Mr. Bozidar Djelic

Managing Director, Lazard Sovereign Advisory Group

Former Deputy Prime Minister and Minister of Finance of Serbia;

The Plumbing: Financial Sector Development

Building Market Economies in Europe: Lessons and Challenges after 25 years of Transition

01 OCTOBRE 2010 CONFIDENTIEL B

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24

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2014

A The Western financial plumber was not sufficient after all

B However, a national financial plumber will not be sufficient either

C The best of both worlds: transparent plumbing serving a sustainable

development model for the real economy

1- Move beyond the traditional debate domestic vs. international

2- Strengthen domestic banks in order to serve countries’ developmental

objectives

3- Foster in a sound manner a more diverse foreign participation

01 OCTOBRE 2010 CONFIDENTIEL B

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2014

A The Western financial plumber was not sufficient after all

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2014

4 4

CIS: FOREIGN OWNERSHIP***

* Banks with over 50% foreign ownership

** 100% foreign-owned banks

*** % of total assets

Source: national sources, Raiffeisen RESEARCH

Foreign ownership of CESEE banks is on a slight decline but

remains very high, with the exception of CIS

SEE: FOREIGN OWNERSHIP**

** % of total assets

Source: national sources, Raiffeisen RESEARCH

CE: FOREIGN OWNERSHIP*

excluding OTP, * % of total assets

Source: national sources, Raiffeisen RESEARCH

100%

80%

60%

40%

20%

0%

SK HU CZ HU* PL SI

2008 2013

100%

80%

60%

40%

20%

0%

AL BH RO HR RS BG

2008 2013

100%

80%

60%

40%

0%

20%

UA BY RU

(50%)*

RU

(100%)**

2008 2013

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2014

5 5

LOANS IN FOREIGN CURRENCY (AS A % OF TOTAL) RANGE BETWEEN 20% (FOR CIS COUNTRIES) AND 60% (FOR

SEE COUNTRIES)

Source: national sources, Raiffeisen RESEARCH

De-euroization is still a big challenge in SEE

08 13 08 13 08 13

70

60

50

40

30

20

10

0

Central Europe Southeastern

Europe

Community of

Independent States

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6 6

CESEE: EXTERNAL POSITIONS OF CESEE BIS-REPORTING BANKS (US$BN)

Source: national central banks, Raiffeisen RESEARCH

Foreign banks have been disengaging…

1,000

900

800

700

600

500

400

300

200

100

0

2003 Q1 2014 Q1 2013 Q1 2012 Q1 2010 Q1 2011 Q1 2009 Q1 2008 Q1 2007 Q1 2005 Q1 2006 Q1 2004 Q1

CESEE

CESEE ex. RUS & TUR

US$210bn

(4.5% of

2013 GDP)

US$90bn

(1.9% of

2013 GDP)

US$184bn

(10.6% of

2013 GDP)

US$123bn

(7.1% of

2013 GDP)

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7 7

EXTERNAL POSITIONS OF BIS-REPORTING BANKS (CHANGE IN 2008-2013, % OF 2013 GDP)

Source: IMF

… but deleveraging is much more acute in some countries than

in others

-50

-40

-30

-20

-10

0

10

20

Lat

via

Est

on

ia

Hun

gary

Slo

ven

ia

Lit

huan

ia

Cro

atia

Bulg

aria

Ukra

ine

Ro

man

ia

BiH

Ser

bia

Mo

ldo

va

Cze

ch R

epub

lic

Po

lan

d

Russ

ia

Bel

arus

Slo

vak

Rep

ub

lic

Turk

ey

Mo

nte

neg

ro

Alb

ania

Mac

edo

nia

CE

SE

E

CE

SE

E e

xcl.

RU

S &

TU

R

01 OCTOBRE 2010 CONFIDENTIEL B

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B However, a national financial plumber will not be sufficient

either

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2014

9 9

PRESENCE OF STATE-OWNED BANKS (% OF TOTAL ASSETS)

Source: national central banks, Raiffeisen RESEARCH

The presence of the State in the banking sector as of yet is on

the rise only in CIS…

60

50

40

30

20

10

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CE SEE CIS

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10 10

DECLINING LEVELS OF LENDING: CREDIT TO PRIVATE SECTOR (% CHANGE, YEAR-ON-YEAR)

Source: national central banks, Raiffeisen RESEARCH

… amid a creditless recovery in CESEE…

35

30

25

20

15

10

5

0

-5 Jan-09 May-14 Jan-13 Sep-11 May10

Total: CESEE excl. TUS & TUR

Total: CIS & TUR

NFCs: CIS & TUR

NFCs: CESEE excl. TUS & TUR

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11 11

RISING LEVELS OF GROSS NPLS (AS A % OF TOTAL LOANS)

Source: IMF

… and lower credit quality

1,7

3,1

4,9

3,0

7,1 6,1

6,7

5,2

7,2

2,7 3,8

11,3

3,9 4,7

15,5 16,4 16,6

20,4

9,9

11,3 11,9

17,2

22,3

6,5

23,0

14,6

Bel

arus

Bo

snia

an

dH

erze

govin

a

Cro

atia

Hun

gary

Kaz

akh

stan

Lit

huan

ia

Mac

edo

nia

, F

YR

Mo

ldo

va

Mo

nte

neg

ro

Ro

man

ia

Russ

ia

Ser

bia

Ukra

ine

2008 2014F

01 OCTOBRE 2010 CONFIDENTIEL B

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C The best of both worlds: transparent plumbing serving a

sustainable development model for the real economy

Bu

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13 13

The best of both worlds: what kind of financial system do we

want for the 25 years to come?

Strengthen domestic banks in order to serve countries’ developmental objectives

Move beyond the traditional debate domestic vs. international

2

1

Foster in a sound manner a more diverse foreign participation 3

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14 14

CHANGE IN CROSS-BORDER EXPOSURES BETWEEN 2007 AND 2013(1):

Note: (1) Relative change 2007-2013, BIS-reporting European banks, Source: BIS, Raiffeisen Research, IMF

Move beyond the traditional debate domestic vs. international

Foreign banks are gaining experience, differentiating between

countries and increasingly linking lending to country

fundamentals

1

Czech Republic

Hungary

Poland

Slovak Republic

Slovenia

Albania

Bosnia and Herzegovina

Bulgaria

Croatia Romania

Serbia

Russia

Ukraine

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-15% -10% -5% 0% 5% 10% 15% 20% 25%

Change in banks’ cross- border exposures 2007-2013

Cumulative real GDP growth 2007-2013

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15 15

HIGHER RELIANCE ON DOMESTIC DEPOSITS VS. FOREIGN FUNDING – EVOLUTION OF BANKS’ FUNDING

SOURCES

Notes: CESEE excl. Russia and Turkey; year-on-year change in the stock of BIS banks’ exposure and domestic deposits in percent of GDP, exchange-rate adjusted. Excludes Latvia prior to 2011:Q3, Montenegro and Kosovo because of data

unavailability

Strengthen domestic banks in order to serve countries’ developmental objectives

Domestic deposits have had a countercyclical effect,

compensating for the decline in foreign funding

2

14

12

10

8

6

4

2

0

-2

-4

-6

2007:Q1 2008:Q4 2010:Q3 2012:Q2 2014:Q1

Δ Foreign banks

Δ Domestic deposits

Total

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16 16

ANNUAL AVERAGE CREDIT GROWTH BY GROUP OF BANKS

Source: Bankscope, IMF

0

5

10

15

20

25

30

35

40

45

2003-07 2008-12

Domestic banks Foreign banks

Strengthen domestic banks in order to serve countries’ developmental objectives

Furthermore, domestic banks have played to some extent a

countercyclical role and foreign banks a procyclical one in their

lending activities

2

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17 17

LOANS-TO-DEPOSITS ARE SLOWLY RECOVERING TO THEIR 2005 LEVELS IN MOST COUNTRIES

* Slovenia, Ukraine and Belarus in 2008 with L/D ratio values above 160%; Sl: 166%, UA: 205%, BY: 171%

Source: national central banks, Raiffeisen RESEARCH

160%

140%

120%

100%

80%

60%

40%

20%

0%

Po

lan

d

Hun

gar

y

Cze

ch R

ep.

Slo

vakia

Slo

ven

ia*

Ro

man

ia

Bulg

aria

Cro

atia

Ser

bia

Bo

snia

a.H

.

Alb

ania

Ukra

ine*

Russ

ia

Bel

arus*

CE SEE CIS

2005 2008 2013

Strengthen domestic banks in order to serve countries’ developmental objectives

Lower Loan-To-Deposits ratios increase stability but also cap

development opportunities, slowing down the pace of

convergence and of transition as a whole

2

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18 18

P/BV VS. ROAE FOR LOCAL AND INTERNATIONAL BANKS

Source: Companies, Factset

Strengthen domestic banks in order to serve countries’ developmental objectives

Markets seem to discount at this stage banks with international

networks vs. local banks

2

0,00x

0,50x

1,00x

1,50x

2,00x

2,50x

0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% 16,0% 18,0% 20,0%

Local Banks

International

Banks

RoAE 2015E

P/

BV

2015

E

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2014

19 19

SIZE OF CAPITAL MARKETS

Source: Bloomberg, World Bank (as of end-2013)

Foster in a sound manner a more diverse foreign participation

Local capital markets are still not large enough to compensate for

the deleveraging

Size of capital markets: c. US$450bn (equivalent to Austrian GDP)

Average of 20% of GDP in the region, as opposed to 50% in Eurozone

3

0%

10%

20%

30%

40%

50%

60%

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20 20

Foster in a sound manner a more diverse foreign participation

With some Western banks retreating from CEE, new types of

owners are emerging, calling for adequate regulation

Regional consolidators

Sberbank acquired Volksbank Int’l and Denizbank in 2011/12

OTP acquired Banco Popolare Croatia in 2014 and Banca Millenium

Romania from BCP en 2014

Domestic investors

Otkritie acquired a 20% stake in Nomos Bank (Aug 2012) with the

aim to consolidate 100% in the coming two years

Ukrainian Smart Group acquired Bank Forum in Q3 2012

MK Group in Serbia purchased a majority stake in AIK Banka

Sovereign Wealth Funds

SWF of Oman bought a 30% stake in Bulgarian Corporate

Commercial Bank

QIA invested c.$1bn in VTB as part of a c.$3bn investment by a

group of institutional investors

Private Equity: PE funds are restricted as bank investors in some

jurisdictions (e.g. Poland only allows minority stakes); though in some

situations they have been allowed to buy smaller banks

Dexia Banka Slovensko was bought by Penta Investments in 2011

3

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21 21

Foster in a sound manner a more diverse foreign participation

Bank profitability is still stronger in CE and CIS countries than in

the Eurozone, thus providing interesting acquisition

opportunities for focused players

LONG-TERM RETURNS ON EQUITY (%)

* H1 2013 data for euro area

Source: national central banks, Raiffeisen RESEARCH

25

23

20

18

15

13

10

8

5

3

0

-3

CE SEE CIS Euro area* CE (excl. Hungary)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

3

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22 22

NET PROFITABILITY OF BANKS

Source: Moody’s Research

The future starts today: Ukraine’s banking sector shows most

graphically the extent of what needs to be done in the near future

Declining profitability and soaring levels of low-quality loans are yet but the tip of the iceberg

NPL’S REMAINED HIGH IN 2013, AND ARE

EXPECTED TO FURTHER INCREASE IN 2014

Source: National Bank of Ukraine, Moody’s estimates

0%

5%

10%

15%

20%

25%

30%

35%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012 2013E 2014F

Loan Loss Reserves (%) Problem loans % loans

-0,1

-0,05

0

0,05

0,1

(6)

(4)

(2)

0

2

4

4Q12 1Q13 2Q13 3Q13 4Q13 4M14

Net Profit/(Loss) (UAH bn; lhs) ROE (%; rhs)