Credit Monitor Eastern Europe

A credit-less recovery in
CEE May 7, 2010

Key views
— Economic recovery under way, no revival in credit
growth. Most CEE countries have left recession and will Only few countries still in
recession
record modest positive growth rates this year. But we do not
Global Risk Analysis

Real GDP growth, % qoq sa

expect any significant growth stimulus to come from credit. 6
— Gradual external deleveraging ongoing. External asset-to- 4
2
liability ratios have inched down across the board and are 0
-2
expected to continue to do so. CEE banking sectors still -4
-6
characterised by high external leverage should profit from the -8
very moderate monetary tightening outlook of the ECB. -10
-12
— NPLs are close to peak levels, no significant risks from -14
further provisioning needs. NPLs continue to trend up in 2007 q1 2008q1 2009q1 2010q1
almost all CEE countries. With the exception of Ukraine,
Latvia Hungary
Lithuania and Russia, provisioning levels stand at Romania Lithuania
comfortable levels.
Sources: Eurostat, Nat. authorities, DB Research
— Assessing contagion risk from Greek debt crisis. Our
contagion matrix shows that Bulgaria, Macedonia and Serbia
would suffer most from a potential withdrawal of Greek parent
Credit is contracting almost
banks and reduced exports to Greece. Hungary seems most everywhere
exposed to a reduction of foreign investor holdings of local Real private sector credit growth, % yoy
assets, if global risk aversion increases. Poland
Bulgaria
A credit-less recovery Kazakhstan Nov.-Jan., avg.
Czech Rep.
Although Eastern Europe is lagging other EM regions in terms of Estonia
recovery, most countries have left recession and will record Romania
modestly positive growth rates this year. Only the worst or latest Russia
hit countries (Latvia, Lithuania, Hungary, Romania and Bulgaria) Latvia
Lithuania
were still in recession in Q4 2009 or Q1 2010 (see chart). But the Hungary
recovery has been credit-less so far. Credit is still declining in Ukraine
most countries (see charts) and will only pick up slowly. The
availability of (external) funding and the evolution of NPLs (and -20 -15 -10 -5 0 5
subsequent risks to profitability and capital) will be important Sources: IMF,
National central banks, DB Research
determinants for credit growth over the next few months.
Contact: Gunter Deuber, Marion Mühlberger  +49 69 910-31815

No credit impulse in CEE countries

Real credit growth, 3mma, % mom
8
6
4
2
0
-2
-4
2007 2008 2009 2010
Romania Bulgaria Hungary
Ukraine Poland Estonia
Latvia Lithuania Russia
Czech Kazakhstan
Sources: IMF, DB Research
Credit Monitor Eastern Europe

Gradual external deleveraging in CEE

External deleveraging is taking place gradually in CEE as Ongoing deleveraging
external asset-to-liability ratios are inching down across the Banks' external liabilities as % of total
board (see chart). Ukraine, Kazakhstan and Russia have seen assets in LC
the strongest drop, while Czech Republic, Hungary and Poland
have recorded the smallest decline. This mirrors data on cross- Latvia
border exposure of BIS-reporting banks as of Q4 2009, which Estonia
show large decreases in exposure to CIS countries (20% yoy at Lithuania
least), but stable or even increasing exposure to Poland, Czech Bulgaria
Republic and Hungary (see chart). In our view, further gradual Romania
deleveraging is still in the cards, especially in the Baltics. On a
Ukraine
positive note, CEE banking sectors still characterised by high Dec. 2008
Kazakhstan
external leverage should profit indirectly from the very moderate Dec. 2009
monetary tightening outlook of the ECB and slow removal of Hungary
liquidity expansion. Poland
Russia
NPLs already close to expected peak levels
Czech Rep.
In tandem with weak economic performance and rising
unemployment NPLs are continuing to trend up in almost all 0 20 40 60
countries. While NPLs may already have reached their peak
Sources: IFS, Central Banks, DB Research
levels in Kazakhstan and Estonia, we expect further strong
increases in Bulgaria and Romania, as they lag the other
countries in terms of economic recovery. In Ukraine and Russia International banks retreat
NPLs are estimated to be much higher than official figures, as from CIS
these include only overdue loan payments and not the full Cross border claims Q409 / Q408, %
outstanding loan amount or restructured loans (Moody’s
Ukraine
estimates NPL levels in Russia at 20% and 20-25% in Ukraine).
Kazakhstan
Given NPL levels above 20% in several countries, strategies to
clean up bank balance sheets have to be developed, e.g. writing Russia
off of fully provisioned loans or the creation of bad-asset Estonia
management companies. Overall, we expect our NPL peak level Latvia
forecasts (see chart) to be reached within the next few months. Lithuania
Romania
NPL peak levels to be reached soon Bulgaria
NPLs in % of total loans (national definitions)
50 Hungary
Czech Rep.
40
Poland
30
20 -50 -25 0 25

10 Source: BIS, DB Research

0
CZ RU PL HU BG LT EE RO UA LV KZ Relatively sound
provisioning levels
2008 eop Feb./March 2010* Bank provisions to NPLs, %
Peak level forecast lower bound** Peak level forecast upper bound**
*PL, HU and UA data from Dec. **Forecasts DBR Credit Monitor Eastern Europe, 20. August 2009 Kazakh.
Sources: National central banks and regulators, DB Research
Russia
Estonia
No significant risks to profitability and capital from Bulgaria
further provisioning needs Latvia
Adequate provisioning helps banks to avoid negative surprises in Hungary
terms of profitability or capital needs. We have taken a close Poland
look at current provisioning levels in CEE. The chart on the right Romania 2009*
shows that provisioning levels have declined since last year in Ukraine 2008
almost all countries but still stand at relatively comfortable levels. Lithuania
We consider 60-70% loan-loss provision coverage of NPLs as 0 20 40 60 80 100 120
appropriate, given that a considerable share of loans is
*As of Sept./Oct or Dec.
collateralised by mortgages. In Lithuania, Ukraine and Russia, Sources: IMF, nat. statistics, DB Research

May 7, 2010 2
Credit Monitor Eastern Europe

however, either due to current low provisioning levels or

underreported NPLs, we see a need for increased loan-loss Capital adequacy ratios
provisions and thus potential negative surprises to profitability increased
and capital needs. Thus the recent improvements in capital Bank reg. capital to risk-weighted assets
adequacy ratios for these countries (see chart) have to be taken Poland
with a grain of salt. In all other countries, provisioning needs
Hungary
should decrease over time and well-diversified CEE banks
Romania
should be able to support the real economy with new credit later
Lithuania 2009
in 2010.
Latvia 2008
Assessing contagion risks from Greek debt crisis Ukraine
After S&P’s downgrade of Greece to sub-investment grade on Estonia
April 28 and resulting negative financial market reactions, the Bulgaria
question of possible contagion channels to CEE has resurfaced. Russia
In our contagion matrix we present the three main contagion
channels, i.e. contagion via reduced bank lending from Greek 0 5 10 15 20 25
parent banks, contagion via reduced exports to Greece and Sources: IMF, DB Research
contagion via foreign investors selling their portfolio equity and
debt holdings. We grouped the CEE countries into three
categories according to the relative contagion risk they face.
We start our analysis with the banking channel, which we regard
as the most relevant. Our matrix shows that Bulgaria, Macedonia
and Serbia would suffer most from a potential withdrawal of
Greek parent banks. The recent rescue package for Greece
mitigates the risk of a fire sale of Eastern European assets by
Greek banks in two ways. First, Greek banks access to ECB
funding cannot be jeopardised by another sovereign downgrade
as the ECB suspended the minimum credit rating threshold.
Second, the package includes EUR 10 bn for a financial stability
fund to support Greek banks. Nevertheless, it is unrealistic to
expect the same level of commitment of Greek parent banks as
before the crisis.
With regard to the second contagion channel, the real economy,
Albania, Bulgaria and Macedonia would be most affected by
lower import demand from Greece.
The third contagion channel captures indirect spillover potential
resulting from an increase in general risk aversion due to
Greek/PIIGS troubles. Here, Hungary seems most exposed to a
reduction of foreign investor holdings of local assets.

Banking sector Real econom y Capital outflow s

Greek foreign claim s, in % Exports to Greece in % of Portfolio investm ent (equity + debt),
of local GDP, Dec. 2009 total exports, Oct. 2009 in % of local GDP, 2008 eop

High (15-25%) Bulgaria, Macedonia, Serbia Hungary

Bulgaria, Croatia, Czech Republic,

Medium (5-15%) Albania, Romania Albania, Bulgaria, Macedonia
Estonia, Lithuania, Poland, Slovakia

Croatia, Czech Republic, Croatia, Czech Republic, Estonia,

Estonia, Hungary, Kazakhstan, Hungary, Kazakhstan, Latvia, Albania, Kazakhstan, Latvia, Macedonia,
Low (<5%)
Latvia, Lithuania, Poland, Lithuania, Poland, Romania, Romania, Russia, Serbia, Ukraine
Russia, Slovakia, Ukraine Russia, Serbia, Slovakia, Ukraine

May 7, 2010 3
Credit Monitor Eastern Europe

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