Slide 1 / Impact of crisis on retail banking Ionut Dumitru, Chief-Economist Raiffeisen Bank

Slide 2 / Overview – Impact of crisis on demand for retail banking products Rapidly deteriorating economic activity caused  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

Slide 3 / Economic activity deteriorated rapidly... Adjustment in retail salesSharp contraction in industrial output Industrial output in new-EU member countries Output in construction sector shrank Source: Eurostat, Raiffeisen RESEARCH

Slide 4 / … with a negative impact on households’ financial position Flat real wages since beginning of 2009 Increasing unemployment rate Decrease in remittances Real disposable income started to decrease Source: National Bank of Romania, National Institute of Statistics, Raiffeisen RESEARCH

Slide 5 / Households savings continued to increase, as economic and financial uncertainties persisted Outstanding deposits of households Structure of households’ deposits Dynamics of households’ savings remained positive Source: National Bank of Romania, Raiffeisen RESEARCH Consumer confidence remains at very low levels

Slide 6 / Loans for consumer purposes were the most affected Outstanding consumer loans are decreasingOutstanding housing loans Sharp decline in purchases of durables goods An increase was recorded only for housing loans in FCY due to Prima Casa Program Source: National Bank of Romania, Raiffeisen RESEARCH Dynamics of loans to households turned negative

Slide 7 / 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 8 / Banks tightened the lending standards and became more reluctant to lend money Source: National Bank of Romania, Raiffeisen RESEARCH Lending standards have been tightened Credit risk of real sector as perceived by banks increased substantially

Slide 9 / Mounting credit risk deteriorated banks’ portfolio quality and increased the associated costs  Source: NBR, Raiffeisen RESEARCH Rapid increase in NPLsRisk costs increased sharply

Slide 10 / Cost of credit (LCY plus FCY) in Romanian banking sector remains at elevated levels… Overall cost of credit* by components (avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Cost of credit* components (2009 avg.) (% of total loans) Source: NBR, Raiffeisen RESEARCH …determined/ justified by:  Sharp increase in risk costs (+)  Higher cost of funds (+)  Containment of administrative costs (-)  Lower profit margins (-)

Slide 11 / LCY lending in 2009: marginally higher cost of credit, BUT significantly lower profit margins Local currency cost of credit* by components ( 2008 avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Local currency cost of credit* by components ( 2009 avg.) Source: NBR, Raiffeisen RESEARCH  LCY lending remained marginally profitable in 2009, despite the sharp increase in risk costs  Compared to 2008 profit margins have been significantly eroded

Slide 12 / FCY lending in 2009: lower cost of credit and negative profit margin Foreign currency cost of credit* by components ( 2008 avg.) *Includes both interest income and fees and commissions and refers to both FCY and LCY loans Foreign currency cost of credit* by components ( 2009 avg.) Source: NBR, Raiffeisen RESEARCH  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

Slide 13 / 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 Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH The large budget deficit is the result of fast increase in public expenditures, especially with wages and social transfers (pensions, unemployment benefits) 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 Main drivers of expenditures The government decided to adjust the deficit on the expenditure side: cut in public wages by 25% and in pensions by 15% 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 14 / 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 Source: Eurostat, Finance Ministry, Raiffeisen RESEARCH Ratio between earnings in public and private sector Government intermediate expenses (% of GDP)Public investments (% of GDP)