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Analysts Presentation Milan, March 25 th , 2002

UniCredito Italiano. “Catching the Embedded Value of the New Europe”. Analysts Presentation Milan, March 25 th , 2002. GOALS OF THE PRESENTATION.

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Analysts Presentation Milan, March 25 th , 2002

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  1. UniCredito Italiano “Catching the Embedded Value of the New Europe” Analysts Presentation Milan, March 25th, 2002

  2. GOALS OF THE PRESENTATION To highlight macroeconomic developments in the New Europe, in order to show the embedded value of the region, which relies in sustained economic and banking growth and decreasing risk To provide basic framework in order to evaluate UCI-New Europe (NE) Division within a sum of parts valuation approach

  3. Executive Summary UCI continues to profit from its leadership strategy in the New Europe, an area characterised by high growth potential, decreasing risk and getting closer to the EU • In two decades market positioning in the New Europe will be comparable to that in other EU member countries. For UCI being a leader in the region means high revenue opportunities now and first mover advantage in the future. • UCI New Europe division is increasing its weight on group performance, while an effective operating and governance structure has been developed • Accelerated and sustainable growth, coupled with decreasing risk, represent the embedded value of the New Europe • Economic growth, supported by both infrastructure development and EU convergence process, and increasing banking penetration guarantee high profitability in the next decade, with two digit CAGR in pre tax profits in all countries • Decreasing risk, supported by EU convergence, leads to growing value added, due to contraction in cost of equity • Despite national differences, a positive growthscenario characterizes all UCI operating countries

  4. Agenda UCI and the New Europe The embedded value of the New Europe New Europe countries: opportunities and perspectives Conclusions

  5. UCI IS ALREADY LEADER IN TERMS OF PROFITABILITY AND ASSETS IN THE REGION … Total Assets controlled* bln Euro, 31/12/2000 Total net profit Bln Euro, 31/12/2000 24.8 392 (271 mln Euro pertaining UCI) 18.8 253 24.7 202 Including Zagrebacka Banka 162 9.0 100 11.3 * Considering 100% of total assets only for controlled Companies (stake > 50%) and including foreign branches

  6. … WITH WIDESPREAD PRESENCE… Poland Slovakia Group Pekao UniBanka* Warsaw * Formerly Pol’nobanka Romania Bratislava Demirbanka Croatia Zagreb Romania Zagrebacka Banka Sofia Bulgaria Bulbank Pioneer

  7. Bulbank 23.3% 22.9% 13.1% 23.9% Splitska Banka 5.9% 5.9% 6.0% 4.9% 7.6% 8.4% Zagrebacka 34% 36% 22% 25% 30% 36% 1.3% 10.8% … AND SIGNIFICANT MARKET SHARE Loans Corporate Loans Retail Deposits Corporate Deposits Retail Loans Deposits Year 2001 14.8% 12.6% 16.4% 18.2% Pekao 15.6% 12.2% 5.6% n.s. Pol’nobanka 3.5% 2.6% 6.6% 4.8% Demirbank Romania 0.6% n.a. 0.7% n.a. n.a. n.a. Note: Pekao: December. Bulbank, Pol’nobanka: November. Splitska banka: October. Demirbank Romania: innternal estimate. Zagrebacka : June 2001 Source: UCI, TdB.

  8. NEW EUROPE BANKING IN 2001: KEY HIGHLIGHTS MORE AND MORE IMPORTANT GROWTH FACTOR FOR UCI • Macroeconomic environment sustains accelerated growth • Further restructuring opportunities available • New acquisition in the pipeline to fuel further growth BRILLIANT ECONOMIC RESULTS … +43% OPERATING INCOME GROWTH (+31% at fixed FX), THANKS TO: • Revenue generation (+21% y/y, +11% at fixed FX) and diversification (Net non Interest Income/Total Revenues 39%,+2.5 p.p. y/y) • Strict cost control (C/I Ratio down by 8 p.p. to 48.9%) … IN A LESS FAVOURABLE THAN EXPECTED 2001 ENVIRONMENT (TO IMPROVE IN 2002) • Economic slowdown in Poland (1,1% real GDP growth in 2001 vs 4.0% in 2000) while growth in other countries remained strong • Strong reduction of Polish interest rates STRONG PERFORMANCE OF THE DIVISION ALSO PROVEN BY: • Out-performance of Bank PEKAO vs major competitors • Increased contribution of other banks CAPITAL GAIN ON SPLITSKA (over Euro 34 mln gross of tax effect with 60% gross return on 1.5 years) PROVIDES TANGIBLE EVIDENCE OF NE STRATEGY

  9. OPERATING INCOME UP 43% Y/Y AND NET INCOME GROWTH AT +53% Y/Y (+31% AND +42% AT END 2000 FX RESPECTIVELY) +6% Mln € Net Interest Income • VOLUMES GROWTH*: • Gross Customer Loans: +17,3% yoy • Customer Deposits: +16,6% yoy • COMMERCIAL ACTIONS: • Active and rapid Repricing • Increased sales productivity +11% Total Revenues +16% 943 +21% 812 1,541 +31% 1,275 Operating Income +43% 787 2000 2001 Non Net Interest Income 552 +18% • NEW VALUE ADDED PRODUCTS INTRODUCED • Structured CD • Asset Management products • Credit Cards and Payment Services 2000 2001 +29% 599 464 Cost/Income 56.7% 2000 2001 48.9% 2000 2001 -7.8 pp • -2.400 HEADCOUNT VS 2000: • Implementation of outsourcing opportunities • Incentives to exits, management of turnovers • STRICT COST CONTROL • Tight procurement, centralised purchasing • Real estate restructuring • Full scope contract renegotiation At end 2001 FX At end of period FX** 2000 2001 * Calculated on end of period data. ** Exchange ratio at 31 December.

  10. INCREASED CONTRIBUTION TO DIVISION’S NET INCOME FROM BULBANK, SPLITSKA, AND POL’NOBANKA THANKS TO RESTRUCTURING NEW EUROPE BANKING NET INCOME – UCI’s PORTION: EURO 227.3 mln (+35% y/y) SPLITSKA 5% (Euro 10.9 mln) POL’NOBANKA 1% (Euro 2.2 mln) BULBANK 14% (Euro 30.9 mln) GROUP PEKAO 80% (Euro 183.3 mln) Group Pekao Bulbank Total Division Splitska Pol’no Banka +81 ** +53 +80 (2) +175 n.s. Net Income – % y/y growth* ROE, % 21.1 22.2 14.7 23.8 9.0 ROE – point perc. Change ‘00 +5.5 ** +2.6 +6.6 (2) +13.5 n.s. C/I Ratio, % 48.9 48.7 45.9 48.0 68.2 -7.8 -7.9 -5.2 -6.9 -13.7 C/I Ratio – point perc. Change ‘00 17.7 23.5 29.7 17.9 1.8 RARORAC, % * At Unchanged FX. ** For 2000 Bulbank Net Profit net of € 79 mln (pre tax) extraordinary income from UBB disposal

  11. OVERALL ASSET QUALITY PRESERVED DESPITE ECONOMIC SLOWDOWN IN POLAND THANKS TO PEKAO’S SELECTIVE LENDING POLICY AND EFFECTIVE RECOVERY ACTIONS Mln € KEY HIGHLIGHTS 2000 2001 % change (Fixed FX) Volumes • Selective and conservative lending policies Total gross loans 9,845 11,552 +7.4 • Deterioration of asset quality mainly due to the economic slowdown in Poland in 2001 Gross NPL 916 1,241 +25.4 Gross NPL/total gross loans (%) 9.3 10.7 +1.4 Net NPL/total net loans (%) 1.4 2.4 +1.0 • Good coverage ratios, although negatively impacted by write-offs Coverage ratios • Approximately 25%(3) of Doubtful Loans with no payment delays(4) -on total gross loans (%) (1) 9.7 10.4 +0.7 56.1 -3.3 59.4 -on total gross doubtful loans (%) (2) WE ARE PROMPTLY REACTING THROUGH: • Conservative lending policy • Implementation of new lending rules and procedures and active monitoring • Effective recovery actions (1) Total loan loss provisions /Total gross loans (2) Total specific provisions for doubtful loans/ Total gross doubtful loans (3) Internal estimate based on Pekao’s current portfolio situation (4) Due to restrictive Polish regulation based on financial ratios and risky sectors

  12. NEW EUROPE BANKING: RESULTS BREAKDOWN BY BANK New perimeter: excluding Splitska and including Zagrebacka Mln € ZAGRE-BACKA BANKA Group (85%(2)) Group PEKAO (53,2%) POL’NO BANKA (72,4%) SPLITSKA BANKA (62,6%) BULBANK (85,2%) TOTAL (1) TOTAL UCI stake 206 Interest margin (incl. div.) 823 21 1 101 47 942 51 Net non interest income 545 13 159 740 18 599 23 Total revenues 1 368 34 365 1 841 65 1 541 74 754 Operating costs (incl. dep.) 666 23 249 972 31 34 34 Net operating income 702 11 116 869 787 40 12 204 174 5 22 185 Net loan loss provisions 6* 18 353 3 63 455 Net income 410 36 183.3 2.2 270 Net income (UCI’s portion) 10,9 227,3 53.6 30.9 23,8% 9.0% 21,1% ROE 14.7% 22.2% 13.5% 19.5% Cost/income (excl. goodwill dep.) 48,9% 48.7% 45.9% 68.2% 68.2% 52.8% 48,0% (1)Balance due to roundings and elisions (2)IAS, calculation based on an estimated share acquired (*)Writeback

  13. THE NEW EUROPE DIVISION IS INCREASING ITS WEIGHT ON UCI GROUP… 2001 • New Europe carries a significant increasing weight on Group performance • Weight increasing as result of restructuring and new investments • RARORAC above Group level • A very significant EVA contribution Amount invested (mln €) 1,570 Net Income (% of UCI) 18.0%* Revenues (% of UCI) 17.9%* 17.7%** % RARORAC * Including Zagrebacka, excluding Splitskabanka (at 2001 perimeter: net income = 15.6% , revenues = 15.4%). ** UCI Group RARORAC = 9.97%.

  14. ... WHILE AN EFFECTIVE ORGANISATION MODEL HAS BEEN ADOPTED Strategy and organization model Opportunity • Similar segment strategies (respecting single country differences and single banks position) • Same business models and target information systems • Economies of scale (ex. card processing, single purchase center) and product (ex. Pioneer) • Strong P&C • Homogenous region: • Countries with similar dynamics (but different life-cycles) • Converging regulation (EU convergence)

  15. A UNIQUE TECNOLOGY FOR DIFFERENT OUTSTANDING MODELS Cars & Pilots Mechanical support

  16. LOCAL BANKS: DIRECT MANAGEMENT RESPONSABILITY/ACCOUNTABILITY • WHAT DO THE BANKS DO • Keep relationships with local Public Institutions • Define commercial policies • Manage daily operativity • Devise credit policies • Implement investment policy and credit strategies approved by the Supervisory Board cars & pilots with local pilots and UCI co-pilots * * Mainly but not exclusively on controlling functions.

  17. HOLDING: STRATEGIC GUIDANCE AND BUSINESS SUPPORT • WHAT DOES THE HOLDING DO • Strategy & Control • Strategic guidelines • Performance budgeting & controlling • Risk budgeting & controlling • Audit • Support in development of: • Products (retail/corporate) • Operation & Process (credit risk,…) • IT & Systems • HR training • Centralized production (ex. card processing, asset management,…) Mechanical support

  18. Agenda UCI and the New Europe The embedded value of the New Europe Accelerated and sustainable growth Decreasing risk New Europe countries: opportunities and perspectives Conclusions

  19. Tallinn Estonia Riga Poland Latvia Vilnius Lithuania Czech Rep. Warsaw Slovakia Prague Bratislava Hungary Budapest Lubjana Zagreb Bucharest Romania Bulgaria Slovenia Sofia Croatia WHAT DO WE CONSIDER NEW EUROPE? A REGION INCLUDING 10 EU ACCESSION COUNTRIES PLUS CROATIA New Europe EU Year 2001 Population, mln 108 377 496 9,006 GDP, bln € 23,885 4,595 Per Capita GDP, € Source: Datastream and EIU.

  20. EMU entry WHY NEW EUROPE? PERSPECTIVE ENTRY INTO EU AND EMU GUARANTEES A PREDETERMINED CONVERGENCE PATH Phase 1: pre-accession Phase 2: EU membership No Euro adoption Phase 3: full EMU membership Upon fulfillment of Maastrichtcriteria (min 2 years) – no opting out Accession negotiations Ratification (18 months) ERM II T Min T+2 Poland, Slovakia, Hungary, 3 Baltics, Czech R., Slovenia 2004 Bulgaria, Romania and Croatia 2007 EU entry

  21. SUSTAINABLE, HIGH GROWTH AND A DECREASING LEVEL OF RISK REPRESENT THE “EMBEDDED VALUE” OF THE NEW EUROPE Accelerated and sustainable growth Bank revenues and profitability • Decreasing level of risk Cost of equity

  22. Agenda UCI and the New Europe The embedded value of the New Europe Accelerated and sustainable growth Economic growth Banking growth Decreasing risk New Europe countries: opportunities and perspectives Conclusions

  23. ACCELERATED AND SUSTAINABLE GROWTH DRIVEN BY SIGNIFICANT MACROECONOMIC DEVELOPMENT AND INCREASING BANKING PENETRATION Existing economic development gap suggests opportunities of high and sustainable growth, with real GDP growth rates well above EU standards for the next two decades Post convergence experience (Spain, Portugal, Ireland) and structural reasons, support reliability/credibility of accelerated growth expectations in NE Positive economic scenario and wide scope for increasing banking penetration suggest a dynamic growth scenario for banking revenues, with two digit CAGR for the next decade

  24. Agenda UCI and the New Europe The embedded value of the New Europe Accelerated and sustainable growth Economic growth Banking growth Decreasing risk New Europe countries: opportunities and perspectives Conclusions

  25. CATCHING UP PROCESS TOWARDS THE EU SUGGESTS A LONG PERIOD OF FAST AND SUSTAINABLE GROWTH • NE growth rate (past and expected) well above EU and USA • Current gap in per capita income between EU and NECs (New Europe Countries) suggests a continued more dynamic growth Source. Per capita GDP in PPP: EU Commission estimates, 2000. Real GDP growth: UCI- FBD Research Team and UBM.

  26. PAST EXPERIENCES OF EU ENLARGEMENT ADDRESS TO IRELAND, SPAIN, AND PORTUGAL AS SUCCESS ROLE MODELS Average Growth 1986/01 IE+SP+POR 4.2% EU 2.1% • The experience of past EU enlargement processes shows that catching up implies decades of average growth above EU standards • Spain, Portugal, and Ireland experienced for 20 years growth by 2/3% point higher, compared to the EU Source: University of Groningen database.

  27. IN 20 YEARS OPERATING ENVIRONMENT OF NECs WILL BE EQUIPARABLE TO OTHER EU MARKETS Estimated time for convergence to EU per capita GDP in PPP • NECs should approach the average of 3 least developed EU countries (Portugal, Greece and Spain) by 2020… • … with two decades of growth rates 2%/3% higher than EU levels Note: Consensus on average years to convergence forecasted by different growth models (Barro model and Levine- Renelt model in Fisher et al (1998) and EU commission convergence model (2001). EU standards are based upon per capita GDP of the three low income EU members, Portugal, Spain and Greece, with convergence income representing 75% of EU’s per capita GDP. Results of different models are similar, with the exception of Slovenia, where the EU Commission forecasts 1 year to convergence.

  28. STRUCTURAL REASONS FOR GROWTH ARE RELATED TO THE NATURE OF NECs AS TRANSITION ECONOMIES, SIGNIFICANTLY DIVERGING FROM EMERGING MARKETS EXISTING SKILLS AND INFRASTRUCTURE EU ACCESSION PROCESS • Existence of industrial assets • Developed infrastructures • Skilled labour force and availability of human capital • Historical linkages with EU countries • Pre-determined path of convergence and forced structural reform process • Harmonisation of legal and regulatory framework • Integration and liberalisation of markets • EU financial support for convergence

  29. PRODUCTION • DEMAND NEW EUROPE ECONOMIC GROWTH CAN BE ANALIZED BOTH ON PRODUCTION AND DEMAND SIDE ECONOMIC GROWTH

  30. ON THE PRODUCTION SIDE, DRIVERS OF GROWTH ARE MAINLY RELATED TO PRODUCTIVITY GAINS AND CAPITAL (INVESTMENT INFLOW) PRODUCTION SIDE Structural reasons for growth Relevance* Capital - Foreign direct investment - EU structural funds - availability of domestic invest. /saving 47% Factors leading to growth • Productivity gains • - privatisation and restructuring • Foreign Direct Investment • - skilled work force • - competitive challenge of EU market 38% • Labour • - low cost of labour • limited wage pressures, due to unemployment 15% * Contribution to 2000-2009 growth in 10 CEE candidates for EU enlargement. Source: EU Commission estimates.

  31. SUSTAINED AND INCREASING INFLOW OF FDI SUPPORTS HIGHER CONTRIBUTION OF CAPITAL TO GROWTH AND INCREASES IN PRODUCTIVITY PRODUCTION SIDE FDI provide a positive contribution to the catching up process: • enhancing structural transformation, thus boosting capital and labour productivity • sustaining productive investment, with consequent positive impact on export * Average of single countries’ ratio, weighted with nominal GDP. Source. FDI flows: Transition Report 2001, EBRD. Stock of FDI: UNCTAD, 1999. GDP: EIU forecasts.

  32. NECs PRODUCTIVITY INCREASING AT DOUBLE THE SPEED OF EU WITH STRONG SCOPE FOR FURTHER GROWTH PRODUCTION SIDE • NECs productivity growing at twice the speed of EU • Gap in productivity levels leading to higher productivity growth in the future, further enhanced by entry into the EU market (free movement of resources, transfer of technology, and homogenisation of market conditions) * Austria taken as reference country for EU. ** Czech Republic, Hungary, Poland and Slovakia. Source. Productivity gap: WIIW, 1999. Productivity growth: WIIW 1999, average of 4 NECs.

  33. UNEMPLOYMENT, DETERMINED BY RESTRUCTURING AND PRODUCTIVITY GAINS, AVOIDS RISK OF STRONG SALARY PRESSURES PRODUCTION SIDE • Low labour cost sustains competitive advantages, compared to the EU • Persisting unemployment guarantees low salary pressures, supporting real rather than nominal convergence Note: NECs cost of labour is a simple average. Source: EIU forecasts, 2001.

  34. ON THE DEMAND SIDE , INTERNAL DEMAND RATHER THAN EXPORT IS DRIVING NE GROWTH, MAKING GROWTH LESS VULNERABLE TO THE INTERNATIONAL ENVIRONMENT DEMAND SIDE Structural reasons for growth Relevance for 2002-04 Gap in life-style Key factors for internal demand growth Investment and FDI Internal led growth EU structural funds Factors leading to growth Increase disposable income Selected comparative advant. Key factors for export growth Cost of labour Full liberalisation of markets

  35. GAP IN LIFE STILE IS EXPECTED TO SHRINK WITH INCREASING MOVEMENT OF LABOUR, FREEDOM OF SETTLEMENT, ETC. DEMAND SIDE % Food on Household Spending % Leisure on Household Spending Gap in Personal Disposable Income per head USD * 27.2% 13,093 14.0% 14.1% 8.3% 2,442 Italy NECs Italy NECs Italy NECs Mobile per 100 population Internet users per 100 population Housing stock per 1000 population 88.8% 37.5% 402 339 10.2% 21.4% Italy NECs Italy NECs Italy NECs * Income plus transfers, minus taxes. ** Households spending in tourism and restaurants. Note: NECs is weighted average of Poland, Slovakia, Romania, Bulgaria. Source: EIU.

  36. Agenda UCI and the New Europe The embedded value of the New Europe Accelerated and sustainable growth Economic growth Banking growth Decreasing risk New Europe countries: opportunities and perspectives Conclusions

  37. SUSTAINED GROWTH SCENARIO IS DETECTED IN TERMS OF PRE TAX BANKING PROFITS, WITH TWO DIGIT CAGR IN THE NEXT DECADE Despite convergence and increasing competition, high growth opportunities in terms of pre tax revenues are expected Note: 10 Year macroeconomic assumption from Oxford Economic Forecasting. Source: UCI - FBD Research Team, simulated model for NECs data.

  38. In the NE volume effect to offset contraction in spread, supporting NIM growth... • … with significant increases in fees generation, although lower than in Italy in 1996-01… • … and decreasing credit risk POSITIVE PERSPECTIVES ARE EVIDENT ALSO COMPARED TO WHAT HAPPENED IN ITALY IN THE LAST 5 YEARS (EMU CONVERGENCE PERIOD) Net Interest Margin CAGR Loans+Deposits, CAGR Non Interest Margin CAGR 17.7% 12.6% 6.0% 7.3% 10.0% 0.4% New Europe Italy New Europe Italy New Europe Italy Operating Costs CAGR Total Net Revenues CAGR Provisions/Loans 1.0% (down from 2.0) 7.9% 6.5% 3.1% 0.8% (down from 1.5) 2.9% Italy Italy New Europe New Europe New Europe Italy Source: UCI - FBD Research Team, simulated model for NECs data. 10 Year macroeconomic assumption for OEF. Data for Italy, Prometeia

  39. 300% 250% EU 200% 150% (Loans+Deposits)/GDP CR 100% SK POL SLO HU 50% EST BU LAT LIT RO 0% 0 5 10 15 20 25 GROWTH OPPORTUNITIES ARE RELATED TO RELATIVELY LOW BANKING PENETRATION, … Per capita GDP (‘000 USD) • Significant banking growth potentialdriven by: • gap towards EU penetration levels, • low levels in absolute terms, • NECs economic growth Source: UCI on National Central Banks and FBD Research Team’s projections.

  40. … AND TO PERSISTING DIFFERENCES IN DOING BANKING IN NE AND EU COUNTRIE, CREATING SCOPE FOR FURTHER DEVELOPMENTS Share loans retail over total loans Cards per ths inhabitants (Loans+Deposits)/ GDP 862 • Significant scope for growth in banking penetration and increase in fees generation • Lower cost of labour, but higher cost of risk 53% 337% 28% 248 94% New Europe EU New Europe EU New Europe EU UCI’s ‘01 Non interest income/Total Income UCI’s ‘01 Average Cost per employee (Euro ths) UCI’s ‘01 Gross NPL/Gross Loans 58.5 10.7% 49% 39% 2.6% 16.6 New Europe Banks New Europe Banks Italian Banks New Europe Banks Italian Banks Italian Banks Note: Top line: comparisons between banking sector data in 4 UCI NECs countries and EU aggregate, 2000. Bottom line: comparisons between data for UCI Italian banks and UCI New Europe Banks, 2001. Source: National Central Banks and UCI.

  41. Agenda UCI and the New Europe The embedded value of the New Europe Accelerated and sustainable growth Decreasing risk New Europe countries: opportunities and perspectives Conclusions

  42. RISK IN THE NEW EUROPE IS THE LOWEST AMONG EMERGING MARKET REGIONS Commitment to structural reforms guarantees low and decreasing risk, confirmed also in terms of spread over EU bonds** * Asia is defined as Indonesia, Malaysia, Thailand,Korea, Philippines. ** Spread over Eurobond is based upon SUEMI: Sole24Ore UBM Emerging Market Index, for Euro-denominated high-yield benchmark (total returns traded sovereign debt instruments in Euro with fixed interest rate, 76 sovereign bonds for 22 countries and a market capitalisation of EUR 36 bln). Source: S&P’s database and UBM Research.

  43. HIGHER STABILITY EMERGES AT BOTH BANKING SYSTEM AND OVERALL ECONOMY LEVEL, WHEN COMPARED TO OTHER EMERGING MARKETS

  44. DECREASING RISK LEADS TO GROWING VALUE ADDED , DUE TO CONTRACTION IN COST OF EQUITY EU convergence Decreasing Risk Decreasing Interest rates Cost of equity The combined decrease of risk and interest rates will impact significantly on the Cost of Equity for the Group, allowing a steep increase in value creation

  45. IN SUMMARY, THE EMBEDDED VALUE OF THE NEW EUROPE IS RELATED TO ACCELERATED AND SUSTAINABLE GROWTH, WITH LOW AND DECREASING LEVEL OF RISK • The catching up process supports accelerated growth for the next decade, up to convergence to EU standards • In 2020 being leader in NE will be comparable to equal positioning in other EU markets • Structural reasons for growth are related to productivity gains and FDI on the production side, while internal rather than external demand will be the engine of growth on the demand side • Economic opportunities reflect in banking growth, with two digits CAGR in terms of pre-tax profits • Decreasing risk leads to growing value added, due to contraction in cost of equity

  46. Agenda UCI and the New Europe The embedded value of the New Europe New Europe countries: opportunities and perspectives Poland Slovakia Croatia Bulgaria Romania Conclusions

  47. HIGLY ATTRACTIVE INTERNAL MARKET AND STABLE ENVIRONMENT, DESPITE ECONOMIC SLOWDOWN, WITH RECOVERY EXPECTD AFTER MID 2002 ENGINES OF GROWTH • After seven years (1994-2000) of GDP growth exceeding 4%, significant slowdown has been observed and growth in 2001 dropped to 1.1% due to weakening demand abroad and collapse in domestic investment activity • There is no chance for sharp acceleration of economic growth in 2002 – GDP growth will stay at around 1.5 % • Reduction in growth rate was accompanied by significant improvement in macroeconomic equilibrium: 12-month inflation dropped to 3.5 % in February 2002 and current account deficit remains below 4% of GDP • Monetary policy remains relatively tough, with short-term nominal interest rates kept around 10% SIGNALS TO MONITOR • Zloty likely to remain above its long term equilibrium level • State budget policy faces difficult challenges, but budget deficit remains under control Budget deficit in 2002 shouldn’t exceed 40 bln Zloty (5.2% of GDP) and expenditure cap (inflation +1%) to be observed starting from 2003 Source: Pekao Macroeconomic Research Office and UCI – FBD Research Team

  48. STABILISING CURRENT ACCOUNT DEFICIT,… • The cash current account deficit shrunk to 3.9 % of GDP in 2001 as a whole • Lower prices of imported energy (oil) and a jump in unclassified turnovers accounted for most of the recent improvement Source: Pekao, Macroeconomic Research Office

  49. …AND LOW INFLATION ALLOWED AN EXPANSIONARY MONETARY POLICY, SUPPORTING ECONOMIC RECOVERY LOMARD RATE, REDISCOUNT RATE, INTERVETION RATEAND CONSUMER INFLATION RATE • Lower prices of food and imported energy slowed 12-month consumer inflation to 3,5 % by January 2002 • The monetary policy council reacted adequately Source: Pekao, Macroeconomic Research Office

  50. GROWTH IN REAL GDP SLOWED DUE TO WEAK DEMAND ABROAD AND DECREASE IN FIXED INVESTMENT Source: Pekao, Macroeconomic Research Office

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