The CEE Markets The Challenges Ahead Attila Szalay-Berzeviczy Head of Global Securities Services UniCredit Corporate & Investment Banking 27 May 2010 / Portoroz
1. SHORT TERM BOOST TO THE ECONOMY VIA IMPROVED ABSORPTION OF EU FUNDS EU funds Simulated impact of full absorption of EU funds on nominal GDP growth (2010F) 3 (current prices) EU Financial Allocations 2.3 Size of the ball = EU Structural Funds 2007-2013 (€ bn)* financial allocations in 2010 Bulgaria 6.7 2.1 additional GDP growth in 2010F (yoy % LC nominal terms) Romania 19.7 Bulgaria Hungary 24.9 1.9 Hungary Poland 67.9 (2) 31.0 (1)(2) Czech Rep. 1.7 Romania 11.7 (2) Slovakia Lithuania 6.6 Slovakia 1.5 Lithuania Poland Estonia 3.5 Latvia 4.5 Latvia 1.3 Czech R. Slovenia 4.2 Total 180.6 1.1 EU Financial Pre-Accession Assistance Allocations 0.9 (IPA) 2007-2012 (€ bn) Slovenia Croatia 0.9 0.7 Bosnia 0.6 Serbia 1.2 0.5 0 10 20 30 40 50 60 70 Turkey 3.9 Estimated EU funds absorption rate on a cash basis (2007-2009)(4) Total 6.6 (*) Excluding funds for Rural Development and fisheries; (1) Including co-financing from local budget; (2) Incl. recently approved extra funds of EUR 633mn for PL, EUR 237mn for CZ and EUR 138mn for SK; (3) Based on short term government investment multipliers; interest rates are 2 held constant at baseline value in all simulations; (4) Funds paid out % of EU funding 2007-2009 (March 2010 – SI as of Dec 2009, HU Oct 2009) SOURCE: UniCredit Group CEE Strategic Analysis, OECD, European Commission
2009: A VERY TOUGH YEAR. LOTS OF THINGS WENT WRONG BUT THE WORST HAS BEEN AVOIDED Economic growth in 2009 (GDP yoy growth %) Negative shocks: Country 1 2 3 4 5 Rank n Trade collapse 5 Low macro High macro - -14% vulnerability vulnerability n Capital Inflows collapse Russi - Russia: -8% -18% 14 n Overshooting in the -15% - repricing of CEE risk a: - 18 % 15 8% % PL:+1.7% DE: -5% PL: DE: - Stabilizers: % Ukraine: -15% +1. n Strong international support -4.2% Ukrain KZ: 5% K -5% +1% (IMF and EU packages) FR: -2.2% 7% e: -15% -6% RO:-7% Z: n Strong commitment of -7.8% RO: -6% international banks active in -3% + IT: -5% BG:-5% -4% -7% the region 1 n Continuous trust in long Turkey: -5% term fundamentals % Colors are assigned to different countries on the basis of a qualitative and quantitative assessment, including several macro (GDP growth, CA 3 balance, fiscal and external debt position, etc.) and financial variables (banking performance, credit quality, fx lending, etc.); SOURCE: UniCredit Research, UniCredit Group CEE Strategic Analysis
RECOVERY IS UNDERWAY - OUT OF THE CRISIS, THE GROWTH MODEL HOLDS BUT LONG TERM GROWTH WILL REMAIN BELOW PRE-CRISIS Real GDP growth Long term economic trends CEE vs Eurozone (% yoy growth) (GDP yoy growth %) 8.0 2009 2010F 2011F 6.0 Poland 1.7 2.6 2.7 Hungary -6.3 -0.1 2.8 4.0 Czech Rep. -4.2 1.6 2.4 2.0 Slovakia -4.7 3.1 3.8 0.0 Slovenia -7.8 0.6 1.5 -2.0 Lithuania -15.0 -3.0 3.0 Latvia -18.0 -2.5 5.5 Eurozone -4.0 CEE17 Estonia -14.1 -1.3 3.4 CEE averages -6.0 Bulgaria -5.0 -1.0 2.2 -8.0 Romania -7.1 0.4 3.5 2004 2006 2008 2010 2012 2014 Croatia -5.8 -1.0 1.3 Bosnia-H. -3.5 -1.0 0.8 Drivers of convergence hold but are weaker than in the past Serbia -3.0 -0.5 2.2 < Competitiveness (but uncertain global outlook and competition Turkey -4.7 4.5 4.5 from Asia) Ukraine -15.1 3.0 4.0 Capital inflows (but higher cost of country risk) < Russia -7.9 3.4 5.0 Convergence in standards of living (but households sector < Kazakhstan 1.2 3.5 5.0 delays recovery) CEE-17 -5.7 2.8 4.1 EU Funds and infrastructural projects < SOURCE: UniCredit Group CEE Strategic Analysis, UniCredit Research
CONCLUSION CEE convergence continues, with a rebalanced economic model and average long term growth < expected at 4% vs. the pre-crisis 6%. The Greek crisis confirms the end of cheap cost of country risk. We are still in the middle of a < demand driven credit crunch. Competition holds, with margins pressured, but long term profitability in CEE holds. CEE banking resilient even in the years of the crisis. Credit quality gradually stabilizing. < In a scenario of strict fiscal control and high country risk, CEE countries have to find a way to < stimulate demand. EU Funds full utilization is a must, which has the potential to contribute in the range of 0.8pps to < 2.0pps to annual growth (in nominal terms). Strategies for increasing competitiveness and quality of the operating environment have to < remain a priority, to compensate other long term weaknesses (first of all ageing of population). 5
CEE IS A KEY PILLAR FOR UNICREDIT Banking Sector revenues pool n UniCredit is a committed strategic investor (cumulative 2012-2015, EUR bn) in CEE with enough capital, funding, low % over UCG legacies and lots of Group synergies. CEE Net Rev(2) 26% 67 Poland 18% n UniCredit is undisputed leader in CEE with Turkey 157 10% a unique franchise and strong position in 267 Russia 9% its 19 countries of presence (among top 5 11 Croatia 6% players in 11 countries)1 30 Czech R. 6% 38 Ukraine 5% Kazakhstan 22 5% n CEE is a key contributor to UniCredit 10 Bulgaria 5% profitability Romania 27 4% 22 CEE Region weights for 23% of Group Hungary P 2% 10 Slovakia Revenues (2) 2% 3 Bosnia-H. 1% 68% of UCG CEE Revenues P Serbia 9 1% generated in 5 countries Slovenia 7 0.4% 10 Baltics Total CEE 690 (1) Ranking as of Q2 2009; (2) FY 2009 including Profit Center Vienna 6 SOURCE: UniCredit Group CEE Strategic Analysis
UNICREDIT GLOBAL SECURITIES SERVICES UniCredit is the market leader securities services provider in CEE. EUR 100 bn institutional client assets under custody, serviced in 14 CEE markets by some 240 GSS employees. Austria < Bosnia < Bulgaria < Croatia < Czech Republic < Hungary < Kazakhstan < Poland < Romania < Russia < Serbia < Slovakia < Slovenia < Ukraine <
THE CEE MARKETS n Three sub-regions: New Europe, Ex-Soviet Republics, Balkan n Improving but still low financial culture, savings slowly but continuously picking up in a region of 350 million people. Domestic investors’ freedom to invest world-wide; savings ethos growing. n Market capitalisation of CEE is 1% of world capitalisation. n Much of the privatisation took place by sales to corporations rather than market IPO's. n Challenge of scale, liquidity and delistings in most markets n ...and n Infrastructure "confusion" n Regulatory "constraints"
INFRASTRUCTURES „CONFUSION” n Vienna Stock Exchange strategy n Arrival of the MTF platforms n Demand for CCP services n Ambitions of T2S
VIENNA STOCK EXCHANGE STRATEGY n Budapest Stock Exchange was the intiator and the engine of the CEE stock exchange integration back in 2004 n Now Vienna Stock Exchange is running the show under CEESE Group name which is holding a controlling stake in the Budapest, Ljubljana and Prague bourses n Centralising trading by rolling out Xetra Trading System n Weak point of the startegy is Warsaw and the unilateral approach in the CCP topic Conclusion: The Euronext model is the one Vienna Stock Exchange targets but it is unclear, in this model how local Exchanges would fulfill their „social” role as alternative capital sources and providers of secondary trading platforms to small cap stock.
ARRIVAL OF THE MTF PLATFORMS n They will reduce the attraction of remote brokerage n They will target the most liquid stocks n They could marginalise local markets n They provide no full services, no capital raising opportunity for companies Conclusion: They are likely to reduce Exchange revenues on major stocks, increase cost of trading in less liquid issues and reduce the effectiveness of local markets as pools for domestic issuance.
DEMAND FOR CCP SERVICES n CCP helps to reduce broker to broker risk, especialy on the cash side n CCP is an expensive solution therefore it is an efficient one only in developed, high volume markets. The majority of the CEE markets have limited shares that fall in that category n CCP can drive out from the business smaller brokers who dosn’t have enough capital Conclusion: They are a valid option but should not be introduced if they reduce competition across brokers in the nascent markets. Smaller firms could find it a challenge to invest in the technology and provide the collateral backing demanded by the CCP.
AMBITIONS OF T2S n Outsourcing of settlement functions by each CSD; many feel T2S is the first step towards an EC CSD n The Euro based CEE CSD's will join T2S despite real interest n Most CEE CSD's are young companies; their ability to grow their role into limited purpose global custodians is questionable. Can they broaden their product lines? n T2S sets the stage for take over of CEE CSDs by those who has the size, considerable skill in cross border settlement and asset servicing (e.g. ICSDS) Conclusions: T2S does not enhance the CEE infrastructure as it will add cost. It will not be the catalyst for the change that will take place in more developed markets.
REGULATORY CONSTRAINTS n The Euro n UCIT regulations n MiFID n The Code of Conduct
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