9 73.3 36.8 91.1 16.2 98.7 14.3 107.7 7,214.4 7,944.4 10,079.2 12,928.6 14,433.8 (11.3) 39.1 10.1 39.6 26.9 45.6 28.3 54.5 11.6 58.1 - 2,983.1 3,968.3 5,094.5 5,394.6 - 14.9 33.0 18.0 28.4 21.5 5.9 21.7 - 3,066.2 4,087.1 5,787.5 7,192.6 - 15.3 33.3 18.5 41.6 24.4 24.3 29.0 - 834.4 997.5 1,402.0 1,316.2 - 4.2 19.5 4.5 40.6 5.9 -6.1 5.3 7,303.5 10.5 9,563.8 9.9 13,957.2 10.8 15,091.7 9.1 16,085.5 (8.9) 39.6 30.9 47.6 45.9 63.1 8.1 63.7 6.6 64.8 6,221.7 9,545.8 10,012.7 10,863.8 10,667.8 18.1 27.3 53.4 31.3 4.9 44.5 8.5 41.8 -1.8 42.6 101.2 120.4 138.5 116.7 111.4 53 823 45.6 39.9 43 756 5.7 84.1 43 879 5.0 89.3 46 956 4.0 90.2 41 1019 3.0 91.5 0.7 10.6 20.6 10.3 9.3 1.4 12.2 21.3 9.5 7.1 0.9 13.1 18.5 7.3 6.8 1.6 14.6 17.2 5.9 9.4 1.6 15.7 16.0 5.2 9.8 13.5 4.3 10.5 3.4 9.5 2.8 10.9 1.6 11.5 1.7 Source: CNB, RZB Group Research 37 Bosnia and Herzegovina Small market large potential Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 Bosnia and Herzegovina 0.2 0.1 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: CBBH, RZB Group Research Credits to households and private enterprises, in % of GDP 20 18 16 14 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 The dynamics of the transition process of the economy in Bosnia and Herzegovina was determined by the accomplishments of the post-war reconstruction phase. The banking sector in Bosnia and Herzegovina had and still has the pioneer role with regard to reforms and for the promotion of western standards and practices. The market entrance of international groups, led by Raiffeisen in mid 2000, has had a huge impact on the banking industry. By the end of 2003, the banks in Bosnia and Herzegovina were almost fully privatized and to a large degree owned by foreign banks (more than 75% of total banking assets in 2003). The main characteristics over the last few years have been a very strong growth with total assets almost doubling in % of GDP since 1999 on the one hand, and a struggle for market share between the key players on the other hand. By the end of 2003, the top five banks accounted for almost two third of total banking assets. Increased competition has squeezed margins, forcing banks to further develop their products and services and to attract new customer groups. Additionally, in the course of the introduction of the euro as banknotes, the banks were faced with a substantial growth of deposits in 2001 (+58.7%). The high deposit base together with reduced margins for corporate loans has opened the path for the boom of credits to households (118.7% growth in 2002). Although a further growth of the consumer banking segment can be expected in the future, a slowing down of the dynamics is already noticeable. With credits to households having reached a ratio of 16% of GDP, compared with only 3.8% in 2000, Credits to households, in % of GDP Credits to private enterprises, in % of GDP Source: CBBH, RZB Group Research Key economic figures and forecasts Population: 3.9 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Current account balance (% of GDP) Gen. government foreign debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate BAM/EUR (avg) Exchange rate BAM/USD (avg) 4.6 4,830 10.0 12.1 39.3 3.7 4.0 (7.8) (22.4) 41.7 0.4 1.96 1.83 5.1 5,210 5.5 9.3 39.5 4.8 (0.2) (7.0) (21.7) 40.4 0.5 1.96 2.12 5.6 5,500 4.5 (2.0) 40.0 3.1 2.4 (3.3) (24.3) 40.3 1.4 1.96 2.18 6.0 5,860 5.5 11.5 40.5 0.4 0.6 (2.2) (30.9) 36.8 1.3 1.96 2.07 6.2 6,030 3.5 3.8 41.5 0.6 0.8 0.4 (29.6) 33.0 1.4 1.96 1.73 6.5 6,350 5.0 5.0 42.0 0.9 1.5 0.0 (29.0) 32.0 1.4 1.96 1.59 6.9 6,700 5.8 6.0 41.0 1.5 2.0 0.0 (28.5) 31.5 1.5 1.96 1.55 Source: Thomson Financial Datastream, WIIW, RZB Group Research 38 Bosnia and Herzegovina Market share, % of total assets the central bank introduced measures in order to limit future credit growth. Those measures and the saturation of this market segment will certainly accelerate the further diversification and development of existing and new products. Low inflation and the fixed exchange rate to the Euro (currency board arrangement of the central bank) provide a solid base for this. The establishment of a fully functional local capital and money market, and further reforms of the legal environment and the tax system will open additional business fields for the banks. The unrealised potential in consumer banking and particularly in the SME segment should give plenty of room for future growth. Raiffeisen Bank 19.9% Others 35.5% Upi Banka Sarajevo 3.7% Zagrebacka banka (UniCredit) 16.8% Hypo AlpeAdria 16.2% HVB Bank (BACA ) 7.9% Data as of year-end 2003 Source: CBBH, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (BAM) 1999 2000 2001 2002 2003 1,468.3 1,604.2 2,290.7 2,801.8 3,578.7 - 9.3 42.8 22.3 27.7 31.9 31.2 40.9 47.0 57.5 7,23.5 812.4 1,048.2 1,619.4 2,118.8 - 12.3 29.0 54.5 30.8 15.7 15.8 18.7 27.2 34.1 402.3 373.6 523.7 688.1 965.3 - (7.1) 40.2 31.4 40.3 8.8 7.3 9.3 11.6 15.5 172.1 193.6 330.8 723.3 993.5 - 12.5 70.8 118.7 37.3 3.7 3.8 5.9 12.1 16.0 936.3 1,070.4 1,699.1 2,125.9 2,680.6 - 14.3 58.7 25.1 26.1 20.4 20.8 30.3 35.7 43.1 207.3 274.1 739.3 832.6 1,002.1 - 14.3 58.7 25.1 26.1 4.5 5.3 13.2 14.0 16.1 129.4 131.8 162.1 131.3 126.5 61 30 <40 56 10 50 49 <10 60 39 <5 >70 36 <5 >75 (2.1) (9.3) 28.3 - (1.7) (7.8) 28.4 - (0.8) (5.0) 60.3 25.1 - (0.3) (1.6) 60.2 20.6 25.0 8.8 0.6 3.7 62.1 20.3 21.2 7.7 average lending rate - - - 11.8 10.3 average deposit rate - - - 3.0 2.6 Source: CBBH, RZB Group Research 39 Serbia Bank privatisation finally underway Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Serbia 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: NBS, RZB Group Research Credits to and deposits from households, in % of GDP 9 8 7 6 5 4 After being neglected for a decade, retail and SME business are now the fastest growing market segments similar to most other countries in the region. All market players are offering a wide range of products to potential retail customers, with housing loans and car loans being the most important. In the first half of 2004, retail loans finally took off with a growth of 33%, reaching EUR 556 mn. At the same time, retail deposits are also continuing their upward trend. Owing to the successful privatisation of local blue chips, which attracted the top multinationals, a new investment cycle was initiated and generated an increase of corporate credit. The largest creditors are the privately owned Delta banka and Raiffeisenbank due to their strong deposit base. Loan portfolio growth for other locally owned banks is limited since the main funding source is deposits. 3 2 1 0 2000 After a year of standstill, the reform of the banking system should gain momentum with the privatisation of the first three state-owned banks, which is scheduled to be finished by the end of Q1 2005. For the first bank to be sold, Jubanka, there remain three contenders in the bidding race with Societe Generale, Alphabank and the Hungarian OTP. The four largest banks make up 43% of total banking assets. Raiffeisenbank, so far the only foreignowned bank among the large banks, already moved into second position in % of total assets by the end of June 2004. However, with just 36.3% of GDP by the end of 2003 overall banking assets are rather low in comparison with the neighbouring countries. 2001 2002 2003 Credits to households, in % of GDP Deposits from households, in % of GDP Source: NBS, RZB Group Research Key economic figures and forecasts Population: 7.5 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at exchange rate)* Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate CSD/EUR (avg) Exchange rate CSD/USD (avg) 9.5 1,945 (21.9) (23.1) 25.5 41.0 43.2 (8.3) (12.9) 123.9 0.3 11.7 11.0 9.4 2,990 6.4 10.9 26.7 70.0 102.6 (0.9) (4.2) 131.7 0.6 15.3 16.7 12.9 1,558 5.1 0.0 27.9 91.8 87.8 (1.6) (5.9) 101.7 1.3 59.4 66.8 16.6 1,996 4.0 1.7 29.0 19.5 8.8 (3.6) (12.8) 75.2 2.2 60.8 64.2 16.8 2,075 1.5 (2.9) 31.4 11.3 4.6 (4.0) (12.5) 72.5 2.9 65.3 57.4 17.4 2,160 3.5 5.0 31.0 9.0 5.0 (3.0) (11.0) 63.3 3.2 73.0 59.3 18.9 2,380 4.5 6.0 28.5 9.0 4.5 (3.0) (10.0) 55.0 3.5 78.0 61.9 *data for Serbia and Montenegro Source: Thomson Financial Datastream, WIIW, NBS, RZB Group Research 40 Serbia Market share, % of total assets Foreign owned banks are in a better position in this respect, since additional funding may be procured from their parent or other western banks. Komercijalna banka 11.7% Other important trends are the usage of payment cards and e-banking offered to both corporate and retail customers. Although decreasing, interest rates are still high due to a number of reasons, above all the remaining country risk and the overall limited new funding. The privatisation of the state-owned banks, together with the recent 62% write-off of debt by the London club of creditors, should open the path for Serbia to be assigned a credit rating for the first time sometime in 2005. It would also facilitate the inflow of much needed foreign capital which in turn would accelerate corporate investment. Delta banka 11.6% Vojvodjanska banka 10.6% Others 43.8% Raiffeisenbank 8.5% Srpska banka 2.4% Novosadska banka 2.7% Jubanka 4.0% Postal Savings bank 3.4% Societe AIK banka Generale Nis 3.2% 3.2% Data as of year-end 2003 Source: NBS, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Total deposits, EUR mn 1999 2000 2001 2002 2003 12,100.6 10,891.4 14,940.0 5,364.5 5,518.5 (37.1) (10.0) 37.2 (64.1) 2.9 79.8 180.0 126.0 35.9 36.3 4,005.1 3,477.1 3,936.0 2,487.2 2,956.9 (34.9) (13.2) 13.2 (36.8) 18.9 26.4 57.5 33.2 16.6 19.5 - 477.2 469.0 455.2 409.9 - 7.9 (1.7) 4.0 (2.9) 3.0 (10.0) 2.7 1,533.9 920.4 1,674.9 2,422.2 (33.5) (40.0) 82.0 44.6 23.9 10.1 15.2 14.1 16.2 19.7 188.3 86.1 467.0 940.4 1,233.7 (33.5) (40.0) 82.0 44.6 23.9 1.2 1.4 3.9 6.3 8.1 38.3 26.5 42.6 97.4 101.5 96 180 58.2 - 86 155 72.4 0.3 49 156 84.9 2.1 50 236 58.7 12.8 46 46.5 20.0 0.0 0.0 68.6 18.4 42.1 (0.1) (0.4) 62.3 0.6 30.9 71.6 (0.3) (0.8) 79.3 27.0 8.9 28.4 (0.1) (0.2) 70.0 27.0 20.9 16.5 0.0 0.0 80.0 31.0 12.1 average lending rate 45.4 77.9 32.5 19.2 14.8 average deposit rate 3.4 6.3 4.1 2.6 2.7 growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (CST) 3,000.8 Source: NBS, RZB Group Research 41 Albania Returning to the fold Stage set for dynamic development Market share, % of total assets Procredit Bank 3.6% National Bank of Greece 2.1% Others 9.9% Banka ItaloAlbanese 4.4% Tirana Bank (Piraeus Bank ) 6.7% Alpha Bank 7.0% Savings Bank of Albania (Raiffeisen ) 49.1% American Bank of Albania 7.8% National Commercial Bank 9.5% Data as of year-end 2003; Source: Bank of Albania, RZB Group Research Key economic figures and forecasts Population: 3.1 mn 2000 2001 2002 2003 Nominal GDP (EUR bn) Real GDP (% yoy) GDP per capita (EUR at PPP) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Budget balance (% of GDP) C/A balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate ALL/EUR (avg) Exchange rate ALL/USD (avg) 4.2 7.7 2,800 0.9 16.8 0.1 (8.0) (4.3) 30.5 0.7 132.6 143.7 4.8 7.6 3,390 6.5 16.4 3.1 (8.5) (5.1) 28.2 0.9 128.5 143.5 5.1 4.7 3,560 2.1 15.8 5.2 (8.0) (8.7) 24.5 0.9 132.4 140.2 5.4 6.0 3,740 3.0 15.2 2.4 (7.2) (6.7) 21.6 0.9 137.5 121.9 The banking market experienced significant developments during 2003, with the market entry of two new banks and the privatisation of the Savings Bank of Albania, the country's largest bank, which was sold to Raiffeisen International. The concentration of the banking sector is very high, with the top five banks accounting for 80% of total assets. After the privatisation of the Savings Bank the Albanian banking sector is now entirely controlled by private and mostly foreign investors. Even though total credits tripled over the last three years, the ratio of total credits in % of GDP remained among the lowest in the CEE-20 represented by 13.6% at end 2003. There is certainly both the need and the potential for ample growth in the future. Due to the particularly low amount of outstanding loans, the ratio of total deposits in % of total credits has been the highest in the CEEC-20, which underpins the banks' dependence on treasury bills. The development of the banking sector has also been helped by the satisfactory economic development over the last two years. Albania has entered the first stage of the process of EU integration with the negotiations concerning the Stabilisation and Association Agreement having been rather slow. The necessary reforms in the course of this integration process, however, should provide the approoriate conditions for sustained growth not only in the economy but also in the banking sector. Source: Thomson Financial Datastream, WIIW, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information, profitability and efficiency Number of banks Number of bank branches Market share of foreign owned banks, in % of total assets Return on Assets (RoA) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (ALL) average lending rate average deposit rate Source: Bank of Albania, RZB Group Research 42 2000 2001 2002 2003 2,042.2 2,638.8 2,420.1 2,519.5 11.2 50.2 29.2 54.8 -8.3 54.3 4.1 55.1 182.5 336.4 446.5 624.0 4.5 84.3 7.0 32.7 10.0 39.7 13.6 1,725.5 2,164.0 2,061.3 2,124.0 10.8 42.4 25.4 44.9 -4.7 46.2 3.0 46.4 1,238.3 1,360.4 1,171.2 1,106.5 10.8 26.2 25.4 25.5 (4.7) 25.5 3.0 24.2 945.5 643.3 461.7 340.4 13 45 36.2 2.1 35.3 42.6 16.0 13 68 41.0 1.5 31.6 6.9 15.0 14 74 45.0 1.2 28.5 5.6 7.9 14 65 45.0 1.2 25.3 5.1 7.7 24.0 8.3 23.7 7.7 16.3 7.7 13.9 6.2 Kosovo Small but growing market re-established in 2000 The Kosovo banking sector was re-established in 2000 after the war with Serbia ended. The Banking and Payments Authority of Kosovo (BPK) became the de-facto central bank, as well as the banking regulator. In 2002, it closed all its branches (except the main branch in Pristina) and leased the premises to the highest bidder amongst the Kosovo banks. Today, BPK has adopted the role of central bank and is gradually transferring responsibilities to its local staff. Micro Enterprise Bank was the first bank to open after the war in 2000, as a provider of micro finance. It was followed a year later by five local banks who obtained authorisation from BPK. The last bank to open was the USAID funded American Bank of Kosovo (ABK) in November 2001. ABK quickly established itself through the integration of the loan portfolio of the USAID funded KBFF and the acquisition of many of the BPK branches. In December 2002, 76% of the Bank was sold by USAID to Raiffeisen Zentralbank, which acquired the remaining shares in July 2003, and was renamed Raiffeisen Bank Kosovo. Naturally total credits have been growing strongly from zero levels after the re-establishment of the banking sector. Due to the lack of sufficient foreign corporate investment, the economy remains highly dependent on foreign aid. Market share, % of total assets, end 2003 Bank for Private Business 6.8% Others 11.0% New Bank of Kosovo 8.1% ProCredit Bank 46.8% KSB 10.4% Raiffeisen Bank 17.0% Data as of year-end 2003; Source: BPK, RZB Group Research Key economic figures and forecasts Population: 1.9 mn 2000 2001 2002 2003 Nominal GDP (EUR bn) GDP per capita (EUR) Real GDP (% yoy) Consumer prices (avg, % yoy) Budget balance (% of GDP) C/A balance (% of GDP) Official FX-Reserves (EUR bn) 0.7 410 -14.3 -22.1 0.4 1.2 626 21.2 11.7 3.6 -19.1 0.4 1.3 684 3.9 3.6 5.4 -30.8 0.5 1.3 696 4.7 0.1 1.4 -29.4 0.4 Source: BPK, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn 2000 2001 2002 2003 103.0 519.0 471.2 581.5 growth in % yoy in % of GDP 13.8 404.1 45.0 25.9 (9.2) 36.3 86.5 23.4 44.2 232.8 growth in % yoy in % of GDP 0.4 723.3 2.2 233.8 6.7 169.1 17.7 growth in % yoy in % of GDP - - 0.4 583.2 3.0 Total credits, EUR mn Credits to households, EUR mn Total deposits, EUR mn 3.1 - - 5.7 38.9 93.0 492.3 427.2 515.8 growth in % yoy in % of GDP 12.5 0.0 429.3 42.7 227.8 -13.2 32.9 273.7 20.7 39.2 298.0 growth in % yoy in % of GDP 0.0 0.0 0.0 27.5 20.2 17.6 8.9 20.8 Deposits from households, EUR mn Total deposits, in % of total credits Structural information, profitability and efficiency Number of banks Number of bank branches Market share of foreign owned banks, in % of total assets Return on Assets (RoA) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (EUR) average lending rate average deposit rate 2,954.3 1,899.4 493.9 221.6 7 22 74.2 1.3 53.5 1.9 0.7 - 7 46 73.1 0.6 76.2 1.6 3.7 12.5 7 47 63.8 1.1 64.2 1.4 2.6 12.9 7 42 63.2 0.3 63.3 1.2 5.3 11.6 - 14.9 2.4 15.3 2.4 14.2 2.6 Source: BPK, RZB Group Research 43 Russia Shaky developments in 2003 but huge long-term growth potential Credits to households vs. GDP per capita Credits to households, in % of GDP 0.6 Eurozone 0.5 0.4 0.3 0.2 0.1 Russia 0 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: CBR, RZB Group Research Credits to and deposits from households, in % of GDP 14 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Deposits from households, in % of GDP Source: CBR, RZB Group Research The Russian banking sector, while being the largest of the CEEC-20 in terms of total assets in EUR bn, is still relatively small with regards to the size of the economy, and it also has some striking peculiarities in terms of its structure. Over 1,100 institutions have licences to collect private deposits. At the same time, total banking assets only reached a level of around 42% of GDP by the end of 2003. State-owned Sberbank accounts for over 60% of private deposits and about 30% of commercial loans; the second-largest bank, Vneshtorgbank (VTB), is also state-owned. Most banks are small and either serve as treasuries of industrial groups or regional businesses, or are used for dubious operations. The presence of foreign banks is limited in both number and market share, as they are not allowed to open branches and have to operate through subsidiaries. While many subsidiaries of foreign banks are active in corporate banking, only two of them Raiffeisenbank and Citigroup - have a notable share in the retail banking business. The highly atomised banking sector is clearly in need of consolidation. Despite certain legal impediments we expect such a consolidation process to speed up. There are a number of areas of concern with respect to the current situation of the banking sector. There is a huge need for long-term funds for Russian enterprises (esp. large ones) to finance their investment needs. Long-term commercial loans still make up less than 10% of GDP. In 2003, the growth rate was impressive (over 50%), but highquality borrowers are getting difficult to find. The stability of the financial system as a whole is not unshakable yet, as was perfectly demonstrated by the recent mini-crisis in the banking sector. In early Key economic figures and forecasts Population: 143.5mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public external debt (% of GDP) Current account balance (% of GDP) Official FX-Reserves (EUR bn) Exchange rate RUB/EUR (avg) Exchange rate RUB/USD (avg) 192.0 5,460 6.4 6.4 (2.9) 8.1 12.6 36.6 71.0 (1.2) 12.6 13.1 23.51 24.67 280.5 6,130 9.0 18.1 7.3 11.9 10.4 20.8 46.5 2.4 56.5 17.9 25.8 26.0 28.2 345.8 6,630 5.0 10.2 9.5 4.9 9.0 21.6 19.1 2.9 43.9 11.2 36.5 26.1 29.2 366.1 7,160 4.3 3.0 8.9 3.7 8.0 15.8 11.7 1.4 35.4 9.5 42.0 29.7 31.4 382.5 7,890 7.3 12.9 7.9 7.0 8.3 13.6 13.6 1.7 25.0 8.3 58.0 34.7 30.7 471.8 8,350 7.0 10.0 7.0 7.0 7.9 10.9 23.0 1.3 19.8 9.5 77.9 35.6 29.0 538.1 8,850 5.8 10.0 7.0 6.0 7.6 11.2 15.0 0.7 15.7 7.2 83.8 37.5 29.8 Source: Thomson Financial Datastream, WIIW, RZB Group Research 44 Russia Market share, % of total assets summer 2004, the inter-bank market collapsed primarily as a result of purely psychological factors, leaving many smaller banks engaged in high-risk activities without the means of refinancing. Also a hostile PR campaign precipitated a run on the largest private bank, Alfa-bank, where deposits up to USD 200 mn were withdrawn in a matter of days. The banking sector overall still suffers from a lack of trust. Even though deposits from households recorded strong growth last year, circa USD 40-80 bn are still estimated to be kept "under the mattress". The introduction of deposit insurance, now under way, should improve the situation. Despite its intrinsic problems Russia's banking sector, like its economy, has a huge potential to grow. On-going reforms of the banking sector will help to realise this. Sberbank 28.1% Vneshtorgbank 5.2% Others 47.4% Gazprombank 4.1% Raiffeisenbank 1.1% IMB (HVB minority stake ) 1.5% Alfa Bank 3.7% MDM Bank Rosbank 2.1% 2.1% IIB 2.6% Bank of Moscow 2.1% Data as of year-end 2003 Source: CBR, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Number of bank branches Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (RUB) average lending rate average deposit rate 1999 2000 2001 2002 2003 59,074.3 90,380.6 119,135.3 125,142.4 152,509.1 23.3 35.4 53.0 33.4 31.8 34.9 5.0 37.8 21.9 41.8 21,917.4 36,583.5 55,397.8 61,278.3 79,246.2 29.5 13.1 66.9 13.5 51.4 16.2 10.6 18.5 29.3 21.7 16,349.2 37.8 9.8 3,945.6 1.0 2.4 11,167.7 (5.3) 6.7 51.0 16,953.0 29,202.2 78.6 10.8 5,216.2 32.2 1.9 14,076.2 26.0 5.2 38.5 26,618.6 44,977.4 54.0 13.2 7,087.8 35.9 2.1 18,680.6 32.7 5.5 33.7 36,676.9 48,707.2 8.3 14.7 8,420.2 18.8 2.5 22,500.0 20.4 6.8 36.7 41,145.7 62,628.5 28.6 17.2 11,374.6 35.1 3.1 26,766.0 19.0 7.3 33.8 52,393.8 39.5 10.2 57.0 9.9 37.8 10.7 12.2 12.4 27.3 14.4 11,033.7 17,337.6 26,049.7 31,609.3 41,932.6 36.8 6.6 57.1 6.4 50.2 7.6 21.3 9.6 32.7 11.5 77.3 72.8 66.2 67.1 66.1 2342 3923 - 2034 3793 - 1953 3433 32.4 - 1773 3326 31.6 - 1612 3219 31.7 <4 (0.3) (4.0) 18.1 13.4 27.1 0.9 8.0 19.0 7.7 21.5 2.4 19.4 20.3 6.2 16.8 2.6 18.0 19.1 5.6 17.6 2.6 17.8 19.1 5.0 15.7 42.4 15.3 28.4 7.0 22.2 5.3 23.3 5.7 21.1 5.4 Source: CBR, RZB Group Research 45 Ukraine Booming economy thriving banking sector Credits to households vs. GDP per capita Credits to households, in % of GDP 60% Eurozone 50% 40% 30% 20% 10% Ukraine 0% 0 5,000 10,000 15,000 20,000 25,000 GDP per capita (at PPP), in EUR Source: NBU, RZB Group Research Credits to and deposits from households, in % of GDP 14 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 Credits to households, in % of GDP Deposits from households, in % of GDP By the end of 2003, there were 156 banks licensed by the National Bank of Ukraine (NBU). The market share of foreign banks in % of total assets increased by half a percent to 7.5% in 2003, but remains rather low. Raiffeisenbank was the largest foreign bank with a market share of 2.9% of total assets by the end of 2003. The share of the majority stateowned banks also decreased to less than 10%. The two majority state-owned banks are Oschadbank and Ukreximbank, and both are planned to be privatized in the foreseeable future. Market concentration is fairly low with the top five banks accounting for less than 40% of total assets. Also no single bank had a market share of more than 10% of total assets by the end of 2003. Deposits from households more than tripled in the last three years, from 4% of GDP in 2000 to 12.3% by the end of 2003, showing the increased trust in the banking sector and overall economic stability. Strong growth of deposits from households also continued in the first half of 2004. A more recent phenomenon is the strong growth of credits to households, which doubled in each of the last two years. However, this growth comes from virtually zero levels and leaves a lot of untapped potential for the coming years. Like Russia, but unlike most of the other CEE countries, total deposits only covered 90% of total credits in 2003, a ratio that has been fairly stable with both credits and deposits growing strongly. This means that banks have to find funding for additional credits through different channels. The economic stabilisation and subsequent recovery from year 2000 onwards has allowed the banking sector to reduce the share of bad loans in their Source: NBU, RZB Group Research Key economic figures and forecasts Population: 47.6 mn 1999 2000 2001 2002 2003 2004e 2005f Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Gross fixed capital formation (% yoy) Household consumption (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Producer prices (avg, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate UAH/EUR (avg) Exchange rate UAH/USD (avg) 29.7 3,400 (0.2) 0.4 (1.9) 4.0 4.3 22.7 31.1 (1.5) 5.2 41.7 3.0 4.39 4.13 33.8 3,690 5.9 14.4 2.5 12.4 4.2 28.2 20.9 0.6 4.7 32.9 3.9 5.03 5.44 42.4 4,190 9.2 20.8 9.6 14.2 3.7 12.0 8.6 (0.3) 3.7 32.4 5.3 4.81 5.37 44.9 5,470 5.2 8.9 5.6 7.0 3.8 0.8 3.1 0.7 7.5 21.9 5.7 5.03 5.33 43.9 5150 9.4 31.3 15.8 3.6 5.2 7.8 (0.2) 5.8 27.8 6.6 6.02 5.33 47.5 5,600 9.5 30.0 15.0 3.5 7.0 14.0 5.8 29.5 6.9 6.5 5.3 53.6 6,000 7.0 15.0 10.0 3.5 8.0 7.0 4.3 30.5 7.0 6.7 5.3 Source: Thomson Financial Datastream, WIIW, RZB Group Research 46 Ukraine Market share, % of total assets portfolios and to improve overall profitability. Ukraine has recorded the strongest GDP growth of all CEE countries in recent years. After suffering through a particularly severe and lengthy recession caused by the transformation from the Soviet planned economic system and further economic and political crises, GDP per capita at PPP has yet to reach the level of 1991. The very high growth rates of fixed capital investment in recent years underpin both the need and the willingness of companies to invest after more than a decade of wearing out the machinery existing from the Soviet times. Banks have been playing an increasingly important role with credits to private enterprises growing strongly and reaching 22.4% of GDP by the end of 2003. Improved economic and political relations with the EU could open the door for a substantial increase in foreign direct investment. Aval 9.9% PrivatBank 9.8% Others 51.4% Prominvestbank 7.6% Oshadbank 5.6% Ukrsots-bank 5.1% BrokBusinessBank 2.2% Nadra 2.9% Raiffeisenbank 2.9% Ukreximbank 3.9% Ukrsibbank 3.8% Data as of year-end 2003 Source: NBU, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Credits to private enterprises, EUR mn growth in % yoy in % of GDP Credits to households, EUR mn growth in % yoy in % of GDP Credits in foreign currency, EUR mn growth in % yoy in % of GDP Credits in foreign currency, in % of total credits Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information Number of banks Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Return on Equity (RoE) Cost income ratio Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (UAH) average lending rate average deposit rate 1999 2000 2001 2002 2003 - 7,342.4 10,191.7 11,548.4 15,045.2 - 21.8 38.8 23.3 13.3 28.3 30.3 38.1 2,249.3 3,870.8 6,076.1 7,597.3 10,182.1 20.0 9.0 72.1 11.5 57.0 13.9 25.0 18.6 34.0 25.8 2,118.4 3,677.0 5,772.4 6,998.3 8,833.1 20.1 8.5 73.6 10.9 57.0 13.2 21.2 17.1 26.2 22.4 130.9 193.8 303.7 598.8 1,348.8 17.1 0.5 48.0 0.6 56.7 0.7 97.2 1.5 125.3 3.4 1,090.8 2,089.9 3,393.2 4,421.4 5,938.4 0.9 4.4 91.6 6.2 62.4 7.8 30.3 10.8 34.3 15.0 48.5 2,319.5 54.0 3,705.5 55.8 5,497.9 58.2 6,816.7 58.3 9,210.9 32.6 9.3 59.8 11.0 48.4 12.6 24.0 16.7 35.1 23.3 824.0 1,340.8 2,427.8 3,488.8 4,849.6 25.1 3.3 62.7 4.0 81.1 5.6 43.7 8.5 39.0 12.3 103.1 95.7 90.5 89.7 90.5 153 - 149 - 149 - 153 12.0 7.0 156 9.5 7.5 26.2 -0.1 -0.5 13.7 21.9 1.2 7.5 20.7 6.6 16.2 1.2 8.0 61.8 18.5 5.0 13.4 1.0 7.6 66.9 14.4 3.7 10.7 43.3 17.1 33.0 11.1 26.1 9.9 20.8 7.4 17.5 6.8 Source: NBU, RZB Group Research 47 Belarus Growing strong as planned New EU neighbour continues its own way Market share, % of total assets Others 14.0% Belinvestbank 7.2% Belarusbank 44.3% Belpromstroybank 8.3% Priorbank (Raiffeisen ) 12.9% Belagroprombank 13.3% Data as of year-end 2003; Source: NBRB, RZB Group Research Key economic figures and forecasts Population: 9.8 mn Nominal GDP (EUR bn) GDP per capita (EUR at PPP) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Consumer prices (avg, % yoy) Budget balance (% of GDP) C/A balance (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn) Exchange rate BYR/EUR (avg) Exchange rate BYR/USD (avg) 2000 2001 2002 2003 14.0 13.9 15.5 15.3 7,210 7,760 8,390 9,200 5.8 4.7 5.0 6.8 7.8 5.9 4.5 6.8 2.1 2.3 3.0 3.1 169.0 61.0 43.0 29.0 (0.6) (1.6) (0.2) (1.6) (3.8) (3.6) (2.3) (2.9) 18.5 20.6 19.1 17.7 567.0 390.0 482.0 418.0 962.6 1,248.2 1,694.8 2,344.8 1,035.0 1,394.0 1,784.0 2,075.0 By the end of Q2 2004, 31 banks were operating in Belarus, with the overwhelming majority being universal banks. In total eight representative offices of foreign banks and non-bank financial institutions from Russia, the Baltics, Germany and Poland have been established. In 2004, a new bank was opened with Unionbank, fully owned by RussianLatvian investors. Foreign investments in the banking sector constitutes over 12% of share capital, seven banks are completely owned by foreign investors, and 26 banks have foreign holdings in their share capital. The major investors in the banking sector are state bodies and legal entities based on state ownership. The state has holdings in 13 banks and its share is about 80% of total assets. The banking system is dominated by the five largest banks, which accounted for no less than 86% of total assets by the end of 2003. Belarusbank alone commanded a share of 44% of total assets. These five banks are also those that are authorised to fund the national programmes. Deposits from households, despite growing strongly in recent years, remain at a very low level in % of GDP. GDP growth is expected to further accelerate in 2004, but it is important to keep in mind that Belarus is still a planned economy, which also affects the banking sector to a large degree. Source: WIIW, RZB Group Research Overview of banking sector developments Balance sheet data Total assets, EUR mn growth in % yoy in % of GDP Total credits, EUR mn growth in % yoy in % of GDP Total deposits, EUR mn growth in % yoy in % of GDP Deposits from households, EUR mn growth in % yoy in % of GDP Total deposits, in % of total credits Structural information, profitability and efficiency Number of banks Market share of state owned banks, in % of total assets Market share of foreign owned banks, in % of total assets Profitability and efficiency Return on Assets (RoA) Capital adequacy, in % of risk weighted assets Classified loans, in % of total credits Average interest rate spread (BYR) average lending rate average deposit rate Source: NBRB, RZB Group Research 48 2000 2001 2002 2003 1,884.1 (8.9) 22.6 1,551.8 18.1 18.6 - 4,464.4 137.0 36.2 1,959.5 26.3 15.9 1,473.4 11.9 234.1 1.9 75.2 3,218.4 (27.9) 24.5 1,983.8 1.2 15.1 1,591.7 8.0 12.1 334.4 42.9 2.6 80.2 3,758.4 16.8 28.2 2,362.3 19.1 17.7 1,850.5 16.3 13.9 434.2 29.9 3.3 78.3 4.5 87.4 9.6 28 79.6 8.7 30 78.3 10.2 24.4 11.7 - 20.7 12.2 27.7 57.7 30.0 1.0 24.2 7.0 24.4 45.9 21.5 1.5 27.3 3.3 13.5 28.6 15.1 Market players Market players in CEE Foreign controlled banks control the CEE markets to a large extent and take the most active part in the consolidation process. There is no doubt that they have played a key role in ensuring knowledge transfer relating to product diversification, risk management, IT and bank supervision and contributed to stabilise the banking environment by reducing the state influence on banks. The region is clearly controlled by Western European banks especially German, Austrian, Italian and Belgian banks, while US corporations are underrepresented in the region. The only local bank following an explicit regional expansion strategy is OTP. As there is still room for further consolidation we expect the share of foreign banks to increase in the next years. Foreign banks have taken the lead in most countries Share of majority foreign-owned banks 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PL HU CZ SK SL ES LT LI NMC-8 RO BG HR SR BH AL RU UA BY CC-3 SEEC-6 FSR-2 Data as of year-end 2003 Source: Local central banks, RZB Group Research We took a closer look at the top banking groups in the region, ranked the banks in terms of total assets, branch network and country presence and determined the banks' market shares in various regions. For this purpose we fully incorporated local subsidiaries if the company is controlled by a majority stake. Minority interests were not accounted for in the presentations below. 49 Market players Total assets of international banks in CEE, 2003 (in EUR bn) 35 30 25 20 15 10 Volksbank GE Capital Commerzbank ING OTP Citibank Banca Intesa SocGen Raiffeisen Int. HVB/BACA UniCredit Erste KBC 0 Allied Irish Hypo AlpeAdria ABN Amro 5 CEEC-20: PL, CZ, SK, HU, SL, LI, LT, ES, RO, BG, HR, SR, BH, AL, MK, MD, KO, RU, UA, BY Source: Company data Development of total assets in CEE 2000 - 2003 (in EUR bn) Compound annual growth rates of CEE assets 2000-2003: • SocGen: 104% • Raiffeisen Intl.: 44% • Banca Intesa: 42% • HVB/BACA: 33% • Erste Bank: 30% • OTP: 21% • KBC: 18% • UniCredit: 6% 35 30 25 20 15 10 5 0 2000 Raiffeisen Int. KBC 2001 BACA SocGen 2002 Erste OTP 2003 UniCredit Banca Intesa Source: Company data, National banks KBC: No. 1 international bank in terms of assets KBC defines CEE as its second home market and ranks No. 1 in terms of CEE assets. The bank controls CSOB, the market leader in the Czech Republic, K&H - Hungary's second largest bank - and Poland's Kredyt Bank, ranking No. 8 in the local market. In addition, KBC owns a minority stake in Slovenia's largest bank NLB. While CSOB and K&H bank are providing strong results in H1 Kredyt Bank finally managed to get out of the red thanks to improving asset quality and significant restructuring. KBC targets to spread its successful domestic bankassurance concept to its CEE subsidiaries. While having a strong market positions in the Czech Republic, Slovakia and Hungary the bank is partially withdrawing from the region as it has recently disinvested in Lithuania and in the Ukraine. Erste Bank follows a similar strategy, with a strong presence in a few CEE countries based on acquisitions. Ceska Sporitelna, the second 50 Market players largest bank in the Czech Republic and Slovenska Sporitelna, No. 1 in Slovakia, provide substantial market power in these two markets. By acquiring Hungary's Postabanka and merging the Hungarian operations the bank became No. 5 in Hungary. By taking over Rijecka Banka Erste Bank has grabbed a 9% market share of the Croatian market. The bank clearly follows a retail banking-focused strategy with the largest branch network in the region and tries to leverage this position by using economies of scale in the retail segment. Erste Bank: Most branches in the region UniCredit (UCI) ranks third in terms of CEE assets. The bank owes this position to its 53% stake in the second largest bank in Poland, Pekao S.A., and to its Bulgarian and Croatian subsidiaries which are the market leaders in the respective countries as well as owning Zivnostenská banka, a mid-sized bank in CZ. UCI operates the second largest branch network in the region. Pekao S.A. accounts for more than 50% of the group's CEE assets and provides substantial retail exposure to UCI in Poland. UCI: Strong potential in Poland, Croatia and Bulgaria HVB controls one of the broadest networks in CEE with a presence in 13 countries via Bank Austria Creditanstalt (BACA). Poland is the key market for the group's CEE operations accounting for 36% of risk weighted assets in CEE and contributing 48% to segmental pre-tax income. The group has a strong position in corporate banking but its substantial retail operations are only in Poland, Bulgaria and Croatia. BACA intends to strongly expand operations in Poland, Hungary and Croatia by opening 170 branches up to 2007. HVB/BACA: Strong position in corporate banking Raiffeisen International - CEE holding of Raiffeisen Zentralbank (RZB) offers a network with the most comprehensive country presence covering 15 markets in the region with its 15 Network banks. In contrast to KBC, Erste Bank and UniCredit, who have bought their networks, Raiffeisen followed a strategy of organic growth with only a few acquisitions. Whereas the bank has a relatively small market share in some new EU countries such as Poland and the Czech Republic, the bank offers substantial exposure to the convergence markets in South Eastern Europe and is No. 1 among foreign banks in Russia, Belarus and the Ukraine. Raiffeisen International: Most comprehensive network Société Générale offers CEE exposure to a large extent via its 60% stake in Komercni Banka, its 51% holding BRD in Romania and in SKB No. 4 in Slovenia. In addition, the bank is active in Bulgaria and Serbia with a market share of around 5% and a small operation in Russia. SocGen: Top positions in the Czech Republic, Slovenia and Romania Banca Intesa has a strong market position in Croatia (No. 2), Hungary (No. 4) and Slovakia (No. 2). Privredna Banka operates the largest branch network in Croatia and VUB ranks second after Slovenska Sporitelna (Erste Group) in Slovakia in terms of retail exposure. CIB in Hungary is more of a corporate bank trying to intensify retail primarily via direct banking. Banca Intesa: Strong presence in Croatia, Hungary and Slovakia OTP is the only CEE bank expanding outside its home country and has recently created its own network with subsidiaries in Slovakia, Bulgaria 51 Market players OTP: Uncontested No. 1 in Hungary trying to copy paste the success in the Balkans and Romania. OTP is the uncontested No. 1 in Hungary with a market share of 18% in terms of total assets (26% including all domestic subsidiaries), running a network 440 branches in Hungary and capturing more than 60% of the local mortgage market with its mortgage bank subsidiary. The bank tries to expand its retail know-how towards the CEE region and has ambitious targets for its Bulgarian subsidiary DSK (No. 2) and its small unit in Romania. PKO: No. 1 in Poland PKO BP, the largest bank in Poland, operates a branch network of 1,246 units and has scheduled its IPO for early November 2004. According to various sources, the Treasury targets PLN 5-6 bn in proceeds from an offer of up to a 30% stake in the bank. This IPO will have a major impact on the market as we expect that institutional funds are already setting aside liquidity to participate in the offering. The bank has recently acquired the Ukrainian operation of Kredyt Bank (KBC Group). Sberbank: The Russian giant Sberbank: The state-controlled bank is not only No. 1 in Russia, but also the largest bank in the region. Sberbank operates by far the largest branch network in Russia and accounts for over 60% of private deposits and about 30% of commercial loans. TOP 20 banks in CEE, 2003 Bank Majority owner Sberbank CB of the Russian Fed. PKO BP Polish State CSOB Ceská sporitelna Stake Assets Loans Branches EUR mn EUR mn 63.6% 30,417 15,368 1,043 100.0% 18,391 8,168 1,246 KBC 81.9% 15,999 5,268 208 Erste Bank 97.9% 14,431 6,047 663 Komercní banka Societe Generale 60.3% 13,930 4,942 337 Bank Pekao UniCredit 53.0% 13,474 5,450 827 OTP Bank Hungary - 11,336 6,386 440 Bank BPH BA-CA (HVB Group) 9,903 5,121 511 NLB Slovenian. State 35.4%/KBC 34% 7,246 3,369 325 Bank Handlowy w Warszawie Citibank 89.3% 7,073 2,961 160 UniCredit - Zagrebacka banka UniCredit 81.9% 6,460 3,200 127 ING Bank Slaski ING 87.8% 6,256 2,515 338 BRE Bank Commerzbank 72.2% 5,864 2,405 45 Bank Zachodni WBK Allied Irish Bank 70.5% 5,182 2,635 432 Vneshtorgbank Russian state 99.0% 5,182 2,178 44 Kereskedelmi és Hitelbank (K&H) KBC (ABN AMRO [40.2%]) 59.1% 5,134 3,424 n.a. Banca Intesa - Privredna banka Banka Intesa 76.3% 4,905 2,668 178 Kredyt Bank KBC 81.4% 4,903 2,948 372 BCR Romanian state 45.0% 4,333 1,963 283 Bank Millennium Banko Comercial Portugues 50.0% 4,136 2,054 367 71.0% Source: Company data, National banks Austrian banks offer the highest CEE exposure among their international peers 52 While a lot of international banks label themselves CEE players, the relative importance of CEE operations differs substantially. Clearly the Austrian banks offer the highest exposure in this respect. RZB Group offers the highest exposure with 36% of total assets in the region and 62% of pre-tax profit. Hypo Alpe Adria also has a strong footprint in the region through its presence in Slovenia, Croatia, Serbia and Bosnia and Herzegovina. Erste Bank offers the highest exposure among listed banks (31% of assets and already more than 50% of pre-tax profit adjusted for the minority stakes in savings banks which are consolidat- Market players ed due to the cross-guarantee system). It is followed by BACA with 24% of its group assets in CEE, althoughthe bank already generates more than 40% of the pre-tax income in this area. CEE subsidaries of BACA accounted for 17% of total group assets in 2003 Share of assets of CEE subsidiaries in % of total group assets, 2003 80% 70% 60% 50% 40% 30% * 20% Commerzbank SocGen HVB Banca Intesa Allied Irish UniCredit KBC Volksbank BACA Erste RZB Group OTP 0% Hypo AlpeAdria 10% * adjusted for Austrian savings banks in the cross-guarantee system Source: Company data Country presence and asset volume differs among peers When looking at CEE presence it can be seen that some banks have a high network concentration in a few countries or even in a single market, such as Allied Irish. There are only two groups with banking operations in more than 10 countries - Raiffeisen International covering 15 markets and HVB, plus its Austrian CEE competence centre BACA, controlling banks in 13 markets. Market presence* and branch networks PL HU CZ SK SL ES LT LI BG RO HR RU UA BY AL SR 37 1 2 157 190 29 8 14 63 92 9 82 Raiffeisen Int. 58 50 41 103 13 HVB/BACA 519 37 23 24 10 ING 338 35 15 n.a. 2 9 1 Citi 160 20 7 4 1 6 6 28 19 34 68 Volksbank UniCredit 801 26 SocGen 5 338 Erste Bank KBC 359 55 194 664 342 155 208 73 OTP 440 Banca Intesa 45 1 1 3 229 91 28 128 63 181 58 16 4 33 15 789 904 1 8 401 1 8 205 8 8 125 65 7 1207 4 3 21 16 43 1 92 66 122 432 ... 17 13 3 200 Swedb./Hansabank Allied Irish/BZ-WBK 13 163 5 45 10 KO 118 51 Hypo Alpe-Adria Commerzbank 9 BH number of branches per country ... number of countries (majority stakes) Minority interest stakes ... total number of banking outlets 2 59 7 666 4 1318 4 795 4 670 4 475 4 109 4 50 3 280 1 432 * Majority stakes only, data as at 31 Dec. 2003, reflecting ownership structure as at June 2004 Source: Company data 53 Market players Erste Bank: First in branches Raiffeisen: First in country presence Erste Bank with a strong presence in the Czech Republic, Slovakia, Hungary and Croatia has the largest branch network among international banks in the region. However, it is not followed by another international bank other than by PKO BP, operating 1,246 branches in Poland. Also HVB/BACA has more than 55% of its CEE outlets in Poland and intends to further strengthen its position in the country. Whereas a wide market presence (No. of countries) is necessary to capture business from large corporates active in the region, a strong local presence is necessary to use economies of scale in retail banking. Although most of the banks in the region offer direct banking facilities, branch banking clearly dominates the retail scene. However, as branch penetration is much lower than in Western Europe, banks are not concerned with closing outlets but maintain quite aggressive expansion targets in order to increase exposure towards retail banking, which offers higher margins and currently shows stronger dynamics. 50% 40% 30% 20% 10% Retail as % ot total loans 60% 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Commerzbank ING SocGen Banca Intesa KBC HVB/BACA UniCredit Erste 0% OTP CEE retail loans (EUR mn) Retail loan exposure of international banks in CEE, 2003 Source: Company data To provide a closer look at the market shares of banking groups, we split CEE into four regions: New EU members, EU accession candidates, South Eastern Europe (SEE) transition markets, Russia+Ukraine+Belarus (CIS3). As the amount of interbank lending and lending to the state varies significantly among the players in the market, we show market shares in terms of loan volumes. Looking at the overall region, including Russia, offers a somewhat distorted picture as Russian banks account for around 30% of the total loan volume. There are only five banks that can offer a market share of around 4% or more. These are HVB/BACA with 4.9%, KBC with 4.5%, Erste Bank and Unicredito with 4.2% each and Raiffeisen International (RZB Group) with 3.9%. It is interesting to see that no international banking group in the region commands a higher lending volume than Russia's No.1, Sberbank. Also Poland's No. 1, PKO, leaves most institutions in the region behind. Quite significant is the slice of the cake 54 Market players taken by Austrian banks whose market shares aggregate 14% (including Volksbank, BAWAG and ventures of smaller players such as Oberbank, Sparkasse Klagenfurt etc.), followed by Italians with a market share of around 8%. The trend clearly supports banks with a strong market position being able to increase their market shares in the medium term (already indicated by H1 figures). These banks are able to finance the expansion of the fast growing retail business and run local and cross-border synergies and will be able to participate in the further consolidation process by acquiring smaller local banks or taking part in the privatizations that are still left. Size does matter when it comes to market consolidation Market shares in CEEC-20* in % of net loans** Top local banks Sberbank 5.9% PKO 3.1% NLB 1.3% (KBC min.) BCR 0.8% Raiffeisen Int. HVB/BACA 3.9% 4.9% Erste Bank 4.2% KBC UniCredit 4.5% 4.2% Others 63.1% Russia accounts for 30% of net loans Commerzbank 1.3% Societe Generale 2.6% Banca Intesa Citigroup 3.0% 2.3% OTP ING 3.0% 1.5% GE Capital 0.6% Hypo Alpe Adria 0.7% * CEEC-20: PL, CZ, SK, HU, SL, LT, LI, ES, RO, BG, HR, SR, BH, AL, MK, MD, KO, RU, UA, BY ** Majority stakes only, data as at 31 Dec. 2003, reflecting ownership structure as at June 2004 Source: Company Data, National banks The market shares in the new EU countries are driven by Polish banks as nine out of the top-20 CEE banks are Polish. The largest market share is captured by HVB/BACA, Erste Bank and KBC. Poland is currently the most contested market and some international players, which are strongly involved in Poland, are less active in other parts of the CEE region (Allied Irish: 70.5% stake in BZ-WBK, Commerzbank: 72% stake in BRE Bank, ING: 88% of Bank Slaski). Whilst in recent years weak margins and high credit losses have put a drag on banks in Poland the recent turnaround on a broad basis helped many banks to "polish up" their 2004 figures. After Poland with a loan volume of around EUR 50 bn the Czech and Hungarian markets rank second both with a credit volume of approximately EUR 27 bn. While the Czech market is dominated by three players (CSOB/KBC, Ceska Sporitelna/Erste and Komercni Banka/SocGen controlling more than 60% of the market), Hungary is clearly dominated by OTP with a 24% stake in the Hungarian loan market. Polish banks dominate market shares in the new EU countries 55 Market players Market shares in new EU member countries* Raiffeisen Int. BACA (HVB4.3% Group) 8.0% Erste Bank 7.2% in % of net loans** KBC 8.6% Others 44.6% UniCredit 4.9% Societe Generale 3.8% Polish PKO has a 6.1% market share Commerzbank 2.4% Hypo Alpe Adria 0.7% GE Capital 1.2% ING 2.6% Banca Intesa 3.5% Citigroup 3.6% OTP 5.2% * PL, HU, CZ, SK; SL, ES, LT, LI ** Majority stakes only, data as at 31 Dec. 2003, reflecting ownership structure as at June 2004 Source: Company data, National banks Top market positions in accession countries offer high potential The top three in the second wave accession countries are UniCredit (strong position in Croatia and Bulgaria), Banca Intesa (No. 2 in Croatia) and Raiffeisen International, which is present in all three countries with strong positions in Romania and Croatia. We expect this region to outpace the new EU member states in terms of volume growth and expect higher earnings growth from major players in this region. With a loan volume of around EUR 27 mn (the same as Hungary or Czech Republic) at the end of 2003 - Croatia accounted for more than 50% of this figure - with a population of 34 mn we see strong potential in the medium/long-term. Market shares in 2nd wave countries* in % of net loans** Raiffeisen Int. 8.7% Others 35.9% BACA (HVBGroup) 7.4% Erste Bank 4.7% UniCredit 16.8% Hypo Alpe Adria 4.5% ING 1.1% OTP 3.0% Citigroup 0.7% Societe Generale 5.4% Banca Intesa 11.7% * RO, BG, HR ** Majority stakes only, data as at 31 Dec. 2003, reflecting ownership structure as at June 2004 Source: Company data, National banks 56 Market players SEE transition countries (Serbia, Montenegro, Bosnia and Herzegovina, Albania, Macedonia, Moldova and Kosovo) are still characterised a few international banks engaged in these markets. The reason is that the markets are quite fragmented and the overall size (total loan volume in Dec. 2003: EUR 7 mn) is rather small. However, we also expect this region to outpace the new CEE countries in dynamics and assume that banks who might be able to use regional synergies in this region will see a strong upside potentials in earnings. SEE transition countries: Too small to bother? Market shares in SEE transition countries* in % of net loans** Raiffeisen Int. 11.0% BACA (HVBGroup) 2.1% Societe Generale 1.5% Hypo Alpe Adria 6.5% Others 78.9% * SR, BH, AL, MK, MD, KO ** Majority stakes only, data as at 31 Dec. 2003, reflecting ownership structure as at June 2004 Source: Company data, National banks Russia, Ukraine and Belarus are clearly dominated by local banks with Sberbank having the highest market share. International banks concentrate only on a small segment of the market, i.e. primarily on multinationals and local corporate giants in the commodity or telecom businesses. Only Raiffeisen International and Citigroup are able to acquire more than 1% of the total market. CIS3: Still a local party Market shares in CIS-3* Gazprombank Alfa Bank 3.0% 2.2% Vneshtorgbank 2.4% Sberbank 16.7% IIB 2.2% IMB (HVB minority) 0.7% Aval (UKR) PrivatBank (UKR) 1.1% 1.2% Belarusbank (BLR) Raiffeisen 1.2% International Citigroup 1.5% 1.0% ING KBC 0.3% 0.1% HVB 0.1% Societe Generale 0.1% Others 66.3% * RU, UA, BY Source: Company data, National banks 57 Market players To provide an overall picture of the market players and the respective market shares in the region we should like to point out some important facts: • Some international players such as HSBC, Deutsche Bank, JP Morgan Chase and Bank of America are well under-represented in the region. The Dutch banks, ABN Amro and ING had an early entry into CEE markets but have lost relative importance in the last few years. • Austrian banks used the opportunity to "go east" in order to reallocate capital from the very competitive, low margin Austrian market into the burgeoning CEE markets. With Erste Bank, BACA, Raiffeisen International (RZB Group), Hypo Alpe Adria and Volksbank the Austrian banks provide a third of the top 16 players in the region. • Russia, Ukraine and Belarus are to a big extent untapped by international banks. While international banks concentrate only on the very top segment of the market, Raiffeisen International (RZB Group) shows a presence in all three countries and also serves mid-sized companies. • The increasing importance of the retail business will have an impact on market shares as overall loan portfolios are still dominated by corporate loans. 58 Ratio analysis Ratio analysis supporting the positive trend We compared some key ratios in order to assess profitability, revenue structure, operating efficiencies, asset quality and capitalisation of the banks in the region. Due to different standards with regard to segment reporting (different segment definition and allocation to corporate centre etc.) a comparison of CEE operations of Western banks on a consolidated basis was not possible. We therefore had a look at local banks and compared them to the financials of international banks on a group level only. Profitability: Sector profitability has improved in the last few years and this year should become one of the best years for the sector, as indicated by HY figures 2004. The chart below shows profitability in terms of return on equity (ROE) adjusted for goodwill amortisation in relation to the level of leverage used by the bank. While a high capitalisation usually drags down current ROE it offers opportunities for the banks to grow further in terms of assets. In general CEE banks still are less leveraged than their Western peers. ROE vs equity/total assets (2003) Allied Irish Intesa 6% 5% 4% 3% KBC UniCredit BACA SocGen RZB 2% 1% 0% Erste 0% 5% 10% 15% 20% Equity/total assets Equity/total assets 8% 7% ROE vs equity/total assets (2003) 20% Bulbank Handlowy 18% BRD 16% BT 14% Biochim BPH 12% Pekao Hansabank Kredyt 10% Komercni ZaBa PKO OTP < -30% 8% BZ-WBK CSOB Ceska Sp 6% 4% BRE NLB 2% -10% 0% 10% 20% 30% 40% ROE (adj. goodwill) 2003 Source: Company data, consolidated group figures ROE (adj. goodwill) 2003 Source: Company data The position of Polish banks (esp. Pekao S.A., BZ-WBK, Bank BPH) has improved as the banks tend to offer a better ROE than in recent years but still have enough capital in order to expand volume. Also Hansabank has the possibility of further stretching its balance sheet and improve ROE in the medium term. Romanian (BRD, Banca Transilvania) and Bulgarian banks (Bulbank, Biochim) are relatively highly capitalised, but offer substantial potential due to the underbanked nature of their markets. Polish banks have improved their position Thanks to its uncontested No. 1 position in Hungary (especially as a retail bank), the recent mortgage boom and thanks to relatively high interest rates, OTP manages to outperform its peers in terms of profitability. OTP remains No. 1 in terms of profitability Loan quality: In an environment where we see a downward trend in net interest margins, risk costs become even more important for the banks' overall profitability. Overall the asset quality has improved throughout the sector, however information disclosure on non-performing loans, Risk costs become more important for overall profitability 59 Ratio analysis especially in interim reports, is still to some extent weak and the NPL definition also varies among peers. However, comparing the percentage of classified loans with the provision coverage could give an indication whether the bank could have to bear higher credit risk costs in the future relative to the peer group. The provision coverage shows the cushion that a bank has set aside to cover potential loan losses. However, this figure might also be misleading as it gives no information as to what extent NPLs are covered by collateral. NPL/loans vs. provision coverage (2003) 35% Handlowy 30% NPLs/Total loans Kredyt ING Slaski 25% Pekao Millenium 20% 15% BPH BRE 10% BZ-WBK BACA 5% 0% Erste OTP 0% 20% 40% 60% 80% Komercni NLB Hansabank > 300% 100% 120% Provisions/NPLs Source: Company data, consolidated figures Although Polish banks suffered from high risk costs in recent years, their credit quality looks worse than it actually is due to legal restrictions with regard to the write-off of bad loans. Better cost/income, but cost/assets leaves room for improvement Cost efficiencies: A bank's cost efficiency can be measured in two ways. The cost/income ratio relates operating costs (not including risk costs and goodwill amortisation) to total banking income and shows how effective a bank is in producing current revenues. Operating costs to average total assets show how effective a bank is in managing its assets. Especially looking at the second ratio, retail banks score lower due to substantial infrastructure investments. However, as most of the CEE banks are universal banks we do not distinguish between our CEE peers. CEE banks have already done a decent job in controlling operating costs and improving cost-income ratios, as we see this ratio for most banks is already in line with Western peers or otherwise outperforming them. A further step would be to increase the cost effectiveness by volume growth or by spreading operating costs over a larger asset base via consolidation. 60 Ratio analysis Cost/income vs. cost/assets (2003) 6% Cost/avg. assets 4% 3% 2% BZ-WBK OTP 5% PKO Pekao Hansabank Komercni NLB BPH Ceska Sp CSOB RZB Erste 50% 60% BRE BACA 1% 0% 40% Kredyt 70% 80% 90% 100% Cost/income Source: Company data, consolidated figures The development of revenues still looks challenging in an environment with pressure on net interest margins, which are still higher than the margins of Western peers. Margin pressure is coming from the deposit side to a large extent. The effect of low-margin corporate loans is partly offset by a growing portion of higher-margin retail loans. But often deposit rates were kept at a high level in order to use the cross-selling potential of existing retail clients. However, this strategy pays off only if fee generated income is able to compensate the net interest margin reduction. Some banks see this policy more as an investment in the future expecting the market for asset management, insurance and card business to gain speed in the near future. Especially in fragmented markets like Poland we expect the pressure on margins to continue until further consolidation in the market. While interest margins remain under pressure, fee income is the growth driver Hansabank can be considered a cost-leader offering the best cost/income ratio among its peers. OTP has substantially improved its position in recent years. While costs/assets remain relatively high due to the nature of the business (high retail portion), cost/income improved due to cost control measures and high net interest margins of its retail/mortgage business (mortgage loans account for nearly 40% of the bank's loan portfolio). Also Erste Bank offers quite favourable cost ratios considering its positioning with a strong retail focus. Hansabank is the costleader in CEE 61 0.0 62 BRE Bank Komercni Handlowy Kredyt UniCredit Banca Intesa BZ WBK Slaski Pekao Bank BPH Banca Trans. BRD BACA Cseka Sp. Hansabank NLB Allied Irish Bulbank Sberbank CSOB RZB KBC PKO PB Millenium Erste Zagreb. Privredna OTP K&H 0.0% OTP PKO K&H Privredna Sberbank Pekao Hansabank Bulbank Zagrebacka BZ WBK Slaski Kredyt Ceska Sp Millenium Bank BPH Komercni NLB CSOB Intesa Allied Irish Handlowy UniCredit Erste RZB BACA KBC BRE Ratio analysis Net interest margin on avg. total assets (2003) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Source: Company data Net fee income/net interest income (2003) 1.2 1.0 0.8 0.6 0.4 0.2 Source: Company data Market consolidation Market consolidation is still on its way In general, market concentration is already relatively high with the top 5 controlling more than 60% of the market in most countries. Smaller banks were increasingly more aggressive and gained market share throughout the region, especially after a change in the shareholder structure. But in countries where international banks are in the driver's seat the market concentration has increased in the last few years as most privatizations resulted over foreign banks winning market position. Besides Russia and Ukraine, the markets of Poland and Hungary are still relatively fragmented. International banks have driven the consolidation process Market share of five largest banks 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PL HU CZ SK SL ES LT NMC-8 LI RO BG HR SR BH AL RU UA BY CC-3 SEEC-6 FSR-2 Market share of top five banks in % of assets as of year-end 2003 Source: Local central banks, RZB Group Research Despite the fact that major privatisations (esp. in Hungary, Czech Republic, Slovakia, Bulgaria) have already been concluded we still see opportunities for growth via acquisitions in the region, as some international banks with selective holdings might reconsider their CEE strategy and use the opportunity of the current prices for CEE banks trading at a premium over its Western peers to divest from the region. Acquisition growth has not come to an end Banks controlled by the treasury as of Dec. 2003 in EUR mn Poland Slovenia Romania Croatia Bulgaria Serbia Russia PKO Bank Gospodarki (BGZ) Nova Kreditna Nova Ljubljanska (KBC 34%) BCR CEC HPB First Investment Komercijalna bank Delta bank Vojvodjanska bank Jubanka Postal Savings bank AIK bank Nis Novosadska bank a.d. Sberbank Vneshtorgbank Assets 18391 3549 2360 7246 4333 973 710 570 644 643 586 220 190 176 146 30417 5182 Loans 8168 1621 1271 3369 1963 171 n.a. 368 351 263 307 132 59 132 88 15368 2178 Deposits Branches 15207 2736 1782 4791 2972 843 n.a. 312 498 483 263 88 102 29 73 18872 4330 1043 244 91 325 282 1424 n.a. 8 321 120 113 85 17 6 36 1043 44 Source: Company data, National banks 63 Market consolidation Poland: Too precious to leave Being one of the most fragmented markets Poland offers substantial consolidation potential. However it seems that further privatisations might not support the consolidation process as neither the IPO of PKO BP nor - as it looks now - the privatisation of BGZ will allow an existing player to gain market share. The management of Rabobank has indicated acquiring, together with EBRD, a 35% stake in Polish agricultural bank Bank Gospodarki Zywnosciowej (BGZ) and to participate in a capital increase in order to finally hold a 50% stake together with EBRD. Obviously, despite being one of the most difficult markets in terms of competition and margin pressure, the Polish market is considered a key market for many institutions and its pure size justifies an engagement even without an overall CEE strategy (Commerzbank, AIB). Consolidation to go on in Hungary While the Hungarian market is also quite fragmented, we reckon with a faster consolidation than in Poland. While the acquisition of Postabank was one step towards consolidation, we expect further steps to come as Hungary is not such a key market as Poland. In this respect the Hungarian No. 3, Magyar Külkereskedelmi Bank (MKB), might be an example for disinvestments of an international bank as its main shareholder Bayerische Landesbank does not seem not to follow a longterm CEE strategy. Also OTP remains an extremely interesting takeover target for an international bank to increase its CEE exposure, although we do not expect a takeover in the near future. The highest potential for international banks to use privatisations as a market entry point clearly lie in Russia, Belarus and Ukraine. South Eastern Europe also still offers potential to grow via acquisitions. Romania is the hot spot in terms of acquisition targets One highlight in this respect might be Romania where many international banks are still quite underrepresented. The privatisation of BCR has already been on top of the agenda with BACA and OTP close to finding an agreement in forming a joint venture. However, after two failed attempts to sell Romania's No. 1 bank, the EBRD and IFC have bought a 25% stake plus two shares, with the state holding (AVAS) remaining with a 44.8% stake and five local investment funds (SIF) with 6% each. After the privatisation of Petrom (acquired by OMV, Austria) and EBRD’s and IFC’s investment in BCR, there is less pressure on the Romanian Government to achieve further FDI in the near future. The privatisation of the state's savings bank CEC seems to be more likely in the near term. The company, which is currently in a restructuring phase, offers by far the country's largest branch network with 1,424 outlets and would be an interesting target for any bank looking for substantial retail exposure in Romania. Also smaller banks like Banca Transilvania or Bank Tiriac might be considered take-over targets, as evidenced by the current stock valuation of Banca Transilvania. Jubanka only one of several privatisiations in Serbia Several banks in Serbia, are on the selling list of the state. The first of which is Jubanka operating a branch network of 85 outlets and reporting total assets of EUR 220 mn in 2003. The Serbian government has announced that OTP, SocGen and Alpha Bank of Greece have submitted bids for a 88% stake in the bank. After eight banks originally expressed interest in the bank only three have submitted bids. 64 Market consolidation However, there is still plenty of opportunity to capture a piece of the Serbian banking sector with other privatisations to come later this and in 2005. Nova Banka, the No. 8 in Croatia with EUR 1,043 mn in assets, is one example where we might see an exit of a financial investor in the medium term future. The bank was established in 2002 merging the three regional banks Dalmatinska, Istarska and Sisacka which were bought by two offshore funds. The same investors also control Dubrovacka Banka which is not yet included under the roof of Nova Banka. While BACA has explicitly confirmed interest in the bank we believe that all players in the region would have a closer look at the company. No. 8 in Croatia likely for sale Acquisitions in CEE Year Acquisition/Country Buyer Price EUR mn Stake M&A Multiple Price/Book 2004 RoBank/RO OTP Kredyt Bank/UA PKO BP Savings Bank of Albania Raiffeisen 400 n.a. 105 100 67 100 2.0 n.a. 2.5 2003 Postabank/HU DSK/BG Erste Bank OTP 399 311 100 100 2.7 2.4 2002 Biochim/BG Rijecka banka/HR Dubrovacka Banka/HR Splitska Banka/HR LG Bank/PL Zivnostenska B./CZ Zagrebacka Banka/HR Nova Ljiuljanska/SL BACA Erste Bank Charlem.Cap. BACA Nordea UniCredit UniCredit KBC 83 55 24 132 115 200 626 435 100 85 100 88 99 85 82 34 2.4 1.8 1.4 1.8 1.6 2.6 1.7 2.6 2001 SKB/SL Istrobanka/SL Banka Koper/SL Komercni Banka/CZ IRB/SK LTB/LI LZUB/LI VUB/SK SocGen BAWAG San Paolo IMI SocGen OTP Hansabank NordLB IntesaBCI 143 51 119 1,185 12 38 21 550 97 100 47 60 98 91 76 95 1.2 2.0 2.2 3.2 0.7 0.7 0.7 1.8 2000 UBB/BG Bulbank/BG Stopanska Banka/MC Splitska Banka/HR Rijecka Banka/HR Slov. Sporitelna/SK Privredna B./HR Ceska Sporit./CZ PBK/PL Dalmatinska B./HR NB of Greece UniCredit NB of Greece UniCredit Bayer. LB Erste Bank IntesaBCI Erste Bank BACA Regent Pac. 229 361 47 58 76 424 302 517 81 33 90 98 65 63 60 87 66 52 10 65 2.0 1.3 1.6 1.4 1.3 2.1 1.7 1.5 1.6 1.4 1999 Express Bank/BG Bank Zachodni/PL Pekao/PL CSOB/CZ Rom. Devel Bank/RO SocGen Allied Irish UniCredit KBC SocGen 39 635 1,040 1,113 200 98 80 52 66 51 1.2 4.2 2.5 2.3 1.9 1998 BPH/PL Post Bank/BG HVB AIG/EFG 597 38 37 78 3.3 2.8 Source: Reuters, Bloomberg, Company data 65 Valuation Valuation CEE exposure enhances value Recommendations Based on our own and on consensus estimates we have created a peer group comparison. While European banks with a CEE exposure trade at a median 2005e P/E ratio of 10.4, pure CEE players trade at 13.0 times 2005e earnings. Also a regression analysis of Price/Book valuations to 2005e ROE reveals that pure CEE players trade at a premium vs. their Western peers with a lower exposure towards CEE markets. Erste Bank: neutral BACA: overweight Only Erste Bank (neutral) already trades at multiples close to pure CEE players, as it has the highest exposure among Western European listed banks and due to its focus on retail markets which should provide superior earnings growth in CEE for the next years. While Bank Austria trades in line with its Western peers we would consider a premium justified given the above-average CEE exposure and the current recovery of its target market Poland. Bank BPH: neutral Pekao: neutral Bank BPH and Pekao S.A. are both trading at multiples slightly above their CEE peers. We consider a premium justified given the current dynamics in the Polish market. However taking into account the upcoming IPO of PKO BP. which might prompt investors to reduce their current positions in bank shares, we see no significant upside at the moment and recommend to take a "neutral" position towards the stock. OTP: buy Komercni: neutral OTP - the most profitable bank in our universe in terms of ROE - is trading at a significant discount versus its CEE peers. Taking into account the strong position in Hungary (especially in the retail/mortgage market) and its exposure towards Bulgaria we do not consider this discount fundamentally justified. Price/Earnings and Price/Book multiples of Komercni Banka show the bank is trading only at a smaller discount compared to the peer group. BRD: neutral BT: sell Both Romanian banks are valued at a premium versus the peer group. While we consider a premium justified, given the high potential we see in the Romanian banking market, the regional player Banca Transilvania is already trading at takeover multiples. Price/Book vs. ROE 2005e 3.5 Banca Transilvania 3.0 R 2 = 0.4553 Pekao SA 2.5 2.0 1.5 1.0 0.5 5.0% BRD Komercni Hansabank Bank BPH Erste OTP BZ-WBK AIB R 2 = 0.7476 UniCredit ABN SocGen ING KBC BACA Banca Intesa Intl. banks with CEE exp. BRE CEE banks Commerzbank 10.0% 15.0% 20.0% ROE Source: Thomson Financial Datastream, Raiffeisen estimates 66 25.0% 30.0% Valuation Peer Group Comparison Western European banks with CEE exposure Erste Bank Bank Austria Commerzbank Societe Generale UniCredit Italiano Banca Intesa ABN Amro ING KBC Allied Irish Median Average CEE banks OTP Komercni Banka Bank Pekao Bank BPH BZW WBK BRE Bank Sberbank Hansabank Banca Transilvania BRD Median Average Curr. Price EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HUF CZK PLN PLN PLN PLN USD EUR EURc EURc 2004e P/E 2005e P/B 2004e 2005e Dividend yield 2004e 2005e ROE 2004e 2005e 33.8 54.0 15.3 73.1 4.1 3.1 18.4 21.2 50.7 13.5 15.9 14.6 13.7 11.2 12.5 12.8 8.6 9.1 10.8 11.3 11.9 12.0 12.7 12.3 11.4 10.3 11.1 10.6 8.8 8.9 10.2 10.2 10.4 10.7 2.5 1.3 0.9 1.7 1.9 1.3 1.9 1.8 1.5 2.0 1.7 1.7 2.2 1.2 0.9 1.6 1.8 1.3 1.7 1.6 1.4 1.9 1.6 1.5 1.6% 2.1% 1.6% 3.9% 4.9% 3.3% 5.4% 4.8% 3.8% 4.4% 3.8% 3.6% 2.0% 2.4% 2.6% 4.2% 5.6% 4.2% 5.6% 5.0% 4.0% 4.8% 4.2% 4.1% 16.9% 8.9% 7.2% 15.9% 16.1% 10.6% 24.8% 20.3% 13.9% 18.7% 16.0% 15.3% 18.3% 9.9% 8.1% 15.5% 16.8% 12.0% 21.0% 18.8% 13.6% 18.9% 16.2% 15.3% 4,335 2,931 126 447 84 104 429 7.0 17.6 66.2 9.5 12.0 15.6 17.2 15.2 18.0 8.7 14.5 20.5 17.4 15.4 14.9 9.0 11.2 13.7 13.8 13.1 11.5 8.3 12.8 17.5 16.1 13.0 12.7 2.9 2.6 2.8 2.3 2.1 1.3 1.4 2.8 3.8 2.5 2.6 2.5 2.3 2.4 2.7 2.2 1.9 1.2 1.2 2.4 3.2 2.5 2.3 2.2 2.3% 2.9% 5.2% 4.3% 1.5% 1.4% 0.6% 8.1% 0.0% 2.9% 2.6% 2.9% 2.5% 4.0% 5.8% 5.1% 1.8% 2.5% 0.8% 9.4% 0.0% 3.1% 2.8% 3.5% 34.7% 22.5% 18.4% 13.8% 15.3% 7.9% 20.4% 20.7% 19.8% 15.6% 19.1% 18.9% 28.3% 22.0% 20.2% 16.6% 16.1% 10.2% 19.7% 20.1% 19.9% 15.8% 19.8% 18.9% Source: Thomson Financial Datastream, Raiffeisen estimates 67 BACA BACA September 2004 Overweight "Polished up" 2004 Price (EUR) 54.0 17 Sep 2004 Target price 58.0 Listing: Vienna XETRA ISIN Code AT0000995006 Reuters RIC BACA.VI Bloomberg BACA AV Homepage www.ba-ca.com Free Float (%) 22.5% Market Cap. (EUR mn) 7,939.0 Ø daily turnover 01-07/04 (EUR mn) 10.4 ATX weighting (%) 8.4% Book value per share (04e) 41.7 BACA 55 50 45 40 35 30 25 J A S O N D J F Banks M A M J J A S BANK AU.CREDITANSTALT AUSTRIAN TRADED INDEX - PRICE INDEX Source: Thomson Financial Datastream Investment story: Bank Austria is operating a broad network with 868 offices in the CEE region. While the CEE region already accounts for 24% of risk weighted assets, 41% of pre-tax income is generated here. Poland is the key market for the group's CEE operations accounting for 36% of risk weighted assets in CEE and contributing 48% to segmental pre-tax income. An offensive strategy in this market (+ 77 new branches, new product offensive, cost optimization in mid-cap segment) targets at improving the cost/income ratio to 51% on a sustainable basis and should further enhance the relative importance of this region. The recent turnaround of the Polish economy led to a 12% increase in operating income and a reduction in risk costs by 20%. Austria remains a tough terrain, however, with substantial improvements in the retail segment. HY result: With an increase of the pre-tax profit by 37% yoy to EUR 412 mn BACA could report a strong set of H1 figures and presented itself again as the main value driver in the HVB Group - reporting a consolidated pre-tax profit of EUR 535 mn, which is, however, distorted by one-offs of around EUR 40 mn. Due to high competition the Austrian corporate sector remains a difficult terrain for BACA. However, the Austrian Private Clients segment was reporting strong earnings dynamics due to increasing volumes and a more favourable interest rate environment. The main growth driver, however, was again the CEE business showing a 47% jump in pre-tax profit yoy fuelled by the above-mentioned turnaround in Poland (+ 66% pre-tax profit yoy) but as well by a strong performance in Hungary (+88%, distorted by first-time consolidation of the mortgage bank), the Czech Republic (+28%), Romania (+135%) and Bulgaria (+39%). The trend of falling risk costs continues. The risk/earnings ratio improved from 21.6% in H1 2003 to 18.3% in H1 2004. Outlook & Recommendation: BACA confirmed its targeted 15% growth in pre-tax income of EUR 750 mn. However, given the current dynamics we consider this outlook quite conservative and we expect the group to top this figure by around EUR 40 mn. While the stock trades in line with its international peer group we consider a premium justified given its CEE exposure and the current recovery in its focus market Poland. We increase our target price from EUR 52 to EUR 58 and confirm our overweight recommendation. Key figures (IFRS) Analyst Raiffeisen Centrobank Stefan Maxian, CFA +43/1/515 20-177 [email protected] EPS (in EUR) P/E P/B ROE (in %) ROA (in %) Dividend (in EUR) Dividend yield (%) Pay out Ratio (%) No. of outstanding shares (mn) 2002 2003 2004e 2.71 n.a. n.a. 6.5 0.20 1.02 n.a. 37.6 114.0 3.40 11.9 1.0 8.5 0.31 1.02 2.5 30.0 129.9 Source: BACA, Raiffeisen Centrobank estimates 68 3.69 14.6 1.3 8.9 0.39 1.15 2.1 31.1 147.0 2005e 2006e 4.40 12.3 1.2 9.9 0.45 1.30 2.4 29.5 147.0 4.90 11.0 1.1 10.4 0.48 1.50 2.8 30.6 147.0 BACA Austria: In the domestic retail business the surge in pre-tax profits from EUR 61 mn to EUR 90 mn was primarily due to a 4.5% rise in fee and commission income and improvements on the cost front (4% reduction in headcount yoy, IT cost savings and a different cost allocation retail/corporate). The cost/income ratio improved from 81.7% to 78.5%. Further cost control should support the positive cost/income trend. The bank managed to raise average risk weighted assets by 8% yoy backed by successfully marketing mortgage and consumer finance products, but with sacrificing net interest margin on risk weighted assets dropping by 40 bps in H1. We expect this trend to continue in the next quarters. By further streamlining the branch network and intensified use of alternative distribution channels the management intends to reach a C/I ratio of 75% in the Retail segment by 2006. Improving trends in Austrian retail business The Austrian corporate segment remains a tough terrain characterised by eroding net interest margin (NIM) and flat volumes. H1 results do not give a clear picture due to one-off dividend income distorting net interest results. The bank targets an after-tax ROE in the corporate segment above the cost of capital (8.5%). We do not see strong potential in volumes and reckon only with marginal improvements in NIM. Still, due to increased cross-selling efforts and tight cost control we expect the bank to reach this target by 2006 on a sustainable basis. Low NIM and borderline ROE of corporate business CEE: CEE operations in H1 were characterised by a very strong result of the Polish entity. The local bank could increase its market share in deposits by 0.5% to 10.4% and in the lending business by 1.2% to 10.7%. CEE result boosted by turnaround in Poland The bank was able to widen its NIM on RWAs by about 10 bps, which we would attribute to a relatively stronger rise of retail loans and a shift from inter-bank assets to loans. We expect NIM to shrink overall in the region, but the above-mentioned reallocation of assets should partly offset this trend in the medium term. Still, the highest dynamics should come from fee and commission income posting a 23% increase in H1. The bank intends to increase its retail exposure by expanding its branch network by 200 outlets, 170 of which in the core retail markets Poland, Hungary and Croatia until 2007. The management targets to widen its customer base from 4.1 mn to 4.5 mn clients in CEE within the next year and plans to reach a pre-tax ROE of 25% in the region (vs. 21% in H1 04) by 2006. BACA targets more retail exposure in CEE We expect the bank to take an active part in the consolidation process among CEE banks. Romanian operations are relatively small and as the market is gaining momentum there seems to be pent-up potential for BACA, which has been interested in the country's largest bank BCR for quite a while. However, after EBRD and IFC have acquired a 25% stake and due to the Petrom privatisation, an immediate privatisation is not that likely. Although BCR would be the best strategic fit, BACA would probably be interested in the privatisation of CEC (savings bank) scheduled for next year to leverage its Romanian exposure. Consolidation will go on 69 BACA 2004 target confirmed but seems too conservative Outlook: For 2004 BACA confirmed its targeted 15% growth in pre-tax income of EUR 750 mn. However, given the current dynamics we consider this outlook quite conservative and we expect the group to top this figure by around EUR 40 mn. Still, we have to consider that H1 was slightly distorted, especially by the sale of Wienerberger shares with a value of EUR 30 mn and the change in dividend accounting peaking in Q2. BACA reiterates its medium-term targets for 2006. The bank intends to widen the after-tax ROE to 13% and to improve the C/I ratio to 63%. Increased capital allocation to CEE and private customers should support this target. We expect an increase in overall NIM due to a shift of RWAs towards CEE and a shift from interbank and corporate assets to the retail segment. A further reduction of staffing levels in Austria from 11,410 as of December 2003 to 10,000 by December 2005 should keep operating costs down. Valuation: Based on the strong H1 figures we have increased our 2004e EPS estimates by EUR 0.11. On the basis of our estimates BACA stands on a P/E ratio of 14.6 in 2004e and 13.2 in 2005e, respectively. The Price/Book ratios are 1.3 and 1.2. Comparing the P/B valuation and expected ROE to the peer group, BACA trades in line with international peers, but offers a substantial discount versus CEE bank stocks. Taking into consideration that BACA's CEE exposure is higher than the peer group average and given the current recovery in its target market Poland, we believe that a valuation premium is justified. We raise our target price from EUR 52 to EUR 58 and confirm our overweight recommendation. Ratio Analysis in % 2002 2003 2004e 2005e 2006e ROE ROE adj. goodwill amortisation ROA Return on avg. risk weighted assets 6.5 8.4 0.20 0.43 8.5 9.8 0.31 0.67 8.9 10.1 0.39 0.77 9.9 11.1 0.45 0.87 10.4 11.5 0.48 0.94 NIM (on avg. earning assets) NIM (on avg. risk weighted assets) 1.91 3.22 1.97 3.28 2.17 3.34 2.18 3.29 2.12 3.27 F&C income / interest income F&C income / operating income Costs / income Staff costs / total operating costs 46.7 25.0 69.3 56.2 52.1 27.6 69.9 57.1 52.1 27.5 65.5 56.9 53.4 27.9 63.2 57.0 54.2 28.4 62.6 57.0 Deposits /loans (gross) Retail loans / total loans (gross) Mortgage loans / total loans 74.1 n.a. 7.54 70.8 n.a. 8.53 68.9 n.a. 9.80 67.5 n.a. 10.40 67.0 n.a. 10.60 NPL / customer loans Provisions / NPL Provision expense / gross loans 7.6 62.4 0.70 7.0 65.9 0.61 7.9 55.4 0.28 7.7 58.1 0.53 7.6 58.8 0.53 Source: BACA, Raiffeisen Centrobank estimates 70 BACA Shareholder structure 14 72 12 70 10 68 8 66 6 64 4 62 2 60 0 Free Float 22.5% CIR (%) ROE (%) ROE and cost/income development 58 2001 2002 2003 2004e 2005e 2006e ROE (adj. goodwill amort.) HVB 77.5% Cost/income ratio Source: BACA, Raiffeisen Centrobank estimates Source: BACA Income statement (IFRS) in EUR mn Net interest income Losses on loans and advances Net interest income after risk provisions Net fee and commission income Net trading result General administrative expenses Result of other operating activities Operating Income Net income from investments Amortisation Other Result Pre-tax profit Taxes on income Net income Minority interests Consolidated net income 2002 2,306.0 (537.0) 1,769.0 1,076.0 231.0 (2,503.0) (1.0) 572.0 28.0 (88.0) (8.0) 504.0 (111.0) 393.0 (84.0) 309.0 2003 +/- % 2004e (13.7%) 2,176.0 (23.6%) (467.0) (10.2%) 1,709.0 1.5% 1,134.0 (11.5%) 220.0 (9.7%) (2,479.0) (102.9%) 18.0 3.8% 602.0 (85.0%) 120.0 20.5% (67.0) (20.0%) (7.0) (23.1%) 648.0 13.3% (155.0) (29.4%) 493.0 13.5% (51.0) (36.0%) 442.0 +/- % (5.6%) (13.0%) (3.4%) 5.4% (4.8%) (1.0%) n.a. 5.2% 328.6% (23.9%) (12.5%) 28.6% 39.6% 25.4% (39.3%) 43.0% 2,367.0 (437.0 ) 1,930.0 1,233.0 187.0 (2,468.0 (19.5) 862.5 12.0 (73.0) -9.0 792.5 (188.6) 603.9 (61.0) 542.9 +/- % 2005e +/- % 8.8% 2,445.0 3.3% (6.4%) (448.0) 2.5% 12.9% 1,997.0 3.5% 8.7% 1,305.0 5.8% (15.0%) 230.5 23.3% (0.4%) (2,520.0) 2.1% n.a. 6.0 n.a. 43.3% 1,018.5 18.1% (90.0%) 7.8 (35.0%) 9.0% (73.0) 0.0% 28.6% (10.1) 12.2% 22.3% 943.2 19.0% 21.7% (216.9) 15.0% 22.5% 726.3 20.3% 19.6% (79.0) 29.5% 22.8% 647.3 19.2% 2006e +/- % 2,519.0 3.0% (464.0) 3.6% 2,055.0 2.9% 1,366.3 4.7% 245.0 6.3% (2,586.0 2.6% 1.0 n.a. 1,081.3 6.2% 18.0 130.8% (73.0) 0.0% (6.1) (39.6%) 1,020.2 8.2% (224.4) 3.5% 795.8 9.6% (75.0) (5.1%) 720.8 11.4% Source: BACA, Raiffeisen Centrobank estimates Balance sheet (IFRS) 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & central bank Trading assets Inter-bank loans Loans to customers Total loan loss provisions Financial fixed assets Property and equipment Intagible assets Other assets Balance sheet total 1,824 18,954 29,558 76,354 (3,622) 17,976 1,177 1,162 4,586 147,969 1.2% 12.8% 20.0% 51.6% (2.4%) 12.1% 0.8% 0.8% 3.1% 100.0% 2,286 16,140 25,130 75,996 (3,491) 15,910 1,120 1,288 2,674 137,053 1.7% 11.8% 18.3% 55.5% (2.5%) 11.6% 0.8% 0.9% 2.0% 100.0% 2,500 14,200 23,200 81,100 (3,628( 17,900 1,150 1,280 3,120 140,822 1.8% 10.1% 16.5% 57.6% (2.6%) 12.7% 0.8% 0.9% 2.2% 100.0% 2,500 15,200 22,900 84,587 (3,776) 18,100 1,250 1,300 3,200 145,261 1.7% 10.5% 15.8% 58.2% (2.6%) 12.5% 0.9% 0.9% 2.2% 100.0% 2,500 15,400 29,000 88,055 (3,940) 18,300 1,350 1,350 3,600 155,615 1.6% 9.9% 18.6% 56.6% (2.5%) 11.8% 0.9% 0.9% 2.3% 100.0% Interbank deposits Customer deposits Securities Trading assets Provisions Other liabilities Subordinated capital Minority interests Shareholder´s equity Balance sheet total 41,033 56,562 19,992 10,504 3,490 4,673 6,455 650 4,610 147,969 27.7% 38.2% 13.5% 7.1% 2.4% 3.2% 4.4% 0.4% 3.1% 100.0% 39,133 53,825 17,399 8,560 3,422 3,118 5,419 362 5,815 137,053 28.6% 39.3% 12.7% 6.2% 2.5% 2.3% 4.0% 0.3% 4.2% 100.0% 39,250 55,878 19,000 7,430 3,750 3,263 5,520 400 6,331 140,822 27.9% 39.7% 13.5% 5.3% 2.7% 2.3% 3.9% 0.3% 4.5% 100.0% 40,800 57,096 19,200 8,000 3,700 3,413 5,900 450 6,702 145,261 28.1% 39.3% 13.2% 5.5% 2.5% 2.3% 4.1% 0.3% 4.6% 100.0% 44,200 58,997 20,300 10,900 3,850 3,552 6,200 500 7,117 155,615 28.4% 37.9% 13.0% 7.0% 2.5% 2.3% 4.0% 0.3% 4.6% 100.0% Source: BACA, Raiffeisen Centrobank estimates 71 Erste Bank Erste Bank September 2004 Neutral The CEE retail engine Price (EUR) 33.80 17 Sep 2004 Target price 33.0 Listing: Vienna XETRA London SEAQ ISIN Code AT0000652011 Reuters RIC ERST.VI Bloomberg EBS AV Homepage www.erstebank.at Free Float (%) 60.5% Market Cap. (EUR mn) 8,160.7 Ø daily turnover 01-07/04 (EUR mn) 10.4 ATX weighting (%) 20.4% Book value per share (04e) 13.6 Erste Bank 35 30 25 20 15 10 O N D J F M A M J Banks J A S O N D J F M A M J J AS ERSTE BANK AUSTRIAN TRADED INDEX - PRICE INDEX Source: Thomson Financial Datastream Investment story: Erste Bank intends to leverage its strong retail position in CZR, SLK and HUN and wants to take advantage of economies of scale in these countries. While now mortgages and consumer credits are the main revenue drivers the bank expects asset management products to pick up in the next few years. The management accepts highly competitive deposit rates in order to keep its market share to have a strong position once the market for wealth management products starts to flourish. We expect the bank to take a very active part in the consolidation process among CEE retail banks. In Austria the main potential is in increasing the profitability of its "Retail & Real Estate" operations. HY result: Erste Bank reported figures fully in line with our estimates. Main drivers for net interest income (NII) were once again CEE operations reporting a 9.6% rise (however adjusted for one-off effects NII increased by 2.3% in the CEE region). Austrian operations could not show similar dynamics and NII dropped by 2.7%. While NII was partly under pressure due to lower net interest margin (NIM) on earning assets (at 2.21% in H1, down slightly from the 2.30% for FY 2003), net commission income showed strong dynamics and increased by 15.7% already adjusted for the one-off effect of consolidating Postabank. Operating costs seem to be under control. General administrative expenses were up 5.6% to EUR 1,291.5 mn. Excluding the consolidation of Postabank, the increase in expenses was just 2.2%. The cost/income ratio remained stable at 64.4% compared to H1 2003, however considering one-offs in Slovakia last year and integration costs in Hungary we should see a positive trend overall. Along with the industry trend also Erste Bank could report improving asset quality on a group wide basis with its non-performing-loan ratio decreasing from 3.4% at YE 2003 to 3.1%. As a result of the reduction in the effective tax rate, as well as reduced minority interests (below-average results posted by the savings banks in the cross-guarantee system, increase in the ownership interest in Slovenska sporitelna), net profit after minority interests rose from EUR 104.2 mn in Q1 to EUR 136.0 mn in Q2. Outlook and recommendation: We expect Erste to overshoot its net profit targets for 2004e and 2005e. However, trading at the current multiples we see only limited upside potential and confirm our "Neutral" recommendation. Key ratios (IFRS) Analyst Raiffeisen Centrobank Stefan Maxian, CFA +43/1/515 20-177 [email protected] EPS (in EUR) P/E P/B ROE (%) ROA (%) DPS (in EUR) Dividend yield (%) Pay out Ratio (%) No. of outstanding shares (mn) 2002 2003 2004e 1.18 13.6 1.6 11.6 0.25 0.31 2.1 26.2 215.8 1.49 16.5 2.0 13.4 0.28 0.38 1.9 25.6 237.8 Source: Erste Bank, Raiffeisen Centrobank estimates 72 2.13 15.9 2.5 16.9 0.38 0.54 1.6 25.3 239.4 2005e 2006e 2.66 12.7 2.2 18.3 0.45 0.66 2.0 24.8 239.4 2.93 11.6 1.9 17.8 0.48 0.73 2.2 24.9 239.4 Erste Bank Austria: Austrian operations accounted for 52% of pre-tax profits, down from 56% one year ago. We expect its profit contribution to decrease further even without additional acquisitions in CEE. While Austrian operations account for 49% of the total group net income, more than 58% of equity capital is allocated to the domestic segment. In own retail operations restructuring is successfully under way, own savings banks are however lagging behind in the turnaround process. Still the management confirms its target for the Retail & Real Estate segment of 10% ROE in 2005 (up from 4.5% in H1), which we consider quite ambitious but we believe that NIM should improve slightly in the next years backed by a higher interest rate environment and unusually low margins of the building society unit in 2004. Also, provisioning costs should come down as already indicated in the HY trend. We do not see strong upside potential in the large corporate segment contributing 26% of Austrian net income in H1 and yielding an ROE of 14% as this segment remains very competitive and prospects for loan growth seem to be limited. However, overall we expect the management to improve the cost/income ratio of Austrian operations from 67% last year to 63 - 64% by year-end 2006. Ambitious targets in Retail and Real Estate segment prevail … CEE: Volume growth in the CEE region remains impressive with risk weighted assets rising around 18% yoy in H1 adjusted for the acquisition of Postabank. The management expects the loan volume to continue to grow at a rate of 15 to 20% in all four countries. Margins, however, have been under pressure given increasing competition (e.g. in Slovakia Erste Bank has lost some market share in H1 on deposits due to aggressive pricing by its competitors) and decreasing key interest rates in the past. Still the strong erosion of NIM to average RWAs yoy does not give a correct picture due to one-off gains of Slovenska sporitelna last year of more than EUR 20 mn and refinancing costs of the Postabank acquisition. However based on higher key interest rates (esp. in CZ) management reckons with stable or even slightly expansive NIM. Money market rates have come down in Slovakia at the end of Q2 but due to the strong growth of the loan portfolio, the bank expects to replace low-margin interbank money by mortgage loans. Also at Ceska sporitelna the management expects loans to grow at a faster pace than deposits, supporting the overall NIM development. Impressive volume growth in CEE constrained by NIM development in the past Fee growth (Ceska sp. +7% yoy in H1, Slovenska sp. + 36%, Erste B. Hungary +16% adj. for Postabank, Erste B. Croatia +30%) continues to be the main revenue driver in the CEE region. In the Czech Republic fee increases (payment transaction fees) initiated by CS have been followed by competition to a large extent. While the management sees the possibility to raise prices in Slovakia the fee structure in Hungary remains very competitive in the medium term. Due to increased volume and new products we expect net fee and commission income to continue its double-digit growth until 2006e. Operating expenses (rising 5.0% excluding Postabank) seem to be under control and also asset quality gives no reason to worry with non performing loans staying flat despite strong volume growth and actual risk costs indicated by the management to be substantially below the previous assumption of around 80 bps. Fees and commission growth outpaces increase of operating expenses by far … but improvements with large corporates seem limited 73 Erste Bank Guidance for 2005 and 2006 confirmed Outlook: The management has confirmed its net profit targets of EUR 500 mn for 2004e and EUR 600 mn for 2005e, which goes with a ROE above 16% for the current year and at least 18% for 2005e. Total provisioning requirements for 2004 are not expected to exceed those of 2003. The target cost/income ratio for next year is 62%. Given the current volume growth, and the outlook for stable net interest margins and risk costs well under control, we consider this guidance to be realistic and expect the bank to slightly overshoot its targets for this and next year. CEE expansion has not come to an end The company seems to be very interested in the privatisation of the Romanian savings bank CEC, which we would consider a perfect fit given the management's proven experience in turn-around situations in CEE, the exposure towards a high potential economy with EU convergence fantasy still ahead and the broad branch network of the target. In addition, it is likely that Erste will use its option to take over the remaining 20% stake of Slovenska Sporitelna from EBRD in 2005. Valuation: According to our EPS estimates Erste Banks trades at P/E multiples of 15.9 in 2004e and 12.7 in 2005e. The respective Price/Book ratios are 2.5 and 2.2. A peer group valuation to international banks with CEE exposure reveals a valuation premium of roughly 25%, which we consider justified on the back of expected superior earnings growth due to its higher CEE exposure. Looking at pure CEE players, Erste Bank is trading in line with this peer group. While the focus on the fast growing retail market should justify a premium the fact that less than a third of total group risk weighted assets (adjusted for the Austrian savings banks) are "pure" CEE assets should be considered a discount. Taking into account the expected profitability improvements of the Austrian business a sum-of-the-parts valuation reveals a fair value between EUR 31 and EUR 34 per share. We therefore confirm our "neutral" recommendation. Ratio Analysis in % 2002 2003 2004e 2005e 2006e ROE ROA Return on avg. risk weighted assets 11.6 0.25 0.42 13.4 0.28 0.57 16.9 0.38 0.77 18.3 0.45 0.91 17.8 0.48 0.97 NIM (on avg. earning assets) NIM (on avg. risk weighted assets) 2.8 4.1 2.5 4.2 2.4 4.1 2.4 4.1 2.4 4.0 F&C income / interest income F&C income / operating income Costs / income Staff costs / total operating costs 38.3 26.4 67.9 52.1 38.5 26.0 64.2 56.5 42.5 28.0 64.4 57.8 44.3 28.8 61.8 58.0 45.3 29.3 60.3 58.2 Deposits /loans (gross) Retail loans / total loans (gross) Mortgage loans / total loans 95.1 30.2 n.a. 95.7 31.9 n.a. 94.3 31.9 n.a. 92.0 31.9 n.a. 90.0 31.9 n.a. NPL / customer loans Provisions / NPL Provision expense / gross loans 6.4 72.4 0.63 6.0 68.6 0.60 5.7 70.0 0.55 5.7 70.0 0.54 5.7 70.0 0.57 Source: Erste Bank, Raiffeisen Centrobank estimates 74 Erste Bank Shareholder structure 20.0 70.0 18.0 67.0 16.0 64.0 14.0 61.0 12.0 58.0 10.0 Die Erste Privatstiftung 33.5% CIR (%) ROE (%) ROE and cost/income development Free Float 60.5% 55.0 Austria Verein 6.0% 2002 2003 2004e 2005e 2006e ROE Cost/Income ratio Source: Erste Bank, Raiffeisen Centrobank estimates Source: Erste Bank Income statement (consolidated, IFRS) in EUR mn Net interest income Losses on loans and advances Net interest income after risk provisions Net fee and commission income Net trading result Income from insurance Staff expense Depreciation of fixed assets Other operating expense General administrative expenses Other operating activities Pre(tax profit Taxes on income Net income Minority interests Consolidated net income 2002 +/- % 2003 2,463.0 71.2% 2,587.0 (406.4) 99.6% (406.5) 2,056.7 66.5% 2,180.5 944.3 64.3% 996.6 167.4 9.7% 214.6 8.4 n.a. 32.9 (1,373.2) 81.4% (1,422.3) (762.6) 49.5% (691.9) (296.2) 58.3% (346.6) (2,432.0) 67.2% (2,460.8) (80.2 (21.7%) (202.1) 664.6 63.8% 761.7 (151.4) 86.2% (224.4) 513.2 58.2% 537.3 (258.0) 155.3% (184.0) 255.2 14.3% 353.3 +/- % 2004e 5.0% 2,674.1 0.0% (400.3) 6.0% 2,273.8 5.5% 1,135.5 28.2% 209.2 289.7% 34.3 3.6% (1,513.2) (9.3% (730.5) 17.0% (365.3) 1.2% (2,609.0) 152.0% (53.0) 14.6% 990.8 48.2% (257.3) 4.7% 733.5 (28.7%) (223.5) 38.5% 510.0 +/- % 2005e 3.4% 2,822.5 (1.5%) (414.0) 4.3% 2,408.5 13.9% 1,250.5 (2.5%) 215.5 4.3% 46.0 6.4% (1,559.8) 5.6% (745.0) 5.4% (375.2) 6.0% (2,680.0) (73.8% (57.0) 30.1% 1,183.5 14.6% (291.5) 36.5% 892.0 21.5% (256.0) 44.4% 636.0 +/- % 2006e +/- % 5.5% 2,921.5 3.4% (455.0) 5.9% 2,466.5 10.1% 1,324.0 3.0% 214.8 34.1% 53.0 3.1% (1,589.9) 2.0% (751.4) 2.7% (381.2) 2.7% (2,722.5) 7.5% (52.0) 19.4% 1,283.8 13.3% (306.4) 21.6% 977.4 14.5% (276.9) 24.7% 700.5 3.5% 9.9% 2.4% 5.9% (0.3%) 15.2% 1.9% 0.9% 1.6% 1.6% (8.8%) 8.5% 5.1% 9.6% 8.2% 10.1% Source: Erste Bank, Raiffeisen Centrobank estimates Balance sheet (consolidated, IFRS) in EUR mn 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & central bank Inter-bank loans Loans to customers Total loan loss provisions Trading assets Other current financial assets Financial fixed assets Property and equipment Intagible assets Other assets Balance sheet total 3,181 15,492 64,435 (2,983) 3,487 6,736 22,572 1,596 1,866 4,840 121,222 2.6% 12.8% 53.2% (2.5%) 2.9% 5.6% 18.6% 1.3% 1.5% 4.0% 100.0% 2,549 13,140 67,766 (2,772) 5,259 7,379 26,454 1,868 1,814 5,117 128,574 2.0% 10.2% 52.7% (2.2%) 4.1% 5.7% 20.6% 1.5% 1.4% 4.0% 100.0% 2,750 15,000 72,510 (2,893) 5,250 8,400 28,400 1,750 1,795 5,400 138,361 2.0% 10.8% 52.4% (2.1%) 3.8% 6.1% 20.5% 1.3% 1.3% 3.9% 100.0% 2,900 15,400 76,498 (3,052) 5,500 8,500 29,500 1,700 1,800 5,700 144,445 2.0% 10.7% 53.0% (2.1%) 3.8% 5.9% 20.4% 1.2% 1.2% 3.9% 100.0% 3,000 15,300 79,940 (3,190) 5,800 8,800 30,000 1,650 1,814 5,900 149,014 2.0% 10.3% 53.6% (2.1%) 3.9% 5.9% 20.1% 1.1% 1.2% 4.0% 100.0% Interbank deposits Customer deposits Securities Provisions Other liabilities Subordinated capital Minority interests Shareholder´s equity Balance sheet total 26,425 61,308 14,191 5,488 5,220 3,387 2,723 2,481 121,222 21.8% 50.6% 11.7% 4.5% 4.3% 2.8% 2.2% 2.0% 100.0% 25,704 64,839 16,944 6,366 5,515 3,538 2,879 2,791 128,576 20.0% 50.4% 13.2% 5.0% 4.3% 2.8% 2.2% 2.2% 100.0% 28,780 68,377 19,000 6,700 5,251 3,800 3,200 3,259 138,367 20.8% 49.4% 13.7% 4.8% 3.8% 2.7% 2.3% 2.4% 100.0% 29,900 70,378 20,500 6,900 6,193 3,900 3,000 3,675 144,445 20.7% 48.7% 14.2% 4.8% 4.3% 2.7% 2.1% 2.5% 100.0% 31,200 71,946 21,000 7,120 6,466 4,000 3,100 4,182 149,014 20.9% 48.3% 14.1% 4.8% 4.3% 2.7% 2.1% 2.8% 100.0% Source: Erste Bank, Raiffeisen Centrobank estimates 75 Bank BPH Bank BPH September 2004 Neutral Banks Aggressive strategy 2006 Price (PLN) 447 17 Sep 2004 Target price (PLN) 425 Listing: Warsaw WSE ISIN Code PLBPH0000019 Reuters RIC BPHW.WA Bloomberg BPH PW Homepage www.bph.pl Free Float (%) 21.1% Market Cap. (EUR mn) 2,950.7 Ø daily turnover 01-07/04 (EUR mn) 1.5 WIG20 weighting (%) 8.8% Book value per share (04e) 198.8 Bank BPH 500 450 400 350 300 250 200 150 O ND J F M AMJ J A S OND J F M AMJ J AS BANK BPH PRAGUE PX 50 - PRICE INDEX Source: Thomson Financial Datastream Investment story: Bank BPH's strategy for the years 2004-2006 concentrates on: 1) retail banking: expansion of retail network, strengthening sales in the middle market segment, further development of new products: mortgage loans, credit cards, and investment funds, 2) corporate banking: cost optimization, adjustment of corporate centers, revenue growth in transactional banking, treasury products, and Internet banking, 3) improvements in operations. The strategy assumes that a pre-tax ROE of 22% will be reached in 2006, in comparison to 11.2% in 2003, and a C/I ratio of 51%, down from 63.8% in 2003. Major opportunities seem to be in further development of distribution channels. Risks arise from competition of other banks wanting to pursue a similar strategy, and the risk of rising provisions due to aggressive loan expansion. H1 figures: Bank BPH reported H1 2004 consolidated net profit of PLN 424 mn vs. PLN 204 mn in H1 2003, up 107.8%, partly due to oneoff items. Primarily thanks to strong retail operations both net interest income increased by 12.4% and net commission income by 19.4%. Operating costs remained under control. Net provisions decreased by 18% showing further improvement in loan portfolio quality. Total assets increased by 9.2%, mainly in the area of corporate loans, which were higher by 17.2%, and retail mortgage loans, which showed a steady increase of 70%. Corporate deposit volumes increased by 29.4% and retail only by 1.1%, but the bank continued to market alternative savings forms. All in all, the bank's market share in loans was up from 9.7% to 11.2% and in deposits from 9.9% to 10.2%. Additionally, the bank tripled its credit card business and nearly doubled the number of e-clients. Outlook: For the full year 2004 we expect net profit to more than double in comparison to 2003, thanks to a steady increase in net interest and commission income coupled with controlled operating costs and lower provisions. On the balance sheet side we expect a further increase in corporate and mortgage loans but at a slower rate. Recommendation: In our opinion Bank BPH shows good results in revenue generation, cost control and balance sheet developments, which seem to be accounted for by the market. Trading at a slight premium vs. the peer and having in mind the upcoming IPO of PBK we see no significant upside at the moment. Key figures (PAS) 2002 Analyst Janusz Siatkowsi, CFA +48 22 5853171 [email protected] EPS (PLN) P/E P/B ROE (%) ROA (%) DPS (PLN) Dividend yield (%) Payout Ratio (%) Shares outstanding (mn) Source: Bank BPH, Raiffeisen estimates 76 4.7 58.2 1.6 2.7 0.29 1.4 0.52 30.0 28.7 2003 2004e 11.2 31.6 1.9 6.3 0.69 8.4 2.38 75.0 28.7 26.0 17.2 2.3 13.8 1.50 19.5 4.36 75.0 28.7 2005e 2006e 32.3 13.8 2.2 16.6 1.74 24.3 5.43 75.0 28.7 38.6 11.6 2.1 18.9 1.91 29.0 6.48 75.0 28.7 Bank BPH Asset structure: Adjusted for the sale of GBG Bank BPH reported a 16% increase in assets from H1 2003 to H1 2004. Main asset driver was an expanding loan book with corporate loans rising 17% yoy and mortgage loans increasing by an impressive 70% due to a quite aggressive but successful sales strategy. As a result, the ratio of customer loans to total assets increased from 50.5% to 52.4%. In total loans, the share of private individual loans (+33% yoy) went up substantially from 23% to 29%. The bank showed a steady improvement in loan portfolio quality. The ratio of non-performing loans decreased from 19.1% as of Q4 2003, to 14.7% as of H1 2004. Provision coverage of irregular loans increased from 44% in Q4 2003 to 54% in H1 2004. The decrease in non-performing loans was mainly due to loan restructuring and loan reclassification because of regulatory changes. Impressive 70% growth in mortgage loans drives the retail exposure Profitability: In H1 2004 the bank managed to more than double H1 2003 net profit. In Q2 2004 interest income again started to increase yoy thanks to active loan selling, and interest cost continued to fall, however at a decreasing rate. As a result net interest income increased by 12.4% yoy. The aggressive sales strategy and improvements in the card business had an impact on net fee and commission income rising 19.4% yoy. The increase in net profit in H1 2004 was also possible thanks to lower costs and provisions. Operating costs decreased by 6% in comparison to H1 2003, mainly due to the positive effect of falling personnel costs. As a result, the cost/income ratio dropped from 63% in H1 2003 to 54.8% in H1 2004. Net provisions decreased by 18% from PLN 156 mn to PLN 128 mn thanks to better loan quality and a lack of significant new provisions for specific purposes. The larger net profit in H1 2004, amounting to PLN 424 mn, was also supported by such one-off items as a PLN 67m gain on the GBG sale, a PLN 15 mn dividend from CU, and a tax credit of PLN 34 mn related to bad debt at the end of 2003. Net profit up 107% in H1 Strategy 2004-2006: In its strategy presented in early summer, the bank outlined quite aggressive targets for the retail as well as for the corporate business coupled with improvements in operations aimed at achieving a pretax ROE of 22% and a cost/income ratio of 51% in 2006. In retail banking the bank plans to expand its distribution network, open up 77 new retail branches and increase the number of transactions carried out through electronic channels. Additionally, the bank wants to reach retail customers in areas of high economic potential, achieve a 20% market share in the affluent/middle segment and attain the leading position by 2008 through better client segmentation and product adjustments. In the mass client segment the bank also targets at 25% efficiency growth. In corporate banking the bank plans to increase transactional banking and treasury products sales and adjust its corporate centers to local market potential through consolidation of 4 out of 27 centers. On the operations side the bank thinks about simplifying product processes, further optimization of employment and central functions as well as the implementation of modern CRM tools. According to the management all these activities should bring about a positive annual net impact of PLN 340 mn starting from 2007. The bank also estimates that in 2004-2006 it will implement investments Aggressive targets for 2006 77 Bank BPH and bear one-off costs of PLN 170 mn. Since income effects of active sales of loans and cards are already visible, particular costs are decreasing or under control, restructuring of workforce progresses, and the branch network seems to be largely reorganized and ready for expansion, we think that the strategy goals are aggressive but feasible. ROE (pre-tax) target of 22% by 2006 Outlook: We have based our assumptions on the targets announced in the "Strategy 2004 - 2006" and expect an accelerating increase in customer loans and, at a slower rate, also in customer deposits, leading to a steady increase in net interest income. We also assumed strong dynamics in net commissions, some decrease in staff costs and a stable ratio of net provisions to loans leading to further improvements of the cost-income ratio and a pre-tax ROE close to the target level of 22%. Bank BPH trades at a slight premium versus its peers Valuation: We valued the bank using the P/B valuation method. We calculated 2006 expected ROE of 18.9%, took 4.5% growth rate, 11% cost of equity, and assumed that they are sustainable. Using these figures we calculated a target price to book ratio of 2.22 at the end of 2006. Then using this ratio we calculated a 2006 price, discounted it to the end of 2004, and adjusted for the present value of expected dividends, reaching an expected price of PLN 425 at year-end 2004. Bank BPH trades now at 17.2x earnings and 2.3x book for 13.8% 2004e ROE, as well as 13.8x earnings and 2.2x book for 16.6% 2005e ROE. Trading at a slight premium vs. the peer group and having in mind the upcoming IPO of PKO BP we see no significant upside at the moment and recommend to take a "Neutral" position towards the stock. Ratio analysis (PAS) in % 2002 2003 2004e 2005e 2006e 2.7 0.3 3.4 4.2 6.3 0.7 3.0 3.6 13.8 1.5 3.1 3.7 16.6 1.7 3.1 3.8 18.9 1.9 3.2 3.9 F&C income / interest income F&C income / operating costs 49.6 32.7 57.5 40.3 62.8 47.2 64.2 51.9 62.9 54.3 Costs / total income Cash costs / total income Staff costs / total costs 66.8 56.4 28.6 66.7 55.8 28.6 60.3 49.7 25.0 56.2 46.1 22.2 53.3 43.5 20.0 132.4 28.5 10.6 45.3 11.1 112.3 32.1 17.0 52.3 11.0 102.5 39.2 22.7 56.4 10.8 91.8 43.7 27.3 59.3 10.2 83.0 45.3 29.5 61.7 9.9 20.7 46.2 3.11 18.9 43.8 1.07 15.0 55.0 0.86 15.0 55.0 0.86 15.0 55.0 0.87 ROE ROA NIM (on avg. earning assets) NIM (on avg. risk weighted assets) Deposits / loans (gross) Retail loans / total loans Mortgage loans / total loans Loans / total assets Equity / total assets NPLs / total customer loans Provisions / NPLs Provision expense / gross loans Source: Bank BPH, Raiffeisen estimates 78 Bank BPH ROE and cost/income development 15% 10% 40% 30% 20% 10% 0% 5% 0% Free float 21.1% Bank of New York 4.0% CIR (%) 80% 70% 60% 50% 20% ROE (%) Shareholder structure State treasury 3.7% Bank Austria Creditanstalt 71.2% 2001 2002 2003 2004e2005e2006e ROE Cost/income Source: Bank BPH, Raiffeisen estimates Source: Bank BPH Income statement (consolidated, PAS) in PLN mn Interest income Interest expense Net interest income Net commission income Net trading result Other operating income Total operating income Staff expense Depreciation Amortisation of Goodwill Other operating expense Total operating expense Net provisions Profit before tax Tax Minorities Net profit +/- % 2003 +/- % 2004e +/- % 2005e +/- % 2006e +/- % 3,211 (36.3%) (1,954) (48.3%) 1,257 (0.3%) 624 5.1% 901 (8.2%) 79 (56.8%) 2,861 (5.2%) (818) (7.9%) (235) (5.6%) (62) 1.6% (796) (13.0%) (1,911 (9.6%) (703) 5.9% 247 2.1% (104) (182.5%) (11) 37.5% 134 (62.7%) 2002 2,471 (1,208) 1,263 726 536 175 2,700 (772) (234) (60) (734) (1,800) (296) 603 (241) (10) 323 (23.0%) (38.2%) 0.5% 16.3% (40.5%) 121.5% (5.6%) (5.6%) (0.4%) (3.2%) (7.8%) (5.8%) (57.9%) 144.1% 131.7% (9.1%) 141.0% 2,580 (1,216) 1,364 857 595 198 3,014 (754) (258) (60) (744) (1,816) (270) 928 (176) (10) 747 4.4% 0.7% 8.0% 18.0% 11.1% 13.4% 11.6% (2.4%) 10.3% 0.0% 1.4% 0.9% (8.8%) 53.9% (26.8%) 0.0% 131.2% 2,795 (1,275) 1,520 977 640 213 3,350 (745) (277) (60 (800 (1,883) (309) 1,159 (220) (10) 929 8.3% 4.8% 11.5% 14.0% 7.5% 7.5% 11.2% (1.2%) 7.5% 0.0% 7.5% 3.7% 14.5% 24.9% 24.9% 0.0% 24.4% 2,985 (1,276) 1,709 1,074 698 233 3,714 (744) (303) (60 (873 (1,980) (352 1,382 (263) (10) 1,110 6.8% 0.1% 12.4% 10.0% 9.1% 9.1% 10.9% (0.1%) 9.1% 0.0% 9.1% 5.2% 14.0% 19.3% 19.3% 0.0% 19.5% Source: Bank BPH, Raiffeisen estimates Balance sheet (consolidated, PAS) in PLN mn 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & central bank Inter-bank loans Loans to customers Debt securities Equity investments Intangible fixed assets Tangible fixed assets Other assets Total assets 2,369 6,593 20,425 10,500 191 521 1,186 3,310 45,095 5.3% 14.6% 45.3% 23.3% 0.4% 1.2% 2.6% 7.3% 100.0% 1,707 4,342 25,303 12,138 195 467 1,069 3,171 48,392 3.5% 9.0% 52.3% 25.1% 0.4% 1.0% 2.2% 6.6% 100.0% 1,442 4,559 28,702 11,218 168 417 897 3,444 50,848 2.8% 9.0% 56.4% 22.1% 0.3% 0.8% 1.8% 6.8% 100.0% 1,325 4,331 33,109 11,592 174 431 927 3,973 55,862 2.4% 7.8% 59.3% 20.8% 0.3% 0.8% 1.7% 7.1% 100.0% 1,183 4,115 37,357 11,835 178 440 947 4,483 60,537 2.0% 6.8% 61.7% 19.5% 0.3% 0.7% 1.6% 7.4% 100.0% Inter bank deposits Customer deposits Securities Provisions Other liabilities Subordinated debt Minorities Total equity Total equity & liabilities 5,923 29,893 78 892 3,232 0 59 5,020 45,095 13.1% 66.3% 0.2% 2.0% 7.2% 0.0% 0.1% 11.1% 100.0% 7,171 30,978 580 795 3,498 0 67 5,302 48,392 14.8% 64.0% 1.2% 1.6% 7.2% 0.0% 0.1% 11.0% 100.0% 7,627 32,050 861 861 3,959 0 0 5,489 50,848 15.0% 63.0% 1.7% 1.7% 7.8% 0.0% 0.0% 10.8% 100.0% 8,379 33,119 993 993 6,656 0 0 5,721 55,862 15.0% 59.3% 1.8% 1.8% 11.9% 0.0% 0.0% 10.2% 100.0% 9,080 33,813 1,121 1,121 9,403 0 0 5,998 60,537 15.0% 55.9% 1.9% 1.9% 15.5% 0.0% 0.0% 9.9% 100.0% Source: Bank BPH, Raiffeisen estimates 79 Bank Pekao Bank Pekao September 2004 Neutral Bottoming out in H1 Price (PLN) 126 17 Sep 2004 Target price (PLN) 122.0 Listing: Warsaw WSE ISIN Code PLPEKA000016 Reuters RIC BAPE.WA Bloomberg PEO PW Homepage www.pekao.com.pl Free Float (%) 46.9% Market Cap. (EUR mn) 4,853.5 Ø daily turnover 01-07/04 (EUR mn) 4.5 WIG20 weighting (%) 11.9% Book value per share (04e) 44.6 Pekao S.A. 170 160 150 140 130 120 110 100 90 80 70 O N D J F M A M J Banks J A S O N D J F M A M J J AS PEKAO PRAGUE PX 50 - PRICE INDEX Source: Thomson Financial Datastream Investment story: Bank Pekao is the second largest bank in Poland, and (still) the largest of all listed Polish banks. The bank has a 10.1% market share of loans, 13.7% of deposits and 32.3% in investment funds. Bank Pekao plans to: 1) increase the volume of loans by launching a new mortgage product and targeting SMEs 2) strengthen the position in the savings business, mainly through selling investment funds, and 3) increase the volume of the transaction business, active selling of credit cards, and current accounts with higher added value. Due to its size we consider Pekao a good play on the overall economic recovery in Poland. Opportunities lie in actively tapping developing markets for mortgage loans, credit cards, foreign payments and investment funds. Risk might arise from expanding SME loans too aggressively. H1 figures: In H1 2004 Bank Pekao earned a net profit of PLN 665 mn in comparison to PLN 506 mn in H1 2003, which means an increase of 31.4%. Revenue was mainly driven by substantially higher commissions (up by 22.1%). On the other hand, net interest income decreased by 7.7% in H1 2004 compared to H1 2003, due to lower yields on debt securities. However, it recently stabilised and slowly started to pick up. As to the balance sheet developments, loans slightly decreased in H1 2004 in comparison to H1 2003, however started to increase since the beginning of this year, in the case of corporate loans by 4.2%, and in the case of mortgage loans by 11%, and rose faster than the market. One could also observe an increase in corporate deposits by 16.5% in H1 2004 over H1 2003, as well as a continuing decrease in retail deposits and bonds by 10.9%. All in all Bank Pekao's market share in savings remained stable on the level of 18.2% after H1 2004. Outlook: For the full year 2004 Pekao targets an ROE of 18.7% based on accelerating mortgage, an expansive SME business and further improvements of cost effectiveness. We reckon with almost a 46% increase in net profit, to be reached through a further increase in commissions and trading income, with still declining (yoy) but stabilizing interest income, coupled with controlled personnel costs. Recommendation: Q2 figures indicate a positive trend, but there is still room for higher growth. We see the company well positioned in retail, SME and mutual fund market to benefit from the current broad recovery. However Pekao already trades at a premium to its peers. We keep our "Neutral" rating. Key figures (PAS) Analyst Janusz Siatkowsi, CFA +48 22 5853171 [email protected] in EUR 2002 2003 2004e EPS P/E P/B ROE (%) ROA (%) DPS Dividend yield (%) Payout Ratio (%) Shares outstanding (mn) 4.6 20.3 2.2 11.0 1.11 4.18 4.42 90.0 165.7 5.5 19.5 2.5 13.0 1.44 4.5 4.17 81.3 166.1 Source: Pekao S.A., Raiffeisen estimates 80 8.1 15.6 2.8 18.4 2.11 6.5 5.13 80.0 166.1 2005e 2006e 9.2 13.7 2.7 20.1 2.27 7.3 5.83 80.0 166.1 10.6 11.9 2.6 22.3 2.43 8.5 6.73 80.0 166.1 Bank Pekao Profitability: In H1 2004 operating income slightly decreased yoy, a bit more than operating costs, so that the cost/income ratio increased from 54.6% in H1 2003 to 55.1% in H1 2004. Net interest income decreased by 7.7% yoy, especially due to stagnating loan volumes and contracting margins in Q1, when net interest income was down 12% yoy. However, loan growth finally picked up in Q2 and net interest margin improved slightly from a record low level in Q1. The decrease in net interest income was compensated by the substantial rise in net commissions by 22.1% yoy, which boosted the share of fees and commissions in revenue from 30% as of H1 2003 to 38% as of H1 2004. Main growth drivers were fees and commissions from accounts and transactions plus fees from investment funds. Fees from loans and cards remained stable in that period, but picked up in Q2 after a weak Q1. Since the end of 2003, the bank has increased the number of credit cards by 82.4% and charge cards by 8.4%, however in outstanding and new credit cards the bank still has less than one third of the volume of its nearest competitor, Bank BPH. The bank tightly controlled costs in recent months, so that they decreased by 1.2% yoy, with the number of employees decreasing from 17,120 in H1 2003 to 16,617 in H1 2004. Lower credit risk costs (provisioning was still relatively high but down 21% yoy) and a substantial drop in tax expense due to a revaluation of deferred tax assets supported the bottom line as well. Net interest margin still under pressure … Balance sheet developments: On the assets side customer loans decreased slightly by 1.2% in H1 2004 vs. H1 2003, but have been increasing since the end of 2003 driven by higher mortgage loans, which increased by 11%, and corporate loans, which increased by 4.2%. The bank increased its market share in new mortgage loans from 4.3% in Q2 2003 to 12.9% in Q2 2004. However, the bank's overall market share in mortgage loans still dropped from 10.5% in Q2 2003 to 9.4% in Q2 2004 as other players were even more aggressive. Thanks to an improved environment and reclassification of loans, non performing loans decreased by 6.4% and the provision coverage ratio increased to 64.9% in H1 2004 from 57.4% in H1 2003, since the bank decided to maintain its retail loans provisioning strategy. Deposit collection remains weak with deposits flat compared to H1 2003. While retail deposits dropped significantly, Pekao reports an increase in corporate deposits by more than 16% yoy. On the other side, Pekao quite successfully markets mutual funds posting a 34.4% rise compared to 2003 and widening its market share to 32%. … but loan volume picked up in Q2 Strategy: In the upcoming years, Bank Pekao plans an expansion in mortgage loans through a broader product range, the development of an intermediary distribution network, an increase in the sales force and a shorter loans granting cycle. At the end of 2003, the bank expected a 29% increase of the mortgage market for 2004 and up to now increased its market share in new mortgage loans. The bank also plans to sell more loans to SMEs than the market average and to achieve an increase in selected segments of medium-sized companies, mainly through specialized services, broader and deeper market penetration, and cross selling with other Group Pekao products, like leasing. Pekao Focus remains on mortgage products, SME specialization and mutual funds 81 Bank Pekao plans to further strengthen its leading position in the mutual fund market by exploiting cross-selling opportunities and attracting new clients via improved relationship management and product diversification. The management targets to narrow the gap to competitors in the card business through intensified marketing and more flexible selling procedures and the bank also focuses on "upgrading" the current account customer base by offering new money management products. In addition Pekao wants to increase its market share in the foreign trade transaction business. Two-digit expansion of customer loans Outlook: Based on the targeted dynamics in mortgage lending and the additional focus on SME business we reckon with two-digit expansion of customer loans until 2006 coupled with slowly improving net interest margins. We also assumed a stable increase in net commissions, controlled personnel costs and a stable ratio of provisions to loans. Pekao trades at a premium versus its CEE peers Valuation: We valued the bank using the P/B valuation method. We calculated 2006 expected ROE of 22.3%, took 4.5% growth rate, 11% cost of equity and assumed that they are sustainable. Using these figures we calculated a target price to book ratio of 2.74 at the end of 2006. Then using this ratio we calculated a 2006 price, discounted it to the end of 2004, and adjusted for the present value of expected dividends, reaching an expected price of PLN 121.5 at end-2004. Bank Pekao is trading at 15.6x earnings and 2.8x book for 18.4% 2004e ROE, as well as 13.7x earnings and 2.7x book for 20.1% 2005e ROE. In terms of these ratios Bank Pekao trades at a 5-10% premium vs. the peer group. Based on our valuation and having in mind the upcoming IPO of PKO BP we see no significant upside at the moment and remain "Neutral" towards the stock. Ratio analysis in % 2002 2003 2004e 2005e 2006e ROE ROA NIM (on avg. earning assets) NIM (on avg. risk weighted assets) 11.0 1.1 4.9 8.1 13.0 1.4 4.3 6.9 18.4 2.1 4.0 6.4 20.1 2.3 4.1 6.6 22.3 2.4 4.2 6.8 F&C income / interest income F&C income / operating costs 42.8 51.2 59.1 57.5 68.8 62.7 67.6 66.2 67.0 68.7 Costs / total income Cash costs / total income Staff costs / total costs 47.4 42.6 21.9 57.9 50.7 27.4 57.3 49.7 27.4 54.0 46.8 25.6 51.9 44.8 24.1 153.6 22.7 6.1 45.2 10.8 161.0 23.9 8.0 42.1 11.4 152.1 25.2 9.8 43.2 11.5 141.0 25.0 10.9 44.5 11.1 131.0 24.8 11.8 46.3 10.8 21.0 54.5 4.7 24.4 55.4 1.7 23.0 55.0 1.0 23.0 55.0 1.0 23.0 55.0 1.0 Deposits / loans (gross) Retail loans / total loans Mortgage loans / total loans Loans / total assets Equity / total assets NPLs / total customer loans Provisions / NPLs Provision expense / gross loans Source: Pekao S.A., Raiffeisen estimates 82 Bank Pekao ROE and cost/income development 70% 25% 60% 20% Free Float 47.0% 50% 15% 40% 10% 30% CIR (%) ROE (%) Shareholder structure 20% 5% 10% 0% UniCredit 53.1% 0% 2001 2002 2003 2004e2005e2006e ROE Cost/income Source: Pekao S.A., Raiffeisen estimates Source: Pekao S.A. Income statement (consolidated, PAS) in PLN mn Interest income Interest expense Net interest income Net commission income Net trading result Other operating income Total operating income Staff expense Depreciation Amortisation of goodwill Other operating expense Total operating expense Net provisions Profit before tax Tax Minorities Net profit 2002 +/- % 2003 +/- % 2004e +/- % 5,348 (2,485) 2,863 1,226 703 257 5,049 (1,106) (227) (16) (1,046) (2,395) (1,480) 1,174 (392) 7 770 (27.8%) (44.9%) (1.1%) (2.1%) 19.0% 53.0% 2.9% (10.8%) 3.7% 0.0% 0.5% (4.8%) 136.4% (33.4%) (24.0%) 3,915 (1,540) 2,375 1,403 225 212 4,215 (1,157) (294) (11 (980) (2,442) (497 1,276 (358) 3 920 (26.8%) (38.0%) (17.0%) 14.4% (68.0% (17.5% (16.5%) 4.6% 29.5% (31.3%) (6.3%) 2.0% (66.4% 8.7% (8.7%) (57.1%) 19.48% 3,789 (1,547) 2,242 1,543 318 191 4,295 (1,178) (318) (10) (955) (2,462) (326) 1,507 (211) 5 1,341 (3.21%) 0.45% (5.58%) 10.00% 41.50% (9.89%) 1.90% 1.85% 8.29% (9.09%) (2.54%) 0.82% (34.40%) 18.11% (41.06%) 66.67% 45.77% (38.6%) 2005e +/- % 2006e +/- % 4,118 8.67% (1,608) 3.95% 2,510 11.93% 1,698 10.00% 335 5.33% 201 5.33% 4,744 10.46% (1,213) 2.90% (335) 5.33% (10) 0.00% (1,006) 5.33% (2,564) 4.14% (353) 8.40% 1,827 21.21% (347) 64.50% 5 0.00% 1,525 13.69% 4,403 (1,617) 2,786 1,867 362 217 5,233 (1,260) (362) (10) (1,086) (2,718) (395) 2,120 (403) 5 1,762 6.93% 0.58% 11.00% 10.00% 7.92% 7.92% 10.30% 3.95% 7.92% 0.00% 7.92% 6.01% 11.73% 16.03% 16.03% 0.00% 15.55% Source: Pekao S.A., Raiffeisen estimates Balance sheet (consolidated, PAS) in PLN mn 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & central bank Inter-bank loans Loans to customers Debt securities Equity investments Intangible fixed assets Tangible fixed assets Other assets Total assets 3,191 7,432 29,395 21,307 272 72 1,985 1,430 65,084 4.9% 11.4% 45.2% 32.7% 0.4% 0.1% 3.0% 2.2% 100.0% 3,159 6,045 26,528 23,041 300 502 1,660 1,779 63,013 5.0% 9.6% 42.1% 36.6% 0.5% 0.8% 2.6% 2.8% 100.0% 1,937 6,952 27,809 21,797 327 727 1,453 3,337 64,339 3.0% 10.8% 43.2% 33.9% 0.5% 1.1% 2.3% 5.2% 100.0% 2,007 7,786 31,092 22,584 339 753 1,506 3,731 69,798 2.9% 11.2% 44.5% 32.4% 0.5% 1.1% 2.2% 5.3% 100.0% 2,083 8,565 34,720 23,434 352 781 1,562 3,472 74,969 2.8% 11.4% 46.3% 31.3% 0.5% 1.0% 2.1% 4.6% 100.0% Inter bank deposits Customer deposits Securities Provisions Other liabilities Subordinated debt Minorities Total equity Total equity & liabilities 1,887 48,310 1,208 487 6,124 0 24 7,043 65,084 2.9% 74.2% 1.9% 0.7% 9.4% 0.0% 0.0% 10.8% 100.0% 2,758 45,882 514 391 6,292 0 20 7,156 63,013 4.4% 72.8% 0.8% 0.6% 10.0% 0.0% 0.0% 11.4% 100.0% 2,574 48,437 556 362 4,967 0 19 7,424 64,339 4.0% 75.3% 0.9% 0.6% 7.7% 0.0% 0.0% 11.5% 100.0% 2,792 50,187 622 404 8,043 0 21 7,729 69,798 4.0% 71.9% 0.9% 0.6% 11.5% 0.0% 0.0% 11.1% 100.0% 2,999 52,076 694 451 10,644 0 22 8,082 74,969 4.0% 69.5% 0.9% 0.6% 14.2% 0.0% 0.0% 10.8% 100.0% Source: Pekao S.A., Raiffeisen estimates 83 OTP OTP September 2004 Buy Banks The story is not over yet Price (HUF) 4.335 17 Sep 2004 Target price (HUF) 5.350 Listing: Budapest BSE ISIN code HU0000061726 Reuters RIC OTPB.BU Bloomberg OTP HB Homepage www.otp.hu Free float 90,00% Market cap.(EUR mn) 4.894 Ø daily turnover 01-07/04 (EUR mn) 12,04 BUX weighting 31,0% Book value per share (03) 1292 OTP 5000 4500 4000 3500 3000 2500 2000 1500 O N D J F M A M J J A S O N D J F M A M J J AS OTP BANK BUDAPEST (BUX) - PRICE INDEX Source: Thomson Financial Datastream Investment story: As a banking stock and given the share price gain of more than 30% this year, OTP is particularly sensitive to macro sentiment. Due to the shaky macro environment (including the planned corporate tax hike), we see both trading and investing opportunities in the shares this year. The upside is huge profit and still impressive expansion potential supported by additional acquisition targets in the region (mainly in Serbia and Croatia). In the mid-term, fundamentals should gradually come to the fore again. The expected delay of the euro-zone entry is also likely to help OTP maintain its dominance in Hungary. H1 (Q2) figures: Net interest margin was still fuelled by the high key interest rate "thanks to" uncertainty in the government budget and sustainable cash flow from subsidies of housing (mortgage) loans. Increased competition for funding also had a positive effect on the margin, as the deposit volume did not rise as much as at other banks. The quality of loans has basically not changed on a quarterly basis, while provision expenses declined somewhat. On the other hand, the mortgage business and the overall loan business fell back slightly, which was reflected in stagnating net interest income qoq, even though the amount itself is still impressive. Meanwhile, DSK (Bulgarian unit) showed a very attractive performance, much above expectations and the management's earlier targets. Cost control within the group seems adequate, but there is still scope for further tightening, disregarding required one-off items. Outlook: We estimate a full year profit of HUF 127 bn for 2004, which is even higher than management's updated target (HUF 115-120 bn) and significantly exceeds the objective of HUF 103 bn set at the beginning of the year. The factors that characterised the first half of the year are likely to remain in place in the second half, too: the NBH seems to stick to a cautious monetary policy. Even if the NBH lowers the key interest rate sharply, it would have only a slight impact on 2004 results due to the usual time-lag in pricing both the asset and the liability side. Moreover, we also expect a continuing excellent and further improving performance at most subsidiaries (mainly DSK, OTP Banka Slovensko, Merkantil Bank) and strong figures from OTP Mortgage Bank. Recommendation: Based on our peer group valuation as well as a DCF and dividend model we derive a target price of HUF 5,350. We therefore raise our recommendation from "Neutral" to "Buy". Key figures (IFRS) 2002 Analyst Kornél Sarkadi Szabó +36/1/484-4812 [email protected] EPS (HUF) P/E P/B ROE (%) ROA (%) DPS (HUF) Dividend yield (%) Pay out ratio (%) Shares outstanding (mn) Source: OTP, Raiffeisen estimates 84 218 19.9 5.43 30.4 2.41 0 0.00 0.0 280 2003 2004e 297 14.6 3.90 31.1 2.69 64.15 1.48 21.6 280 454 9.6 2.88 34.7 3.47 100 2.31 22.0 280 2005e 2006e 481 9.0 2.29 28.3 3.32 110 2.54 22.9 280 510 8.5 1.89 24.4 3.17 120 2.77 23.5 280 OTP Due to of OTP's dominant market position and sustainable margins on housing loans, OTP group will be able to benefit in all scenarios and it will only make a relatively small difference what happens in monetary policy and to what amount the budget deficit increases. On the other hand, investors do not really make a difference when sentiment turns, and they usually pick OTP to sell off as it is the most liquid stock in the Hungarian market, providing good trading opportunities. It is clearly seen that the group will manage to achieve a net profit level of around HUF 130 - 140 bn for the next 3 - 4 years, even under very conservative conditions and despite the hike in the corporate tax rate. We believe the market needs time to overcome the current level and price the shares above a P/E level of 10 - 12, which will distinguish it more significantly from other banks in CEE and Western Europe. Phase shift: The market has not yet caught up with fundamentals Though mortgage business activity lost impulse this year due to changes in the housing loan subsidy system, it is anticipated to pick up, driven by lower rates and favorable changes in the subsidy system planned and announced by the designated prime minister. Even if lending activity does not speed up to last year's level, the outlook should become brighter as relevant real wages are anticipated to grow and OTP just launched currency-based mortgage loan products in June. The mortgage business in Bulgaria is less foreseeable, but provides much higher growth potential. The ratio of total loans to GDP is below 30 percent, while the mortgages to total credit ratio is 4.5%. In Hungary the corresponding ratios are 40% and 17%, respectively. For the time being, DSK contributes 8% to OTP's operating profit. This figure could jump to 16 - 18% by 2006 and could further rise to 25% by 2008. There are some rumors pointing out that the Bulgarian government might introduce a housing subsidy system similar to Hungary's. Most of the buildings in Bulgaria are in very bad shape. Therefore, we look towards a big housing boom, once disposable incomes and interest rates reach an adequate level and construction activity accelerates. Experience in the Hungarian system showed that the mortgage boom and the construction boom fuel each other. Of course, it is not a shortterm process, but it contributes to creating a great outlook and an interesting story in the long term that investors always jump on. More(tgage)! Outlook: Lending activity in the Hungarian market is tightly connected to government policy and the pace of expected interest rate cuts. We presumed a yearly average rate cut by 200 basis points until 2006. Increasing competition for funding suggests moderate growth in deposits, while loans are forecasted to rise by around 17%, which is still behind OTP's more aggressive targets. Loans at DSK are assumed to rise by close to 50% (annually) for the next three years, even though the margin is likely to gradually narrow. Market shares and the dominance of OTP are likely to decline slightly in retail, as the number of branches of other banks is rapidly growing. We expect the current 26% share of total assets will shrink below 24% by 2006. We incorporated the planned tax rate hike for banks from 16% to 24% from 2005 onwards. We expect OTP to partly pass on the effect of the tax increase to customers and anticipate the contribution to earnings from abroad (mainly Bulgaria) to rise. We assume 4% lower net profit due to the corporate tax hike. The “loanly story” continues 85 OTP OTP trades at a discount versus its CEE peers Valuation: Our new target price of HUF 5,350 is supported by three valuation methods. We mainly applied peer ratios to value the stock, but discounted cash flow and dividend potential models both back up the results. Based on our estimates OTP trades at a P/E ratio 9.0 for 2005e, while all peer companies trade above 11.0x 2005e estimates. Also comparing P/B multiples to ROE reveals a significant discount to the peer group, although we assume ROE to post a slight decrease for the next years. On the one hand ROE might get under pressure as we did not assume large dividends year by year, so shareholders' equity rises pretty sharply in our model, by more than at other banks. The other reason is that net interest margin is expected to narrow, triggered by anticipated interest rate cuts in the future, which will naturally have a negative effect on income. Only P/BV seems to be an exception, because this ratio does not differ from other banks in the region. Even if our new target price materializes, the P/BV ratio will be in line with that of other banks in CEE by 2005-2006 due to the expected increase in equity. Since our target price substantially exceeds the current price, our recommendation is buy. On the other hand, we have to warn that unexpected government actions might have a unfavorable effect on OTP's outlook, even though OTP has the strongest lobby power among the companies listed in Hungary. Furthermore, irrational economic decisions by the government could drive the HUF hectic, which would make the overall Hungarian market less attractive. Ratio Analysis in % 2002 2003 2004e 2005e 2006e ROE ROA NIM (on avg. earning assets) NIM (on avg. weighted assets) 30.4 2.4 6.4 4.9 31.1 2.7 6.7 5.5 34.7 3.5 7.6 6.3 28.3 3.3 7.2 6.1 24.4 3.2 6.5 5.5 F&C income / interest income F&C income / operating costs Costs / total income Cash costs / total income Staff costs / total costs 51.2 51.5 76.1 29.7 68.3 53.3 44.9 75.1 30.6 68.3 39.2 49.2 70.9 26.3 69.7 41.0 54.8 66.8 25.8 77.0 45.4 59.0 65.7 25.8 82.0 168.0 48.4 31.7 47.1 8.2 130.7 59.1 49.5 57.2 9.0 110.9 53.7 49.2 62.1 11.0 103.1 52.7 50.1 65.4 12.4 95.5 52.3 51.4 68.6 13.6 6.8 52.1 0.8 4.0 76.0 0.3 3.7 73.7 0.8 3.8 74.5 0.9 3.9 75.2 0.9 Deposits / loans Retail loans / total loans Mortgage loans / total loans Loans / total assets Equity / total assets NPLs / total loans Provisions / NPLs Provisions expense / gross loans Source: OTP, Raiffeisen estimates 86 OTP 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Shareholder structure Treasury shares Government 0.1% 4.7% EBRD Employees 2.0% 2.9% 80.0% 75.0% 70.0% 65.0% 60.0% CIR (%) ROE (%) ROE and cost/income development Domestic private investors 2.7% 55.0% 50.0% Domestic institutional investors 8.7% Foreign institutional investors 78.8% 2002 2003 2004e2005e2006e ROE Cost / income Source: OTP, Raiffeisen estimates Source: OTP Income statement (consolidated, IFRS*) in HUF mn Net interest income Losses on loans and advances Net interest income after risk provisions Net fee and commission income Net trading result General administrative expenses Result of other operating activities Operating Profit Amortisation of goodwill Other Result Pre(tax profit Taxes on income Net income Minority interests Consolidated net income 2002 +/- % 133,934 10,124 123,810 50,518 1,359 123,165 21,617 74,139 n.a. 1,305 75,444 (14,429) 61,015 0 61,015 n.a. n.a. n.a. n.a. n.a. .n.a. .n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. +/- % 2004e +/- % 176,397 31.7% 6,463 (36.2%) 169,934 37.3% 62,058 22.8% (2,366) (274.1%) 149,300 21.2% 22,521 4.2% 102,847 38.7% 1,950 n.a. 1,760 34.9% 102,657 36.1% (19,569) 35.6% 83,088 36.2% 0 83,088 36.2% 2003 247,969 19,026 228,943 67,676 11,884 178,275 23,260 153,488 4,050 1,922 151,360 (24,291) 127,069 0 127,069 40.6% 194.4% 34.7% 9.1% (602.3%) 19.4% 3.3% 49.2% 107.7% 9.2% 47.4% 24.1% 52.9% 52.9% +/- % 2006e +/- % 272,387 9.8% 25,115 32.0% 247,272 8.0% 76,450 13.0% 10,381 (12.6%) 180,650 1.3% 25,525 9.7% 178,978 16.6% 4,050 0.0% 120 (93.8%) 175,048 15.7% (40,261) 65.7% 134,787 6.1% 0 134,787 6.1% 2005e 278,367 29,128 249,239 85,370 14,357 187,481 27,962 189,446 4,050 120 185,516 (42,669) 142,847 0 142,847 2.2% 16.0% 0.8% 11.7% 38.3% 3.8% 9.5% 5.8% 0.0% 0.0% 6.0% 6.0% 6.0% 2006e % TA 6.0% *adjusted Source: OTP, Raiffeisen estimates Balance sheet (consolidated, IFRS*) in HUF mn 2002 % TA 2003 % TA Cash & central bank Trading assets Inter-bank loans Loans to customers Total loan loss provisions Financial fixed assets Property and equipment Other assets Balance sheet total 355,440 225,555 295,892 1,327,071 (46,361) 352,916 93,568 112,510 2,716,591 13.1% 276,655 8.0% 8.3% 382,732 11.0% 10.9% 252,189 7.3% 48.9% 2,010,643 58.0% (1.7%) (25,408) (0.7%) 13.0% 299,771 8.6% 3.4% 166,789 4.8% 4.1% 106,142 3.1% 100.0% 3,469,513 100.0% Interbank deposits Customer deposits Securities Other liabilities Subordinated capital Minority interests Shareholder´s equity Balance sheet total 79,060 2.9% 126,401 3.6% 2,151,169 79.2% 2,689,849 77.5% 84,862 3.1% 124,887 3.6% 161,972 6.0% 200,982 5.8% 15,511 0.6% 15,413 0.4% 405 0.0% 432 0.0% 223,612 8.2% 311,549 9.0% 2,716,591 100.0% 3,469,513 100.0% 2004e % TA 2005e % TA 328,343 8.5% 315,789 7.4% 377,583 9.8% 395,854 9.2% 194,136 5.0% 190,253 4.4% 2,415,867 62.8% 2,836,694 66.2% (27,348) (0.7%) (34,040) (0.8%) 298,119 7.8% 310,044 7.2% 166,985 4.3% 173,665 4.1% 92,611 2.4% 96,504 2.3% 3,846,298 100.0% 4,284,762 100.0% 0 180,692 4.7% 187,920 4.4% 2,649,229 68.9% 2,888,162 67.4% 358,633 9.3% 431,133 10.1% 219,911 5.7% 231,769 5.4% 15,602 0.4% 15,758 0.4% 440 0.0% 400 0.0% 421,790 11.0% 529,620 12.4% 3,846,298 100.0% 4,284,762 100.0% 276,529 5.8% 419,374 8.9% 186,448 3.9% 3,289,997 69.5% (39,480) (0.8%) 322,446 6.8% 180,611 3.8% 100,631 2.1% 4,736,557 100.0% 0 195,437 4.1% 3,104,294 65.5% 536,133 11.3% 240,480 5.1% 15,916 0.3% 400 0.0% 643,897 13.6% 4,736,557 100.0% *adjusted Source: OTP, Raiffeisen estimates 87 Komercni Banka Komercni Banka September 2004 Neutral KB - another positive dividend surprise? Price (CZK) 2,931 17 Sep 2004 Target price (CZK) 2,900 Listing: Prague PSE ISIN Code CZ0008019106 Reuters BKOM PR Bloomberg KOMB CP Homepage www.kb.cz Free Float 40.0% Market cap (EUR mn) 3,470 Ø daily turnover 01-07/04 (EUR mn) 10.9 PX50 weighting 18.2% Book value per share (03) 976 Komercni Bank 3600 3400 3200 3000 2800 2600 2400 2200 2000 1800 1600 1400 O N D J F M A M J Banks J A S O N D J F M A M J J AS KOMERCNI BANKA PRAGUE PX 50 - PRICE INDEX Source: Thomson Financial Datastream Investment story: KB is a universal bank with focus on both corporate and retail customers. The Czech retail segment is still underdeveloped in comparison to the EU and therefore mortgages and consumer loans are among the growth drivers of the bank. On top of that, SME and municipal loans have been growing by double digit numbers. On the positive side, the CNB is expected to hike interest rates by 25 - 50 bps by the end of 2004. An additional hike of 25 - 50 bps is expected in 2005. In our view, it should enable KB to increase its net interest margins in future. On the negative side, KB still holds a non-liquid CDO portfolio with an average maturity in 2011. The credit rating of the portfolio has deteriorated over time. Despite that, the high quality of KB's assets was recently confirmed by S&P. KB partially solved its overcapitalisation by paying a high special dividend of CZK 200 per share from its 2003 net earnings. We expect a dividend payment of CZK 86 per share from KB's net profit in 2004 based on our conservative assumption of 35% payout. However, in our view there is rather a positive surprise risk on KB's dividend payments. Outlook: In our view, the outlook for KB is rather positive. We expect a 25 to 50 bp hike in interest rates by the end of the year, which should further improve interest rate margins and consequently top line and operating profit growth of KB. We expect KB's top line to grow 4% yoy in 2004. In addition we expect KB's management to keep operating costs at low levels, which should be reflected by a low cost/income ratio at around 51% in 2004. As a result, we expect KB's operating profit to grow 9% yoy in 2004. On the negative side, KB might create additional provisons for its collatalized debt obligation (CDO) portfolio due to two reasons. The credit rating of the CDO portfolio has worsened over time. Therefore KB had to post an impairment charge of CZK 218 mn 1H 2004. In addition, possible interest rate hikes in the USA by the end of 2004 might further reduce the fair value of KB's CDO portfolio. Despite that, S&P recently upgraded its longterm credit rating on KB deposits from BBB to BBB+. Recommendation: We set our price target for KB stock at CZK 2,900 for the end of this year, which means that in our view further upside potential for the stock is limited. We believe that KB stock is fairly valued at the current price level of around CZK 2,900 per share. Therefore we changed recently our "Buy" recommendation on KB stock to "Neutral". Key figures (IFRS) Analyst Jindrich Svatek +420/221/141/841 [email protected] EPS (CZK) P/E P/B ROE (%) ROA (%) DPS (CZK) Dividend yield (%) Payout ratio (%) Shares outstanding (mn) 2002 2003 2004e 230.6 9.0 2.8 30.6 2.0 40.0 1.9 17.3 38.0 243.7 9.9 2.5 25.0 2.1 200.0 8.3 82.1 38.0 Source: Komercni Banka, Raiffeisen Centrobank estimates 88 244.6 12.0 2.7 22.5 2.0 85.6 2.9 35.0 38.0 2005e 2006e 262.2 11.2 2.4 21.9 2.1 118.0 4.0 45.0 38.0 249.5 11.7 2.1 18.5 1.9 137.2 4.7 55.0 38.0 Komercni Banka H1 figures: KB's result for H1 2004 was better than our and market expectations. We see it positively that net interest income started to grow by 2.7% yoy in H1 2004. In addition, KB's net fees and commissions grew by 3.2% yoy in 1H 2004 as a result of increasing demand for loans, payment cards and settlements. All told, KB's top line grew by 2.6% yoy in 1H 2004 based on restated unconsolidated statements. On the balance sheet side, we can see impressive customer loan growth of 15.7% yoy and customer deposits growth of 8.7% yoy. The main drivers of loans growth remained mortgages (+45% yoy), consumer loans (+17% yoy), loans to small businesses (+47% yoy) and municipalities and medium-sized enterprises (+22 % yoy). On top of that, large corporate loans grew by 3% year to date. All told, KB's assets grew 6.3% yoy in 1H 2004. KB has a problem with its excess liquidity because there are limited opportunities for loan placements. Therefore KB is forced to buy fixed income securities or to increase inter-bank loans. KB's equity declined due to dividend payments and value changes in CDOs, which dropped by CZK 124 mn in 1H 2004 on the back of an increasing interest rate environment in the USA. Half year figures beat our estimates CDO portfolio: KB acquired the CDO portfolio at the end of 2000. Most of the portfolio (86%) is invested in the USA and particularly in the financial sector. The average maturity of the portfolio ends in 2011. On the negative side, the CDO portfolio is usually illiquid. As a matter of fact KB was unable to find a buyer for the portfolio. CDO portfolio remains a risky asset The initial amount invested in the portfolio was USD 426 mn, or CZK 11 bn. Part of the portfolio has already been repaid so the balance was USD 388 mn in 1H 2004. KB already created specific provisions for the portfolio of USD 91 mn, which is 23.5% of the current value. In other words, the current exposure of the portfolio reaches USD 297 mn, or CZK 7.7 bn. Even though the credit rating of the portfolio has deteriorated over time, 57% of the portfolio still has an investment grade rating, which means at least Baa3 or better. Therefore, the noninvestment grade part of the portfolio stood at 43% of CZK 7.7 bn, i.e. CZK 3.3 bn or CZK 87 per KB share. Even if we assume a default on the non-investment grade part, our price target would only be reduced by CZK 87 per share. KB's management indicated its dividend policy in the past which seems to be rather conservative. The management would prefer a payout ratio around 35%. This is also our assumption for a dividend payment from the 2004 net profit. However, KB's shareholders approved a special dividend of CZK 200 per share from the 2003 net profit due to the overcapitalisation of KB. Its capital adequacy ratio stood at 18.5% before the special dividend payment in 1Q 2004. After the dividend payment, the capital adequacy ratio fell to 14.8% in 1H 2004, which is still a high figure. Taking into account the good quality of KB's assets, we would rather expect a positive dividend surprise than lower dividend payments. KB’s CDO credit rating development 100% 80% 60% 40% 20% 0% 2002 Investment grade 2003 1H 2004 Non - investment garade Source: Komercni Banka A positive dividend surprise seems possible 89 Komercni Banka Outlook: In our view, the outlook for KB is rather positive. We expect a 25 to 50 bp hike in interest rates by the end of year, which should further improve interest rate margins and consequently the operating profitability of KB. We expect KB's top line to grow 4% yoy. In addition, we expect the management to keep KB's operating costs at low levels, which should be reflected by a low cost/income ratio at around 51% in 2004. We assumed KB's ROE to gradually decline to a sustainable level of 18% after 2007. Among our main balance sheet assumptions is net customer loan growth of 12.5% for this year and 12% for next year. Valuation: According to our EPS estimates KB trades at P/E multiples of 12.0 in 2004e and 11.2 in 2005e. The respective Price/Book ratios are 2.7 and 2.4. Based on these multiples, KB trades at a small discount compared to the peer group. For a valuation of KB stock we also used the equation P = (ROE1-g)/(required rate-g)*BVPS in combination with a discounted dividend model. We assumed a risk free rate of 5.5%, market premium of 5% and beta of KB stock at 1. In other words, our required rate of return stood at 10.5% for calculating terminal value. In addition, we assumed a sustainable ROE of 18% and a sustainable growth rate of 4%. We derived a price target around CZK 2,900 per share at the end of 2004. This would imply an expected P/BV ratio of 2.4 at an ROE of 22% in 2005 and a P/BV of 2.1 at an ROE of 21% in 2006. Ratio analysis in % 2002 2003 2004e 2005e 2006e ROE ROA NIM (on av. earnings assets) NIM (on av. risk weighted assets) 30.6 2.0 3.1 n.a. 25.0 2.1% 2.9 n.a. 22.5 2.0 2.9 n.a. 21.9 2.1 3.3 n.a. 18.5 1.9 3.4 n.a. F&C income/interest income F&C income/operating costs Cost/Income ratio Cash costs/ income Staff costs/total costs 66.8 70.8 52.0 44.7 21.4 73.0 78.8 50.5 44.4 21.6 71.9 77.9 51.3 44.5 20.1 63.5 76.6 48.7 41.7 20.3 61.7 75.6 48.5 41.0 20.3 281.6 18.8 13.2 27.6 6.5 267.0 26.0 19.3 29.2 8.3 258.7 29.0 22.2 30.9 8.7 239.1 32.0 25.2 33.4 9.2 224.9 34.2 27.4 35.3 10.0 19.1 65.0 (1.2) 6.6 101.0 (2.4) 5.8 80.6 (1.2) 5.4 72.4 (0.2) 5.2 83.4 0.8 Deposits/ net loans Retail loans/total loans mortgage loans/total loans loans/total assets equity/total assets NPLs/total loans Provisions/NPLs Provison expense/gross loans Source: Komercni Banka, Raiffeisen estimates 90 Komercni Banka Shareholder structure 35% 58% 30% 56% 25% 54% 20% 52% 15% 50% 10% 48% 5% 46% 0% 44% Free float 40% CIR (%) ROE (%) ROE and cost/income development Societe Generale 60% 2001 2002 2003 2004e2005e2006e ROE Cost/Income ratio Source: Komercni Banka, Raiffeisen estimates Source: Komercni Banka Income statement (consolidated, IFRS) in CZK mn Net interest income Net F&C income Income on securities Other income Total non(interest income Total banking income Staff costs Depreciation Other non(interest expenses Total non(interest expenses Restructuring costs Net operating income Provisions Profit before tax Income tax Reported net profit Adjusted net profit +/- % 2003 +/- % 2004e +/- % 12,447 (4.2%) 8,320 (0.9%) 1,426 (8.1%) 404 (53.8%) 10,150 (6.2%) 22,597 (5.1%) (5,257) (10.7%) (1,653) (34.8%) (4,843) (4.4%) (11,753) (12.9%) (1007) (42.6%) 9,837 14.9% 1,434 (126.9%) 11,271 248.8% (2,508) 185.3% 8,763 272.6% 6,320 168.7% 2002 11,937 8,711 800 441 9,952 21,889 (5,149) (1,347) (4,562) (11,058) (670) 10,161 3,122 13,283 (4,021) 9,262 6,768 (4.1%) 4.7% (43.9%) 9.2% (2.0%) (3.1%) (2.1%) (18.5%) (5.8%) (5.9%) (33.5%) 3.3% 117.7% 17.9% 60.3% 5.7% 7.1% 12,661 9,103 600 397 10,100 22,761 (4,892 (1,549 (5,246 (11,687 0 11,074 1,836 12,909 (3,615) 9,295 7,372 6.1% 4.5% (25.0%) (10.0%) 1.5% 4.0% (5.0% 15.0% 15.0% 5.7% n.a. 9.0% (41.2%) (2.8% (10.1%) 0.4% 8.9% 2005e +/- % 14,988 18.4% 9,513 4.5% 612 2.0% 405 2.0% 10,530 4.3% 25,518 12.1% (5,136) 5.0% (1,781) 15.0% (5,509) 5.0% (12,426) 6.3% 0 n.a. 13,091 18.2% 373 (79.7%) 13,465 4.3% (3,501) (3.1%) 9,964 7.2% 8,821 19.7% 2006e +/- % 16,110 7.5% 9,941 4.5% 624 2.0% 413 2.0% 10,978 4.3% 27,088 6.2% (5,315) 3.5% (2,049) 15.0% (5,784) 5.0% (13,147) 5.8% 0 n.a. 13,941 6.5% (1,465) (492.4%) 12,476 (7.3% (2,994) (14.5%) 9,482 (4.8% 9,608 8.9% Source: Komercni Banka, Raiffeisen estimates Balance sheet (consolidated, IFRS) in CZK mn % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & central bank Inter-bank loans (net) Loans due from CKO Customer loans Debt securities Other assets Total assets 14,377 (21.1%) 199,729 18.8% 35,440 (28.8%) 121,154 (1.3%) 36,143 (7.3%) 32,910 37.4% 439,753 4.3% 2002 12,340 201,638 24,303 130,900 48,444 29,940 447,565 (14.2%) 1.0% (31.4%) 8.0% 34.0% (9.0%) 1.8% 12,472 231,884 12,152 147,263 42,146 29,940 475,856 1.1% 15.0% (50.0%) 12.5% (13.0%) 0.0% 6.3% 12,289 238,840 0 164,934 46,361 31,138 493,562 (1.5%) 3.0% n.a. 12.0% 10.0% 4.0% 3.7% 11,394 240,034 0 181,427 48,679 32,383 513,918 (7.3%) 0.5% n.a. 10.0% 5.0% 4.0% 4.1% Central bank & inter(bank deps. Customer deposits Subordinated debt Certified debt Other liabilities Share capital Retained earnings & reserves Total equity Total liabilities & equity 22,549 341,114 6,100 18,267 17,965 19,005 14,753 33,758 439,753 18,959 349,505 0 21,348 17,354 19,005 21,394 40,399 447,565 (15.9%) 2.5% n.a. 16.9% (3.4%) 0.0% 45.0% 19.7% 1.8% 15,167 380,960 0 20,281 17,354 19,005 23,089 42,094 475,856 (20.0%) 9.0% n.a. (5.0% 0.0% 0.0% 7.9% 4.2% 6.3% 14,409 394,294 0 19,469 16,585 19,005 29,799 48,804 493,562 (5.0%) 3.5% n.a. (4.0%) (4.4%) 0.0% 29.1% 15.9% 3.7% 13,688 408,094 0 21,416 16,917 19,005 34,797 53,802 513,918 (5.0%) 3.5% n.a. 10.0% 2.0% 0.0% 16.8% 10.2% 4.1% (21.9%) 6.2% (15.9%) (34.2%) 39.3% 0.0% 221.2% 43.1% 4.3% Source: Komercni Banka, Raiffeisen estimates 91 BRD BRD – GSG September 2004 Neutral On track… Price (ROL) 27,200 Price (EURc) 66.2 17 Sep 2004 Target price (EURc) 57.0 Listing: Bucharest BSE ISIN Code 0000BRD510 Reuters RIC BRDX.BX Boomberg BRD RO Homepage www.brd.ro Free Float (%) 10.9%* Market Cap. (EUR mn) 922.3 Ø daily Turnover 01-07/04 (EUR mn) 0.2 BET Weighting (%) ROL/EUR 24% 41083 *incl. SIFs 36% BRD 000'S 30 28 26 24 22 20 18 16 14 12 O ND J F MA MJ J Banks A S O ND J F M AMJ J AS BRD ROMANIA BET (L) - PRICE INDEX Source: Thomson Financial Datastream Investment story: BRD-Groupe Société Générale (BRD) is Romania's second largest bank in terms of assets. The bank currently has 1.4 mn clients and some 900 thousand cards issued. BRD claims a 13% market share in terms of assets, some 16% of the loan market and around one-third of the credit card market. In early August, AVAS (the successor of the privatisation authority - APAPS) initiated the process of selling the State's remaining stake of 7.32%. Although the market expected a sale on the stock exchange, AVAS decided to sell its stake through direct negotiation. France's Société Générale, now holding a 51% stake in BRD, was the sole investor showing interest in the deal. H1 figures: BRD provides IFRS financials only once a year. We base our forecasts and recommendation on full IFRS financials, but believe that figures under Romanian standards offer a good insight on loans and deposit growth rates. BRD's loan book expanded by 13.2% in EUR terms in H1 04 (7.8% in real ROL terms), reaching EUR 1.3 bn. Deposits rose by 11.3% on YE03 in EUR terms (6.0% in real terms). The loans-to-deposits ratio stood at 80%, flat on end-2003. Outlook: Despite the fact that BRD managed to raise NIM in 2003 to 8% (from 7.5% in 2002), we believe that looking ahead the bank will align to the industry trend. Thus, in a falling inflation environment, we see NIM declining over the forecast period to 7.4% in 2004 and 5.7% in 2006. Following a significant decline in the cost/income ratio to 64% in 2003 from 71% during the previous year, we believe that the ratio will remain in the 63-65% range in the coming period. Accounting for the positive effect of the switch from inflation to nominal accounting starting 2004, as well as of the reduction in corporate tax from 25% to 19% as of January 1, 2005, we estimate that BRD will post ROEs in excess of 15% between 2004 and 2006. Recommendation: At the September 17 closing price of ROL 27,200 (EURc 66.2), BRD trades at a 2005e P/BV of 2.5x versus an average multiple of its CEE peers of 2.1x. However, we note that due to the fact that Romania remains underbanked compared to the CEE countries, the bank should benefit from the growth potential of the industry. Our target price of ROL 23,400 (EURc 57.0) per share implies a 14% discount to the current market price of BRD-GSG. We maintain our "Neutral" view on the stock. Key figures (BRD) Analyst Bogdan Campianu +40/21/30202-71 [email protected] multiples on EUR basis 2002 EPS (ROL) EPS (EURc) P/E BPS (EUR) P/B ROE ROA DPS (EURc) Dividend yield 848 2.35 18.4 0.24 1.81 9.7% 1.7% 2.39 5.5% Source: BRD, Raiffeisen Centrobank estimates 92 2003 2004e 1394 3.39 15.3 0.24 2.15 14.1% 2.4% 1.69 3.3% 1615 3.81 15.0 0.26 2.23 15.6% 2.4% 1.90 3.4% 2005e 2006e 1786 4.11 13.9 0.27 2.09 15.8% 2.1% 2.06 3.8% 1900 4.29 13.3 0.29 1.97 15.4% 1.9% 2.14 4.1% BRD BRD provides IFRS financials only once a year, while quarterly data is reported under the local standards, IAS compliant to some extent and thus dubbed BNR IAS. Although a direct comparison of the results reported under the two accounting standards is meaningless, we note that the latter offer a good insight on loans and deposit growth rates. This in turn is useful in revising the IFRS forecasts on which we base our recommendation. BRD provides IFRS financials only once a year BRD's loan book expanded by 13.2% in EUR terms in H1 04 (7.8% in real ROL terms), reaching EUR 1.3 bn. Loans to individuals stood at EUR 400 mn, up 21% on YTD basis, comprising 30% of total credit at end-June, from 28% as of end-2003. We calculate that the bank held an 18% market share in retail lending as of H1 04, virtually flat on YE03. In corporate lending BRD's market share stays around 15%, while the bank's overall market share in loans remains in the region of 16%. Deposits rose by 11.3% on YE03 in EUR terms (6.0% in real ROL terms). The loans-to-deposits ratio stood at 80%, flat on end-2003. The ROL/FCY breakdown of loans and deposits was not available. Loan book expanded by 13% in EUR terms in H1. Deposits' growth broadly in line Balance Sheet - BNR accounting standards (EUR mn) Cash and Banks Securities Portfolio H1 03 H2 03 H1 04 457.7 540.9 669.2 19.6 11.5 26.7 Change (EUR) yoy YTD 46.2% 2002 2003 23.7% 652.3 540.9 36.3% 132.1% 103.1 11.5 1,044.1 1,189.0 1,345.9 28.9% 13.2% 853.0 1,189.0 Total assets 1,760.2 1,974.5 2,299.1 30.6% 16.4% 1,829.6 1,974.5 Customer deposits 1,318.3 1,508.7 1,679.2 27.4% 11.3% 1,407.6 1,508.7 Customer loans, net Borrowings 126.7 138.1 235.3 85.7% 70.4% 109.9 138.1 Equity 244.6 289.7 307.4 25.7% 6.1% 270.6 289.7 Source: BRD Income Statement - BNR accounting standards H1 03 H2 03 H1 04 Interest income 98.5 119.1 136.9 Interest expense 37.7 47.2 Net interest income 60.8 71.9 Provision for Loan Losses (-) Change (EUR) yoy hoh 2002 2003 245.0 217.6 38.9% 14.9% 58.7 55.6% 24.5% 137.4 84.9 78.1 28.6% 8.6% 107.6 132.7 (15.5) (14.4) (6.3) (20.8) Net Trading Gains / (Losses) 10.4 11.1 10.1 (3.0%) (9.2%) 40.8 21.6 Net Fees and Commissions 32.0 37.8 34.4 7.7% (9.0%) 60.8 69.8 2.3 3.9 3.8 60.4% (3.9%) 5.7 6.3 (55.6) (74.6) (63.4) 14.0% (15.0%) (121.8) (130.2) Other non(Interest Income Other non(Interest Expenses (11.4) (26.5%) (21.0%) Profit before taxes 34.3 45.0 51.6 50.4% 14.8% 86.8 79.3 Net profit 28.6 34.2 37.9 32.6% 10.8% 72.0 62.8 Source: BRD State's stake: In early August, AVAS (the successor of the privatisation authority - APAPS) initiated the process of selling the State's remaining 7.32% stake in BRD. Although the market expected a sale on the stock exchange, AVAS decided to sell its stake through direct negotiation. France's Société Générale, now holding a 51% stake in BRD, was the sole investor showing interest in the deal. The bid placed by SocGen was put by the media at EUR 40 mn, corresponding to ROL 16,000 (EURc 39.2) per share. On the bright side, AVAS' opting for a direct SocGen - the sole bidder for the State's 7.3% stake 93 BRD sale removed fears of a share overhang that might have occurred should the block have been dumped on the market. Moreover, the fact that Société Générale's offer pointed to a 40% discount to the market price had virtually no influence on the stock price. BRD to post ROEs in excess of 15% in 20042006 Outlook: The bank has released FY03 IFRS financials long after our May update. We have used those together with H1 04 financials reported under Romanian standards to revise our earlier forecasts. Despite the fact that BRD managed to raise NIM in 2003 to 8% (from 7.5% in 2002), we believe that looking ahead the bank will align to the industry trend. Thus, in a falling inflation environment, we see NIM declining over the forecast period to 7.4% in 2004 and 5.7% in 2006. Following a significant decline in the cost/income ratio to 64% in 2003 from 71% during the previous year, we believe that the ratio will remain in the 63-65% range in the coming period. Taking into account the positive effect of the switch from inflation to nominal accounting starting 2004, as well as of the reduction in corporate tax from 25% to 19% as of January 1, 2005 we estimate that BRD-GSG will post ROEs in excess of 15% between 2004 and 2006. We remain Neutral Valuation: At the September 17 closing price of ROL27,200 (EURc66.2), BRD trades at a 2005e P/BV of 2.5x versus an average multiple of its CEE peers of 2.1x. However, we note that due to the fact that Romania remains underbanked compared to the CEE countries, the bank should benefit from the growth potential of the industry. Also, BRD still holds the maximum weighting in the BET index (25%) and remains one of the most liquid stocks traded at the BSE. As such, it is likely to continue to attract a significant part of the funds entering the capital market. Our target price of ROL 23,400 (EURc 57.0) per share implies a 14% discount to the current market price of BRD. We maintain our “Neutral” view on the stock. Ratio Analysis in % 2002 2003 2004e 2005e 2006e ROE ROE adj. Goodwill amortisation ROA Return on avg. Risk weighted assets 9.7 9.7 1.7 3.1 14.1 14.1 2.4 3.8 15.6 15.6 2.4 3.5 15.8 15.8 2.1 3.2 15.4 15.4 1.9 2.8 NIM (on avg. Earning assets) NIM (on avg. Risk weighted assets) 7.5 11.1 8.0 10.6 7.4 9.6 6.3 8.3 5.7 7.4 F&C income / interest income F&C income / operating income Costs / income Staff costs / total operating costs 51.9 32.3 70.7 40.1 54.7 34.6 63.6 38.1 56.8 36.1 63.1 37.6 60.1 37.5 64.0 37.1 62.9 38.5 64.6 36.9 Deposits / loans (gross) Retail loans / total loans Mortgage loans / total loans Loans / Total Assets Equity / Total Assets 168.1 16.8 n.a. 42.7 17.8 129.7 28.5 n.a. 56.5 16.4 124.6 30.8 n.a. 59.3 14.1 121.8 33.2 n.a. 60.3 12.9 117.4 34.9 n.a. 62.0 12.3 NPL / customer loans Provision expense / gross loans n.a. (0.67) n.a. (1.33) n.a. (1.42) n.a. (1.31) n.a. (1.20) Source: BRD, Raiffeisen estimates 94 BRD ROE and cost/income development 75.0% 20.0% SIFs (combined) 26% 65.0% 10.0% 60.0% 5.0% CIR (%) 70.0% 15.0% ROE (%) Shareholder structure 55.0% 0.0% 50.0% others 11% 2002 2003 2004e 2005e 2006e ROE Societe Generale 51% EBRD 5% Cost/income Source: BRD, Raiffeisen estimates AVAS 7% Source: BRD Income Statement IFRS (consolidated IFRS) Total interest income Total interest expense Net interest income Loan provisions Net interest less provisions Comission income, net Total non(interest income Inc. Bef. non(interest exp. Personnel expenses D&A Other exoense Total non(interest expense Net operating profit Loss on monetary positions Profit before tax Income Tax Net Profit 2002 +/- % 2003 +/- % 2004e +/- % 244.2 (128.8) 115.4 (5.7) 109.6 59.9 76.0 185.6 (54.3) (28.6) (52.5) (135.3) 50.3 (3.5) 46.8 (14.0) 32.8 (18.3%) (26.0%) (7.7%) (55.2%) (2.4%) 4.7% (15.6%) (8.3%) 0.3% (1.2%) 12.2% 4.2% (30.7%) (59.3%) (26.8%) (38.2%) (20.6% 213.4 (81.8) 131.7 (16.2 115.5 72.1 92.7 208.2 (54.4) (32.5) (55.8) (142.7) 65.5 (7.1) 58.4 (11.1) 47.2 (12.6%) (36.5%) 14.2% 184.1% 5.3% 20.4% 22.0% 12.2% 0.3% 13.5% 6.3% 5.4% 30.2% 103.4% 24.7% (20.8%) 44.3% 235.3 (89.3) 145.9 (22.2) 123.7 82.9 106.1 229.9 (59.8) (36.0) (63.3) (159.1) 70.8 0.0 70.8 (17.7) 53.1 10.2% 9.3% 10.8% 36.6% 7.2% 15.1% 14.5% 10.4% 9.8% 10.8% 13.6% 11.5% 8.1% (100.0%) 21.3% 59.3% 12.3% 2005e +/- % 2006e +/- % 232.3 (1.2%) (81.0) (9.4%) 151.4 3.7% (24.4) 10.1% 126.9 2.6% 91.0 9.7% 115.6 8.9% 242.5 5.5% (63.3) 6.0% (38.4) 6.5% (69.1) 9.2% (170.9) 7.4% 71.6 1.2% 0.0 71.6 1.2% (14.3) (19.0%) 57.3 8.0% 242.7 (86.5) 156.2 (25.5) 130.7 98.2 124.2 254.9 (66.8) (40.7) (73.8) (181.2) 73.7 0.0 73.7 (14.0) 59.7 4.5% 6.8% 3.2% 4.4% 3.0% 8.0% 7.5% 5.1% 5.4% 5.9% 6.7% 6.0% 2.9% 2.9% (2.2%) 4.2% Source: BRD, Raiffeisen estimates Balance Sheet IFRS (consolidated IFRS) 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & Deposits Treasury securities Other securities Loans, net Lease receivables Interest earning assets Investments in equities Tangible assets, net Goodwill, net Intangible assets, net Other assets, net Total assets 632.3 104.1 1.9 798.3 15.2 1,533.3 13.3 272.5 14.2 10.8 9.1 1,871.7 33.8% 5.6% 0.1% 42.7% 0.8% 81.9% 0.7% 14.6% 0.8% 0.6% 0.5% 100.0% 542.5 11.5 1.2 1,160.8 53.9 1,770.9 11.4 248.3 12.2 6.1 5.7 2,053.7 26.4% 0.6% 0.1% 56.5% 2.6% 86.2% 0.6% 12.1% 0.6% 0.3% 0.3% 100.0% 642.0 10.4 1.3 1,494.0 69.0 2,219.0 10.9 269.9 12.3 5.2 4.9 2,519.9 25.5% 0.4% 0.1% 59.3% 2.7% 88.1% 0.4% 10.7% 0.5% 0.2% 0.2% 100.0% 752.6 10.1 1.4 1,778.9 82.9 2,635.4 10.8 290.3 12.3 4.9 4.6 2,948.8 25.5% 0.3% 0.0% 60.3% 2.8% 89.4% 0.4% 9.8% 0.4% 0.2% 0.2% 100.0% 786.1 11.0 1.5 2,032.0 92.9 2,938.2 11.8 316.6 13.4 5.3 5.0 3,275.7 24.0% 0.3% 0.0% 62.0% 2.8% 89.7% 0.4% 9.7% 0.4% 0.2% 0.2% 100.0% Total deposits Borrowings Deferred tax liability, net Other liabilities Total Liabilities Interest bearing liabilities Total shareholders' equity Total liabilities & Equity 1,425.6 79.3 25.1 8.8 1,538.8 1,504.9 332.9 1,871.7 76.2% 4.2% 1.3% 0.5% 82.2% 80.4% 17.8% 100.0% 1,583.1 107.4 12.9 14.1 1,717.6 1,690.6 336.1 2,053.7 77.1% 5.2% 0.6% 0.7% 83.6% 82.3% 16.4% 100.0% 1,944.9 189.9 12.4 16.6 2,163.7 2,134.8 356.2 2,519.9 77.2% 7.5% 0.5% 0.7% 85.9% 84.7% 14.1% 100.0% 2,264.1 274.5 12.9 18.2 2,569.7 2,538.6 379.1 2,948.8 76.8% 9.3% 0.4% 0.6% 87.1% 86.1% 12.9% 100.0% 2,492.2 346.4 14.2 19.8 2,872.7 2,838.6 403.0 3,275.7 76.1% 10.6% 0.4% 0.6% 87.7% 86.7% 12.3% 100.0% Source: BRD, Raiffeisen estimates 95 Banca Transilvania Banca Transilvania September 2004 Sell Banks Expectations confirmed but the stock is expensive… Price (ROL) 7,250 Price (EURc) 17.6 17 Sep 2004 Target price (EURc) 13.9 Listing: Bucharest BSE ISIN Code 0000TLV510 Reuters RIC BATR.BX Boomberg TLV RO Homepage www.bancatransilvania.ro Free Float (%) 25%* Market Cap. (EUR mn) 235.6 Ø daily Turnover 01-07/04 (EUR mn) 0.3 BET Weighting (%) 24% ROL/EUR 41083 *incl. local investors/founders 85% Banca Transilvania 8000 7000 6000 5000 4000 3000 2000 O N D J F M A M J J A S O N D J F M A M J J AS BCA.TRANSILVANIA CLUJ ROMANIA BET (L) - PRICE INDEX Source: Thomson Financial Datastream Investment story: Banca Transilvania (BT) continued to deliver on the expected strong loan and asset growth during H1 2004. It improved its market share in terms of total assets to 2.7% from 2.3% as of YE03 and looks on track to achieving its target of entering the top ten of Romanian banks by year-end. Moreover, the bank posted improved bottom line performance, especially on the back of the switch to nominal accounting and we now expect it to post ROE in excess of 19% over the forecast period. The stock's weight in BET is just below the 25% cap imposed for weightings in the index and liquidity is good (by BSE standards). Finally, BT remains a potential acquisition target, as one of the tasks ahead for the management team seems to be to set the grounds for the sale of the bank sometime around 2006. H1 figures: Non-consolidated IFRS financial results for H1 04 revealing a 31% rise in total assets and a 39% increase in loans (YTD, EUR terms). The bank's balance sheet growth was funded by a 27% increase in deposits to EUR 326mn and a 28% rise in borrowed funds. On the P&L, the bank recorded NII of EUR 15mn, up 42% yoy in EUR terms. Net fee and commission income of EUR 8.0 mn was up 49% yoy in EUR terms, covering 45% of operating expenses, flat on H1 03. Operating profit was up 25% in EUR-terms to EUR 6.2 mn while net income of EUR 5.1 mn was up 104% in EUR-terms, due to the impact of the change from hyperinflationary to nominal accounting. Outlook: The bank sticks to the targets announced in the 2004 budget where total assets and loans are expected to grow more than 40% and 50% in real terms, respectively. Despite an expected decline in NIM in line with inflation and an anticipated deterioration in the cost/income ratio on the back of the aggressive strategy adopted by the bank, we see BT posting ROEs in excess of 19% over the forecast period. This is mainly due to the positive impact of the switch to nominal accounting and of the reduction in corporate tax from 25% to 19% as of 2005. Recommendation: BT now trades at a 2005e P/BV multiple of 3.2x (the highest in our comparison universe) pointing to a premium of 54% to the average multiple of its peers. At average 2004/2005e ROE of 19.9% we believe that the stock should trade at a 2005e P/BV of 2.3x and set our target price at ROL 5,700 (EURc 13.9) per share. At September 17 closing BT traded at a 28% premium to our target. We downgrade the stock from "Neutral" to "Sell". Key figures (IFRS) multiples on EUR basis Analyst Bogdan Campianu +40/21/30202-71 [email protected] EPS (ROL) EPS (EURc) P/E BPS (EUR) P/B ROE ROA DPS* Dividend yield 2002 102.2 0.54 9.7 0.034 1.52 17.0% 3.2% 0.0 0.0% 2003 2004e 193.4 0.62 13.6 0.040 2.07 16.5% 2.6% 0.0 0.0% 253.2 0.86 20.8 0.047 3.81 19.8% 2.5% 0.0 0.0% 2005e 2006e 364.1 1.01 17.6 0.056 3.19 19.9% 2.2% 0.0 0.0% 440.6 1.20 15.0 0.067 2.68 19.6% 2.1% 0.0 0.0% *Banca Transilvania pays stock dividends only; Source: Banca Transilvania, Raiffeisen estimates 96 Banca Transilvania BT continued to deliver on its aggressive growth strategy expanding its network by another 21 branches in H1 2004, out of the planned 30 new units for the year. It currently operates 91 branches and claimed a market share of 2.7% as of end-June (up from 2.3% as of YE03). The bank, now ranking eleventh in terms of TA, plans to enter the top ten of Romanian banks by year-end. Market share continues to grow According to the management, BT managed to expand its overall customer base by 25% during the first semester of 2004 (the retail customer base was up 27% while the corporate customer base grew by 10%). Over the period, the bank's ATM and POS networks reached 194 and 999, respectively, expanding by 11% and 25%, respectively. The bank recently presented non-consolidated and un-audited IFRS financial results: Balance sheet: During H1 04, BT persisted in growing faster than the banking sector as a whole, with total assets reaching EUR 455 mn from EUR 348 mn as of YE03, rising 31% in EUR-terms and 25% in real ROL-terms. Earning assets rose 80% yoy in EUR-terms to EUR 405 mn, triggered by a 97% rise in loans (90% in real ROL terms). The bank's loan portfolio grew 39% on an YTD basis (32% in real ROL-terms). Loans up 39% in H1 versus the sector’s 17% growth BT's balance sheet growth was funded by strong deposit growth and helped by the increase in borrowed funds, especially due to financing programs with international institutions. Deposits rose 83% yoy in EURterms (77% in real ROL terms) to EUR 326 mn with demand deposits representing 25% of the total, down from 30% in the same period of 2003 and 31% at YE03. The breakdown between ROL and FCY deposits was not available. The loans-to-deposits ratio climbed to 85% from 77% at end-2003 and 79% one year ago. Borrowed funds rose 28% (EUR-terms), as the bank has made use of the credit lines attracted from EBRD, DEG and FMO. Profit and Loss: BT recorded NII of EUR 15 mn, up 42% yoy in EUR terms, corresponding to an annualized NIM of 8.3%, down from 9.5% in H1 03. Net fee and commission income of EUR 8.0 mn was up 49% in EUR terms, covering 45% of operating expenses, flat on H1 03. Bottom line boosted by the switch to nominal accounting Operating expenses, influenced as anticipated by the aggressive expansion of the bank, stood at USD 18mn, up 50% yoy. The cost/income ratio stood at 66% in H1 04, up from 64% in the same period of 2003. Operating profit was up 25% in EUR-terms to EUR 6.2 mn. Net income of EUR 5.1 mn rose 104% in EUR-terms, due to the impact of the change from hyperinflationary accounting to nominal accounting. Outlook: The bank sticks to the targets announced in the 2004 budget where total assets and loans are expected to grow more than 40% and 50% in real terms, respectively. Based on the recently announced H1 IFRS results we have fine-tuned our estimates for 2004 and extended our forecast period to 2006. We see NIM declining in line with infla- 97 Banca Transilvania Expansion set to continue and NIM to decline tion to 7.4% in 2004 and 5% in 2006. On the other hand, we expect the aggressive expansion strategy pursued by the bank to be reflected in higher operating expenses (personnel, depreciation, marketing). Thus, we expect the cost/income ratio to hover around 67% in 2004 and 2005 and to start to decline in 2006. However, due to the positive impact of the switch to nominal accounting as well as of the reduction in corporate tax from 25% to 19% as of January 1, 2005, we see BT posting ROEs in excess of 19% over the forecast period. Trading at the highest 2005e P/BV among peers Valuation: Since our May update BT stock has gained 29% in EURterms bringing the YTD performance of the stock to a staggering 102% in EUR terms. BT has outperformed the BET index by 35% during 2004 and now trades at a 2005e P/BV multiple of 3.2x (the highest in our comparison universe), pointing to a premium of 54% to the average multiple of its peers. As we expect BT to post an average 2004/2005e ROE of 19.9% (significantly above the average of its peers) we believe that the stock should trade at a 2005e P/BV of 2.3x and set our target price at ROL 5,700 (EURc 13.9) per share. BT has consistently proved its ability to post higher growth rates than its peers and we believe it has the ability to continue on that path. The stock's weight in BET is just below the 25% cap imposed for weightings in the index and liquidity is good (by BSE standards). Finally, BT remains a potential acquisition target, as one of the tasks ahead for the management team seems to be to set the grounds for the sale of the bank sometime around 2006. On the other hand, the aggressive growth strategy pursued by the bank, and especially the rapid expansion of its loan portfolio, alongside the size issue, increase the risks in the stock. Currently, BT trades at a 28% premium to our target. We downgrade the stock from “Neutral” to “Sell”. Ratio Analysis in % 2002 2003 2004e 2005e 2006e ROE ROE adj. goodwill amortisation ROA Return on avg. risk weighted assets 17.0 17.0 3.2 n.a. 16.5 16.5 2.6 n.a. 19.8 19.8 2.5 n.a. 19.9 19.9 2.2 n.a. 19.6 19.6 2.1 n.a. NIM (on avg. earning assets) NIM (on avg. total assets) 12.0 11.0 9.0 8.2 7.4 6.7 5.7 5.3 5.0 4.6 F&C income / interest income F&C income / operating income Costs / income Staff costs / total operating costs 44.9 28.3 60.2 52.7 54.4 32.0 63.5 52.3 63.5 36.7 67.2 48.7 68.8 38.7 67.0 49.4 71.0 39.6 65.6 50.6 Deposits / loans (gross) Retail loans / total loans Mortgage loans / total loans Loans / total assets Equity / total assets 166.0 23.2 n.a. 43.4 18.0 127.8 34.2 n.a. 57.2 14.4 119.4 36.9 n.a. 60.6 11.8 112.2 39.9 n.a. 62.9 10.6 107.5 41.9 n.a. 64.4 10.4 NPL / customer loans Provisions / NPL Provision expense / gross loans n.a. n.a. (0.41) n.a. n.a. (0.26) n.a. n.a. (0.72) n.a. n.a. (0.63) n.a. n.a. (0.60) Source: Banca Transilvania, Raiffeisen estimates 98 Banca Transilvania ROE and cost/income development EBRD 15% 70.0% 25.0% 20.0% 65.0% 15.0% 60.0% 10.0% 55.0% 5.0% 0.0% Foreign indiv. 7% 50.0% 2002 2003 2004e 2005e 2006e ROE Domestic indiv. 43% Foreign instit. 13% CIR (%) ROE (%) Shareholder structure Domestic instit. 22% Cost/income Source: Banca Transilvania, Raiffeisen estimates Source: Banca Transilvania Income statement (consolidated, IFRS) in EUR mn 2002 +/- % 2003 +/- % 2004e +/- % 2005e +/- % 2006e +/- % Total interest income Total interest expense Net interest income Loan provisions Net interest less provisions Comission income, net FX income, net Other income Total non(interest income Inc. Bef. non(interest exp. Personnel expenses D&A Other expenses Total non(interest expense Net operating profit Loss on monetary positions Profit before tax Total income tax Net Profit 38.6 (16.0) 22.7 (0.4) 22.2 10.2 2.9 0.6 13.7 36.0 (11.5) (3.8) (6.5) (21.9) 14.1 (4.8) 9.3 (2.7) 6.6 (2.4%) (6.1%) 0.4% (93.2%) 36.6% 8.1% 23.8% (58.1%) 3.5% 21.7% 16.6% 211.9% 3.0% 25.4% 16.3% (16.8%) 46.0% 32.6% 52.3% 37.8 (14.0) 23.8 (0.5 23.3 12.9 3.4 0.8 17.1 40.4 (13.6) (1.8 (10.5 (26.0) 14.4 (4.0) 10.4 (2.8) 7.6 (2.1%) (12.0%) 4.9% 20.0% 4.6% 26.9% 16.0% 31.6% 24.8% 12.3% 17.8% (52.2%) 61.6% 18.6% 2.5% (15.2%) 11.6% 2.7% 15.0% 51.4 (22.1) 29.3 (2.4 26.9 18.6 4.2 1.0 23.8 50.7 (17.4) (3.1) (15.2) (35.7) 15.0 0.0 15.0 (4.0) 11.0 35.8% 57.2% 23.2% 357.4% 15.8% 43.9% 22.6% 26.1% 38.8% 25.6% 27.9% 70.5% 43.9% 37.4% 4.2% (100.0%) 44.7% 44.5% 44.9% 56.0 (23.5) 32.5 (2.9) 29.6 22.3 4.7 1.1 28.1 57.7 (20.1) (3.6) (17.0) (40.6) 17.1 0.0 17.1 (3.6) 13.5 9.0% 6.5% 10.9% 22.0% 9.9% 20.1% 12.8% 9.3% 18.4% 13.9% 15.4% 14.9% 11.8% 13.8% 14.0% 15.7% 22.6% 10.6% 17.6% 10.0% 14.2% 9.0% 8.7% 13.1% 11.5% 12.2% 11.1% 5.9% 9.5% 16.4% 14.0% (9.6%) 22.6% 64.8 (28.8) 35.9 (3.4) 32.5 25.5 5.1 1.2 31.8 64.4 (22.5) (4.0 (18.0) (44.5) 19.9 0.0 19.9 (4.0) 16.0 16.4% 10.9% 17.9% Source: Banca Transilvania, Raiffeisen estimates Balance Sheet (consolidated, IFRS) in EUR mn 2002 % TA 2003 % TA 2004e % TA 2005e % TA 2006e % TA Cash & Deposits Treasury securities Other securities Loans, net Lease receivables Interest earning assets Investments in equities Tangible assets, net Intangible assets, net Other assets, net Total assets 77.0 33.2 1.3 102.6 6.2 215.3 1.6 11.5 0.6 2.0 236.1 32.6% 14.1% 0.5% 43.4% 2.6% 91.2% 0.7% 4.9% 0.3% 0.9% 100.0% 93.6 18.5 2.3 198.9 12.4 317.0 1.7 17.0 1.8 1.4 347.7 26.9% 5.3% 0.6% 57.2% 3.6% 91.2% 0.5% 4.9% 0.5% 0.4% 100.0% 136.4 16.8 3.1 322.0 19.9 488.5 2.9 23.6 2.5 3.7 530.9 25.7% 3.2% 0.6% 60.6% 3.7% 92.0% 0.5% 4.4% 0.5% 0.7% 100.0% 173.0 15.8 3.9 445.0 29.1 658.8 3.6 29.6 2.9 4.0 706.9 24.5% 2.2% 0.6% 62.9% 4.1% 93.2% 0.5% 4.2% 0.4% 0.6% 100.0% 201.1 16.4 4.9 553.4 36.2 804.9 4.1 35.3 3.3 5.0 859.8 23.4% 1.9% 0.6% 64.4% 4.2% 93.6% 0.5% 4.1% 0.4% 0.6% 100.0% Total deposits Borrowings Other liabilities Total Liabilities Interest bearing liabilities Total shareholders' equity Total Liabilities & Equity 174.0 16.1 3.6 193.7 190.1 42.4 236.1 73.7% 6.8% 1.5% 82.0% 80.5% 18.0% 100.0% 257.9 36.9 2.8 297.6 294.8 50.1 347.7 74.2% 10.6% 0.8% 85.6% 84.8% 14.4% 100.0% 390.2 64.9 13.1 468.2 455.1 62.7 530.9 73.5% 12.2% 2.5% 88.2% 85.7% 11.8% 100.0% 509.5 108.3 14.4 632.2 617.8 74.8 706.9 72.1% 15.3% 2.0% 89.4% 87.4% 10.6% 100.0% 608.4 146.5 15.7 770.6 754.9 89.2 859.8 70.8% 17.0% 1.8% 89.6% 87.8% 10.4% 100.0% Source: Banca Transilvania, Raiffeisen estimates 99 Notes 100 Key abbreviations Key abbreviations CEEC-20 The 20 Central and Eastern European markets NMC-8 The eight new EU member countries from CEE Poland (PL) Hungary (HU) Czech Republic (CZ) Slovakia (SK) Slovenia (SL) Estonia (ES) Latvia (LT) Lithuania (LI) CC-3 The three second wave EU accession countries Bulgaria (BG) Romania (RO) Croatia (HR) SEEC-6 The remaining six markets of South East Europe Serbia (SR) Bosnia a. H. (BH) Macedonia (MK) Kosovo (KO) Albania (AL) Moldava (MD) Russia Russia (RU) FSC-2 The two former soviet republics on the European continent Ukraine (UA) Belarus (BY) GDP PPP yoy FX bn mn Gross Domestic Product Purchasing Power Parity Year on year Foreign exchange billion million RoA RoE NIM NII C/I P/E P/B Return on Assets Return on Equity Net interest margin Net interest income Cost income ratio Price earnings ratio Price book ratio 101 Acknowledgements Acknowledgements Published by: Raiffeisen Zentralbank Österreich AG and Raiffeisen Centrobank AG Raiffeisen Zentralank Österreich AG Am Stadtpark 9, A-1030 Vienna Postal address: P.O. Box 50, A-1011 Vienna Phone: +43-1-71 707-0 Fax: +43-1-71 707-1715 www.rzb.at, www.rzbgroup.com Raiffeisen Centrobank AG Tegetthoffstraße 1, A-1010 Vienna Phone: + 43-1-515 20-0 Fax: +43-1-515 20-180 www.rcb.at Published and manufactured in: Vienna Design: Marion Stadler, ERPEG Publikations Gesellschaft mbH This report was completed on 24 September 2004 Analysts: Walter Demel, CEFA Stefan Maxian, CFA 102 Raiffeisen Zentralbank Österreich AG, Vienna +43-1-71 707-1526, [email protected] Raiffeisen Centrobank AG, Vienna +43-1-515 20-177, [email protected] Acknowledgements Analysts of this report (continued): Janusz Siatkowski, CFA Raiffeisen Bank Polska S.A., Warsaw +48-22-5853-171, [email protected] Kornel Sarkadi Szabo Raiffeisen Bank Rt., Budapest +36-1-484-4812, [email protected] Jindirch Svatek Raiffeisenbank a.s., Prague +420-221-141-841, [email protected] Bogdan Campianu Raiffeisen Bank S.A., Bucharest +40-21-30202-71, [email protected] RZB network contributions: Slawomir Szkutnik Agnes Tolgyes Zoltan Torok Bence Lany Pavel Mertlilk Maria Bilcikova Robert Prega Alenka Plut Tsvetanka Madjounova Elena Stancheva Mihail Catalin Ion Anton Starcevic Hrvoje Dolenec Ljiljana Grubic Miodrag Dimitrijevic Osvelda Qafa Rigers Muhedini Madina Butaeva Elena Romanova Petr Prikhodko Sergey Naumov Vladimir Grigoriev Olga Laschevskaya Raiffeisen Bank Polska S.A., Warsaw Raiffeisenbank Rt., Budapest Raiffeisenbank a.s., Prague Tatra banka a.s., Bratislava Raiffeisen Krekova Banka d.d., Maribor Raiffeisenbank EAD, Sofia Raiffeisen Bank S.A., Bucharest Raifeisenbank Austria d.d., Zareb Raiffeisenbank a.d., Belgrade Raiffeisen Bank d.d. 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Raiffeisen Investment AG, Vienna Head: Christian Säckl Sales: Hans Rettl Tel: +43 1 71707 3347 Tel: +43 1 71707 3300 Contact: Dusan Pivka Tel: +421 2 5919 1221 Head: Wilhelm Celeda Sales: Manfred Schmirl Contact: Heinz Sernetz Tel: +43 1 515 20 402 Tel: +43 1 515 20 465 Tel: +43 1 710 54 00 13 Bucharest: Raiffeisen Capital & Investment S.A. Moscow: ZAO Raiffeisenbank Austria Budapest: Raiffeisen Bank Rt. Prague: Raiffeisenbank a.s. Contact: Dragos Neacsu Tel: +40 21 302 00 82 Contact: Gabor Nagy Tel: +36 1 4844 813 Kiev: Raiffeisenbank Ukraine Contact: Vladislav Anisimov Tel: +380 44 49005 43 Contact: Sergei Monin Contact: Martin Blaha Tel: +7 095 721 9972 Tel: +420 221 141 863 Sofia: Raiffeisenbank (Bulgaria) EAD Contact: Dragomir Velikov Tel: +359 2 91985 451 Maribor: Raiffeisenbank Krekova Banka d.d. Warsaw: Raiffeisen Bank Polska S.A. Minsk: Priorbank JSC Zagreb: Raiffeisenbank Austria d.d. Contact: Primoz Kovaæiæ Contact: Vladimir Dedyul Tel: +386 2 2293 119 Tel: +375 17 217 34 19I Contact: Konrad Sitnik Contact: Zoran Koscak Tel: +48 22 585 26 50 Tel: +385 1 4560 839 Commercial banks Raiffeisen Zentralbank Österreich AG, Vienna RZB Finance LLC, New York RZB London Branch RZB Bejing Branch Contact: Peter Bazil Martin Czurda Contact: David Cahill W. Ledochowski Tel: +43 1 71707 1547 Tel: +43 1 71707 1120 Tel: +44 20 7933 8001 Tel: +44 20 7933 8002 Raiffeisen Malta Bank plc., Sliema Contact: A. C. Schembri Tel: +356 21 320 942 Contact: Dieter Beintrexler Contact: Andreas Werner RZB Singapore Branch Contact: Rainer Silhavy Tel: +1 212 845 4123 Tel: +86 10 653 233 88 Tel: +65 653 192 00 Central and Eastern Europe Belgrade: Raiffeisenbank a.d. Contact: Oliver Rögl Bratislava: Tatra banka, a.s. Contact: Rainer Franz Bucharest: Raiffeisen Bank S.A. Contact: S. van Groningen Tel: +381 11 32021 02 Tel: +421 2 591 912 03 Tel: +40 21 32622 64 Contact: Péter Felcsuti Tel: +361 484 44 40 Kiev: JSCB Raiffeisenbank Ukraine Tel: +380 44 490 05 59 Maribor: Raiffeisen Krekova Banka d.d. Contact: Aleš Zajdela Minsk: Priorbank JSC Contact: Olga Gilakhwa Tel: +386 2 229 31 02 Tel: +375 17 217 34 01 Moscow: ZAO Raiffeisenbank Austria Contact: Michel Perhirin Contact: Rudolf Rabinak Tel: +420 2 21 141 289 Pristina: Raiffeisen Bank Kosovo J.S.C. Contact: Mike Issaias Tel: +381 38 226 400 114 Sofia: Raiffeisenbank (Bulgaria) EAD Budapest: Raiffeisen Bank Rt. Contact: Leonid Kryuchkov Prague: Raiffeisenbank a.s. Tel: +7 095 721 99 11 Contact: Momtchil Andreev Tel: +3592 91 985 101 Sarajevo: Raiffeisen Bank d.d. Bosna i Hercegovina Contact: Edin Muftic Tel: +387 33 208 366 Tirana: Raiffeisen Bank (Savings Bank of) Albania Contact: Steven Grunerud Tel: +355 422 93 04 Warsaw: Raiffeisen Bank Polska S.A. Contact: Piotr Czarnecki Tel: +48 22 585 20 17 Zagreb: Raiffeisenbank Austria d.d. Contact: Lovorka Penaviæ Tel: +385 1456 65 37