2009. Gerald Kogler and Janez Uranic. Banking in CEE – a deeper insight into banking in Slovenia....

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16:30 Vortrag / Presentation

Gerald KOGLERManaging Director, Ernst & Young Österreich/Austria,

Österreich/Austria

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16:30 Vortrag / Presentation

Janez URANICCountry Managing Partner, Ernst & Young

Slowenien/Slovenia, Slowenien/Slovenia

Banking in CEE - a deeper insight into Banking in SloveniaJanez UraničGerald Kogler

16.09.2009

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Introduction

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Austria and its exposure in CEE countries

► An important strategic growth market for Austrian financial services► The financial development of the credit volume is still below the

Western industry countries:► CEE 40-50% of the GDP► Austria 110% of the GDP

► The economic performance is declining considerably► Declining demand of foreign and local investments► Reduced foreign loans► Depreciation of local currencies

► CEE countries are on the long-term a growth region for Europe► IMF expects that after accomplishing the credit crunch, members of

EU in the CEE region will balance their growth in 2011

Source: Austrian National Bank OeNB

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Austrian Investments in CEE

► 12 Austrian banks with 69 fully consolidated subsidiaries► Operating revenue of 7 billion EUR in 2008► In 2008 5.1 billion EUR loan loss depreciation► In 2008 the foreign commitments worldwide amounted to 360

billion EUR (121% of GDP)► 199.5 billion EUR in the CEE and CIS region► Direct loan exposure of Austrian subsidiaries increased of 24.7% to

68.5 billion EUR

Source: Austrian National Bank OeNB

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Market share of Austrian subsidiaries in CEE

► Austrian banks account for a market share of approximately 20% in the region

Aggregated national total assets (bill. EUR)

Market share of Austrian subsidiaries

Source: OeNB, National Central Banks, Moody‘s

BIH

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Earnings and profitability in 2007/2008

0

5

10

15

20

25

2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008

RoE

RoA

Source: IMF, National Central Banks, OeNB

in %

SK CZ PL HU BG RO HR UA RU

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Quality of credits in 2008

0

2

4

6

8

10

12

14

16

18

SK CZ PL HU BG RO HR UA RU

non-performing loans

depreciations

Source: IMF, National Central Banks, OeNB

Non-performing loans and depreciations in % of the total loans at 2008

Development in CEE Countries

Czech Republic, Slovakia, Hungary and Croatia

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CEE region not immune to global crisis

► Since the fall of 2008, the global financial crisis has increased the risk aversion significantly especially according to emerging economies

► Forecasts for CEE countries predicted that the readiness to accept credit risk has fallen significantly.

► 2009 is forecasted to bring a stagnation in Poland and recession in Czech Republic and Hungary

Source: Austrian National Bank OeNB and IMF

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GDP Growth in CEE countries

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GDP Growth in CEE countries 2008

GDP growth in the last quarter of 2008 ► Czech Republic: 0.2%► Slovakia: 2.5%► Hungary: - 2.3%► Croatia: 0.2%

-8

-6

-4

-2

0

2

4

6

8

EU CESEE CIS SK CZ PL HU BG RO HR UA RU

2008

2009

2010

Source: IMF (World Economic Outlook), April 2009

in constant prices,

year-on-year change in %

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Inflation in CEE countries

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Inflation in CEE countries

In February 2009 (2008): ► Czech Republic: 2% (6.3%)► Slovakia: 2.4% (3.9%)► Hungary: 2.9% (6%)► Croatia: 4.2% (6.1%)

0

1

2

3

4

5

6

7

8

9

2007 2008 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

CZ

SK

HU

HR

Annual change in %

Source: eurostat

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Banking sector in CEE

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Banking sector in Czech Republic

►The Czech Republic is hit by the current economic environment in the automotive sector

►Strongly affected by the downturn in foreign demand of investments

►Economic policy environment dominated by reducing inflationary and emerging recession risks

► Inflation declined since the beginning of 2008

Source: Austrian National Bank OeNB [European Economic Integration Q2/2009]

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Banking sector in Slovakia

► Annual growth of domestic credit volume to the non-government sector declined to 15.4% in December 2008 mainly due to a drastic slowdown in corporate credit growth

► This is also related to the decline in the export-oriented industrial sector

► The short-term impact of the global financial crisis on the economy has arguably been mitigated by the euro adaption, in particular as regards exchange rate developments

Source: Austrian National Bank OeNB [European Economic Integration Q2/2009]

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Banking sector in Hungary

► The government bond market became illiquid at the beginning of October 2008 and the lending by domestic banks came to a standstill

► In 2009 Hungary is falling into a steeper and longer recession owing to more pronounced macro-financial weaknesses

► Public sector debt► High share of foreign currency loans

► EU and World Bank jointly provided 20 billion EUR in financial assistance► The government decided to inject through loans a combined 1.4 billion

EUR into two major banks by mid 2009.► The Magyar Nemzeti Bank (MNB) decided to improve the foreign currency

liquidity of Hungarian banks► Long-term foreign exchange swaps

Source: Austrian National Bank OeNB [European Economic Integration Q2/2009]

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Banking sector in Croatia

► The government adopted a set of anti-recession measures and revised the 2009 budget

► The new budget proposes a deficit of 1.5% of GDP (targeted deficit of 0.9% of GDP)

► Net FDI coverage decreased and access to debt finance has become more difficult/expensive

► Croatia’s foreign debt increased considerably to 82% of GDP in 2008

► The corporate sector continued to borrow directly from abroad► Cross-border funding for corporations largely dried up► Banks gradually reduced their foreign liabilities (credit restrictions)

Source: Austrian National Bank OeNB [European Economic Integration Q2/2009]

Banking in Slovenia – credit risk

Janez Uranič

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Structure of Slovenian financial system

► The depth of Slovenian financial system stood at 173% of GDP► The depth of Slovenian financial system represents 40% of

average in EURO area► 77% of the financial system represent banks► Investments funds represent only 3% and have decreased

from 7% in 2007

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Risks in the financial system

► Over-reliance on the banking system► Underdeveloped capital market► The market capitalisation declined by 57% in 2008► While volumes were down by 67%► Demand for Slovenian shares by foreign investors was down

in 2008

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Banking system

► The banking system total assets stood at 128% of GDP► This is 2,5 times lower than EU average► Bank concentration is higher than in EURO area, although it is

diminishing with the growth of foreign owned banks

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Risks in the banking system

► In March 2009 banks warned strongly of the risks associated with the deterioration in the macroeconomic climate

► This comprise of credit cycle, decline in economic growth and deterioration in international environment

► The economic crisis is leading to worsening clients financial position, hence reducing the quality of credit portfolio

► Second important risk is liquidity risk and refinancing risk► This is primarily due to high foreign borrowings to finance the

expenses in lending in prior years

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Credit risk

► The banks expect a deterioration of the quality of credit portfolio

► As a result, the banks expect significant increase in impairment charges in 2009

► Impairment charges in Slovenia are done in accordance with IAS 39, based on an incurred loss model

Financial Instruments Recognition and MeasurementReplacement of IAS 39

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IAS 39 replacement project

► Classification and Measurement Exposure Draft (ED) issued on 14 July 2009 ► Comments due by 14 September 2009

October 2009:

ED on impairment of financial assets

During 2010:

IASB to complete replacement of IAS 39 by issuing final guidance on :

• Impairment• Derecognition• Hedge accounting

Q4/2009:

Final IFRS on classification and measurement of financial instruments

ED on hedge accounting

1 January 2012:

Expected mandatory effective date of successor standard to IAS 39

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Measurement categories

Amortised cost

Fair Value

► Two measurement categories:

Fair Value Option

► Basic loan features, AND

► Managed on a contractual yield basis

► All other instruments

► Fair Value Through P/L (FVTPL)

► Non-trading equity instruments

elective OCI presentation (FVTOCI)

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ED on impairment (1/2)

► ED on impairment expected in October 2009► Change in approach from incurred loss to expected loss

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ED on impairment (2/2)

► The reason for change► Current incurred model was argued to be pro-cyclical► Reporting profits when times are good and losses when

times are bad► Regulators argued that accounting standards should promote

financial stability► Hence more prudence to be built into financial reporting► Expected standard to be issued in 2010

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Implications for preparers

► Reduces complexity by having just two categories

► Eliminates the complex rules on embedded derivatives

► No tainting rules for debt securities at amortised cost

► Reduced impairment charge for debt securities if the instrument now qualifies as amortised cost

► Hedge accounting possible for securities held at amortised cost, not previously permitted if ‘held to maturity’

► Can reverse fair value losses on some equity instruments through profit or loss as equity markets recover

► Opportunity to reverse previous FVO designations (provided the amortised cost criteria are met)

► Opportunity to re-apply the FVO for instruments (provided there is an accounting mismatch)

► Early adopters will not know the final changes to be made during impairment and hedge accounting (Phases II and III)

► All equity instruments will be at FVTPL additional volatility (unless designated as FVTOCI on initial recognition)

► Structured investment vehicles all tranches at FVTPL except most senior tranche

► Many instruments reclassified from FV to amortised cost using the October 2008 amendment may need to be reclassified back to FV (eg. securitisation tranches)

► Many liabilities containing embedded derivatives now at fair value in their entirety, including changes due to own credit risk

► Once a classification is determined, no further reclassifications

► Loans acquired at a discount not at amortised cost

What is attractive? What are the challenges?

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Implications for users

What is attractive?

► Simplification of the standard many of the current complexities will be eliminated better understanding amongst users

► No more diverse impairment rules for available-for-sale investments increased comparability

► No reclassifications between categories better comparability

What are the challenges?

► Instruments reclassified from FV to amortised cost ► Operational challenge →

calculating impairment in future► No retrospective benefit of hedge

accounting, P&L mismatch

► Entities may transit to the new standard at any point from October 2009 until 1 January 2012 potential difficulties with comparability over the next four years

Thank you