INTERNATIONAL SUBSIDIARY BANKS DIVISION

EE Banking landscape

"There are only the pursued, the pursuing, the busy and the tired.“

Francis Scott Key Fitzgerald “The Great Gatsby”

Taras Kirichenko, CEO Pravex Bank, Intesa Sanpaolo Group CIS Bankers, 2nd International Banking Conference & Exhibition Kiev, June 6th, 2013

2

4 key trends – 3 strategies

Strong fundamental growth potential

1

Structural volatility 2

Increasing diversity of performance

3

Technological shifts 4

Portfolio reshaping

Front-office effectiveness

Operational consolidation

3

EE again sells its potential

S t r o n g fundamental g r o w t h potential

1

Ø  EE is likely to return to a moderate GDP growth track (EE CAGR 2011\2020 +3,2%, Ukraine +3,8%, Russia +4,1%)

Ø  In the long run EE banking revenues have above par growth prospects mostly driven by economic growth, lending volumes and risk costs (EE revenues CAGR 2011\2020 +9,7%)

Ø  EE is still very underpenetrated in banking (Retail volume/Disposable income 100% vs 371% world av. - Corporate volume/GDP 56% vs 99% world av.)

Source: EIU. McKinsey Global Banking Pools

Origin Outlook for the next years

q EE markets continue to be underpenetrated (retail volumes over disposable income is only 100% vs ~370% global average)

q There is a natural momentum to PFA accumulation

q Eastern Europe is likely to stay one of the fastest growing regions in a global setting

q Two drivers at play Ø GDP growth potential of the

region Ø  Low penetration

4

Rollercoaster

Ø  EE macro-economic outlook clearly worsened in the last 12 months (Ukraine 2011\2015 GDP growth forecast in July 2011 was +4,23%, in July 2012 was +3,48% and continuously decreasing)

Ø  Plenty of possible global downturn banking scenarios could impact EE banking in different extent (Eurozone breakup, Asia slowdown, US fiscal spiral)

Ø  Macro volatility led ¾ of banks to be valued at below 1.0x (EE is the region with the highest number of “below 1x” P/BV banks (77% vs world av. 61%)

Source: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global Insight

S t r u c t u r a l volatility 2

Origin Outlook for the next years

q Fragmented markets with: Ø  Low financial wealth Ø Declining demographics

q Sensitivity to developments in EU and global commodities markets (Russia/Ukraine)

q The combination of low wealth and poor demographics creates vulnerability

q The region seems to be sensitive to adverse events, e.g., EMU breakup

q Valuation multiples hit their lows

5

There are different sheeps in the herd

Ø  In the last 12 months divergences in performance have been expected among EE banks. Main groups: Relative stability (Czech Republic, Slovakia), Healthy (Russia, Poland, Croatia, Bulgaria), Constrained (Hungary, Ukraine, Serbia, Romania, Bosnia, Albania)

Ø  The increasing diversity is reflected by the widening ROE gap between the best and the worst (more than 10% difference between “performing” and “constrained” groups)

Ø  The divergence between banking groups is also prominent, even within the same markets (Av. ROE–COE, from +2,6% to -5,2%)

Ø  High margin and low cost in EE are key factors keeping banking returns high versus WE, however, both are vulnerable

Source: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global Insight, Annual reports; McKinsey estimates

I n c r e a s i n g diversity of performance 3

Origin Outlook for the next years

q Macro/banking vulnerability differs by country

q Broadly, two country performance groups: “Constrained” and “Performing” countries

q Several regional players are severely hurt

q Risk costs at peak levels in many markets

q Health’ (sustainable Loan-to-Depo and capital adequacy) has become a true differentiator

q Risk cost rebound

6

Industrial revolution starts in Emerging Markets

Ø  While slower than in Northern Europe, role of branches is expected to change in CEE as well, requiring answers from banks (expected decline in branch visits: NE -48%, CE -27%, EE -20%)

Ø  Young citizens of some EE countries already match and exceed their WE peers in terms of Internet usage, but there is still a gap in mature groups

Ø  16-24 generation growing older will likely apply their habits also to banking needs

Source: Thomson Reuters, McKinsey Global Financial Initiative, Oxford Economics, Global Insight, Annual reports; McKinsey estimates

Technological shifts 4

Origin Outlook for the next years

q Rapid changes in consumer behavior and challenging economics make for rapid adoption of new technologies

q Threat of new/non-traditional entrants

7

3 key strategies

Ø  The portfolios of the Top 10 banking groups remain fragmented

Ø  Consolidate / exit sub-scale markets Ø  Potential asset swaps

Portfolio reshaping

Front-office effectiveness

Operational consolidation

Ø  Raise effectiveness of physical networks, re-define channel strategy

Ø  Pilot new technologies Ø  Focus more on strategic customer segments

Ø  Truly ‘frugal’ look at operating cost base and processes

Ø  Lean 2.0 to reduce waste in operations and rationalize costs

Ø  Consolidate operations regionally, where possible

Source: McKinsey

8