Transcript Sharp increase in risk costs

Impact of crisis on retail banking
Ionut Dumitru, Chief-Economist Raiffeisen Bank
Slide 1 / 08.04.2016
Overview – Impact of crisis on demand for retail
banking products

Rapidly deteriorating economic activity caused
Slide 2 / 08.04.2016

Downward adjustment in financial position of households – real disposable income decreased, unemployment increased

Low consumer morale – as a result of both current financial situation and persisting uncertainties regarding future economic
and financial outlook

Dynamics of private credit turned negative – consumer loans were the most affected

Both WILLINGNESS and CAPACITY of households to take on new debt has been significantly impaired

Increased propensity to save and lower consumption
Economic activity deteriorated rapidly...
Sharp contraction in industrial output
Adjustment in retail sales
140
200
135
2005=100,
3 months average
180
130
160
125
120
140
115
120
110
100
105
Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10
Apr-
Oct-
Apr-
Oct-
Apr-
Oct-
Apr-
Oct-
Apr-
06
06
07
07
08
08
09
09
10
Industrial output - total industry (2005=100)
Non-foods, excluding fuels
Fuels
Industrial output - manufacturing (2005=100)
Total retail sales
Foods
Industrial output in new-EU member countries
Output in construction sector shrank
Index of industrial output (2008Q2=100)
105
100
250
3
200
-9
150
-21
100
-33
95
90
85
80
50
Mar-04
75
Apr-07
Romania
Oct-07
Apr-08
Oct-08
CEE 4 Countries
Apr-09
Oct-09
Baltic countries
Apr-10
Euro area
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
-45
Mar-10
Buildings: residential and non-residential (2005=100, 3 months avg)
Building permits - area in square meters (2005=100, 3 months average)
Sentiment index in construction (RHS, 3 months average)
Source: Eurostat, Raiffeisen RESEARCH
Slide 3 / 08.04.2016
… with a negative impact on households’ financial
position
Flat real wages since beginning of 2009
Decrease in remittances
1500
550
1500
1300
470
1200
1100
390
900
900
310
700
230
500
150
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Real net wage in economy (RON, Dec 2009 prices)
600
300
0
03Q1
04Q1
05Q1
06Q1
07Q1
08Q1
09Q1 2010Q1
Remittances from Romanians working abroad (EUR mn)
Nominal net wage in economy (in EUR equivalent, RHS)
Real disposable income started to decrease
Increasing unemployment rate
120
10
100
9
May 2010: 8%
8
80
60
7
40
6
20
5
0
4
-20
05Q1
3
Dec-05
Jan-07
Jan-08
Jan-09
Jan-10
Registered unemployment rate (seasonally adjusted)
Slide 4 / 08.04.2016
06Q1
07Q1
08Q1
09Q1
2010Q01
Real disposable income (2008=100)
Real disposable income (% yoy)
Source: National Bank of Romania, National Institute of Statistics, Raiffeisen RESEARCH
Households savings continued to increase, as
economic and financial uncertainties persisted
Outstanding deposits of households
RON, bln
EUR, bln
60
50
40
70.0
12.00
60.0
10.00
50.0
8.00
40.0
6.00
30
30.0
18.1
20.0
RON deposits
6.1
4.1
Jan-10
Sep-09
Jan-09
May-09
Sep-08
May-08
Jan-08
Sep-07
Jan-07
May-07
Sep-06
Jan-06
May-06
Sep-05
0.0
Total deposits real growth (yoy, CPI deflated)
RON deposits real growth (yoy, CPI deflated)
FCY deposits (r.h.s.)
Structure of households’ deposits
80
10.0
Jan-10
Aug-09
Mar-09
Oct-08
May-08
Dec-07
Jul-07
Feb-07
Sep-06
Apr-06
-
Nov-05
Jun-05
2.00
Jan-05
10
May-05
4.00
20
Jan-05
70
Dynamics of households’ savings remained positive
FCYdeposits growth (yoy, EUR equivalent)
Consumer confidence remains at very low levels
10
RON bn
0
70
60
-10
50
-20
40
30
-30
Financial situation over next 12 months
20
-40
10
General economic situation over next 12 months
Unemployment expectations over next 12 months
-
-50
Savings over next 12 months
Confidence indicator
-60
Current account
Slide 5 / 08.04.2016
Time deposits
Source: National Bank of Romania, Raiffeisen RESEARCH
Loans for consumer purposes were the most affected
Sharp decline in purchases of durables goods
Dynamics of loans to households turned negative
200
60
150
40
20
100
0
50
-20
-40
2
-9
0
-60
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
-50
-80
Mar-07
Mar-09
Mar-10
Computers, telecommunications equipment (% yoy, 3M avg)
Audio-video and electrical household appliances (% yoy, 3M avg)
Passenger cars (% yoy, 3M avg)
Total loans real growth (yoy, CPI deflated)
RON loans real growth (yoy, CPI deflated)
FCY loans growth (yoy, EURequivalent)
Outstanding consumer loans are decreasing
Outstanding housing loans
11
6
2.2
5
2
4
1.8
30
3
1.6
25
2
40
10
35
9
8
7
6
An increase was recorded only for
housing loans in FCY due to
Prima Casa Program
1
1.4
1.2
20
5
0
4
Jun-07
Mar-08
15
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Consumer and other purposes in FCY
Jun-07
1
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Housing loans in FCY (EUR equivalent)
Housing laons in RON (RON bn, RHS)
Consumer and other purposes in RON (RHS)
Slide 6 / 08.04.2016
Source: National Bank of Romania, Raiffeisen RESEARCH
Overview – Impact of crisis on banks (supply-side
of retail banking products)

Financial standing of banks’ clients deteriorated, future outlook of credit risk remains negative Tightening of lending
standards by banks in an attempt to contain future potential losses

Rapid increase in non-performing loans and risk costs leading to a significant erosion of banks’ profit margins

Increase in funding costs as a result of the financial crisis added to the pressure on profit margins, as it was not (fully) passed on
to customers.
Slide 7 / 08.04.2016
Banks tightened the lending standards and became
more reluctant to lend money
Credit risk of real sector as perceived by banks
increased substantially
Lending standards have been tightened
100
100
80
40
20
0
60
40
Easing lending
standards
20
-20
-40
0
-20
-40
2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4
Companies
Households
SME
Source: National Bank of Romania, Raiffeisen RESEARCH
Slide 8 / 08.04.2016
Corporate
Decreasing credit risk
Balance (%)
60
Rising credit risk
Tightening lending
standards
80
Mounting credit risk deteriorated banks’ portfolio
quality and increased the associated costs
Rapid increase in NPLs
60,000
Risk costs increased sharply
EUR, mln
percent
30
160%
140%
50,000
25
120%
40,000
20
100%
30,000
15
20,000
10
40%
10,000
5
20%
80%
60%
Private credit, yoy growth
Provisions, yoy growth
Source: NBR, Raiffeisen RESEARCH
Slide 9 / 08.04.2016
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Jul-09
Aug-09
Jun-09
Unadjusted exposure
Adjusted exposure
Non-performing loans (%of total loans, unadjusted) (r.h.s.)
Non-performing loans (%of total loans, adjusted) (r.h.s.)
-20%
May-09
Jan-10
Apr-09
Sep-09
Mar-09
May-09
Feb-09
Jan-09
Jan-09
Sep-08
Dec-08
May-08
Nov-08
Jan-08
0%
Oct-08
-
Sep-08
-
Rapidly deteriorating portfolio quality
Cost of credit (LCY plus FCY) in Romanian banking sector remains at
elevated levels…
…determined/ justified by:

Sharp increase in risk costs (+)

Higher cost of funds (+)

Containment of administrative costs (-)

Lower profit margins (-)
Cost of credit* components (2009 avg.) (% of total loans)
Overall cost of credit* by components (avg.)
16.0%
16.0%
14.0%
14.0%
12.0%
10.0%
8.0%
5.8%
2.5%
3.4%
3.5%
4.2%
0.0%
1.8%
5.9%
3.1%
2.3%
2.4%
3.5%
-0.1%
-1.0%
6.0%
4.0%
11.3%
1.1%
4.0%
2.0%
5.0%
0.0%
-0.1%
-2.0%
-2.0%
Total credit cost
2006
Profit margin
Risk costs
2007
2008
2009
Administrative costs Cost of funds (incl. cost of reserve)
*Includes both interest income and fees and commissions and refers to both FCY and LCY loans
Slide 10 / 08.04.2016
3.5%
8.0%
4.5%
4.0%
4.0%
2.4%
10.0%
6.0%
2.0%
12.0%
6.1%
Interest income
Risk costs
Administrative
costs
Cost of reserve
Cost of funds
Remaining profit
margin
Fees and comissions
Source: NBR, Raiffeisen RESEARCH
LCY lending in 2009: marginally higher cost of credit, BUT significantly
lower profit margins
 LCY lending remained marginally profitable in 2009, despite the sharp increase in risk costs
 Compared to 2008 profit margins have been significantly eroded
Local currency cost of credit* by components (2009 avg.)
Local currency cost of credit* by components (2008 avg.)
25.0%
25.0%
20.0%
20.0%
3.8%
4.2%
3.4%
15.0%
15.0%
4.5%
16.0%
4.0%
1.2%
1.8%
10.0%
5.3%
10.0%
17.4%
5.6%
8.7%
5.0%
5.0%
4.5%
2.3%
0.0%
0.0%
Total credit cost
Interest income
Risk costs
Administrative
costs
Cost of reserve
Cost of funds
Remaining profit
margin
Fees and comissions
*Includes both interest income and fees and commissions and refers to both FCY and LCY loans
Slide 11 / 08.04.2016
Total credit cost
Interest income
Risk costs
Administrative
costs
Cost of reserve
Cost of funds
Remaining profit
margin
Fees and comissions
Source: NBR, Raiffeisen RESEARCH
FCY lending in 2009: lower cost of credit and negative profit margin
 In case of FCY loans the associated costs exceeded the revenues in 2009 by almost 1%
Higher funding costs on the back of higher risk premiums
Increased risk costs due to deteriorating portfolio quality
Foreign currency cost of credit* by components (2009 avg.)
Foreign currency cost of credit* by components (2008 avg.)
10.0%
12.0%
10.0%
2.1%
8.0%
1.4%
1.7%
2.1%
6.0%
8.0%
4.5%
4.0%
4.0%
6.0%
4.0%
8.8%
2.5%
0.0%
2.3%
0.7%
0.0%
Total credit cost
Interest income
Risk costs
Administrative
costs
Cost of reserve
Cost of funds
Remaining profit
margin
Fees and comissions
*Includes both interest income and fees and commissions and refers to both FCY and LCY loans
Slide 12 / 08.04.2016
1.0%
2.0%
2.1%
2.0%
7.2%
-0.8%
-2.0%
Total credit cost
Interest income
Risk costs
Administrative
costs
Cost of reserve
Cost of funds
Remaining profit
margin
Fees and comissions
Source: NBR, Raiffeisen RESEARCH
The fiscal adjustment process (1)
Will have a negative effect on the economy and consequently on
demand and supply of loans
Public revenues, expenditures and deficit
Main drivers of expenditures
42
42
40.4
40
38.8
37.6
38
38
36.0
34
33.5
2.5
32.3
38
31
24
7.8
5.4
34
17
33.5
33.1
32
32.1
32.1
31.0
30
2005
36
2.2
1.2
32
8.3
35.3
36
40
45
2006
2007
Budget deficit (% of GDP)
2008
2009
10
2005
30
2006
2007
2008
2009
Compensation of employees (% of revenues)
Intermediate consumption and other current expenditure (% of revenues)
Social benefits (% of revenues)
Capital investments (% of revenues)
2010P
Public expenses (% of GDP)
Public revenues (% of GDP)

The large budget deficit is the result of fast increase in public expenditures,
especially with wages and social transfers (pensions, unemployment benefits)

The government decided to adjust the deficit on the expenditure side: cut in
public wages by 25% and in pensions by 15%

The large budget deficit is difficult to finance in the current context


Radical measures are required to lower the budget deficit in a sustainable way:
cut in the expenditures or/and increase in taxation
The measures are radical and they would trigger resistance of unions; Increase in
taxations should not be completely ruled out

Even with these measures, the budget deficit would be very high in 2010 (close
to 7% of GDP based on cash methodology and 8% of GDP based on ESA 95)
Slide 13 / 08.04.2016
Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH
The fiscal adjustment process (2)
There is room for government to cut public spending and to increase
efficiency of spending
Sharp increase in pensions in 2007-2008
Ratio between earnings in public and private sector
55
210
140
185
120
132 127 132 126
49.7
50
101
45
160
43.8
119 118
116
108
113
108 106
101
100
86
80
40
135
37.3
60
34.4
35
110
40
83.7
33.0
30
85
25
60
1991
1994
1997
2000
2003
2006
2009
20
0
Ratio between average monthly pension and net average monthly wage in the
economy (%)
Ratio between the number of employees and the number of pensioners (%, RHS)
Government intermediate expenses (% of GDP)
RO RO RO RO RO RO RO
LV BG HU
03
08
04 05
06
07 08
09
08
LT
08 08
CZ
PL SK
07 08
08
Public investments (% of GDP)
8.0
6.0
5.5
7.5
5.0
7.0
4.5
4.0
6.5
3.5
3.0
6.0
2.5
5.5
2.0
2001
2002
2003
2004
CEE 4 countries
Slide 14 / 08.04.2016
2005
2006
2007
Baltic countries
2008
Romania
2009
2001
2002
2003
2004
CEE4 countries
2005
2006
2007
Baltic countries
2008
2009
Romania
Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH