Please note the risk notifications and ex planations at the end of this document [600106]

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Please note the risk notifications and ex planations at the end of this document
www.raiffeisenresearch.atCEE Banking Sector Report CEE Banking Sector Report
May 2014
2014 will test banks‘ diversification
Asset growth continues compared to euro area
Clear upturn of banking in CE continues
Refocusing of country strategies in CEE
Risk discipline pays off; CEE NPL ratio at around 9%
Double-digit RoE feasible in CEE banking
IMPORTANT NOTICE: NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE U.S.

2 Please note the risk notifications and ex planations at the end of this documentContent
Executive Summary 3
Banking trends in CEE Definition of sub-regions and regional economic outlook 4
Ownership structure and market concentration 8 Focus on: No deleveraging in CEE – material shifts in country allocations at Western European banks 10
Financial intermediation and asset growth 13 Focus on: Financial intermediation in CEE vs. global Emerging Markets 18 Lending structure and loan growth 18
Loan-to-deposit ratios and deposit growth 21 Asset quality, NPL ratios 24
Profitability indicators
(RoA, RoE) 26
Medium-term outlook: Where banks can grow in CEE 29 Focus on: “Banking Union” and CEE – complex inte ractions and possible learning effects 30
Strategic topics for major CEE banks 33Country Overviews Poland 36
Hungary 38
Czech Republic 40
Slovakia 42
Slovenia 44
Croatia 46
Romania 48
Bulgaria 50
Serbia 52
Bosnia and Herzegovina 54
Albania 56
Kosovo 58
Russia 60
Ukraine 62
Belarus 64
Focus on: Headwinds in Russia and Ukraine – does history repeat itself? 66Market players in CEE 69
Key abbreviations 91
Disclaimer 93
Acknowledgements 94
Contacts 96Table of contents

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Please note the risk notifications and ex planations at the end of this documentExecutive Summary
For European banking, 2013 was a year of extensive deleveraging. Spillovers of
this trend to the CEE region were once again limited, but its overall positive image does not rule out selective country strategies on the part of foreign-owned CEE banks. We have found clear evidence that Western banks carried out substantial portfolio shifts over the last three to five years (focussing on more profitable and less risky markets). Therefore, 2014 will provide a crucial test for the diversifica-tion strategies of Western CEE banks. The RoE profitability gap between CE and CIS banking markets narrowed from 5pp to 2.8pp in 2013 and this trend, which benefits CE markets, may continue throughout 2014. Moreover, 2013 already showed indications of accelerating loan extension especially in the CE region and the retail loans segment. In 2014, corporate loans are expected to follow. The decreased external funding of Western banks to CEE cannot be considered as deleveraging per se or a market retreat. In 2013, the remarkable L/D ratio re-balancing in CEE continued and LCY bank bond placements in a “frontier market” were made in Romania. Nonetheless, the substitution of intra-group funding by local funds, deposit growth well above loan growth and fairly high capitalization ratios ate up some profitability in CEE banking. The decrease of the CEE banking RoE by 2pp to 11.5% in 2013 can be attributed largely to a weaker performance on the Russian market. The recent escalation of geopolitical tensions may bolster this trend and in our baseline scenario, Russia’s banking RoE might drop slightly to below 10%. In Ukraine, the overall banking market RoE is likely to be negative. The general trend towards stabilizing or slightly improving asset quality in CEE was confirmed during the past year. The CEE NPL ratio hovered at around 9% in 2013, which was more or less the same level as in 2012. In major CE markets, the NPL ratio peak has been reached, while the NPL ratio in the Russian market posted a marginal decline in 2013, although this is a pattern that may change in 2014. The NPL ratios in several SEE markets continued to inch up from already high levels of around 20%, but 2014 may bring some relief in this area.The ranking of foreign-owned CEE banks remained largely unaltered in 2013 due to low-key M&A activities. Following a moderate decline in 2012, the earn-ings of nine selected banks (typical representatives of foreign banks in CEE) remained generally stable and were supported by higher cost reductions yoy and moderated provisioning. Those banks with a balanced local exposure and solid revenue flows from Russia reported the most resilient CEE segment finan-cials in 2013 (SocGen, RBI). As opposed to 2012, the contribution of the local heavyweights (UniCredit, Erste, KBC) from Poland and the Czech Republic was (again) substantially impacted by margin pressure and modest growth. As far as the CIS region is concerned, the banks still operating in Ukraine expect pres-sure on results, particularly due to significant FX depreciation. The approach of UniCredit, SocGen, RBI and OTP towards the Russian market as major foreign banks has not yet changed, they all maintain their mid-term growth plans for the country. Romania is seen as a turnaround story (Erste, SocGen), which to some extent also applies to Hungary. However, banks are cautious with regard to the Hungarian market given the high degree of political and regulatory uncertainty.Executive Summary
No region-wide asset-based delever-aging …
… but selective country strategies
2013 RoE down 2pp (at 11.5%),
mostly driven by Russia Notable banking expansion in 2013; upside visible in CE and partially SEE, some risks in CIS
Average CEE L/D ratio below 100%; funding gaps of Western CEE banks decreased substantially
Profitability turnaround in several challenging markets in 2013; 2014 a crucial test for banks’ diversification strategies
Financial analysts
Gunter DeuberElena RomanovaJovan SikimicStabilization of NPL ratios to continue
Muted M&A, relative stability in the
ranking of leading CEE banks Uptick in (relative) CE/SEE profitabil-
ity expected

4 Please note the risk notifications and ex planations at the end of this documentBanking trends in CEE
Definition of sub-regions and regional economic outlook
Before going into detail about CEE banking sector structures and the most recent
CEE banking sector trends, which are also partially based on deep-rooted diver-gences in the economic sphere, we wish to shed some light on our sub-regional definitions and regional economic trends. We divide the CEE region into three sub-regions comprised by Central Europe (CE), Southeastern Europe (SEE) and the Commonwealth of Independent States (CIS).
Central Europe (CE): This sub-region consists of five EU and OECD members
(Poland, Hungary, Czech Republic, Slovakia and Slovenia). Slovakia and Slo-venia are also euro area members. The CE economies are characterized by a high level of development and the IMF considers the Czech Republic, Slovenia and Slovakia to be advanced economies. According to the IMF World Economic Outlook, at USD 22,000 (or EUR 18,500) this CE sub-region’s average GDP per capita at purchasing power parity (PPP) is the highest in the CEE region. Over the years, nearly all CE countries have attracted substantial foreign direct investment (FDI) that has helped to (re-)build strong industrial sectors. At EUR 5,600 the nom-inal FDI per capita in CE is almost twice as high as in the other two sub-regions. Powerful export-oriented industrial sectors have also helped to foster economic prosperity and stability (e.g. through the avoidance of excessive external imbal-ances). On average, manufacturing industries contribute over 20% of the GDP in CE countries, with some of them even exceeding the levels of Germany, the EU’s manufacturing powerhouse. Manufacturing in CE is highly integrated with “core” euro area countries such as Germany, the Netherlands and Austria via complex supply chain patterns. These countries are also the biggest investors in CE (in both the real economy and the financial sector). Therefore, it is not surprising that in line with the “core” euro area, GDP growth in CE also picked up from mid-2013. By year-end 2013, all CE countries returned to a respectable economic growth path and entered 2014 with substantial tailwinds, as indicated by the solid readings in the regional Purchasing Manager’s Indices (PMI).
However, the convergence of output and income levels with those of the euro
area has slowed significantly since 2008/09. In the years before the crisis, the average per capita GDP in CE (GDP per capita at PPP in relation to the euro area) increased by 1.8pp p.a., but following the financial crisis only by 1.3pp. In comparison to Germany, the performance of recent years looks even less favora-ble, as the per capita growth (at PPP) in CE was only 0.3pp higher. In addition, CE has become more divergent. Convergence levels in Hungary, Slovenia and the Czech Republic have almost come to a halt or are even falling back, while Poland and Slovakia are still progressing quickly. This may be explained partly by the fact that some CE countries have already exploited the low-hanging fruits of EU/euro area economic integration (e.g. in terms of FDI and trade integra-tion), while others are clearly dropping behind. The GDP per capita of Slovenia and the Czech Republic already stands at 80% of the euro area average (at PPP). As a consequence of the dynamics of recent years, Hungary is now the poorest CE country with an average of less than 60% of the per capita GDP in the euro area. Due to unsustainable developments in the fiscal sphere and its banking sector, in recent years Slovenia has also shown a convergence reversal. However, other CE countries such as Poland, the Czech Republic and Slovakia, and increasingly Hungary as well, have solid growth prospects. We expect GDP Banking trends in CEE
CE, 66
SEE, 47RU, 143CEE
Other*,
55CEE: Population distribution**
* Ukraine, Belarus; ** mn people, 2013
Source: IMF, Raiffeisen RESEARCH
CE
26%
SEE
10%RU
57%CEE
Other*
7%CEE: Nominal GDP distribution**
* Ukraine, Belarus; ** % of total, based on IMF figures in nominal USD, 2013Source: IMF, Raiffeisen RESEARCH
405060708090
2000 2004 2008 2012
CZ HU PL
SK SICE: GDP per capita at PPP*
* % of euro area, current international dollarSource: IMF, Raiffeisen RESEARCH
02,0004,0006,0008,00010,000
CZ HU PL SK SICE: FDI stock per capita (EUR)*
* average 2010-2012Source: wiiw, Raiffeisen RESEARCH

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Please note the risk notifications and ex planations at the end of this documentBanking trends in CEE
growth in CE to average 2.5-3.0% in the period from 2014-2016, resulting in
an outperformance of the euro area of 1-1.5%.
Southeastern Europe (SEE): The SEE sub-region consists of seven countries, which
are characterized by stark economic and political divergence. According to our definition, SEE consists of the EU member states Romania, Bulgaria and since 2013, Croatia, as well as four other countries from the Western Balkans: Serbia, Bosnia and Herzegovina, Albania and Kosovo (for the latter we still have limited coverage throughout the report). Serbia, Bosnia and Herzegovina and Albania are all at very different stages of their long-term rapprochement with the EU (with Serbia being the first to open accession talks). Although the SEE region is moving closer to the EU in political terms, there is un-questionably a certain economic backwardness as compared to CE. The average GDP per capita at PPP in SEE stands at USD 12,600 (EUR 10,000 or 37% of that in the euro area) and at market prices, GDP per capita is around EUR 5,800. In SEE, Croatia – the newest EU member country in SEE – has the highest GDP per capita income (52% of the euro area), while Bosnia and Herzegovina, Albania and Kosovo have the lowest average incomes (24% of the euro area).
4246505458
Mar-12 Oct-12 May-13 Dec-13
Russia Germany CE-3*CE-3, German PMI vs. Russian PMI*
* Equally weighted average of Czech Rep., Hungary,
Poland; Hungarian PMI 3mmavSource: Thomson Reuters, Raiffeisen RESEARCH
SEE: GDP per capita at PPP*
102030405060
2000 2004 2008 2012AL BH BG
HR RO RS
* % of euro area Source: IMF, Raiffeisen RESEARCH
SEE: FDI stock per capita (EUR)*
01,0002,0003,0004,0005,0006,000
AL BH BG HR RO RS* average 2010-2012Source: wiiw, Raiffeisen RESEARCH
2030405060708090100
3 5 7 9Export share (% GDP)
Size of economy (Log of nominal GDP)RUROPLCZ
UAHR
RSHU
SK
BY
BGSICEE: Export share vs. country size*
* average of 2010 to 2011/2012Source: Thomson Reuters, World Bank WDI, Raiffeisen RESEARCHFrom a structural perspective, on average SEE countries are only about a third of
the size of CE economies and the industrial sectors in SEE are also not as strong as those in CE. The share of manufacturing in GDP is about a third lower than in CE and stands at around 16%. SEE countries are less open to trade than the CEE average and, in particular, the more export-oriented CE countries such as the Czech Republic, Hungary and Slovakia. Moreover, the smaller SEE countries, which are even less mature with regard to their economic and political develop-ment, have difficulties in emulating the FDI-fuelled development path of CE. The average FDI level per capita in SEE is EUR 3,100 and thus roughly half of that in CE. On a more positive note some SEE countries, especially Serbia and Bulgaria, have managed to achieve a modest increase in FDI stock from low levels. On average, recent growth performance of SEE has been disappointing. Hence the convergence rate of GDP per capita in comparison to that in the euro area has fallen to 0.4pp per year (as compared to 1.7pp prior to 2008).
That said SEE clearly had to sweat out the economic imbalances that had accu-
mulated in the course of the consumption and bank lending boom of the 2000s. However, it is important to stress that SEE has shown a remarkable degree of structural reform and economic rebalancing (e.g. as shown by the massive cor-rection of external imbalances). Romania in particular has made remarkable progress in the areas of consolidation and reform. The country has been able to 0102030405060708090100
CZ HU PL SK SI AL BH BG HR RO RS BY RU UA
CE SEE CIS2001-2003 2006-2008 2011-2013CEE: GDP per capita (at PPP in current international USD, in % of euro area)*
3 year averages; Source: IMF, Raiffeisen RESEARCH

6 Please note the risk notifications and ex planations at the end of this document
Banking trends in CEE
invigorate its export sector, which has contributed substantially to growth over the
last two years. Serbia’s growth performance has also been passable, while on the back of a standstill in terms of structural reforms and a low degree of overall competitiveness, Croatia is still mired in a recessionary/stagnating environment. Overall, we see a certain upside for GDP growth in SEE in the next two years, although this will be based mainly on the strong impetus in Romania.
From a medium-term perspective, we expect average GDP growth rates in SEE
of around 2-3% yoy. Such growth rates are far below the levels of 5-7% seen in the period of unbalanced economic growth between 2004 and 2007. As a consequence, future income convergence in SEE will also be much slower. Never-theless, the region has not yet fully exploited all of the economic benefits that EU integration offers and some room for catching up remains. Recent economic de-velopments in some SEE countries have also shown that economic convergence is neither a one-way street, nor easy to achieve. For instance, Croatia has not dem-onstrated any convergence over the past 5 years and thus illustrates that real and nominal convergence has to be backed by similar structural progress. Moreover, some SEE countries are still characterized by certain legacies from the past very strong financial cycle. As financial cycles tend to last much longer than business ones, it would also seem reasonable to expect GDP growth in the coming years to remain well below the brisk, credit-fuelled pre-crisis readings of 5-7%.
Commonwealth of Independent States (CIS): This CEE sub-region consists of
Russia, Ukraine and Belarus. Russia and Ukraine are the most populous CEE countries and Russia is the by far wealthiest CIS economy with average GDP per capita at PPP of around USD 17,300 (EUR 14,000 or 51% of the euro area figure). By contrast, GDP per capita at PPP in Ukraine only amounts to 22% of that in the euro area. The Russian and Ukrainian economies are both commodity driven. In Russia, revenues from oil and gas account for up to 50% of central budget revenue and around two-thirds of all exports, while steel rep-resents roughly 30% of all Ukrainian exports. According to World Bank data returns from natural resources represent about 20% of Russian GDP and 6% of Ukrainian GDP. Outside the resource sector, industrial production has not devel-oped as successfully as in CE. Manufacturing accounts for only 15-16% of GDP (with a manufacturing share of 30%, Belarus is the major exception) and lacks global competitiveness, as its main target is the CIS market. The CIS region is comparatively less integrated with Western Europe (in terms of trade and FDI) than the CE and SEE sub-regions, although substantial links do exist. Trade with European countries accounts for 58% of Russian and 25% of Ukrainian exports (in CE and SEE, intra-EU trade accounts for up to 90% of trade volume levels in smaller economies). FDI levels in the CIS region are even lower than in SEE with EUR 2,600 per capita in Russia and EUR 1,100 in Ukraine. However, these figures still “overstate” actual FDI dynamics, as a large share of FDI to Russia is simply Russian money that was “round tripped” through offshore constructions for tax optimization and other purposes. Even so, when corrected by these “Russian FDIs”, the general FDI stock remains at tolerable levels compared to other major Emerging Market peers, but significantly below the FDI stock in CE economies. The commodity-oriented economic model resulted in strong economic growth rates during the commodity price boom of the 2000s and also supported consid-erable income convergence. In nominal terms, the Russian economy ballooned from around 15% of the German economy in 2000 to around 60% in 2013, sur-passing USD 2 tn (equalling 17% of the euro area GDP). Not surprisingly, Russia now accounts for over 55% of nominal CEE GDP (with 45% of the population). In per capita terms (PPP), Russia’s GDP moved from around a third of the euro area level in 2001-2003 to 51% ten years later.
102030405060
2000 2004 2008 2012
BY RU UACIS: GDP per capita at PPP*
* % of euro area
Source: IMF, Raiffeisen RESEARCH
CE
40%
SEE
15%Russia
39%Ukraine
6%CEE: Inward FDI stock distribution*
* % of total, average 2010-2012Source: wiiw, Raiffeisen RESEARCHCEE: Real GDP forecasts (% yoy)
'00-'08* 2013 2014e 2015f
PL 4.2 1.6 3.1 3.3
HU 3.3 1.1 2.0 2.0CZ 4.5 -0.9 2.3 2.4SK 5.6 0.9 2.2 3.0
SI 4.3 -1.1 -0.5 1.5
CE 4.3 0.8 2.5 2.8
HR 4.3 -1.0 -0.8 1.0BG 5.7 0.9 2.0 3.5
RO 5.8 3.5 3.5 3.5
RS 5.0 2.5 1.0 2.0BH 4.9 1.9 1.5 3.5AL 6.1 0.4 2.0 3.0
SEE 5.4 2.1 2.2 2.9
RU 7.0 1.3 -0.3 1.0UA 6.9 0.0 -5.0 1.5BY 8.0 0.9 0.5 1.5
CIS 7.0 1.2 -0.6 1.1
CEE 6.1 1.2 0.5 1.7
EA 2.0 -0.4 1.5 2.0DE 1.6 0.5 1.8 2.5
* average growth rate
Source: National Statistics, Raiffeisen RESEARCH

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Banking trends in CEE
However, superior past performance is no guarantee for future success. The post-
crisis convergence rates (to the euro area GDP per capita) of both Russia and Ukraine have fallen by one percentage point each to 1.2pp and 0.2pp, respec-tively. With commodity prices still high, but no longer rising (oil prices have been flat for almost two years), the Russian economic model is running out of steam. In CIS, the business and investment climate is unfavorable, resulting in low pri-vate sector investment activity (apart from state-sponsored projects such as the Sochi Winter Olympics or the potential forthcoming modernization of the Crimea peninsula) and low labor productivity. Moreover, economic growth in the post-crisis years has been overly reliant upon household consumption and Russia’s confidence indicators, such as the PMI, are currently clearly underperforming as compared to the broader regional CEE trend. The recent round of geopoliti-cal tensions between Russia and the Western world (including a serious debate about the imposition of far-reaching economic sanctions against Russia by major Western countries) have just added to this state of weakness. Even if the tensions between Russia and the West do not escalate further, we expect the Russian GDP to drop by -0.3% in 2014 and even in such a non-escalation scenario, further stagnation in 2015 or a deeper recession cannot be ruled out.
Assuming that no repetition/continuation of the commodity price boom occurs,
future potential growth in CIS will depend upon the ability of CIS countries to tackle structural reforms, modernize their industrial sectors and increase their pro-ductivity. Without these steps Russian (and CIS) growth could remain at around a meagre 2% or lower, which would be substantially below the growth rates of other major Emerging Market regions and only just surpass euro area growth. In a more positive scenario, in which additional growth-enabling reforms are implemented, we could envisage GDP growth rates of 3% and more as being feasible. However, we do not expect a repetition of the boom years and see the unfavorable demographic outlook as a long-term cap on growth.
Given recent political upheavals and the conflict with Russia, Ukraine has a shaky
near-term outlook (we expect a recession of 3-7% of GDP in 2014). However, under the surveillance of the IMF, the new authorities in Ukraine seem to be more willing to move forward with necessary fiscal, monetary, energy and structural re-forms. These, together with strong financial support by the IMF, the EU and other IFIs, may lead to the desired result, i.e. bringing the Ukrainian economy closer to its potential rate of expansion from a medium- to long-term perspective. However, the risk of failure (both due to external and internal reasons) is high. Ukraine has been unable to tap into its economic potential during the last 25 years, and may well add another decade to this record. Finally, the resource-poor, manufacturing-oriented Belarusian economy presents a unique picture in the CIS region. The Belarusian economy remains state-run as in the Soviet era and is characterized by fairly low efficiency, a major dependency upon cheap Russian energy and external funding. The limits of this growth model are obvious, as evidenced by repeated balance of payments problems and ongoing depreciation pressure on the domestic currency.
Financial analyst: Andreas Schwabe, CFA 3.0
1.7
1.0
0.40.61.32.2
-101234
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
CIS CE
SEE CEE (% yoy)CEE: Regional growth contributions*
* pp
Source: Bloomberg, Raiffeisen RESEARCH
5,600
3,100
2,600
1,100
01,0002,0003,0004,0005,0006,000
CE SEE Russia UkraineCEE: FDI stock per capita (EUR)*
* average 2010-2012Source: wiiw, Raiffeisen RESEARCH0.00.51.01.52.02.5
CE SEE CIS CEE EM5y pre-crisis 5y post-crisisCEE: Convergence rate to EA*
* GDP per capita at PPP (pp per year), 5 year periods from 2001/2003 to 2006/2008 (“pre-crisis”); and from 2006/2008 to 2011-2013 (“post crisis”)Source: IMF, Raiffeisen RESEARCH
0510152025
EA CE SEE CIS
Resource rent (% GDP)CEE: Resource rents*
* average of 2010 to 2011/2012Source: Thomson Reuters, World Bank WDI, Raiffeisen RESEARCH

8 Please note the risk notifications and ex planations at the end of this document
0%20%40%60%80%100%
AL BH RO HR RS BG2008 2013SEE: Foreign ownership*
* % of total assets
Source: national sources, Raiffeisen RESEARCH0%20%40%60%80%100%
SK HU CZ HU* PL SI
2008 2013CE: Foreign ownership**
* excluding OTP, ** % of total assetsSource: national sources, company data, Raiffeisen RESEARCH354045505560
050607080910111213
Market share state-owned banks
Market share Top 5 banksRU: Ownership & concentration*
* % of total assetsSource: CBR, Raiffeisen RESEARCHBanking trends in CEE
Ownership structures and market concentration
During 2013, the long-term trend with regard to CEE banking sector ownership
structures was maintained. In the CEE region as a whole, the average market share of foreign-owned banks inched further down, due mainly to Russia’s vast weight. By contrast, the average market share of state-owned banks continued to increase. In 2013, foreign-owned banks had a market share of 34% in the whole CEE region (down 3.5pp from 2008), while in the same period the market share of state-owned banks rose by 7.7pp to 37%. CE and SEE regions ownership pat-terns resemble the broader CEE trend, but with entirely different market share lev-els. The average market share of foreign-owned banks in CE and SEE also eased, falling from 78% in 2008 to around 74% at year-end 2013. The market share of state-owned banks in CE and SEE was up by around 3-4pp (from 9.5% in 2008 to about 13% in 2013), but starting from a much lower level than in the CEE re-gion as a whole. As far as ownership trends in CE and SEE are concerned, addi-tional breakdowns are needed. In CE the average market share of foreign-owned banks continued to decline marginally, falling to 71% in 2013. This trend has been evident for roughly the past ten years (peak foreign ownership levels in CE of close to 80% were reached in 2003-2005). Conversely, the average market share of foreign-owned banks in the SEE sub-region showed a modest upturn dur-ing the past two years. This somewhat counterintuitive trend was largely driven by two markets, namely Romania and Serbia. In both countries the market share of foreign-owned banks increased over the last two years. Moreover, the market share trend in CE and SEE shows clearly that there is no extensive withdrawal or above market-average deleveraging amongst Western European banks.
The picture in the CIS banking markets is somewhat different, as it goes without
saying that the CIS market share trends are largely driven by the sizeable Rus-sian market, where foreign-owned banks have recently tended to lose market share. The group of 100% foreign-owned banks in Russia (which also includes the three leading foreign-owned Western European banks among the Top 10 to Top 15 Russian banks and which, in our view, is also the relevant variable for a “true” foreign-owned bank presence) has been gradually losing market share since 2007 or 2008 and this tendency intensified again in 2013. On the other hand, the group of 50% foreign-owned Russian banks managed to gain market share prior to 2010 (however, this group of banks includes institutions in which the final beneficiaries are not truly foreign-owned). Following a period of fairly stable market share, the group of 50% foreign-owned banks also suffered a con-siderable market share loss during 2013. Given most recent developments, this group may very well have ambitions regarding a “de-offshoring” in the Russian economy, which may lead to changes of legal ownership.
The broader CIS picture also mirrors the trends outlined in the Russian market.
Here, the market-share of foreign-owned banks is also declining steadily, in terms of both the 100% and the 50% foreign-ownership ratio in Russia. The overall trend towards market share losses by foreign-owned banks in the CIS region is also underpinned by the major withdrawal of Western European banks from Ukraine during recent years, where both Russian and Ukrainian banks have filled the gap. All in all, the CIS ownership trends clearly indicate that domestic, pri-vately-owned and/or state-owned banks are currently in the driving seat in this sub-region. This tendency in the overall CIS averages is not altered by the expan-sion of major state-owned Russian banks into other CIS markets such as Belarus and Ukraine, which to a certain degree has helped to increase (as in Belarus) or at least stabilize (as in Ukraine) foreign-ownership ratios.

9
Please note the risk notifications and ex planations at the end of this document
0%10%20%30%40%50%
UA
BY
RU (50%)*
RU
(100%)** 2008 2013CIS: Foreign ownership***
* Banks with over 50% foreign ownership
** 100% foreign-owned banks*** % of total assetsSource: national sources, Raiffeisen RESEARCH
010203040506070
08 13 08 13 08 13
CE SEE CISCEE: Market share Top 5 banks (%)*
* % of total assetsSource: national sources, Raiffeisen RESEARCH610141822
5060708090
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013CE
SEE
CIS (50% foreign-owned Russian banks, r.h.s.)
CIS (100% foreign-owned Russian banks, r.h.s.)CEE: Presence of foreign-owned banks (% of total assets)
Source: national central banks, Raiffeisen RESEARCH
051015202530354045
PLHUCZSKHRROBGRSRUUABY
CE SEE CISCEE: Market share largest bank (%)*
* 2013, % of total assetsSource: national sources, company data, Raiffeisen RESEARCH
01020304050607080
PLHUCZSKHRROBGRSALRUUA
CE SEE CISCEE: Market share Top 5 banks (%)*
* 2013, % of total assetsSource: national sources, company data, Raiffeisen RESEARCHBanking trends in CEE
State-owned banks now account for over 50% of market share in the CIS region
overall. In the Russian market, state ownership continued to increase and at year-end 2013 amounted to 55% (compared to 53% in 2012). On average, in both the CIS markets and Russia, state-ownership in the banking sectors has grown by some 10pp since 2008. During the past few years, state-owned banks in CE have also increased their average market share by 3-4pp, but only to a still mod-est level of around 10-15%. This tendency was driven largely by the growing ex-tent of state-ownership in the Polish, Hungarian and Slovenian banking sectors. In the case of the latter two markets, recent increases in state-ownership were largely crisis-driven and/or induced by tough policies. Conversely, in Poland’s case the moderate increase in the state-ownership ratio was more a reflection of the relative strength of state-run banks, as well as well-targeted policy initiatives to support overall economic growth. In SEE, the average market share of state-owned banks increased marginally in recent years, i.e. by 2-3pp, at low aver-age levels of around 7%. This increase was driven by a broad-based but mod-est increase in state ownership across all larger SEE banking markets (i.e. in Ro-mania, Serbia, Croatia and Bulgaria). Given recent developments with regard to the Russian banking sector, the trend of rising state-ownership may receive a boost. Periods of economic and financial uncertainty in Russia caused by domes-tic and/or external factors tend to bolster the largest state-owned banks (e.g. via higher placements with state-owned banks and/or crisis-related business expan-sion). From 2007 to 2008, state-owned banks in Russia gained some 4-5pp of market share, while the longer-term average annual market share gains of state-owned Russian banks amount to only 2-2.5pp.
In terms of market concentration, i.e. the market share of the Top 5 banks, there
were no major changes in 2013 as compared to 2012. On average, the market share of the Top 5 banks in all CEE sub-regions remained at around 50-60% (CE: 64%; SEE: 57.1%; CIS 55.7%). On a country level, Poland, the Czech Repub-lic, Slovakia, Croatia, Bulgaria, Serbia and Ukraine are exceptions. In Poland, Bulgaria, Serbia and Ukraine the banking market concentration remains below the relevant regional average and the average concentration ratio in larger and smaller CEE banking sectors. By contrast, banking markets in the Czech Repub-lic, Slovakia, Croatia and the smaller SEE markets of Bosnia and Herzegovina and Albania are characterized by a concentration among the Top 5 banks that is well-above the regional average. In most of these banking markets, a top-end concentration looks fairly unlikely in the near future. In Russia the market share of the Top 5 banks is more or less at the level that could be expected in such a large market. However, outside the top players, Russia’s banking sector is still

10 Please note the risk notifications and ex planations at the end of this documentFocus on: No deleveraging in CEE – mate rial shifts in country allocations at Western
European banks
In recent years there has been an ongoing discussion about the threat of a far-reaching
deleveraging of Western European banks in CEE, which however, we still cannot ob-serve (see also our 2013 CEE Banking Sector Report).
1 Within this context, our analysis
of relevant regional trends is based on BIS data regarding the cross-border claims of European banks (aggregated according to the regional definitions used throughout this report).
In September 2013, the total cross-border exposure of Western European banks in the
CEE region stood more or less at the year-end 2007 level. This comparative stability continues to be a sign of strength in view of the recent adverse environment for European banks and the deleveraging experienced at Western European banks in general over the last three to five years. For example, the cross-border exposure of European banks in Western Europe and in the USA has dwindled by 30-40% since 2007. This said, it seems that most deleveraging and de-risking at Western European banks was achieved through substantial cuts to the intra-euro area and global exposures, with sizeable reductions in euro area periphery countries. This trend of more dramatic cuts in Western European cross-border exposures as opposed to changes in CEE (i.e. total cross-border exposures of Western European banks in Western Europe and in CEE) has been evident since 2000. Given time-series characteristics (i.e. past variations in the pre-crisis uptrend), the CEE cross-border exposure of Western European banks remains well within the range band based on its own past volatility (measured as an annualized standard deviation). By contrast, there seems to be a trend reversal in Western Europe, where current cross-border exposures are significantly below previous levels. This development could be interpreted as a widespread and large-scale deleveraging trend in Western Europe, although pre-crisis expansion was less strong in Western Europe than in CEE.
Therefore, it is not surprising that as compared to global or Western European expo-
sures, the relative importance of the CEE cross-border exposure of Western European banks has increased in recent years. The size of CEE cross-border exposure in relation to Western European exposure at Western European banks increased to a new all-time high of 14% in 2013. Therefore, it would seem that the focus of international financial institutions and individual national banks (e.g. in Austria or Poland) on CEE delever-aging as part of the “Vienna Initiative” has decreased somewhat.
2 The renaming of
the former “Quarterly Deleveraging Monitor” into “Quarterly Deleveraging and Credit Growth Monitor”
3 in 2013 offers proof of this trend. Against this background, it should
be stressed that in recent years, the three Western European banking sectors (Austria, France and Italy) of systemic importance to CEE and with extensive ownership links, of-fered some shock absorption. The cross-border exposure of Austrian, French and Italian banks to CEE (which represents about 50% of cross-border exposure to CEE) showed a high degree of resilience, while CEE exposures from other Western European banking sectors demonstrated less stability. Nonetheless, the reductions by the Western European banks of funding to their CEE subsidiaries were higher than overall exposure cuts. This trend is largely driven by a much greater degree of self-funding in the CEE banking sec-tors. In 2013, the L/D ratio in the CEE region hit its lowest level since 2006 and all CEE sub-regions currently exhibit average L/D ratios below 100% (for more details see the L/D ratio and funding section of this report).
Despite the positive picture of the total CEE exposure of Western European banks, sig-
nificant regional and country-specific differences do exist. In addition, quite substantial shifts of the exposure on a regional and country level have been notable in recent years. From 2007 to 2013, the CE share of total CEE exposures of the Western European banks increased by some 4pp from 54-58% (which puts the relative increase at some 7% when
1 Focus on: The never-ending “Deleveraging Debate” in CEE, in: CEE Banking Sector Report 2013, p.10ff.
2 See Austrian National Bank, Financial Stability Report No. 25, June 2013, p. 40f or National Bank of Poland,
Financial Stability Report July 2013, p. 70ff.
3 See Vienna Initiative website: www.vienna-initiative.com/vienna-initiative-part-2.Banking trends in CEE
0%3%5%8%10%13%15%
Dec.1999 Jun.2004 Dec.2008 Sep.2013
CEE (% of total)
CEE (% of Western Europe)Share of CEE cross-border claims*
* BIS-reporting European banksSource: BIS, Raiffeisen RESEARCH
75150225300375450
Dec-99 Dec-02 Dec-05 Dec-08 Dec-11
CEE
Western Europe (WE)
Upper/Lower bound CEE*
Upper/Lower bound WE*BIS cross-border claims**
* Based on annualized past standard deviation with matching maturities** Dec 1999 = 100, BIS-reporting European banksSource: BIS, Raiffeisen RESEARCH507090110130
Dec.2007 Sep.2009 Jun.2011 Mar.2013CE SEE
CEE Other* RussiaBIS cross-border claims**
* Ukraine, Belarus** Dec 2007 = 100, BIS-reporting European banksSource: BIS, Raiffeisen RESEARCH
20406080100120
Dec.2007 Sep.2009 Jun.2011 Mar.2013CEE
EA Periphery (IT, ES)
Western EuropeBIS cross-border claims*
* Dec 2007 = 100, BIS-reporting European banksSource: BIS, Raiffeisen RESEARCH

11
Please note the risk notifications and ex planations at the end of this document406080100120140
Dec-07 Apr-09 Aug-10 Dec-11 Apr-13PL HU CZ
RO RU UABIS cross-border claims*
* Dec 2007 = 100, BIS-reporting European banks
Source: BIS, Raiffeisen RESEARCHstarting levels are taken into account). Conversely, the relative share of SEE exposures
in the overall CEE exposure at Western European banks dropped by 3pp over the same period and stood at about 20% as at year-end 2013. At first sight this decrease looks modest, but if starting levels are accounted for, it implies overall cuts of some 12%. The relative share of the CIS exposure has remained almost flat with a marginal change from 20.5-19.5% (share of total CEE exposures of Western European banks) between 2007 and 2013.
On a country level, there are also considerable divergences within the sub-regions. In
relative terms, in CE the exposures towards Poland and the Czech Republic increased fairly substantial between 2007 and 2013 (i.e. by around 30%). Exposures to Slovakia increased less strongly with a modest, single-digit relative increase of 4%. By contrast, Hungary and Slovenia experienced drastic cuts of 30-35%. In SEE, on a relative basis exposures of Western European banks to Romania, Croatia and Bosnia and Herze-govina have been cut by 20-30% (as compared to 2007), while exposures to Serbia, Bulgaria and Albania increased by some 10-30%. During the same period, in the CIS sub-region exposure of Western European banks to Russia increased on a relative basis by some 3-4%, while the exposure to Ukraine was cut by 40-50%. The trends described indicate clearly the highly differentiated approach of the Western European banks within the CEE region, based on extremely selective country strategies (as shown by the relative exposure changes in the -40% to +30% range). Given the magnitude of exposure changes, it has to be mentioned that selected banking markets (such as Hungary, Slovenia or Ukraine) experienced exposure cuts by Western European banks similar to those witnessed in the countries of the euro area periphery. However, the num-ber of CEE banking markets that saw an increased exposure exceeded the number that experienced cuts (i.e. 8 as opposed to 6 markets). Especially the larger CEE markets such as Russia, Poland and the Czech Republic showed stable or increasing Western European bank exposures.
There is definitely not one single driving force behind the shifts in CEE country alloca-
tions at Western European banks. Parts of the changes can be explained by past overex-pansion and low banking sector growth (as indicated by changes in loan-to-GDP ratios). However, we have also identified two additional explanatory factors. Firstly, changes in CEE country allocations are positively correlated with profitability, i.e. Western Euro-pean banks increased their exposure to the most promising markets. This would appear to be rational, as profits remain the best means of meeting current capitalization needs. Secondly, country allocation shifts are positively correlated to levels and changes in CEE sovereign ratings. Western European banks increased exposures to CEE countries with rating upsides or at least limited rating downsides at decent rating levels, i.e. sovereign ratings in the BBB to BBB+ and Baa1 to Baa2 range (S&P/Moody’s) and higher. Con-versely, exposures were cut in countries with sovereign ratings below BB- and Ba3 levels (S&P/Moody’s) and/or rating pressure. Accordingly, the country portfolio shift towards less risky countries also shielded the CEE exposures of Western European banks from rating pressure on several CEE sovereigns. Without de-risking and changes to the coun-try allocation, the average sovereign rating of the aggregated CEE exposure at Western European banks would be around one full notch lower than the current portfolios, which were subject to the material portfolio shifts.
Within this context, it is also important to mention that Western European banks showed
a less aggressive market approach in the fast growing Russian market, despite its profit-ability and the demand-side driven increase of the Russian loan-to-GDP ratio. On the
other hand, in Ukraine the cautious market strategies were a result of low profitability and increased sovereign risk. Although these less aggressive and even cautious strate-gies in the CIS region resulted in a loss of market share by Western European banks as compared to state-owned and/or locally-owned banks, it will now partially shield them from the current downsides in the Russian and Ukrainian economies and banking sectors.
Financial analyst: Gunter Deuber Banking trends in CEE
-50% -25% 0% 25% 50%
CZ
HU
PL
SK
SI
AL
BH
BG
HR
RO
RS
RU
UACE SEE CISChange cross-border exposures*
* Relative change 2007-2013, BIS-reporting European
banks, Source: BIS, Raiffeisen RESEARCH
-45%-30%-15%0%15%30%45%
-10 0 10 20 30Relative exposure change (%)
Avg. RoE (2008-2013)Change exposures* vs. Profitability
* Relative change 2007-2013, BIS-reporting European banks, Source: BIS, national sources, Raiffeisen RESEARCH-45%-30%-15%0%15%30%45%
-8 -6 -4 -2 0 2Relative exposure change (%)
Avg. rating change (notches)Change exposures* vs. ratings
* Relative change 2007-2013, BIS-reporting European banks, Source: BIS, rating agencies, Raiffeisen RESEARCH

12 Please note the risk notifications and ex planations at the end of this document0102030405060
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013CE SEE CISCEE: Presence of state-owned banks (% of total assets)
Source: national central banks, Raiffeisen RESEARCH
0.00.51.01.52.02.53.03.54.0
2005 2007 2009 2011 2013CE SEE CISCEE: Average bank size (EUR bn)*
* Total assets divided by number of banks
Source: national central banks, Raiffeisen RESEARCHBanking trends in CEE
0.00.30.50.81.01.31.5
2005 2007 2009 2011 2013
CIS
Russia
Russia (excl. Sberbank, VTB)
UkraineCIS: Average bank size (EUR bn)*
* Total assets divided by number of banksSource: national central banks, company data, Raiffeisen RESEARCHfaced by the problem of extreme fragmentation, as indicated by the very high to-
tal of 923 banks operating in the local market. Therefore, in Russia the ratio of to-tal assets (in EUR bn) divided by the number of banks shows a low figure of only around EUR 1.4 bn. By comparison, the respective figures for the CE and SEE banking markets stand at EUR 3.7 bn and EUR 1.5 bn respectively. Moreover, the ratio between total assets and the number of banks in Russia becomes even more extreme when Sberbank and VTB are excluded from such calculations. In such equations, the division of total banking assets (excl. Sberbank and VTB) by the number of banks leads to a stunningly low figure of only EUR 0.7-0.8 bn. The “average bank size” of EUR 0.7-0.8 bn caused by this extreme market frag-mentation is more or less identical with that prevailing in the highly fragmented Ukrainian market (with 180 banks). Challenges to the banking sectors in Russia and Ukraine, which may arise from recent adverse developments, could there-fore trigger further market consolidation. Past experience shows that the number of banks operating in Russia and Ukraine may fall by at least by 10-20% over the next two to three years, which would result in the closure of some 120-130 banks operating in the Russian market and some 20-30 banks in the Ukrainian market. Such trends could be considered as healthy given the high market frag-mentation in both countries. That said, it is important to stress that structural bank-ing sector consolidation also remains a key objective of the regulator, the Cen-tral Bank of Russia (CBR). Therefore, in the Russian market there is also additional pressure from the regulatory side on top of the looming economic and banking sector challenges, which may add to consolidation pressure. However, consoli-dation in the fragmented Russian banking market is unlikely to add substantially to market concentration in terms of the market share of the Top 5 or even the Top 10 banks, as most Russian banks outside the Top 50 to Top 100 market player group have minuscule market shares. Nevertheless, the market exits of a larger number of banks may still help to somewhat increase the average bank balance sheet in the Russian market. It has to be mentioned that on average Russia’s bank-ing sector has seen 30-40 market exits annually over the last five to ten years, which have all been conducted in an orderly way. However, given the size of the Russian banking sector, there can be no direct comparisons with the other CEE countries. In spite of this fact, it is expected that at some point the Russian bank-ing sector will downsize to some 300-500 banks, which would more or less be equal to the more mature levels of the Polish banking sector.
As far as the Ukrainian banking sector is concerned, it remains to be seen to
what extent much-needed IMF-sponsored reforms will target banking sector con-

13
Please note the risk notifications and ex planations at the end of this document-2,500-2,000-1,500-1,000-5000500
CEE* Euro areaChange total assets 2011-2013**
** EUR bn * EUR-based
Source: ECB, national central banks, Raiffeisen RESEARCH1,1001,2001,3001,4001,5001,600
140170200230260290
2000 2003 2006 2009 2012
CE SEE CIS (r.h.s.)CEE: Banks operating in sub-regions
Source: national central banks, Raiffeisen RESEARCH
20%35%50%65%80%95%110%
99 01 03 05 07 09 11 13
CE SEE CISCEE: Asset-to-GDP ratio trends
Source: national central banks, Raiffeisen RESEARCHBanking trends in CEE
solidation. It must also be mentioned that a structural transformation in Ukraine
(e.g. supported by a further rapprochement with EU standards), which would also support a tangible reduction of the shadow economy, might also help to fos-ter essential banking sector consolidation. As an illustration, other CEE banking markets of roughly the same size as Ukraine (in terms of total assets), such as the Czech Republic or Romania, have on average 40 banks, while in Ukraine 180 banks are in operation. This large bank overhang also translates into a very low Top 5 concentration ratio of only around 40%, which is one of the lowest fig-ures in the entire CEE region.
Financial intermediation and asset growth
The European banking industry as a whole, which is dominated by trends in the large Western European banking markets, is currently facing tough delev-eraging, which became even more widespread in 2013. The huge deleverag-ing in Western European banking is being driven by overexpansion in cross-bor-der transactions and in some Western markets by tougher regulations. The latter are reflected by tightened liquidity and capital ratios, as well as the far-reaching consolidation of euro area banking supervision at the ECB (which will perform a comprehensive Asset Quality Review in the course of 2014). Overexpansion in the banking sector has been particularly significant in some of the (larger) coun-tries of the euro area and therefore regulatory and deleveraging pressure is much more intense inside the euro area than in CEE.
In the euro area, significant deleveraging was achieved via sizeable cuts in
cross-border banking over the past few years. The cross-border exposure of West-ern European banks inside the euro area has been slashed by some 40% since year-end 2007, while the CEE cross-border exposure of Western European banks has hovered around the level of year-end 2007 (see section “Focus on” on page 10f). Given such adverse conditions, it has to be stressed that spillovers from the broader European deleveraging to CEE as a whole have been limited. In other words, the striking divergence of financial intermediation trends between the euro area and CEE continued in 2013. With an increase of 3-4pp, the CEE as-set-to-GDP ratio rose slightly in 2013, while the asset-to-GDP ratio for the euro area plunged by some 17pp. This fall reflects massive asset sales (e.g. of deriv-atives or real estate portfolios), the winding down of loan exposures, total busi-ness line closures and transfers of non-performing assets to resolution entities (so-called “bad banks”). Deleveraging in terms of falling asset-to-GDP ratios was not merely limited to the so-called “euro area periphery”, but was also evident to a lesser extent in so-called “core” euro area countries such as Austria, Germany or Finland. The focus of euro area banks on cutting non-core bank activities is also indicated by a much greater fall in the euro area asset-to-GDP ratio as compared to the loan-to-GDP ratio. However, widespread deleveraging was not the name of the game across the CEE region, as illustrated by a modest increase in the as-set-to-GDP ratio, which can also be explained by the dominance of traditional lending in CEE banking.
A continuation of divergent financial intermediation trends for the euro area and
CEE, which was already evident in recent years, led to remarkable CEE outper-formance in terms of relative financial intermediation stability (e.g. measured by the asset-to-GDP ratio). Since 2011, financial intermediation in the euro area has fallen by 24pp, while in CEE it has risen by 6-7pp. The cumulative asset growth rate picture is even more interesting. For even if the relative under-penetration and developing banking markets in CEE are taken into account, nominal post-cri-sis bank growth in the region has been remarkable. Cumulative 2009-2013 total asset growth (in EUR-terms) in CEE stood at 39%, while the corresponding growth
-5%0%5%10%15%20%25%30%35%
00020406081012
CEE* Euro areaCEE vs. EA: Total asset growth (% yoy)
* EUR-based
Source: ECB, national central banks, Raiffeisen RESEARCH

14 Please note the risk notifications and ex planations at the end of this document-10%0%10%20%30%40%
04 05 06 07 08 09 10 11 12 13
CEE* Euro areaCEE vs. EA: Real loan growth**
* for CEE LCY loan growth
** Nominal loan growth deflated with CPI and PPI (75% and 25% weight)Source: ECB, Eurostat, national sources, Raiffeisen RESEARCH180%195%210%225%240%255%270%285%300%
30%40%50%60%70%80%90%100%
1999 2001 2003 2005 2007 2009 2011 2013CEE total assets (% of GDP) Euro area total assets (% of GDP, r.h.s.)*CEE vs. euro area: Long-term asset-to-GDP ratio trends
* Excluding MFI businessSource: national central banks, ECB, Raiffeisen RESEARCHBanking trends in CEE
-10%0%10%20%30%
Cumulative 2010-2013*
CEE Euro areaCEE vs. EA: Real loan growth
* Cumulative 2010-2013 nominal loan growth deflated with CPI and PPI (75% and 25% weight), for CEE LCY loan growthSource: ECB, Eurostat, national sources, Raiffeisen RESEARCHrate for the euro area amounted to a meagre 3%. The solid rise of financial in-
termediation in CEE in recent years is largely based on encouraging increases in CE and the CIS (mostly in Russia). By contrast, in SEE, there was a modest decline in financial intermediation following brisk pre-crisis expansion. In 2013, the as-set-to-GDP ratio in SEE dropped by some 4pp from its 2010 peak level.
Logically, the strong divergence in the most recent asset-to-GDP ratio trends re-
sulted in a fall in total banking assets in absolute terms inside the euro area, while banking assets in CEE continued to rise. In the euro area, banking assets decreased by some EUR 2,000 bn from 2011 until year-end 2013, which more or less equals the total amount of CEE banking assets. Conversely, CEE banking assets grew by some EUR 350 bn during the same period, which brought total CEE banking assets up to around EUR 2,400 bn (as at year-end 2013). At the same time, the solid growth of CEE banking assets should not mask the relatively small size of the CEE banking market, which although growing, remains only a fraction of the size of the euro area banking sector. Nevertheless, in view of the increasingly divergent financial trends in CEE and the euro area, the level of total banking assets in CEE in relation to the euro area continued to rise significantly. As at year-end 2013, CEE banking assets amounted to 9.7% of banking assets inside the euro area, which is an increase of 0.8pp as compared to 2012. There-fore, the CEE banking sector catch-up (measured as a relative increase in rela-tion to the euro area’s assets) was the second largest in history following 1.3pp in 2012 and 0.8pp in 2007.
The divergence between the loan-to-GDP ratios in CEE and the euro area has
been slightly smaller than that of the asset-to-GDP ratios (a reflection of the sharp deleveraging in non-core banking activities among Western European banks). Nevertheless, the CEE region continued to post a moderate increase in its loan-to-GDP ratio in 2013, while the euro area’s ratio showed a not inconsiderable decrease for the second time in succession in 2013. On the one hand, the rel-ative stability of CEE banking in terms of financial intermediation (measured as an asset-to-GDP or loan-to-GDP ratio) clearly underlines the fact that structural problems are less acute and broad-based than those in Western Europe. Several core banking markets in CEE, including the largest in absolute terms, are char-acterized by loan-to-GDP ratios that point to a prevailing under-penetration. In other words, as compared to the income position, loan-to-GDP ratios remain at a low level, which points to a substantial yet untapped demand-side potential for banks. This finding is clearly backed by empirical demand-driven estimations of fundamentally backed loan-to-GDP ratios in relation to GDP per capita levels

15
Please note the risk notifications and ex planations at the end of this document-10% 0% 10% 20%
LCY
EUR
LCY
EUR
LCY
EURCE SEE CISCEE: 2013 loan growth (% yoy)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
based on large country samples including CEE states, as well as other developed
and emerging economies, but not the euro area.
Nevertheless, the fact cannot be ignored that the most recent deleveraging in
euro area banking via a decrease in financial intermediation also has some ma-terial implications for some CEE countries. This is a reversal of the situation be-fore the crisis when a brisk rise in Western European financial intermediation lev-els led on paper to a “non-convergence” as the clean loan-to-GDP ratio penetra-tion gap between CEE and the euro area did not decrease (due to the growth of the “convergence target”, i.e. financial intermediation inside the euro area). This trend then partly fuelled over-optimistic banking sector growth (expectations) in some CEE markets such as Slovenia, Croatia or Bulgaria.
100%105%110%115%120%125%130%135%140%145%
10%15%20%25%30%35%40%45%50%55%
1999 2001 2003 2005 2007 2009 2011 2013CEE total loans (% of GDP) Euro area total loans (% of GDP, r.h.s.)*CEE vs. euro area: Long-term loan-to-GDP ratio trends
* Excluding MFI business
Source: national central banks, ECB, Raiffeisen RESEARCH
Given the strong pre-crisis expansion (i.e. prior to 2007/08), at best the post-
crisis banking growth in several overexposed (major) euro area and CEE coun-tries has been very modest. In the case of Spain, Portugal, Ireland, Slovenia and Hungary, we have even seen deleveraging, as indicated by falls in the loan-to-GDP ratios over the past three to five years. However, it has to be stressed that it can even take longer to overcome significant banking overexpansion. In this re-gard, it has to be acknowledged that some CEE countries such as Slovenia, Cro-atia or Bulgaria followed the steep financial intermediation trend of the countries in the so-called “euro area periphery” rather than that of their CEE peers or coun-tries like Germany. When adjusted for income levels some of the banking sec-tors in selected CEE countries even look as oversized as those in the “euro area periphery”. Interestingly, the idea that higher GDP per capita levels can be as-sociated with higher financial intermediation levels is currently being challenged within the euro area and in CEE, where some of the richer core euro area and CEE countries have much lower loan-to-GDP ratios than those of less advanced euro area or CEE countries. In other words, the financial deepening of the past was stronger in the less developed euro area countries than in the euro area as a whole. To a certain extent a similar tendency was visible in the CEE region dur-ing the last credit cycle. For example, the loan-to-GDP ratios in all SEE econo-mies (except Romania) are above the CE-3 average of Poland, the Czech Repub-lic and Slovakia (some 65% in SEE as opposed to 55% in CE-3), whilst the GDP per capita levels in SEE are only 70-50% of the CE-3 average. In the CIS region, it has to be acknowledged that Ukraine has a substantially higher loan-to-GDP ra-tio than Russia, while the income level in Ukraine (measured in PPP) is only 40% of the one in Russia. Given this underlying picture, it should not come as a sur-prise that NPLs in the CEE banking sector are largely clustered in the SEE sub-re-10%20%30%40%50%60%
99 01 03 05 07 09 11 13CE SEE CISCEE: Loan-to-GDP ratio trends
Source: national central banks, Raiffeisen RESEARCH
-0.8%-0.1%0.6%1.3%2.0%
0%3%6%9%12%
1999 2003 2007 2011
CEE total loans (% of euro area)
Change vs. euro area (pp, r.h.s.)CEE vs. EA: Loan-to-GDP catch-up
Source: national central banks, Raiffeisen RESEARCH
-55152535
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13CEE (total loans, % yoy)
Euro area (total loans, % yoy)CEE vs. EA: Loan growth
Source: CBR, Raiffeisen RESEARCH

16 Please note the risk notifications and ex planations at the end of this documentBanking trends in CEE
gion, or in a country like Ukraine where as compared to the income position, fi-
nancial intermediation levels are fairly high.
The recent major setback in financial intermediation levels in some countries
within the “euro area periphery” also implies a sizeable need for indirect ad-justment in selected overexposed CEE countries. In fact, in relative terms (i.e. ad-justed for income levels) financial intermediation levels in Slovenia, Croatia and Bulgaria have even been slightly above the financial intermediation trend of the “euro area periphery” if the most recent banking sector adjustments there are ig-nored. For example, as compared to the financial intermediation trend prior to the recent deleveraging in the “euro area periphery”, Croatia’s estimated finan-cial overexpansion measured by the loan-to-GDP ratio in relation to income lev-els would have “only” been some 10pp. However, when the most recent adjust-ments in the “euro area periphery” (i.e. substantial loan-to-GDP ratio drops in Spain or Portugal) are factored in, as compared to the financial intermediation trend, it now stands at around 15pp.
The expected economic recovery in the “euro area periphery” and the CEE coun-
tries that to date were also lacking an economic upside may even lead to an-other drop in loan-to-GDP ratios during the next few years. Moreover, the rela-tive degree of overleverage in some CEE countries also has some significant me-dium-term implications for the economic growth outlook. A strong rise in private sector debt, based partially on very optimistic, long-term income convergence assumptions by borrowers and lenders, was an important driver of the pre-cri-sis growth in several euro area and CEE economies. In Ireland, Spain, Slovenia, Bulgaria, Croatia and Ukraine expansion went over the top, i.e. these countries would have ended up in a situation of over-indebtedness anyway (regardless of global or regional, i.e. euro area financial crisis events). In countries with tangi-ble deleveraging needs in the private sector/banking sector, economic growth in the years to come is unlikely to match the performance during the past ten debt-based boom years. In other words, much of the bank lending in some CEE and euro area economies was based on overly optimistic, inter-temporal consumption smoothing. Now loan-to-GDP ratios must be brought into line with income levels. It is evident that economic growth during such a period will probably be lower than in the pre-crisis era of strong loan growth. This idea is supported by more recent economic research, which suggests that financial cycles (e.g. as measured by loan growth, loan-to-GDP ratios or house prices) tend to last much longer than standard business cycles. In order to make this idea more transparent, pre-cri-sis and post-crisis (expected) GDP growth rates were calculated for a larger set of countries. This country sample included twelve euro area and CEE countries that can be grouped together as overleveraged countries, and countries without a significant private sector debt overhang (the group of overleveraged countries comprises Ireland, Spain, Slovenia, Bulgaria, Croatia and Ukraine; the group of countries without private sector debt overhang consists of Austria, Finland, Ger-many, Poland, the Czech Republic and Slovakia). Within these country samples, economic growth in overleveraged countries will probably remain at around 30% of pre-crisis levels, while countries without a private sector debt overhang are likely to achieve around 80% of their pre-crisis economic growth in the pe-riod from 2010-2018 (the overall lower growth performance can be explained by an anticipated slowdown in global economic growth, as well as the inclusion of the most recent years into the time period from 2010-2018).
1 Therefore, it is
clear that possible benefits from a period of deleveraging with regard to eco-nomic growth usually only materialize given a long-term perspective.
1 See also Raiffeisen RESEARCH (2014): CEE growth: looking beyond the numbers, CEE Economics Special, 3 February
2014.35%50%65%80%95%
12,000 16,000 20,000 24,000
Intermediation trend (ES benchmark)
Intermediation trend (DE benchmark)GDP per capita (EUR, at PPP)Total loans (% of GDP)SI2001 -13
SK2001 -13Financial intermediation trend*
* Grey dot shows GDP p.c./loan-to-GDP relationship in 2001, blue dot in 2013Source: ECB, national sources, Raiffeisen RESEARCH
20%35%50%65%80%95%
5,000 10,000 15,000 20,000
Intermediation trend (ES benchmark)
Intermediation trend (DE benchmark)GDP per capita (EUR, at PPP)Total loans (% of GDP)HR2001 –
13
PL2001 –
13Financial intermediation trend*
* Grey dot shows GDP p.c./loan-to-GDP relationship in 2001, blue dot in 2013Source: ECB, national sources, Raiffeisen RESEARCH
10%20%30%40%50%60%
5,000 10,000 15,000 20,000
CE 2000-2013 SEE 2000-2013GDP per capita (EUR, at PPP)Total loans (% of GDP)CE/SEE: Financial intermediation*
* Line starts in 2000, latest data point 2013Source: ECB, national sources, Raiffeisen RESEARCH
25%50%75%100%125%150%175%
5,000 20,000 35,000CEE countries (2013)
Euro area countries (2013)GDP per capita (EUR)*Total loans (% of GDP)**CEE/EA: Financial intermediation*
* For CEE countries GDP per capita at PPP, for EA coun-tries GDP per capita** Excluding MFI business Source: ECB, Eurostat, national sources, Raiffeisen RESEARCH

17
Please note the risk notifications and ex planations at the end of this document90100110120130140
1999 2003 2007 2011
Euro area (loan-to-GDP ratio, %)EA: Loan-to-GDP ratio* vs. trend
* Excluding MFI business
Source: ECB, national sources, Raiffeisen RESEARCH
1525354555
1999 2003 2007 2011
CEE (loan-to-GDP ratio, %)CEE: Loan-to-GDP ratio vs. trend
Source: national sources, Raiffeisen RESEARCH10203040506070
1995 1998 2001 2004 2007 2010 2013
RO, HR, BG, UA PL, CZ, SK, RUCEE: Long-term loan-to-GDP ratio (%)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
At this point, it should be reiterated that in the past problems of overexpansion
in the CEE banking sector were limited to a few markets, while the largest bank-ing markets in absolute terms and on a regional level, namely Poland, the Czech Republic, Russia, Romania and Serbia (representing around 80% of CEE bank-ing assets) can still be considered fundamentally underpenetrated. Here, it has to be stressed that loan-to-GDP ratios (in relation to income levels) in Poland, Russia and Romania are clearly at very modest levels as compared to more developed markets, a broader sample of global emerging markets, or even the BRICS econ-omies (excluding Russia). Fairly modest financial intermediation figures for major CEE countries such as Poland, Russia or Romania become even more infavorable when the much higher GDP per capita levels compared to other Emerging Mar-kets are taken into account. For more details, please also see the “Focus on” sec-tion comparisons of financial intermediation in CEE and other global Emerging Markets on pages18f.
The outlined relatively solid outperformance of the CEE banking sector in terms
of asset and loan growth, as well as the remaining degree of underpenetration point to some highly important strategic factors for (Western) CEE banks. Firstly, overall financial overexpansion in CEE was not as excessive as that in the euro area. Modest financial intermediation levels (as compared to fundamentals, e.g. adjusted for income levels) in the largest core CEE banking markets (e.g. Rus-sia, Poland, some other CE markets and Romania) back this idea. From a me-dium-term perspective financial intermediation in CEE also stays fairly close to the longer-term financial intermediation uptrend (with some overshooting from 2007-2010), while there seems to be a clear trend hiatus in financial interme-diation terms within the euro area. In addition, there is still room to grow for fi-nancial intermediation levels in the core banking markets in CEE. Therefore, CEE banks have to be prepared for a totally different setting as compared to euro area banks without sizeable CEE business. Moreover, the deleveraging experi-enced inside the euro area also has some important messages for a few smaller and overexposed markets in the CEE region. There may be an additional decline in the financial intermediation levels and such an outlook does not seems unrea-sonable in view of the fact that large parts of the deleveraging in the euro area were also linked to aggressive balance sheet clean-ups, portfolio sales or the pull-ing out of business lines. Consequently, such developments cannot be excluded for weaker and less promising CEE banking markets.
Furthermore, long-term, crisis-induced deleveraging in the Western European
banking sectors once again shows that a convergence to the (past) financial in-termediation levels in Western Europe may not represent an economically feasi-ble optimum. This is especially true with regard to total assets and hence the pre-vious asset-mix of the large Western European banks, which over the past two to three years have slashed many non-core activities.
2
2 See also Raiffeisen RESEARCH (2013): Euro area bank deleveraging – rethinking financial intermediation in CEE, CEE
Banking Sector Research, 2 July 2013.255075100125150175200
1980 1988 1996 2004 2012ES, PT, IE, GR DE, FR, AT, FIEA: Long-term loan-to-GDP ratio (%)
Source: World Bank, ECB, Eurostat, national sources, Raiffeisen RESEARCH

18 Please note the risk notifications and ex planations at the end of this document020406080100120140
1977 1985 1993 2001 2009EM
CEE-3*
BRICS (excl. RU)CEE vs. EM: Loan-to-GDP ratio (%)
* CEE-3: Poland, Russia, Romania, no reliable data be-
fore 1990ies; ** Averages not GDP-weightedSource: World Bank, national sources, Raiffeisen RESEARCH
0.00.81.52.33.03.84.5
BRICS (excl.
RU)EM CEE-3*Chg. loan-to-GDP ratio (l-t trend, pp)
Chg. loan-to-GDP ratio (2009-2012)No overheating in CEE**
* CEE-3: Poland, Russia, Romania; ** Averages not GDP-weighted, long-term financial intermediation trend 1995-2012; Source: World Bank, national sources, Raif-feisen RESEARCH
-10%0%10%20%30%40%50%
00 02 04 06 08 10 12
CEE loan growth (% yoy, LCY)
CEE loan growth (% yoy, EUR-based)CEE: Loan growth LCY- vs. EUR-terms
Source: national central banks, Raiffeisen RESEARCH35404550556065
Q4 09 Q4 10 Q4 11 Q4 12 Q4 13
Global EM (excl. CEE)
CEE50IIF Lending Survey: NPLs*
* 50 = neutral level, levels above 50 indicate improv-ing NPL outlook (falling NPLs), below 50 deteriorating NPL outlook (increasing NPLs), Source: IIF, Raiffeisen RESEARCHBanking trends in CEE
Lending structure and loan growth
In 2013, total loan growth in LCY-terms in CEE remained at reasonable levels
and once again a double-digit increase of 11.2% yoy (as opposed to 11.4% yoy in 2012) was posted. In EUR-terms, however, the situation looks less favorable and stable with loan growth of only 3% yoy (14% yoy in 2012), which is the sec-ond lowest reading since 2008.
This slowdown was mainly driven by the negative developments in the CIS re-
gion, where the difference between loan growth rates in LCY and in EUR was by far the largest in CEE and was also reflected by FX risks above the regional average. Furthermore, the CIS region had the strongest deviations in LCY loan growth rates from 2012 to 2013 and given the continuation of FX depreciation, similar divergence between LCY and FCY loan growth rates also seems likely for 2014. The strong impact of the CIS markets on overall LCY loan growth trends in CEE is also illustrated by the fact that in CE total loan growth in LCY-terms for 2013 is even higher than in EUR-terms, while the CE sub-region also posted a modest increase in LCY loan growth yoy. In SEE, total loan growth in both, LCY and EUR-terms was slightly negative in 2013, which mirrored some fundamen-tal regional weaknesses described in the previous section on financial intermedi-ation levels (i.e. some SEE banking markets are overexposed, which is also indi-cated by negative regional asset quality trends). In terms of economic impact on (new) lending, it has to be stressed that real loan growth in LCY terms in CEE was higher in 2013 than in 2012 (although headline LCY growth in 2013 was down on that in 2012). In real terms, total loan growth in CEE increased from 6.3% in 2012 to 7.2% in 2013. Focus on: Financial intermediation in CEE vs. global Emerging Markets1
Despite robust financial sector trends in CEE compared to the euro area no overly strong
financial deepening took place in CEE in recent years. Therefore, on average the CEE loan-to-GDP ratio did not increase significantly compared to its long-term financial deep-ening trend in recent years. Also in the core CEE banking markets of Poland, Russia and Romania loan-to-GDP ratios did not increase very strongly in recent years. In contrast, an already fairly steep financial deepening in key global Emerging Markets (EM) clearly accelerated in recent years. Hence financial deepening in global EM (measured as an-nual change of the loan-to-GDP ratio) was more or less double its long-term trend over the last 3-5 years. In contrast, recent financial deepening was more or less half of its longer-term trend in CEE. More modest banking sector developments in CEE in recent years can be attributed to two factors. First, recent modest expansion in CEE (below its long-term trend) is just a “natural” correction following a boom phase or “overshooting” (above the long-term financial intermediation trend). Moreover, considerable market and regulatory challenges for Western European banks that arose in recent years also had some impact (foreign-owned Western European banks have a much higher impor-tance in CEE compared to global EM). It goes without saying that accelerated financial deepening in global EM increased loan-to-GDP ratios substantially. Therefore, it is not a surprise that the speed of financial deepening and financial intermediation levels in several major EM – measured by loan-to-GDP ratios – became more and more a point of concerns (e.g. China on a more global level and Turkey closer to the CEE region). There-fore, it is important to stress that CEE has not participated in the strong rise of financial intermediation we have seen in key global EM over the last 3-5 years. Moreover, fi-nancial intermediation levels in the main CEE economies are well below levels in other major EM. The current regional CEE loan-to-GDP ratio stands at some 50% vs. 80% in a broader EM sample on average and 130% in the BRICS economies excluding Russia.
1 See also Raiffeisen RESEARCH (2013): Current EM weakness and lessons from the CEE credit cycle, CEE Banking
Sector Research, 23 September 2013.

19
Please note the risk notifications and ex planations at the end of this document2025303540
00 02 04 06 08 10 12CEE loans in FCY (% of total loans)CEE: FCY loans (% of total)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
In 2013, the share of FCY loans in the total loans portfolio in CEE continued to
decrease, falling to 26% in CE (32% in 2008), 60% in SEE (63% in 2008) and 20% in CIS (26% in 2008). Until 2008, loan growth was exceptionally strong across the whole CEE region. Moreover, since 2008, loan books have at least doubled in all three CEE sub-regions, although the picture has changed com-pletely. Strong growth continued in the CIS region, driven mainly by the Russian market, while loan books more or less stagnated in SEE and increased only mod-estly in CE. The core CE banking markets of Poland, the Czech Republic and Slo-vakia developed well, while there was a painful deleveraging in Hungary and Slovenia. Stagnation is broader based in SEE, with the possible exception of Ser-bia, while the CIS region is also characterized by marked divergences. In re-cent years, the Russian and Belarussian banking markets continued to show very strong growth (that slowed in 2013), while the Ukrainian banking market was closer to stagnation. Prior to the crisis, i.e. until 2008, lending growth had been equally strong in almost all business lines. Household and corporate loans in-creased in all three CEE sub-regions and from 2000-2008, retail and corporate loan volumes grew significantly across all CEE sub-regions, with loan stocks in corporate and retail lending at least doubling or even tripling across the board.
As compared to the market average, volumes in corporate lending posted decent
growth in the SEE and CIS sub-regions, while corporate lending in CE has more or less stagnated over the last few years. By contrast, since 2008 volumes in re-tail lending have stalled in SEE, while they grew at tolerable rates in CE and at very strong rates in the CIS region. In light of the sketched trends the CEE banking sectors are at a very different stage of the credit and financial cycle compare d to global
EM. Hence CEE started to outperform global EM in the broad-based Bank Lending Conditions Survey conducted by the Institute of International Finance (IIF). The CEE sub-index outperforms the global EM sub-index (excl. CEE) since Q1 2013. Moreover, the Eme rg-
ing Europe/CEE sub-index change over the last 8-10 quarters shows the strongest relative upsurge from its lows back in Q4 2011.
Therefore, the IIF EM Bank Lending Survey points to above average near-term momentum in CEE banking compared to global EM (the CEE outperformance in the IIF Bank Lending Survey is particularly pronounced in the categories for loan demand and NPL formatio n).
It remains to be seen to what extent the IIF Lending Survey will take a hit from the most recent deterioration of sentiment and liquidity
conditions in Russia and Ukraine; at least a modest temporary setback to the CEE sub-index might be in the pipeline.
All in all it seems that nowadays some key global EM outside of CEE have to pay the price for a certain banking overexpansion o r over-
heating (like CEE also did in 2008/09), while there was no overexpansion in CEE in recent years (compared to the years 2004–200 8).
In this context it has to be stressed that Russia’s banking market exhibits a very low degree of financial intermediation compa red to other
global EM and other BRICS economies in particular. Or in other words: the size of the Russian banking market is much smaller th an
predicted by income to financial intermediation relationships in a larger sample of CEE and EM economies. Basically, Russia cou ld be
considered as one of the least leveraged major EM. Therefore, a sizeable penetration gap vs. peers will even remain in case par ts of
the most recent rise in financial intermediation in other BRICS economies are reflecting a bit of overheating there.
The prevailing degree of fundamental banking sector underpenetration, that offers substantial long-term potential, may also hel p to
limit near-term downsides on the Russian banking market that may result from recent adverse developments in terms of slowing gr owth,
exchange rate depreciation and increased funding costs. It has to be added that increasing loan books without adding too much c redit
risks tends to become more and more challenging the closer an economy inches towards a fundamentally-backed loan-to-GDP ratio. With regards to Ukraine the picture is less favorable. Here financial intermediation, as measured by the loan-to-GDP ratio, rem ains at
a fairly high level compared to the income position (i.e. the loan-to-GDP ratio in Ukraine is some 10pp higher than in Russia, while the
GDP per capita level in Ukraine is 40% the one of Russia). Therefore, recent adverse developments in Ukraine may quickly erase upside
that was achieved via de-leveraging that followed the credit-based boom-bust cycle from 2004-2008 (that pushed the loan-to-GDP ratio
beyond a fundamentally backed level at that time).
Financial analyst: Gunter Deuber
010203040506070
08 13 08 13 08 13
CE SEE CISCEE: FCY loans (% of total)
Source: national sources, Raiffeisen RESEARCH

20 Please note the risk notifications and ex planations at the end of this documentBanking trends in CEE
Despite the recent divergence in terms of regional growth rates in corporate and
retail lending, corporate lending still represents the backbone of banking busi-ness in CEE. In CE, corporate loans represent some 54% of total lending, in SEE 52% and in the CIS region around 70%. Household lending constitutes only some 30-40% of total loans, with readings at around 30% in CE and CIS and roughly 40% in SEE. This said, slightly higher household lending growth (already visible in CE in H2 2013) and increasing loan extensions in corporate lending in CE (corporate lending tends to follow retail lending in an economic upcycle) will be a key factor for the near-term loan growth of major Western-owned CEE banks and total loan growth in CEE. New lending in the corporate and retail segments is likely to be subdued in the CIS region. With regards to future loan demand the IIF Lending Survey flags increasing loan demand across all loan categories in CEE (with the exception of commercial real estate). The lending survey data also flag a fairly strong consumer loan demand, which we consider as a usual pattern in the early stage of an economic recovery (like we are seeing it in most major CEE economies with the exception of Russia). Therefore, the recent outper-formance of retail lending in CE and SEE should not per se be considered as an alarming sign (i.e. that banks are taking on too much risks here).
From a medium-term perspective, the expected loan growth dynamics look more
favorable in CE and Russia (once the current cyclical low, which has been exac-erbated by recent political tension is overcome) than in SEE, where a significant near-term upside in loan extension seems unlikely. However, Romania is a pos-sible exception to this trend in the CE sub-region. One main indicator for the ex-pected loan growth dynamics in CE (with the exception of Hungary and Slove-nia) and Russia is the loan-to-GDP ratio, which did not decline over the past few years. By contrast, the loan-to-GDP ratio in SEE declined significantly in recent years and especially in 2013. This development was similar to those inside the euro area and points to structural deleveraging needs. The outlined loan-to-GDP ratio picture for the CEE banking market as a whole and its sub-regions is well in line with our forecasts. Loan-to-GDP levels still offer significant growth potential for the whole CEE region. The difference in the loan-to-GDP ratio in CEE as op-posed to the euro area stands at 73pp, while the difference to a more cautiously estimated and fundamentally backed loan-to-GDP ratio stands at 10-15pp.
On a country level, there is clear segregation of the best performers within the
three CEE sub-regions. In terms of loan growth, the high performers in CE were the Czech Republic and Slovakia (6.6% and 5.4% LCY lending growth in 2013), while the Polish banking market started to demonstrate a degree of positive dy-namics in H2 2013 with loan growth of 3.5% (in LCY-terms). Romania provided the negative surprise in SEE with a loan growth decline of 3-4% in 2013. How-ever, a recovery is expected in 2014. In Hungary, the decline in lending contin-ued in 2013, although at a slower pace (with a 5.8% decrease in loan stock in 2013, following a drop of 12.8% in 2012).
For the CIS sub-region and the CEE region as a whole, Russia remained the lead-
ing banking growth market in 2013. In LCY-terms, total loans expanded by 17% yoy, once again led by a surge in retail lending that was well above the mar-ket average. The retail lending boom in Russia continued in spite of the regula-tory constraints introduced in the past two years, although at a much slower pace (29% yoy in 2013) than before (35-40% yoy in 2012). However, in view of the increasingly difficult environment in Russia, our near-term growth estimates for the Russian banking sector in 2014 are more conservative: The overall slow-down in loan growth is unlikely to be as sharp as it was in 2008, but may fall to a single-digit level. For the rest of the CEE region, we broadly expect the major lending performance trends of 2013 to be maintained in 2014.
0%10%20%30%40%50%60%70%
00 02 04 06 08 10 12
High-growth markets*
Other banking markets*CEE: Loan growth divergence**
* High-growth markets: PL, CZ, SK, RO, RS, AL, RU;
Other banking markets: HU, SI, BG, HR, BH, UA, BY** Yoy loan growth rates, EUR-basedSource: national central banks, Raiffeisen RESEARCH-10010203040
2009 2010 2011 2012 2013CE household loans (% yoy)
CE corporate loans (% yoy)CE: Loans by business segments
Source: national central banks, Raiffeisen RESEARCH
-10-5051015202530
2009 2010 2011 2012 2013 SEE household loans (% yoy)
SEE corporate loans (% yoy)SEE: Loans by business segments
Source: national central banks, Raiffeisen RESEARCH
-150153045
2009 2010 2011 2012 2013
RU household loans (% yoy)
RU corporate loans (% yoy)Russia: Loans by business segments
Source: CBR, Raiffeisen RESEARCH

21
Please note the risk notifications and ex planations at the end of this document0%20%40%60%80%100%120%140%160%
Poland
Hungary
Czech Rep.
Slovakia
Slovenia*
Romania
Bulgaria
Croatia
Serbia
Bosnia a.H.
Albania
Russia
Ukraine*
Belarus*
CE SEE CIS
2005 2008 2013CEE: Loan-to-deposit ratios at the country level (%)
* Slovenia, Ukraine and Belarus in 2008 with L/D ratio values above 160%; Sl: 166%, UA: 205%, BY: 171%
Source: national central banks, Raiffeisen RESEARCHBanking trends in CEE
It must be stressed that bank balance sheets in CEE are largely dominated by tra-
ditional lending. This is particularly clear if one looks at the share of loans in to-tal assets. A distinctive trend in CEE lending of the past decade was a significant increase in the share of loans as a percentage of total banking assets. However, this trend was somewhat disrupted by the recent crisis years. All in all, the share of loans in CE region assets rose from 42% in 2006 (which was the last “quiet” year before the crisis) to about 55% in 2013, while the respective ratios for SEE are 51% and 61%, and 55% and 58% for CIS.
However, it should be noted that if 2013 is considered in isolation, the share of
loans diminished slightly across almost all of CEE, with the exception of the CIS. In the rest of the CEE region, the share of loans in assets declined by around 1pp yoy. A possible reason was the new regulatory norms (both for euro area based CEE banks and locally-owned banks). These new regulations may have forced CEE banks to be somewhat more restrictive in issuing new loans. Moreover, the still limited demand for loans in some CEE markets was also reflected by higher (government) bond holdings, which also slightly reduced the share of loans in to-tal assets.
Loan-to-deposit ratios and deposit growth
Adjustment to a new macroeconomic and market environment, more cautious business strategies, the sorting out of credit risks, and the digestion of tightened liquidity and capitalization requirements are all factors that have pushed the CEE banking sectors towards a stricter focus on liquid assets and more conserva-tive lending. As a result and on an annual basis, the aggregate CEE Loan-to-De-posit (L/D) ratio continued its generally moderate downward movement at levels slightly below 100%, with fairly balanced L/D ratios in most of the major CEE banking markets (e.g. Poland, Russia, Romania). The L/D ratio downtrend in CEE is also reflected by the number of CEE banking markets with L/D ratios above 110%, which currently stands at only five out of fourteen, as compared to ten in 2008. Hence, a broad-based increase in balance sheet flexibility and liquidity in the CEE banking sectors has taken place.
0%20%40%60%80%100%
CE SEE CIS
Corporate lending (% of total)
Household lending (% of total)CEE: Business segment split*
* % of total loans
Source: national central banks, Raiffeisen RESEARCH
0%20%40%60%80%
PL HU CZ SK SI
2006 2013CE: Loans (% of total assets)
Source: national central banks, Raiffeisen RESEARCH
0%20%40%60%80%
RO BG HR RS BH AL
2006 2013SEE: Loans (% of total assets)
Source: national central banks, Raiffeisen RESEARCH404550556065
Q4 09 Q4 10 Q4 11 Q4 12 Q4 13
Global EM (excl. CEE)
CEE50IIF Lending Survey: Loan demand*
* 50 = neutral level, levels above 50 indicate improving loan demand, below 50 decreasing loan demandSource: IIF, Raiffeisen RESEARCH

22 Please note the risk notifications and ex planations at the end of this documentBanking trends in CEE
Apart from a more cautious new loan extension, the past two years have seen
quite robust deposit collection, which has also bolstered the L/D ratio improve-ment supported by fairly modest inflation readings in nearly all CEE economies. This trend shows that the CEE economies had internal resources that could be transferred to fund banks through deposits, and will hopefully be transformed into a new wave of lending.
A more detailed look at the deposit and loan growth trends across the CEE coun-
tries shows a significant decline in the L/D ratio in SEE to 97% at year-end 2013. The main reasons for this development were slow lending activity and an ongo-ing deposit increase throughout the region, especially in the Romanian market. In Croatia, Serbia and Bosnia and Herzegovina, funding imbalances remained as the L/D ratios stayed above 100%. The ongoing adjustment process in these markets will eventually lead to balanced self-funding in the new lending cycle.
In 2013, the average L/D ratio in the CE region showed a slight but continu-
ous decline of 3pp to 102% (following a slide of 5pp in 2012). In Poland and Hungary the L/D ratio was steadily close to 100%, while the banking systems in the Czech Republic and Slovakia even remained somewhat over-liquid with low L/D ratios of 75% and 90% respectively. The L/D ratio in the CIS sub-region re-mained stable at 100%, as compared to 99% in 2012. As at year-end 2013, the L/D ratio in the Russian banking sector hovered at around 95%, while Ukraine’s self-funding was much weaker with an L/D ratio of 135% (which is neverthe-less clearly below the levels seen in previous years). In Belarus, the L/D ratio re-mained at the highest level in the CIS region, hitting 150% at year-end 2013. However, for 2014, we see risks that banking sector impact stemming from the tensions between Russia and Ukraine could also have impacts on both sides of the balance sheets of CIS banks. In general, some deterioration of the L/D ra-tios can be expected if there are prolonged liquidity tensions, as well as contin-ued pressure on deposit collection in Ukraine and, as is likely, in Russia as well.
In 2013, deposit funding in CEE continued to grow at rates that clearly outpaced
the overall euro area deposit dynamics (3% as opposed to less than 1% in EUR-terms), but were significantly below the growth of 2012 (14% in EUR-terms). To-tal deposit stock in the CE sub-region surged by almost 6% in LCY-terms in 2013 (4% in 2012). However, deposit growth in EUR-terms was only at 1.9% (9% in 2012), mainly because of HUF and CZK currency depreciation. The CIS region posted an even stronger difference in deposit stock development between LCY- (15%) and EUR-terms (3%), mainly because of strong RUB and UAH deprecia-tion. The slump in deposit and loan growth in EUR-terms is mainly the result of a notable depreciation of CIS currencies, as well as the weakness of the CZK and HUF against the EUR. That said, even the strong negative impact of CEE cur-rency volatility did not impinge upon the relative strength of the region as a de-posit provider.
As at year-end 2013, the deposit base in CEE amounted to 12.5% of the de-
posit base of the euro area, while total loans in CEE amounted to about 10% of total loans in the euro area. For 2014 and beyond, in spite of the somewhat in-ferior macro-outlooks in the CIS sub-region, we see reliable deposit funding re-maining in CEE, as the potential for deposit growth is not yet exhausted. Rea-sons for reliable deposit funding include the still-rising propensity in CEE to save and the more favorable outlook regarding economic development in CE and ma-jor SEE countries.
-5051015202530
2009 2010 2011 2012 2013
SEE total loans (% yoy)
SEE total deposits (% yoy)SEE: Loan vs. deposit growth
Source: national sources, Raiffeisen RESEARCH-505101520253035
2009 2010 2011 2012 2013
CEE total loans (% yoy)
CEE total deposits (% yoy)CEE: Loan vs. deposit growth
Source: national sources, Raiffeisen RESEARCH
-5051015202530
2009 2010 2011 2012 2013
CE total loans (% yoy)
CE total deposits (% yoy)CE: Loan vs. deposit growth
Source: national sources, Raiffeisen RESEARCH0%20%40%60%80%
RU UA BY
2006 2013CIS: Loans (% of total assets)
Source: national central banks, Raiffeisen RESEARCH

23
Please note the risk notifications and ex planations at the end of this document0%25%50%75%100%125%
CZ SK HU PL BG RU RO HRL/D ratio, 5 banks weighted average*
L/D ratio, market aggregateL/D ratios (%)*
* RBI, ERSTE, UniCredit, Societe Generale, OTP
Source: company data, national central banks, Raiffeisen RESEARCH
75%85%95%105%115%125%
2005 2007 2009 2011 2013
CE SEE CISCEE: L/D ratio in the sub-regions
Source: national central banks, Raiffeisen RESEARCH80%90%100%110%120%
2000 2003 2006 2009 2012
CEE Euro areaCEE vs. EA: L/D ratio trends
Source: national central banks, Raiffeisen RESEARCHBanking trends in CEE
The recent strong deposit collection in CEE is clearly based on the far greater po-
tential for steering short-term deposit collection trends via pricing adjustments, as compared to instruments available in more mature markets (where there are also additional alternatives for placing savings on the corporate and retail side). In this context it has to be stressed that deposits in relation to GDP remain at modest levels in all major CEE sub-regions as compared to both the more mature bank-ing markets and the major Emerging Markets (which might be explained by a higher reliance on cross-border/parental funding in the past). Nonetheless, de-posit collection in CEE, which is well above euro area trends, should not create too much complacency, as banks inside the euro area have far more opportuni-ties to attract alternative, and even more stable and longer-term funding than de-posit funding.
In CE and SEE, the main shares in the total deposit-funding portfolio consist of re-
tail deposits with about 66% and 70% respectively. As far as the perspectives for 2014 and beyond are concerned, there is evidence that the corporate funds in-flow will move up a gear in CE, where corporate deposits grew by about 11% yoy in 2013 (LCY), causing acceleration in all of the region’s five countries. However, it should be noted that the pick-up in corporate deposits in 2013 was caused in part by sluggish investment activity and as yet, it is too early to state that a new trend has begun. Indeed, investment dynamics in 2014 may well bring some changes to the corporate deposit area. By contrast, retail deposit rates in CE demonstrated a quite significant slowdown, although they remained in positive territory. The retail funding growth rate for CE banks in 2013 fell to 3% (LCY) from about 5.5% (LCY) in 2012. This, however, was entirely attributa-ble to a significant decline in retail funding in Hungary, where the household de-posit base deteriorated by almost 10% in 2013. If this impact is excluded, retail funding growth in the other countries was only somewhat lower than in 2012, and reached 4% yoy (LCY). The deposit component dynamics in SEE followed a similar development. In the CIS, the pattern was reversed with retail deposits posting growth that was almost twice as high as that of corporate deposits (22% and 12% yoy, respectively, on aggregate levels in LCY-terms).
The aggregate L/D ratio in CEE has fallen substantially since its peak level in
2008 (17pp from 115% in 2008 to around 98% in 2013), driven by a broad-based improvement across all sub-regions and major banking markets such as Poland, Russia and Romania. The decline in the L/D ratio in CEE is definitely a reflection of a broader trend in global and European banking derived from the increasing appeal of deposit financing. Therefore, it comes as no surprise that the aggregated L/D ratio in the euro area is also on a sustained downward path. Nevertheless, the drop in the aggregated L/D ratio in the euro area (some 7-9pp from pre-crisis peak levels) did not match the level of the L/D ratio fall in CEE, while the overall L/D ratio in the euro area also remained slightly above 100% as at year-end 2013. The rather low L/D ratio has some important implications for loan and asset growth over the next two years, as banks in CEE will face greater pressure to invest their collected deposit base in interest-earning and/or fee-earning assets.
The already visible uptick in loan growth in CE and parts of SEE should bode
well for such asset growth. Moreover, the current modest L/D level in major CEE markets implies that at the very least sufficient resources exist to fund most of this increase in loan growth. Nevertheless, it must be kept in mind that most of the funding recently attracted in local markets is short-term in nature (as sight de-posits dominate compared to term deposits). By contrast, most intra-group fund-ing (which has been reduced in recent years) was more long-term in nature (and -10010203040
2009 2010 2011 2012 2013Russia total loans (% yoy)
Russia total deposits (% yoy)RU: Loan vs. deposit growth
Source: national sources, Raiffeisen RESEARCH

24 Please note the risk notifications and ex planations at the end of this documentmostly denominated in FCY). Therefore, the increased reliance on local fund-
ing may cause a growing number of maturity mismatches in CEE banking sec-tors with relatively large mortgage portfolios. This is especially true in the case of larger (legacy) FCY-denominated mortgage portfolios (although new loan exten-sion in FCY is currently declining).
Non-performing loans, NPL ratios
In terms of the aggregated non-performing loan (NPL) ratio in CEE, 2013 was definitely the long-awaited year of stabilization. After several years of increases in the NPL ratio by several percentage points, the overall NPL ratio did not move significantly in 2013 and stabilized at around 9%. Moreover, 2013 was the first year for roughly a decade in which overall levels of NPLs in terms of volume did not increase significantly in absolute terms. The trend towards stabilized asset quality is definitely a reflection of a much changed risk appetite and risk disci-pline within the CEE banking sector. Moreover, NPL ratios in several markets also received support from solid lending activity.
The stabilization of CEE asset quality in 2013 was largely driven by the CE and
CIS markets. In CE, the average NPL ratio increased marginally from 8.9% in 2012 to 9.1% in 2013. This gradual rise was largely driven by positive NPL ratio developments in Poland, the Czech Republic and Slovakia, while upward pres-sure continued in Hungary and Slovenia. In the CIS region, the average NPL ra-tio dropped from 7.1% in 2012 to 6.6% in 2013. This development was largely supported by an NPL ratio decrease in the Russian market from 4.8% in 2012 to 4.3% in 2013. As opposed to the NPL ratio decrease in the CIS region, the av-erage NPL ratio in SEE continued its significant upturn. The regional NPL ratio in SEE rose from 17% in 2012 to 19.5% in 2013. During the last three to four years, the SEE NPL ratio has been increasing by several percentage points annu-ally. In SEE, the uptrend in NPL ratios tends to be a reflection of poor asset qual-ity trends as well as subdued loan growth. The concentration of asset quality is-sues in two CE countries (Hungary, Slovenia) and several SEE banking sectors is also reflected by the fact that the NPL ratio in these two sub-regions continues to remain well above the overall CEE ratio.
We expect a certain downward NPL ratio trend in CE during 2014, following the
stabilization seen in 2013. A certain slowdown in the rise of the regional NPL ratio in the SEE region might also be possible in 2014. However, given the still substantial rise of NPLs in 2013, a complete trend turnaround in SEE seems un-likely in the coming year. In the light of recent adverse developments in the CIS region, pressure on the asset quality side cannot be ruled out for 2014. In the case of Russia, the NPL ratio may increase to some 5%-6%, depending on loan extensions in 2014. Our expectation of a modest increase is based on the as-sumption that borrowers are already more familiar with a much higher degree of exchange rate flexibility than they were five years ago. Moreover, we do not an-ticipate steep falls in GDP and lending dynamics of the scale seen in 2008/09. In the case of Ukraine, macroeconomic weakness and exchange rate pressure should add to an already fairly high NPL ratio in the range of 35-40%. Therefore, Ukraine NPL ratios may inch above 40% in 2014. However, as in Russia, an as-set quality deterioration in Ukraine might also turn out to be less dramatic than in 2008/09, as in recent years loan growth rates have remained within a range of low single-digit or very low double-digit expansion. Banking trends in CEE
2468101214
0304050607080910111213
CEE CE/SEECEE: NPL ratio (%)*
* % of total loans
Source: national central banks, Raiffeisen RESEARCH
02468101214
020406080
2000 2003 2006 2009
CE/SEE NPLs (total EUR bn)
CE/SEE NPLs (% of total loans, r.h.s.)CE/SEE: NPLs (EUR bn) and NPL ratio
Source: national central banks, Raiffeisen RESEARCH05101520
2005 2007 2009 2011 2013
CE SEE CISCEE: NPL ratio in the sub-regions*
* % of total loansSource: national sources, Raiffeisen RESEARCH

25
Please note the risk notifications and ex planations at the end of this document012345
00
01
02
03
04
05
06
07
08
09
10
11
12
13
Number of countries with negative RoECEE: No. of challenging markets*
* out of 15 CEE banking sectors covered in this report
(loss-making 2013: SI)Source: national central banks, Raiffeisen RESEARCH0510152025303540
HU BH HR BG RS RO SI AL UA*CEE: Markets with NPL ratio > 10%**
* based on IFRS estimates, official ratio much below that** % of total loansSource: national sources, Raiffeisen RESEARCH
-400-300-200-1000100200300400500
04050607080910111213
CE SEE
CIS CE (excl. HU)CEE: Change of NPL ratio (bp)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
As asset quality issues in CEE are clearly concentrated in the SEE banking mar-
kets, coordinated efforts to support NPL resolution will be key to restoring the eco-nomic and banking sector recovery prospects in this sub-region. The tendency to carry bad loans on balance sheets is an impediment to the future growth pros-pects of these banks and therefore requires the use of all possible means of res-olution. Gradually, the banks will write off, restructure, or even refinance them should the borrowers show robust recovery. There are signs of increased activity on this front already and bad loan sell-off transactions, whether government or-chestrated or market-driven by nature, have started to take place in Poland, the Czech Republic and Russia.
While overall asset quality data indicates a certain stabilization across most of
the CEE banking markets, individual player performance (especially that of the large ones, including major foreign-owned CEE banks) remains challenged by asset quality issues. Evidence of this is provided by the fact that within a country context, the NPL ratios for foreign-owned CEE banks still often exceed the coun-try’s overall NPL level, especially in the CEE banking sectors most exposed to credit risk. However, we think that this factor, although painful at present, should be relatively short-lived. Financial performance data still shows significant jeop-ardy to the results of foreign-owned CEE banking groups owing to credit risk costs, which continue to eat into their bottom line returns. Provisioning costs of as much as 40-50% of operating revenues are not surprising for the group of com-petitors considered in a number of CEE markets. This is yet another indication of the fairly strong pre-crisis risk appetite of the foreign banks, which was driven mostly by the strategy of chasing large market shares. The banks hit hardest are naturally those that prior to the crisis were actively expanding in the countries that posted the highest aggregate asset quality deterioration (e.g. Hungary, Bulgaria or Romania). Another group consists of banks with a high willingness to assume consumer-lending exposures in CIS countries. OTP Russia is one of these banks and in 2013 it had rocketing provisions due mainly to aggressively accumulated credit risk during the previous years. Apart from the other factors, the most recent shifts in country mix within the country strategies of the biggest CEE foreign bank players were determined by expectations of credit quality developing in various markets. Firstly, Western European CEE banks used to issue a significant portion of loans in foreign currencies, which backfired when the crisis hit. Secondly, the excessive credit risk could have been assumed during the race for market share in the pre-crisis years. In any case, whatever the reasons, the evidence points to the fact that gaining a quality franchise is now one of the key issues for the banks active in CEE. Their ability to attract and maintain the strongest clientele will de-termine their further NPL and profitability development.
Possible asset quality deterioration in the CIS in 2014 may hit foreign-owned
Western European banks to a lesser extent than locally owned players. This is be-cause to the latter, major foreign-owned banks in the Ukrainian and Russian mar-ket have been operating in a cautious and risk-disciplined manner. As a result, in recent years Western foreign-owned banks in Ukraine have lost substantial mar-ket shares and this is also the case in the Russian market. Asset quality trends in SEE will continue to be an important profitability driver, as these banks have fairly large market shares in the region (foreign ownership ratios are the highest in SEE). On a more positive note, the expected positive asset quality trends in CE should bode well for large foreign-owned banks, especially in view of the sub-stantial foreign ownership ratios in nearly all CE markets (with the exception of the heavily burdened Slovenian banking market).012345678910
BY RU SK CZ PLCEE: Markets with NPL ratio < 10%*
* % of total loans
Source: national sources, Raiffeisen RESEARCH

26 Please note the risk notifications and ex planations at the end of this document-3.0%-2.0%-1.0%0.0%1.0%2.0%
SI HU SK PL CZ
2012 2013CE: Return on Assets (RoA, %)
Source: national sources, Raiffeisen RESEARCH-3035810131518202325
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013CE SEE CIS Euro area* CE (excl. Hungary)CEE: Long-term Return on Equity (%)
* H1 2013 data for euro area
Source: national central banks, Raiffeisen RESEARCH-40%-30%-20%-10%0%10%20%30%
SI HU SK PL CZ
2012 2013CE: Return on Equity (RoE, %)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
In this connection, 2012 and 2013 have brought greater clarity to the identifica-
tion of the worst performers in those markets where there has been notable pro-gress with regard to asset quality and possibilities to undertake viable new busi-ness. These included the Czech Republic (NPL ratio: 6%), Poland (8%), Slovakia (5%), and Russia (4%), while in 2013 Slovenia with an NPL ratio of over 20%, Hungary (14%) and Bulgaria (17%) continued to lag behind. The situation in Ro-mania is somewhat more complex in this respect. Although the NPL ratio was high at 22% in 2013, the increase was largely driven by loan base deteriora-tion. The NPL ratio is expected to fall as soon as lending activity picks up and a more decisive balance sheet cleanup occurs.
Profitability indicators (RoA, RoE)
In 2013, profit development in the CEE banking sectors was characterized by two major trends. On the one hand, there were signs of broad-based improve-ment, while on the other, stark regional and intra-regional differences in terms of profitability remained. On a positive note, in 2013 the number of loss-mak-ing banking sectors (RoE) decreased to one (Slovenia), while two sizeable mar-kets (Hungary and Romania) shifted back to a marginally positive RoE after a few loss-making years. The RoE in 2013 in Hungary amounted to 4.5% (up 8pp from -3.8% in 2012) and the Romanian banking sector posted average RoE of 1.3%, which was up 7.2pp from -5.9% in 2012. Nevertheless, overall banking profitability in CEE deteriorated slightly on average in 2013. The overall RoA in CEE decreased from 1.5% (2012) to 1.2% (2013) and the RoE slid from 13.3% to 11.5%. However, this moderate fall cannot be attributed to clear-cut deterio-ration in bottom-line profits or squeezed profit-making opportunities, as both in-dicators represent broad, weighted averages with diverse components. Besides, the RoE decline has been due to strengthening of capital base by the banks (a positive stability impact of which is likely to outweigh the somewhat negative im-pact on profitability ratios in this case). This was the intended result following ac-tion by major CEE banks and their regional subsidiaries, which was also partially driven by regulation aimed at solidifying capital positions. The implementation of new, stringent capital requirements (by EU and/or local regulators) and more conservative own leverage strategies were therefore reflected in lower RoEs. Even so, 2013 was still a year in which the macroeconomic backdrop and mar-ket sentiment in most CEE banking markets became more favorable and created modestly positive loan extension momentum in several countries. Nonetheless, an ultra-low rate environment in several CEE markets (especially in CE and SEE) lim-ited the interest-bearing opportunities in new business. At the same time, 2013 -2-10123
2000 2003 2006 2009 2012CE SEE CISCEE: Long-term Return on Assets (%)
Source: national central banks, Raiffeisen RESEARCH

27
Please note the risk notifications and ex planations at the end of this document-6%-4%-2%0%2%4%6%8%
RO HR RS BH BG AL
2012 2013SEE: Return on Equity (RoE, %)
Source: national sources, Raiffeisen RESEARCH
-0.8%-0.5%-0.3%0.0%0.3%0.5%0.8%1.0%1.3%
RO HR AL BH BG RS
2012 2013SEE: Return on Assets (RoA, %)
Source: national sources, Raiffeisen RESEARCHBanking trends in CEE
saw stable or slightly improving RoA ratios in some major markets, in particular
in Poland, the Czech Republic, Slovakia and, as already highlighted, in Roma-nia and Hungary, which finally emerged from negative return territory. The de-cline of profitability ratios in Russia, which moved down from their 2012 heights (RoE down to 15% in 2013), is responsible for almost the entire decrease in the average 2013 RoA in CEE and to a large extent also impacted the RoE in the CEE region.
As with other indicators, the average RoE in CEE masks strong regional and in-
tra-regional divergences. In 2013, the average RoE in CE amounted to 10.6% and without the negative effects of the Hungarian market would have stood at 12.2%. Such levels are fairly close to the average RoE in the CIS region, which is mainly driven by Russia and came in at 13% in 2013. In terms of average profitability, SEE continued to underperform in 2013 with a disappointing RoE of only 2.4%, which still is an improvement on the negative RoE of -0.5% in 2012 that was caused primarily by the Romanian market. The outlined regional profit-ability trends imply that the sizeable performance gap between CE and SEE de-creased slightly in favor of the SEE markets, but a large difference remains. The challenging profitability situation in SEE is also reflected by the fact that average government bond yields and/or risk premiums (i.e. LCY bond yields or yields on government Eurobonds, where there are no long-term rates in LCY) are above the banking sector’s RoE. In all other CEE sub-regions there remains a decent posi-tive differential between banking RoE and bond yields and/or risk premiums. For the CIS region, the difference between banking RoE and government bond yields and/or risk premiums is not substantially higher than the CE average. Hence the fact that on a risk-adjusted basis (i.e. factoring in volatility risks on CIS banking markets), on average the CE banking sector already looked fairly promising as compared to the CIS region in 2013, where profitability in Russia showed a tan-gible downturn. In the light of the most recent adverse economic, FX and rates developments in Russia and Ukraine, a narrowing or even a closing of the prof-itability gap between the CE and CIS banking markets, as well as a reduction in the positive gap between banking profitability and government bonds yields in the CIS countries, can be expected to continue throughout 2014. Therefore, for Western European banks with a strong presence in CEE and especially Russia, 2014 will represent a test of diversification across the whole CEE region in gen-eral and the profitability of their SEE and CE operations in particular.
Within this context, it must be stressed that another general distinguishing feature
of the CE banking sector, where the difference between balance sheet growth in LCY and EUR-terms in 2013 was modest, is the high degree of through-the-cycle resilience in terms of profitability, e.g. as demonstrated during the five post-crisis years of 2009-2013. The average RoE in CE for these years stood at 12.5% with a standard deviation (STD) of 1.5%. In Poland, the average RoE for this 5-year period was 13.7%, with a STD of just 0.8%. The Czech banking sector posted an even higher average RoE of 24% over the same period, although with a some-what higher volatility (i.e. a STD of 2.4%). The respective parameters for the Slo-vak banking market were at 10% (RoE) and 3.2% (STD). Hungary and Slove-nia definitely constitute exceptions with regard to this positive regional through-the-cycle resilience. As opposed to the core CE banking markets, as always the core CIS markets are characterized by more volatile margins and higher risk pre-miums. For 2014, downside potentials along the lines of past patterns of profit-ability volatility are expected. In the past five years, the average RoE in Russia’s banking market was 13.6% with a STD of 5.4%. This alone is quite a high vol-atility indicator and is likely to have a negative effect on profitability and return ratios in 2014 that may even extend into 2015. This said, the Russian banking
0%5%10%15%20%
UA BY RU
2012 2013CIS: Return on Equity (RoE, %)
Source: national sources, Raiffeisen RESEARCH
0.0%0.5%1.0%1.5%2.0%2.5%
UA RU BY
2012 2013CIS: Return on Assets (RoA, %)
Source: national sources, Raiffeisen RESEARCH

28 Please note the risk notifications and ex planations at the end of this document02468101214
2012 2013*
CEE Euro areaCEE vs. EA profitability (RoE, %)*
* H1 2013 data for euro area
Source: national sources, Raiffeisen RESEARCH
-10-505101520
2005 2007 2009 2011 2013
CE SEE CISCEE: Bank RoE – gov. bond yield (pp)*
* Long-term gov. bond yields if available, otherwise yields on long-term gov. FCY instrumentsSource: national sources, Raiffeisen RESEARCHBanking trends in CEE
sector’s RoE may decline to around 10% in 2014, which is likely to once again
have a significant impact on overall banking profitability ratios in the entire CEE region. The economic and political situation in Ukraine also indicates a down-side risk to bank profits. The only difficulty here is to “guestimate” the extent of the profitability drop. In this connection, it should be stressed that over the past five years and even before, the Ukrainian banking sector was characterized by very high return volatility. The average RoE in the Ukrainian banking sector for the years 2009-2013 was -9%, with a STD at 14%, i.e. from a statistical point of view, the situation has been relatively unpredictable for quite some time.
In SEE, the major positive shift in 2013 was the return of Romania’s banking sec-
tor to profit (after being in the red for three years). Romanian banks posted a RoA of 0.1%, and their RoE was at 1.3%. Although fairly modest in absolute terms, these figures may well prove to be an indication that banking in Romania is com-ing out of recession. Relatively upbeat expectations and increasing balance sheet clean-ups by major market players also support this view. Among the remaining SEE markets, Bulgaria and Albania showed acceptable, though unspectacular, performance ratios in 2013 (with RoEs in the range of 5-6%), while all other SEE markets were characterized by RoEs below 3%. Given the depressed earnings situation in SEE over the past few years, it is rather hard to compare the stabil-ity of returns in these markets with the two other CEE sub-regions. The SEE prof-itability “observation cloud” appeared uneven, and therefore the average RoA and RoE ratios in SEE were roughly equal to their standard deviations within the past five years. On average, the RoE for SEE stayed at 1.9% from 2009-2013 with a STD of 1.8%.
The profitability data (RoE) of the largest Western European banks doing busi-
ness in CEE show a rather mixed set of (cross-country) figures. The weighted av-erage for the five international banking groups with high CEE exposure (namely UniCredit, RBI, Erste Bank, SocGen and OTP, as at September 2013) was mark-edly lower than the overall market RoE in countries such as the Czech Republic, Poland and Romania, but notably better than the market RoE in Hungary, Bul-garia, Slovakia and Russia, and virtually the same as in Croatia. On the posi-tive side, these ratios point yet again to the advantages of the big Western Euro-pean banking groups with regard to technologies and risk management, which enable them to beat the average market profitability in markets with higher risks. The poor market performance in Romania is explained by the high costs of credit risks, in particular those of Erste Bank.
However, the relative underperformance of leading Western banks in profita-
ble but generally lower-risk CE markets such as Poland and the Czech Republic is perhaps an evidence that these banks are not seizing emerging opportunities actively enough. On the other hand, the reason could be purely statistical and it might be difficult to employ micro- and macroeconomic RoE data for banking in this regard because the largest international CEE banks report according to IFRS, while the local market statistics are still largely based on local accounting stand-ards. Part of the differences outlined may be related to this statistical effect. There could also be an economic rationale behind this question, as large international CEE banks are subject to their domestic regulations and thus restricted as far as increases in their exposures are concerned.
With the macroeconomic mood becoming more positive throughout CEE in gen-
eral, the topic of ongoing business optimization and efficiency improvement con-tinues to be particularly important for Western European banks operating in the region. In 2014 and beyond, this issue will be applicable to the Russian banking -5%0%5%10%15%20%25%
RU CZ SK BG PL RO HR HURoE, 5 banks weighted average*
RoE, market aggregateRoE: Selective CEE countries (%)
* RBI, ERSTE, UniCredit, Societe Generale, OTP
Source: company data, national central banks, Raiffeisen RESEARCH

29
Please note the risk notifications and ex planations at the end of this document15%30%45%60%75%
99 02 05 08 1114f 17f
High-growth markets**
Other banking markets**CEE: Banking market divergence*
* Loan-to-GDP ratio; ** High-growth markets: PL, CZ, SK,
RO, RS, AL, RU; Other banking markets: HU, SI, BG, HR, BH, UA, BY; Source: National sources, Raiffeisen RESEARCHBanking trends in CEE
sector, where over the past five years business adjustments and cost optimization
were the smallest, and Western-owned CEE banks have larger franchises com-pared to other markets. In other larger CEE markets such as Poland, the Czech Republic or Romania (which have witnessed a great deal of cost cutting and opti-mization in recent years) leading Western European banks will aim for better re-turns, which will require both a search for profit-making opportunities, continued competitive pricing (competition is increasing notably on these markets), and fur-ther improvements in administrative efficiency.
Medium-term outlook: Where banks can grow in CEE
A number of our medium-term banking sector growth expectations have not changed substantially since our last CEE Banking Sector Report. We expect an-nual nominal banking sector growth in the range of 8-10% yoy over the next five years and consequently a further round of modest financial deepening for the CEE region as a whole. Based on our growth assumptions, we anticipate the loan-to-GDP ratio to rise from 51% at year-end 2013 to some 56% by 2018. Our expectation of another round of financial deepening in CEE is based largely on the fact that the major banking markets, which represent some 80% of total re-gional banking assets, continue to be high-growth markets where the loan-to-GDP ratio remains below a level that can be justified by current and expected GDP Poland: 8.7%Russia: 9.5%
Czech Republic:
5.4%Romania: 10.8%
3%4%5%6%7%8%9%10%11%12%13%
– 50 100 150 200 250 300Average annual loan growth rate 2014-2018
(% yoy in LCY-terms)
Change in total loan volume year-end 2013 – 2018 (EUR bn)CEE: Expected loan growth trends (2014 – 2018)
Source: National sources, Raiffeisen RESEARCH
Hungary: 6.3% Slovenia: 4.9%
Bulgaria: 3.6%
Croatia: 0.1%Serbia: 10.6%
Bosnia a.H: 4.7%Albania: 9.6%
Ukraine: 7.1%Belarus: 19.8%
Slovakia: 8.2%
0%2%4%6%8%10%12%14%16%18%20%22%
– 5 10 15 20 25Change in total loan volume year-end 2013 – 2018 (EUR bn)Average annual loan growth rate 2014-2018
(% yoy in LCY-terms)CEE: Expected loan growth trends (2014 – 2018)
Source: National sources, Raiffeisen RESEARCHHigh-growth vs. Other CEE markets
Given different loan-to-GDP and GDP per capita levels in the CEE banking markets we are covering, we tend to split these markets into two categories.
High-growth CEE banking markets:
These markets have a high growth potential and are characterized by a loan-to-GDP ratio well below or at least at a fundamentally backed level com-pared to adequate long-term financial intermediation trends. According to this definition Russia, Poland, Czech Republic, Slovakia, Romania, Albania and to a certain extent Serbia still tend to be undersupplied in terms of bank services.
1 In these markets, business
strategies based on volume growth are feasible from both a macroeconomic and macroprudential point of view.
Other CEE banking markets: These
markets are characterized by high loan-to-GDP ratios in relation to cur-rent income levels (either measured in comparison to the euro area or finan-cial intermediation trends in Emerging Markets).
1 In such a setting banking
growth is unlikely to strongly outpace GDP growth on a sustainable basis. In some of these markets loan-to-GDP ra-tios may decrease. However, this does not indicate that there will not be any growth opportunities at all. There still might be a multitude of business oppor-tunities apart from loan volume growth. Furthermore, a certain stabilization of loan-to-GDP ratios following a period of very strong growth may help to restore medium-term banking sector prospects.
1 Source: Raiffeisen RESEARCH 2011 CEE Banking
Sector Report

30 Please note the risk notifications and ex planations at the end of this documentFocus on: “Banking Union” and CEE – complex in teractions and possible learning effects
The foundation of the so-called “Banking Union” (BU) in the euro area involves the concentration of the Single Supervisory Mech anism
(SSM) and banking supervision at the European Central Bank (ECB) along with the Single Resolution Mechanism (SRM), the phasing- in
of a unified bank resolution and “bail-in” procedure, which will put the euro area well ahead of other jurisdictions.
Both the SSM and SRM will increase the transparency and resilience of the participating, individual (Western) European banking sectors
and the euro area’s banking sector as a whole. Basically, the objective of the BU is to enhance the clarity, comparability and harmoniza-
tion of the banking supervision, regulation and supervisory culture inside the euro area and possibly the rest of the EU. Moreo ver, the
BU will strengthen the cross-border dimension of European banking supervision and regulation. The last few years revealed sizea ble
and complex cross-border banking linkages. Therefore, the foundation of the BU is also in the interest of the CEE countries, as the related
tensions in major Western European banking sectors caused negative spillovers in CEE. Greater and more stable confidence in the vi-
ability of Western Europe’s banking sectors, based on the BU architecture, may now produce positive effects in CEE (e.g. as mir rored
by the broad-based decline of bank funding costs in recent years, which also benefits larger Western European banks in CEE). Fo r euro
area members in CEE (e.g. Slovakia, Slovenia) there is no choice. They have to follow the rules of the game inside the BU. Howe ver,
for CEE countries such as Poland, the Czech Republic, Hungary, Romania, Bulgaria or Croatia (still outside the euro area) the q uestion
as to whether they should join the BU on a voluntary basis (as offered by current regulations) remains.
Beyond the political sphere, there are some valid arguments for the claim that having as many non-euro area EU countries as pos sible
on board would make sense. Foreign ownership ratios in the CEE banking sectors are well above the levels in most euro area coun tries
and European financial and banking sector integration extends well beyond the euro area. Consequently, very broad-based SSM participation might also help to prevent contrasting regulations at national levels (e.g. where national interests are in confl ict with the
overlapping European goals of the single market). Furthermore, although complex by nature, decision-making inside the SSM/SRM might still be faster than less organized home/host regulatory coordination outside the SSM. And in any event, decisions taken within
the SSM and SRM may have significant spillover effects on non-opt-in countries. Therefore, BU participation by the non-euro are a CEE
countries can ensure that their interests are reflected in broader European regulation. In addition, there are definitely some aspects
where the CEE banking sectors deviate from those in Western Europe (e.g. measurements of the credit-to-GDP gap within the Basel III
framework, which are relevant to countercyclical capital buffer implementation (CCB), may have to be treated more cautiously in CEE
than in Western Europe). From a private sector perspective, the broad-based participation of non-euro area CEE countries could also
be highly beneficial. Firstly, SSM participation might assist the streamlining of the supervision of large cross-border banks ( i.e. for large
cross-border banks the costly multiplication effects of dealing with and reporting to several regulators with different legisla tions would
be reduced considerably). This may also help to lower overall compliance and supervisory costs significantly. The latter might also be in
the interests of several CEE countries given the relatively small size of their banking sectors (and hence their revenue bases) . Moreover,
broad-based SSM participation could assist the limitation of national ring-fencing and/or additional uncoordinated local regula tion that
sometimes lead to even higher market risks at the group level of large cross-border banks in CEE. Furthermore, opt-in countries within
the BU would still have the possibility to apply a wide range of national (macro-prudential) regulation despite the centralizat ion of micro-
and macro-prudential supervision at the ECB.
However, there are also several arguments, which could keep non-euro area countries in CEE from joining the BU at least for the time
being. For instance SSM participation is also linked to SRM participation and this makes the choice far from easy. The SRM impl ies
mutual burden sharing (via its Single Resolution Fund, SRF), which looks less attractive from a CEE perspective. This holds esp ecially
true, as the SRF is likely to be based on some pooling or mutualization of national resolution funds. The fact cannot be ignore d that
with the exception of Slovenia, banking crisis costs are concentrated in the Western European banking sectors and there remains some
uncertainty with regard to their legacy assets. Moreover, in most CEE countries traditional lending dominates the banks’ balanc e sheets
(which is not the case in all the larger euro area banking sectors). Banking trends in CEE
per capita levels. According to our definition, we consider the banking markets
in Russia, Poland, the Czech Republic, Slovakia, Romania, Serbia and Albania as the ones with the highest potential for a significant deepening of financial in-termediation over the next five years.
On a sub-regional level, we expect that the average loan-to-GDP ratio in CE will
inch up by 7pp, from 55% in 2013 to 62% in 2018. Based on the achieved de-leveraging over the last few years, we forecast the loan-to-GDP ratio in SEE to in-crease marginally by 1-2pp by 2018 (from 51% in 2013). In the CIS region, we anticipate a rise in the average loan-to-GDP ratio to 53%, up 4pp from 49% as at year-end 2013. This said, as compared to previous editions of our CEE Bank-
0%5%10%15%20%
0% 5% 10% 15% 20%RO
CZPL
UABYRSRO
EUR-based loan growth
< LCY-based loan growthEUR-based loan growth >
LCY-based loan growthCEE: LCY- vs. EUR-based loan growth*
* average annual 2014-2018 loan growth rate
Source: national sources, Raiffeisen RESEARCH

31
Please note the risk notifications and ex planations at the end of this documentThe dimensions of the BU cannot be underestimated. It constitutes the biggest transfer of sovereignty and potential financial b urdens
since the euro area’s foundation. This can be shown easily by comparing the fiscal and banking sector liabilities. At present, depend-
ing upon the definition, the average public sector indebtedness of euro area members stands at some 90% of GDP, while the liabi lities
of euro area banks amount to some 257-317% of GDP (i.e. including or excluding interbank liabilities). As a rule of thumb, smal ler
countries with sizeable banking sectors and/or international banks may gain from the BU. That said there might not be near-term gains
from voluntary BU membership in CEE. Moreover, some CEE countries have much lower L/D ratios, while all CEE banking sectors are
characterized by far lower leverage ratios than the largest euro area banking sectors. Therefore, several CEE countries could b e de facto
liquidity providers within the SSM and it remains unclear as to how this rule would be handled in times of crisis.
However, it has to be stressed that in the case of disagreements, non-euro area countries would have the option of leaving the SSM
(and hence the SRM) with the possibility of re-entry after a certain period of time. On the one hand, such a flexible opt-in an d opt-out
mechanism (a fairly new aspect of European politics) could make sense, but on the other, it is obvious that in a more volatile market en-
vironment an opt-out, following a previous opt-in, may at least temporarily add to uncertainty. Decision-making structures in t he SSM are
given, providing CEE countries with some important constraints (e.g. that non-euro area countries cannot be part of the ECB Gov erning
Council). Moreover, the problem remains that the CE and SEE banking sectors are very small in comparison to the euro area aggre gate
(total loans in all the CEE countries within the EU currently total just 4.4% of the euro area’s total loan stock). Therefore, the concerns of
the CE and SEE banking sectors, which could also arise in the case of voluntary BU participation, may not receive sufficient at tention
inside the BU, in spite of the fact that voluntary participation would mean that a large part of the banking assets in non-euro area CEE
countries would be part of the SSM. Furthermore, in several CEE countries there is also some skepticism with regard to the comp lexity
of the BU and the current Western European focus on macro-prudential regulation. In CEE sound business models and soundness at the
micro-level are seen as being key to financial sector stability, while in some CEE countries the view that the new supervisory complexity
in the euro area and beyond also has its costs and drawbacks predominates.
We think that a likely scenario will involve non-euro area countries in CEE taking a wait and see stance with regard to the opt ion of
joining the BU (i.e. the SSM and SRM) on a voluntary basis. The position recently adopted by the local authorities in the Czech Republic,
Poland, Hungary and Romania is fairly skeptical with regard to the handling of their interests within the BU framework that is currently
evolving. From Bulgaria and Croatia there are more neutral signals, but to date there is no clear indication that any non-euro area coun-
try may opt-in for the SSM/SRM-framework in 2014. Therefore, it will be crucial that pan-European institutions for banking regu lation
such as the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB) keep a close watch on the consistency of
regulation inside the BU (substantially driven by the ECB) and within the EU as a whole. Moreover, it will be up to the non-par ticipating
CEE countries to remain as close as possible to the BU in terms of regulatory standards in order to avoid competitive disadvant ages
and/or regulatory arbitrage. Furthermore, the BU and its institutions have to seek close cooperation with European countries (m ostly
located in SEE) that are still not part of the EU, but may become members in roughly the next ten years. Here further cooperati on within
the much appreciated “Vienna Initiative” framework will be required.
As far as near-term business prospects are concerned, say for the next one to three years, the decision as to whether a non-eur o area
CEE country will or will not opt-in for the BU is unlikely to have a strong influence. A non-opt-in would not represent a chang e to the status
quo and banks operating in the region are used to the sometimes complex home/host supervisory coordination in CEE. In addition,
overall business strategies will be determined to a far greater extent by market-related factors. However, from a long-term per spective
an uneven playing field in terms of regulation and supervision may still have a slightly negative impact (definitely also depen ding upon
the concrete national regulation of an opt-out country). Nevertheless, it has to be stressed that, going forward, there should not be any
de-facto or de-jure differentiation from home country supervision inside the BU with regard to participating, opt-in and non-op t-in CEE
countries.
From a more strategic perspective the BU might also help to bring the ownership structures in the Western European banking sect ors
slightly closer to those in CEE. Up to now, equity-based, cross-border banking integration inside the euro area has been fairly modest. In
fact, compared to CEE, previous banking integration inside the euro area was largely debt-based. However, the high degree of cr oss-
border banking sector integration in CEE also represents a result of the crisis-induced clean-up, which is an aspect that under lines the
need for possible structural changes in euro area banking. An efficient BU that also helps to limit country-specific risks will require the
tangible cross-border expansion of healthy euro area banks inside the euro area. Recent financial fragmentation inside the euro area
has shown that in times of crisis, incentives for banks differ substantially in an environment of equity- or debt-based cross-b order banking
sector integration. Equity-based integration offers more incentives and possibilities to maintain cross-border stability in per iods of dif-
ficulty (as shown by the “Vienna Initiative” framework). By contrast, debt-based integration increases the risks of “cut and ru n” behavior
(as we have seen inside the euro area in the past). However, at present the BU is not promoting further cross-border risk shari ng of the
type that could be offered by equity-based banking sector integration. Critical observers of the BU even foresee the risk that from a
short-term perspective it may create smaller and more nationally focused banking systems. For example, capital ratios have been raised
substantially inside the euro area, although this was carried out partially via substantial (cross-border) deleveraging.
Financial analyst: Gunter Deuber Banking trends in CEE

32 Please note the risk notifications and ex planations at the end of this documenting Sector Report, there are definitely changes with regard to the regional bank-
ing growth outlook that reflect structural macroeconomic strengths and weak-nesses. Given the expected regional projections regarding financial deepening, we envisage that loan growth in Russia and the whole CIS region will marginally outpace loan growth in the CE region and some SEE countries. This relative shift in medium-term growth expectations clearly represents a game change. Before the most recent setback in near-term and medium-term growth expectations, we awaited the largely underpenetrated Russian banking market to clearly outpace other CEE banking markets. Now, our medium-term loan growth expectations for markets such as Poland and Romania are more or less identical with those for Russia. This holds especially true in EUR-terms given our expectations that the RUB is likely to follow a modest, but fundamentally backed medium-term depre-ciation path against the EUR and the USD. By contrast, we foresee some mod-est, medium-term appreciation of the PLN and the RON against the EUR. There-fore, in terms of expected, medium-term growth rates, Russia may lose its position as the strongest growing CEE banking market (in EUR-terms) over the next few years. Nevertheless, due to its sheer size the Russian banking market is expected to post the largest volume growth by far in the years 2014-2018. On the basis of our macroeconomic RUB and financial deepening forecasts, we expect the to-tal loan volume in the Russian banking market to grow by some EUR 200 bn till 2018. In terms of expected total loan volume growth, Russia will be followed by Poland (EUR 125 bn until 2018), the Czech Republic (EUR 48 bn) and Romania (EUR 37 bn). In all other individual CEE banking markets, total loan growth is ex-pected to add up to less than EUR 20 bn until 2018. However, some 80% of the total expected loan stock growth in CEE banking is likely to take place in Russia, Poland, the Czech Republic and Romania. It goes without saying that these top banking growth markets (by volume) in CEE show a substantial under-penetration with regard to several demand-side indicators such as loan-to-GDP ratios in rela-tion to income levels, or the already penetrated bankable population. In Russia, Poland, the Czech Republic and Romania the penetrated bankable population re-mains below the potential estimated in a larger sample of CEE countries. Hence, other CEE banking markets with relatively high loan-to-GDP ratios also tend to demonstrate a penetration of the bankable population, that is above the values that could be anticipated given their current income position. Nevertheless, for the CEE region as a whole the level of the already penetrated bankable popu-lation looks modest. At present, around 60% of the bankable population has an account with a formal financial institution, while the average figure in more ma-ture markets is generally above 80% and stands at 93% inside the euro area.
In recent years the leading Western European banks in CEE have clearly refo-
cused their operations on the largest and most attractive or underpenetrated CEE markets (among them Russia, Poland, the Czech Republic and Romania). This process has taken several years, and the first clear results of this rethink only be-came evident in 2013 (e.g. in terms of profit allocation). Moreover, there were a number of outright market exits from less promising markets and downscaling plans were announced. We expect the increasing penetration of markets with the most promising near-term potential (by and large the strongest and most resilient economies within CEE) to continue. These are the markets where banks achieve the best returns in their major business lines, further expand their franchises in both corporate and retail business and are placing a growing emphasis on in-vestment banking.CEE banking growth outlook*
Chg. total
loans year-
end 2013 –
18 (EUR bn)Avg.
growth rate
2014-18
(LCY-terms)Avg.
growth rate
2014-18
(EUR-terms)
PL 125 8.8% 10.2%
CZ 48 5.4% 8.7%SK 19 8.2% 8.2%HU 14 6.3% 5.9%
SI 7 4.9% 4.9%
RO 37 10.9% 11.8%AL 3 9.7% 9.8%RS 8 10.7% 8.5%
BH 2 4.8% 4.8%
BG 6 3.7% 3.7%HR 0 0.1% 0.1%
RU 206 9.5% 9.4%
BY 10 19.8% 6.5%UA 13 7.1% 5.2%CE 213 7.3% 7.3%
SEE 57 7.7% 7.9%
CIS 404 9.7% 9.0%CEE 674 8.9% 8.4%
* Countries within the sub-regions sorted by EUR-based
loan growth rateSource: Raiffeisen RESEARCH
Bankable
population
penetra-
ted *GDP p.c.
(EUR at
PPP)Potential
based
on GDP
trend**
2009-11 2013
PL 70% 18,000 -5%
HU 73% 15,480 4%
CZ 81% 20,337 -1%SK 80% 18,943 4%
SI 97% 20,800 12%
CE 80% 18,382 4%RO 45% 14,180 -18%BG 53% 12,238 -3%
HR 88% 15,300 22%
RS 62% 8,800 16%BH 56% 7,550 13%AL 28% 8,100 -15%
SEE 54% 12,705 -6%
RU 48% 14,400 -14%UA 41% 6,200 4%
CIS 49% 13,342 -10%
EA 94% 28,932 n.a.
* Population age 15+ having an account with a formal
financial institution** Based on the correlation between GDP per capita and bankable population penetration in CEE; negative value shows relative underpenetration, positive value relative overpenetrationSource: World Bank, national sources, Raiffeisen RESEARCH

33
Please note the risk notifications and ex planations at the end of this documentStrategic topics for major CEE banks
In this section we will provide some food for thought on major topics that will
most likely keep CEE banks busy over the next few years. The main strategic fields that are important to improved profitability are market approach, network optimization and funding, including capitalization.
Markets, market approach, networks
Western European-owned CEE banks will probably continue to review their over-all banking market and network approach in the region. The concentration of nearly all major CEE banks on a few, but highly attractive growth markets may well subject them to increasing margin pressure and therefore cannot be a win-ning strategy throughout the cycle. Consequently, major CEE banks have to cau-tiously rethink their market position in every country and also consider a halt to certain business and product lines in selected markets, or even exiting from less attractive ones if necessary. For some banks, however, the presence in what are currently only moderately attractive CEE banking markets such as Serbia, Alba-nia, Ukraine and Belarus will continue to make strategic sense. Restructuring pro-cesses in CEE banking markets inside the EU may also take advantage of the “Single European Passport” principle. Moreover, considerable potential remains for introducing countrywide smart (e-based) solutions in the CEE markets. Here, Western players that are also market leaders in this field in their home markets may fully catch the upside. Smart banking solutions may also be a way of op-timizing and reducing the still fairly extensive branch networks in several CEE countries. For the time being, we do not expect significant M&A transactions in the CEE banking sector involving the leading Western European players. Never-theless, we can envisage some transactions on a portfolio basis during which the largest banks may absorb smaller portfolios from less committed players in the region, as we have partly seen in Russia, Romania and the Czech Republic. In terms of optimizing existing franchising networks, the most challenging balance may arise from the trade-off between securing standardization and harmoniza-tion (e.g. via shared service centers) and the need to remain close to the domes-tic markets.
Up to now, we have not witnessed significant NPL (selling) transactions in CEE
markets (this is especially true with regard to retail portfolios). The absence of transactions can be attributed to several factors that have determined the lack of appetite on the part of buyers, such as limited CEE experience of international distressed debt investors, a shortage of valid collector solutions, a marked dete-rioration in collateral value or simply different price expectations. The latter are also based on a degree of evidence that case-by-case handling could result in better recoveries than a loan sale. However, the outlook for a more broad-based economic stabilization in CE and SEE may open up room for a rethink concern-ing the possibility of selling larger NPL portfolios (especially regarding real estate or corporate loans). In some CEE markets we see an increasing interest in pur-chasing NPL portfolios at reasonable prices.
Funding, capital and product mix
As far as funding is concerned, the two major strategic issues facing CEE banks in 2014 and beyond are identical to those that worried all the banking groups in the euro area some two to three years ago. Firstly, there is the matter of capital-ization, especially in view of the imposition of the new banking capital require-ments according to Basel III standards, the additional capital buffers imposed on European SIFIs, the “Austrian Finish” and the requirements of local CEE regula-tors relating to an increased degree of risk perception. The new regulatory re-5,0008,00011,00014,00017,00020,00023,000
20% 40% 60% 80% 100%GDP per capita (PPP, EUR,
2013)
Population with an accountCEE: GDP p.c. & account penetration
Source: World Bank, national sources, Raiffeisen
RESEARCH
5,0008,00011,00014,00017,00020,00023,000
0% 10% 20% 30% 40% 50%GDP per capita (PPP, EUR,
2013)
Usage of electronic paymentsCEE: GDP p.c. & e-payments
Source: World Bank, national sources, Raiffeisen RESEARCH
Usage
e-payments
(2011) *GDP p.c.
(EUR at PPP,
2013)Potential
based on
GDP trend**
PL 31% 18,000 -9%
HU 29% 15,480 -6%
CZ 45% 20,337 -5%SK 43% 18,943 0%
SI 41% 20,800 -9%
CE 38% 18,382 -6%RO 11% 14,180 -19%BG 5% 12,238 -22%
HR 17% 15,300 -18%
RS 10% 8,800 -8%BH 6% 7,550 -9%AL 3% 8,100 -14%
SEE 8% 12,705 -18%
RU 8% 14,400 -24%UA 6% 6,200 -4%
CIS 8% 13,342 -18%
EA 61% 28,932 n.a.
* % of population age 15+ using electronic payments;
** Based on the correlation between GDP per capita and usage of electronic payments in CEE; negative value shows relative underpenetration, positive value relative overpenetration; Source: World Bank, national sources, Raiffeisen RESEARCH

34 Please note the risk notifications and ex planations at the end of this documentquirements introduced in recent years are tough for large Western European-
owned CEE banking groups, both in terms of securing sufficient capital stocks and in adjusting their asset mix.
The first round of checks and adjustments was completed by the beginning of
2013, and all major Western European-owned banking groups managed to demonstrate sufficient capital ratios. However, the second round of capitalization adjustments is still ahead. Therefore, certain negative surprises on the RWA side cannot be excluded, for example, as a result of the European Asset Quality Re-view (AQR), which is expected in the course of H2 2014. In addition, the inten-tion of the Austrian regulators to impose more stringent capital requirements on the banks with large international exposures remains in place. At the same time, profits remain a fairly limited source of new capital (albeit the more favorable macro trends and the gradual improvement of NPLs in CEE suggest that the next 12-14 months will be more hopeful). New equity placements and Tier II solutions, such as the issue of various hybrids, are possible and have been implemented by the largest Western European-owned CEE banks, although these were and will continue to be strongly dependent on market sentiment. Last but not least, an im-portant issue for the coming years will be the possibility of state support for euro area SIFIs in capital need (for example as a result of the AQR) and the impact that such a scenario would have on both the cost of capital and bank ratings. Given all these complications for large European banks with high CEE exposures, we expect banks to continue to focus on less capital-intensive products in order to se-cure compliance with the new capitalization norms. In this regard, it has to be mentioned that corporate lending in CEE remains structurally still more profitable than in Western Europe markets. Therefore, Western European banks in CEE will possibly concentrate more on corporate lending than in their home markets, al-though there is an increasing corporate bond flow in less mature CEE markets.
The second point relates to alternative funding sources. Hence, the trade-off with
deposits (primarily market funding) in CEE countries remains largely untouched. Cautious lending and good deposit funding secured sufficiently low L/D ratios for the major players in 2013 and provided potential for loan growth for at least next year. At the same time, the majority of CEE markets are still lacking alterna-tive funding sources, which would be essential for the future growth of the bank-ing sectors. Accordingly, the issue of local bond market development becomes particularly important, as during the next few years the issuance of LCY-denomi-nated debt by the banks could well evolve into a supportive funding source. Un-til recently, the most developed local bond market in the CEE region was Russia, although countries such as Poland and the Czech Republic and possibly Roma-nia (given first bank bond issuance recently) offer as yet untapped potential for this kind of funding.
In addition, the high reliance to date of the CEE banking sectors on capital con-
suming traditional loan business also has some important implications. Firstly, major CEE banks are likely to expand in non-capital consuming (bank) activi-ties. Secondly, asset-based finance transactions that do not stretch the own cap-ital position may gain in importance. Up to now significant deals were limited to the Russian market, but we may see further transactions in the future (also in other markets and with more diverse collateral). For example, Western European-owned CEE banks may mobilize their group-wide EUR, USD and/or CHF assets for asset-backed finance or covered bond transactions.
Gunter Deuber, Elena Romanova 050100150200250
2014
2015201620172018201920202021
2022
20232024Refinancing large Europ. CEE banks*
* EUR bn totals for RBI, ERSTE, UniCredit, Societe Gen-
erale, BNP Paribas, Intesa, Santander, Commerzbank, KBCSource: Bloomberg, Raiffeisen RESEARCH
0%10%20%30%40%50%60%70%
EA
CE
SEE
CIS
2006 2013CEE vs. EA: Loans (% of total assets)
Source: ECB, national sources, Raiffeisen RESEARCH

35
Please note the risk notifications and ex planations at the end of this documentBasel III implementation timeline – major highlights
2011 2012 2013 2014 2015 2016 2017 2018 2019
Minimum Common Equity Capital Ratio 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital Conservation Buffer 0.625% 1.25% 1.875% 2.5%
Minimum Common Equity + Capital Conservation Buffer 3.5% 4% 4.5% 5.125% 5.75% 6.375% 7%Minimum Tier 1 4% 4% 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%
Minimum Total Capital 8% 8% 8% 8% 8% 8% 8% 8% 8%
Countercyclical Buffer 0.625% 1.25% 1.875% 2.5%
Minimum Total Capital + Conservation Buffer + Counter-
cyclical Buffer8% 8% 8% 8% 8% 9% 11% 12% 13%
Leverage Ratio Supervisory moni-
toring phase; first
disclosures since
2015Final
adjust-
ments
Liquidity Coverage Ratio Obser-
vation
periodFinal ad-
justmentsPlanned
imple-
menta-
tion
Net Stable Funding Ratio Obser-
vation
periodFinal
adjust-
mentsPlanned
imple-
menta-
tion
Source: Basel III, Raiffeisen RESEARCH

36 Please note the risk notifications and ex planations at the end of this document20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Poland vs. all other
CEE marketsSource: NBP, national sources, Raiffeisen RESEARCHPoland
First signs of upside in retail – corporate lending to follow
-10-50510152025
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-terms
Source: NBP, Raiffeisen RESEARCH
Key economic figures and forecasts
Poland 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 311 355 370 382 389 412 451
Nominal GDP per capita (EUR) 8,152 9,206 9,612 9,902 10,100 10,701 11,729
Real GDP (% yoy) 1.7 3.9 4.5 1.9 1.6 3.1 3.3Consumer prices (avg, % yoy) 3.5 2.6 4.3 3.7 0.9 1.2 2.1Unemployment rate (avg, %) 11.0 12.1 12.4 12.8 13.6 13.1 12.7
General budget balance (% of GDP) -7.4 -7.9 -5.0 -3.9 -4.1 -3.2 -2.8
Public debt (% of GDP) 50.9 54.8 56.4 55.6 57.1 49.9 49.8Current account balance (% of GDP) -3.9 -5.1 -4.9 -3.5 -1.3 -2.8 -4.1Gross foreign debt (% of GDP) 62.5 66.9 67.5 72.7 71.0 68.7 66.5
EUR/LCY (avg) 4.33 3.99 4.12 4.18 4.20 4.16 4.03
Source: national sources, wiiw, Raiffeisen RESEARCHAs in 2013 economic growth turned out fairly weak, banks did not experience
a broader upside. However, faster GDP growth in H2 2013 helped to lift an-nual banking sector expansion figures somewhat. Accelerating loan growth ob-served in Q4 2013 might even mark the beginning of a new uptrend. Total loan growth (LCY-terms) rose marginally from 1.2% yoy in 2012 to 3.5% yoy in 2013. Corporate lending underperformed mostly due to weak investments. In contrast, retail lending showed an increase, up by 4.2% yoy (compared to 0.2% in 2012). The latter was supported by low inflation and low interest rates. As usual, mortgage lending enjoyed higher growth than overall retail lending business (up 4.5%). On a positive note, PLN lending outpaced FCY lending for mortgages (95% of mortgages are in PLN). Thus, the share of FCY loans in total loans continued its downtrend (30% of total loans in FCY at year-end 2013, 6pp below peaks). Going forward, we expect corporate lending to follow the uptrend in retail lending, a usual pattern at the early stage of a broad-based recovery. Corporate lending should also profit from state incentives for working capital and SME loans. Modest growth of loans and assets (up by 4.2% in 2013) helped to lower the balance sheet leverage, reflected in a L/D ratio of 108% – the lowest reading since 2007. But the L/D ratio tells only half the story as Polish banks can also use alternatives to deposits by (re-)financing on local and international markets. Capitalization is not an issue on the Polish market with its decent capital adequacy and conservative risk weightings. The NPL ratio decreased slightly in 2013 (from 8.8% in 2012 down to 8.6%). However, the modest overall NPL ratio masks substantial divergences across segments. In corporate lending NPL are 11% (large corporates: 9%, SMEs: 13%); in retail the NPL ratio is at around 7% (15% consumer, 3% mortgages).
A fairly stable FX rate and stabilization of asset quality helped to keep promis-
ing profitability despite headwinds from modest growth and net interest margin pressure (a reflection of low key rates and competition for deposits). The 2013 RoA came in at 1.1% (which is about the post-crisis average since 2009). With 12.5% the RoE decreased a tad below its post-crisis average in 2013 (13.5%). Although we expect an uptick in asset growth, this will not necessarily translate Positioning for the economic upside started, low inve stments continue to weigh on corporate lending
Additional increase in balance sheet liquidity, supp orted by modest balance sheet growth in 2013
Decent profitability; stabilization of asset quality helped to offset pressure on interest rate margins

37
Please note the risk notifications and ex planations at the end of this documentKey banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 273,965 292,755 293,100 330,267 339,309 growth in % yoy 4.8 6.9 0.1 12.7 2.7 in % of GDP 83.7 81.8 85.0 84.6 86.2
Total loans (EUR mn) 156,084 176,384 181,285 198,230 202,242
growth in % yoy 11.7 13.0 2.8 9.3 2.0 in % of GDP 47.7 49.3 52.6 50.8 51.4 Loans to private enterprises (EUR mn) 54,058 55,472 59,888 66,593 67,024
growth in % yoy 4.4 2.6 8.0 11.2 0.6
in % of GDP 16.5 15.5 17.4 17.1 17.0 Loans to households (EUR mn) 101,361 120,048 120,447 130,436 133,947 growth in % yoy 15.2 18.4 0.3 8.3 2.7
in % of GDP 31.0 33.6 34.9 33.4 34.0
Mortgage loans (EUR mn) 53,007 67,547 72,223 78,706 81,083 growth in % yoy 7.9 27.4 6.9 9.0 3.0
in % of GDP 16.2 18.9 20.9 20.2 20.6
Loans in foreign currency (EUR mn) 52,497 60,406 64,789 62,465 60,567 growth in % yoy 9.1 15.1 7.3 (3.6) (3.0) in % of GDP 16.0 16.9 18.8 16.0 15.4
Loans in foreign currency (% of total loans) 34 34 36 32 30
Total deposits (EUR mn) 138,058 156,647 158,168 177,097 186,970 growth in % yoy 19.2 13.5 1.0 12.0 5.6 in % of GDP 42.2 43.8 45.9 45.4 47.5
Deposits from households (EUR mn) 94,368 106,648 108,078 126,211 132,181
growth in % yoy 18.6 13.0 1.3 16.8 4.7 in % of GDP 28.8 29.8 31.3 32.3 33.6
Total loans (% of total deposits) 113 113 115 112 108
Structural information
Number of banks 67 70 66 69 69Market share of state-owned banks (% of total assets) 21 22 22 21 21
Market share of foreign-owned banks (% of total assets) 63 66 66 63 62
Profitability and efficiency
Return on Assets (RoA) 0.9 0.9 1.2 1.2 1.1 Return on Equity (RoE) 13.3 13.7 14.6 14.3 12.5
Capital adequacy (% of risk weighted assets) 13.3 13.7 13.1 14.7 14.2
Non-performing loans (% of total loans) 7.1 7.8 7.5 8.8 8.6
Source: NBP, Raiffeisen RESEARCHimmediately into profitability. The lat-
ter was kept at decent levels due to im-provements to the cost-effectiveness. However, such measures are largely exhausted. Moreover, pressure on the net interest rate margin and fees driven by macro-prudential regulation (e.g. the Stabilization Fund) are likely to stay. Backed by M&A, also of lead-ing banks, the market share of the Top 5 banks increased to 46% (40.9% in 2012). This trend is also largely re-flected in the increase of Bank Zach-odni WBK’s (Santander Group) mar-ket share from 4.3% in 2012 to 7.5% in 2013, as well as in the increased market share of PKO Bank Polski (by 0.5pp from 13.8% to 14.3%). Recent market concentration lead to concerns among competent Polish authorities (regard-ing “too big to fail” risks). Yet, from a broader European and regional perspective we do not see too much concentration in Poland. However, given the regulatory stance it is unlikely that further market consolidation involving the largest players will take place soon.
Financial analyst: Gunter Deuber Poland
PKO BP, 14.3%
Bank Pekao
(UniCredit), 10.7%
BRE Bank (Commerz-
bank), 7.4%
ING Bank, 6.2%
BZ WBK (Santander
+ Kredyt Bank),
7.5%
Bank Millennium (BC
Portugues), 4.1%Raiffeisen Polbank,
3.4%Bank Handlowy
(Citibank), 3.2%Bank BPH, 2.4%Alior, 1.5%BOS, 1.3%Others, 37.9%Market shares (2013, eop)
% of total assets
Source: NBP, Raiffeisen RESEARCH

38 Please note the risk notifications and ex planations at the end of this documentHungary
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Hungary vs. all other
CEE marketsSource: MNB, national central banks, Raiffeisen RESEARCHBottoming out – upside likely to be limited for the time being
-20-15-10-5051015
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: MNB, Raiffeisen RESEARCH
Key economic figures and forecasts
Hungary 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 91 96 101 96 98 96 100
Nominal GDP per capita (EUR) 9,119 9,619 10,145 9,674 9,876 9,755 10,104Real GDP (% yoy) -6.8 1.3 1.6 -1.7 1.1 2.0 2.0Consumer prices (avg, % yoy) 4.2 4.9 3.9 5.7 1.7 1.1 3.2
Unemployment rate (avg, %) 9.8 11.1 11.0 10.9 10.4 8.0 6.8
General budget balance (% of GDP) -4.6 -4.2 4.3 -1.9 -2.9 -2.9 -2.9Public debt (% of GDP) 79.8 81.4 80.6 80.2 79.2 81.6 80.9
Current account balance (% of GDP) -0.2 1.1 0.8 1.8 2.8 3.4 4.2
Gross foreign debt (% of GDP) 149.9 143.5 130.3 131.1 123.6 121.3 114.4EUR/LCY (avg) 280 275 279 289 297 313 321
Source: national sources, wiiw, Raiffeisen RESEARCHThe Hungarian economy turned around in 2013 and GDP growth came just above
1% – in part due to a statistical base effect, but also supported by exports, agricul-ture and the public sector. In 2014, we expect 2% GDP growth with the public sec-tor remaining a major driver. However, the domestic private sector is still weak and requires a more sustained stabilization for a recovery. The deleveraging process in the banking sector continued in 2013, which partly explains why the Hungarian Central Bank (MNB) launched a “Funding for Growth Scheme” (FGS) aiming to supply SMEs with cheap HUF funding (maximum interest rate 2.5%). During phase 1, the focal point of the FGS was on restructuring high-cost loans – a quite success-ful exercise. In phase 2, the emphasis is now on lending – with limited demand so far. Due to the FGS the share of FX corporate loans dropped from 56% to 50%. We expect demand for FGS loans to increase in 2014, and net corporate lending to become positive. For retail lending, however, a turnaround is not yet expected, as many households have been affected by the HUF weakness. In 2013, the house-hold loan stock declined by more than 5%. In 2014 and in 2015 we expect households to further deleverage. While HUF-lending is expected to rise due to the cheaper HUF credit costs, FX-denominated loans remains an issue (55% share in 2013), although there was a notable drop (from 67% back in 2011). As a consequence of massively reduced interest rates and attractive alternative investments (e.g. government bonds and mutual funds) households’ bank deposits are melting away quickly (10% decrease in 2013). This, however, was offset by an upsurge of corporate deposits. The capitalization improved in 2013, with a capital adequacy ratio increasing to 17.4% by year-end 2013. The NPL ratio peaked at 14% in 2013, showing contrasting developments in the individual sectors. While the NPL ratio for corporates decreased (to 16.4% at year-end 2013, down from 18% in 2012, on the back of the FGS), the household NPL ratio went the opposite direction (up from 16.1% in 2012 to 18.5% in 2013, also due to the shrinking loan base). These trends are expected to continue in 2014.After two consecutive loss-making years, the banking sector turned profitable in 2013, albeit at a low level (RoA 0.5%, RoE 4.5%), and many large banks are still in the red. Another government program targeting problem-ridden FX mort-gages, with the possibility of further costs for the related banks, is expected to be installed before the end of the year. In 2013, Takarékbank (the Central Bank of Economic recovery is on its way, but government burden on the financial sector is expected to stay
Retail lending has yet to recover, corporate le nding supported by Hungarian National Bank’s scheme
Share of FX loans is slowly decreasing, partially supported by enforced restructurings

39
Please note the risk notifications and ex planations at the end of this documentHungary
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 124,888 121,268 111,934 107,899 104,589 growth in % yoy (0.3) (2.9) (7.7) (3.6) (3.1)
in % of GDP 133.1 126.9 126.0 112.1 107.7
Total loans (EUR mn) 58,129 59,964 53,678 50,003 46,149 growth in % yoy (4.4) 3.2 (10.5) (6.8) (7.7) in % of GDP 61.9 62.8 60.4 51.9 47.5
Loans to private enterprises (EUR mn) 28,035 27,369 24,842 23,757 22,496
growth in % yoy (7.1) (2.4) (9.2) (4.4) (5.3) in % of GDP 29.9 28.6 28.0 24.7 23.2 Loans to households (EUR mn) 28,721 30,919 27,351 24,832 23,019
growth in % yoy (1.2) 7.7 (11.5) (9.2) (7.3)
in % of GDP 30.6 32.4 30.8 25.8 23.7 Mortgage loans (EUR mn) 22,240 24,699 22,159 20,055 18,488
growth in % yoy (0.9) 11.1 (10.3) (9.5) (7.8)
in % of GDP 23.7 25.9 24.9 20.8 19.0 Loans in foreign currency (EUR mn) 35,635 36,962 32,854 27,401 23,731 growth in % yoy (4.6) 3.7 (11.1) (16.6) (13.4)
in % of GDP 38.0 38.7 37.0 28.5 24.4
Loans in foreign currency (% of total loans) 61 62 61 55 51Total deposits (EUR mn) 43,630 42,742 40,449 42,856 41,830 growth in % yoy (1.1) (2.0) (5.4) 6.0 (2.4)
in % of GDP 46.5 44.7 45.5 44.5 43.1
Deposits from households (EUR mn) 27,761 26,580 25,057 26,426 23,373 growth in % yoy 2.4 (4.3) (5.7) 5.5 (11.6)
in % of GDP 29.6 27.8 28.2 27.4 24.1
Total loans (% of total deposits) 133 140 133 117 110
Structural information
Number of banks 35 35 35 35 35
Market share of state-owned banks (% of total assets) 4.4 4.6 5.3 5.1 5.8
Market share of foreign-owned banks (% of total assets) 91 90 89 89 88Market share of foreign-owned banks (excl. OTP, % of total
assets)69 69 70 68 67
Profitability and efficiency
Return on Assets (RoA) 1.7 0.2 (0.2) (0.4) 0.5
Return on Equity (RoE) 10.1 2.3 (1.7) (3.8) 4.5 Capital adequacy (% of risk weighted assets) 13.1 13.3 13.5 15.7 17.4 Non-performing loans (% of total loans) 5.9 7.8 11.5 13.7 14.0
Source: MNB, Raiffeisen RESEARCHSaving Cooperatives) was getting full
attention, as the whole savings and cooperative bank sector underwent a state-driven reform and moderniza-tion. Of particular interest were the transactions related to the stake of Ger-man DZ Bank, which was purchased by the government in 2012 and then, in early 2014, sold to the Hungarian project company Magyar Takarék. The goal of this transaction was to enhance competition in the rural retail and SME business sector. The long-awaited sale of MKB (owned by Bayerische Landes-bank) may take place rather sooner than later. The eventual MKB transac-tion would most likely comply with the goal of policy makers to increase the share of domestic ownership in the Hungarian banking sector. Given the recent re-elec-tion of the previous government in April 2014, the policy stance towards the financial sector is unlikely to improve significan tly.
Financial analyst: Zoltán Török (+36 1 484 4843), Raiffeisen Bank Zrt., BudapestOTP, 21.3%
Erste, 8.7%
K&H (KBC), 7.9%
MKB (Bay. LB), 7.7%
CIB (Intesa), 7.3%Raiffeisen Bank, 6.9%UniCredit, 5.3%MFB, 4.4%BB (GE Money), 2.9%Others, 27.6%Market shares (2013, eop)
% of total assets
Source: MNB, Raiffeisen RESEARCH

40 Please note the risk notifications and ex planations at the end of this documentCzech Republic
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Czech Republic vs. all
other CEE marketsSource: CNB, national sources, Raiffeisen RESEARCHThe Czech banking sector – geared for the future
-10-5051015
Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: CNB, Raiffeisen RESEARCHThe Czech banking sector’s assets grew by almost 9% in 2013 in LCY-terms,
supported by the FX interventions of the Czech National Bank (CNB) with an impact of approximately +4bp. The Czech economy’s growth numbers turned positive again in the last quarter of 2013 and the recovery is expected to con-tinue in 2014. The supportive global economic sentiment and the competitive exchange rate should have a positive impact on exports and consequently lead to a recovery of investment activities. At the same time, we expect the recovery of household consumption to be slower and bumpier. Both corporate and household loans accelerated in 2013, and grew by 3.8% yoy and 4.5% yoy respectively (in LCY-terms). The term structure of corporate loans gradually changed towards longer-term credits that grew by more than 6% in 2013. Corporate bonds continued to gain more importance as an alternative to traditional bank loans. The growth in household loans was mostly driven by mortgage loans, which surged by more than 6%. The volume of consumer credits stabilized, after having posted a decline for two subsequent years. The amount of newly issued consumer loans grew by 27% yoy. Following this trend, we expect the growth rate of loans granted to households to remain in a single-digit terri-tory, while the volume of corporate loans is likely to show accelerated growth.Czech banks’ funding, which is relatively independent from external financing due to a stable client deposit base, continued its growth in 2013 with an in-crease of 6.7% yoy. The L/D ratio stayed at the quite low level of 75%, therefore providing a sufficient funding base for a further rise in lending activity. In 2013 however, caused by low demand for loans, the banks kept a high proportion of government bonds on their balance sheets. Due to high demand for liquid instru-ments from the banks, almost 45% of total governmental debt were held by the local banking sector. The positive development of the banking sector’s financial results in 2013 enabled it to boost the sector’s capitalization. Thus, the capital adequacy ratio rose above 17% in 2013. The NPL ratio remained almost unchanged at 6.1% in 2013, mainly because of the stabilization of NPLs in the corporate segment (+0.8%) and a moderate NPL growth in the household segment (+1.3%). The latter was mainly the result of the current situation on the Czech labor market. However, the NPL structure Economic turnaround expected, supported by external dema nd, a supportive FX rate and recovery of investments
Positive outlook as a result of rising capitalization , sufficient liquidity, and improving financial standing
Loans to recover gradually, with the highest growth potential in the corporate segment
Key economic figures and forecasts
Czech Republic 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 142 150 156 153 150 148 160
Nominal GDP per capita (EUR) 13,606 14,274 14,835 14,576 14,216 14,074 15,193Real GDP (% yoy) -4.4 2.3 1.8 -0.9 -0.9 2.3 2.4Consumer prices (avg, % yoy) 1.0 1.5 1.9 3.3 1.4 1.3 2.0
Unemployment rate (avg, %) 6.2 7.0 6.7 6.8 7.6 7.3 7.2
General budget balance (% of GDP) -5.8 -4.7 -3.2 -4.2 -1.5 -1.8 -2.2Public debt (% of GDP) 34.5 38.4 41.4 46.2 46.0 44.2 44.6
Current account balance (% of GDP) -2.4 -3.9 -2.7 -1.3 -1.5 -0.5 -0.1
Gross foreign debt (% of GDP) 43.5 47.6 49.0 50.5 51.1 49.8 49.3EUR/LCY (avg) 26.44 25.28 24.59 25.14 25.98 27.14 26.00
Source: national sources, wiiw, Raiffeisen RESEARCH

41
Please note the risk notifications and ex planations at the end of this documentCzech Republic
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 159,418 172,776 178,675 189,996 189,749 growth in % yoy 3.4 8.4 3.4 6.3 (0.1)
in % of GDP 112.2 114.3 120.7 124.2 135.2
Total loans (EUR mn) 79,429 86,781 89,314 93,835 91,692 growth in % yoy 3.1 9.3 2.9 5.1 (2.3) in % of GDP 55.9 57.4 60.3 61.4 65.3
Loans to private enterprises (EUR mn) 29,555 31,142 32,095 33,214 31,616
growth in % yoy (6.1) 5.4 3.1 3.5 (4.8) in % of GDP 20.8 20.6 21.7 21.7 22.5
Loans to households (EUR mn) 33,930 38,339 39,107 41,548 39,828
growth in % yoy 13.0 13.0 2.0 6.2 (4.1) in % of GDP 23.9 25.4 26.4 27.2 28.4 Mortgage loans (EUR mn) 20,948 24,129 25,543 27,851 27,222
growth in % yoy 42.0 15.2 5.9 9.0 (2.3)
in % of GDP 14.7 16.0 17.2 18.2 19.4 Loans in foreign currency (EUR mn) 10,655 11,941 13,287 13,746 16,704
growth in % yoy (1.7) 12.1 11.3 3.5 21.5
in % of GDP 7.5 7.9 9.0 9.0 11.9 Loans in foreign currency (% of total loans) 13 14 15 15 18Total deposits (EUR mn) 101,955 111,257 112,944 124,352 121,697
growth in % yoy 7.0 9.1 1.5 10.1 (2.1)
in % of GDP 71.7 73.6 76.3 81.3 86.7 Deposits from households (EUR mn) 55,366 61,310 61,791 65,628 61,512 growth in % yoy 10.8 10.7 0.8 6.2 (6.3)
in % of GDP 39.0 40.6 41.7 42.9 43.8
Total deposits (% of total credits) 78 78 79 75 75
Structural information
Number of banks 39 41 44 43 45
Market share of state-owned banks (% of total assets) 2.7 3.3 3.2 2.8 2.6
Market share of foreign-owned banks (% of total assets) 87 87 84 82 83
Profitability and efficiency
Return on Assets (RoA) 1.5 1.3 1.2 1.4 1.4
Return on Equity (RoE) 25.8 21.9 19.3 21.4 20.6
Capital adequacy (% of risk weighted assets) 14.1 15.5 15.3 16.4 17.3 Non-performing loans (% of total loans) 5.2 6.5 6.2 6.2 6.1
Source: CNB, Raiffeisen RESEARCHworsened in 2013, as the share of
non-recoverable loans reached 59%. This trend remains the main source of risk for the performance of the Czech banking sector in 2014. As a conse-quence, additional provisions for this loan category need to be created.Another potential threat to the Czech banking sector’s profitability is the narrowing interest margin due to the low level of interest rates while at the same time market competition is increasing. As a natural response to this development, banks are cutting down costs and are actively seeking new sources for income. In this con-nection, most banks are focusing on the expansion of their client franchise, the introduction of new technologies and product innovations. Some marginal changes in the ownership structure of the Czech banking sector were made in 2013 but without a significant impact on the market concentration. The Top 5 banks still control more than 60% of the banking sector’s assets.
Financial analyst: Lenka Kalivodova (+420 724 266869), Raiffeisenbank a.s., PragueCS (Erste), 17.2%
CSOB (KBC), 8.0%
KB (SocGen), 15.9%
UniCredit, 10.9% Raiffeisen Bank, 5.6%GE Money, 3.5%PPF banka, 1.2%J&T Banka, 1.5%Sberbank (Volksbank),
1.9%Air Bank, 0.9%Others, 33.5%Market shares (2013, eop)
% of total loans
Source: CNB, Raiffeisen RESEARCH

42 Please note the risk notifications and ex planations at the end of this documentSlovakia
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Slovakia vs. all other
CEE marketsSource: NBS, national sources, Raiffeisen RESEARCHSurge in retail loans supports sector performance
-505101520
Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)
Source: ECB, Raiffeisen RESEARCHAfter having bottomed out in 2013 at 0.9%, we expect economic growth to ac-
celerate to 2.2% during 2014. The banking sector should benefit from this devel-opment, in particular from the recovery of private consumption and investments.In 2013, the asset growth of the Slovak banking sector has been supported by a surge in retail loans. Loans to enterprises declined and have only posted a marginal growth of 0.2% yoy. Investments into securities, mainly into government bonds, have decreased as a percentage of banking assets. Thus, the develop-ment is in line with the trend towards recovery in retail lending, down from levels which are among the highest in the euro area. Corporate loans remained stag-nant, mimicking the overall corporate lending trends in the euro area. Contrary to this, loans to households posted a steady double-digit growth in 2013, one of the highest growth rates in CEE. Mortgage loans, up by 12% in 2013, were the key driver of this development while real estate prices and average mortgage interest rates further decreased. We expect this trend to continue in 2014, with retail loans remaining the main driver of the overall lending growth. At the same time, we see corporate lending recover, supported by higher economic growth rates. Also, we continue to forecast a positive outlook for deposit growth in the corporate and retail segments, which are both backed by the stabilizing labor market and growing income levels. At the same time, the structure of deposits is expected to further shift towards short-term maturities, as the decreasing interest rates have translated into a move from term deposits to current accounts. The Slovak banking sector’s capitalization is decent with a Tier 1 ratio above 15% and hence sufficient to support the ongoing loan growth in the years to come.The NPL ratio has been stable at slightly above 5% for the whole banking system. The share of NPLs in retail loans is close to 4%, while corporate NPLs exceed 7%. We expect the ongoing banking system recovery and rising volume of loans to push the NPL ratio further down in 2014.After a more than 25% decline in net profit back in 2012, 2013 was a more promising year, with the banking sector’s net financial result improving by 13% yoy. This development is largely explained by increasing gross income, decreas-ing operational expenses and lower provisioning costs. Still, the banks’ overall profitability in 2013 was negatively impacted by the high level of the Slovak bank levy (0.4% of total liabilities; this rate is expected to be lowered to 0.2% in Profitability recovered in 2013 despite headwinds from taxation
Growth of retail loans major factor for positive perfor mance, corporate loan growth expected to catch up in 2014
Sound capital and liquidity position supportive to future growth of banking system
Key economic figures and forecasts*
Slovakia 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 63 66 69 71 72 74 78
Nominal GDP per capita (EUR) 11,638 12,137 12,777 13,151 13,301 13,669 14,312Real GDP (% yoy) -4.9 4.4 3.0 1.8 0.9 2.2 3.0Consumer prices (avg, % yoy) 1.6 1.0 3.9 3.6 1.4 0.7 2.7
Unemployment rate (avg, %) 12.1 14.4 13.4 13.9 14.2 13.5 13.1
General budget balance (% of GDP) -8.0 -7.7 -5.1 -4.4 -2.8 -2.6 -2.4Public debt (% of GDP) 35.4 41.0 43.4 52.2 55.4 55.2 56.2
Current account balance (% of GDP) -2.6 -3.7 -3.8 2.2 2.2 2.4 2.2
Gross foreign debt (% of GDP) 72.3 74.5 76.5 71.5 81.6 82.9 83.9
* Slovakia is a euro area member as of 1 January 2009
Source: national sources, wiiw, Raiffeisen RESEARCH

43
Please note the risk notifications and ex planations at the end of this documentKey banking sector indicators
2009 2010 2011 2012 2013
53,028 54,695 55,775 58,086 59,554
growth in % yoy (15.6) 3.1 2.0 4.1 2.5
in % of GDP 84.1 83.0 80.9 81.7 82.6
Total loans (EUR mn) 31,876 33,452 36,624 37,870 39,909 growth in % yoy 0.7 4.9 9.5 3.4 5.4 in % of GDP 50.6 50.8 53.1 53.3 55.3
Loans to private enterprises (EUR mn) 15,620 15,688 16,677 16,277 16,317
growth in % yoy (3.3) 0.4 6.3 (2.4) 0.2 in % of GDP 24.8 23.8 24.2 22.9 22.6
Loans to households (EUR mn) 13,158 14,773 16,362 17,940 19,733
growth in % yoy 11.2 12.3 10.8 9.6 10.0 in % of GDP 20.9 22.4 23.7 25.2 27.4 Mortgage loans (EUR mn) 9,235 10,581 12,014 13,290 14,860
growth in % yoy 10.8 14.6 13.5 10.6 11.8
in % of GDP 14.6 16.1 17.4 18.7 20.6 Loans in foreign currency (EUR mn) 375 340 330 520 409
growth in % yoy (94.6) (9.5) (2.9) 57.7 (21.3)
in % of GDP 0.6 0.5 0.5 0.7 0.6 Loans in foreign currency (% of total loans) 1.2 1.0 0.9 1.4 1.0Total deposits (EUR mn) 37,541 39,642 40,426 42,980 44,823
growth in % yoy (8.4) 5.6 2.0 6.3 4.3
in % of GDP 59.5 60.1 58.6 60.5 62.1 Deposits from households (EUR mn) 21,090 22,248 23,869 25,312 25,990 growth in % yoy (1.2) 5.5 7.3 6.0 2.7
in % of GDP 33.4 33.8 34.6 35.6 36.0
Total loans (% of total deposits) 85 84 91 88 89
Structural information
Number of banks 26 29 31 28 28
Market share of state-owned banks (% of total assets) 0.9 0.9 0.9 0.8 0.8
Market share of foreign-owned banks (% of total assets) 99 99 99 99 99
Profitability and efficiency
Return on Assets (RoA) 0.5 0.9 1.2 0.8 0.9
Return on Equity (RoE) 6.5 12.3 14.2 9.1 7.8
Capital adequacy (% of risk weighted assets) 12.6 12.7 13.4 16.0 16.6 Non-performing loans (% of total loans) 5.5 6.1 5.7 5.3 5.2
Source: NBS, Raiffeisen RESEARCH2015) and the low interest rate envi-
ronment. The decreasing margins and interest rates on assets cannot be fully compensated by the liability side.
The ownership structure of the Slovak
banking sector is stable with foreign owners absolutely dominating the market. Competition has been further intensifying with the most apparent effects in the mortgage market. Con-sidering the small size of the Slovak market, the Top 3 banks have a strong position. On the deposit side, com-petition is mainly driven by smaller banks, which have to pay significantly higher rates to attract the desired vol-ume of deposits.
Financial analyst: Juraj Valachy (+421 2 5919 2033), Tatra banka, a.s., BratislavaSlovakia
Slovenska Sporitelna
(Erste)
20.7%
VUB Banka (Intesa)
19.0%
Tatra Banka (Raiffeisen)
15.7%CSOB (KBC)
9.3%UniCredit
6.9%Postova banka
5.5%Prima Banka (Penta)
3.4%Volksbank Slovensko
(Sberbank)
2.9%OTP Banka
2.3%Others
14.2%Market shares (2013, eop)
% of total assets
Source: NBS, Raiffeisen RESEARCH

44 Please note the risk notifications and ex planations at the end of this document20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Slovenia vs. all other
CEE marketsSource: BSI, national sources, Raiffeisen RESEARCH
-20-15-10-50510152025
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)
Source: ECB, Raiffeisen RESEARCH2013 brought successful attempts to solve the Slovenian banking sector’s most
pending issue of the past few years – the system’s recapitalization and the start of its restructuring. In December 2013, the system’s total EUR 4.8 bn lack of capital was made public, and the largest systemically relevant banks – state-controlled Nova Ljubljanska banka (NLB), Nova Kreditna Banka Maribor (NKBM) and Abanka Vipa (Abanka), which together account for over two thirds of the Slo-venian banking system’s assets – received capital injections of around EUR 3 bn (in total) from the Slovenian government. These three banks have also transferred sizeable parts of their NPL portfolios (amounting to EUR 4.5 bn in total) to the state-run Bank Asset Management Company (BAMC). This transaction was made in exchange for state-guaranteed bonds worth EUR 1.6 bn, which in turn, can be used as a fund-securing tool, and serve as collateral for ECB funding in particular. The three banks are also obliged to start restructuring their business models and governance, and are subject to privatization up until 2016.Although the measures outlined above have resolved the system’s immediate sol-vency concerns, the systemic banking crisis in Slovenia is still far from being resolved. The banks’ aggregate loans and assets are still in a steep downward trend, and the banking sector’s net financial result has been negative for several years already. Over the past three years, the volume of loans contracted by 22%, in 2013 alone by 8.5%, which adds to the vicious circle between the banking sector and the macroeconomic weakness of the country. Banks are suffering from a lack of revenue-generating opportunities, a situation that erodes their capital base, limits their access to global market funding, and thus prevents any quick fundamental revival. The system’s recovery now depends on a number of criti-cal factors with the macroeconomic performance as one of the most important determinants. The problems of the past have a high probability of repeating them-selves, as long as the real sector and public finances remain in distress. With regard to the macroeconomic situation, there are some early signs of re-covery, which might help gaining ground against additional downside risks (e.g. in terms of asset quality). At the same time, the high concentration of loans from large holding companies as well as from the construction and real estate sectors in the corporate loan portfolio remains the main weakness of the Slovenian banks’ asset mix. Before the clean-up, some banks’ impairment ratio in this category of Slovenia
Recapitalization brings relief, but structural weaknesses remain
Key economic figures and forecasts*
Slovenia 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 35 36 36 35 35 36 37
Nominal GDP per capita (EUR) 17,355 17,317 17,616 17,153 17,087 17,273 17,855Real GDP (% yoy) -7.8 1.2 0.6 -2.3 -2.0 -0.5 1.5Consumer prices (avg, % yoy) 0.9 1.8 1.8 2.6 1.8 1.8 2.0
Unemployment rate (avg, %) 5.9 7.3 8.2 8.9 10.5 10.5 10.0
General budget balance (% of GDP) -6.3 -5.9 -6.3 -3.8 -7.0 -5.0 -4.0Public debt (% of GDP) 35.0 38.6 46.9 54.0 65.0 70.0 72.0
Current account balance (% of GDP) -0.6 -0.1 0.4 3.3 7.1 7.0 4.9
Gross foreign debt (% of GDP) 113.9 114.7 110.8 115.7 113.6 115.2 115.5
* Slovenia is an euro area member as of 1 January 2007
Source: national sources, wiiw, Raiffeisen RESEARCH Bold recapitalization of state-own ed banks eased long-lasting solvency concerns
Alarming deterioration of banking fundamentals continued
Uncertainty up to now how structural imbalances will be resolved

45
Please note the risk notifications and ex planations at the end of this documentKey banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR bn)* 45.3 45.8 45.6 44.5 39.8 growth in % yoy 5.1 1.1 (0.4) (2.4) (10.6)
in % of GDP 128.5 130.0 126.4 125.5 112.2
Total loans (EUR bn)* 32.7 33.8 33.0 31.7 26.4 growth in % yoy 3.2 3.4 (2.4) (3.9) (16.7) in % of GDP 92.7 95.9 91.5 89.4 74.5
Total loans incl. MFIs and state (EUR bn) 39.0 39.0 38.4 36.9 32.3
growth in % yoy 8.0 0.0 (1.5) (3.9) (12.5) in % of GDP 110.6 110.7 106.5 104.1 91.1
Loans to private enterprises (EUR bn) 21.0 21.0 20.3 18.8 14.3
growth in % yoy 1.4 0.0 (3.3) (7.4) (23.9) in % of GDP 59.6 59.6 56.3 53.0 40.3Loans to households (EUR bn) 8.4 9.3 9.5 9.3 8.9
growth in % yoy 7.7 10.7 2.2 (2.1) (4.3)
in % of GDP 23.8 26.4 26.3 26.2 25.1Mortgage loans (EUR bn) 3.9 4.8 5.2 5.3 5.3 growth in % yoy 14.7 23.1 8.3 1.9 0.0
in % of GDP 11.1 13.6 14.4 14.9 14.9
Total deposits (EUR bn)* 20.0 20.8 21.3 20.9 20.8 growth in % yoy 4.5 4.1 2.5 (2.0) (0.5)
in % of GDP 114.9 108.1 105.1 104.1 90.8
Total deposits incl. MFIs and state (EUR bn) 40.5 38.1 37.9 36.9 32.2 growth in % yoy 5.5 -5.9 -0.6 -2.6 -12.7 in % of GDP 56.7 59.0 59.1 58.9 58.7
Total loans (% of total deposits) 164 162 155 152 127
Total loans incl. MFIs and state (% of total deposits) 96 102 101 100 100
Structural information
Number of banks 25 25 25 23 23
Market share of state-owned banks (% of total assets) 48 47 47 45 61
Market share of foreign-owned banks (% of total assets) 29 28 29 31 31
Profitability and efficiency
Return on Assets (RoA) 0.3 (0.2) (1.1) (1.6) (2.6)
Return on Equity (RoE) 3.9 (2.4) (11.7) (19.0) (31.6)
Capital adequacy (% of risk weighted assets) 11.6 11.3 11.6 11.5 11.8Tier-1 capital adequacy (%) 9.3 9.0 9.6 10.1 11.1Non-performing loans (% of total loans) 5.8 8.2 11.8 15.0 22.0
* excluding MFI business; Source: BSI, ECB, Raiffeisen RESEARCHloans exceeded 50%. On contrast, the retail lending segment is underdeveloped,
representing just about 25% of the total loan portfolio. These structural factors weigh on the banks’ profits and growth, and cannot be resolved quickly without a substantial recovery of the Slovenian economy.Another issue is that of availability of funding for the Slovenian banking sector, in particular for the largest banks which are in the middle of their restructuring phase. On an aggregate level, the non-bank deposit base has decreased by 5.5% in 2013, mostly due to a large-scale conversion of state deposits into capi-tal. Apart from that, the deposits’ “flight to quality” has been a clear trend, with household and corporate deposits, for example, drifting away from the large state-owned banks to foreign-owned banks. Debt funding would be challenging for the banks in restructuring too, and cross-border financing is clearly difficult for Slovenian banks. Finally, the planned privatization of the by then “cleaned-up giants” in 2016 will leave some question marks, and will depend not only on the country-specific performance, but to a large extent also on the demand of poten-tial investors. Finally, the question of “how much more might be needed?” still remains open. Slovenia is facing an ECB AQR in 2014, and additional capital needs cannot entirely be ruled out. It all comes down to the question of whether the Slovenian government can cope with the restructuring process of its banking sector on its own, or whether it will have to turn to the EU for further assistance.
Financial analyst: Elena Romanova Slovenia
Market share ranking as of 2013
1 Nova Ljubljanska banka (State-owned)
2 Nova Kreditna banka Maribor (State-
owned)
3 Slovenska izvozna in razvojna banka –
SID (State-owned)
4 Abanka Vipa (Zavarovalnica Triglav/
Sava)
5 UniCredit Banka Slovenija (UniCredit)
…
12 Raiffeisen Bank Slovenia (RBI)
Source: BSI, Raiffeisen RESEARCH
Market shares (%)
Large
domestic
banksSmall
domestic
banksForeign-
owned
banks
Assets
(2007)63.6 7.8 28.6
Assets
(2013)59.9 9.3 30.7
NPLs
(2013)75.3 9.0 15.7
Source: BSl, Raiffeisen RESEARCH

46 Please note the risk notifications and ex planations at the end of this documentCroatia
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Croatia vs. all other
CEE marketsSource: CNB, national sources, Raiffeisen RESEARCHDecreasing loans and assets in a more and more difficult market
-15-10-5051015
Jan-09 Feb-10 Mar-11 Apr-12 May-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: CNB, Raiffeisen RESEARCHEconomic and regulatory factors have caused a continuous decline of the Croa-
tian banks’ loan and asset base. Croatia’s economy has been ailing since 2008, and little has changed after the EU accession in July 2013. The newly introduced legislation regarding a pre-bankruptcy settlement of bad assets (Financial Opera-tions and Pre-Bankruptcy Settlements Act) seems to have further undermined busi-ness confidence. In accordance with the new regulation, debtors obtain an op-tion to initiate pre-bankruptcy proceedings with creditors, and thus to reduce their debts by writing-off claims, or engaging in debt-to-equity swaps. Hence, we ex-pect a massive write-off of claims in the corporate sector, which may add to de-leveraging. As a consequence, Croatian banks have responded by implement-ing more restrictive credit policies and enhancing their liquidity position – both measures, are not supportive for an economic recovery. Demand for household loans has further declined as well, mostly because of negative income expecta-tions. A number of banks which had reset the interest rates on retail loans issued in FCY were facing resistance of the regulator. Through the amendments of the Consumer Loans Act a cap was introduced in order to prevent further interest rate hikes. Also, a maximum level for interest rates on mortgages and consumer loans was defined. As a result, fewer loans were issued in these categories, while the still high real estate prices put additional pressure on mortgage lending. Since mid-2013, a new legislation is focusing on houses and apartments built illegally, which leads to even more confusion in the mortgage market.On a positive note, deposit funding remained solid in 2013. Household term de-posits are predominantly denominated in EUR (80%) and banks are still offer-ing high interest rates on deposits (above 2.5%), thus stimulating the increase. In 2013, 90% of the Croatian total banking equity was owned by foreign finan-cial institutions. An average CAR of 21% shows that foreign owners do not with-draw equity. At the same time, foreign financial groups have further engaged in the ongoing deleveraging process of the last two years as the amount of funds borrowed by Croatian subsidiaries from their foreign parent banking groups ex-ceeded the amount of equity by year-end 2013. Given that Croatia is among the CEE countries where since 2007 Western European banks have substantially cut their exposure and the economic growth outlook remains subdued, we expect the foreign funds outflow from the banking sector to continue in 2014. Loans continue to decline due to weak macroeconomics and new regulatory standards
Profitability is jeopardized by high cost of credit risk and lack of profitable alternatives
NPLs are expected to increase further
Key economic figures and forecasts
Croatia 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 44.8 44.4 44.2 43.7 43.3 42.9 44.1
Nominal GDP per capita (EUR) 10,111 10,045 10,305 10,221 10,172 10,098 10,413Real GDP (% yoy) -6.9 -2.3 -0.2 -1.9 -1.0 -0.8 1.0Consumer prices (avg, % yoy) 2.4 1.1 2.3 3.4 2.2 0.6 2.0
Unemployment rate (avg, %) 14.9 17.4 18.0 19.1 20.3 21.0 20.6
General budget balance (% of GDP) -5.3 -6.4 -7.8 -5.0 -4.9 -5.0 -4.6Public debt (% of GDP) 36.6 44.9 51.6 55.5 67.1 70.5 72.8
Current account balance (% of GDP) -5.1 -1.1 -0.9 -0.1 1.3 1.2 0.7
Gross foreign debt (% of GDP) 101.0 104.7 103.8 102.6 105.3 106.1 103.7EUR/LCY (avg) 7.34 7.29 7.43 7.52 7.58 7.63 7.65
Source: national sources, wiiw, Raiffeisen RESEARCH

47
Please note the risk notifications and ex planations at the end of this documentKey banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 51,788 53,028 54,096 53,045 52,126 growth in % yoy 2.5 2.4 2.0 (1.9) (1.7)
in % of GDP 115.1 120.9 123.9 121.8 120.8
Total loans (EUR mn) 35,084 36,965 38,440 37,528 37,375 growth in % yoy 3.4 5.4 4.0 (2.4) (0.4) in % of GDP 78.0 84.3 88.1 86.2 86.6
Loans to private enterprises (EUR mn) 12,389 11,948 12,664 11,474 11,094
growth in % yoy 2.8 (3.6) 6.0 (9.4) (3.3) in % of GDP 27.5 27.3 29.0 26.3 25.7
Loans to households (EUR mn) 16,725 17,056 16,889 16,628 16,123
growth in % yoy (2.7) 2.0 (1.0) (1.5) (3.0) in % of GDP 37.2 38.9 38.7 38.2 37.4 Mortgage loans (EUR mn) 7,671 8,237 8,346 8,223 7,945
growth in % yoy 1.3 7.4 1.3 (1.5) (3.4)
in % of GDP 17.1 18.8 19.1 18.9 18.4 Loans in foreign currency (EUR mn) 25,460 27,548 29,214 27,901 27,669
growth in % yoy 13.7 8.2 6.0 (4.5) (0.8)
in % of GDP 56.6 62.8 66.9 64.1 64.1 Loans in foreign currency (% of total loans) 73 75 76 74 74Total deposits (EUR mn) 35,150 36,416 37,353 36,549 37,028
growth in % yoy 3.9 3.6 2.6 (2.2) 1.3
in % of GDP 78.1 83.1 85.6 83.9 85.8 Deposits from households (EUR mn) 19,321 20,664 21,169 22,066 22,652 growth in % yoy 4.0 7.0 2.4 4.2 2.7
in % of GDP 42.9 47.1 48.5 50.7 52.5
Total loans (% of total deposits) 100 102 103 103 101
Structural information
Number of banks 34 33 32 31 30
Market share of state-owned banks (% of total assets) 4.2 4.3 4.5 4.8 5.3
Market share of foreign-owned banks (% of total assets) 91 90 91 90 90
Profitability and efficiency
Return on Assets (RoA) 1.1 1.1 1.2 0.8 0.3
Return on Equity (RoE) 6.4 6.5 6.9 4.8 1.3
Capital adequacy (% of risk weighted assets) 16.4 18.8 19.6 20.9 20.9 Non-performing loans (% of total loans) 7.8 11.2 12.4 13.8 15.6
Source: CNB, Raiffeisen RESEARCHThe NPL ratio continued to grow,
reaching 15.6% year-end 2013. In the light of the weak growth prospects for lending to the vulnerable real es-tate sector, high and still rising unem-ployment, and the “delayed bankrupt-cies” in the corporate sector we ex-pect further growth in NPLs during 2014. The shrinking profit margins of the banks are primarily caused by the worsening asset quality and ris-ing provisions. Both, an increase in in-come or a decrease in risk costs are unlikely to happen in 2014. Hence, we expect cost cutting and efficiency improvement measures to be imple-mented in order to raise profitability. However, such measures are feasible only for bigger players. In the heavily regulated Croatian banking sector, small banks find it difficult to cut costs and will therefore continue to post losses in 2014. Thus, the Croatian banking sector might face
consolidation pressure in the years to come: either local players will merge or will be taken over by stronger competitors.
Financial analyst: Anton Starcevic (+385 1 6174-210), Raiffeisenbank Austria d.d., ZagrebCroatia
Zagrebacka Banka
(UniCredit)
26.9%
Privredna Banka (Intesa)
16.5%
Erste
15.1%Raiffeisenbank
8.3%Hypo Alpe Adria Bank
7.6%Splitska Banka (SocGen)
6.9%HPB
4.6%OTP
3.4%Sberbank
2.3%Others
8.4%Market shares (2013, eop)
% of total assets
Source: CNB, Raiffeisen RESEARCH

48 Please note the risk notifications and ex planations at the end of this documentRomania
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Romania vs. all other
CEE marketsSource: NBR, national sources, Raiffeisen RESEARCHExpectations building up for 2014 and beyond
-10-50510152025
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: NBR, Raiffeisen RESEARCHAlthough economic activity is on an upward trend, the recovery remains uneven
across the sectors. Due to fragile financial balances and low confidence, compa-nies and households remained cautious in terms of spending and investment. As a consequence, their propensity to save was quite strong. Adjusted for FX effects total banking loans (RON and FCY) decreased by 4.4% yoy in 2013. There were quite strong deleveraging efforts related to FCY loans (-3.3% for household loans and -10.9% for corporate loans, in EUR equivalent). This development was ampli-fied by tighter lending standards and a reluctance to lend in FCY due to changed funding strategies. Little lending activity was accompanied by a faster, but still orderly deleveraging process of foreign-owned banks. In 2013, external liabilities in the Romanian banking system fell by 11.9% (or EUR 2.5 bn). In contrast to a poor overall market performance, 2013 showed again a decent performance of housing loans as the government program “First House” continued. However, starting in H2 2013, the program covers only RON-denominated loans.The funding structure of domestic banks continued to improve. In 2013, total deposits (RON and FCY) went up by 8.3% yoy (adjusted by FX changes), driven mainly by strong RON-deposit inflow (+12.5% yoy). The sharp fall in RON yields has been taken as an opportunity for bank bond issues. Raiffeisen Bank (Romania) raised RON 225 mn through a three year RON-denominated bank bond and UniCredit Tiriac raised RON 550 mn in a five year placement. Further bond is-sues are planned in 2014. Also, competent authorities are amending the covered bonds legislation in order to allow banks to take benefit of this funding instrument. The Romanian banking system as a whole started to experience a liquidity surplus in 2013, although this is unevenly spread across the banks. In January 2014, the National Bank of Romania (NBR) reduced the minimum reserve requirement ratios for RON and FCY and plans similar moves in the future.A subdued economic recovery as well as sluggish loan growth resulted in another rise of the NPL ratio reaching 21.9% (year-end 2013). As part of the agreements with the IMF and the European Commission (EC), efforts of the authorities are now directed to easing and speeding up the removal of fully provisioned NPLs from banks’ balance sheets. The NBR has intensified the supervision of banks by performing regular reviews of their collateral and of asset quality. A special focus was put on restructured loans and impaired assets. The solvability ratio of the Low spending, investing and borrowing a ccompanied by a strong appetite for savings
Housing loans increased thanks to government program “First House”
National Bank of Romania tightened its bank su pervision, with a focus on resolving NPLs
Key economic figures and forecasts
Romania 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 118.3 124.4 131.5 131.7 142.2 149.3 161.8
Nominal GDP per capita (EUR) 5,509 5,804 6,142 6,565 7,106 7,470 8,106Real GDP (% yoy) -6.6 -1.1 2.3 0.6 3.5 3.5 3.5Consumer prices (avg, % yoy) 5.6 6.1 5.8 3.3 4.0 2.1 3.3
Unemployment rate (avg, %) 6.9 7.3 7.4 7.0 7.3 7.2 7.1
General budget balance (% of GDP) -9.0 -6.8 -5.5 -3.0 -2.3 -2.5 -2.3Public debt (% of GDP) 23.6 30.5 34.7 38.0 38.4 38.5 38.2
Current account balance (% of GDP) -4.2 -4.4 -4.5 -4.4 -1.1 -2.0 -2.5
Gross foreign debt (% of GDP) 68.7 74.3 75.1 75.7 67.5 63.6 61.8EUR/LCY (avg) 4.24 4.21 4.24 4.46 4.42 4.51 4.49
Source: national sources, wiiw, Raiffeisen RESEARCH

49
Please note the risk notifications and ex planations at the end of this documentRomania
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 86,202 89,906 90,925 91,451 91,096 growth in % yoy 1.2 4.3 1.1 0.6 (0.4)
in % of GDP 72.7 73.6 70.5 69.0 64.7
Total loans (EUR mn) 47,584 49,208 52,125 51,562 49,077 growth in % yoy (4.8) 3.4 5.9 (1.1) (4.8) in % of GDP 40.1 40.3 40.4 38.9 34.9
Loans to private enterprises (EUR mn) 22,932 24,692 27,108 27,289 25,304
growth in % yoy (3.9) 7.7 9.8 0.7 (7.3) in % of GDP 19.3 20.2 21.0 20.6 18.0
Loans to households (EUR mn) 23,779 23,889 24,199 23,647 23,087
growth in % yoy (4.8) 0.5 1.3 (2.3) (2.4) in % of GDP 20.1 19.5 18.8 17.8 16.4 Mortgage loans (EUR mn) 5,754 6,776 7,753 8,393 9,132
growth in % yoy 9.2 17.8 14.4 8.3 8.8
in % of GDP 4.9 5.5 6.0 6.3 6.5 Loans in foreign currency (EUR mn) 28,713 31,131 33,183 32,351 30,027
growth in % yoy (0.8) 8.4 6.6 (2.5) (7.2)
in % of GDP 24.2 25.5 25.7 24.4 21.3 Loans in foreign currency (% of total loans) 60 63 64 63 61Total deposits (EUR mn) 42,803 44,843 46,866 47,612 51,175
growth in % yoy 6.1 4.8 4.5 1.6 7.5
in % of GDP 36.1 36.7 36.3 35.9 36.4 Deposits from households (EUR mn) 23,534 24,673 26,506 27,922 29,250 growth in % yoy 11.0 4.8 7.4 5.3 4.8
in % of GDP 19.9 20.2 20.5 21.1 20.8
Total loans (% of total deposits) 111 110 111 108 96
Structural information
Number of banks 41 41 40 39 39
Market share of state-owned banks (% of total assets) 7.3 7.4 8.2 8.4 8.5
Market share of foreign-owned banks (% of total assets) 85 85 83 90 90
Profitability and efficiency
Return on Assets (RoA) 0.3 (0.2) (0.2) (0.6) 0.1
Return on Equity (RoE) 2.9 (1.7) (2.6) (5.9) 1.3
Capital adequacy (% of risk weighted assets) 14.7 15.0 14.9 14.9 15.0 Non-performing loans (% of total loans) 7.9 11.9 14.3 18.2 21.9
Source: NBR, Raiffeisen RESEARCHbanking system remained unchanged
at 15% in 2013 despite strong pro-visioning pressure. However, for the first time since 2009, the Romanian banking sector has been able to post a profit in 2013. This was to a large extent based on one-off fiscal gains while many banks still posted losses. Hence, the aggregated RoE remained at a disappointing 1.3%, the RoA stood at 0.1%. Also, several small banks are put on sale by their foreign shareholders.A new law for the application of the Civil Code has set new rules to deal with the so-called “abusive clauses” in lending contracts. According to the programs with the IMF and the EC, the authorities pledged to ensure a harmonized application of the law provisions (i.e. cases involving abusive clauses to be dealt with by higher-ranking courts or by specialized courts). An uneven economic recovery, fragile balance sheets and low confidence still constrain lending. However, the low level of financial intermediation
suggests that medium- and long-term prospects remain positive.
Financial analyst: Nicolae Covrig (+40213061262), Raiffeisen BANK S.A., BucharestBCR (Erste), 17.5%
BRD (Societe Generale),
13.0%
Banca Transilvania, 8.9%
UniCredit, 7.6%
CEC Bank, 7.4%Raiffeisen Bank, 7.3%ING Bank, 5.0%Alpha Bank, 4.5%Others, 29.8%Market shares (2013, eop)
% of total assets, preliminary data
Source: Ziarul Financiar, Raiffeisen RESEARCH

50 Please note the risk notifications and ex planations at the end of this documentBulgaria
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Bulgaria vs. all other
CEE marketsSource: BNB, national sources, Raiffeisen RESEARCHStability and modest profitability in a low growth environment
-5-3035810
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: BNB, Raiffeisen RESEARCHIn 2013, the Bulgarian economy continued to recover slowly, with GDP posting
a 0.9% growth yoy. Despite last year’s positive performance of the export sector, domestic demand has been stagnant, due to only marginal pay increases, slowly rising levels of unemployment and political uncertainty in Bulgaria. The economy is expected to continue its weak performance in the years to come with declining export growth – although against the backdrop of gradually improving consump-tion patterns and investment climate.Amidst the sluggish economic recovery, the Bulgarian banking sector is expe-riencing pressure on the quality of its assets and profitability. Still, in 2013 it generated sound results.Thanks to a stable inflow of funds, mainly from private households, the Bulgarian banking system’s total assets increased by 4% yoy to EUR 44 bn. The majority of the funding was allocated to liquid assets. The banks’ loan portfolio grew by only 1.1% in 2013, to EUR 30 bn in total. A moderate increase in demand for loans by corporate clients, mostly in agri-culture, transport and processing industries, resulted in a 1.4% yoy growth (to EUR 20 bn in total) of the banks’ corporate loan portfolio. Retail loans rose by less than 0.5% to EUR 9.5 bn due to the slow recovery of purchasing power. The Bulgarian National Bank (BNB) expects that the low economic growth will con-tinue to weigh negatively on the demand for loans (corporate and households) and will challenge the banks’ ability to generate profits from this core activity. Thus, the liquidity position of the banking sector remained sanguine. The liquidity ratio, showing the ability of banks to repay debts, improved further to 27.1%, up from 26% in 2012. The households’ high propensity to save contributed largely to the deposit base growth, moving it up by 8.7% yoy to BGN 32 bn. Retail deposits surged by 9.4% yoy, while corporate deposits were up by 7.5% yoy, indicating an improving confidence in the Bulgarian banking sector. Overall, the financial results were positive, adding up to the sector’s capital adequacy ratio, which remained close to 16.9% in 2013. The reported sectors’ net profit saw a moderate growth, reaching EUR 300 mn at year-end 2013 (EUR 290 mn in 2012). Profitability was positively influenced by an increased net income from fees and commissions and lower impairment costs, while the system-wide NPL ra-tio increased slightly to 16.9% compared to 16.6% in 2012. The profitability in- Banking system’s total assets increased on accoun t of retail and corporate funds inflow
Growth of corporate and retail lending continued, though at a slower pace
Banks maintained levels of capital and liqui dity buffers significantly above the required minimum
Key economic figures and forecasts
Bulgaria 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 34.9 36.1 38.5 39.9 39.9 42.1 44.5
Nominal GDP per capita (EUR) 4,618 4,804 5,255 5,483 5,520 5,858 6,228Real GDP (% yoy) -5.5 0.4 1.8 0.6 0.9 2.0 3.5Consumer prices (avg, % yoy) 2.8 2.4 4.2 3.0 0.9 2.2 3.5
Unemployment rate (avg, %) 6.8 10.2 11.3 12.3 12.9 12.6 12.1
General budget balance (% of GDP) -0.9 -4.0 -2.0 -0.5 -1.8 -1.8 -1.3Public debt (% of GDP) 14.6 16.2 16.3 18.5 19.0 22.0 20.0
Current account balance (% of GDP) -8.9 -1.5 0.1 -1.3 2.1 0.7 -0.5
Gross foreign debt (% of GDP) 108.3 102.7 94.3 94.3 93.5 89.1 82.4EUR/LCY (avg)* 1.96 1.96 1.96 1.96 1.96 1.96 1.96
* Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH

51
Please note the risk notifications and ex planations at the end of this documentdicators RoA (0.7%) and RoE (5.31%)
remained largely unchanged due to the marginal increase in profitability and an overall rise in total assets. That said, banks maintained levels of capi-tal and liquidity buffers significantly above the required minimum.Following the close-down of the Sofia Branch of the Latvian Regional Invest-ment Bank, the total number of banks operating on the Bulgarian market decreased to 30 (24 universal banks and 6 branches of foreign banks). The market share of local credit institutions grew to 30% (26% in 2012), largely because of First Investment Bank’s (Fibank’s) acquisition of MKB Union-bank. The market share of foreign financial institutions – most of them are banking groups originating from Western Europe – stayed at around 70%. Less than 4% of the total assets are controlled by state-owned banks.
Financial Analyst: Tsvetanka Madjounova (+359 2 91985-423), Raiffeisenbank (Bulgaria) EAD, SofiaBulgaria
UniCredit Bulbank,
14.8%
DSK Bank, 10.4%
First Investment Bank,
8.7%
Corporate Commercial
Bank, 7.9%
United Bulgarian Bank,
7.8%Raiffeisenbank (Bulgaria)
EAD, 7.0%Eurobank Bulgaria ,
6.6%Central Cooperative
Bank, 4.4%Societe Generale,
Expressbank, 4.3%Alpha Bank, S.A.
Bulgaria Branch, 4.3%Others, 23.9%Market shares (2013, eop)
% of total assets
Source: BNB, Raiffeisen RESEARCH
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 36,234 37,695 39,273 42,138 43,842 growth in % yoy 1.9 4.0 4.2 7.3 4.0
in % of GDP 103.7 104.6 102.0 105.5 109.8
Total loans (EUR mn) 26,817 27,535 28,655 29,573 29,905 growth in % yoy 4.5 2.7 4.1 3.2 1.1 in % of GDP 76.8 76.4 74.4 74.1 74.9
Loans to private enterprises (EUR mn) 17,274 18,036 19,189 20,158 20,444
growth in % yoy 2.9 4.4 6.4 5.0 1.4 in % of GDP 49.4 50.0 49.8 50.5 51.2
Loans to households (EUR mn) 9,543 9,499 9,466 9,416 9,461
growth in % yoy 7.5 (0.5) (0.4) (0.5) 0.5 in % of GDP 27.3 26.3 24.6 23.6 23.7 Mortgage loans (EUR mn) 4,578 4,739 4,790 4,827 4,800
growth in % yoy 8.4 3.5 1.1 0.8 (0.6)
in % of GDP 13.1 13.1 12.4 12.1 12.0 Loans in foreign currency (EUR mn) 15,726 16,876 18,267 18,937 18,297
growth in % yoy 7.2 7.3 8.2 3.7 (3.4)
in % of GDP 45.0 46.8 47.4 47.4 45.8 Loans in foreign currency (% of total loans) 59 61 64 64 61Total deposits (EUR mn) 22,132 23,994 27,000 29,275 31,818
growth in % yoy 3.7 8.4 12.5 8.4 8.7
in % of GDP 63.4 66.6 70.1 73.3 79.7 Deposits from households (EUR mn) 12,699 14,335 16,311 18,340 20,067 growth in % yoy 12.0 12.9 13.8 12.4 9.4
in % of GDP 36.4 39.8 42.4 45.9 50.2
Total loans (% of total deposits) 121 115 106 101 94
Structural information
Number of banks 30 30 31 31 30
Market share of state-owned banks (% of total assets) 2.4 3.2 3.7 3.3 3.4
Market share of foreign-owned banks (% of total assets) 84 81 76 74 70
Profitability and efficiency
Return on Assets (RoA) 1.1 0.86 0.78 0.71 0.70
Return on Equity (RoE) 9.3 6.73 5.76 5.34 5.31
Capital adequacy (% of risk weighted assets) 17.0 17.5 17.5 16.7 16.9 Non-performing loans (% of total loans) 6.1 11.9 14.9 16.6 16.9
Source: BNB, Raiffeisen RESEARCH

52 Please note the risk notifications and ex planations at the end of this documentSerbia
20%40%60%80%100%
5,000 15,000 25,000GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Serbia vs. all other
CEE marketsSource: NBS, national sources, Raiffeisen RESEARCHConsolidation in one of the most attractive SEE banking markets
-10-505101520253035
Jan-10 Dec-10 Nov-11 Oct-12 Sep-13Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: NBS, Raiffeisen RESEARCHFollowing a recession in 2012, the Serbian economy started to recover in 2013
(+2.2% yoy), with the help of the automobile manufacturer Fiat investing in the country, and thanks to oil exports and the recovery of the agricultural sector. De-spite these – modestly positive – economic indicators, banks tightened credit sup-ply. This was mainly driven by a high NPL ratio, coupled with ongoing fiscal consolidation. Disappointing lending dynamics were mainly caused by a steep setback in medium- and longer-term corporate loans (-9.4% yoy), whereas re-tail lending showed a modest growth of 2.4% yoy, mainly driven by an exten-sion of high-margin cash lending products. Banks were especially cautious in the segment of corporate lending due to negative NPL dynamics here (the cor-porate lending NPL ratio inched up to around 26% in 2013, from 21.2% year-end 2012). On the other hand, we witnessed a deleveraging process in relation to existing clients and a reduction in credit demand due to business restructuring and the decision to reduce financing of new investments via bank loans. Also, the NPL ratio of SMEs continued to increase and reached 30% in 2013 (28% in 2012). In contrast, the NPL ratio remained in the single-digit territory in the retail segment, posting an increase to 9.4% in 2013 (8.5% at year-end 2012). On a more positive note, the level of NPLs covered by provisions is very high (117.7 % as of Q3 2013). Also, capital adequacy remained well above the mandatory re-quirements of 12%, standing at 19.9% (Q3 2013). Due to the lack of viable new business models, banks showed a high willingness to take long positions in repo operations with the National Bank of Serbia (NBS) and/or T-bills. The L/D ratio continued its down trend in 2013 on the back of a subdued loan extension and reached 116% (125% in 2012). The L/D drop is mainly the result of solid growth in retail deposits (+4.8% yoy). In contrast, corporates drained li-quidity from banks and caused a decline in deposits of 2.5% yoy. Subdued asset growth prompted banks to further improve cost efficiency as the cost-income ratio was down to 62.9% in Q3 2013 (compared to 67.3% in 2012). Together with still impressive net interest margins, this supported a slight improvement in profit-ability. However, other operating revenues were weak, especially FX gains due to fairly stable EUR/RSD exchange rates. Therefore, the Q3 2013 RoE came in at 3.8% – just slightly above its disappointing Q3 2012 reading of 2.9%. Softening of lending growth on the back of deteriorating asset quality
Marginal improvement in profitability, supported by cost discipline
Consolidation of banking sector continue d, de-licensing of banks might continue
Key economic figures and forecasts
Serbia 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 29 28 31 30 33 35 38
Nominal GDP per capita (EUR) 3,955 3,841 4,317 4,083 4,557 4,858 5,230Real GDP (% yoy) -3.5 1.0 1.6 -1.5 2.5 1.0 2.0Consumer prices (avg, % yoy) 8.2 6.3 11.3 7.8 7.8 5.5 5.5
Unemployment rate (avg, %) 16.1 19.2 23.0 26.0 23.9 24.5 23.0
General budget balance (% of GDP) -4.5 -4.7 -4.9 -6.4 -4.8 -6.9 -5.9Public debt (% of GDP) 34.1 43.2 45.8 59.7 60.8 64.1 64.6
Current account balance (% of GDP) -6.6 -6.7 -9.1 -10.7 -4.8 -5.1 -5.8
Gross foreign debt (% of GDP) 77.7 84.9 76.7 86.9 78.2 76.2 73.4EUR/LCY (avg) 93.95 103.00 101.96 113.05 113.08 116.00 119.00
Source: national sources, wiiw, Raiffeisen RESEARCH

53
Please note the risk notifications and ex planations at the end of this documentSerbia
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 24,362 25,984 27,732 27,775 27,485
growth in % yoy 12.6 6.7 6.7 0.2 (1.0)
in % of GDP 84.1 92.8 88.1 93.8 83.2 Total loans (EUR mn) 13,138 15,166 16,452 16,615 15,801
growth in % yoy 7.1 15.4 8.5 1.0 (4.9)
in % of GDP 45.4 54.2 52.3 56.1 47.8 Loans to private enterprises (EUR mn) 7,514 8,696 9,218 9,419 8,514 growth in % yoy 13.8 15.7 6.0 2.2 (9.6)
in % of GDP 25.9 31.0 29.3 31.8 25.8
Loans to households (EUR mn) 4,784 5,373 5,702 5,686 5,820 growth in % yoy 11.6 12.3 6.1 (0.3) 2.4 in % of GDP 16.5 19.2 18.1 19.2 17.6
Mortgage loans (EUR mn) 2,193 2,621 2,835 2,940 2,899
growth in % yoy 17.8 19.5 8.2 3.7 (1.4) in % of GDP 7.6 9.4 9.0 9.9 8.8
Loans in foreign currency (EUR mn) 8,054 10,002 11,633 11,921 11,453
growth in % yoy (17.9) 24.2 16.3 2.5 (3.9) in % of GDP 27.8 35.7 37.0 40.3 34.7 Loans in foreign currency (% of total loans) 61 66 71 72 72
Total deposits (EUR mn) 11,408 11,894 13,100 13,310 13,655
growth in % yoy 13.9 4.3 10.1 1.6 2.6 in % of GDP 39.4 42.5 41.6 45.0 41.3
Deposits from households (EUR mn) 6,546 7,515 8,173 8,694 9,112
growth in % yoy 27.1 14.8 8.7 6.4 4.8 in % of GDP 22.6 26.8 26.0 29.4 27.6 Total loans (% of total deposits) 115 128 126 125 116
Structural information
Number of banks 34 33 33 32 31Market share of state-owned banks (% of total assets) 18.2 20.3 19.7 19.0 18.5 Market share of foreign-owned banks (% of total assets) 74 73 73 69 75
Profitability and efficiency
Return on Assets (RoA) 1.0 1.1 1.2 1.0 0.8 Return on Equity (RoE) 4.6 5.4 6.0 4.7 3.8 Capital adequacy (% of risk weighted assets) 21.4 19.9 19.1 19.9 19.9
Non-performing loans (% of total loans) 15.7 16.9 19.0 18.6 21.1
Source: NBS, Raiffeisen RESEARCHAgrobanka was the first state-owned
bank that faced bankruptcy in 2012; its assets and liabilities were ultimately transferred to Nova Agrobanka. Given that Nova Agrobanka did not meet minimum requirements under the Law on Banks concerning equity and other prudential ratios in a six months deadline, the bank was de-li-censed and assets and liabilities were merged with the Postal Savings bank. Razvojna Banka Vojvodine followed in 2012 and finally the NBS revoked the undercapitalized Privredna banka Beograd’s (PBB) license due to exces-sive NPLs. The remaining healthy PBB assets and deposits were transferred to the state-owned Banka Poštanska štedionica. On the back of these mergers, the share of state-owned banks’ assets in to-tal banking assets stands at 19.9% (Q3 2013), out of which Komercijalna banka holds 12.2pp. As there are indications that several niche banks have continuous problems to meet required capital ratios, the Serbian government and the NBS formed a joint financial stability committee.
Financial analyst: Ljiljana Grubic (+381 11 2207178), Raiffeisenbank a.d. Serbia, BelgradeBanca Intesa, 14.7%
Komercijalna banka,
12.2%
UniCredit, 8.7%
Societe Generale, 7.3%
Raiffeisen Bank, 7.0%
Eurobank, 6.0%AIK banka, 5.3%Hypo Alpe Adria, 5.1%Vojvoðanska banka,
3.9%Sberbank, 3.3%Others, 26.4%Market shares (2013, eop)
% of total assets
Source: NBS, Raiffeisen RESEARCH

54 Please note the risk notifications and ex planations at the end of this documentBosnia and Herzegovina
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loanst (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Bosnia a.H. vs. all
other CEE marketsSource: CBBH, national sources, Raiffeisen RESEARCHSobering NPL ratio but silver lining on the horizon
-10-50510
Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13
Household loans (% yoy)
Corporate loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: CBBH, Raiffeisen RESEARCHThe economy of Bosnia and Herzegovina (BH) experienced a modest recovery in
2013. The GDP growth achieved was mostly driven by the improving sentiment in the euro area, which resulted in higher exports and investments. The lending of banks was supported by the economic recovery, matching the nominal GDP growth at 3% yoy in 2013. However, the growth rate of major loan segments differed from their performance in 2012.
Household demand for credit was rising, as the disposable income was ham-
pered by stagnating wages, although the unemployment rate started to margin-ally decrease. As a result, retail loans increased throughout the year, posting an overall growth of 3.9% yoy (which corresponds to 26.7% of the GDP). At the same time, corporate lending experienced easing dynamics, with a modest growth of 1.6% yoy, corresponding to 31.6% of the GDP. Given the currency structure of the total loans, there were no major changes during 2013. Around 60% of total loans are linked to the EUR. Because of the high share of NPLs in the corporate segment, banks became more cautious and hence limited their corporate lending.
As of Q3 2013, the corporate NPL ratio peaked at 18.1%, while the retail NPL
ratio fell to 10.8%. Consequently, the total NPL ratio posted a record increase by 1.6pp up to 15.1% as of year-end 2013.
We expect lending to gain additional momentum in 2014, with the corporate
segment as key driver for credit growth. Further economic recovery should con-tinue to be driven by investments in public infrastructure projects and growing ex-ports of manufacturing goods. The retail segment should also post sound growth, but we expect it to lag behind the corporate sector. We see the latter increasing at a rate of 5-8% yoy, which should result in a 4-5% growth in total loans yoy – matching the nominal GDP growth rates expected in 2014. At the same time, we expect that NPLs will continue to increase, especially in H1 2014, although at a slower pace compared to 2013, and to stabilize in H2 2014. Lending dynamics in line with nominal GDP growth rates
NPL ratio at record level, but expected to stabilize by H2 2014
Banking sector’s capital adequacy, liquidit y and profitability at satisfying levels
Key economic figures and forecasts
Bosnia and Herzegovina 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 12 13 13 13 14 14 15
Nominal GDP per capita (EUR) 3,222 3,298 3,418 3,415 3,561 3,661 3,891Real GDP (% yoy) -2.8 0.7 1.0 -1.1 1.9 1.5 3.5Consumer prices (avg, % yoy) -0.4 2.1 3.7 2.1 -0.1 2.5 2.5
Unemployment rate (avg, %) 24.1 27.2 27.6 28.0 27.5 26.5 24.5
General budget balance (% of GDP) -4.4 -2.5 -1.3 -2.0 -1.5 -1.0 -1.0Public debt (% of GDP) 35.1 38.3 38.9 39.7 41.5 39.6 38.5
Current account balance (% of GDP) -6.6 -5.5 -9.5 -9.8 -5.9 -8.6 -10.2
Gross foreign debt (% of GDP) 53.8 57.5 67.0 63.3 62.2 62.0 60.3EUR/LCY (avg)* 1.96 1.96 1.96 1.96 1.96 1.96 1.96
* Currency Board to the EUR; Source: national sources, wiiw, Raiffeisen RESEARCH

55
Please note the risk notifications and ex planations at the end of this documentDeposits inflow in 2013 registered an
increase by 6.9% yoy, the strongest growth since 2007. Household sav-ings, as the main engine of deposit growth, saw an increase by 9.3% yoy. Corporate deposits surged by 7.9% yoy, which is the first positive growth rate since 2010 (although the growth came largely on the back of a low statistics base). In 2014, stable growth of deposits in a range of 6-8% remains our baseline scenario.
Despite elevated NPLs, the financial
stability and profitability of the BH banking sector could be sustained in 2013. In the first three quarters of 2013, the banking sector registered a net financial result of EUR 54.6 mn resulting in a RoA of 0.5% and a RoE of 3.4%. The CAR also remained stable at 17%, which is well above the legal re-quirements. There have been no major M&A activities or corporate changes in BH’s banking sector, although the number of banks decreased to 27, as one small local bank was revoked of its banking license.
Financial analyst: Ivona Zametica (+387 33 287 784), Raiffeisen BANK d.d. Bosnia and Herzegovina, SarajevoBosnia and Herzegovina
UniCredit Group*,
20.8%
Raiffeisen Bank, 17.5%
Hypo Alpe Adria Group,
12.6%NLB Group, 9.0%Intesa Bank, 6.3%Sberbank, 6.1%Others, 27.8%Market shares (2013, eop)
% of total assets
* UniCredit Bank & UniCredit Bank Banja LukaSource: CBBH, Raiffeisen RESEARCH
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 10,742 10,828 11,196 11,414 11,994 growth in % yoy (0.5) 0.8 3.4 1.9 5.1 in % of GDP 86.8 85.5 85.3 87.0 89.1
Total loans (EUR mn) 7,184 7,436 7,828 8,151 8,391
growth in % yoy (3.2) 3.5 5.3 4.1 3.0 in % of GDP 58.1 58.7 59.6 62.1 62.3
Loans to private enterprises (EUR mn) 3,398 3,545 3,641 3,803 3,848
growth in % yoy (1.1) 4.3 2.7 4.4 1.2 in % of GDP 27.5 28.0 27.7 29.0 28.6 Loans to households (EUR mn) 3,225 3,234 3,428 3,474 3,611
growth in % yoy (5.8) 0.3 6.0 1.3 3.9
in % of GDP 26.1 25.5 26.1 26.5 26.8 Loans in foreign currency (EUR mn) 733 534 372 333 325 growth in % yoy (0.9) (27.2) (30.2) (10.5) (2.6)
in % of GDP 26.1 25.5 26.1 26.5 26.8
Loans in foreign currency (% of total Loans) 10.2 7.2 4.8 4.1 3.9Total deposits (EUR mn) 6,183 6,406 6,643 6,814 7,286
growth in % yoy 1.8 3.6 3.7 2.6 6.9
in % of GDP 50.0 50.6 50.6 51.9 54.1 Deposits from households (EUR mn) 2,896 3,315 3,605 3,914 4,276 growth in % yoy 8.8 14.5 8.7 8.6 9.3
in % of GDP 23.4 26.2 27.5 29.8 31.8
Total loans (% of total deposits) 116 116 118 120 115
Structural information
Number of banks 30 29 29 28 27
Market share of state-owned banks (% of total assets) 0.9 0.8 0.9 1.0 1.0
Market share of foreign-owned banks (% of total assets) 95 93 92 92 90
Profitability and efficiency
Return on Assets (RoA) 0.1 (0.6) 0.7 0.6 0.5
Return on Equity (RoE) 0.8 (5.5) 5.8 5.0 3.9
Capital adequacy (% of risk weighted assets) 16.1 16.2 17.1 17.0 17.0 Non-performing loans (% of total loans) 5.9 11.4 11.9 13.5 14.9
Source: CBBH, Raiffeisen RESEARCH

56 Please note the risk notifications and ex planations at the end of this documentAlbania
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Albania vs. all other
CEE marketsSource: NBA, national sources, Raiffeisen RESEARCHHard landing, but not all banks affected the same way
-10010203040
Mar-09 Feb-10 Jan-11 Dec-11 Nov-12
Household loans (% yoy)
Corporate loans (% yoy)
Mortgage loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: NBA, Raiffeisen RESEARCHIn 2013, the Albanian economy has further slowed down due to weak domestic
demand. The modest growth in GDP was solely driven by external demand and fiscal stimulus. Despite a less supportive macroeconomic picture, total banking assets increased by 6.7% yoy in 2013. However, this expansion was based on investments in government securities. In contrast, credit growth remained sub-dued, with a decline of total loans by 1.8% yoy, reflecting low demand for loans and a lack of confidence in the market. Corporate lending saw an above-average decline of -2.5% yoy, retail lending posted a very modest growth of 0.1% yoy. FCY loans shrunk by 4.2% yoy, however, they still make up around 63% of total loans (five years ago, this ratio was at 73%). In contrast, LCY lend-ing posted a moderate growth of 2.4% yoy in 2013. Despite the overall market dynamics, it seems that the expansionary monetary policy, as well as other sup-portive measures undertaken by the Bank of Albania in H1 2013 (especially in terms of capital requirements), were not appropriate to boost lending. The high level of NPLs continues to be a serious issue. In 2013, the NPL ratio increased further by 1pp to 23.5%. In 2014, the NPL ratio might reach a plateau indicat-ing an uptick in lending activity, especially in the corporate segment. The start of government arrears payments to the private sector (estimated at around EUR 100 mn) will improve the liquidity situation in the business sector and in particular in the construction sector. Another factor likely to have a positive impact on lending activity and NPLs is a new draft law facilitating procedures for the writing-off of impaired loans from banks’ balance sheets. Moreover, agreements of the public sector with international financial institutions, such as IMF or World Bank, to finance half of the current budget deficit with soft loans is expected to support banks’ appetite for lending to the real economy (instead of government papers, the sole driver for asset growth in 2013). In 2013, deposits grew only by 3% compared to around 7% in 2012. Deposit collection was mainly concentrated in the segment of LCY deposits. This trend and overall low deposit growth reflect a drop in remittances (caused by eco-nomic hardship in Italy and Greece), which remain the main source of FCY inflow into Albania. Investments in term deposits posted an even more negative trend than total deposits (term deposits only grew by 0.4% in 2013), which can be interpreted as a reflection of the low interest rate environment. In 2013, the Lending down for the first time since 2004, replaced by asse t growth due to increased holdings of government bonds
Deposit growth under pressure of low remitt ance inflow, but deposit base still solid
Slowdown of NPL growth and government payments to the private sector should support banking sector in 2014
Key economic figures and forecasts
Albania 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 9 9 10 10 10 11 12
Nominal GDP per capita (EUR) 2,743 2,928 3,445 3,563 3,686 4,003 4,221Real GDP (% yoy) 3.3 3.9 3.1 1.6 0.4 2.0 3.0Consumer prices (avg, % yoy) 5.0 4.0 3.5 2.0 1.9 2.3 2.5
Unemployment rate (avg, %) 13.0 13.5 14.0 13.3 13.5 13.6 13.4
General budget balance (% of GDP) -7.0 -5.7 -3.5 -3.4 -6.0 -6.6 -4.5Public debt (% of GDP) 59.5 59.5 59.4 61.5 68.0 72.0 68.0
Current account balance (% of GDP) -15.6 -10.3 -11.3 -8.8 -9.1 -9.2 -9.2
Gross foreign debt (% of GDP) 22.5 23.5 23.6 24.7 26.5 25.9 26.8EUR/LCY (avg) 132.12 137.79 140.36 139.04 140.30 140.00 139.75
Source: national sources, wiiw, Raiffeisen RESEARCH

57
Please note the risk notifications and ex planations at the end of this documentAlbania
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 6,424 7,139 8,063 8,626 9,164 growth in % yoy (4.7) 11.1 12.9 7.0 6.2
in % of GDP 76.6 76.8 81.8 85.6 87.6
Total loans (EUR mn) 3,261 3,537 4,076 4,139 4,045 growth in % yoy 1.8 8.5 15.2 1.6 (2.3)
in % of GDP 38.9 38.1 41.4 41.1 38.7
Loans to private enterprises (EUR mn) 2,070 2,379 2,858 2,887 2,788 growth in % yoy 4.6 14.9 20.1 1.0 (3.4) in % of GDP 24.7 25.6 29.0 28.7 26.7
Loans to households (EUR mn) 1,047 1,065 1,072 1,071 1,067
growth in % yoy (7.4) 1.7 0.6 (0.0) (0.3) in % of GDP 12.5 11.5 10.9 10.6 10.2 Mortgage loans (EUR mn) 716 753 806 815 801
growth in % yoy 7.0 5.1 7.0 1.1 (1.7)
in % of GDP 8.5 8.1 8.2 8.1 7.7 Loans in foreign currency (EUR mn) 2,291 2,470 2,766 2,670 2,547
growth in % yoy (1.8) 7.8 12.0 (3.5) (4.6)
in % of GDP 51.2 53.7 58.3 61.8 61.1 Loans in foreign currency (% of total credits) 70 70 68 65 63Total deposits (EUR mn) 5,032 5,885 6,651 7,104 7,315
growth in % yoy (3.4) 17.0 13.0 6.8 3.0
in % of GDP 60.0 63.4 67.5 70.5 69.9 Deposits from households (EUR mn) 4,296 4,987 5,743 6,225 6,388 growth in % yoy 0.5 16.1 15.2 8.4 2.6
in % of GDP 51.2 53.7 58.3 61.8 61.1
Total loans (% of total deposits) 65 60 61 58 55
Structural information, profitability and efficiency
Number of banks 16 16 16 16 16
Market share of foreign-owned banks (% of total assets) 94 94 94 94 94
Profitability and efficiency
Return on Assets (RoA) 0.4 0.7 0.1 0.3 0.5 Return on Equity (RoE) 4.6 7.6 0.8 3.8 6.4
Capital adequacy (% of risk weighted assets) 16.2 16.2 15.6 16.2 18.0
Non-performing loans (% of total loans) 10.5 14.0 18.8 22.5 23.5
Source: NBA, Raiffeisen RESEARCHAlbanian banking system posted a net
profit of EUR 46.8 mn. This unusually high profit was triggered by banks cleaning up their balance sheets. Nev-ertheless, with a RoA at 0.54% and a RoE at 6.43%. Despite low profit-ability, the Albanian banking sector as a whole remains well capitalized (the CAR remains at 18% at year-end 2013, well above the minimum re-quirements of 12%) and has a solid liquidity position – as indicated by the low market L/D ratio of around 55%. However, it has to be mentioned that there are vast discrepancies among the individual players on the market. The NPL ratios of individual banks are quite diverse, ranging from 9% to 50% (with five players above the market average of 23.5%). In 2013, five major banks posted losses, while the three top players (Raiffeisen Bank, National Commercial Bank of Albania [NCB] and Intesa San-paolo Bank Albania) managed to post double-digit RoEs in 2013.
Financial analyst: Joan Canaj (+355 4 2381000 1122), Raiffeisen Bank Sh.a., TiranaRaiffeisen Bank, 26.2%
National Commercial
Bank, 21.1%
Intesa Sanpaolo Bank,
10.6%Credins Bank, 8.4%Tirana Bank (Pireaus
Bank), 7.1%Alpha Bank, 5.9%Societe Generale, 5.4%Procredit Bank, 3.2%National Bank of
Greece, 3.1%Others, 9.1%Market shares (2013, eop)
% of total assets
Source: NBA, Raiffeisen RESEARCH

58 Please note the risk notifications and ex planations at the end of this documentKosovo
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Kosovo vs. all other
CEE marketsSource: national sources, Raiffeisen RESEARCH
01020304050
2005 2007 2009 2011 2013
Corporate loans (% yoy)
Household loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: national sources, Raiffeisen RESEARCHThe banking sector in Kosovo only started to emerge in 2000 after the Yugo-
slavian conflicts, but has managed to turn into a more or less fully developed banking sector within the last decade. However, in spite of this rapid growth, the Kosovar banking sector still remains quite small by European standards. The sector consists of nine banks with total assets of around EUR 3 bn (60% of GDP) as at year-end 2013. Loans make up about two-thirds of banking assets, and during the last five years reached 35% of GDP. In nominal terms, loan stock has increased by over 50% since 2008, supported by the relative resilience of the economy during the global financial crisis, ongoing capital inflow from the Koso-var diaspora and additional foreign lending. 70% of loan stock is comprised by corporate loans and 30% by retail lending.Foreign banks also play a substantial role in Kosovo’s banking lending devel-opment. In 2013, the share of euro area based banks in loans stock issued to corporate clients amounted to 71%, other foreign banks accounted for 17% and domestic banks contributed just 12% to the total loan volume. The upbeat economic performance that triggered consumption and investment activity has also had a positive impact on the development of the Kosovar bank-ing sector. However, in the last two years, the banking assets growth rate slowed to 6.8% (2012 yoy) and 4.3% (2013 yoy), falling from previous double-digit rates. In 2014, the continuing decline in interest rates is expected to be a major factor in further pushing loan demand. The Kosovar banking sector has a high level of liquidity, as banks are mostly deposit-funded with customer deposits making up to 80% of the banking sector’s liabilities. Over the last five years, deposits showed growth rates similar to that of assets and were the main reason for the comparably low L/D ratio of below 80%. Of all deposits 46% are fixed-term, 37% are in current accounts and 18% are in savings accounts. Banking system capitalization is firm, with the Tier 1 CAR ratio at 12% in 2012 and 2013, and total regulatory CAR approaching 15%. Capital quality is also good, with share capital representing 78% of the capital base.Asset quality is with an NPL ratio of 7.6% as of year-end 2013 more or less in line with the CEE trends. We expect the NPL ratio to drift upwards slightly in 2014, although the impact of a rather speedy write-off policy may well counteract this Banking sector continues to develop supported by reasonable funding levels and capital standing
Asset growth stabilized in 2013, asset quality in line with CEE trends (NPL ratio at 7.5%) and better than in SEE peers
Profitability mostly core-business driven, as th e securities market is still in the build-up phase
Key economic figures and forecasts*
Kosovo 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 4.1 4.1 4.6 4.7 4.9 5.0 5.2
Nominal GDP per capita (EUR) 2,460 2,427 2,667 2,729 2,775 2,822 2,897Real GDP (% yoy) 2.9 3.9 4.0 2.5 3.0 3.0 4.0Consumer prices (avg, % yoy) -2.4 3.5 7.3 2.5 1.8 3.0 2.5
Unemployment rate (avg, %) 45.4 45.1 41.4 44.8 30.5 30.5 31.0
General budget balance (% of GDP) -0.7 -2.6 -2.9 -2.7 -2.7 -2.0 -2.0Public debt (% of GDP) 17.6 16.6 15.4 18.0 20.0 22.0 22.0
Current account balance (% of GDP) -9.1 -12.6 -14.4 -8.0 -7.0 -7.7 -7.8
Gross foreign debt (% of GDP) 16.8 17.1 15.8 14.8 14.4 13.9 13.4
* EUR is the official currency of Kosovo introduced on a unilateral basis.
Source: national sources, wiiw, Raiffeisen RESEARCHGrowth on track, modest upside as no past overexpansion

59
Please note the risk notifications and ex planations at the end of this documentKosovo
Key banking sector indicators
Balance sheet data 2008 2009 2010 2011 2012
Total assets (EUR mn) 1,808 2,205 2,455 2,650 2,829 growth in % yoy 26.0 21.9 11.4 7.9 6.8
in % of GDP 48.9 53.8 59.9 58.1 59.8
Total loans (EUR mn) 1,183 1,289 1,459 1,698 1,763 growth in % yoy 32.7 8.9 13.2 16.4 3.8 in % of GDP 32.0 31.4 35.6 37.2 37.3
Loans to private enterprises (EUR mn) 902 943 1,010 1,129 1,171
growth in % yoy 30.4 4.6 7.1 11.7 3.8 in % of GDP 24.4 23.0 24.6 24.7 24.7 Loans to households (EUR mn) 281 344 434 511 543
growth in % yoy 40.1 22.3 26.4 17.7 6.2
in % of GDP 7.6 8.4 10.6 11.2 11.5 Mortgage loans (EUR mn) 21 44 45 38 36
growth in % yoy 84.1 111.8 1.5 (15.2) (5.0)
in % of GDP 0.6 1.1 1.1 0.8 0.8 Loans in foreign currency (EUR mn) n.a. n.a. 3 7 7 growth in % yoy n.a. n.a. n.a. 185.2 (5.3)
in % of GDP 22.8 25.4 31.7 32.7 34.7
Loans in foreign currency (% of total credits) n.a. n.a. 0.2 0.4 0.4Total deposits (EUR mn) 1,444 1,745 1,937 2,104 2,279 growth in % yoy 26.3 20.8 11.0 8.6 8.3
in % of GDP 39.0 42.6 47.2 46.1 48.2
Deposits from households (EUR mn) 843 1,040 1,299 1,490 1,640 growth in % yoy 24.5 23.4 25.0 14.7 10.0
in % of GDP 22.8 25.4 31.7 32.7 34.7
Total loans (% of total deposits) 82 74 75 81 77
Structural information, profitability and efficiency
Number of banks 8 8 8 8 9
Profitability and efficiency
Return on Assets (RoA) 2.4 1.4 1.5 1.4 0.7 Return on Equity (RoE) 20.2 13.8 14.8 14.9 7.1 Capital adequacy (% of risk weighted assets) 16.5 17.9 18.7 17.5 14.2
Non-performing loans (% of total loans) 3.3 4.4 5.9 5.7 7.5
Source: NBA, Raiffeisen RESEARCHtrend. As the internal securities mar-
ket only really started in 2012, bank-ing industry profitability is comprised mostly of core income. According to IMF data, net interest income made up around 75% of the pre-tax profit of the Kosovar banking system. In general, profitability remains in positive terri-tory, although it is volatile with RoE varying within a range of 7% to 17% and RoA of 0.8% to 1.6% over the past three years.
As far as M&A activities are con-
cerned, Turkish IS Bank, which has been hibernating without any deposit-ing or lending activity since its market entry in 2013, is looking for an appropriate acquisition target amongst the existing market players. IS Bank is interested in an established branch network and a sound customer base. Hence, two banks would come into question: the German-owned ProCredit Bank and the Slovenian NLB Prishtina. However, for the moment the situation is uncertain and surrounding details are quite vague.
Financial Analyst: Fisnik Latifi (+381 38 222222-183), Raiffeisen Bank Kosovo J.S.C., Prishtina ProCredit Bank, 27.7%
Raiffeisen Bank, 24.5%NLB, 16.3%TEB (BNP), 13.1%BKT, 7.7%Banka Ekonomike, 6.3%Banka per Biznes, 4.0%IS Bank, 0.4%Market shares (2013, eop)
% of total assets
Source: national sources, Raiffeisen RESEARCH

60 Please note the risk notifications and ex planations at the end of this documentRussia
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Russia vs. all other
CEE marketsSource: CBR, national sources, Raiffeisen RESEARCHPotential remains, but watch out for short-term downsides
-150153045
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13Household loans (% yoy)
Corporate loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: CBR, Raiffeisen RESEARCHIn 2013, Russia continued to outpace the rest of CEE in banking assets and loan
growth rates, although the growth has slowed down. Economically, it was a re-flection of a gradual credit saturation in Russia, and lowering demand for loans from the major private borrower groups (corporates and households). As a re-sult, corporate lending growth lowered to 12-13% yoy in 2013 (16% in 2012), and the retail loan growth rate was 29% yoy (39-40% in 2012). In total, loans to the private non-financial sector grew some 17% over the year, down from about 20% in 2012. The development in 2014 and beyond will depend strongly on the political sentiment and its implications on the economic performance. Although we expect the lending growth to remain at solid levels, it should lower further in 2014. Market-related and macroeconomic factors will play a crucial role in this trend. The major constraining factors for lending growth in 2014 are a slow-down of economic growth, and – by large – FX and interest rate fluctuations, in-duced by political risks. The latter two would also weigh on the banking sector profitability through tighter margins and weaning on borrowers’ financial stand-ing. In 2013, with RoE at 15% and RoA at 1.7%, Russia kept its position among the most profitable CEE banking markets. As mentioned, there is a notable down-side risk for profitability in 2014 and beyond, mainly due to inferior economic performance, possible political instability, and expected margin squeeze. So far the credit risk remained at a fairly low level, with the NPL ratio varying around 4.5% within 2013. In 2014, depending upon the extent of the economic slow-down, and expose to risks related to the crisis in Ukraine, we expect an increase of the NPL stock to about 5-6%. Funding and capital trends saw an improve-ment in 2013. According to national accounting standards, the overall capitali-zation of the system remained at decent levels in 2013, with an own funds ratio of 13.5%, only 0.2% lower than in 2012. In 2014, we anticipate a cautious lev-erage of own funds by banks and the continuation of tighter regulatory capital supervision, as lower expected growth, and dampened profitability could result in limited ability of the banks to boost their capital base. Deposit funding posted a slightly stronger growth in 2013 than a year before, up by 22% in yoy terms. The system-wide L/D ratio therefore levelled at 94%, pointing to the possibility of further expanding the loan base via domestic funding. As previous, a potential Lending growth rates high, but drifting down on economic slowdown
Profitability under pressure from more challenging interest and exchange rates environment
Tighter and more pro-active regulatory stance positive for system stability
Key economic figures and forecasts
Russia 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 879 1,147 1,342 1,540 1,578 1,441 1,517
Nominal GDP per capita (EUR) 6,157 8,030 9,387 10,753 11,012 10,049 10,575Real GDP (% yoy) -7.8 4.5 4.3 3.4 1.3 -0.3 1.0Consumer prices (avg, % yoy) 11.8 6.9 8.5 5.1 6.8 6.1 5.5
Unemployment rate (avg, %) 8.4 7.5 6.6 5.7 5.8 6.0 6.0
General budget balance (% of GDP) -6.3 -3.5 1.6 0.4 -1.0 -0.5 -0.6Public debt (% of GDP) 8.3 9.3 9.8 10.5 12.0 13.0 14.0
Current account balance (% of GDP) 4.1 4.4 5.2 3.6 1.6 2.3 2.0
Gross foreign debt (% of GDP) 37.1 31.8 31.1 31.4 34.1 42.0 44.1EUR/LCY (avg) 44.25 40.29 40.92 39.94 42.32 48.97 49.37
Source: national sources, wiiw, Raiffeisen RESEARCH

61
Please note the risk notifications and ex planations at the end of this documentRussia
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 678,293 838,138 998,949 1,238,697 1,276,922
growth in % yoy 0.3 23.6 19.2 24.0 3.1
in % of GDP 75.8 73.0 74.6 79.4 86.1 Total loans (EUR mn) 371,425 449,946 558,325 693,248 721,734 growth in % yoy (6.9) 21.1 24.1 24.2 4.1
in % of GDP 41.5 39.2 41.7 44.4 48.7
Loans to private enterprises (EUR mn) 289,057 348,669 425,119 499,671 500,317 growth in % yoy (4.2) 20.6 21.9 17.5 0.1 in % of GDP 32.3 30.4 31.7 32.0 33.7
Loans to households (EUR mn) 82,368 101,277 133,206 193,577 221,417
growth in % yoy (15.0) 23.0 31.5 45.3 14.4 in % of GDP 9.2 8.8 9.9 12.4 14.9
Mortgage loans (EUR mn) 27,214 32,119 38,992 52,838 0
growth in % yoy (11.2) 18.0 21.4 35.5 (100.0) in % of GDP 3.0 2.8 2.9 3.4 0.0 Loans in foreign currency (EUR mn) 88,157 99,615 114,462 118,308 129,341
growth in % yoy (10.7) 13.0 14.9 3.4 9.3
in % of GDP 9.9 8.7 8.5 7.6 8.7 Loans in foreign currency (% of total loans) 24 22 21 17 18Total deposits (EUR mn) 393,260 520,161 622,019 748,058 766,887
growth in % yoy 10.9 32.3 19.6 20.3 2.5
in % of GDP 44.0 45.3 46.5 47.9 51.7 Deposits from households (EUR mn) 172,512 243,423 284,881 356,550 377,086
growth in % yoy 21.0 41.1 17.0 25.2 5.8
in % of GDP 19.3 21.2 21.3 22.9 25.4 Total loans (% of total deposits) 94 87 90 93 94
Structural information
Number of banks 1,058 1,012 978 956 923
Market share of state-owned banks (% of total assets)** 45 46 52 53 55Market share of banks over 50% foreign-ownership (% of total assets)* 18.3 18.0 16.9 17.8 15.5
Market share of 100% foreign-owned banks (% of total assets)** 9.0 8.6 8.3 7.9 7.6
Profitability and efficiency
Return on Assets (RoA %) 0.7 1.9 2.4 2.3 1.7 Return on Equity (RoE %) 4.9 12.5 17.6 18.2 14.9 Capital adequacy (CAR % of risk weighted assets) 20.9 18.1 14.7 13.7 13.5
Non-performing loans (% of total loans) 6.2 5.7 5.0 4.8 4.3
* As reported by the CBR, ** Raiffeisen RESEARCH estimate; Source: CBR, RBC-Rating, Raiffeisen RESEARCHliquidity risk in the system stems from
sizeable maturity gaps. A consider-able part of the loan base is funded with short-term means from the inter-bank and money market. The sec-tor’s structure is characterized by an increasing concentration, with a “the big become bigger” stance pushed even more so by the recent regula-tory measures on the sector clean-up. The share of state-controlled heavy-weights (Sberbank, VTB, Russian Ag-ricultural Bank, Gazprombank, and commercial subsidiaries of Vneshek-onombank [VEB]) reached 55% of the system’s assets in 2013. Large private banks (Top 50) also gained a bit of weight, reaching 17% in assets, up from 16.5% in 2012. The market share of 100% foreign-owned banks stays flat at 7.7% as of December 2013.
Financial analyst: Elena Romanova Sberbank, 28.5%
VTB Group, 15.6%
Gazprombank, 6.2%
RusAgro, 3.2%
Alfa Bank, 2.6% NOMOS Group, 1.6%UniCredit, 1.6%Promsviazbank, 1.3%Raiffeisenbank, 1.2%SocGen, 1.5%Others, 36.8%Market shares (2013, eop)
* VTB Group = VTB, VTB 24, Bank of Moscow, Transcreditbank; SocGen = Rosbank, Rusfinance and Deltacredit; Nomos
Bank Group = Nomos Bank, Bank Khanty Mansiysk and 2 small regional subsidiaries% of total assetsSource: RBC-Rating, Raiffeisen RESEARCH

62 Please note the risk notifications and ex planations at the end of this documentKey economic figures and forecasts
Ukraine 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 81.7 102.7 117.2 135.6 133.2 103.7 112.9
Nominal GDP per capita (EUR) 1,775 2,239 2,564 2,975 2,929 2,288 2,499Real GDP (% yoy) -14.8 4.2 5.2 0.2 0.0 -5.0 1.5Consumer prices (avg, % yoy) 15.9 9.4 8.0 0.6 -0.2 6.0 7.5
Unemployment rate (avg, %) 8.8 8.1 7.9 7.7 7.5 8.5 8.0
General budget balance (% of GDP) -8.7 -7.5 -4.3 -5.5 -7.0 -4.0 -3.0Public debt (% of GDP) 34.6 40.0 36.0 36.8 40.3 52.0 53.0
Current account balance (% of GDP) -1.6 -2.2 -6.3 -8.5 -9.1 -5.9 -4.2
Gross foreign debt (% of GDP) 88.2 85.2 83.0 74.4 78.9 107.1 106.3EUR/LCY (avg) 11.21 10.54 11.11 10.39 10.83 14.46 14.76
Source: national sources, wiiw, Raiffeisen RESEARCHUkraine
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Ukraine vs. all other
CEE marketsSource: NBU, national sources, Raiffeisen RESEARCHHeadwinds once again – legacy assets still on the balance sheets
-20-100102030405060
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Household loans (% yoy)
Corporate loans (% yoy)Lending growth (% yoy)*
* in LCY-termsSource: NBU, Raiffeisen RESEARCHThe macroeconomic situation remains complex amid a slump in growth and a
non-sustainable current account deficit. However, in 2013 FX pressure has been brought under control (before the adjustment seen in March 2014), thus improv-ing the liquidity situation for banks. As a result, total loan growth in LCY-terms accelerated to 11.9% yoy in 2013 (up from 2.2% in 2012), while the loan-to-GDP ratio increased from 57% to 62%. Hence, as we indicated in our 2013 CEE Banking Sector Report, a deep deleveraging cycle, lasting for approximately five years, has slowed down in 2013. Among the various market segments unsecured consumer lending has been the most thriving, providing attractive margins, while longer-term lending to corporates was curbed by weak demand in the light of looming economic uncertainty and a poor business climate. On the funding side, deposit growth accelerated from 16.1% yoy in 2012 to 17.3% in 2013, driven by a 38% yoy increase in LCY retail deposits. Moreover, the structural funding profile of Ukrainian banks improved as new lending was predominantly funded by domestic deposits. The L/D ratio in 2013 further dropped from 142.5% to 136%, albeit at a much slower pace than in recent years. So far, the last two year’s economic stagnation surprisingly has not yet caused material deterioration in asset quality, which might be explained by tighter lending standards. However, the overall NPL ratio remains at a very high level of 30-40%, largely reflecting legacy asset from the 2008/09 crisis. There is upward pressure on the NPL ratio due to the FX adjustment and the slump in growth that is likely to follow. Additional pressure is caused by the expected fiscal tightening and ongoing tensions with Russia. On aggregate, the banking system posted a meagre profit in 2013 (RoE at 0.8%) due to the continued build-up of provisions by a few large banks and squeezed interest margins. The Ukrainian banking system is characterized by a low degree of consolidation, while the ownership structure has changed dramatically. In particular, the deterio-rating economic prospects for Ukraine and the increasingly challenging economic and regulatory environment in the home markets prompted an exodus of Western European banks – the share of foreign-owned (non-Russian) banks shrank from 37% of total assets to 16% in the years 2010 to 2013. This retreat has resulted in a cut of cross-border banking exposures of European banks by around 75% from peaks (September 2008), which is slightly above exposure cuts of Western banks Highly uncertain outlook on the macroeconomic developments, deep recession inevitable in 2014
Financial system under pressure of FX adjustment and increasing liquidity risk
Local private banks continued to benefit from shift in market structure, but reshuffling might be in the cards

63
Please note the risk notifications and ex planations at the end of this documentUkraine
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 76,697 88,167 101,788 106,339 114,627 growth in % yoy (11.9) 15.0 15.4 4.5 7.8
in % of GDP 96.4 87.0 81.3 80.0 88.5
Total loans (EUR mn) 62,619 67,809 76,268 76,353 81,155 growth in % yoy (9.3) 8.3 12.5 0.1 6.3 in % of GDP 78.7 66.9 60.9 57.4 62.7
Loans to private enterprises (EUR mn) 42,013 48,674 57,402 59,078 64,246
growth in % yoy (3.0) 15.9 17.9 2.9 8.7 in % of GDP 52.8 48.0 45.8 44.4 49.6
Loans to households (EUR mn) 20,506 19,134 18,866 17,275 16,909
growth in % yoy (20.2) (6.7) (1.4) (8.4) (2.1) in % of GDP 25.8 18.9 15.1 13.0 13.1 Mortgage loans (EUR mn) 9,122 8,686 7,526 6,174 0
growth in % yoy (9.8) (4.8) (13.3) (18.0) (100.0)
in % of GDP 11.5 8.6 6.0 4.6 0.0 Loans in foreign currency (EUR mn) 32,043 31,569 31,071 28,261 27,624
growth in % yoy -21.4 -1.5 -1.6 -9.0 -2.3
in % of GDP 40.3 31.2 24.8 21.3 21.3Loans in foreign currency (% of total loans) 51 47 41 37 34Total deposits (EUR mn) 28,555 38,767 46,806 53,995 59,959
growth in % yoy (15.1) 35.8 20.7 15.4 11.0
in % of GDP 35.9 38.3 37.4 40.6 46.3 Deposits from households (EUR mn) 18,423 25,431 29,560 34,836 39,209 growth in % yoy (9.1) 38.0 16.2 17.8 12.6
in % of GDP 23.2 25.1 23.6 26.2 30.3
Total loans (% of total deposits) 219 175 163 141 135
Structural information
Number of banks 182 176 176 176 180
Market share of state-owned banks (% of total assets) 17 17 17 18 18
Market share of foreign-owned banks (% of total assets) 47 43 38 33 27
Profitability and efficiency
Return on Assets (RoA) (4.4) (1.5) (0.8) 0.5 0.1
Return on Equity (RoE) (32.5) (10.2) (5.3) 3.0 0.8
Capital adequacy (% of risk weighted assets) 18.1 20.9 18.2 18.1 18.3 Non-performing loans (% of total loans)* 33.8 42.0 40.0 37.5 37.5
* Average of “unofficial” estimates based on IFRS estimates
Source: NBU, Raiffeisen RESEARCHin the peripheral countries of the euro
area. The gap in market shares was filled by private domestic banks with aggressive growth strategies and valu-able political connections. Going forward, the banking system is facing a number of challenges, mostly stemming from the ongoing economic and political adjustment. In particular, the large-scale FX depreciation (around 20-30%) will dent banks’ profitability, given the open short-term FX positions in the banking system (around USD 1.5 bn) and the still sizeable share of FX loans. Also, the expected severe GDP decline in 2014 is likely to result in adverse banking sector conditions. In the long run the local banking system might undoubtedly benefit from a broader-based economic transformation (which is expected to follow the recent political changes and a possible rapprochement with the EU), with the fight against corruption being one of the first priorities for any new government in order to strengthen the domestic economy.
Financial analyst: Dmytro Sologub (+380 44 49590-72), Raiffeisen Bank Aval JSC, KievPrivatBank, 16.8%
Oshadbank, 8.1%
Ukreximbank, 7.4%
Delta , 4.3%
Raiffeisen Bank Aval,
3.4%
Ukrsotsbank
(UniCredit), 3.4%
Prominvestbank,
3.1%Sberbank, 2.7% FUIB, 2.6%Nadra, 2.4%Others, 45.7%Market shares (2013, eop)
% of total assets
Source: NBU, Raiffeisen RESEARCH

64 Please note the risk notifications and ex planations at the end of this documentBelarus
20%40%60%80%100%
5,000 15,000 25,000
GDP per capita (EUR at PPP)Total loans (% of GDP)Total loans vs. GDP per capita
Data for 2013, red triangle shows Belarus vs. all other
CEE marketsSource: NBB, national sources, Raiffeisen RESEARCHChallenged by macroeconomics – increasing risks in FX lending
203550658095
Jan-09 Feb-10 Mar-11 Apr-12 May-13
Household loans (% yoy)
Corporate loans (% yoy)Lending growth (% yoy)*
* in LCY-terms
Source: NBB, Raiffeisen RESEARCHUnlike in 2012, Belarus’ macroeconomic position was characterized by a sig-
nificant slowdown in growth, a return to trade deficit and another round of BYR devaluation. Although macroeconomic trends played against the banking sector, the latter posted strong growth in 2013. Total assets in LCY-terms increased by 23% yoy, even though in EUR-terms growth amounted to 7% yoy, affected by a 15% BYR weakening. The loan growth was in high double-digits in 2013 (28.5% yoy in LCY), which even exceeded official targets. A very strong loan growth was visible in the consumer lending segment: households’ loan portfolio in BYR increased by almost 35% yoy on the back of a strong increase of wages. The expansion of loans was also underpinned by a continued stimulation of eco-nomic activity (partly through direct lending under state programs) and domestic demand, as well as for some part inflated by the LCY devaluation. Rapid growth of FCY loans, up from 22% in total loans back in 2010 to around 50% in 2013, as well as strong retail lending growth gave rise for concern in 2013. In early 2014, the National Bank of the Republic of Belarus (NBB) introduced a number of additional measures limiting FCY lending and aiming at a reduction of interest rates on consumer loans, but also at constraints in terms of total lending volumes (e.g. higher capital requirements for household credit risk or restrictions on FX loans to Belarusian enterprises, except for payments to non-residents). The vol-ume of NPLs increased slightly in 2013. However, their share in the total loan vol-ume remains rather insignificant at 0.8%. This can be attributed to the continued support from the NBB, the ban on FX lending to households issued in 2009 and the activity of the Development Bank of Belarus (founded in 2011), which takes state lending programs on its own balance. The loan book of the Development Bank of Belarus almost doubled in 2013, amounting to BYR 19 tn (EUR 1.5 bn).Profitability figures according to local reporting standards were not as impressive as in 2012 (net earnings grew by a quarter in 2013 against above 70% in the previous year), however, the RoA climbed to 1.9%, reaching the highest level of the last decade, and RoE stood at 13.8%. Nevertheless, the gradual BYR devalu-ation had a negative impact on the CAR, which now stands at 15.5% (year-end 2013), down from above 20% in 2012. Devaluation expectations and low confidence in BYR deposits forced the regulator to adhere to a high interest rate policy (above 40% p.a.) in order to prevent mass deposit outflows and/or con- Slowdown of the domestic economy leads to a decline in profitability of banks
Regulator’s policy of high interest rates on BYR deposits have borne fruit so far, bu t fragile further development expected
Credit expansion is underpinned by continued direc t lending and increased domestic demand
Key economic figures and forecasts
Belarus 2009 2010 2011 2012 2013 2014e 2015f
Nominal GDP (EUR bn) 35.3 41.6 43.1 49.6 54.0 47.4 56.3
Nominal GDP per capita (EUR) 3,715 4,391 4,550 5,237 5,708 5,024 5,977Real GDP (% yoy) 0.2 7.7 5.5 1.7 0.9 0.5 1.5Consumer prices (avg, % yoy) 13.0 7.7 53.2 59.2 18.3 21.0 20.0
Unemployment rate (avg, %) 0.9 0.7 0.5 0.5 0.5 1.0 1.0
General budget balance (% of GDP) -0.7 -2.6 2.1 0.5 0.0 0.0 0.0Public debt (% of GDP) 22.2 23.3 48.5 31.5 33.0 34.4 34.6
Current account balance (% of GDP) -12.5 -15.0 -8.5 -2.9 -9.7 -4.0 -6.1
Gross foreign debt (% of GDP) 43.6 50.9 60.9 51.7 49.0 59.4 54.7EUR/LCY (avg) 3,892 3,954 7,263 10,748 11,828 14,484 17,208
Source: national sources, wiiw, Raiffeisen RESEARCH

65
Please note the risk notifications and ex planations at the end of this documentBelarus
Key banking sector indicators
Balance sheet data 2009 2010 2011 2012 2013
Total assets (EUR mn) 20,281 32,104 24,019 28,328 30,211 growth in % yoy (2.1) 58.3 (25.2) 17.9 6.6
in % of GDP 60.6 78.3 94.6 60.9 62.1
Total loans (EUR mn) 15,499 22,355 13,691 17,808 19,831 growth in % yoy 5.9 44.2 (38.8) 30.1 11.4 in % of GDP 46.3 54.5 53.9 38.3 40.7
Loans to private enterprises (EUR mn) 11,614 16,645 10,729 14,265 15,705
growth in % yoy 10.4 43.3 (35.5) 33.0 10.1 in % of GDP 34.7 40.6 42.2 30.7 32.3
Loans to households (EUR mn) 3,885 5,710 2,962 3,544 4,126
growth in % yoy (5.6) 47.0 (48.1) 19.6 16.4 in % of GDP 11.6 13.9 11.7 7.6 8.5 Loans in foreign currency (EUR mn) 4,582 4,848 5,410 8,101 9,960
growth in % yoy 1.3 5.8 11.6 49.7 22.9
in % of GDP 13.7 11.8 21.3 17.4 20.5 Loans in foreign currency (% of total loans) 30 22 40 45 50Total deposits (EUR mn) 7,978 10,831 9,093 12,743 13,202
growth in % yoy (6.9) 35.8 (16.0) 40.1 3.6
in % of GDP 23.8 26.4 35.8 27.4 27.1 Deposits from households (EUR mn) 4,421 5,779 4,539 6,884 7,824
growth in % yoy 1.9 30.7 (21.5) 51.7 13.7
in % of GDP 13.2 14.1 17.9 14.8 16.1 Total loans (% of total deposits) 194 206 151 140 150
Structural information
Number of banks 32 31 31 32 31
Market share of state-owned banks (% of total assets) 79 71 67 65 63Market share of foreign-owned banks (% of total assets) 19 28 32 35 36
Profitability and efficiency
Return on Assets (RoA) 1.4 1.7 1.7 1.8 1.9
Return on Equity (RoE) 8.9 11.8 14.9 12.7 13.8 Capital adequacy (% of risk weighted assets) 19.8 20.5 24.7 20.8 15.5
Non-performing loans (% of total loans) 0.9 0.7 0.5 0.5 0.8
Source: NBB, Raiffeisen RESEARCHversion into FCY. Currently, deposits in
FCY make up for about 62% of total deposits, while the L/D ratio stands at 150% (compared to more than 200% in 2010), pointing to improvements in the deposit base.The overall number of banks in Be-larus amounts to 31. The market is highly concentrated as 80% are con-trolled by the Top 5 players. Three of them are state-owned banks, while the other two are banks with a ma-jority Russian capital. The position of the latter shows the continued trend of increasing market share of foreign-owned (mainly Russian) banks and their aggressive growth strategies. We expect only moderate growth for the Belarusian banking sector in the following years, influenced by a slowdown in economic growth. It is also inevitable that a rise of NPLs will be seen, which will put additional pressure on the banks’ capital reserves. Further credit growth is likely to be limited, due to the weakening ability of the state to support to the re al
economy and the banking sector.
Financial Analyst: Marya Keda (+375 17 2899231), Priorbank Open Joint-Stock Company, MinskBelarusbank, 40.3%
Belagroprombank, 18.4%BPS-Sberbank, 11.1%Belinvestbank, 5.8%Bank Bel (VEB), 5.2%Priorbank (Raiffeisen), 4.9%Belgazprombank, 3.4%Bank VTB Belarus, 2.4%Others, 8.5%Market shares (2013, eop)
% of total assets
Source: NBB, Raiffeisen RESEARCH

66 Please note the risk notifications and ex planations at the end of this documentFocus on: Headwinds in Russia and Ukraine – does history repeat itself?
Both Russia and Ukraine have been exposed to significant event and market risks. This
situation confronts banks with a number of issues and in the following analysis we seek to assess possible challenges and their results.
Our judgments are based on past experience, as both the banking sectors in Russia and
Ukraine also faced significant difficulties in 2008/09, as well as a so-called baseline scenario (for the assumptions see the left-hand side). In 2014, the Ukrainian banking market is likely to be hit harder than the Russian. Nevertheless, the overall impact in Ukraine is expected to be somewhat less severe than the one in 2008/09. Banking sector growth has been quite modest recently and since 2008/09 FX retail lending has stalled. As far as the Russian banking market is concerned, on the basis of several indicators (balance sheet growth, NPLs and profitability), at a maximum we expect about half of the setback seen in 2008/09. This assumption is backed by the fact that as compared to the period from 2004 to 2008, recent banking growth in Russia has been less aggressive. Moreover, the 2014 losses on domestic financials are much lower than in 2008/09. In 2013 economic agents were used for RUB flexibility and the macro-backdrop already clouded substantially (which also implies less aggressive business strategies).
Market risks
Interest rates in Russia and Ukraine are likely to drift upwards. In Ukraine the “upside risk” is higher. However, Russia is also exposed, as indicated by the recent emergency rate hikes that are likely to be only partially reversed in 2014. However, FX volatility implies far more disruptive impacts. Here, Russia would appear to be in a much better position to fend off pressure on the RUB. This holds especially true following the return to greater FX fine-tuning and a decreasing focus on introducing full-scale FX flexibility in the near future. By contrast, even taking IMF funding into account, the reserve position in Ukraine remains critically low. Moreover, political uncertainty could last at least until the summer (presidential elections in May, subsequent forming of a new government, etc.) and this may add to the FX overshooting risks. Liquidity risk is far more danger-ous than interest or credit risk, as a liquidity crunch comes quickly and is hard to stop once contagious panic sets in. This is especially true in fragmented banking systems such as those in Russia or Ukraine. Should a liquidity crunch occur, the probability of system-wide pressure is much greater in Ukraine than in Russia. With the exit of major foreign banks and limited firepower at the National Bank of Ukraine (NBU), the Ukrain-ian banking system appears to be relatively “locked into itself”, especially if the locals undertake another round of conversions from LCY into FX. Moreover, Ukrainian borrow-ers are priced out of international markets and as compared to Russia (L/D ratio below 100%), balance sheet liquidity and flexibility in Ukraine (L/D ratio at around 130%) is constrained. One relief element does exist in Ukraine because the elevated L/D ratio has to be seen within the context of large NPL portfolios. Balance sheet cleanup (as per IMF requirements) may lower the L/D ratio significantly and as compared to 2008/09 various aspects look much brighter for Ukrainian banks. In September 2008, these had a L/D ratio of 166% and were therefore heavily reliant upon foreign funding (of total liabilities some 27% were non-resident). Since then the Ukrainian banking system has gone through external deleveraging and by year-end 2013, foreign funding in total liabilities had shrunk to 17%. Owing to surging loan growth in 2007/08 (60-70% yoy), Ukrainian banks also suffered from a lack of liquidity reserves, which is not the case at present. Therefore, the liquidity risk would seem to be lower than in 2008/09, especially given the determination of the new NBU management to support banks via refinancing facilities. Although increasing liquidity pressure on the Russian market can-not be ruled out, the probability of a liquidity crunch is much lower. Moreover, in Russia, the 2007/08 liquidity crunch provided experience as how to avoid such situations (with measures ranging from ample liquidity injections, to the rescue of distressed banks and a degree of funding outflow ring-fencing). Russian issuers have also felt some pressure on foreign markets. For as funding costs increase, there is anecdotal evidence that lines for Russian banks are treated more cautiously although Russian issuers have not been
-40-30-20-100102030
2000 2003 2006 2009 2012 Russia UkraineBanking sector RoE (%)
Source: national sources, Raiffeisen RESEARCH
0%1%2%3%4%5%
1020304050
CHJPUKNLATSEITDEUSFR
Cross-border exposure (USD bn)
Share total cross-border exposure (%, r.h.s.)Russia: Cross-border claims*
* Averages for 2013
Source: BIS, Raiffeisen RESEARCH
0.0%0.5%1.0%1.5%2.0%
02468
GR DE FR IT ATCross-border exposure (USD bn)
Share total cross-border exposure (%, r.h.s.)Ukraine: Cross-border claims*
* Averages for 2013Source: BIS, Raiffeisen RESEARCHAssumptions baseline scenario
No tangible Russian interference in
Ukraine, no secession of Eastern/South Eastern Ukraine
Diplomatic dialogue between Ukraine/
Russia/US/EU, some change to the ter-ritoral structure of Ukraine
No far reaching economic and financial
sanctions against Russia implemented
Modest economic fall-out in Ukraine and
Russia
Political stabilization in Ukraine in H2
2014

67
Please note the risk notifications and ex planations at the end of this documenttotally priced out of international markets. However, the deposit base in Russia is concentrated at major state banks and there fore many
banks have L/D ratios well above the market average.
Asset quality and credit risk trends
The Russian loan-to-GDP ratio (at 49%) is somewhat below a level that, given the high wealth levels, we deem as being fundament ally
sound but all in all this implies that there is no over-indebtedness. Conversely, in Ukraine the loan-to-GDP ratio (62%) remain s at the up-
per limit of a level that given low current GDP per capita levels could be seen as sustainable. Thus, on average there are fewe r “good”
credits risks, which implies higher risk costs in times of an external shock. However, loan growth had been moderate in Ukraine in recent
years and by contrast strong consumer lending in Russia may now backfire. Accordingly, asset quality will possibly deteriorate in both
markets (again with a far greater impact in Ukraine) and NPL ratios are likely to rise. In Russia, the main risk of negative pe rformance
relates primarily to direct and indirect exposure to Ukraine (also via cross-border loans from headquarters). A second threat t o asset
quality stems from macro-economic and RUB weakness, but in Russia’s case the system-wide NPL ratio rise might be offset by a co ntinu-
ation of decent loan growth. However, in this regard we are slightly more optimistic than some observers, who expect an NPL rat io
rise in Russia to around 8%. Moreover, we anticipate that (state-owned) banks are likely to rollover a lot of corporate exposur e, which
may otherwise become non-performing. At the same time, we do not exclude a tangible upswing in the NPL ratios of state-controll ed
banks, as these may well be involved in sizeable lending, not only to Ukrainian companies and large Russian companies with sign ificant
Ukraine exposure, but also a number of infrastructure projects. In Ukraine, stagnant loan books are likely to step up the press ure on
the NPL ratio. Here it has to be stressed that Ukrainian banks are still plagued by large NPL volumes (average NPL ratio accord ing to
IFRS estimates at 30-35%, as compared to 5-10% in 2008), as well as a sizeable short open FX position (about USD 1.5 bn). On th e
other hand, the exposure to indirect credit risk (i.e. UAH depreciation) is lower now, given much smaller FX loan portfolios an d tighter
underwriting standards, e.g. FX loans to individuals, the most toxic product 2008/09, fell by 70% (to USD 8 bn) amidst a ban on new
lending. Moreover, half of this loan stock is already non-performing and therefore the incremental NPL increase is unlikely to be signifi-
cant. In our baseline scenario, this time banks are also facing less severe macroeconomic adjustment (in 2009 GDP slumped by 15 %),
although NPLs are much higher. In general, according to our estimates, 20-30% UAH depreciation might bring the aggregate NPL ra tio
up from its current level of over 30% to more than 40%.
Profitability and capitalization
Given sizeable profitability swings, a year or two of poor profitability for banks in Ukraine (with negative RoE and RoA readin gs) is on
the cards. The most likely strategy of banks (local and foreign-owned, including Russian banks) operating in Ukraine will be to freeze
operations until greater clarity is obtained. By contrast, in our baseline scenario we continue to expect satisfactory banking sector
profitability in Russia, i.e. RoE of 7-12% might still be in reach given a much higher degree of overall resilience. Moreover, we do not
see an immediate need for Russia’s private banks to recapitalize, although capitalization levels are now much lower than in 200 8/09.
Whether or not Ukrainian banks have a higher loss absorption capacity than in 2008/09 is not yet entirely clear. The headline c apital
position seems to be stronger than in 2008 because at the end of 2013 capital adequacy stood at 18.2%, as compared to 14% in 2008. We estimate that 20-30% UAH depreciation could push capital adequacy down to 11-14%, which would still be above the normative level of 10%. However, a lot of banks may need recapitalization (driven by UAH devaluation and accelerated balance sh eet
clean-up) and this could become an issue for some local private banks, which currently comprise 60% of the system. As the resou rces of
the Deposit Insurance Fund (DIF) are limited at present, the Ukrainian authorities should quickly come up with a mechanism to r aise their
firepower. Recapitalization needs in Ukraine over the next 12-18 months could amount to between USD 3 and 5 bn.
Potential impact on Western banks
As compared to their local peers, who showed strong growth in recent years, given their less aggressive positioning foreign-own ed
banks may be less hard hit in both the Russian and Ukrainian markets. In Russia, major foreign-owned players were less aggressi ve
in the retail and SME lending segments, which could now be impacted most. On a comparative basis, in terms of profitability the Rus-
sian market is likely to suffer less than the Ukrainian. However, the exposures of Western European banks to Russia are much la rger
than to Ukraine. If one looks for comparisons in CEE, the exposure of major Western European banks to Russia is comparable to t hat
in Poland, while exposures to Ukraine are closer to the level of exposures to Slovenia. The cross-border banking exposure to Ru ssia
(some USD 200 bn) of European banks (the largest providers of liquidity and funding to Russia) represents something like 1.12% of
total cross-border claims, or roughly 15% of the emerging Europe exposure (CEE + Turkey). The largest absolute exposures are he ld by
French, German and Italian banks. In relative terms (as compared to overall international exposures) the largest exposures to R ussia are
at Italian, Austrian and Swedish banks. The share of Russia in total CEE exposures in the Austrian and Italian banking sector ( due to a
broad-based, large-scale CEE presence) is not overly large per se. In fact other European banking sectors are far more exposed to Russia
with regard to this indicator. In the European banking sector as a whole, the cross-border exposures to Ukraine are very low (0 .14%
of total cross-border claims or some USD 25 bn). The cross-border exposures of European banks for Ukraine are far more concentr ated
with the largest exposures in Austria, Italy and France. Owing to increased financial stability concerns, international banks o perating
in Russia and Ukraine may become subject to increased regulatory vigilance, or tighter regulation in their home countries. More over,
some (de facto) ring-fencing activity on the part of host country authorities cannot be ruled out entirely.
Financial analysts: Gunter Deuber, Elena Romanova,
Dmytro Sologub, dmytro.sologub@aval.ua, Raiffeisen Bank Aval JSC, Kiev

68 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
International players in Ukraine – many exits in recent quarters
Apart from Russian banks, the international players that are active in Ukraine include RBI, BNP Paribas, UniCredit, OTP, as wel l as the
Greek banks EFG and Alphabank. Ukraine has seen several exits by international players in the last quarters (e.g. Erste Group, Com-
merzbank, Swedbank, SocGen, SEB and most recently Bank Intesa) and some others are also considering exit scenarios. UniCredit plans to merge its two subsidiaries with the final objective of leaving the country, as evidenced by the fact that the group ha s already
booked its Ukraine exposure as held-for-sale. RBI, as well as BNP Paribas, have become more cautious with regard to their lendi ng
activity, but continue to finance the subsidiaries of multinational corporates and agricultural clients. OTP’s management has i ndicated
that as of March 2014 the bank had not yet seen a significant weakening of credit quality, but admitted that it is too early to judge
the impact of recent events. The management has stated that it is prepared for UAH depreciation, but estimates that UAH/USD 10. 0
should be a break-even FX rate for the local subsidiary. A more significant devaluation (as currently) would cause additional p rovision-
ing which would not allow OTP’s local subsidiary to report a positive result in 2014. There have not been any statements with r espect
to a potential market exit.
International players in Russia – ongoing commitment by key players
To date, most of the international players in Russia have not indicated a strategy shift. For example, in its recently presente d “Strategy
2018”, UniCredit, the largest foreign player, included Russia among its CEE core markets. UniCredit’s management clearly sees a n
incentive to increase the capital allocations to fast-growing markets such as Russia. After years of consolidation and the merg er of indi-
vidual entities, thus far SocGen has not announced any changes to its business model, nor presented a specific strategy for the Russian
market. A look at the 2013 performance of Rosbank, which includes all the banking entities in Russia, reveals that the turnarou nd of
what is now the second largest CEE market for SocGen, seems to be on track. The RBI management recently confirmed that Russia w ill
remain among its six strategic focus markets. OTP‘s Russian subsidiary is focused primarily on consumer lending with a large PO S lend-
ing market share. The portfolio quality has deteriorated significantly owing to a more aggressive attitude on the part of compe titors in
the consumer financing area, problems with collection agents and a shift away from POS lending by clients. This trend has promp ted
the management to review its local strategy and significantly reduce its growth targets, which was already evidenced in Q4 2013 by
substantially reduced POS loan origination (-29% yoy).
Financial analyst: Stefan Maxian, maxian@rcb.at, Jovan Sikimic, sikimic@rcb.at, Raiffeisen Centrobank
Competitive landscape and financial stability considerations
The Russian authorities are in a better position to safeguard financial stability. The buffers in Russia are large and major st ate-owned
banks are in a much healthier state than those in Ukraine. Moreover, there are initial signs that large Russian state-owned ban ks may
function as anti-cyclical players (e.g. more leeway may arise from the relaxation of dividend payments, generous liquidity prov isions, or
risk sharing agreements with state development institutions). We expect the market share of state-owned banks to increase notic eably in
2014. In addition, the Russian authorities have shown their ability to safeguard financial stability in a global crisis (as in 2008/09). As
compared to Russia, the picture with regards to near-term market share trends is less clear for Ukraine. Recently there was a t endency
towards decreasing activity with Russian-owned banks, which may benefit local and/or foreign-owned players in Ukraine. However,
some local private banks (especially those with close ties to the ousted government) may feel the pressure. Accordingly, it wou ld appear
that there is a chance for foreign (non-Russian) banks to gain some market share through the use of their higher operative effi ciency and
strong parent support. Moreover, if Ukraine is able to embark on a sustainable growth path (as we expect in our baseline scenar io, with
GDP growth of 1.5% in 2015 followed by 4% in 2016) the foreign presence in the banking sector might increase again. It remains to
be seen to what extent foreign-owned (non-Russian) banks are willing to change their country allocations in favor of Ukraine (i n the last
few years exposures were cut substantially). And in terms of overall financial stability, it has to be stressed that Ukrainian banks have
still not fully recovered from the fall-out of the 2008/09 crisis, which implies far smaller buffers than in Russia.
General outlook and a hi gh degree of unpredictability
All the aforementioned ideas are based on our current baseline scenario. Therefore, it goes without saying that the absence of broad-
based political stabilization in Ukraine, non-compliance with IMF conditionality, or the implementation of far-reaching economi c and
financial sanctions against Russia would change all the outlined views completely. Market risks, the overall macroeconomic back drop
and the credit risk picture are likely to worsen substantially in an escalation scenario, which would obviously imply substanti al opera-
tional risks for international banks operating in the Russian and Ukrainian markets. Tighter economic sanctions would also crea te an
increased risk of “informal sanctions”, e.g. higher capital requirements for the Western subsidiaries of Russian banks and vice versa.
Financial analysts: Gunter Deuber, Elena Romanova,
Dmytro Sologub, dmytro.sologub@aval.ua, Raiffeisen Bank Aval JSC, Kiev

69
Please note the risk notifications and ex planations at the end of this documentMarket players in CEEMarket players in CEE
Aggregated profitability of the nine selected typical representatives of foreign
banking in CEE1 as measured by year-end RoA remained broadly stable in 2013
after a moderate decline in 2012. Despite a continuous slowdown in revenue generation (weak loan growth, downward key rate moves), a slight acceleration in cost reductions and only negligible easing in the provisioning cycle (upcom-ing AQRs, CIS/SEE picking up) helped to drive up aggregated RoA by 2bp to 1.06%. Unlike in 2012, margin pressure on massive rate cuts in the largest CE countries, Poland and the Czech Republic, has somewhat distorted its usual “safety” features especially for the local banking heavyweights UniCredit, Erste and KBC. This led us to conclude that only banks with balanced local exposure and strong revenue streams from Russia reported the most resilient CEE segmen-tal financials in 2013 (SocGen, RBI). With regard to the rapidly changing overall environment in the CIS region, the banks operating in Ukraine expect heavy earnings pressure on the results after the currency devaluation ytd. Major foreign banks in Russia declared themselves committed to the fast-growing market poten-tial in their updated strategies following their Q4 2013 results (UniCredit, RBI). Hindered by the pace of accumulating risks from unsecured consumer lending in 2013, OTP has adopted plans to review its retail operations in the near future. Fortunately, Romania is seen as a turnaround story, particularly for those banks with deep losses on their books over the last two years (Erste, SocGen). With some reservations this can be said to apply to Hungary as well. However, the banks remain cautious regarding the potential unpredictability of political and regulatory actions against the sector.
The ranking of foreign banks in CEE remained broadly unchanged in 2013 due
to the absence of large-scale M&A activity over the last 12 months (we already considered some deals in our last year’s edition). UniCredit, RBI, Erste, SocGen and KBC are still the largest foreign banks as measured by CEE assets. When also considering important CEE-domiciled players, PKO BP’s purchase of Nordea Bank in Poland has placed the largest Polish bank ahead of KBC. In the middle of the ranking, Santander (also operating a consumer finance arm in Poland, SCB) has pushed itself into the Top 10, but here the lack of proper 2013 local data for Citibank and Commerzbank might have played a role. BNP Paribas is the newcomer after having signed an agreement to acquire Rabobank’s EUR 8 bn in Polish assets. Overall, apart from missing deals, the reported total assets in
1 The selected representatives of foreign banking in CEE include: Raiffeisen Bank International, Erste Group, OTP, Uni-
Credit, Société Générale, Santander, Commerzbank, KBC, Intesa Sanpaolo.0%20%40%60%80%100%
Santander
Swedbank
KBC
Commerzbank
ING
Erste
Citibank
OTP
UniCredit
Intesa
SocGen
RBI
Sberbank
EFG
Alpha Bank
NBG
VTB
CE SEE CISCEE: Regional asset allocation (%, year-end 2013)
Source: company data, national central banks, Raiffeisen RESEARCHForeign banks in CEE had quite a
solid year 2013 with stable profitability yoy
Major challenges were key rate cuts
in CE, provisioning in SEE as well as a pick-up of retail-based impairments in Russia
Top-ranking unchanged and BNP
Paribas as a newcomer after takeover in Poland

70 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
EUR-terms were pretty much deflated due to local currency depreciation, muted
loan demand and were earmarked by asset reductions. When considering those parameters, this is particularly visible for those banks with above-average asset allocation in CE (excl. Poland). The most heavily impacted banks were Intesa, Erste and KBC, while, on the other hand, UniCredit, SocGen and RBI benefitted from the volume pick-up effect in Russia.
376.4
194.3
120.1
80.9
79.3
76.0
55.5
53.9
38.2
38.0
37.3
29.4
28.5
27.1
19.8
16.0
14.4
9.6
9.2
8.5
6.6
5.9
020406080100120140
Sberbank
VTB
UniCredit
RBI
Erste
SocGen
PKO BP
KBC**
ING***
Intesa Sanpaolo
OTP
Citibank****
Santander
Commerzbank*****
Swedbank
BNP Paribas
BCP
Hypo Alpe Adria
EFG Eurobank
NBG
BLB
Alpha BankCEE: Total assets of international banks, consolidated* (EUR bn, 2013)
* considering also the announced but not yet finalized M&A activities
** BG as of 31 December 2012*** CZ, SK, BG, HU, RO, RU, UA as of 31 December 2012**** CZ, SK, HU, RO, BG, RU, UA as of 31 December 2012***** CZ, SK, HU, RU as of 31 December 2012Source: company data, national central banks, Raiffeisen RESEARCH
020406080100120140
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013RBI OTP Intesa Erste UniCredit SocGen KBCCEE: Development of total assets, consolidated* (EUR bn)
* considering also the announced but not yet finalized M&A activitiesSource: company data, Raiffeisen RESEARCH
Analogous to total assets, the aggregated loan growth of selected foreign banks
in euros has notably deteriorated, which we attribute to the deflating currency ef-fects and generally weak corporate loan growth. Both factors have combined to affect the CE countries (see KBC, Santander, Commerzbank). For foreign banks, Russian volume pick-up has been distorted by RUB devaluation, but still it can be evidenced that the banks focusing on the local market outperformed the rest in terms of aggregated loan growth (RBI, SocGen, UniCredit). Furthermore, coun-tries with stable currencies yoy as of year-end 2013, such as Romania and Hungary, are still characterized by muted loan demand, whereas in some cases company-specific de-risking measures have taken their toll on reported lending volumes: Erste in both countries and Intesa in Hungary were more affected than others.Currency depreciation in CE and
CIS notably impacted reported loan
growth in EUR-terms

71
Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
-15%-10%-5%0%5%10%15%
UniCredit
SocGen
RBI
Santander
OTP
Commerzbank
Erste
KBC
Swedbank
Intesa
2011 2012 2013CEE: Loan book growth 2011 – 2013 (yoy, in EUR)*
* adjusted for M&A activities
Source: company data, Raiffeisen RESEARCH
Loans and deposits, change 2013/2012 (in EUR-terms)
UniCredit* RBI Erste SocGen KBC OTP Intesa
Country Loans Deposits Loans Deposits Loans Deposits Loans Deposits Loans Deposits Loans Deposits Loans Deposits
PL 5% 9% -7% -8% n.a. n.a.
HU -7% 3% -5% -16% -15% -12% -21% 3% -9% 3% -19% -11%
CZ 3% 6% -6% -9% -5% -5% -4% 3% -3% -1%SK 4% 1% 6% 8% 0% 12% 15% 10% 1% 0%SI -16% 4% -14% -15% -10% 11% -5% 13%
BG 5% 5% -12% -1% 0% 1% -9% -40% -2% 6%
RO 5% 12% 1% 15% -13% -2% -6% 13% 2% 27% 0% 17%HR 2% 2% -3% -6% 4% 6% -1% 1% 6% 2% -3% -2%
AL -6% -14% 1% 1% 0% 0%
RS -7% 1% -9% -2% -1% 21% 2% 7% 0% 12% -8% 0%ME -1% 0% 10% -9%
BH 3% 4% -3% 3% 0% 25%
KO 7% 8%
MK 15% 21%
BY 5% -3%
RU -3% -5% 3% 3% -4% 3% -2% -7% -8% -11%
UA -3% -8% 1% -2% -33% 0%MD 10% 21%
* CZ incl. SK
Source: company data, Raiffeisen RESEARCH
There is nothing unusual to add regarding the foreign banks’ segmental loans-to-
deposits profiles. Weak lending growth in large parts of CEE, continuous asset reductions and on top of all this depreciating currencies in 2013 – the latter par-ticularly weighing on the Czech Republic, Russia and Ukraine – have gradually pushed down overall CEE L/D ratios. We have been observing this trend more or less since 2010. The notable exceptions to this trend were the two Russian banks in our sample, which could not decouple from the rest in 2013 follow-ing the RUB correction at the end of last year. Also the absence of large-scale takeovers in the last 12 months has contributed to this trend on the individual CEE fragments. Nevertheless, we have detected some noteworthy developments during 2013 within particular banking groups: UniCredit managed to improve its L/D ratios across the region (with the exception of Russia, but even there the L/D ratio is below 100% and the lowest among all foreign banks in the market). Erste performed similarly including a massive loan contraction in Serbia and Romania which clearly stands out also in local interbank comparison. RBI’s indi-vidual L/Ds in CE countries grew on the back of deposit contractions, somewhat contrary to overall market trends. However, in Romania RBI scaled down the L/D Following the currency effect, L/D
balances improved further in 2013

72 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
ratio to 100% following strong deposit inflows. OTP’s core market meanwhile
shows L/D of less than 80% – cementing the comparative advantage of HUF liquidity. In contrast, Russia’s L/D ratio of 143% and Romania’s L/D ratio of more than 200% might call for some adjustments going forward. SocGen tapered L/Ds in a quite balanced way with less volatility observed on the level of subsidi-aries. Intesa together with KBC topped other foreign banks when it comes to loan volume reduction in Hungary (19% yoy vs. 5-15% for the main players) and has demonstrated above average deposit growth of 17% yoy in Romania. However, this has to be interpreted as a base effect.
NPL ratios are decelerating, though
still in an upward trend;
improvement only in Russia and/
or via exits (KBC, Commerzbank,
UniCredit)
75%
88%
92%
93%
95%
100%
106%
107%
109%
109%
119%
146%
0%20%40%60%80%100%120%140%160%180%200%
KBC
Santander
Erste
Intesa
UniCredit
Swedbank
SocGen
Sberbank
RBI
OTP
Commerzbank
VTB
2010 2011 2012 2013CEE: Loan-to-deposit ratios of regional segments (2010-2013)*
* adjusted for M&A activities
Source: company data, Raiffeisen RESEARCH
With regard to the screening of asset quality across foreign banks, we concede
that an interbank comparison is pretty much limited due to different NPL meth-odologies that are applied, so we rather focus on commenting on the trends for particular banks. Nevertheless, we dare to share the view that reported NPL ratios as of year-end 2013 to some extent display the banks’ risk profiles from the geographical point of view. This is evident when comparing, for example, OTP – which tops the ranking as market leader in Hungary, boasts a strong retail segment in Russia and also has a not to be underestimated SEE presence – to Rus-sian universal banks (Sberbank, VTB) or to pure CE specialists (KBC, Santander or Commerzbank), all with limited or no exposure to Hungary. In a dynamic comparison and excluding M&A activity, the data show increasing NPL ratios, albeit with a decelerating trend. The positive “effects” from market exits during the analyzed period are visible in particular at Swedbank, Commerzbank or KBC, but temporarily also at UniCredit after leaving Kazakhstan in 2012. At this stage we note that the depreciation of local currencies in CE as well as gradual asset optimization measures, especially observable in Hungary and Romania, also gave some boost to the reported NPL ratios in 2013.

73
Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
0%5%10%15%20%25%
Sberbank
Swedbank
VTB
KBC
Commerzbank
Santander
Intesa
UniCredit
SocGen*
RBI
Erste
OTP
2010 2011 2012 2013CEE: NPL ratios of international banks (2010-2013)
* NPLs of CZ, RO, RU
Source: company data, Raiffeisen RESEARCH
When looking at recently released data for 2013, the NPL ratio trend was rather
mixed with positive developments at those banking groups whose assets are almost exclusively focused on Russia, such as Sberbank and VTB, while moder-ately negative – as mentioned above on a decelerating trend – for those with a higher share of SEE exposure (Erste, RBI, UniCredit and OTP). In addition, OTP’s Russian retail specialized subsidiary delivered a sharp increase of NPLs in Q4 2013. The asset quality trend in Russia, improving at RBI as a corporate bank and stabilizing at SocGen as merely a retail bank, could not fully compensate for some pressure on other markets. In Hungary the banks finally reported a contrac-tion in nominal NPL volumes yoy overall, but still predominantly registered higher NPL ratios than in 2012 as the permanent de-risking depressed the asset base in the denominator. One of the exceptions was Intesa, which managed to reduce NPLs in Hungary more sharply than its competitors by neutralizing higher bad loans accumulation from the SEE segment (i.e. Croatia and Serbia, top-ranked in both countries). After signs of easing in Hungary, some improvement can be expected in Romania as well. Erste’s NPL volumes peaked in 2012, but a sharp 15% loan contraction in EUR-terms pushed up the NPL ratio further, while the rest including SocGen, RBI and OTP were facing additional nominal growth as of Q4 2013. The development in the Czech Republic was noteworthy, with all the Top 3 names – KBC, Erste and SocGen – reporting lower NPL volumes. KBC stood out positively by keeping its CEE NPL ratio below the level of 2012 despite the sharp CZK depreciation.
Over the last 12 months there have been no large M&A transactions in the CEE
region. Aside from deal closings in Kazakhstan by UniCredit and in Ukraine by Erste, the transaction which we would like to highlight is the agreement signed between Rabobank and BNP Paribas for the sale of Rabobank’s subsidiary in Poland. With this coup BNP Paribas is now ranked among the Top 15 foreign banks in the region with assets of EUR 16 bn. Signs of easing in Hungary, Romania
and Slovenia
M&A transactions

74 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
CEE: Finalized and ongoing transactions
Country TargetTotal assets
(EUR bn)Comment
PolandBank BGZ 8.6BNP Paribas has acquired the majority in the bank that has specialized in agriculture from Dutch
Rabobank. The purchase price was EUR 1 bn or ~1.2x BV.
Santander Consumer
Bank2.1Bank Zachodni WBK agreed to acquire 60% of Santander's subsidiary via a share exchange with
the latter. The deal was priced at EUR 512 mn or 1.75x BV.
Nordea Bank Polska S.A. 7.9PKO BP acquired Nordea´s Polish business for approx. EUR 620 mn. The deal was closed in April
2014.
Czech Rep. / Slovakia
UniCredit (CZ/SK) 4.0UniCredit Bank Czech Republic and UniCredit Bank Slovakia merged at the end of 2013 in order
to gain synergies.
Bulgaria MKB Unionbank 0.8 Bulgarian First Investment Bank acquired 100% of the shares of MKB Unionbank for EUR 50 mn.
RomaniaRBS retail operations 0.3 UniCredit took over the retail & private banking portfolio of RBS in Romania in spring 2013.
RIB 0.1 Getin Holding bought the bank from two individuals in late 2013.
Nextebank 0.2Three investment funds managed by Axxess Capital bought Nextebank from MKB (which is owned
by BayernLB) in December 2013.
Citibank operations 0.1Raiffeisen Bank Romania acquried the retail loan book of EUR 90 mn as well as deposits/Asset
under Management in Q1 2013.
SerbiaKBC Banka 0.1Mobile operator Telenor bought 100% of the shares, while the local SocGen subsidiary took over
the loan portfolio.
AIK Banka 1.3Miodrag Kostic increased his holding to 50.4% from 36% via a takeover bid in February 2014 at
a price of approx. 0.3x BV.
Croatia Banco Popolare 0.3OTP Banka Hrvatska has acquired 100% of Banco popolare Croatia at a price of EUR 13 mn, or
at a takeover multiple of 0.3x BV. The purchase agreement was signed in January 2014.
Bosnia a. H.Balkan Investment Bank n.a.The Government of the Republic of Serbia acquired the Balkan Investment Bank AD Banja Luka for
EUR 15 mn.
UkraineJSC Astra Bank 0.2 Alpha Bank sold its small Ukrainian subsidiary to Delta Bank in September 2013 for EUR 82 mn.
Pravex-Bank 0.4In January 2014 Intesa Sanpaolo signed an agreement for the sale of 100% of its Ukrainian
subsidiary Pravex-Bank.
JSC Swedbank 0.5Swedbank finalized the sale of its Ukrainian operations in Q2 2013. Swedbank´s subsidiary JSC
Swedbank was sold to Mykola Lagun, the majority owner of Delta Bank in Ukraine.
Russia/other CEERosbank 19.7In April 2014, SocGen acquired 7% of Rosbank's share capital from Interros group, raising its
stake to 99.4%. Previously in Q4 2013, SocGen had already raised its stake in Rosbank by 10pp to 92.4%.
ATF Bank 3.8 In April 2013 UniCredit disposed of ATF Bank in Kazakhstan.
VTB Bank 195A consortium including China Construction Bank Corporation bought a 13.8% stake in VTB Bank
for ~EUR 1.8 bn.
Bank Petrocommerce 5.3Otkritie Financial Corporation JSC acquired a 95% stake in the bank from Financial Group IFD
Capital for EUR 422 mn.
GE Money Bank (Russia) 0.6 Sovcombank purchased GE Money Bank from DRB Holdings BV.
Source: banks, press articles, Bloomberg, Raiffeisen RESEARCH
Apart from this, an acceleration of the departures from Ukraine (Alpha Bank,
Intesa and UniCredit – still in progress) was observed. For one thing, the less eventful M&A market can open up some room for a pick-up in takeover activity in the near future. Namely, in some countries the pipeline of possible deals is getting larger for various reasons: Firstly, the Romanian banking sector benefits from positive macro, regulatory and asset quality momentum and some small- and medium-sized banks might consider a country exit. Secondly, Poland is still considered to have remarkable growth potential and is hence of interest for large international banks. Thirdly, in Hungary the banking sector might enter a consolidation phase, which is partially driven by the government’s intention to increase the local ownership in the sector. Here due to a lack of deals since the crisis the question is at what multiples the local top-ranked banks are disposed of in light of the uncertainty regarding actions to be taken by the regulator/the government, the heavy losses that have been digested since 2009 but with an improving macro outlook. Departures from Ukraine (Alpha,
Intesa, potentially UniCredit) and
one mid-field deal in Poland are the
highlights in the last 12 months

75
Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
CEE: Potential takeover candidates
CountryTarget Total assets
(EUR bn)Comment
PolandBank Millennium 13.8 The bank appears to be the takeover candidate in the mid-term; dependent on the repayment of
state aid and the outcome of the AQR at its parent BCP.
Alior Bank 6.2 After the IPO in late 2012, a 36% stake held by Carlo Tassara Group should be sold to a strategic
investor. The deadline set by the regulator was extended to year-end 2014.
Bank BPH 8.0 Subsidiary of GE Money Bank. Getin Noble Bank 15.4 Owned by Leszek Czarnecki, no rumors at all currently, rather long-term takeover target.
PKO BP 55.5 Government is expected to dilute its current 31% stake further, very speculative long-term target.
mBank 24.2 Despite CoBa's committment to Poland, mBank appears as an ongoing speculative long-term
target, very much depending on its parent bank's standing.
HungaryMKB Bank 6.6 Bayerische Landesbank plans to sell Hungarian MKB Bank by the EU´s deadline of 2015. Accor-
ding to local media, OTP is being connected with a potential acquisition.
Raiffeisen Bank Hungary 6.2 Hungary does not belong to RBI‘s focus markets. The sale of the Hungarian subsidiary is no longer
on the agenda.
RomaniaBanca Transilvania 7.2 10% owned by the Bank of Cyprus; 15% owned by EBRD; these stakes might be sold through
accelerated private placements.
Intesa Sanpaolo Romania 0.9 The Italian group said that it would rethink its strategy for some markets, including Romania, where
it lacked scale.
Banca Carpatica 0.9 The management is seeking shareholders´ approval for a merger with the Romanian subsidiary of
a foreign group which might be willing to leave the market.
Marfin Bank 0.6 The bank is owned by the Cyprus Popular Bank and is expected to be sold given an agreement
with the EC.
Volksbank Romania S.A. 3.1 According to the agreement with the EC, the Romanian subsidiary should be sold by the end of
2015; according to rumors, Rothschild has been mandated as advisor.
BCR 15.8 SIF Oltenia is still expected to sell its 6% minority stake to Erste Group but apparently negotiations
are on hold for the moment.
Millennium Bank S.A. 0.6 The Portuguese group has reached an agreement with the EC to divest its Romanian subsidiary by
June 2015.
Bancpost 2.5 With its parent, EFG, being the sole big bank nationalized by the Greek state, Bancpost is a likely
candidate to be sold.
SerbiaAIK Banka 1.3 A 20% stake changed hands from ATE to Piraeus Bank; the bank did not sell the shares to Miodrag
Kostic.
Komercijalna Banka 3.2 Country's No. 2 in size, EBRD holding 25% and the state 42%, strong retail network, rather a
long-term target.
CroatiaHPB 2.3 The government has rejected two bids from Erste and OTP priced at 0.7x BV and 0.6x BV respec-
tively.
SloveniaNLB Group 12.5 After being nationalized and recapitalized in 2013, NLB is part of the privatization strategy. No
precise time frame has been set yet, currently the transfer of bad loans to the bad bank established in Slovenia is on the agenda.
NKBM 5.0 After being nationalized and recapitalized in 2013, NKBM is part of the privatization strategy.
The government plans to proceed with the sale of a majority stake earlier than at NLB. The transfer of bad loans to the bad bank established in Slovenia is open.
Banka Celje 1.8 According to local media, the bank should be merged with visibly larger Abanka Vipa in 2014.
Russia/
other CEEBanca Intesa (Russia) 1.5 Intesa Sanpaolo considers its rather small Russian subsidiary as non-core, therefore a divestment
cannot be ruled out in the long run.
Raiffeisen Bank Aval
(Ukraine)4.3 Ukraine does not belong to RBI‘s focus markets. Prior to the crisis outbreak, RBI was in talks to
dispose of its Ukrainian subsidiary. This plan is on hold.
OAO Swedbank 0.2 Since Q1 2013 Swedbank´s rather small Russian subsidiary has been classified as held for sale.
UniCredit (Ukraine) 3.8 UniCredit announced first the merger of its two subsidiaries Ukrsotsbank and UniCredit Bank and
later their intention to exit.
OthersHypo Group Alpe Adria
(SEE assets)7.3 The Austrian government is still considering the option of selling HGAA's SEE subsidiaries (largest
entities in RS and HR) separately from the parent bank in Austria.
Source: banks, press articles, Bloomberg, Raiffeisen RESEARCH
From the individual banks’ perspective, we understand that everything that is
not clearly defined as a core segment (see the section with bank descriptions for more details) could potentially be subject to disposal. This is also true for several SEE markets including Slovenia, but with the exception of a few banks who are still benefitting from leading positions in Croatia, Serbia (Intesa, UniCredit) or Romania.

76 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
Profitability
Aggregated proportional profit before tax of the nine selected banks remained
broadly stable after a moderate decline in 2012 despite a continuous slowdown in revenue generation (-3% yoy in 2013 vs. -4% in 2012, characterized by weak loan growth and downward key rate moves in CE). Support in this area came from slightly higher cost reductions compared to 2012 and a moderate easing in the provisioning cycle. In relation to underlying CEE segmental assets, the aggregated RoA before tax improved negligibly by 2bp to 1.06% compared to 2012, which could be partially a consequence of depreciating local currencies (end of period yoy RUB -12%, CZK -9%, UAH -7%, PLN -2%, HUF -1%, RON 0%) and the ensuing deflating impact on the reported assets in EUR-terms. In general we have observed that among the banks with a wide CEE presence, those with a balanced local exposure as well as above-average revenue streams from Russia (namely RBI and SocGen) reported the most resilient CEE segment financials yoy in 2013. It is also worth mentioning that Erste managed to offset a revenue downturn in CEE via a turnaround in Romania (both expenses were cut and provisioning was lowered) and a visible cost decline in the Czech Republic. UniCredit seems not to have faced the same magnitude of revenue pressure like Erste, presumably due to Russia and partially SEE, but offset higher impair-ments across CEE thanks to strong cost control in most of the countries. Although purely CE-focused, KBC posted satisfactory profitability in 2013, supported by a reported above-average performance in its main market of the Czech Republic. Santander posted the strongest RoA increase in yoy terms, but here the base ef-fect after extraordinary provisioning in 2012 played a certain role. It should be noted that Intesa, being still in the red, managed to reduce the segmental loss on the back of P&L recovery in Hungary and Ukraine, despite facing weakness in Croatia and Romania. OTP, following a significant deterioration in Russia and Serbia which overshadowed the rebound on its core market of Hungary, ended the year 2013 with the highest RoA before tax among foreign banks.
KBC, RBI and UniCredit with better
RoA vs. 2010
-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%
UniCredit*
RBI
KBC
Erste
OTP
Santander
Commerzbank**
SocGen***
Intesa****
2010 2011 2012 2013CEE: Pre-tax RoA in the region (proportional, 2010-2013, %)
* Baltics, Kazakhstan and Ukraine not included in 2013, ** considering only mBank, *** calculation includes CZ, RO,
RU, **** excl. Ukraine in 2013; Source: company data; Raiffeisen RESEARCHPre-tax RoA broadly stable
compared to 2012, but helped by
deflating impact on assets from
currencies
From the longer-established banks in CEE, based on our calculations, only RBI
(due to Russian momentum), KBC (exits from Poland, Bulgaria, Slovenia and Ser-bia) and UniCredit (departure from the Baltics and Kazakhstan, more conserva-tive approach in Hungary and thanks to Russia and Poland) showed higher RoAs before tax in 2013 than in 2010. While SocGen’s performance was stable dur-ing the last four years, Intesa still brings up the rear on the back of late/delayed clean-ups in Hungary, Romania and Ukraine when compared to the actions of its main foreign peers in the region.

77
Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
Revenues development
Relative to the underlying assets allocated in CEE, we observed that core rev-
enues (calculated as the sum of net interest income and net fee and commission income) of the sample of nine selected foreign banks have been showing a declining trend since 2010, with an acceleration of the trend taking place espe-cially over the last two years. When looking at individual banks’ performances, there are multiple reasons for such a development, ranging from dynamic ex-ternal factors to key rates, underlying growth, the competitive environment and the banks’ specific issues such as disposals or acquisitions, strategies, funding profiles or capital endowment. From a static point of view the revenues and as-sets overview for 2013, irrespective of any possible accounting/reporting differ-ences, might be taken as an indicator for the CEE allocation. For instance, OTP shows the highest ratio by far, with a visible gap to the second best RBI, given its dominant asset and revenue contribution from Hungary and Russia. In contrast, Commerzbank ranks at the low-end with a ratio of below 3% due to the bank’s almost exclusive focus on Poland. Net interest income significantly
driven by key rate cuts in Poland, the Czech Republic, Hungary and Romania
0%1%2%3%4%5%6%7%8%
UniCredit*
RBI
KBC
Erste
OTP
Santander
Commerzbank***
SocGen
Intesa**
2010 2011 2012 2013CEE: Revenues per assets in the region (2010-2013, %)
* Baltics, Kazakhstan and Ukraine not included in 2013, ** excl. Ukraine in 2013, *** in 2012, 2013 only contribution
of mBank / BRE Bank; Source: company data; Raiffeisen RESEARCH
In a dynamic analysis, we sum up our main findings that the most severe decline
of revenues/assets in the period 2010-2013 was observed by banks which ac-quired less revenue-rich assets such as Santander with the Kredyt Bank takeover in 2011. Also banks with above-average exposure to the sharpest key rates cuts, such as UniCredit (Poland and Czech Republic), Erste (Czech Republic), Santander and Commerzbank (Poland), and banks which pulled out from high interest rate countries like Commerzbank after selling Bank Forum (Ukraine) did see a severe decline of their revenues/assets. Only RBI and OTP managed to achieve revenue/asset ratios comparable to those in 2010 which is, in our view, the result of a strong CIS/Russia momentum, while OTP has additionally highly benefitted from its extraordinary position on its Hungarian home market. To that group we can also add Intesa and KBC, both with quite a robust performance over the last four years: Intesa on the back of the highest share of SEE allocation among foreign banks including Top 3 positions in Croatia and Serbia albeit with below-average exposure to downward rate movements (no presence in the Czech Republic and Poland); KBC, as an almost pure CE player, rubbing hands after leaving Poland in 2011, which has undoubtedly reduced the downward margin pressure on group revenues, while also departing from non-core countries that generate lower revenues (Serbia, Bulgaria and Slovenia).Core revenues on assets still
declining since 2010
Intesa, KBC, RBI and OTP with
comparable performance to 2010

78 Please note the risk notifications and ex planations at the end of this documentMarket players in CEE
0.0%0.5%1.0%1.5%2.0%2.5%3.0%
UniCredit*
RBI
KBC
Erste
OTP
Santander
Commerzbank****
SocGen***
Intesa**
2010 2011 2012 2013CEE: Provisioning per assets in the region (2010-2013, %)
* Baltics, Kazakhstan and Ukraine not included in 2013, ** excl. Ukraine in 2013, *** calculation includes CZ, RO, RU
**** in 2012, 2013 only contribution of mBank / BRE Bank; Source: company data; Raiffeisen RESEARCHRisk provisioning development
The dynamics of relative provisioning look more volatile compared to revenue
streams over the last four years, obviously as the managerial influence on that line is somewhat higher. The reported data show that provisioning/assets ratios for the majority of banks were predominantly fuelled by Hungary and Ukraine in 2010/11, while more differentiation among banks was observed in 2012/13 (Romania, Slovenia and Russia were catching up, while no real easing was felt in CE). Nevertheless, in nominal terms segmental provisioning eased by 5% yoy (-3% in 2012), but the decline was determined by a few positive cases. One of them was Erste, a clear outlier in 2013 after facing peaks in the Czech Republic (2010), Hungary (2011) and Romania (2012). In addition, Erste boasted no CIS exposure and a below-average share of business in SEE. Somewhat similar was the performance of Santander after extraordinary provisioning in Poland in 2012. However, the majority of peers faced growing balances of impairments and assets. In some cases we understand this as precautionary measures for the upcoming ECB AQRs and/or as a reaction to higher requirements from local regulators. For example this applies to UniCredit which had a “late provisioning hike” in Romania, a significant pick-up in Croatia and Russia. SocGen showed a similar performance to UniCredit, but already saw the second year in a row of material provisioning in Romania. For OTP, it should be noted that the Russian segment with a size of less than one third of its Hungarian core operations trig-gered more than two times higher impairments in 2013, keeping the bank at the top of the provisioning/assets ranking. Preparing for upcoming AQRs in
some cases
Provisioning relative to assets visibly
lower than in 2010 in most cases /
Intesa (SEE) and OTP (Hungary, SEE,
Russia) still with the highest ratios in
the peer group The worst seems over in Hungary,
Romania and Slovenia
Since 2010, RBI’s performance has been one of the least volatile with some
recent challenges from Russia, Ukraine and Slovenia which have been compen-sated for by the positive tendencies in Hungary and Poland. Interestingly, Intesa’s CEE provisioning was growing until 2012 due to somewhat delayed clean-ups in Hungary and Ukraine (both only in 2012). However, the ongoing weakness in Croatia, where Intesa is the second largest bank, did not leave too much room for improvement in 2013. Also, similar to revenues, assets disposals/acquisitions had an impact on the ratio with the most prominent case of Kredyt Bank in Poland which was positive for the seller KBC and negative for the new owner Santander. According to 2013 figures, OTP unsurprisingly leads the ranking on the back of above-average combined allocation in Hungary and Russia, but with a clearly narrowing gap to the second-ranked Intesa. Erste and RBI are in the middle of the provisioning league table despite the former’s sharply positive momentum in

79
Please note the risk notifications and ex planations at the end of this documentthe last three years. Although there is evidence of increasing macro risks, Russia
is still not perceived as a “high-credit-risk market” among foreign market par-ticipants from an asset quality perspective, especially for those banks where the corporate segment prevails.
Branch network
In 2013, the aggregate number of branches in the region decreased by 4% yoy, which equals the decrease in 2012. The only bank that expanded its branch net-work was OTP with more than 50 new branch openings in Russia. In this report we give an overview on the historical evolution of branch networks by compar-ing the available data from 2013 and 2008. For this purpose we analyzed the branch development of almost all relevant foreign players (excluding ING and Citibank, due to limited public data quality). It is evident that the networks of foreign banks have visibly narrowed over the last five years. We calculated with a net decline of about 15% since year-end 2008 (M&A deals between selected banks have been considered). The overall reasons are various but most prominent, in our view, certainly are M&A-driven changes as well as any kind of harsh restructuring steps like those undertaken (or which are still in the process of being implemented) by banks in Hungary, Romania and Ukraine. Our findings on individual banking groups suggest that KBC and EFG (thanks to their exits from Poland/CIS) as well as Commerzbank and Swedbank (through exits from Ukraine) have reduced their respective network presences in the magnitude of 45-65%. Intesa can also be put in this group after the bank signed the agreement to sell its Ukrainian subsidiary with a wide network, thereby cutting almost a third of the total number of its branches. UniCredit and Erste have not disposed of any of their respective “branch-rich” subsidiaries – although UniCredit’s exit from Kazakhstan is debatable – and therefore show only a modest down-scaling of -16% and -11% respectively compared to 2008. OTP and RBI show “just” a single-digit branch network scale-down which is a result of gradual optimization in Ukraine, expansion in Russia (OTP) and an acquisition in Poland (RBI with its Polbank deal).

80 Please note the risk notifications and ex planations at the end of this document2013PL HU CZ SK SI EE LV LT BG RO HR AL RS ME BH KO MK BY RU UA* KZ MD GENo. of
countriesNo. of
outlets 2013
Sberbank 38 22 41 12 32 27 26 35 17734 205 137 11 18309
RBI 370 122 129 165 16 168 530 76 104 85 98 54 100 195 798 1 1 17 3012
UniCredit 1002 100 111 73 35 199 187 130 74 124 105 402 12 2542
SocGen 478 398 58 150 900 118 43 101 20 29 630 60 34 13 3019
Erste 135 653 292 563 150 68 6 1861
Intesa 95 239 52 76 203 31 192 51 69 260 10 1268
OTP 382 68 378 84 102 51 29 200 140 9 1434
VTB 156 1378 121 22 16 5 1693
Santander 830 1 830
KBC 219 256 121 50 4 646
EFG190 211 107 54 4 562
NBG 210 115 27 109 64 5 525
Alpha Bank86 149 42 101 18 5 396
Commerzbank 225 7 26 9 4 5 271
Swedbank 50 54 77 2 4 183
… Number of branches per country …only leasing
branchesCEE: Market presence and networks of international banks
* of which located on Crimea: RBI 32, UniCredit 20, Sberbank 14, OTP 8, Intesa 6, EFG 2, VTB n.a.
Source: company data, www.securities.com, Raiffeisen RESEARCH
-70%-60%-50%-40%-30%-20%-10%0%
SocGen
RBIOTP
Erste
UniCreditNBG
Intesa
Alpha Bank
EFG Eurobank
KBCCommerzbank
SwedbankCEE: Branch network change (2013 vs. 2008, %)
Source: company data, www.securities.com, Raiffeisen RESEARCH

81
Please note the risk notifications and ex planations at the end of this documentRaiffeisen Bank International
The management of Raiffeisen Bank International (RBI) has undertaken a strategy
review. It has changed its approach from a full commitment to the whole CEE region with restructuring in individual problematic countries (i.e. Hungary and Slovenia) towards a more specific country focus on Russia, Poland, the Czech Re-public, Slovakia, Romania and Austria. RBI intends to allocate additional capital to these focus markets in order to more efficiently explore the growth opportuni-ties they offer. In other countries, RBI’s management is aiming for stable overall business development. A significant strengthening of RBI’s capital position by means of a capital increase of about EUR 2.8 bn took place in Q1 2014. The proceeds are earmarked to redeem private and state participation capital, which is currently being negotiated with the Republic of Austria.
Despite recent tensions between the EU and Russia, RBI’s management confirmed
that Russia would remain among its six focus markets and that it continued to target a solid position in corporate lending and a growing share in retail banking there. RBI’s loan book contracted by 3.2% in 2013, due above all to continued weak corporate credit demand (mainly in Russia, Bulgaria, the Czech Republic and Hungary), as opposed to retail loan growth especially in Russia, Slovakia and Romania. In 2014, the bank aims to increase the overall loan volume and expects a net provisioning requirement at around the same level as in the previ-ous year (excl. possible impacts from the ECB AQR and a potential additional provisioning requirement in Ukraine, which in the case of a currency devaluation of about 40% the management has flagged at around EUR 200 mn in additional risk costs as of April 2014). A reduction of the cost base remains one of the management’s key initiatives and is aimed at a total cost savings target of EUR 460 mn, which translates into a flat cost base in 2016 as compared to 2012.
Erste Group
Management attention of Erste in CEE was on restructuring of the group’s Roma-nian and Hungarian operations. In Romania operations returned to profitability in 2013 driven by significantly lower risk provisioning and lower operating ex-penses following a 17% headcount reduction and the closure of 60 branches of BCR. For 2014 the management of BCR targets a 15-20% reduction of its NPL stock and expects to deliver the full cost benefits of the restructuring program. Also in Hungary Erste continued its restructuring exercise, however, its FY result 2013 remained deeply in the red (EUR -84 mn) impacted by bank taxes (incl. extra FTT) of EUR 103 mn and a fine by the Competition Authority affecting all banks. Management continues to express interest in closing the main gap of Erste’s regional footprint in CEE (Poland) and in M&A opportunities that might arise in connection with the ECB AQR. In 2013 Erste filed an indicative bid in the priva-tisation of Croatian HPB with the intention to increase its HRK deposit base (the privatisation was cancelled). Erste conducted a capital increase of EUR 661 mn in July 2013 and has fully repaid the participation capital of EUR 1.76 bn. Man-agement expects overall stable customer loans on group level (+/-2% yoy) and aims to keep the operating profit (before risk costs) flat yoy. In the light of the up-coming ECB AQR, Erste does not expect a decline in risk costs beyond 5% yoy.Raiffeisen Bank International
2013
in EUR mn Loans Deposits Pre-tax
profit
Poland 9,744 7,280 54
Russia 9,967 9,924 615Slovakia 6,879 7,320 134Czech Rep. 5,983 5,757 51
Hungary 4,990 4,163 -110
Romania 4,266 4,344 104Ukraine 3,599 2,433 127
Croatia 3,436 2,863 56
Bulgaria 2,526 2,133 -18Bosnia a. H. 1,223 1,567 29Slovenia 1,051 423 -63
Serbia 1,105 1,119 54
Albania 916 1,758 35Belarus 910 842 87
Kosovo 458 558 18
Source: company data, Raiffeisen RESEARCHMarket players in CEE
Erste Group
2013
in EUR mn Loans Deposits Pre-tax
profit
Czech Rep. 18,503 26,492 750Romania 10,453 8,387 15Slovakia 7,513 9,091 239
Croatia 6,776 4,604 35
Hungary 5,465 4,093 73Serbia 562 601 10
Source: company data, Raiffeisen RESEARCH

82 Please note the risk notifications and ex planations at the end of this documentOTP
OTP did not change the setup of its CEE presence in 2013. However, the manage-
ment has the clear target to strengthen its position in the region and in its home market via acquisitions. The capitalization of the bank (Core Tier 1 ratio of 16.0%) provides room for that. This was evidenced by OTP filing an indicative bid for the Croatian Postbank HPB (however, the privatisation was cancelled) and showing interest in further targets in the region. In January 2014 OTP announced a small transaction in Croatia acquiring the local banking arm of Italy’s Banco Populare (total assets of ca. EUR 300 mn, 35 branches). Also the bank is rumoured to have set its sights at the Hungarian subsidiary of Bayerische Landesbank MKB, which would strengthen the corporate business in OTP’s home market. All in all, OTP reported a 1% contraction of its loan book in HUF terms adjusted for FX effects. Consumer lending in Russia was again the most expansionary segment, however weakening portfolio quality over several quarters prompted the management to re-view its local strategy and hence significantly reduce its growth targets. Local man-agement targets to gradually shift Russian operations from a POS/consumer credit-focused bank towards universal banking by launching online banking, enhancing cross-sale activity and starting SME lending. OTP’s Hungarian loan book was still contracting by 7% in 2013 driven by further erosion in the mortgage book. For 2014 OTP expects to be able to start increasing its loan volume (FX adjusted) on group level and reckons with stable net interest margins. Management expects further stabilization of the portfolio quality and anticipates declining risk costs.
UniCredit
Following 2011, except in Poland, UniCredit completed another wave of large-scale impairments on its CEE goodwill position. However, this time the remaining amount of EUR 2.2 bn was fully written off (only at Bank Austria level as the CEE hub). With additional provisioning for underlying business of EUR 300 mn, Uni-Credit has raised its segmental NPL coverage to 51% as a part of precautionary measures against unforeseen risks from the upcoming AQR, while deliberately taking a hit on segmental profit as opposed to 2012. Nonetheless, several one-offs helped to ease the pressure on asset quality and thus facilitate a marginal net profit fall from EUR 1.77 bn to EUR 1.66 bn. Such important, non-recurring effects were provided by the sale of stakes in the Moscow Stock Exchange and Yapi Kredi Sig-orta in Turkey. Bearing in mind the current interest rate trend in Poland, the Czech Republic, Hungary and Romania, a solid core revenue growth also contributed to this mitigating effect. At the same time, by wiping the slate clean of legacies from the past in Q4 2013, UniCredit’s CEO presented the group’s new 2020 strategy, which foresees a return to a growth course in CEE, especially in so-called “expan-sion countries”. The wording points clearly to a strategic change with a move away from the “savings/restructuring bias” of the last five years, which delivered the respectable 10% cost decline achieved on FTEs reduction (Kazakhstan disposal included). As far as the Baltics are concerned, UniCredit has shut down its banking business and from mid-2014 onwards will only offer leasing products. The opera-tions in Ukraine are considered as being “for sale” but as yet no immediate steps appear realistic. Following the active role in local acquisitions of the major peers PKO BP and BZ WBK in Poland, UniCredit should become slightly more concrete, as it is well equipped with a CT1 of almost 19%. Of its individual subsidiaries, Rus-sia delivered the highest yoy growth (+27%), which to a large extent was driven by non-recurring income from asset sales in Q4 2013, while Croatia, Hungary (still no red figures!) and Romania posted the weakest yoy trends with the latter entering the loss zone following the material clean-up of the loan book. On top, the loss in Slovenia, which is a country of relatively low importance for UniCredit, tripled in a yoy comparison.Market players in CEE
UniCredit
2013
in EUR mn Loans Deposits Pre-tax
profit
Poland 25,089 28,916 817Russia 12,049 12,796 706
Croatia 9,518 8,463 105
Czech Rep.
+ Slovakia10,563 12,736 151
Bulgaria 4,613 4,428 100
Romania 3,771 3,487 -6
Hungary 3,065 3,620 27
Slovenia 1,895 1,283 -53Bosnia a. H. 1,526 1,665 42Serbia 1,266 907 31
Ukraine 2,452 1,829 -123
Source: company data, Raiffeisen RESEARCHOTP
2013
in EUR mn Loans Deposits Pre-tax
profit
Hungary 10,246 13,180 486
Bulgaria 3,843 3,561 114Russia 2,813 1,873 12
Ukraine 2,250 813 38
Romania 1,376 677 -14Croatia 1,280 1,422 9Slovakia 1,147 1,123 5
Montenegro 554 493 3
Serbia 309 147 -45
Source: company data, Raiffeisen RESEARCH

83
Please note the risk notifications and ex planations at the end of this documentSociété Générale
2013
in EUR mn Loans Deposits Operat.
income
Czech Rep. 17,967 23,731 575
Russia 14,562 8,562 260Romania 7,500 8,093 -145
Slovenia 2,050 1,712 n.a.
Croatia* 2,244 2,078 130Poland 2,200 n.a. n.a.Bulgaria* 1,511 1,162 n.a.
Serbia 1,405 1,056 n.a.
Montenegro* 242 208 n.a.Albania 245 372 n.a.Georgia* 216 180 n.a.
Macedonia* 253 335 n.a.
Moldova 160 167 n.a.
* as of 31.12.2012
Source: company data, Raiffeisen RESEARCHSociété Générale
One can sum up 2013 for SocGen’s core CEE operations in the Czech Republic,
Russia and Romania (which together account for 81% of SocGen’s total CEE assets) with one word for each country: stability, reorganization and clean-up. Despite facing headwinds in 2013 owing to lower key rates and moderate loan growth, which weighed down both net interest margin and net fee and commis-sion income, in the Czech Republic Komerèní banka managed to counter both effects by keeping the profitability decline at an acceptable -10% yoy. This was achieved thanks to effective cost control and lower risk costs, which benefitted from a positive NPL trend of 3.8% as at year-end. With CT1 of 15.8% and an L/D ratio of 73%, Komerèní banka ranks among the most defensive banks in the region. In Russia, where SocGen is the No. 1 foreign bank in terms of as-sets, 2013 was a year of further consolidation for its three entities under the Rosbank umbrella. According to SocGen, consolidated combined annual earn-ings rebounded by 83% yoy (excluding goodwill impairment of EUR 250 mn in 2012) although this was driven by non-recurring asset sales income in Q4 2013 and burdened by increasing risk costs, which related mainly to inherited corporate cases. The improvement in the funding balance at Rosbank on a stand-alone base is worth mentioning (L/D ratio fell by 10pp to 115%). However, the L/D ratio on a consolidated level is still at 170%, i.e. relatively stretched. In its Romanian subsidiary, BRD-GSG, SocGen has been facing twin pressure from lower key rates and to some degree from the National Bank of Romania’s recom-mendation to improve NPL coverage. In 2013, BRD-GSG decided to undertake a thorough clean-up of its loan book, reporting a record loss of EUR 85 mn (follow-ing a loss of EUR 71 mn in 2012). Conversely, it lifted the NPL coverage to 69%, which opens up room for an earnings recovery (11% RoE is expected in 2014). This said, BRD-GSG remains one of the most attractive banks in terms of valua-tion among the listed banks in Romania and the region. As far as the remaining markets are concerned, SocGen’s limited presence in Poland, as well as in the SEE sub-region remains of note. At this stage, there are no indications from the French bank that this picture will change in the foreseeable future.
(Banco) Santander
The Spanish (Banco) Santander, the “newcomer” in the region (and at this point only present in Poland with two separate banks) is still a small CEE foreign player in terms of assets, but quite a dynamic one with regard to its business integration, development of underlying operations and appetite for acquisitions. Santander’s CEE adventure started in late 2010 with the purchase of the Polish corporate lender Bank Zachodni WBK. A year later, the purchase of Kredyt Bank, former KBC’s FX mortgage lender, followed. The operational merger of the two institu-tions started in Q1 2013 and management expects to be able to begin reaping the benefits of revenue synergies in Q3 2014. By then cross-selling as the op-erational tie-up should be largely completed. By year-end 2013, the number of employees had been reduced by 2,000 and 60 branches closed (as compared to the levels at year-end 2011). The material lowering of funding costs in 2013 helped to boost the NIM by 10bp as compared to the peers’ average NIM de-cline of about 40bp. Parallel to the integration of Kredyt Bank, the consolidation of Santander Consumer Bank (SCB, former Consumer Bank Polska) is scheduled for Q3 2014. This is another Santander entity that specializes in consumer lend-ing with around 15% of BZ WBK’s asset size and somewhat better profitability owing to a higher margin product range. According to Santander’s manage-ment, unlike Kredyt Bank, there will be no merger between SCB and BZ WBK due to a lack of synergies, as both banks will maintain a different business ap-proach with virtually no network overlap. Last, but not least, BZ WBK will transfer Market players in CEE
(Banco) Santander
2013
in EUR mn Loans Deposit Pre-tax
profit
Bank Zachodni
WBK/ PL16,214 18,503 557
Santander Con-
sumer Bank*3,196 1,688 108
* net profit
Source: company data, Raiffeisen RESEARCH

84 Please note the risk notifications and ex planations at the end of this documentits (locally quite well-known) asset management operations to Santander and
will concentrate on funds distribution in Poland. The management has recently reiterated its intention to generate a RoE of at least 20% from 2016 onwards and, in spite of losing the race for BGZ’s assets to BNP Paribas in late 2013, has expressed further interest in local acquisitions with the aim of raising its current market share from about 10% to 15%. In 2013, Poland already delivered 6% of Santander’s total group earnings thus equalling the contributions from the bank’s activities in Germany.
Commerzbank
Commerzbank has benefitted from the earlier sale of its minority stake in the Rus-sian Promsvyazbank in 2011 and disposing of its majority holding in the Ukrain-ian Bank Forum in 2012, which in the meantime has been put under state control. By far its most important subsidiary is located in Poland and Commerzbank can be quite upbeat when looking at the underlying performance of mBank in 2013, which prior to rebranding was known as BRE Bank. In a nutshell, during 2013 mBank’s profitability outstripped that of its main peers. This performance was mainly based on its NIM of -20bp, which was visibly stronger than the sector’s -40bp. This was achieved on the back of more resilient lending yields, thanks to one of the most aggressive approaches to higher margin consumer lending. In addition, mBank’s robust F&CI growth of +6% clearly outperformed the average -1% decline of its main competitors. Despite some risk cost volatility throughout 2013, the full year result was slightly higher yoy and, unlike that at some other banks, did not contribute positively to profitability growth. As far as funding is concerned, mBank has mainly been enjoying parental funding for its FX mort-gage segment for quite some time. However, since 2008 it has gradually delev-eraged via deposit generation and bond issuances, thereby reducing the share of parental funding in total funding from 47% to about 32% in 2013. Starting in 2014, mBank will use its mortgage bank platform to tap into the covered bonds market. For 2014 the management is optimistic about attaining growth potential at a lower double-digit rate and aims to emulate the 2013 results, which can be considered as a conservative goal. mBank’s retail subsidiaries in the Czech Re-public and Slovakia also both performed well in 2013, but still only provided a moderate contribution to the overall results. Interestingly, the Commerzbank CEO has recently been quoted as mentioning expansion outside Germany. However, he did not specify the CEE region as a target market.Market players in CEE
Commerzbank
2013
in EUR mn Loans Deposit Pre-tax
profit
Poland 17,036 14,527 318
Czech Rep.* 691 565 23Hungary*** 560 342 n.a.Russia** 526 266 n.a.
Slovakia* 26 136 1
* as of 31.12.2012
** as of 30.9.2012*** as of 31.12.2011Source: company data, Raiffeisen RESEARCH

85
Please note the risk notifications and ex planations at the end of this documentKBC
In 2013, KBC continued to divest in line with its strategy of reducing group as-
sets and entities in CEE. At the beginning of the year, KBC implemented a new business unit structure, defining the Czech Republic as its core market in CEE. Having completed the sale of KBC Banka, its rather small Serbian subsidiary, in December 2013 KBC downsized its presence to the Czech Republic, Slovakia, Hungary and Bulgaria, which are considered to be its core operations. The loan book and deposits stock in the Czech Republic grew by 6% and 4% yoy respec-tively with the cost/income ratio (47%) stable at the level of 2012. While in the Czech Republic the cost of risk slightly improved yoy, the figures for all other CEE countries deteriorated yoy. Loan volumes decreased overall in CEE, while depos-its remained stable thus helping to improve the L/D ratio to an excellent 75% from 81% in 2012. However, the aggregated pre-tax profit in the CEE region slightly decreased as compared to the 2012 figures, with only the Slovakian seg-ment increasing its contribution. Interestingly, the Hungarian segment still shows a positive pre-tax result of EUR 81 mn. KBC plans to keep its focus on the retail and SME segments, providing bank and insurance services in all of its markets in order to make use of cross-selling and cost synergies. The bank is divesting itself of all activities apart from traditional banking and insurance business, and most of its non-core activities have already been sold.
Intesa Sanpaolo
Intesa Sanpaolo has not pulled out of the CEE markets, however, in January 2014 it did sign an agreement to sell its Ukrainian subsidiary, which is currently pending regulatory approval. Like its main rival UniCredit, Intesa decided to write off EUR 722 mn of goodwill on its network banks, which represented 82% of its total goodwill position in CEE. The bulk of the impairment was related to Serbia and Slovakia (53% of total). The group operates relatively small banks in Ukraine and Russia with a loan exposure of EUR 0.2 bn and EUR 1.2 bn, respectively, or 6% of its total CEE loan volumes. This represents a negligible 0.4% of the group’s total assets. Aggregate CEE segmental revenues were virtu-ally unchanged over 2012, but net loss was down marginally, falling by 25% yoy to EUR 199 mn. This was due mainly to lower risk provisioning in Hungary and Ukraine. However, both entities are still in the red, as is Intesa’s Romanian subsidiary, which has been struggling to escape from negative territory since 2010. As far as other subsidiaries are concerned, we wish to highlight stable earnings development in Serbia and respectable earnings growth in the group’s biggest subsidiary in Slovakia. These improvements compensated largely for a deterioration in earnings at the core subsidiary in Croatia, which has been fac-ing NII headwinds, as well as pressure on the asset quality front. In total, the CEE region accounts for 6% of the group´s total assets and 11% of its operating income (10% in 2012). With an NPL ratio of 9.5% (9.7% in 2012), Intesa’s asset quality in CEE re-mained generally stable at a somewhat lower level than that of a number of its rivals. The loan-to-deposit ratio decreased slightly to 94% yoy. Apart from the initiated sale of the Ukrainian subsidiary, the new updated 2014-2017 CEE strat-egy underlines the group’s focus on its core markets in Croatia, Serbia and Slo-vakia, which has the overall objective of gaining market share in these countries. All other markets are subject to reviews and repositioning with a clear message not to exit from any of them.Market players in CEE
Intesa Sanpaolo
2013
in EUR mn Loans Deposits Pre-tax
profit
Slovakia 7,600 9,200 180Croatia 6,400 6,300 121Hungary 4,200 4,200 -387
Serbia 2,300 2,500 83
Slovenia 1,800 1,700 3Russia 1,200 800 5Romania 800 700 -37
Bosnia a. H. 500 500 8
Albania 300 800 9Ukraine 200 300 -27
Source: company data, Raiffeisen RESEARCHKBC
2013
in EUR mn Loans Deposits Pre-tax
profit
Czech Rep. 18,103 24,840 654Hungary 3,864 5,878 81
Slovakia 4,248 4,583 95
Bulgaria 612 544 1
Source: company data, Raiffeisen RESEARCH

86 Please note the risk notifications and ex planations at the end of this documentSberbank
Sberbank is the largest state-controlled commercial bank in Russia, with an asset
base of EUR 406 bn, which equals more than 27% of Russia’s total banking as-sets (year-end 2013). CBR holds a 50% stake plus one vote in Sberbank, with the rest of the shares being held by Russian and international private and institutional investors. The vast majority or 87% of the total group’s assets involve the bank’s business in Russia with its network of nearly 18,000 branch offices. In November 2012, Sberbank registered a special subsidiary called Sberbank Europe AG in Austria, which coordinates the business activities of a network of banks in nine countries i.e. Slovakia, Czech Republic, Hungary, Slovenia, Croatia, Bosnia and Herzegovina, Serbia and Ukraine. Sberbank Europe AG operates a network of 280 branch offices and accounts for about 3% of Sberbank’s total group assets.
Within the next five years Sberbank is planning to continue its growth in Russia
(in all business divisions) and further expand in the CEE region (with a special focus on the Czech Republic and Slovakia) and Turkey at an average rate of 4%. In these countries Sberbank expects growth in commercial banking sector, and in particular, aims to exploit untapped opportunities in the fields of corporate and investment banking (CIB). In Russia, key developments over the past few years have been the strengthening of Sberbank’s CIB division, the launch of a con-sumer banking venture in cooperation with Cetelem, and focusing on innovative banking technologies and a restructuring process to improve its cost-efficiency. As a result, Sberbank has improved profitability in recent years, boasting a RoE close to 20% in 2012/13, cost/income ratio down to 47% in 2013, and loan growth of 22% yoy in 2013. A strong competitive advantage of Sberbank on the Russian market remains its access to state support and the bank’s historical connections to the largest and most important Russian enterprises for corporate lending. Sberbank
2013
in EUR mn Loans Deposits Pre-tax
profit
Group total 287,614 268,268 11,198
Ukraine 2,073 1,660 n.a.Kazakhstan 3,439 3,486 n.a.
Belarus* 1,906 1,479 n.a.
Czech Rep.* 2,210 1,997 n.a.Slovakia** 1,227 1,378 n.a.Hungary** 1,045 971 n.a.
* as of 30.9.2013
** as of 31.12.2012Source: company data, Raiffeisen RESEARCHMarket players in CEE

87
Please note the risk notifications and ex planations at the end of this documentVTB
2013
in EUR mn Loans Deposits Pre-tax
profit
Group total 132,733 96,540 2,817
Ukraine 1,645 981 n.a.
Kazakhstan 509 456 n.a.Belarus* 385 328 n.a.Armenia 384 262 n.a.
* as of 30.9.2013
Source: company data, Raiffeisen RESEARCHVTB
VTB is the second largest bank in the Russian market, 61% state-controlled, with
assets at EUR 195 bn at the end of 2013. The bank follows a universal banking model, being one of the key lenders to domestic large corporates, enlarging its retail business, and actively developing its investment banking arm. The group also runs insurance, leasing and factoring business. The bank is currently rep-resented in 23 countries with a strong focus on its domestic market of Russia (accounting for an estimated 90% of group assets and revenue). In mid-2013, VTB issued a SPO resulting in a decrease of the Russian Federation’s stake from 75.5% to 60.9% and an equity increase totaling USD 3.3 bn. The CAR stood at 12.4% as of year-end 2013.
VTB’s position in retail banking was further strengthened as a consequence of the
consumer banking venture Leto Bank established in 2012, reflecting the bank’s strategy to enlarge both its retail business and investment banking arm. However, in 2013 the share of retail loans only amounted to a quarter of the loan portfolio. Nevertheless, VTB managed to achieve quite a favorable net interest income performance, with NIM at 4.5% by year-end 2013. In particular, this was driven by commission income (contributing 13% of the core income before provisions). As a result, VTB saw rather good returns in 2013, although the RoE was down to 11.8% from 13.7% in 2012.
In the corporate business segment, the declared strategic priority of the group is
the development of lending to medium-size enterprises, where the bank sees a strong potential for increasing returns. Another strategic target of the group is to enhance cost efficiency, as reflected in the goal of reducing the cost/income ratio down to 42-43% by 2016 from the current level of 49-50%. For the time being, the cost of risk is on the decline and is in line with the banking system’s average (NPL ratio at 4.7% in 2013). However, downside risks for VTB’s asset quality can-not be excluded, given the group’s exposure in Ukraine (direct and indirect) as well as the aggressive development of consumer lending over the past two years.Market players in CEE

88 Please note the risk notifications and ex planations at the end of this documentMarket shares
In 2013, there was no big change in the CEE ranking. The Top 5 banks account
for roughly one third of the total market share. 52% of total CEE assets are held by the Top 15 banks, a slight increase compared to 2012. In EUR-terms, aggre-gated banking assets grew by 2.3% yoy due to the performance of the Russian banking sector. The strongest increase in CEE market share was achieved by Sberbank, the largest player in the region. The bank reached a 14.8% market share in 2013 (up 170bp yoy), mainly due to strong loan book growth. In a yoy perspective, only Russian banks managed to increase their relative market shares in CEE (VTB up 20bp, Gazprombank up 20bp, RusAgro up 10bp). As a consequence, the market shares of foreign banks in CEE deteriorated in the range of 0.1-0.3%, also because of the lack of M&A activity over the last 12 months. Similar to prior years, Russian banks strengthened their presence at the expense of Western European players. The largest Western European bank in CEE remains UniCredit with a market share of 4.7%, followed by RBI and Erste with 3.2% and 3.1% respectively. KBC ranks behind with 2.1%. For the second consecutive year, UniCredit, RBI, Erste and SocGen lost market share, altogether some 80bp yoy.Sberbank strengthens top position in CEE
Total assets in CE remain stableSberbank, 14.8%
VTB, 7.6%
UniCredit, 4.7%
RBI, 3.2%
Erste, 3.1%
Gazprombank, 3.0%
SocGen, 3.0%
PKO BP, 2.2%
KBC*, 2.1%
ING**, 1.5%
Intesa, 1.5%
OTP, 1.5%RusAgro Bank***, 1.5%Alfa Bank, 1.4%Citibank****, 1.2%Commerzbank*****, 1.1%Santander, 1.0%Other, 45.7%Market shares in CEE (in % of total assets, 2013)
CEE: PL, CZ, SK, HU, SL, LT, LV, EE, RO, BG, HR, RS, MD, BH, AL, KO, MK, RU, UA, BY, KZ
* BG as of 31 December 2012** CZ, SK, BG, HU, RO, RU, UA as of 31 December 2012*** as of 30 June 2013**** CZ, SK, HU, RO, BG, RU, UA as of 31 December 2012***** CZ, SK, HU, RU as of 31 December 2012Source: company data, local central banks, Raiffeisen RESEARCH
From a sector point of view, aggregated banking assets in the CE region re-
mained broadly at the same level. Concentration on this sub-market is relatively high, with the Top 10 players accounting for a combined market share of nearly 50% in the region. UniCredit is still the market leader in CE with 8% market share, followed by PKO BP (6.9%) and Erste (6.8%). While UniCredit and KBC could slightly expand their market shares, PKO BP has benefitted from a local takeover of Polish Nordea Bank assets (the deal has been announced but is not yet fully finalized, up 20bp market share). On the other hand, Erste (down 40bp) and RBI (down 30bp) fell somewhat behind due to Erste´s loan volume decrease, while especially RBI saw asset volumes decline in the Czech Republic and in Hungary. SocGen remained stable at 4.6%. With UniCredit, RBI and PKO BP three of the Top 5 banks are present in Poland, which for all of them is a crucial part of their CE market. In 2013, ING and Com-merzbank saw a decrease in market share as well, standing at 3.5% and 3.3% respectively. On average, the largest contribution to the CE market share stems from Poland and the Czech Republic.Market players in CEE

89
Please note the risk notifications and ex planations at the end of this documentUniCredit, 13.1%
Erste, 10.1%
RBI, 8.7%
SocGen, 7.9%
Intesa, 6.5%
OTP, 3.6%
EFG Eurobank, 3.5% NBG, 3.5%Hypo Alpe Adria*, 3.0%Alpha Bank, 2.4%ING**, 1.5%Volksbank, 1.3%Sberbank, 1.1%Citibank***, 0.6%KBC****, 0.4%Other, 32.9%Market shares in SEE (in % of total assets, 2013)
SEE: RO, BG, HR, RS, MD, BH, AL, KO, MK
* as of June 2013** BG, RO as of 31 December 2012*** BG, RO as of 31 December 2012**** BG as of 31 December 2012Source: company data, local central banks, Raiffeisen RESEARCHThe SEE market is characterized by a relatively low concentration. The Top 6
banks by assets account for half of the market. In 2013, market leader UniCredit saw a decline in its market share to 13.1% (down 30bp) due to a decrease in assets. Erste´s loan book in Romania shrank, with the country representing more than half of Erste’s SEE exposure. Therefore the bank lost 60bp yoy to stand at a 10.1% market share in 2013. Following a slight decrease, RBI comes in third in the asset ranking with a market share of 8.7%. Like RBI, SocGen and Intesa lost a moderate 10bp yoy, though they managed to clearly defend their positions in the size ranking. SocGen and Intesa both reduced their exposures in Russia. Interestingly, not a single one of the Top 15 foreign players in the region man-aged to increase its market share in 2013. With a decline of 120bp Austrian Hypo Alpe Adria saw the strongest market share fall, now ranking in ninth place, presumably due to its limited operational activity during the ongoing political solution-finding process for its NPL portfolio. It is worth mentioning that Volksbank Romania also suffered from a relatively strong decline in market share (down 50bp yoy). The Greek NBG as well as Sberbank were both able to keep their market shares stable at 3.5% and 1.1% respectively.Small players on the upside in SEEUniCredit, 8.0% PKO BP, 6.9%
Erste, 6.8%
KBC, 6.5%
RBI, 4.8%
SocGen, 4.6%
ING*, 3.5%
Commerzbank**,
3.3%
Santander, 3.1%
OTP, 2.9%
Intesa, 2.5%Swedbank, 2.4%Citibank***, 2.4%BCP, 1.8%Sberbank, 0.9%BLB, 0.8%Other, 38.7%Market shares in CE (in % of total assets, 2013)
CE: PL, CZ, SK, HU, SI, LT, LV, EE
* CZ, SK, HU as of 31 December 2012** CZ, SK, HU as of 31 December 2012*** CZ, SK, HU as of 31 December 2012Source: company data, local central banks, Raiffeisen RESEARCHMarket players in CEE

90 Please note the risk notifications and ex planations at the end of this documentSberbank, 24.5%
VTB, 13.0%
Gazprombank, 5.2%
RusAgro Bank*, 2.5%
Alfa Bank, 1.6%
Nomos Bank, 2.4%
UniCredit, 1.4%
RBI, 1.3%
SocGen, 1.1%
PrivatBank, 1.1%
Promsvyazbank, 0.8% Kazkommertsbank, 0.7%Halyk Bank, 0.8%Belarusbank, 2.0%Citibank, 0.6%Uralsib Bank, 0.5%BTA**, 0.6%OTP, 0.4%Other, 39.5%Market shares in CIS (in % of total assets, 2013)
CIS: RU, UA, BY, KZ
* as of 30 June 2013** as of 30 June 2013Source: company data, local central banks, Raiffeisen RESEARCHTraditionally strong Russian banks further strengthened their market presence,
with Sberbank leading the way (up 270bp yoy), followed by VTB (13.0% market share) and Gazprombank (5.2% market share). Apart from the Top 3 banks, the CIS region is characterized by high concentration. RusAgro Bank ranked fourth in 2013, with a market share of only 2.5%. The biggest Western European player is UniCredit with a market share of 1.6% (down 20bp due to decreasing assets in Russia and Ukraine), followed by RBI (down 10bp) and SocGen (down 20bp). For these Western European players, the Russian market accounts on average for approximately 80% of their total assets in the CIS region. Analogous to the SEE market no foreign bank from Western Europe managed to improve its market share in the CIS region (overall, as well as country level).Market share of Russian banks
further increasing
Market players in CEE

91
Please note the risk notifications and ex planations at the end of this documentKey abbreviations
Basic abbreviations
bn billion
bp basis point(s) eop end of periodmn millionp.c. per capitapp percentage point(s)qoq quarter on quarterr.h.s. right hand sidetn trillionyoy year on yearytd year to date
Key figures
BV Book valueCAR Capital adequacy ratioCPI Consumer price index CT1 Core Tier 1F&CI Fee & commission incomeGDP Gross domestic productL/D ratio Loan-to-deposit ratioNPL Non-performing loan(s)NII Net interest income NIM Net interest marginP&L Profit & lossPMI Purchasing manager’s indicesPPI Producer price indexPPP Purchasing power parityRoA Return on assetsRoE Return on equityRWA Risk-weighted assets
Currencies
FCY foreign currencyFX foreign exchangeLCY local currency
BYR Belarusian ruble
CHF Swiss francCZK Czech crownEUR EuroHRK Croatian kunaHUF Hungarian forintPLN Polish zlotyRON Romanian leuRSD Serbian dinarRUB Russian rubleUAH Ukrainian hryvniaUSD US dollarKey abbreviations

92 Please note the risk notifications and ex planations at the end of this documentInstitutions
BIS Bank for International Settlement
BNB Bulgarian National Bank BSI Bank of Slovenia BU Banking UnionCBR Central Bank of RussiaCBBH Central Bank of Bosnia and Herzegovina CNB Czech National Bank | Croatian National BankDIF Deposit Insurance FundEBA European Banking AuthorityEC European Commission ECB European Central BankEMU European Monetary UnionESRB European Systemic Risk BoardEU European UnionIFI International Financial InstitutionIIF Institute of International FinanceIMF International Monetary FundMFI Monetary Financial InstitutionMNB Hungarian Central BankNBA National Bank of AlbaniaNBB National Bank of the Republic of BelarusNBP National Bank of PolandNBR National Bank of RomaniaNBS National Bank of Slovakia | National Bank of SerbiaNBU National Bank of UkraineOECD Organization for Economic Co-operation and DevelopmentSIFI Systemically Important Financial Institutionwiiw Vienna Institute for International Economic Studies
Others
AQR Asset Quality ReviewBRICS Brazil – Russia – India – China – South AfricaCCB Countercyclical Capital BufferFDI Foreign direct investmentsFGS Funding for Growth SchemeIFRS International Financial Reporting StandardsM&A Mergers and acquisitionsPOS Point of salesSME Small and medium sized enterprisesSPO Second public offeringSRF Single Resolution FundSRM Single Resolution MechanismSSM Single Supervisory MechanismSTD Standard deviationWDI (World Bank) World Development IndicatorsKey abbreviations

93
Please note the risk notifications and ex planations at the end of this documentWarnings
Figures on performance refer to the past. Past performance is not a reliable indicator of the future results and develop-
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comparison period is not a reliable indicator for future results.
Performance is reduced by commissions, fees and other charges, which depend on the individual circumstances of the
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94
Acknowledgements
Published by: Raiffeisen Bank International AG
Raiffeisen Bank International AG
Am Stadtpark 9, 1030 Vienna Phone: +43-1-717 07-0 Fax: +43-1-717 07-1715 www.rbinternational.com
Financial analysts
Gunter Deuber Raiffeisen Bank International AG, Vienna Banking trends in CEE, Focus on sections,
+43-1-717 07-5707, gunter.deuber@rbinternational.com Country overview PolandElena Romanova Raiffeisen Bank International AG, Vienna Banking trends in CEE, Country overview +43-1-717 07-1378, elena.romanova@rbinternational.com Russia and Slovenia, Russian banksAndreas Schwabe Raiffeisen Bank International AG, Vienna Definition of sub-regions and regional +43-1-717 07-1389, andreas.schwabe@rbinternational.com economic outlook
Jovan Sikimic Raiffeisen Centrobank AG, Vienna* Market players in CEE
+43-1-515 20-184, sikimic@rcb.at
* Raiffeisen Centrobank would like to thank David Haberfellner for excellent research assistance.
Note: Raiffeisen RESEARCH comprises research work by Vienna based RBI analysts, Raiffeisen Centrobank analysts and
analysts in the RBI network banks
Published and produced in: Vienna
Editing: Anja Knass, Raiffeisen Bank International AG
Design: Kathrin Rauchlatner, Birgit Bachhofner, Raiffeisen RESEARCH GmbH
Printed by: Rabl Druck, Karl Müller Straße 9, 3943 Schrems
This report was completed on 5 May 2014.Acknowledgements

95
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Juraj Valachy
Ukraine Dmytro Sologub Raiffeisen Bank Aval JSC, Kiev

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