Banking Market Overview

Banking Market Overview CEE and Romania Bucharest, March 212 212 Ensight Management Consulting.

2 Agenda Banking Sector Overview CEE banking market Romanian banking market

3 CEE and Romanian banking market evolution in 211 shows both differences and similar trends Executive summary Banking market CEE banking market overview 1. Similar to 29, in 21 as well, the total CEE banking assets had a general positive trend and increased in value by ~2%. Romania was the 4th biggest banking market in CEE, with total banking assets below the CEE average 2. Even though total bank loans have increased in CEE in 21, the trend was mainly driven by Poland while other countries had a low increase 3. The average CEE loans-to-deposits ratio has stopped its high rising trend, but it has decreased only for a limited number of countries and for most of them it is still over 1 4. As cards usage is concerned, the CEE market has still a growth potential; Romania and Bulgaria have the lowest values of card transactions per inhabitant among CEE countries that are part of EU Romanian banking market overview 5. The moderation of the banking activities continued in 211 as well, as reflected by the evolution on total net banking assets 6. Total banking loans continued their declining trend in 211 as well; the value of the total banking deposits attracted by the Romanian banking system in 211 continued to increase, showing the population s increased tendency towards savings 7. Both the overall number of valid cards and the value of payment transactions increased in 211 compared to 21 8. Non-performing loans continued their ascending trend in 211, leading to a further worsening of credit quality for many banks 9. The overall banking system s profitability was heavily impacted once again in 211 and reached significant negative territory 1. Some of the main short and medium term trends on the Romanian banking system include: increased financing pressures, reduced credit activity, increased focus on EU co-financing, cost control/branch network optimization, change of the competitive landscape, increased competition for good customers etc. Note: Upon writing this study, official data regarding the evolution of the banking and insurance market in 211 is still being published. The analysis and formulated trends have been realized based on data available until February 212. As future official data will be published, the study will be updated accordingly. * The study included the following countries: Poland, Czech Republic, Hungary, Romania, Slovakia, Croatia, Slovenia, Bulgaria, Serbia, Bosnia & Herzegovina, Albania. For payment related information, were included only the countries that are also part of EU Source: EBF database 21 NBR 211

4 Agenda Banking Sector Overview CEE banking market Romanian banking market

5 Total CEE banking assets had a general positive trend in 21, even though the total asset base has decreased for some countries Banking market size in CEE Total bank assets, CEE, 21 (bneur) 35 292.42 3 25 2 167.38 Similar to 29, in 21 as well, the total CEE banking assets had a general positive trend and increased in value by ~2% Still in some countries the total asset base has decreased in absolute terms in 21, compared to 29 (either in EUR-term or both EUR and LCY*-terms) 15 1 5 12.93 79.77 54.74 53.3 5.31 37.69 24.2 81.65 76.49 1.78 7.14 Poland, the CEE country with the most developed banking system cumulated at the end of 21 ~292 bneur in banking assets, more than 3 times higher than the CEE average of 81.65 bneur Czech Republic and Hungary have also total banking assets higher than the average CEE average 21 CEE Average 29 However, considering the current macroeconomic environment, the near term outlook for the banking sector needs to be considered with caution * Local currency Source: EBF databases, 21

6 Even though total bank loans have increased in CEE in 21, the trend was mainly driven by Poland while other countries had a low increase Banking loans in CEE Total bank loans, CEE, 21 (bneur) Bank loans per destination, CEE, 21 (bneur) 2 16 12 8 4 198.7 86.8 74.8 49.2 36.9 34.4 33.5 25.9 16.4 7.5 3.5 52 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Loans Average Loans CEE Corporate Loans Loans for Housing purposes Consumer Credit Loan growth in CEE accelerated in 21, the overall trend of bank loans at CEE level increasing in 21 by ~13% in nominal terms compared to 29 values No country showed decreases in total bank loans While, the high increase was mainly driven by Poland, countries like Bulgaria, Slovenia, Hungary and Romania had a low increase in total bank loans The distribution of bank loans per destination still shows differences between the CEE country banking sectors, with a different focus on either corporate or household loans In 21, corporate lending has been mainly outpacing household lending and it seems there is still further catch up potential; on the other hand, consumer credit has had mainly a negative trend Source: EBF databases, 21

7 Non-performing loans continued to put pressure on the CEE banking system in 211 as well Non-performing loans Non-performing loans [% total loans], June 211, CEE 2% 18% 18.1% 17.% Non-performing loans continued to put pressure on the CEE banking system 16% 14% 12% 1% 8% 6% 4% 13.5% 13.4% 11.9% 11.8% 1.5% 7.9% 6.3% 5.8% 3.9% Thus, the level of non-performing loans continued to increase in some countries (like, for example, in Romania), even if at a lower pace than in 21 In some other countries it already seems to have reached a peak compared to the values in 21 2% % On the other hand, there are countries like Slovenia that have very good credit quality compared to the other CEE countries NPL(%) Source: Raiffeisen Outlook 211, National Banks

8 The overall bank deposits had a general positive trend in many CEE countries in 21 Banking deposits in CEE 18 16 14 12 1 8 6 4 2 Total bank deposits, CEE, 21, (bneur) 17. 111.3 48.8 41.4 39.5 36.5 24. 23.5 14.3 47.4 42.6 6.4 5.9 Bank deposits per category, CEE, 21, (bneur) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Deposits Average CEE 21 Overall bank deposits had a general positive trend in most of the CEE countries, the average total bank deposits in CEE increasing in 21 to 47.4 bneur from 42.6 bneur in 29; however, similarly to total bank loans, Poland market size is considerably larger than the other CEE countries and thus highly impacts the average Still, as opposed to the pre-crisis years (25 28), in many CEE countries the growth of deposit collection outpaced or was closer to the evolution of granted loans Deposits, as a traditional funding source, will most likely gain weight in terms of financing of the bank s general activities and thus regain attractiveness, also due to the expected lower availability of external financing Average CEE 21 Corporate deposits Source: EBF databases, 21 Private individuals

9 The average CEE loans-to-deposits ratio has stopped its high rising trend, but it has decreased only for a limited number of countries 3.5 3. 2.5 2. 1.5 1..5. Banking leverage needs in CEE Loans-to-deposits ratio, CEE, 21 1.5 1.2 1. 1.5 1.4.6 1.6 1.4 1.5 1.2 1.2 1.2 1.2 1.1 1..9.8 Loan-to-deposit ratio Retail loan-to-deposit ratio.5 1.1 1.8.6 1. 2.5.8.8 3.3.4 Corporate loan-to-deposit ratio Average CEE loan-to-deposit ratio 2.3.9.8 2.8 1.9 1.2.6 Before 28, in the context of a good level of international liquidity, low cost of country risk and low saving rates, CEE local banks had a big support for their funding needs through capital inflows from the group As a consequence, loans-to-deposits ratios had also an upward trend, in some countries reaching high imbalances After 28, given the current economic context, the average rising trend has stopped However, on an individual country level, the ratio has decreased only in a limited number of countries and in other it either stabilized or continued its increase with a different pace Thus, the overall loans-to-deposit CEE average in 21 was of 1.9, compared to a value of 1.8 in 29 There are still countries like Bulgaria, Croatia or Slovakia that have high imbalances between corporate loans and deposits Source: EBF databases, 21

1 Among CEE countries that are in EU, Slovenia has the highest number of ATM s and POS devices per inhabitant Payment terminals in CEE Number of ATM s, CEE countries part of EU, 21 Number of POS terminals, CEE countries part of EU, 21 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 16,92 442 471 1,12 758 5,718 484 4,843 355 3,742 43 885 2,339 1,814 Poland Romania Bulgaria Hungary Czech Republic Slovakia Slovenia No of ATM's No. of ATM's per mil.inhabitants 8 7 6 5 4 3 2 1 25, 2, 15, 1, 5, 251,833 17,52 6,594 4,995 9,218 96,958 78,441 7,844 8,64 6,762 6,896 17,387 37,45 35,622 Poland Romania Czech Hungary Bulgaria Slovakia Slovenia Republic No of POS terminals No. of POS devices per mil.inhabitants 16 14 12 1 8 6 4 2 Based on official ECB data, in terms of number of ATMs per million of inhabitants, Slovenia ranks first with 758 ATMs, while Czech Republic has 355 The average number of ATMs per million of inhabitants in CEE countries which are part of the EU is 546 In comparison, Romania has 471 ATMs per million of inhabitants and is thus under the average of the selected countries, and 1,12 ATMs in total Slovenia ranks first also as the number of POS devices per million of inhabitants is concerned, with 17,387 POS; this is a very high value compared to the other CEE countries and even is the average in some west European countries or Euro Area Considering its population size, Poland has the largest total number of POS terminals among the analyzed countries Romania is on the last place among the analyzed countries regarding the no. of POS devices per mil. inhabitants (4,995) Note: The countries in scope of the analysis are CEE countries that are in the EU Source: ECB database, 21

11 Romania has the lowest number of cards per inhabitant among the CEE countries in the EU Payment instruments in CEE (1/2) Number of credit and debit cards (mil.), CEE, 21 Number of cards (debit and credit)/inhabitant, CEE, 21 25 2 22.7 2. 1.75 1.73 1.57 15 1 5 8.9 1.4 2.1 7.9 Poland Romania Czech Republic 7.5 6.6 1.6 1.4 1..8 4.2 2.74.12 Hungary Bulgaria Slovakia Slovenia 1.5 1.25 1..75.5.25. 1.1.94.9.89.84.59 Number of credit cards(mil.) Number of debit cards(mil.) Considering the size of the population, Poland has the largest total number of debit and credit cards When benchmarked regarding the number of total cards (debit and credit) per inhabitant, Romania has the lowest level among the CEE countries that are part of EU, with.59 cards per inhabitant On the other hand, Slovenia has a large number of cards per inhabitant (1.73), compared to the other CEE countries that are part of EU and even to the average of the Euro area In comparison, the average number of cards per inhabitant in the Euro area is 1.57 Note: The countries in scope of the analysis are CEE countries that are in the EU Source: ECB database, 21

12 Bulgaria has the lowest value of transactions made by debit card per inhabitant, while Slovakia has the highest value Payment instruments in CEE (2/2) Value of all transactions credit and debit cards, CEE, 21 Value of all transactions per inhabitant credit and debit cards, CEE, 21 16, 14, 12, 16,78 1,2 1, 1,284 1,156 1, 8, 6, 4, 2, 5,591 Poland 7,212 6,277 4,882 871 588 787 593 Czech Republic 3,255 2,632 458 114 356 Slovakia Hungary Romania Slovenia Bulgaria 8 6 4 2 686 56 18 83 79 Slovenia Slovakia Czech Republic 488 146 421 152 61 28 47 Hungary Poland Romania Bulgaria Value of all transactions - credit cards(mil.eur) Value of all transactions - credit cards/inhabitant Value of all transactions - debit cards(mil.eur) Value of all transactions - debit cards/inhabitant Regarding the value of all transactions made with debit and credit cards per inhabitant, Romania and Bulgaria have the lowest values among the CEE countries that are part of EU Thus, even though it has a large number of cards per inhabitant, the value of all transactions (payments, withdrawals etc.) made with cards in Bulgaria is low compared to the other countries Slovenia has the highest value of transactions made with debit cards per inhabitant, while in Poland there is the highest value for credit cards (also due to the fact that in Poland there is the highest number of credit cards per inhabitant) Note: The countries in scope of the analysis are CEE countries that are in the EU Source: ECB database, 21

13 Agenda Banking Sector Overview CEE banking market Romanian banking market

14 The moderation of the banking activities continued in 21 and 211 as well, as reflected by the evolution on total net banking assets Romanian banking system Ownership structure of the Romanian banking sector (Dec. 21) 78% 11% 12% State owned Romanian private capital Foreign capital Concentration degree of the Romanian banking sector 62% 6% 58% 56% 54% 52% 5% 48% 59% 6% EU 27 average (6%) 56% 54% 52% 53% 54% 25 26 27 28 29 21 S1211 Assets of Top five banks/ Total assets (%) Total net banking assets evolution (bneur) 12 1 8 6 4 2 Over 75% of the Romanian banking system has foreign ownership, out of which Greece has ~3%, Austria ~21%, Holland ~15%* The dynamic of the aggregated net bank assets increased with 3,5% in nominal terms in RON in 211; it is still a low level compared to the high growth values registered in previous years As regards the proportion of the banking assets in GDP, it had similar levels in the last 3 years The Top 5 banks in Romania covered in Q1/211 ~54% of the total banking assets; the trend has been slightly increasing in 21, and continued to be until 211, but it is lower than EU average * Dec. 21 CAGR 39.9% 68% ** 8% 67% 67% 6% 61% 7% 69.5 78.9 78.1 79.8 82. 44% 5% 6% 32% 36% 5% 2.2% 5.9-1.% 3.5% 4% 34.8 3% 14.7 22.6 2% % 23 24 25 26 27 28 29 21 Dec. 211 Total banking assets % GDP Column1 ** estimate Source: NBR 21, 211, INS 1%

15 In 21, the level of banking penetration in Romania remained similar with the one from 29 and is still reduced compared to CEE values Banking penetration Banking penetration, comparative analysis CEE, 21 The level of banking penetration remained fairly stable both in Romania and CEE 7% 6% 5% 4% 3% 2% 1% % 4% 6% Total loans [%GDP] 26% 24% 18% 2% Households loans [%GDP] Corporate* loans [%GDP] 34% 55% Total deposits [%GDP] 2% 32% Households deposits [%GDP] Romania CEE 29 value 16% 14% Corporate* deposits [%GDP] Thus, Romania has still a more reduced penetration level compared to CEE values This is especially true for the deposits gathered in Romania, which represented 34% of GDP, while in CEE they were 55% in 21 Households deposits represented in Romania in 21 34% of GDP (similar with the level from 29), while for CEE they were 55% As regards the level of total loans as share of GDP, in 21 in Romania it was 4%, compared to 6% for CEE countries CEE countries included: Slovakia, Slovenia, Bulgaria, Czech Republic, Hungary, Poland, Romania, Albania, Bosnia & Herzegovina, Croatia * Non government., non-bank companies Source: NBR 211, EBF 21, NIS (National Institute of Statistics), 29

16 Total banking loans continued their declining trend in 211 as well 7 6 5 4 3 2 1 Loans - structure and growth rate Loans structure per destination (bneur), nominal values 12.2.8 14.3 11.8 7.6 1. 2.2 19.8 15. 12.3 8.2 6.1 1.6 2.7 2.6 2.2 23.7 22.8 24.4 26.7 24.9 23.7 23.8 24.1 Jan.27 Dec.27 Dec.28 Dec.29 Dec.21 Dec. 211 Annual growth rate, non-government* loans, real values 1% 8% 81% 77% 6% 4% 36% 28% 36% 2% 13% 13% 9% 4% 5% 4% % -7% -5% 2% -4% -9% -7% -1% -.1% -2% Households Corporate* Public administration Other** RON Foreign currency After the high levels reached up to 29, the value of the total loans granted by banks started to decline in 21 and continued on the same descending trend in 211 as well; thus, the total loans granted by banks in 211 decreased with 3.1% in nominal terms compared to 21 This evolution is determined partly by the banks risk aversion due to increased non-performing loans and profitability issues. On the other side, the contraction of the population s disposable income and an increased tendency towards savings had an influence as well Concerning the loans structure per destination, corporate loans continued their increase in 211 as well, reaching a level of 26.7 bneur in 211; on the other hand, household loans were fairly stable in 211 Even if they had a slightly decreasing trend in 211 compared to 21, the weight of public administration in total banking loans is still higher then in 28, on the basis of the financing of the budget deficit From a currency point of view, after more than 2 years of negative values, RON denominated loans reached a positive real annual growth rate at the end of 211. Loans denominated in foreign currency had a more positive and fluctuating evolution in both 21 and 211, reaching negative levels during the middle of the year and then regaining positive growth value. * Non government, non-bank companies ** Financial companies (incl. insurance), non residents Source: NBR 211, INS

17 Overall loans structure per type of currency and household loans per destination had in 211 a similar trend with the one registered in 21 Loans households and currency structure Loans structure per type of currency 1% H C H C H C H C H C 8% 6% 53% 55% 59% 57% 61% 59% 65% 62% 66% 61% 4% 2% 47% 45% 41% 43% 39% 41% 35% 38% 34% 39% % Dec.27 Dec.28 Dec.29 Dec.21 Dec.211 RON Foreign currency Note: H Households, C Corporate (non-government, non-bank companies) The weight of foreign currency loans has remained fairly stable for both households (~66%) and corporate loans (~61%) in December 211, compared to the values reached in December 21 Correlated with a general CEE trend, the NBR has introduced in 211 regulation aiming to reduce the level of foreign currency denominated consumer loans Households loans structure per destination (bneur) As households loans structure per destination is concerned, consumer credits were in Dec. 211 of 14.4 bneur, with ~22% lower than their value in 28 Thus, the contraction that started in 29 continued in 211 as well Despite the current economic environment and the local demand, mortgage has a small positive trend in nominal terms in 211 as well (+14.4% in Dec. 211, compared to Dec 21), driven mainly by the national program Prima Casa which is currently at its 4 th edition 25 2 15 1 5.2 2.3 9.3.6 3.9 15.3 1.2 5.2 5.7 18.5 17.2.7 2.1 2.1 6.8 7.7 15. 14.4 Jan.27 Dec.27 Dec.28 Dec.29 Dec.21 Dec.211 Consumer credit Mortgage Other Source: NBR 211

18 Total deposits continued to increase in 211 as well, showing the population s increased tendency towards savings Deposits Deposits structure per destination (bneur), nominal values 45 4 35 14.4 3 14.9 13.7 14.5 25 15.2 2 12.3 15 18.6 2.8 23. 24.3 26.1 1 13.8 5 Jan.27 Dec.27 Dec.28 Dec.29 Dec.21 Dec. 211 Households Corporate* Deposits structure per type of currency 1% 8% 31.2% 32.1% 34.8% 38.8% 36.% 33.7% 6% 4% 68.8% 67.9% 65.2% 61.2% 64.% 66.3% 2% % Jan.27 Dec.27Dec.28Dec.29Dec.21Dec.211 RON Foreign currencies The nominal value of the total deposits continued its increase up to ~4.5 bneur in Dec. 211 The population s increased tendency towards savings was visible in 211 as well. It thus shows a trend in the population s behavior, with a higher appetite towards savings. This tendency is also a reflection of a more prudent liquidity management Thus, households deposits amounted in 211 to the equivalent of 26.1 bneur according to official data, an increase of over 7% compared to 21, while corporate* loans were 14.4 bneur, ~1% lower than in 21 (in nominal values) From a currency point of view, RON denominated deposits accounted for 66.3% of total deposits in 211, showing a slight increase in their weight compared to 21. Thus, savings in RON currency are preferred due to higher interest rates and also on the basis of a decreased fear of RON depreciation * Non government, non bank companies Source: NBR 211

19 In Dec. 211, average interest rates for loans were higher than the 21 levels, while interest rates for households deposits had a decline Interest rates New term deposits - average interest rate (%p.a.) 25% New credits - average interest rate (%p.a.) 25% 2% 15% 1% 5% Households RON Corporate RON Households EUR Corporate* EUR 2% 15% 1% 5% % Jan.27 Dec.27 Dec.28 Dec.29 Dec.21 Dec.211 % Jan.27 Dec.27 Dec.28 Dec.29 Dec.21 Dec.211 After a high growth period, in late 28/ beginning of 29 the local banks started to reduce their loans interest rates and increased the competition for new deposits In the second semester of 21 the banks have stopped the descending adjustment of their interest rates for households new credits in RON. Thus, in Dec. 211 the average interest rate for RON new credits was 12.66% (p.a.), higher than its Dec. 21 value. For EUR new credits, the interest rates values were similar with the ones in Dec. 21 The average interest rates used for corporate loans, both RON and EUR were higher in Dec. 211 than their values in Dec. 21; however, for new credits in RON the gap was smaller for corporate loans than for households The competition for new deposits collected from the population continued towards the end of 21 when the interest rates offered had an ascending trend, and then started to decline in 211, considering banks efforts to boost operational revenues However, the deposits increased during 211 based on an increased tendency towards savings from households * non-bank companies Source: NBR 211

2 Both the overall number of valid cards and the value of payment transactions increased in 211 compared to 21 Cards Number of valid cards (mil. units) 18 16 14 12 1 8 6 4 2-4.7% 2.7 2.2 2.1 1.8 1.7 1.5 11.2 2.2 Dec.28 Dec.29 Dec.21 Dec.211 Debit cards* Credit cards * Including deferred debit cards -2.2% 5.9% The value * of ATM withdrawals increased in 211 with 13% to ~6.1 bneur, compared to a 2.3% increase in 21 and after a decrease in 29 of -5.2% Cards payment transactions also had a positive growth rate in 211 (24.7%) Similarly to the increase in their number, the value of payment transactions with credit cards has increased in 211 with 35.1% compared to Dec. 21, while payment transactions with debit cards increased with 22.7% * Calculated in EUR values After a descending trend in the last 2 years, the number of total valid cards increased in 211 (+5.9% in Dec. 211 compared to Dec. 21) Thus, the number of total valid debit cards increased in Dec. 211 with 6.8%, compared to Dec. 21 values, reaching a number of ~11.2 mil. units Similarly, the number of total valid credit cards increased as well, reaching in Dec. 211 the number of ~2.2. mil. units compared to 21 (with 1.6% higher than in Dec. 21) Value of cards transactions ATM withdrawals (meur) 65 6 55 5 45 4 35 3 5,563 5,274 5,395 6,97 Payment transactions (meur) 225 149 169 839 756 92 * Including deferred debit cards Source: NBR 211, 228 1,17 Dec.28Dec.29Dec.21Dec.211 Dec.28Dec.29Dec.21Dec.211 Romania ATM withdrawals with cards issued in Romania and abroad Debit cards* Credit cards

21 The online banking has continued its growth and has a great potential ahead Online and mobile banking Number of clients, online banking*, 21 273,964 BCR 15,813 143,9 338,15 354, 78,45 39,996 Raiffeisen Bank ING Bank BRD Banca Transilvania UniCredit Tiriac Bank Other The number of online banking clients continued to increase in 21 as well, even if the growth rate was not as high as in previous years Based on number of clients in 21, the top 3 payers are: BCR, Raiffeisen Bank and ING Bank (closely followed by BRD) At the end of 21, there were 6 banks with more than 1, clients in online banking representing over 8% of the total market Value and number of transactions, online banking, 21 As regards the value of the transactions, ING Bank is the clear leader with ~28.4 meur in 21, followed by UniCredit Tiriac with ~12 meur ING Bank also has a high number of transactions, followed by BCR which has a large number of transactions with low value Even though there are no official estimates regarding the online banking market, according to the existing market data, ING has more than 3% market share based on the value of transactions The mobile banking market is less developed; the two first players on the market were BRD Société Générale and Raiffeisen Bank and it was recently introduced by other banks as well Source: efinance 21, 3. 9.3 25. 2. 28.4 15. 4. 3.3 1. 12. 1.5 5.9 5. 6.3. Value of transactions (meur) * 19 financial institutions 2.9 3.8 1.8 3. 1.3 2.9 4.4 2.6 Number of transactions (million) 1. 9. 8. 7. 6. 5. 4. 3. 2. 1..

22 Non performing loans continued their ascending trend in 211, leading to a further worsening of credit quality for many banks Credit quality Non performing loans evolution (%) 25. 23.3 21.9 2.8 2. 15.3 17.8 15. 14.1 13.4 11.9 1.2 1. 7.9 6.5 4. 5. 2.5 2.8. Dec.27 Dec.28 Dec.29 Jun.21 Dec.21 Jun.211 Dec.211 Non performing loans ratio* Credit Risk Ratio** The consequence of the aggressive credit strategy during previous years, cumulated with financial pressures for households and companies and a RON devaluation are still visible in the credit quality in Romania Non-performing loans continue to put a great pressure on local banks profitability Thus, financial indicators measuring the credit quality have worsened in 211 as well, even if the trend continued at a lower pace According to official data, the ratio of nonperforming loans in Dec. 211 was 14.1%, compared to a value of 13.4% in Dec. 21 The credit risk ratio also increased in 211 and reached the value of 23.3% in Dec. 211 However, the good level of capital adequacy was maintained in 211 as well, providing thus a safety net for potential constraints due to increasing non performing loans * Gross exposure of non-bank loans and interest classified as loss category 2, with debt 212 service by Ensight > 9 Management days and/ or Consulting for which there were initiated judicial procedures/ Total classified non-bank All loans rights and reserved related interest, excluding off-balance sheet items ** Gross exposure of non-bank loans and interest classified as doubtful and loss / Total classified non-bank loans and related interest, excluding off-balance sheet items Source: NBR 211,

23 The overall banking system s profitability was heavily impacted once again in 211 and reached significant negative territory Banking system profitability Net profit aggregated banking system (meur) ROA 1.6%.3% -.2% -.3% -.1% The pressure on the Romanian banking system s profitability continued in 211 as well ROE 17.% 2.9% -1.7% 1,2 1,14 1, -3.4% -1.4% The driving factors were similar with the ones in 21: non-performing loans, cumulated with reduced revenues due to lower credit activity, to which also summed up the funding pressures registered at group level due to the growing concerns regarding the euro zone debt crisis 8 6 4 2-82.6% 193-162% Thus, the aggregated banking system s net profit up to Sep. 211 outpaced the negative result from the entire 21 year and reached a net aggregated loss of ~-198 meur. In December 211, the banks compensated for almost half of the loss, posting at the end of the year an aggregated loss of ~-1 meur -2-12 28 29 21-198 Jan-Sep 211-1 Jan-Dec 211 Consequently, profitability indexes ROA and ROE* had negative values * Return on net assets (ROA) = Net profit/ Total assets Return on equity (ROE) = Net profit / Equity Source: NBR 211

24 The banks have implemented cost reduction measures in 211 as well and have reconsidered their branch network expansion plans Costs and distribution network Evolution of branch network and number of employees 8, 7, 6, 5, 4, 3, 2, 1, 49.5 3. 52.4 3.5 58.1 4.4 65.7 71.6 5.5 6.6 6.3 69.6 6.2 66.8 5.9 65.6 24 25 26 27 28 29 21 Jun. 211 Employees (thousands) - left scale No. of branches (thousands) - right scale 7, 6, 5, 4, 3, 2, 1, Cost reduction The continuing economic decline has led the banks to further cost control Thus, the reduction of the number of branches continued in 211 as well, reaching in June 211 a number of ~5,95 branches The number of employees also declined compared to the values from Dec. 21, reaching in 211 ~65,6 employees at the overall banking system s level Distribution network As concerns Romania s number of branch units per 1, inhabitants, it is still lower than EU 27 average As regards the distribution network, besides the branches, the number of ATMs have been steadily growing, in Sep. 211 increasing with 4.6% compared to Dec. 21 The number of POS terminals have also continued their increase (7.9% in 211 compared to 21) Also, similar to European trends, banks are focusing more on developing their alternative channels (i.e. mobile, internet banking) Source: NBR 211

25 In June 211, there were changes among the Top 1 players on the market based on total net assets, but no major ones Competition overview market share Market share 21 Market share 211 1 BCR 19.8% 2.1% 2 BRD 13.9% 13.6% 3 Banca Transilvania 6.2% 7.3% 4 CEC Bank 6.4% 7.% 5 Raiffeisen Bank 6.5% 6.7% 6 UniCredit Tiriac Bank 6. % 6.3% 7 Volksbank 5.8% 5.% 8 Alpha Bank 6.2% 4.7% 9 ING Bank 3.6% 4.% Bancpost 3.9% 1 3.5% Total Top 1 78.3% 78.2% Increase in market share Relatively stable Decrease in market share Source: NBR 21, Press releases

26 In June 211, there were relatively small changes among the Top 1 players on the market based on total net assets Competition overview Top 1 banks 211, market share 1 2 BCR BRD BCR and BRD remain the biggest market players based on their market share, with no significant changes to their market shares in 211 compared to 21 However, in 211, BRD was the most profitable bank in the Romanian banking system and posted a net profit of ~11 meur, while BCR s profitability was considerably affected and posted a loss of ~ -77 meur 3 4 5 6 7 8 9 1 Banca Transilvania CEC Bank Raiffeisen Bank UniCredit Tiriac Bank Volksbank Alpha Bank ING Bank Bancpost Banca Transilvania continued to increase the total net banking assets and thus gain market share in 211 as well It became the 3 rd largest player on the market and posted a net profit of ~32 meur in 211, 35% higher than in 21 Reaching a market share of 6.4% in 211, CEC Bank is the 4 th largest player on the Romanian banking market based on total net banking assets Raiffeisen also increased its market share up to 6.7% and ranks 5 th on the Romanian banking market As in previous years, its focus on product quality had a positive impact on the profitability (211 net profit: ~73 meur) UniCredit Tiriac Bank ranks behind Raiffeisen Bank in terms of market share (6.3%), and posted a profit of ~ 24 meur Volksbank continued its descending trend as the market share is concerned (5%) and also posted the highest loss in the Romanian banking system (~ -151 meur) Alpha Bank s total net banking assets continued to decrease and thus its market share went `down to 4.7%, compared to 6.2% in 21; Its profitability was also affected posting a loss of ~ 27 meur In 211 ING continued to increase its market share and went up one place, ranking 9 th on the Romanian banking system, based on total net banking assets Bankpost has lost market share in 211 compared to 21 and reached a level of 3.5% of the overall banking market As profitability is concerned, the bank returned back on profit in 211, posting a net profit of ~ 3.8 meur Increase in market share Relatively stable Decrease in market share Source: NBR, Press releases, 21-212

27 In 211, there were no major changes to regulations activities, their long term objectives and estimated impact remaining the same Main regulations overview (extract) The long term objectives of the supervision activities and prudential regulations remained the same: to strengthen banks capacity to cope with ongoing challenges and to harmonize the national legislation to international standards. BASEL II implementation Capital adequacy IFRS implementation Rules and guidance (extract) Capital requirements (incl. credit, operational and market risk) and Implementation of Pillar II Preparations of Basel III implementation through the Capital Requirements Directives (CRD) IV In 211, credit institutions recorded an adequate level of capitalization; Thus, the solvency ratio reached 14.2% in June 211, compared to 15% in Dec. 21 and 14,7% in Dec. 29 The minimum level of 1% was maintained in the supervision process In March 211 the Vienna initiative ended; the banks reconfirmed their long term engagement on the Romanian market, without a new formal commitment to minimum exposure levels In 212, IFRS standards will be implemented in the Romanian banking system after a 3 years transition period (29 211) with RAS reporting (legally mandatory) and IFRS (for information purposes, on individual level) Impact on banking institutions Capital pressures Redefinition of strategies (disinvestments, banking products & services etc.) Development/ adaptation of IT banking systems (Basel II, IFRS) and associated costs Review/ definition of internal processes (e.g. internal control, risk management, performance management, compensation and benefits etc.) Other rules/ guidance Current NBR challenges IMF recommendations/ CEBS ** recommendations & best practices EUR adoption (officially in 215, but according to official statements most likely to be delayed) etc. Management of contagion risk of the sovereign debt crisis Improvement of the quality of banking assets and loans currency structure Tools/ instruments for rapid intervention in case of institutions in financial difficulty (new regulation was issued in 211 in this respect i.e. bridge bank regulation) Definition of respective corporate governance (Committees, roles & responsibilities etc.) Development of human resources (trainings, recruitment of key employees etc.) Source: NBR 211

28 Increased financing pressures and competition for good customers are some of the trends on the banking market Trends on the Romanian banking sector short & medium term (extract) Trend Increased financing pressures Reduced credit activity / Increased focus on EU funds cofinancing Change of the competitive landscape Cost control / Branch network optimization Increased competition for good customers Rationale Increased capital pressures at group level and a focus on their core / Western European markets could lead to a reduction of foreign banks exposure on the Romanian market Therefore, local banks could also face financing constraints and implicitly margin pressures The financing pressure that banks might face in the near future, correlated with the current state of the market, can have an impact on the lending activity There is still potential in EU fund co-financing, considering the low absorption rate. Some banks have already positioned themselves on this market segment As also stated in the previous Banking & insurance study, we have already assisted in 211 to release of news regarding the consolidation of activities at group level, with impact on the Romanian market as well The trend could continue during the next year as well, as there are still some public statements of sell intentions A reduced lending activity, combined with a further increase of non-performing loans and higher costs due to regulatory changes (new credit regulation, IT systems adaptations due to regulatory changes etc.) increase even further the cost pressures on the banks A tight cost control will be necessary on short & medium term Competition for attracting good customers will increase both for lending, as well as for deposits (in order to attract additional funding sources); it is visible also an increasing focus and reliance on wholesale funding Source: Press releases, 211

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