Impact of crisis on retail banking Ionut Dumitru, Chief-Economist Raiffeisen Bank

1. Impact of crisis on retail bankingIonut Dumitru, Chief-Economist Raiffeisen Bank

2. Overview – Impact of crisis on demand for retail banking products • Rapidly deteriorating economic activity caused • Downward adjustment in financial position of households – real disposable income decreased, unemployment increased • Low consumer morale – as a result of both current financial situation and persisting uncertainties regarding future economic and financial outlook • Dynamics of private credit turned negative – consumer loans were the most affected • Both WILLINGNESS and CAPACITY of households to take on new debt has been significantly impaired • Increased propensity to save and lower consumption

3. Economic activity deteriorated rapidly... Sharp contraction in industrial output Adjustment in retail sales Industrial output in new-EU member countries Output in construction sector shrank Source: Eurostat, Raiffeisen RESEARCH

4. … with a negative impact on households’ financial position Flat real wages since beginning of 2009 Decrease in remittances Real disposable income started to decrease Increasing unemployment rate Source: National Bank of Romania, National Institute of Statistics, Raiffeisen RESEARCH

5. Households savings continued to increase, as economic and financial uncertainties persisted Outstanding deposits of households Dynamics of households’ savings remained positive Structure of households’ deposits Consumer confidence remains at very low levels Source: National Bank of Romania, Raiffeisen RESEARCH

6. Loans for consumer purposes were the most affected Sharp decline in purchases of durables goods Dynamics of loans to households turned negative Outstanding consumer loans are decreasing Outstanding housing loans An increase was recorded only for housing loans in FCY due to Prima Casa Program Source: National Bank of Romania, Raiffeisen RESEARCH

7. Overview – Impact of crisis on banks (supply-side of retail banking products) • Financial standing of banks’ clients deteriorated, future outlook of credit risk remains negative Tightening of lending standards by banks in an attempt to contain future potential losses • Rapid increase in non-performing loans and risk costs leading to a significant erosion of banks’ profit margins • Increase in funding costs as a result of the financial crisis added to the pressure on profit margins, as it was not (fully) passed on to customers.

8. Banks tightened the lending standards and became more reluctant to lend money Credit risk of real sector as perceived by banks increased substantially Lending standards have been tightened Source: National Bank of Romania, Raiffeisen RESEARCH

9. Mounting credit risk deteriorated banks’ portfolio quality and increased the associated costs Rapid increase in NPLs Risk costs increased sharply • Source: NBR, Raiffeisen RESEARCH

10. Cost of credit (LCY plus FCY) in Romanian banking sector remains at elevated levels… …determined/ justified by: • Sharp increase in risk costs (+) • Higher cost of funds (+) • Containment of administrative costs (-) • Lower profit margins (-) Cost of credit* components (2009 avg.) (% of total loans) Overall cost of credit* by components (avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Source: NBR, Raiffeisen RESEARCH

11. LCY lending in 2009: marginally higher cost of credit, BUT significantly lower profit margins • LCY lending remained marginally profitable in 2009, despite the sharp increase in risk costs • Compared to 2008 profit margins have been significantly eroded Local currency cost of credit* by components (2009 avg.) Local currency cost of credit* by components (2008 avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Source: NBR, Raiffeisen RESEARCH

12. FCY lending in 2009: lower cost of credit and negative profit margin • In case of FCY loans the associated costs exceeded the revenues in 2009 by almost 1% • Higher funding costs on the back of higher risk premiums • Increased risk costs due to deteriorating portfolio quality Foreign currency cost of credit* by components (2009 avg.) Foreign currency cost of credit* by components (2008 avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Source: NBR, Raiffeisen RESEARCH

13. The fiscal adjustment process (1) Will have a negative effect on the economy and consequently on demand and supply of loans The large budget deficit is the result of fast increase in public expenditures, especially with wages and social transfers (pensions, unemployment benefits) The large budget deficit is difficult to finance in the current context Radical measures are required to lower the budget deficit in a sustainable way: cut in the expenditures or/and increase in taxation Public revenues, expenditures and deficit Main drivers of expenditures • The government decided to adjust the deficit on the expenditure side: cut in public wages by 25% and in pensions by 15% • The measures are radical and they would trigger resistance of unions; Increase in taxations should not be completely ruled out • Even with these measures, the budget deficit would be very high in 2010 (close to 7% of GDP based on cash methodology and 8% of GDP based on ESA 95) Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH

14. The fiscal adjustment process (2) There is room for government to cut public spending and to increase efficiency of spending Sharp increase in pensions in 2007-2008 Ratio between earnings in public and private sector Government intermediate expenses (% of GDP) Public investments (% of GDP) Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH