Richard Hunter - Icap Bucharest 4-12

Credit Risk Management Volatile Times
Richard Hunter Group Head, European and Asian Corporate Ratings Bucharest, April 2012
All About Europa?

Velocracy Sovereigns
Banks
Corporates Conclusion
Some Very Plastic Questions

Where do I put my deposits? What currency do I take out my loan in? What growth do I expect from my trade partners? Who do I think will be providing capital? Can I escape the problems? A Very Abstract Answer
Source: ritholtz.com, Factiva
www.fitchratings.com
14/05/2012
Velocracy at Work
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Authoritative Voices?
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The Plastic Premium

Opaque
Transparent Cheap Expensive
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Outlooks Were Stabilising

Negative Outlooks
Sovereign 45 40 35 30 25 20 15 10 5 0
(% of portfolio)
Banks
Corporates
Structured Finance
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Source: Fitch Ratings
Q311
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All About Europa?

Banks
GEO Forecasts, March 2012

2012 United States Euro-zone UK Romania BRICs World 2.2 -0.2 0.5 1.6 6.3 3.5 revision 0.4 1.0 0.7 0.9 0.4 0.8 2013 2.6 1.1 1.9 3.0 6.6 4.0
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If the Euro Area were a Sovereign...
Euro Area GDP = USD12,200bn Population = 330m Govt debt = 85% of GDP Govt deficit = 6% of GDP
United States GDP = USD14,700bn Population = 310m Govt debt = 87% of GDP Govt deficit = 10.6% of GDP
Net ext. liabilities = 13% of GDP

External deficit = 0.4% of GDP
Net ext. liabilities = 17% of GDP

External deficit = 3.2% of GDP
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A Crisis of Management
Spain is not Greece. (Elena Salgado, Spanish finance minister, February 2010)
Portugal is not Greece. (The Economist, 22 April 2010)

Greece is not Ireland. (George Papaconstantinou, Greek Finance minister, 8 November 2010) Spain is neither Ireland nor Portugal. (Elena Salgado, Spanish Finance minister, 16 November 2010)
Neither Spain nor Portugal is Ireland. (Angel Gurria, Secretary-general OECD, 18 November 2010)
Ireland is not Greece, Im getting that printed on a T-shirt. (Irish Finance Minister Michael Noonan, 23 June 2011)
Source: ritholtz.com, Factiva
14/05/2012
13
Where to Next?
A. Fiscal union? B. Muddle-through? C. Greek Exit? D. Orderly Defaults/Restructurings? E. Euro break-up?
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14
Focus on Romania
Returned to investment grade
Progress on deficits Public debt improved Solid reserves Governance improving
Bank exposures
NPLs still an issue have they peaked? FX lending driving otherwise weak credit growth Exposure to French and Austrian banking systems
Inflation Still Volatile Elections in November expect some policy slippage
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Doing Business Rankings Improving

Overall Investors Getting Credit Singapore 1 8 2 External Trade Insolvency
Paying Taxes 4 1
Contracts 12 2
Bulgaria
Romania Croatia Albania Italy Serbia Greece Kosovo Bosnia/ Herzegovina
59
72 80 82 87 92 100 117 125
8
8 48 24 98 24 78 24 67
46
46 133 16 65 79 155 174 97
69
154 32 152 134 143 83 46 110
91
72 100 76 63 79 84 131 108
87
56 48 85 158 104 90 157 125
90
97 94 64 30 113 57 31 80
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Risk of Contagion
Issuer Default Ratings Banca Comerciale Romana Erste Group Bank AG BRD-Groupe Societe Generale Societe Generale SA BBB+/Stable A/Stable BBB+/Stable A+/Stable
Raiffeisen Bank AG Alpha Bank AE
A/Stable B-/Stable
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17
Room in the Eurobond Markets?

Public Eurobond Issuance
($mln) 100,000 80,000 60,000 40,000 20,000 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct EMEA - Mature Markets (75% of GDP) EMEA - Growth Markets (25% of GDP)
Average
7%
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Room in the Eurobond Markets?

Public Eurobond Issuance
($mln) 10,000 EMEA - Growth Markets (USD5.1trn) Russian Issuers (USD 1.3trn)
Average
7,500
33%
5,000
2,500
0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
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All About Europa?

Banks
Banks in Developed European Markets: Ratings Evolution

(%) 18 16 14 12 10 8 6 4 2 0 2012 2006
A-
AA-
BBB-
BB-
A+
AA+
BBB+
BB+
B+
B-
Source: Fitch Global Bank Rating Trends Q211, December 2012
CCC
AAA
BBB
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CC
21
AA
BB
Those Bank Cost Savings in Full

Cost/Income
(%)
UK
France
Spain
Italy
Germany
Scandi
Benelux
150 130 110 90 70 50 30 2006
2007
2008
2009
2010
H111
Source: Fitch
14/05/2012
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Getting to 9%
Level of 9% a happy medium, at lower end of solid range
8% - EUR20-30bn less capital 10% - EUR 50n-60bn more capital
Few actual public capital issuances expected Governments - may subscribe to hybrid capital Prices for financial assets will fall on fire sales
Obvious bidders unexcited as yet Selling at a loss creates its own capital hole MTM debate will continue to rage
De-leveraging out of country most likely route...
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Risk of Contagion - Eurozone Bank Public Issuance Suffers Heavily

Debt/covered Bonds Issued in EMEA and Proportion of Guaranteed
(USDbn) 160 140 120 100 80 60 40 20 0 Unsecured issuance in EMEA (LHS) O/w proportion of guaranteed issues (RHS) Covered bonds (LHS) (%) 70 60 50 40 30 20 10 0
Source: Dealogic
Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11
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Comparative Default/Failure Rates 1990-2009
(Default/Failure Rate %) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1yr 2yr
Failed Banks
Defaulted Corporate
Defaulted Banks
The value of support
3yr
4yr
5yr
Source: Fitch
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All About Europa?

Banks
What About the Real Econony?

Shock Case pitched below our conservative Base Case (used for ratings) Above a Eurozone default stress Worst Case
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Precedents
Pitched between Average of Big 5 Bank Crises and break-up of the Soviet Union
GDP Recovery in Crises
A vg "B ig 5" B ank Crises Fo rmer So v Unio n B reak Up Euro zo ne 2008/09 (T = 1 00) 1 05 1 00 95 90 85 T T+1 T+2 T+3 T+4 T+5 EZo ne Sho ck Case (T=201 ) 1
(T = 1 00) 1 05 1 00 95 90 85 T T+1 T+2 T+3 T+4 T+5
GDP Recovery in Crises

Finland B anking Crisis 1 991 Sweden B anking Crisis 1 991 A vg Latin A merica mid-90s Fo rmer So v Unio n B reak Up
So urce: Fitch /OECD/Rheinhart & Ro do ff
So urce: Fitch /OECD/Rheinhart & Ro do ff
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Shock Scenario: Conclusion

Leverage & FFO
FFO Decline
Cap Goods
FCF Shock vs Rating Case

Integrated Util Oil & Gas Reg Util
Leverage increase (x) inverted

Chemicals Alch Bev
Metals
Retail
Telco
HBM
Auto
(x) 0 -0.3 -0.6 -0.9 -1.2 -1.5 -1.8
0% -20% -40% -60% -80% -100% -120%
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Shock Scenario: Southern European Blow-Up

Impact of Shock Case
AA+ Utilities A+ Industrial Teleco m Drinks
Current Ratings
BBB+ BB+ Oil B+ A uto s CCC Retail
So urce: Fitch
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Shock Scenario: Southern European Blow-Up

Impact of Shock Case
AA+ Utilities A+ Industrial Teleco m Drinks Current Ratings Sho ck Case
BBB+ BB+ Oil B+ A uto s CCC Retail
So urce: Fitch
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What About a Full Eurozone Default Stress Test?

Not Everybody Dies Euro Exit Worst Case By Far Diversification helps Todays Highest Ratings Dont Always Perform Best
Defaults: Liquidity vs. Restructuring?
Country Risk versus Industry Risk

Schematic
Utilities
Industrials
So urce: Fitch
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Default Scenario 1: Orderly Sovereign Default

Impact of Scenario 1
AA+ Oil A+ BBB+ BB+ B+ CCC Utilities Industrial Teleco m Current Ratings Scenario 1
1 So urce: Fitch
1 0
1 1
1 2
1 3
1 4
1 5
1 6
1 7
1 8
1 9
20
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Default Scenario 2: Disorderly Default, Keep Euro

AA+ Oil A+ BBB+ Utilities Industrial Teleco m
Current Ratings
Scenario 2
BB+ B+ CCC
1 So urce: Fitch
1 0
1 1
1 2
1 3
1 4
1 5
1 6
1 7
1 8
1 9
20
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Default Scenario 3: Disorderly Default, Euro Exit

AA+ Oil A+ Utilities Industrial Teleco m Current Ratings Scenario 3 Co untry Ceiling
BBB+ BB+ B+
CCC
1 So urce: Fitch
1 0
1 1
1 2
1 3
1 4
1 5
1 6
1 7
1 8
1 9
20
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All About Europa?

Banks
The Impact
Improvement in Europe and the US will take years not months Growth will slow further
We see major GDP headwinds going into 2013 Growth markets cannot decouple from stagnant western economies
Credit should get much more expensive

Solvency II and Basel III Recapitalisation/de-leveraging Benchmark risk-free yields Loss of top-tier counterparties Defaults will increase from their current low level
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The Impact II
Velocracy will grow in power; authoritative voices may diminish further
Instability will drag on growth and continue to generate sub-crises Currency volatility will increase markedly
Solutions will be partial

So
Where do I put my deposits? What currency do I take out my loan in? What growth do I expect from my trade partners? Who do I think will be providing capital? Can I escape the problems?
14/05/2012
38
Suite of Fitch Eurozone Publications

Scenario: If the Eurozone Crisis Escalates
Underlying approach to ratings in a volatile environment
Scenario: Corporate Shock Case Full Study

A sector-by-sector review of how a near-break-up could affect corporate ratings
Scenario: Corporate Shock Case FAQ

A 3-Minute Primer on the Shock Case
Sovereign Corporate Linkage

An updated review of the influence of sovereign ratings on corporates in the Eurozone
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Disclaimer
Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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Richard Hunter - Icap Bucharest 4-12

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Credit Risk Management Volatile Times

All About Europa?

Some Very Plastic Questions

Source: ritholtz.com, Factiva

The Plastic Premium

Transparent Cheap Expensive

Outlooks Were Stabilising

Source: Fitch Ratings

All About Europa?

GEO Forecasts, March 2012

If the Euro Area were a Sovereign...

Net ext. liabilities = 13% of GDP

Net ext. liabilities = 17% of GDP

Portugal is not Greece. (The Economist, 22 April 2010)

Source: ritholtz.com, Factiva

Inflation Still Volatile Elections in November expect some policy slippage

Doing Business Rankings Improving

Raiffeisen Bank AG Alpha Bank AE

Room in the Eurobond Markets?

Room in the Eurobond Markets?

All About Europa?

Banks in Developed European Markets: Ratings Evolution

Source: Fitch Global Bank Rating Trends Q211, December 2012

Those Bank Cost Savings in Full

150 130 110 90 70 50 30 2006

De-leveraging out of country most likely route...

Risk of Contagion - Eurozone Bank Public Issuance Suffers Heavily

Comparative Default/Failure Rates 1990-2009

The value of support

All About Europa?

What About the Real Econony?

GDP Recovery in Crises

So urce: Fitch /OECD/Rheinhart & Ro do ff

So urce: Fitch /OECD/Rheinhart & Ro do ff

Shock Scenario: Conclusion

FCF Shock vs Rating Case

Leverage increase (x) inverted

(x) 0 -0.3 -0.6 -0.9 -1.2 -1.5 -1.8

0% -20% -40% -60% -80% -100% -120%

Shock Scenario: Southern European Blow-Up

BBB+ BB+ Oil B+ A uto s CCC Retail

Shock Scenario: Southern European Blow-Up

BBB+ BB+ Oil B+ A uto s CCC Retail

What About a Full Eurozone Default Stress Test?

Defaults: Liquidity vs. Restructuring?

Country Risk versus Industry Risk

Default Scenario 1: Orderly Sovereign Default

Default Scenario 2: Disorderly Default, Keep Euro

Default Scenario 3: Disorderly Default, Euro Exit

All About Europa?

Credit should get much more expensive

Solutions will be partial

Suite of Fitch Eurozone Publications

Scenario: Corporate Shock Case Full Study

Scenario: Corporate Shock Case FAQ

Sovereign Corporate Linkage

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