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Press briefing

Press briefing . Debora Revoltella – CEE Chief Economist , UniCredit Group Andrzej Bratkowski – Chief Economist, Bank Pekao SA Warsaw, 6 June 2008. CEE: weathering the international storm. Debora Revoltella – CEE Chief Economist CEE Economic Research. EXECUTIVE SUMMARY.

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Press briefing

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  1. Press briefing Debora Revoltella – CEE Chief Economist, UniCredit Group Andrzej Bratkowski – Chief Economist, Bank Pekao SA Warsaw, 6 June 2008

  2. CEE: weathering the international storm Debora Revoltella – CEE Chief Economist CEE Economic Research

  3. EXECUTIVE SUMMARY • A new international environment, with lower US and European growth, higher uncertainty and volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but usual drivers still hold. Most countries were however relying on external savings to finance growth and, in the context of a general repricing of risk, this might lead to some deceleration in credit expansion • On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing • We still recognize opportunities in the residential real estate sector, even if moderation is on the cards. The residential real estate sector is still characterized by a gap in supply. As income and living standards improve, demand for residential real estate is strong. 2 out of 10 households plan to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been reducing and demand for house purchase is still mostly linked to the emerging middle class segment or to high net worth individuals. This means that, on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues • Increases in house prices have been significant in the last years. We still believe that house prices in the region are compatible with an equilibrium level, although there might be out-of-equilibrium trends in some sub-segments • Looking ahead, there are however a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest. The bursting bubble in Kazakhstan should be the a warning signal for the region.

  4. Agenda Facing the international challenge Central Europe South Eastern Europe and the Baltics Broader Europe countries Residential Real Estate

  5. Slow recovery at the international level, with 2009 to be another gloomy year • Oil prices moderate only marginally, as well as food prices – inflationary pressures remain a key policy constrain • Growth in the US to recover only moderately in 2009, with the FED starting a tightening cycle • Growth in the Eurozone moderating further, forcing the ECB to start an easing cycle, despite strong concerns for inflation • The dollar marginally strengthening against the Euro Source: UniCredit Group CEE Research Network

  6. Repricing of risk highlights local vulnerabilities in CEE Repricing of risk – 5Y CDS Spread1 External unbalances Current Account Deficit vs FDI over GDP (% 2007) 2 Note: 1\ CE: Hungary, Czech Rep., Slovakia, Poland; SEE & Baltics: Croatia, Bulgaria, Romania, Serbia, Latvia; Broader Europe: Russia, Kazakhstan, Ukraine, Turkey; 2\ Latest available data: 30/05/2008 Source: UniCredit Group CEE Research Network, Bloomberg

  7. Repricing of risk at the international level to affect the banking industry in CEE, with some possible credit squeeze Sensitivity to a credit squeeze1 Banks Loans/GDP 2007 1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as external liabilities minus external assets, divided by banks total assets, as of Dec 2007 Source: UniCredit Group CEE Research Network, Bloomberg

  8. Resilient economy Strong slowdown Stagnation So far the CEE region not immune, but still showing good economic resilience Growth rates of real GDP (based on not seasonally adjusted data)1 Economic growth in 2008 Real Estate shock Note: 1\ Based on seasonally adjusted data for Portugal Source: UniCredit Group CEE Research Network, Bloomberg, Eurostat

  9. Agenda Facing the international challenge Central Europe South Eastern Europe and the Baltics Broader Europe countries Residential Real Estate

  10. A cyclical slowdown expected in 2008, with domestic demand remaining the main driver and inflationary pressures strong • GDP growth to decelerate to 4.7% in 2008 in Central Europe, after the 6% peak reached in 2006/2007 • Hungary to recover this year, after the bottom touched in 2007, due to the austerity package implemented by the government (Q1 2008 GDP growth: 1.6% vs 0.8% Q4 2007) • Investment expenditure, despite moderating, continues to support economic growth all over the region • Personal consumption, slightly subdued in 2008 because of higher interest rates and high inflation, will again gain momentum in 2009 and 2010 • Net exports to have positive contribution to GDP growth by 2010 as the global economy accelerates again • Tightened fiscal policies curb government expenditure, but 2010 is an election year (2011 in Poland) Real GDP (% yoy) Inflation (% yoy) Source: UniCredit Group CEE Research Network

  11. Strong growth and rising inflation lead to monetary policy tightening, with markets betting on an even tighter stance Poland Czech Republic Reference rate, eop. May-07 Aug-07 Nov-07 Feb-08 May-08 May-07 Aug-07 Nov-07 Feb-08 May-08 Slovakia Hungary • Reference rates to further increase in Poland during the summer period • The National Bank of Hungary, after raising interest rates by 100 bps since March, expected to come back to 7.50% by year end May-07 Aug-07 Nov-07 Feb-08 May-08 May-07 Aug-07 Nov-07 Feb-08 May-08 Reference Rate Interbank Rate Note: 1\ Latest available data: 30/05/2008 Source: UniCredit Group CEE Research Network, Bloomberg

  12. After Slovenia joining the EMU in 2007, only Slovakia is outrunning • After Slovenia joined the EMU in Jan. 2007, Slovakia is the only country in Central Europe that will join Euro zone in the next months. • The European Commission recommended, in early May 2008, accession of Slovakia to Eurozone. Thus, the process got the most important “green light” and moved to the final phase. The European Parliament, the Ecofin (3rd June) and the European Council (consisting of prime ministers and presidents of the EU – 19th - 20th June) have to take a stand of the EC recommendation. Euro adoption will be finally confirmed by the Ecofin on July, 8th. By this date, the convergence rate will be also determined • On May 29th, the central rate of the Slovak koruna in the ERM II has been revalued by 17.6% and set at 30.1260 versus euro, on ongoing improvements in underlying fundamentals • No EMU accession data set for Poland, Czech Republic and Hungary yet • We foresee 2012 as the first possible EMU entry date for Poland, while for the Czech Republic and Hungary 2013 looks more likely Source: UniCredit Group CEE Research Network

  13. Agenda Facing the international challenge Central Europe South Eastern Europe and the Baltics Broader Europe countries Residential Real Estate

  14. The Baltics are now facing a pronounced slow-down, with some cooling on the cards also in SEE Real GDP Growth (% yoy) • A pronounced slow-down in the Baltics, with lowering capital inflows, reduced credit growth and cooling real estate markets • Further cooling is anticipated in the Baltics, with growth to bottom out between 2008 and 2009 in Estonia and Latvia, respectively • SEE countries still show good dynamics, with lively consumption and a booming investment activity • Tighter liquidity conditions in the context of high external disequilibria are however expected to drive some slowdown Main drivers of GDP growth (% avg 2008-2010) Source: UniCredit Group CEE Research Network

  15. Some potential credit squeeze, which in some cases works in line with Central Banks aspirations Sensitivity to a credit squeeze1 Total loans (% yoy growth)2 Romania Batlics Bulgaria Bosnia Croatia Serbia Banks Loans/GDP 2007 1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as external liabilities minus external assets, divided by banks total assets, as of Dec 2007; 2\ Total loans include general govt, non-financial corporations and retail and where available NPISHs and Non-MFIs Source: UniCredit Group CEE Research Network, Bloomberg

  16. Agenda Facing the international challenge Central Europe South Eastern Europe and the Baltics Broader Europe countries Residential Real Estate

  17. 7% > CPI > 4% CPI > 12% 12% > CPI > 7% Strong growth but booming inflation Inflation (CPI, yoy %, April) GDP Growth %, real Source: UniCredit CEE Research

  18. Some credit squeeze Banking sector dependency on foreign funding (Ext. Liabilities – Ext. Assets)/Tot. Assets (%) Lending Growth (Monthly, yoy) • Banks need of foreign funding and strong increase in the of cost of risk point to a significant vulnerability of the Kazakh banking sector. The global liquidity crunch has translated into stalled credit growth • Some funding problems might emerge, most probably affecting only a few players, with no systemic consequences, in Russia. For Ukraine refinancing costs have increased but the large share of foreign ownership should protect the banking sector from a sever downturn. • While remaining very sensitive to capital market volatility, Turkey is relatively less likely to face constraints to lending growth; however the tighter monetary policy will have some effects Source: UniCredit Group CEE Research Network

  19. Agenda Facing a new global environment Central Europe South Eastern Europe and the Baltics Broader Europe countries Residential Real Estate

  20. Dwelling stock per ‘000 inhabitants1,4 The transition process throughout the region resulted in very high home ownership rates, still in the context of a gap in supply Home ownership in CEE and Western Europe1,2,3 Coo-perative • The privatization in the early 1990s led to widespread private ownership, with around 77% of the housing stock being currently owner-occupied vs 64% in the older EU states • Still the CEE region residential market is characterized by an housing gap Notes: 1\ EU: AT, DK, FI, FR, IT, NL and ES; last available Census for EU countries; 2\ Data as of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for HU and RUS; as of 2006 for EST, PL and RO; 3\ Calculated as ratio between owner-occupied dwellings over total occupied dwellings measures in physical units, except for Russia (sqm); 4\ As of 2001 for LT, 2006 for BG, HR, EST, LV, PL, RO and UKR and as of 2007 for CZ, HU and SK Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland), UNECE

  21. Construction activity has been strong in the last years, especially in the capital cities and urban areas, but well below western standards Dwelling unit completion per ‘000 inhabitants1,2 IRELAND= 19.0 SPAIN= 12.6 EU=Ø 7.4 % of dwellings built after 19903 7.2 8.8 8.3 5.3 11.1 n.a. 7.1 12.9 11.5 n.a. 6.9 n.a. Notes: 1\ EU proxy including AT, DK, FI, FR, IE, IT, NL and ES; 2\ BG, HR and RUS (no. of apartments): 2000-2006; 3\Census data (last available year) Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)

  22. Average number of rooms per dwelling1,2 Average usable area per dwelling1,2 The housing gap is enhanced when quality standards are considered • The communist regime left the CEE region with a unique housing stock of relatively recent, but often rundown homes • Quality and maintenance issues are particularly relevant in some CIS countries • In Central European countries, like Hungary and the Czech Republic, quality standards are much more similar to western ones Notes:1\ EU proxy including AT, DK, FI, FR, IT, NL and ES; 2\ EU: Census data (last available year). As of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for RUS and UKR, as of 2006 for EST, HU, PL and RO Sources: UniCredit Group CEE Research Network, Department of the Heritage and Local Government (Ireland)

  23. Survey data show strong potential demand, mostly as primary house General likelihood to buy new house/flat (%)1,2 • 2 out of 10 households intend to buy real estate property • 9 out of 10 potential buyers are seeking for an house to live in • Some rising demand associated to investment or vacation purposes, particularly in Croatia, Bulgaria and Romania UKR Avg SI CZ HU SK HR PL RUS RO SRB BG BIH General likelihood to buy new house/flat, by purposes1,2,3 Avg SI CZ HU SK HR PL RUS RO SRB BG BIH UKR Notes:1\ Survey involving 1,000 individuals (more than 2,000 in RUS) aged >15 and living in the largest cities of the country; all interviews were conducted as personal face-to-face interviews by Bank Austria’s long term partner agencies (GfK, RmPlus, TNS); 2\Countries are ranked by level of per capita GDP; 3\ Sample represented only by those willing to buy new house/flat Sources: UniCredit Group CEE Research Network, Bank Austria Market Research.

  24. Growth in house prices has been persistently high, … Residential property prices in the enlarged Europe (yearly average increases 2002-2007)1,2 Notes:1\ Growth rates calculated in local currency (nominal terms). All data used are from NCBs and local Statistical Offices and refer to non-harmonised national sources, thus any comparison on the dynamic of house prices across countries should be taken with care; 2\ BE, DE, IT: 2002-2005; NL, PT, LV, LT: 2002-2006. House prices for Latvia and Ukraine refer to capital cities Sources: UniCredit Group CEE Research Network based on National Statistical Offices, NCBs, Department of the Environment Heritage and local Government (Ireland)

  25. …still no major deviations from equilibrium trends Ratio of real estate prices over equilibrium prices in 20072,3,4 Real estate prices, country avarage (EUR per sqm)1,3 Notes: 1\ LV, LT: 2006; 2\ LV, LT, RUS: 2006; 3\ Prices for Latvia refer to Riga suburbs, while for Romania to Bucharest; 4\ Equilibrium house prices are calculated based on out-of-sample estimation by regressing house prices (expressed in real terms) on GDP per capita in PPS and mortgage rates using Eurozone countries as a benchmark Source: UniCredit Group CEE Economic Research Network

  26. Housing investment affordability has significantly decreased over the last years Affordability Index (2007)1,2 • Over the last years, growth in real estate property prices much higher than in wages resulting in a sharp deterioration in housing affordability • Low affordability implies that in many countries demand for house purchases remains mostly related to the emerging middle class segment or to high net worth individuals Affordability of housing investment3 (percentage of households over total) Notes: 1\ The affordability index is calculated as house prices (€ per sqm)/ average gross monthly wages; 2\ As of 2006 for Latvia, Lithuania and Ukraine; 2005 for Italy, Finland and Austria and as of 2003 for France. Prices for old EU Countries (except Finland), Latvia and Romania refer to the capital cities; 3\ Share estimated using an affordability index benchmark of 2 (measured as house prices per sqm over gross monthly wages) and official statistics on households’ income distribution Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)

  27. Gap in supply matched to continuously lively demand to remain a clear driver for long term sustainability • Bulgaria: more selection to come on the holiday home segment • Croatia: monetary tightening is expected to slow otherwise solid growth • Czech Republic: no housing bubble on the horizon (yet) • Hungary: some oversupply, but no evidence of price bubble • Kazakhstan: bubbles do burst • Poland: first signs of stabilization, but housing gap remains • Romania: some cooling but still with high potential in the mid term • Slovakia: still healthy growth potential on the horizon • Turkey: still a market for few people • Ukraine: untapped potential in the medium-high segment, with some cooling on the luxury one Years to saturation1 Note: 1\The number of years before saturation in the residential property market is calculated as the ratio between the estimated market potential (total number of households willing to buy a new house/flat) and the current level of construction activity (based on last available data) under the extreme assumption that all potential buyers will look for new housing Sources: UniCredit Group CEE Research Network, Eurostat

  28. EXECUTIVE SUMMARY • A new international environment, with lower US and European growth, higher uncertainty and volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but usual drivers still hold. Most countries were however relying on external savings to finance growth and, in the context of a general repricing of risk, this might lead to some deceleration in credit expansion • On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing • We recognize still opportunities in the residential real estate sector, even if moderation is on the cards. The residential real estate sector is still characterized by a gap in supply. As income and living standards improve, demand for residential real estate is strong. 2 out of 10 households plan to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been reducing and demand for house purchase is still mostly linked to the emerging middle class segment or to high net worth individuals. This means that, on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues • Increases in house prices have been significant in the last years. We still believe that house prices in the region are compatible with an equilibrium level, although there might be out-of-equilibrium trends in some sub-segments • Looking ahead, There are however a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest. The bursting bubble is Kazakhstan should be the warning signal for the region

  29. Press Office press@pekao.com.plBank Pekao SA Grzybowska Str. 53/5700-950 Warszawatel.: +48 22 656 07 01fax: +48 22 656 04 16www: http://www.pekao.com.pl

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