Presentation at 4th Annual Risk Management Conference in Romania organized by ICAP. by George Georgakopoulos

1. ICAP Credit Risk Conference
Credit Risk in Romania – The Banking Perspective
George Georgakopoulos
Executive Vice President, Bancpost
April 24th 2012
1

2. Some Questions for Today
1. Have the banks played a role in the crisis in Romania?
What have the banks done wrong?
2. Will the lending rates go down?
3. What are the risks for the banking system in Romania?
4. Can Romania be in control of its own economic destiny?
2

3. 1. How Did We Get in the Crisis in Romania – What Did the Banks Do Wrong?
What is really behind the boom & subsequent contraction in the Romanian
economy in the last 6 – 7 years is the foreign capital inflows for the boom,
and outflows for the contraction.
The bank-provided-finance has played a role in accentuating the cycle:
firstly, foreign banks brought in significant capital through funding to
subsidiaries; and, secondly, they kept lending to customers, who over time got
more indebted, in foreign currency, when sometimes the borrowers were not
hedged.
The pattern followed in Romania regarding the impact of capital inflows and
the role of bank-finance is similar across the CEE region.
The role of the banks in Romania though cannot be compared with the US:
banks here have only done prime lending (against proof of income and
affordability calculations).
3

4. Capital Inflows
A large current account deficit in the run-up to the crisis was financed by FDI and inflows to the
financial sector Capital Inflows to Romani
Sept 2008
25 25
22 22
20 20
17 17
15 15
12 12
10 10
7 7
5 5
2 2
-1 -1
-3 -3
-6 -6
-8 -8
-11 -11
-13 -13
-16 -16
-18 -18
-21 -21
-23 -23
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
IMF loans Potfolio investment Foreign direct investment
Financial derivatives Financial loans and cash Current Account Deficit
Euro Billion
Data Source: NBR
4

5. Factors Driving Borrowing
Ever higher inflows until end 2008 boosted the economy, creating higher employment and subsequently
high optimism at households.
Employment Outlook
Sept 2008
90 14%
85
12%
80
10%
75
70 8%
65
6%
In the period from 2003 to 2008,
60 consumers’ income and
4%
55 employment expectations rose
50
Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11
2% rapidly
Unemployment Expectations Unemployment Rate (rhs.) This benign outlook encouraged the
Balance of positive answers, Percentage points expansion of lending
Data Source: European Commission, ANOFM
Both the financial and employment
Financial Outlook
500
Sept 2008
74
outlook deteriorated sharply from
450
2008
73
400
350 72
300 71
250
70
200
150 69
Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12
Statement on financial situation of household (rhs)
Euro Denominated Net Real Wage (lhs)
5
Euros, Balance of positive answers
Data Source: INSSE, NBR, European Commission

6. How the Banks Accentuated the Boom Phase of the Cycle
Bank lending to GDP increased rapidly by a factor of 2.4 times (as % of the GDP) between Jan 2006 – Dec
2008. Consumer Lending (incl. mortgages) increased 5.4 times.
Bank lending to GDP
60%
3 years
50%
x2.4 540%
40%
30% 190%
20% 460%
10% 150%
0%
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Banking and insurance Agriculture Public adm inistration
Industry Construction Services
Consum ers
Percentage points
Data Source: NBR, INSSE
6

7. Banks Brought High Foreign Funding in Romania
Romania is one of the countries most dependent on foreign and wholesale funding
Foreign funding/total liabilities Customer deposits/liabilities
45 90
40 80
35 70
30 60
25 50
20 40
15
30
10 20
5
10
- -
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
2007
2008
2009
2010
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2009
2010
2008
2009
2010
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
2007
2008
2009
2010
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2009
2010
2008
2009
2010
Bulgaria Croatia Czech Hungary Poland Rom ania Slovakia Slovenia Bulgaria Croatia Cze ch Hungary Poland Rom ania Slovak ia Slovenia
Republic Re public
Percentage points
Data Source: Corresponding Central Banks
7

8. Capital Outflows and Risk Perception for Romania Led to Depreciation of the Currency
Pressures in the financial markets generated a spike in both the EURRON and Romania's CDS.
EURRON, Romania CDS
Sept 2008
4.6 700
4.4 600
500
4.2
400
4
300
3.8
200
3.6
100
3.4
0
3.2 -100
3 -200
Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11
EURRON (lhs.) Romania 5-yr CDS (rhs.)
Ron/Euro, Basis Points
Data Source: NBR, Thomson Reuters
8

9. Depreciation of the Currency and Lower Expectations on Growth Led to Sharp
Increase of NPLs
Volume of overdue loans increased very quickly from 2008, but the growth rate is receding.
Both the credit risk ratio and the NPL ratio deteriorated rapidly once overdue loans started to accumulate.
Asset quality deterioration in the banking system:
Volume of Overdue
Sept 2008 Sept 2008
3.5 500% 24
B illions
R ON
450% 21
3.0
400%
18
2.5 350%
15
300%
2.0
250% 12
1.5
200% 9
1.0 150% 6
100%
0.5 3
50%
0
0.0 0%
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11
Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11
EUR Overdue Loans RON Overdue Loans Credit Risk Ratio NPL Ratio*
Ron Overdue Loans (y-o-y growth rate) Euro Overdue Loans (y-o-y growth rate)
Percentage points
percentage points
Data Source: NBR, Bancpost Estimates
Data Source: NBR
* Backwards from November 2009, the NPL ratio is re-constructed as an interpolation of the Credit Risk Ratio.
Credit Risk Ratio is defined as gross exposure to non-banking loans and interest classified as “doubtful” and “loss” to total non-banking loans and interest, excluding off-balance
sheet elements
9

10. A Balance of Payments Crisis
Capital outflows Ron depreciation
Deterioration of growth outlook Higher debt burden for FCY loans
Higher credit costs Loan Defaults
10

11. 2. Will the Lending Interest Rate come down? Will Lending Expansion Restart?
Lending interest rates in RON in the last 1 year are at lowest level since
2007
In the short term, significant further fall in unlikely, due to competition
for deposits, a loss-making banking sector and persistently high Non-
Performing-Loans.
Lending expansion has not restarted, because households and
businesses are not optimistic about the future; this supports the point
that availability of bank finance is not creating a boom cycle – this is
driven by the confidence of consumers and businesses.
11

12. Lending Rates Are Currently at Historic Levels
Lending interest rates in RON in the last one year are the lowest since Jan ’07. For EUR, current
rates in the last 3 months are lowest since Jan ’07, too.
Transmission of Monetary Policy to Consumer Interest Rates (RON)
Euro Interest Rates
High competition for
20
New Deposits New Loans
consumers deposits makes
18
Jan. 2007 3.17 7.00
deposit interest rates sticky
to downward adjustments of
16
Jan. 2008 3.88 7.50
monetary policy
14 Jan. 2009 6.39 6.99
12 Jan. 2010 5.70 9.13 Lending interest rates are
10 Jan. 2011 5.45 6.68 further constrained by high
8 Nov. 2011 2.93 6.03 NPL ratios
6 Dec. 2011 2.91 5.75 As a result, the transmission
4 Jan. 2012 3.26 5.64 of monetary policy suffers
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11
Feb. 2012 3.09 5.72 from an asymmetric lag
New Deposits Interest Rate New Lending Interest Rate NBR Rate
Percentage points
Data Source: NBR
12

13. The Poor Profitability of the Banking Sector in Romania is an Inhibitor to Further Fall
of Lending Rates
Profitability of Romanian banks has deteriorated very rapidly from 2008: both ROE and ROA turned
negative since 2010
Return on equity
Return on assets
30
3
25
2
20
2
15
1
10
1
5
-
-
(1)
(5)
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
Q3-2011
2007
2008
2009
2010
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2009
2010
2008
2009
2010
Q 3-2011
Q 3-2011
Q 3-2011
Q 3-2011
Q 3-2011
Q 3-2011
Q 3-2011
Q 3-2011
2007
2008
2009
2010
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2007
2008
2009
2010
2009
2010
2008
2009
2010
Bulgaria Croatia Czech Hungary Poland Rom ania Slovakia Slovenia
Republic Bulgaria Croatia Czech Hungary Poland Rom ania Slovakia Slovenia
Republic
Percentage points
Data Source: Corresponding Central Banks, IMF
13

14. The Key Vulnerability of the Banking System in Romania is Credit Quality
Currently, the growth rate of provisions is slowing; the number of Overdue Loans has started to
decline in 2011
Banking System Provisions Number of overdue loans
35 200% 1.2
B illio n s R O N
Millio n s
180%
30 1.0
160%
25 140% 0.8
120%
20
100% 0.6
15
80%
0.4
10 60%
40%
5 0.2
20%
0 0% 0.0
Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11
Bank Provisions Bank Provisions (y-o-y growth rate) Number of consumers with loans overdue for ove 30 days
Numver of overdue loans
Number of overdue loans
Percentage points
Data Source: NBR
Data Source: NBR
14

15. 3. What are the Risks in the Banking System?
Banking system has shown resilience. It is well capitalized with adequate
liquidity
Major banks kept capital in Romania – as a result of Central Bank
requirement and their commitment to the country
But Risks Remain
• Credit risk is key vulnerability
• FX portion of loans @ c. 60% is high
• There is mismatch between lending and deposits maturities
• There is risk of contagion from Eurozone
• Risk of bank capital flight – rather limited, since the significant
deleverage needed to make an impact on the CAD ratios of parent
banks is substantial and can only damage the profitability of the
local franchises
15

16. Resilience of the Banking System
The Banking System remained well capitalized throughout the crisis while the loan/deposits remained
above 110%.
Banking Sector Indicators:
In spite of the financial strains, no major
banks defaulted and the aggregate
system remained liquid
130 16
125 15
Capital ratios remained above 12%
throughout the turmoil
120 14
Loan to deposits ratios also remained
115 13
relatively conservative
110 12
High MRRs for RON and EURO also
105 11
helped limit consumer lending in the
100 10 boom period
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Sep-08
Sep-09
Sep-10
Sep-11
Mar-08
Mar-09
Mar-10
Mar-11
Systemic risks are to be addressed via
the creation of bridge banks
Loans/Deposits Solvency Indicator >8% (rhs.)
Percentage points
Data Source: NBR
16

17. Maturity Mismatch of Banks’ Assets & Liabilities
Lending is predominantly done over long maturities. Deposit maturity is overwhelmingly biased
towards the short term.
Lending in Romania
Billions
150
135
120
105
90
75
60
Lending in Romania is
45 predominantly made over long
30
15
periods (in excess of 5 years)
0
Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Deposits are overwhelmingly over
Short term lending (up to 12 months) Medium term lending (1 to 5 years) short maturities (up to 1 year)
Long term lending (over 5 years)
This maturity mismatch increases
Deposit maturity
lending costs and makes RON
140
illions
lending on extended maturities
120
difficult
B
100
80
60
40
20
0
Jan-07 Sep-07 May-08 Jan-09 Se p-09 May-10 Jan-11 Sep-11
Overnight Short tem (<1 year) Long Term (>1 year)
RON 17
Data Source: NBR

18. 4. Can Romania be in Control of its Economic Destiny?
Romania is following a regional pattern in risk perception
And it is dependent on what’s going on in the Eurozone
Its employment and economy structure, with 30% of employment in agriculture,
indicates need for structural reform
Its growth will be influenced by demand and investment appetite in the
Eurozone
However,
• Fiscal stability and good performance vs. IMF program
• Low inflation @ 2.4% in March
The basis for growth
• Manageable public debt
• Potential to absorb EU structural funds
18

19. CDS
Credit costs (as measured by CDS) increased for all countries in the CEE region starting from 2008;
Romania was affected particularly hard
CDS for Romania and the CEE region
800
700
600
500
400
300
200
100
0
Mar-05 Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11
Romania Hungary Poland Bulgaria
Basis Points
Data Source: Thomson Reuters
19

20. Economic Outlook and Structural Challenges: Labor Market Employment
There are large discrepancies in the structure of employment for Romania and the CEE region
Employment in CEE: Large discrepancies in the structure of
employment for Romania and CEE region
100%
90% 23.9
30.9 30.3 27.0 30.9 28.0 29.8 Employment in Romania is
80% 36.3
one of the lowest in the
70% European Union
60% The issue is further
50% 40.1 compounded by a high
67.6
52.3 percentage of workers in the
40% 63.8 55.8
65.2 62.8 agricultural sector
60.4
30%
Economic convergence
20% should result in higher
30.1
10% 19.6
employment in the Services
6.9 8.6 9.2 13.3 sector
0% 3.4 3.9
Czech Estonia Hungary Latvia Lithuania Poland Bulgaria Romania
Republic
Agriculture Services Industry
Percentage points
Data Source: Eurostat
20

21. Macro Forecasts
MACRO INDICATORS 2008 2009 2010 2011 2012F 2013F 2014F
Long-term credit rating BB+ BB+ BB+ BBB- BBB- BBB- BBB
Real GDP growth % 7.3 -7.1 -1.9 2.5 1.0 2.0 2.5
Nominal GDP level (local ccy bn) 557.1 490.0 522.3 578.5 604.7 635.3 669.5
Nominal GDP level (€ bn) 139.8 115.9 121.9 128.2 141.0 153.1 167.4
Inflation (% YoY) 6.3 4.7 8.1 3.1 3.5 3.0 2.8
Unemployment (%) 4.4 7.8 8.0 7.3 6.8 6.5 6.3
FX rate (ye) vs € 3.99 4.23 4.28 4.32 4.29 4.15 4.00
Local Currency Interest Rate % (3M) 12.00 8.00 6.17 6.05 5.25 4.90 4.90
Budget Deficit/ GDP (%) 4.8 7.4 6.6 4.4 2.5 2.0 1.8
Public Debt/ GDP (%) 42.3 56.8 59.3 60.5 61.3 61.3 60.6
Data Source: Fitch Ratings, INSSE, NBR, Ministry of Finance, IMF, Bancpost Forecasts
21

22. Key Macro Forecasts
The exchange rate may stabilize in the 4.3-4.4 interval as international markets remain
apprehensive about emerging market currencies
• Structural changes in capital inflows ( reliance on EMTN issues, recovery of FDI and higher
absorption of EU funds) should result in an appreciation of the domestic currency over the long
term
Inflation has fallen to historic lows (2.4% in March) as a corollary of low food prices and is expected
to end the year within the NBR’s target interval (at 3.5%)
• The Central Bank has been adjusting the monetary policy in line with the benign inflation
environment (key rate lowered by 75bp from November and liquidity injections in the interbank
market); relaxation is likely to continue with rate cut in May 2012
• Risks over the short term stem mainly exogenous factors: oil prices in the international
markets, hikes of administered goods’ prices and expansionary fiscal policy in an election year
• Inflationary pressures may return over the medium term as the output gap is gradually
eliminated and global demand for commodities recoils; Nevertheless, we don’t anticipate a
new rate tightening cycle from the NBR
Labor market is gradually improving (ILO unemployment fell to 7.3% in December), but conditions
may deteriorate slightly over the short term
22

23. Economic Outlook and Structural Challenges
The simultaneous deleveraging of both consumers and the government has resulted in a gradual
recovery of growth.
30.0% Agriculture Industry Construction 5.0%
Retail Financial Services Other Services
20.0% GDP (rhs.) 3.0% The recovery remains primarily driven
10.0% by exports and industrial production
1.0%
0.0% For 2012, a deteriorating external
-1.0% sector will be compounded by fiscal
-10.0% adjustment and a strong negative
-3.0%
-20.0%
base effect from agriculture
-5.0% Growth is thus expected to
-30.0%
temporarily slow in 2012 to 0.6% - 1%
-7.0%
-40.0%
GDP may receive a boost from
-50.0% -9.0% improved absorption of European
funds
-60.0% -11.0%
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
Percentage points, y-o-y growth rate
Data Source: INSSE, Bancpost Forecasts
23

24. Fiscal Stability
Before 2008, fiscal imbalances were concealed by rapid GDP expansion. Budget deficit widened to
9% of GDP in 2009.
Fiscal Adjustment 2012/2011 (percent of GDP)
Increase in Revenues 0.3
Excise rate hikes for cigarettes and In order to address fiscal imbalances and
Excise taxes 0.1
diesel budget deficit and avoid a liquidity crisis,
Increase in royalties for construction Romania applied for a €20 support
Nontax revenues 0.1
materials program from the IMF (superseded by a
Capital revenues 0.1 Sales of buildings precautionary agreement in 2011)
Reduction in Progress under the program has been
2.1
Expenditures adequate, with Romania meeting all
Personnel 0.5 Wage freeze and employment cuts quantitative and indicative targets
Cut in district heating subsidy, Progress was made in limiting
Subsidies 0.1
termination of coal subsidy and expenditures, raising budget income and
substitution of EU funding for implementing structural reforms
agricultural subsidises
For 2012, Romania is committed to a
Reduction in cofinancing of EU post-
Cofinancing 0.6
accession projects
cash deficit target of 1.9% (from 4.5% in
2011)
Contingency Funds 0.2 Reduction in buffer
Pensions 0.5 Pension freeze
Social Assistance 0.1 New social assistance code
Improvement in the
2.4
Fiscal Balance
Percentage points
Data Source: Ministry of Finance, IMF 24

25. To Sum Up
The economic cycle of the last 7-8 years in Romania is defined by capital inflows
and outflows and the view of foreign investors towards Romania.
Banks have not created the boom & contraction cycle in Romania, have helped to
accentuate it, through capital inflows and FX lending.
Lending rates are low by historical standards. They are unlikely to change
much due to lack of profitability in the banking sector, competition for deposits
and high credit costs.
The banking sector is well capitalized, high credit risk being the key
vulnerability. There is a risk of bank capital flight and deleveraging, but rather low
in view of the commitment of the foreign banks and profitability risks that
deleveraging would entail.
Romania is heavily dependent on foreign capital & foreign demand for faster
growth, and its economy follows the regional pattern. However, Romania has done
its homework, with sound monetary & fiscal policies and is ready to benefit from
any pick-up in the global economy.
25