Seite 1

16:30 Vortrag / Presentation

Gerald KOGLERManaging Director, Ernst & Young Österreich/Austria,

Österreich/Austria

Seite 2

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

Seite 412.04.23

Introduction

Seite 512.04.23

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

Seite 612.04.23

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

Seite 712.04.23

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

Seite 812.04.23

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

Seite 912.04.23

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

Seite 1112.04.23

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

Seite 1212.04.23

GDP Growth in CEE countries

Seite 1312.04.23

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 %

Seite 1412.04.23

Inflation in CEE countries

Seite 1512.04.23

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

Seite 1612.04.23

Banking sector in CEE

Seite 1712.04.23

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]

Seite 1812.04.23

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]

Seite 1912.04.23

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]

Seite 2012.04.23

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

Seite 2212.04.23

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

Seite 2312.04.23

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

Seite 2412.04.23

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

Seite 2512.04.23

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

Seite 2612.04.23

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

Seite 2812.04.23

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

Seite 2912.04.23

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)

Seite 3012.04.23

ED on impairment (1/2)

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

Seite 3112.04.23

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

Seite 3212.04.23

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?

Seite 3312.04.23

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