The First Global Bank in Hungary

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The First Global Bank in Hungary

• Sajjad Razvi
• Citi Country Officer, Hungary
• Division Executive, Central Europe
• 31 May 2007

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Agenda

• Citi in Hungary and CE
• CE Banking Market Overview
• The Hungarian Banking Market
• Competition in Hungarian Corporate Banking

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1. Citi in Hungary and CE
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Citi in CE - Broad Footprint

• Presence Countries
• Bulgaria (BG)
• Czech Republic (CZ)
• Hungary (HU)
• Romania (RO)
• Slovakia (SK)
• Non-Presence Countries
• Albania (AL)
• Belarus (BE)
• Bosnia (BO)
• Croatia (CR)
• Estonia (ES)
• Latvia (LA)
• Lithuania (LI)
• Macedonia (MA)
• Moldova (MO)

CE5
NPCs
Rep. Office opened in Dec 2006
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Citi in Hungary Long Term Commitment
Fact sheet

• First foreign bank in Hungary in 1986
• 23 Branches (consumer corporate services)
• 15 Consumer Sales Centers
• 3000 Collection Points
• Strengthened presence through two local
  acquisitions (ING, EKB)
• Serving clients in the widest spectrum
  (consumers, SMEs, corporates)
• Acting as a one stop banking service provider
  with full product set

Achievements

• Leading position in Credit Cards, PIL, Custody,
  FX, Derivatives
• Recognitions Awards for Citigroup Hungary
• - Worlds Best Internet Bank in Hungary (2006,
  Global Finance)
• - Best Corporate and Investment Bank in Hungary
  (2005, Global Finance)
• - Best Clearing Bank in Fixed Income Category
  (2005, Global Investor)

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Citi in Hungary Reaching out to the Community
Education
We are a member of the ...

• Financial Education School Program in
  Partnership with Junior Achievement Hungary
  (Citi Foundation, since 2001, total M 680, 178
  schools)
• Citi Corporate Finance Chair Program with
  Corvinus University of Budapest (Citi Foundation,
  since 2004, total M 80)
• Economics for Leaders Summer Program in
  Partnership with Foundation for Teaching
  Economics and Junior Achievement(Citi
  Foundation, since 1994, total M 200, 800
  participants)

• American Chamber of Commerce Patron Member
• British Chamber of Commerce
• German Chamber of Industry and Commercial
• Hungarian Business Leaders Forum

Charitable Activities

• Childrens Hospital Program (since 1999)
• Habitat for Humanity Program (Citi Foundation,
  since 2004, total M 110)
• Terry Fox Run (since 1999)
• Blood Donation Drive (since 1999)
• Citi Global Community Day (since 2006, 100 Citi
  Hungary employees, 5 projects

Music

• Supporting further education of young talented
  Hungarian Musicians through the Friends of Franz
  Liszt Music Academy (since 2001)
• May 4, 2007 The New York Philharmonic Concert in
  Budapest was sponsored by Citi Hungary

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2. CE Banking Market Overview
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CE is a Growth Region

• CE 5 economies, a large base (GDP USD 462MM in
  2006) with high growth rate (average growth at
  about 6.5 in 2006)
• Large, attractive and healthy banking sectors
  with financial intermediation of 77 of total
  banking assets (as a of GDP) against EU15
  average of 303 (2005) hence considerable room
  to grow
• Positive business environment Central Europe
  ranks behind the US, Japan and EU15 in terms of
  globalization, human development , doing business
  and transparency rankings (ahead of all other
  large emerging markets)
• Dissociation of economics from
  politicsenvironments relatively stable with
  limited political risk
• CE17 - a converging Socio-economic Block due to
  EUs systematic approach of exporting itself into
  its neighbors

Figures as of 2006
Ratings as of 30 May 2007
A very rare combination of investment grade risk
emerging market growth
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CE Market Potential
Key findings
Degree of intermediation and GDP per capita
between 2001-2005

• CE is still the most dynamic and very profitable
  banking region in Europe with strong expected
  growth rates for the coming years
• Based on banking intermediation, CE banking
  markets are still far away from reaching the
  status of mature markets
• This lag is caused by the lack of full
  integration of banking services and products into
  the daily life of customers
• The future growth of the CE banking markets will
  be affected by
• - A higher GDP per capita ratio and
• - The increasing influence and importance of the
  financial market

Source Central and Eastern European Banking
Study 2007, zeb/, EFMA
There is much growth to capture
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Drivers of Profitable Growth
Return on equity vs. Cost to income ratio in CE
Key findings

• Most of CE banking markets are dominated by
  international banking groups, but only 5 to 10
  institutions can be considered as major player
  with regard to their market share and
  profitability required by the capital market
• No connection between maturity level (banking
  intermediation) and the profitability of CE
  countries banking sector
• Key drivers for higher ROE in CE are (1) size,
  (2) market share, (3) funding base, (4) strategic
  specialization, (5) assets growth and (6) focus
  on revenue growth instead of cost management

Source Central and Eastern European Banking
Study 2007, zeb/, EFMA
Hungarys profitability in line with its growth
potential and risk profile
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3. The Hungarian Banking Market
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Importance of a Healthy Strong Banking Sector
Benefits for Government
Benefits for Individuals

• Competitiveness and credibility of country
• International integration of economy
• International and domestic financial
  intermediation
• - Investments and job creation
• Support to fiscal, monetary and FX management
• Technology and knowledge transfer

• Financial security and privacy
• Access, convenience, ease of use
• Time savings
• Domestic and international mobility
• Fast-forward lifestyle improvement
• Wealth creation and management

Benefits for Companies
Benefits for Foreign Investors

• Efficiency gains
• Domestic and cross-boarder expansion
• Better earnings clarity through exposure
  management
• Accelerated investments
• Reduced funding costs
• Trusted advice

• X-border money and capital flows
• Local funding
• Diversification of risk
• Savings from regional pulling
• Trusted advisor and local partner
• Return on financial sector investments

It is in the interest of all major stakeholders
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The View of the FDI Investor
Strengths
Weaknesses

• Geographical location
• Investment grade country risk
• Developed infrastructure
• EU conform regulatory and legal framework
• Advanced banking system, products and services
• Sophisticated industry bodies

• Pace of adoption of EU regulation should
  accelerate
• More coordination between key stakeholders and
  banking sector
• High rate of overall taxation
• Unfavorable perception of banks
• Joint effort needed to improve consumers'
  financial skills

Banking sector
Opportunities
Threats

• Regional integration and convergence
• Emerging market GDP growth in OECD risk
  environment
• Growing financial intermediation
• Wealth accumulation
• Higher demand for complex, higher value added
  solutions by companies
• Increasing acceptance of electronic channels by
  customers

• Delay in structural reforms
• Increasing factor costs
• Small tax base, aging population
• Relatively low local enterprise base
• Increasing complexity of regulation
• Entry of 'non-presence' banks
• Balance market share vs. shareholder value

Attractive prospects, issues manageable
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The View of the Portfolio Investor
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Maastricht Criteria Watch
General Government Balance and Debt, 1997-2011
(in of GDP)
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Currently Hungary does not meet any of the
Maastricht criteria The austerity measures
promise significant improvement for the next 5
years - Markets still remain skeptical and price
Hungary's 5Yx5Y Forward Rate 150bps over the
Euro's one - Hungary's interest rates need to
become lower then the average interest rates in
the 3 best performing EU countries 200bps -
Market skepticism is based on past
disappointments - In the last 4 years fiscal
deficits systematically exceeded projections in
convergence programs (save for Sep 2006 program)
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Convergence Program Fiscal Deficit
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4
Implied 5Yx5Y Forward Rate Spread against EUR
5Yx5Y Forward Rate (bps)
(Fiscal Deficit)
4
Sources NBH Note EU transfers not included
Fiscal austerity program on track, market expects
promises to be kept
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4. Competition in Hungarian Corporate Banking
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Is Corporate Banking More Competitive?
Credit portfolio

• Corporate market is more cyclical than consumer
• - Impact of austerity measures
• Each existing firm has already at least one bank
  account, many has 2-3 or more
• - No unbanked segments like in the consumer
  sector
• - No significant growth in the number of
  companies
• Higher customer sophistication
• - Product, service, pricing,
  regulations
• - Better transparency
• Strong buying power and excess liquidity of
  larger companies
• Strong focus on SMEs
• Some competitors ready to sacrifice profitability
  for market share
• Substitution underway capital markets, private
  equity

Deposit portfolio
Very competitive but growing segment
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Expected Changes in Competitive Dynamics
Share of Top 10 players

• Macro factors to increase pressure on
  profitability
• - Pricing Euro, SEPA, new corporate banking
  entrants (European overseas)
• - Expenses funding costs, regulation,
  wages, tech distribution investments
• Customers becoming more sophisticated and
  demanding
• - Need of full product set from 2-3 trusted
  houses
• Second wave of consolidation might never happen
• - Market share of 10 largest players already
  higher than European average
• - Banking sector consolidation is driven by
  regional and global forces
• Increasing importance of shareholder value
• - Competitive focus to shift from price to
  quality
• - Cut-throat competition to be replaced by
  co-opetition
• Importance of coordination and cooperation within
  the industry to increase
• - For the benefit of all stakeholders
  (customers, employees, government, banks)

95.9
Belgium
94.0
The Netherlands
83.0
Czech Rep.
87.9
Slovenia
91.9
Croatia
89.9
France
91.9
UK
85.1
Portugal
73.3
Europe
83.0
Greece
86.9
Slovakia
78.8
Romania
77.4
Hungary
68.8
Spain
70.4
Austria
69.9
Poland
57.3
Germany
43.9
Italy
Competition and cooperation can come hand-in-hand
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End of Presentation
THANK YOU!