SLIDE 1 The CEE Markets
The Challenges Ahead
Attila Szalay-Berzeviczy Head of Global Securities Services UniCredit Corporate & Investment Banking 27 May 2010 / Portoroz
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- 1. SHORT TERM BOOST TO THE ECONOMY VIA IMPROVED
ABSORPTION OF EU FUNDS
EU funds (current prices)
(*) Excluding funds for Rural Development and fisheries; (1) Including co-financing from local budget; (2) Incl. recently approved extra funds of EUR 633mn for PL, EUR 237mn for CZ and EUR 138mn for SK; (3) Based on short term government investment multipliers; interest rates are held constant at baseline value in all simulations; (4) Funds paid out % of EU funding 2007-2009 (March 2010 – SI as of Dec 2009, HU Oct 2009) SOURCE: UniCredit Group CEE Strategic Analysis, OECD, European Commission Structural Funds EU Financial Allocations 2007-2013 (€ bn)* Bulgaria 6.7 Romania 19.7 Hungary 24.9 Poland 67.9(2) Czech Rep. 31.0(1)(2) Slovakia 11.7(2) Lithuania 6.6 Estonia 3.5 Latvia 4.5 Slovenia 4.2 Total 180.6 Pre-Accession Assistance (IPA) EU Financial Allocations 2007-2012 (€ bn) Croatia 0.9 Bosnia 0.6 Serbia 1.2 Turkey 3.9 Total 6.6
Simulated impact of full absorption of EU funds on nominal GDP growth (2010F)3
Size of the ball = EU financial allocations in 2010
Slovakia Slovenia Latvia Lithuania Czech R. Poland Hungary Romania Bulgaria 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 10 20 30 40 50 60 70 Estimated EU funds absorption rate on a cash basis (2007-2009)(4) additional GDP growth in 2010F (yoy % LC nominal terms)
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Ukrain e: -15% Russi a: - 8%
%
%
% RO:
DE: - 5% K Z: + 1 % PL: +1. 7%
3
2009: A VERY TOUGH YEAR. LOTS OF THINGS WENT WRONG BUT THE WORST HAS BEEN AVOIDED
Economic growth in 2009
(GDP yoy growth %) Low macro vulnerability
2 5
High macro vulnerability
3 4 1
Country Rank
Ukraine: -15% Russia: -8%
Turkey: -5%
BG:-5% IT: -5% FR: -2.2% DE: -5% KZ: +1%
Colors are assigned to different countries on the basis of a qualitative and quantitative assessment, including several macro (GDP growth, CA balance, fiscal and external debt position, etc.) and financial variables (banking performance, credit quality, fx lending, etc.); SOURCE: UniCredit Research, UniCredit Group CEE Strategic Analysis
Negative shocks:
n Trade collapse n Capital Inflows collapse n Overshooting in the repricing of CEE risk
Stabilizers:
n Strong international support (IMF and EU packages) n Strong commitment of international banks active in the region n Continuous trust in long term fundamentals
PL:+1.7%
SLIDE 4 RECOVERY IS UNDERWAY - OUT OF THE CRISIS, THE GROWTH MODEL HOLDS BUT LONG TERM GROWTH WILL REMAIN BELOW PRE-CRISIS
SOURCE: UniCredit Group CEE Strategic Analysis, UniCredit Research
Long term economic trends CEE vs Eurozone
(GDP yoy growth %)
Drivers of convergence hold but are weaker than in the past < Competitiveness (but uncertain global outlook and competition from Asia) < Capital inflows (but higher cost of country risk) < Convergence in standards of living (but households sector delays recovery) < EU Funds and infrastructural projects
Real GDP growth (% yoy growth)
0.0 2.0 4.0 6.0 8.0 2004 2006 2008 2010 2012 2014 Eurozone CEE17 CEE averages
2009 2010F 2011F Poland 1.7 2.6 2.7 Hungary
2.8 Czech Rep.
1.6 2.4 Slovakia
3.1 3.8 Slovenia
0.6 1.5 Lithuania
3.0 Latvia
5.5 Estonia
3.4 Bulgaria
2.2 Romania
0.4 3.5 Croatia
1.3 Bosnia-H.
0.8 Serbia
2.2 Turkey
4.5 4.5 Ukraine
3.0 4.0 Russia
3.4 5.0 Kazakhstan 1.2 3.5 5.0 CEE-17
2.8 4.1
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CONCLUSION
< CEE convergence continues, with a rebalanced economic model and average long term growth expected at 4% vs. the pre-crisis 6%. < The Greek crisis confirms the end of cheap cost of country risk. We are still in the middle of a demand driven credit crunch. Competition holds, with margins pressured, but long term profitability in CEE holds. < CEE banking resilient even in the years of the crisis. Credit quality gradually stabilizing. < In a scenario of strict fiscal control and high country risk, CEE countries have to find a way to stimulate demand. < EU Funds full utilization is a must, which has the potential to contribute in the range of 0.8pps to 2.0pps to annual growth (in nominal terms). < Strategies for increasing competitiveness and quality of the operating environment have to remain a priority, to compensate other long term weaknesses (first of all ageing of population).
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CEE IS A KEY PILLAR FOR UNICREDIT
(1) Ranking as of Q2 2009; (2) FY 2009 including Profit Center Vienna SOURCE: UniCredit Group CEE Strategic Analysis
10 3 9 7 10 690 22 27 67 157 10 22 38 30 11 267 Poland Turkey Russia Croatia Czech R. Ukraine Kazakhstan Bulgaria Romania Hungary Slovakia Bosnia-H. Serbia Slovenia Baltics Total CEE
n UniCredit is a committed strategic investor in CEE with enough capital, funding, low legacies and lots of Group synergies. n UniCredit is undisputed leader in CEE with a unique franchise and strong position in its 19 countries of presence (among top 5 players in 11 countries)1 n CEE is a key contributor to UniCredit profitability P CEE Region weights for 23% of Group Revenues(2) P 68% of UCG CEE Revenues generated in 5 countries
Banking Sector revenues pool
(cumulative 2012-2015, EUR bn)
% over UCG CEE Net Rev(2)
26% 18% 10% 9% 6% 6% 5% 5% 5% 4% 2% 2% 1% 1% 0.4%
SLIDE 7 UNICREDIT GLOBAL SECURITIES SERVICES
UniCredit is the market leader securities services provider in CEE. EUR 100 bn institutional client assets under custody, serviced in 14 CEE markets by some 240 GSS employees.
< Austria < Bosnia < Bulgaria < Croatia < Czech Republic < Hungary < Kazakhstan < Poland < Romania < Russia < Serbia < Slovakia < Slovenia < Ukraine
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THE CEE MARKETS n Three sub-regions: New Europe, Ex-Soviet Republics, Balkan n Improving but still low financial culture, savings slowly but continuously picking up in a region of 350 million people. Domestic investors’ freedom to invest world-wide; savings ethos growing. n Market capitalisation of CEE is 1% of world capitalisation. n Much of the privatisation took place by sales to corporations rather than market IPO's. n Challenge of scale, liquidity and delistings in most markets n ...and n Infrastructure "confusion" n Regulatory "constraints"
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INFRASTRUCTURES „CONFUSION” n Vienna Stock Exchange strategy n Arrival of the MTF platforms n Demand for CCP services n Ambitions of T2S
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VIENNA STOCK EXCHANGE STRATEGY n Budapest Stock Exchange was the intiator and the engine of the CEE stock exchange integration back in 2004 n Now Vienna Stock Exchange is running the show under CEESE Group name which is holding a controlling stake in the Budapest, Ljubljana and Prague bourses n Centralising trading by rolling out Xetra Trading System n Weak point of the startegy is Warsaw and the unilateral approach in the CCP topic Conclusion: The Euronext model is the one Vienna Stock Exchange targets but it is unclear, in this model how local Exchanges would fulfill their „social” role as alternative capital sources and providers of secondary trading platforms to small cap stock.
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ARRIVAL OF THE MTF PLATFORMS n They will reduce the attraction of remote brokerage n They will target the most liquid stocks n They could marginalise local markets n They provide no full services, no capital raising opportunity for companies Conclusion: They are likely to reduce Exchange revenues on major stocks, increase cost of trading in less liquid issues and reduce the effectiveness of local markets as pools for domestic issuance.
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DEMAND FOR CCP SERVICES
n CCP helps to reduce broker to broker risk, especialy on the cash side n CCP is an expensive solution therefore it is an efficient one only in developed, high volume markets. The majority of the CEE markets have limited shares that fall in that category n CCP can drive out from the business smaller brokers who dosn’t have enough capital Conclusion: They are a valid option but should not be introduced if they reduce competition across brokers in the nascent markets. Smaller firms could find it a challenge to invest in the technology and provide the collateral backing demanded by the CCP.
SLIDE 13 AMBITIONS OF T2S n Outsourcing of settlement functions by each CSD; many feel T2S is the first step towards an EC CSD n The Euro based CEE CSD's will join T2S despite real interest n Most CEE CSD's are young companies; their ability to grow their role into limited purpose global custodians is questionable. Can they broaden their product lines? n T2S sets the stage for take over of CEE CSDs by those who has the size, considerable skill in cross border settlement and asset servicing (e.g. ICSDS) Conclusions: T2S does not enhance the CEE infrastructure as it will add
- cost. It will not be the catalyst for the change that will take place in more
developed markets.
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REGULATORY CONSTRAINTS n The Euro n UCIT regulations n MiFID n The Code of Conduct
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THE EURO n What is the future of EURO? n From CEE Slovakia and Slovenia are already in the Euro zone n Czech Republic, Hungary and Poland are candidates to join in the next 5 years n The Greek crisis (and the potential threat of further stresses in other countries) with all likelyness leads to tighter economic conditions for new members n And there remains the question whether economies, at this stage of growth, can afford the cost of the Euro "umbrella” Conclusion: Adoption of the Euro will be slower than anticipated and this may temper the appetite within the region for some Euro zone based initiatives such as T2S.
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UCITS REGULATIONS n UCITS III. is reducing risk for investors and promoting free movement of capital within the EU by providing passport to all investment funds n UCITS III. could not achieve success in CEE, people prefer local investment funds n UCITS IV. to be implemented in April 2011will allow domestic investment funds to be managed from abroad n UCITS unilateraly supporting big investment funds, asset management companies and Western European financial centers vs. their CEE peers Conclusion: UCITS creators are supporting the shift of fund management fees from the CEE region to Western economies.
SLIDE 17 MiFID n Huge effort, huge amount of regulatory work, huge amount of reporting
- bligation. Concept is fine, but did it achive anything?
n MiFID has increased competition in markets by removing barriers, and has increased regulatory reporting and market transparency n MIFID has also created an unlevel playing field for exchanges by giving way to low cost limited service MTF's, focusing on high value secondary market trading only n The burden of compliance with MiFID is a problem for smaller CEE markets and their intermediaries and gives global players a competitive advantage Conclusion: There needs to be consideration, market by market, on the role of an Exchange (social and commercial), to ensure it is not disadvantaged by regulation to the detriment of the local economy.
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THE CODE OF CONDUCT n Aims at creating interoperability across markets and pricing transparency by product (execution, clearing and settlement) n All proclaim they support it; but how much has really changed? n Many protagonists support it to achieve competitive advantage rather than fairness for all n Interoperability, once again, may divert flow from smaller CEE markets to larger ones Conclusion: Once again, the balance between pan European efficiency and the need to encourage CEE emerging market development needs to be managed.
SLIDE 19 THE CHALLENGES FOR THE CEE n CEE is generally challenged to comply with regulation formulated for the most developed markets n Strong domestic capital markets are key to success of the CEE n Strong capital markets need robust infrastructures: n liquid trading in large to small cap stocks n risk mitigation structures (e.g. CCP's) compatible with the stage of the market's development n local support structures (such as CSD's) that meet the cultural (e.g. language) and business (close to client) needs of markets In conclusion, although most recognizes the advantages of the EU membership of many CEE nations, the developments cannot proceed
- n a "one size fits all basis" and care needs to be taken to enable the
markets to develop - or they could be seriously damaged.
SLIDE 20 IN CONCLUSION 1. It is important that the development of emerging markets in the region is not impaired by the desire for a single market. The two need not be inconsistent. 2. Certain developments create an unlevel playing field. A niche provider may have unfair competitive advantage over a full service
3. The purpose of capital markets is to provide efficient access to investors for companies needing capital. The markets need to service the full spectrum of demand in the local economies. 4. Local investors need to be protected as they are usually the key to local liquidity and the driver for local development.
