CEE on the lookout. 3 rd quarter Economic prospects better but still dull. FX risks partially easing off. Stay defensive in CIS credit

Transcription

1 Central & Eastern European Strategy 3 rd quarter 212 CEE on the lookout Economic prospects better but still dull FX risks partially easing off Stay defensive in CIS credit Fading risk aversion should favour CEE equities 3rd quarter 212 1

2 Content Central & Eastern European Strategy Topical issue: CEE weathers the Eurozone turbulence 3 Forecasts CEE incl. Austria 4 Asset allocation CEE incl. Austria 6 Special: No credit or funding crunch in CEE 1 Austria 12 CE: Poland 14 Hungary 16 Czech Republic 18 Slovakia 2 Slovenia 21 SEE: Croatia 22 Romania 24 Bulgaria 26 Serbia 27 Bosnia and Herzegovina 28 Albania 29 CIS: Russia 3 Ukraine 32 Belarus 34 Kazakhstan 35 Turkey 36 Sovereign Eurobonds 38 Corporate Eurobonds 4 Equity markets 42 Sectors 48 Equities - top picks 54 Equities - region overview 59 Sector weightings in comparison 63 Technical analysis 64 Quantitative analysis 66 Acknowledgements 67 Explanation: e... estimate f... forecast p... preliminary figures Abbreviations Currencies and Countries ALL Albanian lek BAM Bosnian marka BGN Bulgarian lev BYR Belarusian roubel CZK Czech koruna EKK Estonian kroon HUF Hungarian forint HRK Croatian kuna LTL Lithuanian litas LVL Latvian lats PLN Polish zloty RON Romanian leu RSD Serbian dinar RUB Russian rouble SIT Slovenian tolar SKK Slovak koruna TRY Turkish lira UAH Ukrainian hryvnia Economic abbreviations %-chg Percentage change (not in percentage points) avg average bp basis points C/A Current Account CPI Consumer Price Index FCY Foreign Currency FDI Foreign Direct Investments FX Foreign Exchange FY Full year GDP Gross Domestic Product LCY Local Currency mmav month moving average mom month on month pp percentage points PPI Producer Price Index qoq quarter on quarter T/B Trade Balance ULC Unit Labour Costs yoy year on year ytd year-to-date Stock Exchange Indices BELEX15 Serbian stock index BET Romanian stock index BUX Hungarian stock index CROBEX1 Croatian stock index PX Czech stock index MICEX Russian stock index SASX-1 Bosnian stock index WIG 2 Polish stock index Equity related DY Dividend yield EG Earnings growth LTG Long term (earnings) growth P/E Price earnings ratio RS UR Eurozone CE SEE CIS CEE Recommendation suspended Under Revision Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, Spain Central European countries - Poland, Hungary, Czech Republic, Slovakia, Slovenia South East European countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia European CIS (Commonwealth of Independent States) countries - Russia, Ukraine, Belarus Central and Eastern Europe (CE + SEE + CIS) 2 3rd quarter 212

3 Topical issue CEE weathers the Eurozone turbulence Hardly any contagion effects in CEE from the crisis in the Eurozone peripherals Poland, Russia and Slovakia as growth leaders, Balkan countries in a phase of stagnation CEE currencies mirror risk tolerance, with a healthy underlying trend towards the end of the year Whilst tensions in the Eurozone have mounted again since the spring, the situation in Eastern Europe is nicely stable. Although different trends in GDP growth were seen at the beginning of 212, risk tolerance on the financial markets throughout CEE has improved since then. Credit default swaps (CDS) for Austria have fallen slightly as well. The increasingly strong differentiation of growth prospects seen in the previous quarters will continue in all Eastern European regions in the second half of 212. Poland and Russia continue to lead the way in terms of growth, but Slovakia and Ukraine have also been able to post handsome results in the last two years, with real GDP growth rates of markedly more than 2.% each. For Austria, we have increased our annual forecast for 212 to.7%, thanks to the surprisingly strong performance in Q1. The situation on the Balkans, however, is not nearly so positive, with Croatia, Serbia and B&H not expected to manage any growth in 212. This region is impacted the most by the recession in the southern periphery of the Eurozone. Realistically speaking, economic prospects will only improve modestly next year. Widely varying developments have also been seen in the field of inflation. Consumer price increases are at historically low levels in Russia, Ukraine and Romania, whereas the inflation trend in Hungary and Turkey is heading higher. Even though debt levels in the CEE countries (with the exception of Hungary) are well below the Eurozone average, budget consolidation continues to be an issue, especially in Poland, Czech Republic, Hungary, Romania and Ukraine. Plans call for reducing the deficits in 212 and in 213. Impact on monetary policy and exchange rates The deepening worries in the Eurozone and EUR depreciation until the middle of the year did not trigger any renewed turbulence for the CEE currencies. The Polish zloty and the Hungarian forint both appreciated, whilst the Russian rouble, the Romanian leu and the Czech koruna weakened. We expect a general trend of mild appreciation for the CEE currencies versus the euro during the second half of 212, reflecting the individual monetary policies and no Eurozone exit by Greece. Exceptions in this regard will likely be the Ukrainian hryvnia, the Serbian dinar and the Hungarian forint. We project rate cuts to occur only in Czech Republic and Russia. Impact on the bond and equity markets During the third quarter, Eastern European bond markets should only be marked by mild increases in yields. Hungary is the only country where more severe fluctuations are possible along the entire maturity curve, in line with weaker currency trend there. Consequently, our position on Hungarian LCY bonds is Sell. Right now, the only Buy recommendation would be Poland. Following yield increases towards 9%, Russian bonds would look attractive again too. Turning to equities, with more central bank injections of liquidity at the global level the potential for recovery should also increase in the CEE countries. Accordingly, for the first phase of the summer we have a Buy recommendation for the entire region, with the strongest potential for gains seen in Vienna, Budapest, Moscow and Istanbul. Peter Brezinschek CEE currency volatility persists Jan-12 Mar-12 May-12 EUR/PLN EUR/CZK Index, 1 Jan-212 = 1 Source: Bloomberg Recommendations* - stock markets Indices Buy Recommendations* - debt markets LCY bonds Sell Eurobonds Buy Corporate bonds ATX, WIG 2, BUX, PX, MICEX, BET, CROBEX1, ISE National 1 Sectors Overweight Financials, Energy Underweight Telecommunication, Utilities Equities Buy SBO EUR 59.2**/ target price: EUR 72. Erste Group EUR 13.44**/ target price: EUR 18. Rosneft RUB 2.9**/ target price: RUB 258. Cyfrowy Polsat PLN 14.5**/ target price: PLN16.2 PGE PLN 18.8**/ target price: PLN 24.4 HUF 1y T-bonds Poland EUR, Bulgaria EUR EUR/HUF VIX (r.h.s.) Buy BOS Bank 6% * horizon: end 3rd quarter 212; ** the indicated price is the last price as available at 6.3 a.m. (CET) on 26 June 212 Source: Raiffeisen RESEARCH 3rd quarter 212 3

4 Forecasts Real GDP (% yoy) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria Eurozone USA Private consumption (% yoy) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia n.a. n.a. n.a. n.a. Bosnia a. H Albania n.a. n.a. n.a. n.a. SEE Russia Ukraine Belarus 1.2 n.a. n.a. n.a. CIS CEE Turkey Austria Eurozone USA Consumer prices (avg, % yoy) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria Eurozone USA Current account balance (% of GDP) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria Eurozone USA General budget balance (% of GDP) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria Eurozone USA Public debt (% of GDP) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria Eurozone USA Gross foreign debt (% of GDP) Countries e 213f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania SEE Russia Ukraine Belarus CIS CEE Turkey Austria n.a. n.a. n.a. n.a. Eurozone n.a. n.a. n.a. n.a. USA n.a. n.a. n.a. n.a. Exchange rate EUR/LCY (avg) Countries e 213f Poland Hungary Czech Rep Slovakia euro euro euro euro Slovenia euro euro euro euro Croatia Bulgaria Romania Serbia Bosnia a. H Albania Russia Ukraine Belarus Turkey Austria euro euro euro euro USA Ratings* Countries S&P Moody's Fitch Poland A- A2 A- Hungary BB+ Ba1 BB+ Czech Rep. AA- A1 A+ Slovakia A A2 A+ Slovenia A+ A2 A Croatia BBB- Baa3 BBB- Bulgaria BBB Baa2 BBB- Romania BB+ Baa3 BBB- Serbia BB n.r. BB- Bosnia a. H. B B3 n.r. Albania B+ B1 n.r. Russia BBB Baa1 BBB Ukraine B+ B2 B Belarus B- B3 n.r. Turkey BB Ba1 BB+ Austria AA+ Aaa AAA USA AA+ Aaa AAA * for FCY, long-term debt; 1 not rated Source: Bloomberg, Raiffeisen RESEARCH 4 3rd quarter 212

5 Forecasts Exchange rate forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 vs EUR Poland Hungary Czech R Croatia Romania Serbia Albania vs USD Russia Ukraine Belarus Turkey EUR/USD y LCY yield forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Eurozone USA * 5: p.m. (CET) Expected yield change Poland Hungary Czech Rep. Romania Germany Bp-change of gov. bond yield in next 3 months USA Key interest rate forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 Poland Hungary Czech R Romania Russia Turkey Eurozone USA * 5: p.m. (CET) 5y LCY yield forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Eurozone USA * 5: p.m. (CET) Yield structure Poland Hungary Czech Rep. Romania Eurozone Bp-spread between 1y and 3m maturity USA 3m money market rate forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 Poland Hungary Czech R Croatia Romania Russia Turkey Eurozone USA * 5: p.m. (CET) 1y LCY yield forecast Countries 25-Jun* Sep-12 Dec-12 Jun-13 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Eurozone USA * 5: p.m. (CET) LCY changes vs. EUR (% qoq)* CZK RUB RON PLN USD TRY HUF * 28 March 212 in comparison to 25 June 212 Source: Bloomberg Stock market indicators Stock market forecasts Expected index performance Earnings growth Price/earnings ratio 12e 13f 12e 13f ATX 8.8% 16.% WIG 2-11.%.8% BUX -1.7% 17.4% PX % 8.6% MICEX 2.%.6% BET 11.% 6.% CROBEX1-1.% 2.5% ISE Nat % 13.1% Index estimates 25-Jun* Sep-12 Mar-13 Jun-13 ATX 1,881 2,5 2,5 2,2 WIG 2 2,28 2,4 2,42 2,38 BUX 16,86 8,4 18,4 17,9 PX MICEX 1,33 1,45 1,47 1,43 BET 4,428 4,8 4,7 4,6 CROBEX ISE Nat. 1 59,479 66, 67, 66, 12% 1% 8% 6% 4% 2% 1 Czech Rep. (PX): excl. Erste Group and Vienna Insurance Group 2 Russia (MICEX): excl. Inter RAO, Rusal, Sberbank Pref. and Surgutneftegaz Pref. Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH * 11:59 p.m. (CET) In local currency Source: Raiffeisen RESEARCH % ATX WIG 2 BUX PX MICEX BET CROBEX1 ISE Nat. 1 Sep-12 Jun-13 Source: Raiffeisen RESEARCH 3rd quarter 212 5

6 Forecasts Asset allocation - performance Difficult market conditions in CEE in Q2 212 Sum of last quarter* RBI portfolio (in EUR) -5.43% Benchmark (in EUR) -4.94% RBI outperformance (in EUR) -.48% by weighting of equities vs. bonds -.44% regional equity weightings -.7% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.2% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration -.1% * 28 Mar Jun 212 EB...Eurobonds Source: Raiffeisen RESEARCH Period 1: 28 Mar Apr 212 RBI portfolio (in EUR) -1.22% Benchmark (in EUR) -1.8% RBI outperformance (in EUR) -.14% by weighting of equities vs. bonds -.14% regional equity weightings -.2% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.3% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Source: Raiffeisen RESEARCH Period 2: 25 Apr May 212 RBI portfolio (in EUR) -7.3% Benchmark (in EUR) -6.72% RBI outperformance (in EUR) -.31% by weighting of equities vs. bonds -.29% regional equity weightings -.2% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.1% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Source: Raiffeisen RESEARCH Compared to the benchmark, the CEE portfolio posted weaker performance in Q2 212, with the majority of the losses (14bp) incurred in the first and second period. The main reason for this development was the disadvantageous weighting of equities versus bonds in the first two periods. On the whole, however, the benchmark portfolio also suffered losses, due to the economic woes and the sovereign debt crisis. During the first period, an outperformance totalling around 3bp was achieved by all of the weightings within the CEE bond segment. As bonds had already gone a long way, there was an underweighting on Czech Republic. More potential was seen in Hungary and Turkey, and these were thus overweighted. Nevertheless, the weightings within the CEE equities segment resulted in underperformance on the whole. The overweighting of Poland and the underweighting of Croatia generated a loss which could not be offset by the outperformance achieved on the underweighting of Czech Republic and the overweighting of Russia. In the second period, a total outperformance of over 1bp was achieved with the weightings in the bond segment. In this segment, the overweighting of Turkish bonds versus Czech bonds resulted in outperformance, and the overweighted Russian bonds also made a positive contribution. The agreement between the government of Prime Minister Orbán and the European Commission did not have the anticipated positive impact on the Hungarian equity market, and together with the unexpectedly good performance of Czech stocks, this had a negative effect on the performance of the RBI portfolio compared to the benchmark. In the third period, in Czech Republic the anticipated above-average performance of equities and bonds failed to materialise, despite the earlier cuts in interest rates. In spite of the recession in Hungary, bonds and equities in that market posted unexpectedly good performance. On the other hand, the overweighting of Russian equities resulted in outperformance compared to the benchmark portfolio. Performance Veronika Lammer.2 Period 3: 28 May Jun RBI portfolio (in EUR) 2.97% Benchmark (in EUR) 3.1% RBI outperformance (in EUR) -.3% by weighting of equities vs. bonds.% regional equity weightings -.2% weighting of EB vs. LCY bonds.% country weightings of LCY bonds -.1% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 RBI-Portf. Outperformance (r.h.s.) in percentage points 6 3rd quarter 212

7 Asset allocation - total portfolio xx Equity market recovery in CEE expected Equity indices in CEE still look fundamentally attractive Subdued growth prospects in Hungary and Czech Republic Overweighting of equities versus bonds Many markets in CEE were visibly hit by the elevated risk aversion of international investors stemming from the European sovereign debt crisis. Several stock markets in this region have relatively low trading volumes and still feature significant risk premiums. At the same time, growth prospects in many countries, such as Poland, Russia, Ukraine and Turkey are looking positive and are far better than in other Western European countries. Hungary and Czech Republic are the only two countries where the outlook is more decidedly negative. With the exception of Hungary, the CEE countries tend to have significantly lower debt levels and should not be impacted directly by the current debt crisis. We also forecast smaller public deficits in most of the countries in 213 (with the exception of Russia and Turkey). Indirectly, however, Eastern Europe may be more strongly hit, due to the gloomier economic outlook for Europe. The latest leading indicators in Germany are also reflecting negative trends, and sharp declines have been registered for exports in particular. Weakening of the economy in Germany, which is the driving economic force in Europe, is the biggest risk factor for the CEE region as well. Whilst most of the stock markets in CEE tend to have higher volatility and thus entail higher risks for investors, valuations on these markets are still looking relatively attractive in fundamental terms. Accordingly, for long-term investors we believe there are currently good opportunities for entering the market. With a recovery in Europe, the elevated beta in most of the CEE markets should translate into higher asset prices. Risk-return (in %) Historic ytd performance in % Dow Jones Historic 1y volatility in % In local currency CEE portfolio weightings Q3 212 LCY-bonds: 37.6% [-2.4 pp] Czech Republic CEE Poland EB EUR: 4.7% [-.3 pp] EB USD: 4.7% [-.3 pp] Romania Russia -12 DJ Eurostoxx Hungary Even though the ongoing European debt crisis is still the greatest risk factor for the CEE markets, we see the risk of losses as being limited, thanks to the attractive market valuations in fundamental terms. We thus maintain our offensive stance on CEE and overweight the equities portfolio three percentage points over bonds. Mario Annau LCY local currency Source: Raiffeisen RESEARCH Equities: 53% [3 pp] Historical volatility & performance (in %) Equities* Bonds Volatility Performance Volatility Performance Countries EUR LCY EUR LCY EUR LCY EUR LCY Czech Republic Hungary Poland Romania Russia Turkey Croatia CEE * MSCI indices Volatility in EUR; 3 months volatility annualised; ytd performance in EUR LCY local currency 3rd quarter 212 7

8 Forecasts Asset allocation - bonds Elevated risks in Hungary Currency volatility should stabilise in Q3 Overweight Czech Republic Expected HUF depreciation - underweight Hungarian bonds Portfolio weightings: bonds* 5% 4% 3% 2% 1% % Lithuania (BBB) Czech Republic Poland (A-) Hungary Historical relative performance* Hungary (BB+) Bulgaria (BBB) Russia (BBB) EUR Segment Due to the wide variations in currency developments, the performance contributions of the CEE bond portfolio components also showed a relatively wide spread in the previous quarter (Q2). The strongest outperformer was Turkey, whereas the weakest performance was recorded for Russian LCY bonds. The rest of the portfolio components remained relatively tightly grouped. With an eye to Q3, we forecast more stable currency developments in the CEE markets. In Czech Republic, we expect stronger bond performance in Q3. Yields on 1-year Czech bonds should stabilise in a range around 3.3%. In terms of the currency, we are also anticipating further appreciation of EUR/CZK to Our opinion on Hungary, however, has become quite negative: over the short run, we are mostly looking for a more pronounced depreciation of EUR/HUF to 31. Over the longer term, however, the EUR/HUF rate should settle at a lower level. Due to the considerations outlined above, we thus overweight Czech bonds by one percentage point and underweight Hungarian bonds by the same degree. Mario Annau Expected bond market performance 3m 6m 9m 12m Countries EUR LCY EUR LCY EUR LCY EUR LCY Czech Republic Hungary Poland Romania Russia Turkey Croatia Not annualised; 1y US treasury bond, LCY local currency Source: Raiffeisen RESEARCH Croatia (BBB-) Romania (BB+) USD Segment * to benchmark (BM), EMBIG EUR Europe, EMBIG USD Europe, in % yoy Poland Romania Benchmark * Local currency (LCY) bonds; Share in percentage points Source: Raiffeisen RESEARCH Russia RBI Turkey Croatia Serbia (BB) EB USD Turkey (BB) EB EUR Ukraine (B+) 8 3rd quarter 212

9 Asset allocation - equities xx Attractive valuations decisive in terms of positioning Poland: solid macroeconomic conditions Hungary: prospects of an agreement with IMF Czech Republic: Real GDP to contract Market conditions for Polish companies provide a good setting for the Polish stock market. On the one hand, the macro background looks solid, with anticipated GDP growth of 2.8% for 212 and robust domestic demand; on the other hand, technical conditions on the financial market also look supportive, thanks to the relatively large cash holdings of institutional investors and attractive valuations (P/E 212e: 1.2). Along with Poland, we also overweight Hungarian equities, as the valuation of this market is attractive as well. With a 212e P/E of 8.5, Hungary is one of the cheapest equity markets in Eastern Europe. Nevertheless, one factor that is more important than the attractive valuations is that, even though the negotiations with the IMF may drag on for a while, there should be an agreement in the autumn. Due to a lack of local-economy catalysts and the forecast GDP contraction of.5% in 212, we take a rather sceptical view of Czech equities. Along with the Czech Republic, we also underweight Croatia. With a P/E of 11.4, the market in Croatia is looking relatively pricey, despite the recessionary trends. Nor does the sharp decline in trade volumes bode well for the Croatian economy. Albert Moik Portfolio weightings: stocks* 5% 4% 3% 2% 1% % 15% 1% 5% % -5% -1% -15% -2% -25% Czech Republic * Share in percentage points Source: Raiffeisen RESEARCH Romania Hungary Historical relative performance* Hungary EUR * to CEE Russia Poland Benchmark Poland Russia RBI Local currency Czech Rep. Croatia Croatia Romania Expected stock market performance (in %) 3m 6m 9m 12m Countries EUR LCY EUR LCY EUR LCY EUR LCY Poland Hungary Czech Republic Russia Romania Croatia Not annualised, LCY local currency Source: Raiffeisen RESEARCH 3rd quarter 212 9

10 Forecasts Special topic No credit or funding crunch in CEE Neither a credit crunch nor a funding crunch in CEE No significant external deleveraging, but certain rebalancing of business models reflected in cross-border banking flows Balance sheet flexibility and resilience has improved in many CEE banking sectors Real loan growth* 5% 4% 3% 2% 1% % -1% * CPI-deflated Source: national central banks, ECB, Eurostat, Raiffeisen RESEARCH Loan growth (% yoy) CEE, total loan growth (real, % yoy, LCY) Eurozone, total loan growth (real, % yoy) Source: national central banks, ECB, Raiffeisen RESEARCH Market shares foreign-owned banks Q1 9 Q2 9 Q3 9 Q4 9 Q1 1 Q2 1 Q3 1 Q4 1 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 CEE Eurozone (r.h. scale) CE market share of foreign-owned banks* SEE market share of foreign-owned banks* CIS market share of foreign-owned banks (r.h.s.)* * in % of total assets Source: national central banks, Raiffeisen RESEARCH Banking sector developments in Western Europe remain a point of concern as shown by the overall weak loan extension inside the Eurozone, ongoing deposit outflows in some Western European banking sectors, still rising NPLs in large Western European economies and the sizeable, internationally sponsored support package that was needed to restore confidence in the Spanish banking sector. Moreover, international financial institutions are calling for a comprehensive, coordinated solution to the Western European banking sector problems as they did in 28/9 for the CEE region. In contrast to these developments in Western Europe, the CEE banking sectors are showing a remarkable resilience. This article provides a summary of the most important findings of our 212 CEE Banking Sector Report which we released beginning of June. On average, loan extension in CEE remained healthy in 211 and this trend continued in recent months. With loan growth of 19% yoy in LCY terms and 13% yoy in EUR terms, 211 loan growth in CEE generally remained at sound levels and there is nothing like a credit crunch in CEE. Even in banking markets where overall loan growth remains at lower levels (mostly driven by more or less stagnant household lending) corporate lending is still at healthy levels. The latter aspect also reflects the export-led recovery in many CEE economies. At the same time, the banking sector landscape remains challenging in some CEE banking sectors. This holds especially true in some SEE countries such as Romania, Serbia or Croatia, where the overall economic recovery since 28/9 has disappointed on the downside. In these SEE banking markets non-performing loans are still on the rise, resulting in negative earning developments. In many SEE banking markets the 211 Return on Equity for the banking sector remained either in negative territory or (well) below government bond yields in the case of positive profitability readings. Nevertheless, the biggest CEE banking sectors are showing solid performance, which is in stark contrast to the developments inside the Eurozone where there are also financial stability issues in some of the bigger banking sectors. Moreover, most CEE banking sectors have improved their resilience to adverse external shocks by lowering their loan-to-deposit ratios. This development was driven by the fact that deposit inflows have remained more or less constant in recent years, while credit growth slowed below the pre-crisis expansion. Due to declining loan-to-deposit ratios, the total deposit gap in the CEE region (i.e. total loans minus total deposits) declined substantially and even turned into a surplus in recent years (mostly driven by developments in Russia). In CE and SEE there remains a certain deposit gap as shown by loan-to-deposit ratios above the 1% level. However, the CE and SEE regions have also reduced their total deposit gap in recent years. The total deposit gap in the CE banking sectors declined from a deposit shortfall of some EUR 2 bn in 28 to a modest shortfall of around EUR 13 bn in 21 and 211, while the SEE region saw its total deposit gap falling from EUR 16 bn in 28 to some EUR 1 bn in 21 and 211. The improvement in the local funding base also supported a certain degree of external deleveraging (i.e. reduced cross-border financing) in CEE. Therefore, we are also not interpreting too much into the decreasing cross-border banking 1 3rd quarter 212

11 Special topic xx exposures towards CEE (as we define the region, which does not exactly match the BIS definition of Emerging Europe). Moreover, cross-border financing trends in CEE are also largely influenced by exchange rate movements (i.e. EUR/USD fluctuations). For the CEE region as a whole, according to BIS data (in USD terms) for December 211, cross-border banking exposure declined by some EUR 36 bn from its absolute peak level (in USD terms) in June 28. In percentage terms, the total decline in cross-border exposure to the CEE region from its peak level in June 28 to December 211 was around 19% (17% in the CE and SEE regions, and 24% in the CIS region). At first sight, this looks like a significant drop in cross-border banking exposure to CEE. However, the fluctuation in the aggregate for the CE and SEE regions was driven mostly by EUR/USD fluctuations, as most cross-border banking exposure to this region is denominated in EUR. The EUR/ USD exchange rate dropped by 17-18% from June 28 to December 211 and there are only a few CEE countries (Hungary, Slovakia, Slovenia, Croatia, Bosnia and Herzegovina, Russia and Ukraine) that experienced a reduction in cross-border banking exposure that was well above possible exchange rate effects. Other banking sectors such as those in Poland, the Czech Republic, Romania, Serbia, Albania and Belarus saw their cross-border banking sector exposure fluctuating more or less in line with the EUR/USD exchange rate, changing below a level that the EUR/USD exchange rate fluctuation might suggest, or even increasing. Moreover, some of the biggest decreases in cross-border exposure are concentrated in only a handful of countries. Around 3% of the declining cross-border exposure to the CE and SEE region can be attributed to a significant decline that took place in Hungary. Taking a broader perspective on current cross-border banking exposures, the CEE banking sectors are somewhat in between the developments in the Emerging Markets and Developed Markets space. Currently, CEE is not experiencing significant cross-border banking inflows like other Emerging Market regions are, but it is also not subject to the constant outflows that characterise the Developed Markets space. Moreover, one should not forget that from a longer-term perspective, the CEE region experienced the strongest increase in cross-border banking exposure of any EM region over the last decade or so. Hence, from a long-term perspective, most recent data are pointing more towards a stabilisation at current levels rather than towards a spectacular decline or a funding crunch in CEE. Given that there is no significant external deleveraging taking place in the CEE banking sectors, no retrenchment of foreign-owned banks is occurring. This development is in stark contrast to the initial fears voiced immediately after the announcement of the EBA measures in Q In fact, the overall market shares of foreign-owned banks in CE and SEE (where Western European banks are a dominating force) have remained more or less constant in recent years. The marginal decrease by around 2-3 percentage points seen in recent years can be explained by the modest rise in market shares held by locally-owned and/or state-owned banks in some markets. Such developments must be regarded in the context of the fact in the pre-crisis period foreign-owned banks on average expanded somewhat more strongly than their locally-owned peers. All of the aforementioned positive developments should not result in too much complacency. In the fast growing Russian banking sector, there remains a risk of overheating, while margin pressure is increasing in the remaining attractive CEE banking markets. Furthermore, the risk of further escalation of the Eurozone debt and banking sector problems continues to dog the CEE banking sectors. Gunter Deuber Loan-to-deposit ratios Source: national central banks, Raiffeisen RESEARCH Non-performing loans CEE* CE SEE CIS CEE Jan-9 Jan * weighted by banking sector size Source: national central banks, Raiffeisen RESEARCH Cross-border banking claims* CEE non-performing loans (% of total loans) 6 Mar-8 Jun-5 Sep-9 Jun-1 Mar-11 Dec-11 Developed Markets Asia CEE Latin * March 28 = 1, based on USD-data Source: BIS, Raiffeisen RESEARCH 3rd quarter

12 Forecasts Austria Austria: Economy weathers headwinds from the Eurozone Robust GDP growth in Q1 212 No slump in economic activity on the horizon External trade suffering from the Eurozone recession Private consumption as a support for the economy Real wages are rising again Despite the difficult conditions in the Eurozone, Austria s economy performed strongly (+.3% qoq) in Q1 212 and was thus able to avoid a (technical) recession Inflation (% yoy, HICP) Agreed wages (% yoy) Source: Thomson Reuters, Austrian central bank, Raiffeisen RESEARCH Possible implications of a new crisis Further slowdown in external trade likely Fears about the future of the euro should affect private consumption in a negative way However, no recession expected No significant increase in spreads of Austrian government bonds compared to German government bonds expected, as Austria is seen as a safe haven as well Key economic figures and forecasts e 213f Real GDP (% yoy) Private consumption (% yoy) Gross fixed capital formation (% yoy) Nominal exports (% yoy) Nominal imports (% yoy) Trade balance (EUR bn) Current account balance (EUR bn) General budget balance (EUR bn)* General budget balance (% of GDP)* Unemployment rate (avg, %, EU definition) Consumer prices (avg, % yoy) Real wages (% yoy) Unit labour costs (% yoy) * state, provinces, municipalities and social security authorities Source: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH As the year progresses, economic growth is likely to decelerate slightly. For Q2 and Q3, we project real GDP growth rates of.2% qoq. This will mean, however, that the Austrian economy is still performing significantly better than most of the other countries in the currency union. Leading indicators are one of the factors suggesting that growth in Austria will only slow down mildly. Although the purchasing managers index for the manufacturing industry has followed the overall European trend and dropped noticeably since the beginning of the year, it is still pointing to economic expansion with its (May) reading of 5.2. The EU Commission s economic sentiment indicator for Austria has actually risen steadily in the past months (albeit the indicator started out in contractionary territory) and has thus outperformed most of the other EUR countries. All in all, we project real GDP growth of.7% this year, followed by 1.3% next year. Compared to the previous year (+3.%), the Austrian economy will thus slow down tangibly, but it will still be able to post growth rates considerably higher than in most other EUR countries. The impact of the EUR debt crisis on the Austrian economy will likely be seen very clearly in the external trade balance. Some 53% of Austrian goods exports are still delivered to the currency union, and thus the turmoil in the Eurozone will be an obstacle to any dynamic performance in exports. Foreign trade will only make a significant contribution to economic growth next year again. In line with this, the assessment of export orders in the business sentiment survey (EU Commission) has deteriorated substantially since early in the year. To a lesser extent this is also the case for overall orders in the manufacturing sector, and consequently manufacturing will probably not be able to play the role of an economic growth driver this year. At the same time, it should be noted that the assessment of production expectations for the coming three months did not deteriorate recently. But even if production begins to pick up again, investment activity (aside from the necessary replacement investments) will probably only see a revival towards the end of the year, as capacity utilisation was also on a downward trend in recent months (Q2: 84.7%). By contrast, the performance of the construction industry should be better than that of manufacturing in general, as indicated by the rising stock of orders. 12 3rd quarter 212

13 Austria xx Looking ahead, it is also likely that private consumption will turn out to be an important source of support for economic activity, in part due to the relatively positive developments on the labour market. Because despite the economic slowdown, the increase in unemployment (in absolute terms, Eurostat) has been modest, and the number of unemployed is already on the decline again. Another rise in unemployment is rather unlikely, as indicated by the stabilisation in unfilled job vacancies. Consumption also stands to benefit from the increase in real wages expected for this year as there is sizeable growth in agreed wages (May: +3.4% yoy) coupled with falling consumer prices (the inflation differential to the Eurozone has already disappeared). The EU Commission s survey shows a steep increase in consumer confidence since December, and the assessment of overall economic performance and respondents personal financial situation for the coming 12 months has also improved tangibly. Against this backdrop, the saving rate should stabilise at the current level (211: 7.5%), after having dropped sharply since 27. Back then, the saving rate of 11.7% was considerably higher than the EUR average of 8.6%, but this rate has now dipped below the EUR average (Q4 21- Q3 211: 8.%). In the years up to and including 27, absolute gains in income for private households had at times been significantly higher than the absolute increases in consumption expenditures. Since then, however, the development of income has not been able to keep up with consumption, and this has negatively affected the saving rate. Households were thus unwilling to adjust their consumption expenditures to the weaker development of income. Matthias Reith GDP: value added by sector Change (% yoy, in real terms) e 213f Agriculture & forestry Prod. of goods/mining Energy/water supply Construction Wholesale and retail trade Transportation Accom. & restaurant trade Information and communication Credit and insurance Property & business services Other economic services Public sector Healthcare, social services Other services Gross domestic product Source: Statistics Austria, Raiffeisen RESEARCH GDP: expenditure composition Change (% yoy, in real terms) e 213f Private consumption Public consumption Gross fixed capital formation Equipment Construction Exports (broad definition) Imports (broad definition) Gross domestic product Source: Statistics Austria, Raiffeisen RESEARCH Saving rate: consumption not adjusted to income development *private households, absolute change compared to the previous year Source: Statistics Austria, Raiffeisen RESEARCH Change in disposable income (EUR bn)* Saving rate (%, r.h.s.) Change in private consumption (EUR bn)* rd quarter

14 Poland Bears seen knocking at the door? Contrasting signals, some economic and sentiment indicators pointing to an economic slowdown others not Government remains committed to fiscal consolidation which might be a near-term drag on economic growth Monetary policy to stay on hold for the time being, event risk of rate hike remains Very tight pricing on LCY-bond market reflecting position as liquid and safe place for institutional investors Real GDP (% yoy) Real GDP (% yoy) Forecast 212e 213f Industrial output (% yoy, r.h.s.) Possible implications of a new crisis Low degree of economic connections with peripherals Main risk is still economic setback in core European countries such as Germany, but shocks would be absorbed by the floating exchange rate Rate cuts cannot be ruled out if Eurozone troubles cause a significant weakening of the European economy Key economic figures and forecasts Economic outlook Q1 GDP dynamics came in at 3.5% yoy, significantly below the reading of 4.3% in the previous quarter, mainly due to falling domestic demand. Private consumption grew by 2.1% yoy, remaining unchanged versus the previous quarter. The slowdown in this component resulted from weakness on the labour markets, low real wages dynamics and a high unemployment rate. At the same time, gross fixed capital formation dynamics slowed to 6.7% yoy versus almost 1% yoy previously, even though the construction sector remained strong early in the year. With many projects related to the Euro212 coming to an end and depletion of the majority of EU funds available for Poland for , this sector may face problems both with financing and lower demand. Therefore, in the quarters to come we expect the investment growth rate to slow to even % in Q Data for the first quarter was somewhat disappointing, but confirmed the resilience of the Polish economy to external shocks. Another factor which adds to the slowing growth momentum is fiscal consolidation. The government is determined to cut the budget deficit to below 3% of GDP in 212 and to below 1% in 215. This consolidation is carried out mainly via spending cuts (e.g. freeze of wages and employment in public administration), but also by measures such as hiking excise taxes or imposing higher pension fees to be paid by employers. All these measures can be harmful for growth from a short-term perspective, but we believe they may also have positive growth effects over the longer-term horizon. We do not expect any monetary policy moves over the next 3-6 months. Recent economic data were less supportive for the hawks in the MPC, i.e. they did not nourish any interest rate hike bets, and we do not expect a rate hike in July. Moreover, we do not expect a very hawkish wording at the next MPC meeting in July as there is no rate-setting meeting in August and providing any (hawkish) commitment for September would be fairly risky, given the current domestic and international environment e 213f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/PLN (avg) USD/PLN (avg) Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH 14 3rd quarter 212

15 Poland Financial market outlook The zloty remained hostage to global developments (including the most recent EUR weakness), which resulted in a significant PLN weakening and a EUR/PLN rollercoaster ride (from in Q1 to in Q2). In fact, PLN was among the worst performing CEE and Emerging Market currencies in Q2. Polish authorities showed their readiness to provide a certain floor via de facto and verbal interventions (e.g. the usual statements that EU funds may be converted on the market). However, recent PLN fluctuations have also shown that the potential to cap PLN volatility via de facto or verbal interventions is fairly limited. Therefore, we may see a continuation of the recent hefty EUR/PLN swings in the weeks ahead. We do not expect any significant interventionist policies until the rate breaches the level of EUR/PLN From a longer-term perspective, we see fundamental appreciation potential, which should result in EUR/PLN gains from a 6-12 month perspective. Yields on Polish LCY bonds remained more stable than the local currency, despite the NBP s surprise rate hike in May and the increased uncertainty regarding the future interest rate path in Poland. Nevertheless, 1y yields inched upwards from some % to around % in Q In recent weeks, we have once again seen some yield compression to 5.3% in the 1y segment. This took place despite the deteriorating global financial market backdrop. Going forward, bond prices in Poland should be well supported, unless we see a significant escalation of the Eurozone crisis in the weeks ahead. There are no supply side risks as the Polish government has already placed 75% of its annual 212 financing needs. Furthermore, a certain slowdown in the Polish economy (implying some deceleration in credit growth) may add to LCY bond demand from local banks. Moreover, among institutional international investors Polish bonds are increasingly seen as a liquid safe haven in CEE and Europe and there remains a higher chance of rating upgrades (positive outlook changes) than downgrades over the next 9-12 months. The recent well-received placement activity (EUR 1.5 bn mid-june with a yield of 3.77%) on international markets has also shown the flexibility of the sovereign to choose between domestic and international issuance (in several currencies) and the ability to tap markets during issuance windows. Therefore, from a 6-12 month perspective, Polish bonds remain an attractive investment opportunity for EUR-based investors. Although we may see a slight increase in yields over a 3-6 month horizon, the attractive carry and strengthening potential of PLN vs. EUR should result in a nice total return for EUR-based investors. Marta Petka-Zagajewska, Gunter Deuber EUR/PLN outlook Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec EUR/PLN (end of month) PLN yield curve (%) Yields as of Jun-12 Yield curve Jun-12 Yield curve Mar-12 Forecast Sep-12 Source: Bloomberg, Raiffeisen RESEARCH Forecast Possible implications of a new crisis Hit mainly by foreign exchange channel and extra liquidity premium on money market Interventions likely in case of excessive FX volatility Yields would jump in the case of a liquidity crunch, but there would be no problem with covering this year s borrowing needs Exchange rate, interest rate and bond market outlook Coupon Maturity 25-Jun 1 Sep-12 EUR perf. Dec-12 EUR perf. Mar-13 EUR perf. Jun-13 EUR perf. EUR/PLN USD/PLN Key rate m m m y T-bond.% Jan y T-bond 4.75% Apr y T-bond 5.75% Oct y T-bond 5.75% Apr ) 5: p.m. (CET); 2) Performance in USD; 3) 7d rate on money market bills 3rd quarter