Current Financial Market ConditionsCurrent Financial Market ConditionsImpact on EBRD Countries of Impact on EBRD Countries of

OperationsOperationsSub prime Exposure & Impact of Liquidity Sub prime Exposure & Impact of Liquidity

SqueezeSqueeze

London, 30London, 30thth April 2008April 2008Sibel BeadleSibel Beadle

EBRDEBRD

Impact on EBRD Countries of Impact on EBRD Countries of OperationOperation

Sub prime Exposure– What Happened?

– Exposure of Financial Sector in EBRD Countries of Operation

Liquidity Squeeze– Vulnerability – Credit growth and Dependence on

External Funding in EBRD Countries of Operation

– Alternative Funding Sources?

How did the sub prime crisis start?How did the sub prime crisis start?

Initially – US housing prices, started to fall and sub prime mortgage borrowers started to default

First half of 2007 – Acknowledgement from the FED that the broad based defaults could lead to $50 Billion of write downs

August 2007 – Crisis became visible when ECB had to inject the first Euro 95 Billion into money markets

Current Level of Write DownsCurrent Level of Write Downs

SocGen $4bnUniCredit $0.8bnRZB $0.04bn

Citi

Merrill

UBS

Morgan Stanley

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Mortgage Related Write-Downs (91 financial companies, 177bn)

Source: Moody's and BBC

How large are the losses?How large are the losses?

Still uncertain

First week of February – Tokyo meeting –German Finance Minister revealed that the G7 thought losses could reach $400 bn

New write-downs since February

How could this happen?How could this happen?

October 2007 Fitch announces– 26% of downgrades from all rated 2006 sub prime RMBS– Many from investment grade to speculative grade

January 2008 Moody’s announces– Downgrades on 53.3% of the 2006 vintage tranches (representing 93.4% of

the deals backed by first- and second-lien sub prime mortgages)– Downgrades on 38.2% of rated tranches of the 2007 vintage

February 2008 S&P announces– Downgraded $183 billion out of $3.24 trillion in original issuances (an

additional $588.31bn put on credit watch– Securities that S&P downgraded from investment grade to speculative-

grade did account for about 63% of the downgrades by original issuance volume

Downgrades are still continuing…

What does this mean concretelyWhat does this mean concretely——Structured Finance Rating changes S&PStructured Finance Rating changes S&P

0.71

3.64

5.37

4.79

12.49

4.27

2.37

2.87

1.67

1.13

0.54

0.62

0.4

0.04

0.39

D

2.08

0.88

4.03

9.09

26.52

16.3

11.71

8.66

7.45

6.07

1.69

1.9

2.55

0.18

1.3

CC

0.09

0.27

0.48

0.28

1.67

0.36

0.88

1.44

0.65

0.84

1.23

0.04

1.86

CCC-

12.5

23.1

9.09

10.07

12.84

23.91

23.54

14.46

25.72

23.14

14.01

23.58

13.32

4.56

1.23

1.1

CCC

2.08

0.05

0.08

0.32

0.15

0.23

0.35

0.16

0.34

0.64

0.09

0.96

CCC+

83.3

5.29

2.01

0.92

1.36

1.38

0.73

0.92

1.02

0.49

0.44

0.22

0.35

0.09

0.47

B-

69.84

9.4

12.73

5.42

6.26

4.63

4.56

3.79

2.25

3.32

7.55

2.81

2.63

1.08

B

0.09

85.45

4.7

0.82

1.06

0.85

0.97

0.97

0.6

0.84

0.33

0.22

0.28

0.04

0.25

B+

1.8

64.4

2.2

1.4

1.4

0.8

1.2

1.1

0.5

0.4

0.3

0.2

0.3

BB-

56.2

2.5

4.8

4.4

4.9

4.0

3.4

3.4

3.0

2.9

2.5

1.5

BB

0.1

24.9

2.3

2.6

1.8

0.7

1.1

0.9

0.5

0.7

0.4

0.5

BB+

0.1

38.4

2.4

2.3

1.3

1.1

0.9

0.8

0.6

0.1

0.9

BBB-

0.0

52.8

2.4

3.3

2.6

2.3

2.0

2.0

1.9

1.0

BBB

0.0

43.2

2.9

1.4

1.6

1.0

0.7

0.4

0.5

BBB+

0.1

0.1

47.9

1.7

1.5

0.9

1.0

0.3

0.6

A-

B-

B

B+

BB-

BB

BB+

BBB-

0.0BBB

BBB+

0.1A-

61.30.10.00.1A

1.456.8A+

1.71.862.40.50.1AA-

2.01.11.474.30.20.1AA

0.60.70.41.30.783.6AAA

AA+AA-AAAA+AAA

1.50.90.72.184.6AA+

Downgrades

Impact on EBRD Countries of Impact on EBRD Countries of OperationOperation

Sub prime Exposure– What Happened?

– Exposure of Financial Sector in EBRD Countries of Operation

Liquidity Squeeze– Vulnerability – Credit growth and Dependence on

External Funding in EBRD Countries of Operation

– Alternative Funding Sources?

How is the liquidity squeeze How is the liquidity squeeze connected to the sub primeconnected to the sub prime

High uncertainty in financial markets– Increased risk aversion

– Initial uncertainty on exposure caused spill over to all markets

– Spreads widened, funding has become expensive and sometimes was not available any loner

Funding problems in EBRD countries where rapid credit growth was heavily reliant on external funding

Differences of Western World vs. Differences of Western World vs. EBRD Countries of OperationEBRD Countries of Operation

Western Markets:

Asset Problems

Rest of the World:

Liquidity ProblemsWorldwide incl. EBRD countries

- Could lead to asset problems over time

- Uncertainty in markets led to difficulty in raising external funds

Risk Categories among EBRD Risk Categories among EBRD Countries of OperationCountries of Operation

High risk factors: – High credit growth mainly driven by wholesale funding—For example, banks in

Kazakhstan (the worst hit country by the liquidity problem) and the banking system in the Baltic Countries

– Banking systems that do not have a sufficiently diversified funding base; in particular, those with a weak deposit base

– Countries that face other macro economic or financial problems (high deficits, large external imbalances, pressure on currency, housing bubble) are likely to be worse affected by the credit squeeze

Risk mitigating factors:– Strong foreign exchange reserves—determined intervention by a central bank backed

by strong foreign exchange reserves– Strong presence of foreign banks—particularly, if the parent is willing and able to

provide liquidity support– Strong deposit base of the banking system

However, even in banking systems with high deposit levels deposits can move to large systemic banks or state banks—flight to quality/government guaranteeOr in countries with low level of deposits individual banks can have a strong customer base

Financial Intermediation and Credit Financial Intermediation and Credit GrowthGrowth

Financial Intermediation – Bank Credit to Private Sector/GDP)(2004 vs 2007)

2004

2004

2004

2004

2004

2004

2004 20

04

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2007

2007

2007

2007

2007

2007 20

07

2007 20

07 2007

2007

2007

2007

2007

200720

07

2007

2007

2007

2007

2007

2007

0

20

40

60

80

100

120

140

160

180

200

Estonia

Latvia

Lithuan

iaKaz

akhsta

nUkra

ineSlove

niaBulgari

aCro

atia

Georg

iaHungary

Russia

Romania

Czech

MoldovaMac

edonia

Poland

Slovakia

Azerb

aijan

Serbia

Armen

ia

UKFran

ceC

redi

t/GD

P (in

Per

cent

) EUCIS

Baltics

SEEETC2004

By RegionBy Region

Change in Bank Credit to Private Sector/GDP  

(2004 ‐ 2007)

0

10

20

30

40

50

60

Estonia

Latvia

Lithua

nia

Kazakh

stan

Ukraine

Sloven

iaBu

lgaria

Croa

tia

Geo

rgia

Hun

gary

Russia

Roman

iaCzech

Moldo

vaMaced

onia

Poland

Slovakia

Azerbaijan

Serbia

Arm

enia UK

Fran

ce US

BPS

CE

CIS

Baltics

SEE

ETC

Deposit Base by RegionDeposit Base by Region

Source: CEE Banking Sector Report; EBRD; Fitch Ratings. * or latest available

Baltics

CIS

CEE

SEEETC

Figure 2:  Customer Deposits/Total Bank Assets (2007*)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Alban

ia

Sloven

ia

Bulgaria

Moldo

va

Mon

tene

gro

Bosnia

Maced

onia

Czech

Slovakia

Arm

enia

Croa

tia

Azerbaijan

Tajikistan

Ukraine

Geo

rgia

Roman

ia

Poland

Kyrgyz

Lithua

nia

Estonia

Belarus

Latvia

Hun

gary

Serbia

Kazakhstan

Russia

Foreign OwnershipForeign Ownership

Source: CEE Banking Sector Report; EBRD; Fitch Ratings

ETCSEE

CEE

CIS

Baltics

Figure 3: Foreign Ownership (% of total assets)

0

20

40

60

80

100

Esto

nia

Cze

ch

Slov

akia

Bos

nia

Cro

atia

Rom

ania

Lith

uani

a

Hun

gary

Serb

ia

Bul

garia

Geo

rgia

Pola

nd

Latv

ia

Arm

enia

Slov

enia

Ukr

aine

Aze

rbai

jan

Rus

sia

Kaz

akhs

tan

Bel

arus

%

Increase in the Cost of Risk at the Increase in the Cost of Risk at the Country LevelCountry Level

CDS, 5 Year Default, Foreign Currency Bps

0

50

100

150

200

250

300

350

Kazakhstan Ukraine Russia Poland Hungary Estonia

31 December 2006 31 December 2007 Peak Now, 29. April 08

x5.6

x4.5

x2.1

x1.7

x3.6

x2.2 x7.7

x2.9

x9.6

x5.3

x28.4

x17.0

Liquidity and Funding By Region Liquidity and Funding By Region ----BalticsBaltics

The largest vulnerability of the Baltics region is stemming from extraordinarily rapid credit growth prior to the credit squeeze

Depositor base of the Baltic countries is not as strong as in some other regions; only 50% of funding is provided by customer deposits.

Foreign ownership – high, but strategics have higher funding costs

Liquidity and Funding By Region Liquidity and Funding By Region --BalticsBaltics

The largest vulnerability of the Baltics region is stemming from extraordinarily rapid credit growth prior to the credit squeezeDepositor base of the Baltic countries is not as strong as in some other regions; only 50% of funding is provided by customer deposits. Foreign ownership – high, but strategics also have higher funding costsOverall, the majority of banks in the Baltics are controlled by Scandinavian banks—slow down in the Baltics would impact profitability of Scandinavian banks and increase of funding costs of the parent would influence profitability and growth of banking in the Baltics

– For example, currently 15 % of Swedbank’s total lending and more than 30% of its operating profit is stemming from Swedbank’s Baltic banking operations

– Swedbank’s wholly owned subsidiary Hansabank is the market leader in Estonia, Latvia and a major player in Lithuania.

– S&P to revise the outlook of Swedbank to negative from stable on December 18, 2007.

Fitch ratings changed the outlook for Latvia and Estonia to negative on January 31, 2008; prior to that Fitch had downgraded Latvia to BBB+ on August 17, 2007)

Liquidity and Funding By Region Liquidity and Funding By Region ––CEE/SEECEE/SEE

Credit growth in EBRD countries that are a part of the EU have been moderate compared to other regions—The high growth countries among the EU countries were Bulgaria and Slovenia. Bulgaria as well as Slovenia has a very strong customer deposit base and customer deposits make up about 80 percent of total assets of the banking sector--except for Hungary for all countries in this group more than 50 % of funding comes via customer deposits Foreign ownership is very high, often above 80However, large variations in concentration of ownership. In some of the countries the presence of foreign banks is concentrated among a few large strategics. For example:

– Czech Republic, the three largest banks CS (Erste), CSOB (KBC), KB (Soc Gen), make up more than 50 percent of the banking sector assets

– Poland, other than UniCredit which owns Bank Pekao and Bank BPH (2nd and 3rd largest banks in the country), none of the foreign strategics have a larger than 7 percent market share

Therefore, the impact of the liquidity crisis in this region is rather complex and can often be influenced by:

– changes in the funding conditions of a few strategics– or can be largely biased by strategic decisions—For example, in some of these countries, due to the

competition among large international banks to retain or increase market share the increased funding costs have not been fully passed through to the end consumer, yet.

CEE/SEECEE/SEE

Source: EBRD, Monitoring Reports, Raiffeisen, CEE Banking Sector Report

Figure 5: Foreign Ownership--Parent Bank(Percent of Total Banking Sector Assets)

0%10%20%30%40%50%60%70%80%90%

100%

Czech

Slovakia

Bosnia

Croati

aRoman

iaHungary

Serbia

Bulgaria

Poland

Slovenia

Other Foreign

Bayern LB

Intesa

KBC

SocGen

RZB

UniCredit

Erste

Wholesale funding of the StrategicsWholesale funding of the Strategics

Selected European Banks: Dependence on wholesale financing as of March 2008

Rat

io o

f out

stan

ding

deb

t sec

uriti

es to

tota

l lo

ans

(%)

Source: GFSR, April 2008, IMF, page 26Original Sources: Bloomberg L.P.;Thomson Worldscope;and IMF

0

10

20

30

40

50

60

70

0 5 10 15

Average debt maturity in years

Swedbank

DnB

SEB

Handel

Dexia

Nati

Unic

Sanp

Raiff DanskNorde

BBV

Sant

Rabo

Erst

Liquidity and Funding Liquidity and Funding -- KazakhstanKazakhstan

Kazakhstan has experienced one of the most exuberant credit growths prior to the liquidity squeeze—The sudden drying up of world wide credit in August led to a large disruption in the banking sector.

– Rapid growth in private credit was mainly funded by external credit.– Further, the deposit base of banks was one of the weakest among the countries of

operation– Relative limited foreign ownership at the time, banks also had little alternative funding

source

Nonetheless, the relatively strong FX reserves and the ability and willingness of the Kazakh authorities to intervene were very important in fending off the immediate distress situation that was created in August and September 2007. Even in the case of Kazakhstan, which was the most affected country in the region, the rating for the country itself and for individual banks did not change materially, reflecting the very strong fundamentals the region has compared to historic episodes of financial turmoil

Liquidity and Funding Liquidity and Funding -- RussiaRussia

Among the CIS countries, Russia—while not immune—compared to other CIS less vulnerable to the liquidity squeeze (moderate to high credit growth)Extraordinary FX reserves

– key role in providing great credibility to the Russian central bank during the height of problems– was also recently acknowledged by S&P and led to a change in the outlook for the Russian sovereign

to positive from neutral on March 11 2008However, weaknesses in the funding base of banks exist

– Funding to small and medium sized banks is severely restrained– Lowest ratio of customer deposits to total banking sector assets (among EBRD countries)– Low foreign ownership of banks – Government support for the smaller banks’ is likely to be less than the large players in the market.

Liquidity squeeze may accelerate consolidation in the banking sector, including potentially greater concentration towards the state sectorOne distinct difference in Russia, compared to many other EBRD countries of operation, is that driven mainly by the strong oil prices and the solid economic growth, the corporate sector is still strong

– corporate as well as retail customers continue to ask for loans– Banks (unlike in some other markets) can pass on the additional cost of funding to the customer,

since the end customer is able as well as willing to pay for the higher cost.

FX Reserves of RussiaFX Reserves of RussiaForeign Exchange Reserve of Russia are Exceptionally

Strong driven by High Oil Prices

0.00E+00

5.00E+10

1.00E+11

1.50E+11

2.00E+11

2.50E+11

3.00E+11

3.50E+11

4.00E+11

4.50E+11

5.00E+11

M1 199

0M11

1990

M9 199

1M7 1

992

M5 199

3M3 1

994

M1 199

5M11

1995

M9 199

6M7 1

997

M5 199

8M3 1

999

M1 200

0M11

2000

M9 200

1M7 2

002

M5 200

3M3 2

004

M1 200

5M11

2005

M9 200

6M7 2

007

RUSSIA

Liquidity and Funding By Region Liquidity and Funding By Region ----ETC ETC

High credit growth but driven by low base

Resilience compared to historic experience

Going forward:– Liquidity squeeze is likely to slowdown growth in

banking sector

– Slowdown in world GDP growth likely to impact region

Thank you!