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CEE Banking Banana Skins 2012

In association with

CSFI Banking Banana Skins 2012 (2010 ranking in brackets)

CEE

World

1 Macro-economic risk (3)

1 Macro-economic risk (4)

2 Capital availability (9)

2 Credit risk (2)

3 Profitability (-)

3 Liquidity (5)

4 Credit risk (1)

4 Capital availability (6)

5 Liquidity (12)

5 Political interference (1)

6 Quality of risk management (4)

6 Regulation (3)

7 Political interference (6)

7 Profitability (-)

8 Regulation (10)

8 Derivatives (7)

9 Interest rates (13)

9 Corporate governance (12)

10 Corporate governance (19)

10 Quality of risk management (8)

11 Pricing of risk (2)

11 Pricing of risk (9)

12 Business continuation (17)

12 Business continuation (21)

13 Currencies (5)

13 Back office (24)

14 Derivatives (11)

14 Management incentives (16)

15 Equity markets (8)

15 Change management (28)

16 Emerging markets (15)

16 Hedge funds (19)

17 Change management (28)

17 Interest rates (14)

18 High dep. on technology (20)

18 High dep. on technology (18)

19 Back office (18)

19 Currencies (11)

20 Hedge funds (16)

20 Business practices (22)

21 Fraud (7)

21 Equity markets (10)

22 Business practices (21)

22 Emerging markets (17)

23 Management incentives (25)

23 Rogue trader (20)

24 Criminality (23)

24 Criminality (27)

25 Commodities (14)

25 Sustainability (25)

26 Rogue trader (22)

26 Commodities (13)

27 Human resources (-)

27 Fraud (15)

28 Reliance on third parties (-)

28 Human resources (-)

29 Sustainability (27)

29 Reliance on third parties (-)

30 Payment systems (26)

30 Payment systems (26)

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CEE There were 64 responses from CEE countries: Bosnia and Herzegovina 1 Czech Republic 11 Poland 8 Romania 19 Russia 13 Slovakia 8 Ukraine 4

There were 64 responses from CEE countries, as follows Macro-economic risk is the most significant banana skin globally and in CEE Paul Cunningham, PwC Financial Services Leader for CEE comments on the most serious risks for the CEE banking sector. This year we have received 64 responses from the CEE region including Russia and Ukraine. Of the 10 major risks identified in the Region, 9 of these were also the major global risks, which demonstrate the increasing interdependency of the outlook for the Region on global trends and issues. The top risk, macro-economic risk reflects concerns regarding the Eurozone debt crisis in particular and demonstrates that this risk is feared not just by banks in EU countries and countries in which much of the banking sector is owned by banks in other EU countries, but also the impact that disorderly default would have on global markets. For example, one Russian respondent wrote:

“The economic crisis evolving in the US and European Union will have inevitable implications for the whole world, including Russia.”

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There were some notable differences in emphasis between the CEE countries and the global responses. The availability of capital was the most significant risk which CEE rated higher than globally, demonstrating the concern of banks about access to markets in some countries. It also reflects the plight of a number of parents of CEE banks which are currently unable to raise capital. As a result, many banks are being forced to reduce risk weighted assets to meet not just increased local regulatory requirements, but in many cases also group wide capital requirements.

A Slovak banker was concerned about “lending constraints due to risk weighted asset reductions of banks that aim to meet capital adequacy” Profitability was a new category this year and was rated a higher risk in CEE than globally. This stems from the perception that many markets are stagnant and growth is not likely for some time, coupled with increased funding and regulatory costs, which are leading to a greater emphasis on operational efficiency by banks to deliver appropriate levels of profitability for shareholders.

A Russian banker commented: “The competition is getting higher, but currently only the major banks demonstrate sustainable revenue growth.” A Romanian banker commented: “More and more the sovereign assets are perceived as loans with toxic potential.”

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Although rated lower than in the 2010 survey, perception of the quality of risk management by CEE banks remained lower and thus this risk higher than globally. In spite of improvements which have been made, further work is still needed in this area in CEE.

A Romanian banker commented: “Incompetence has a huge price, and the crisis is just increasing the invoice.” Interest rates and currencies were considered to be higher risk by banks in CEE than globally, reflecting the lower levels of maturity of these markets in many countries included in the survey. In Russia interest rates are among the top 10 risks where as for the global results they were ranked as risk number 17. The lower level of maturity of CEE markets was also reflected in the lower ranking of derivatives and hedge funds as a risk than globally.

A Ukrainian banker commented: “The interest risk is perceived as high due to the growth of cost of funds and inability to adjust the rates of assets.”

5

For many banks political interference was not as evident in CEE as in global markets, although regulation was frequently mentioned as a growing concern with banks remarking on an increase in the level of intrusion and cost of compliance.

Perhaps somewhat surprising for the bankers operating outside Russia, in comparison to other CEE countries, political interference is of lower concern, ranking only as the seventeenth most significant risk.

Since we have only received sufficient responses to be able to prepare a separate CEE report for the second time in 2012, there are no long term trends to consider, however we have benchmarked CEE to the global survey results for the overall level of the Banana Skins Index globally, also on a score out of 5. This can be read as an indicator of level of anxiety (globally and for CEE) and how it has changed over time (globally). Both the average score for the top risk of 4.18 (CEE 4.24) and the average of all risks of 3.15 (CEE 3.04) both stand at an all time high since the global survey began in 1998, a clear sign of the unprecedented level of anxiety in the markets, to which the CEE survey has shown the Region is inextricably linked. In terms of the level of preparedness of banks to handle the risks present, on a score of 1 (poorly) to 5 (well), CEE banks scored 2.81, slightly below the global score of 2.96, but both showing a slightly above acceptable level but with a clear message that more could and should be done where possible.

A Russian banker commented: “We are entering a new era of economic environment where there is hardly any experience at management level.”

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Contacts CEE Regional FS Leader Paul Cunningham

Romania / Moldova Dan Iancu

Armenia/ Georgia Altaf Tapia

Russia Ekaterina Lazorina

Azerbaijan Teymur Abasguliyev

SEE Stefan Weiblen

Partner +994 12 497 2515 [email protected]

Partner +38 111 330 2167 [email protected]

Bulgaria Gueorgui Nikolov

Slovakia Juraj Tučný

Director +359 2 9355 215 [email protected]

Partner +421 259 350 565 [email protected]

Czech Republic Petr Kříž

Slovenia/ Croatia François Mattelaer

Partner +420 251 152 045 [email protected]

Partner +386 (1) 58 36 000 [email protected]

Hungary Árpád Balázs

Ukraine Vladimir Demushkin

Kazakhstan/ Kyrgyzstan Alexander Kottmann

Uzbekistan Odiljon Rahimov

Partner CEE Financial Services Leader +420 251 152 012 [email protected]

Partner +995 32 508061 [email protected]

Partner +36 1 461-9163 [email protected]

Director +7 727 330 3200 [email protected]

Partner +402 122 53969 [email protected]

Partner +7 495 967 6365 [email protected]

Partner +380 444 906 776 [email protected]

Director +998 71 120 61 01 [email protected]

Poland and Baltic Countries Adam Celinski Partner +48 22 523 4330 [email protected]

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