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THE BANKING CHALLENGES AND OPPORTUNITIES IN CENTRAL AND EASTERN EUROPE
Robert Wright Chief Executive Officer Raiffeisen Bank Kosovo November 26th 2015
Agenda
• Current environment
- who, where, what?
- macro economic data
• The banking challenges and opportunities
- costs
- competition
- customers
• Q & A
11/24/2015 Chapter 2
Geographic Footprint
3
Leading regional player
with CEE presence of over 25
years
Covering 16 markets (incl.
Austria), of which nine are EU
members and Serbia and
Albania have candidate status
Top 5 market position in
10 countries
Strong market position with
Austrian corporates focusing
on CEE
Note: Position based on loans and advances to customers as of Q3 2014. All loan data in EUR.
Additionally, RBI operates leasing units in Moldova and Kazakhstan.
Croatia, #4
Loans: 3.2 bn
Customers: 463,552
Business Outlets: 77
Bosnia & Herzeg., #2
Loans: 1.2 bn
Customers: 499,973
Business Outlets:
96
Albania, #1
Loans: 0.9 bn
Customers: 723,451
Business Outlets: 92
Kosovo, #1
Loans: 0.5 bn
Customers: 278,432
Business Outlets:
52
Romania, #4
Loans: 4.3 bn
Customers: 2,089,544
Business Outlets: 529
Poland, #8
Loans: 9.8 bn
Customers: 689,676
Business Outlets: 351
Czech Republic, #5
Loans: 6.3 bn
Customers: 481,804
Business Outlets: 127
Hungary, n.a.
Loans: 4.7 bn
Customers: 580,052
Business Outlets: 114
Austria, #3
Loans: 23.5 bn
Customers: 8,040
Business Outlets: 3
Slovenia, #12
Loans: 0.8 bn
Customers: 63,426
Business Outlets: 14
Bulgaria, #6
Loans: 2.2 bn
Customers: 761,894
Business Outlets: 156
Serbia, #5
Loans: 1.1 bn
Customers: 640,337
Business Outlets: 85
Russia, #10
Loans: 8.4 bn
Customers: 2,940,532
Business Outlets: 212
Belarus, #6
Loans: 1.0 bn
Customers: 744,935
Business Outlets: 97
Ukraine, #5
Loans: 2.7 bn
Customers: 2,940,593
Business Outlets: 671
Slovakia, #3
Loans: 7.5 bn
Customers: 926,903
Business Outlets: 178
Central Europe (CE)
Southeastern Europe (SEE)
Russia
CEE Other
Corporate Presentation 011/24/2015
CE /SEE/EE Countries
Central Europe South East Europe Eastern Europe
Hungary Poland Czech Republic Slovakia Slovenia
Romania Bulgaria Croatia Bosnia and Herzogovina Serbia Albania Kosovo
Russia Ukraine Belarus
11/24/2015 Chapter 4
Market data from Thomson Research and Raiffeisen Bank
International Research (June 2015)
Loans
11/24/2015 Chapter 5
-10
-6
-2
2
6
10
14
2010 2011 2012 2013 2014
CE household loans (% yoy) CE corporate loans (% yoy)
%
Central Europe loan growth - household and business segments
Loans
11/24/2015 Chapter 6
-8
-6
-4
-2
0
2
4
6
8
10
12
2010 2011 2012 2013 2014
SEE household loans (% yoy) SEE corporate loans (% yoy)
%
South East Europe loan growth household and business segments
Loans
11/24/2015 Chapter 7
0
15
30
45
60
75
HU PL RO BG HR RS AL RU UA BY
CE SEE EE
2013 V 2014
Foreign Currency Loans (% of total)
Non Performing Loans
11/24/2015 Chapter 8
0
5
10
15
20
25
30
35
40
HU RO SI BH BG HR RS AL UA*
CEE: Markets with NPLs < 10% CEE: Markets with NPLs > 10%
0
1
2
3
4
5
6
7
8
9
10
BY SK RU** CZ PL
Non Performing Loans
11/24/2015 Chapter 9
0
5
10
15
20
04 05 06 07 08 09 10 11 12 13 14
Central Europe Southeastern Europe Eastern Europe
CEE: NPLs (% of total loans)
Average Loan Growth
11/24/2015
Chapter 10
2000-10 2011-14 2015-2019f
Poland 15.2% 6.8% 8.8%
Hungary 17.7% -4.7% 11.4%
Czech Republic 6.7% 4.8% 6.6%
Slovakia 10.9% 6.5% 8.1%
Slovenia 15.8% -8.8% 4.0%
Romania 40.3% 0.6% 12.4%
Bulgaria 34.0% 0.9% 3.8%
Croatia 16.2% 0.6% 0.1%
Serbia 49.8% 4.4% 7.6%
Bosnia and Herzegovina 16.7% 3.8% 4.4%
Albania 36.3% 8.8% 8.8%
Russia 38.0% 22.1% 9.3%
Ukraine 48.1% 7.9% 19.3%
Belarus 67.2% 36.7% 15.0%
CE 13.0% 4.5% 8.2%
SEE 27.9% 1.5% 8.1%
EE 39.7% 21.5% 10.3%
CEE 31.2% 14.8% 9.5%
Source: national sources, RBI/Raiffeisen Research * Loan growth rates in LCY-terms
Return on Equity
11/24/2015 Chapter 11
-15%
-10%
-5%
0%
5%
10%
15%
20%
HU SI** SK PL CZ
2013 2014
Central Europe
-15%
-10%
-5%
0%
5%
10%
15%
RO RS HR BH BG AL
2013 2014
South East Europe
-10%
-5%
0%
5%
10%
15%
20%
UA** RU BY
2013 2014
Eastern Europe
Return on Equity
11/24/2015 Chapter 12
0
2
4
6
8
10
12
2013 2014
CEE CE/SEE Euro area
CEE vs Euro area profitability (RoE, %)
Reduced income
• Regulation on capital, liquidity and structure is also causing shrinkage and distraction. Basel III 200 pages Basel IV 1000 pages!
• EBA – EUR 800bn reduction in loans outstanding 2011 – 2014 and EUR 1trn reduction in RWAs*
• Return on Equity 3.6% December 2014* – better but still too low.
• Non performing loans - NPLs peaked in 2013 at 13.8% in CEE. 9.5% Q1 2014 but forbearance introduced by EBA and IFRS9 may necessitate more provisions.
• Foreign currency loans – haircuts – Poland, Hungary, Croatia, Serbia.
*(EBA Risk Assessment Of The European Banking System June 2015)
11/24/2015 Chapter 13
Reduced income
• Narrowing net interest margins
11/24/2015 Chapter 14
% 2011 2012 2013 2014
SEE 6.6 6.2 6.5 6.4
CE 3.4 4.0 3.9 3.4
EE 4.1 1.3 2.4 2.9
(World Bank Report - Interest Rate Spread for PI customers)
Cost reduction • Revenue decline drives a faster move to digital banking, branch
closures (5300 shut or sold in 2013), 65,000 more branches closed by 2020 (40%). Head Office downsizing. 80,000 staff (3.6%) reduction in 2013. (Cap Gemini June 2014)
• Is the region overbanked? 201 banks in SEE.
• Banks are focusing on cost reduction as RoEs fall – expansion is stopped. Retrench to core markets and core competencies.
• Interest rates will rise in the next few years making the cost of funding more expensive and banks are not always able to pass this on in higher loan rates.
• A decade of under investment due to distractions and costs of the crisis. Back office systems are struggling.
11/24/2015 Chapter 15
Change….
• Customer trust - Libor rigging, illegal FX dealing, PPI miss selling, CEO bonuses. Lack of punishment and penalties. Tax payer bail outs.
• Staff quality deteriorating – experienced bankers retiring or leaving the industry and bright young graduates not interested.
• Millennial generation (18 – 34) do everything on the internet.
• New entrants - have lower barriers to entry
- no branches, no back office operations, no legacy systems diverting attention and resources.
- smart phones and cheap data processing
• Competition with positive brand images – Apple, Google. P2P. Fintechs – flexible systems, lower costs, can operate with narrower margins.
• 1.5bn euros invested by FinTechs in 2014 ($12bn in the US)
11/24/2015 Chapter 16
Top 15 European FinTechs
11/24/2015 Chapter 17
It’s not all doom and gloom…
• Traditional banks have brand strength and heritage.
• Regulation will come to the new players.
• New entrants yet to experience an economic downturn.
• Traditional banks still get the salaries – the primary relationship.
• Banks will have the savings relationship as new entrants don’t want the regulatory obligations.
• Loans and investments need to be face to face.
• The banks will respond – compete or cooperate with the new players and specialist suppliers.
• Customer peace of mind with longevity and bricks and mortar.
11/24/2015 Chapter 18
Generation Y
• Born mid 80s to mid 90s
• Deloitte refers to them as ‘catalysts of change’,
• KPMG predicts that they will be “tomorrow’s accumulators of
wealth” and “the generation that banks cannot afford to ignore.”
• Banks will need to use an approach distinctly different from
anything that they have been accustomed to in the past.
• Gen Y use internet and mobile technologies in their daily lives
and demand that these be used for banking as well.
• The use of social media is also key – facebook, Twitter etc.
Generation Z
• Born after 1995.
• Future employees.
• Never known life without a mobile phone and the internet.
• Expect instant answers.
• Socially aware, care for the environment, global perspective, - sensitivities beyond their years.
• What criteria will influence their
choice of bank?
11/24/2015 Chapter 22
Affluent Banking
11/24/2015 Chapter 23
• A growth segment in CEE in the next decade
• Expectations of a truly distinctive experience which cannot be branch based.
• Re-invent the proposition – digital, branch minimal
• “Cash rich, time poor”
- they will pay for convenience
- not price sensitive
- multiple product relationship
- recognise and acknowledge the relationship
The Unbanked
• 19m people between the age of 18 and 65 (approximately 18% of the adult population) in CEE do not have a banking relationship. (Standard Chartered 2014)
• Challenge for customers and banks.
• Need to serve profitably and with full Know Your Customer process.
• Banks want electronic banking solutions but
are they accessible for the target
market?
11/24/2015 Chapter 24
In summary….
• The “golden” days of 2003 – 2007 are gone for good. Regulation, supervision, bank management and customer awareness will not permit repetition.
• Through the worst but NPLs still need resources and attention.
• We need to make up for lost time – systems, products, customer experience, reputation.
• Watch out for Fin Techs and new entrants with strong brands and no legacy systems / baggage. If you can’t beat them join them.
• Traditional banks still have a lot of positives.
• New and significant opportunities are out there.
11/24/2015 Chapter 25