TRENDS AND CHALLENGES IN THE EUROPEAN NPES MARKET AND THE “FUTURE-READY” BANK

LOUIS LOIZOU CHAIRMAN, HELLENIC BANKERS ASSOCIATION-UK CO-FOUNDER, LOIZOU&CO

2nd Digital Banking & Payments Conference Nicosia, Cyprus, 18 February 2020 Agenda

Section I. European NPEs Market 2-8 Section II. Cyprus NPEs Market 9-14

Section III. Future-Ready Bank? 15-36

2 Are the levels of stock of NPEs/NPLs of the European banking system, on average, within manageable levels?

SECTION I. EUROPEAN NPES MARKET

NPE/NPL Ratios in the EU banking system (2014Q4 to 2019Q2)

6,5% 6,2% 6,0% 5,9% 5,7% 5,6% 5,4% 5,3% 5,1% 4,8% 4,4% 5,5% 5,3% 4,2% 4,1% 5,1% 5,0% 4,9% 3,8% 4,8% 4,7% 4,6% 3,6% 3,4% 4,4% 4,2% 3,2% 3,1% 3,0% 3,9% 3,7% 3,6% 3,4% 3,1% 3,0%

2,8% 2,7% 2,6%

2014Q4 2017Q2 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

NPLs ratio NPEs ratio

Source: European Banking Authority. Note: period covered is 2014 Q4 to 2019 Q2. 3 Large stocks of NPEs in Italy, France, Spain and Greece, but…

SECTION I. EUROPEAN NPES MARKET

NPEs (EUR, bn) – 2019Q2

137

124

84 79

56

34 33 21 10 9

IT FR ES GR GB NL DE PT CY IE

Sources: European Banking Authority, Eurostat. Note: Data for Cyprus based on the Central Bank of Cyprus. 4 …highest NPEs to GDP ratios for Cyprus and Greece indicating the magnitude of the issue when comparing the stock of NPEs (within the banking system) to the total size of the economy

SECTION I. EUROPEAN NPES MARKET

NPEs to GDP (%) – 2018FY

45,9% 42,8%

10,3% 7,8% 7,0% 5,3% 4,4% 2,8% 2,3% 1,0%

CY GR PT IT ES FR NL IE GB DE

Sources: European Banking Authority. Note: Data for Cyprus based on the Central Bank of Cyprus. Includes only the NPE stock that remains part of the banking system of the respective county. NPEs figures are latest available 2019 Q2. 5 Still a large portion of NPEs remains in the banking system, especially in Greece and Cyprus

SECTION I. EUROPEAN NPES MARKET

NPEs Ratio (%) – 2019Q2

39,2%

29,8%

8,9% 7,9% 4,6% 3,5% 2,6% 1,9% 1,3% 1,3%

GR CY PT IT IE ES FR NL GB DE

Sources: European Banking Authority. Note: Data for Cyprus based on the Central Bank of Cyprus. 6 High indebted countries retain high NPE ratios, while GDP growth is peaking up in countries such as Ireland, Cyprus, Spain, Greece and Portugal

SECTION I. EUROPEAN NPES MARKET

Debt-to-GDP Ratio (%) – 2018FY GDP Growth (%) – 2019Q2

182% 6,0%

134% 123%

105% 100% 99% 3,3% 85%

66% 61% 2,0% 1,9% 1,9% 51% 1,6% 1,4% 1,3%

0,3% 0,1%

GR IT PT CY FR ES GB IE DE NL IE CY ES GR PT NL FR GB DE IT

Sources: European Banking Authority. Note: Data for Cyprus based on the Central Bank of Cyprus. 7 With an EU average NPE ratio of 3%, NPE challenges are more regional than EU-wide. However, it possesses threats to the European system hence the introduction of “systemic solutions”.

SECTION I. EUROPEAN NPES MARKET

Italy Greece Cyprus ▪ Italy's government to renew the ▪ The Hellenic Financial Stability Fund, ▪ In Cyprus, the government has guarantee system GACS that has which holds stakes in Greek banks, has introduced in 2019 the ‘Estia’ already helped the country's proposed the set-up of an asset scheme, a special government banks to shed €62bn of NPEs protection scheme called ‘Hercules’, scheme that aims, first, to protect ▪ Guarantees may be requested by similar to the Italian GACS scheme. the primary residency of banks that securitize and sell their ▪ This is a crucial measure that may vulnerable borrowers and, NPEs, against regular payment of facilitate the de-risking process, as it second, to mitigate the issue of a fee to the Treasury. could cover NPLs in excess of EUR 20 NPLs in the Cypriot banking billion (25% of the stock). The proposal system. Portugal was approved by the European ▪ According to reports, a similar Commission in October 2019, as it has initiative is being discussed by ▪ In Portugal the coordination deemed that the Greek state will be the Greek authorities. platform aims to integrate remunerated in line with market negotiations with the debtor on conditions for the risk it will assume by behalf of multiple creditors. The granting a guarantee on securitised objective is to support the NPLs. This, according to the European turnaround of viable debtors and Commission, does not involve state aid the maximum recovery of NPLs within the meaning of the EU rules.

Source: European Banking Authority Notes: Based on data and information as of 2019 Q2. 8 Agenda

Section I. European NPEs Market 2-8 Section II. Cyprus NPEs Market 9-14

Section III. Future-Ready Bank? 15-36

9 The rate of decline of NPEs is only 6.5% p.a., whereas, 46% of NPEs have delays beyond 5 years – mostly from SMEs and households

SECTION II. CYPRUS NPES MARKET

NPEs in the Cypriot banking sector (domestic exposures) – 2011 Q1 to 2019 Q2

60% 30

50% 25

40% 20

30% 15

20% 10

10% 5

0% 0 2011 12 13 14 15 16 17 18 19

NPEs (EUR, bn) NPE Ratio (%)

Source: Central Bank of Cyprus, The Economist World 2020 Greek Note: period covered is March 2011 to June 2019. Refers only to domestic exposures. The annualised Edition, Loizou&Co estimates. rate of decline is based on 2014 (EUR 28.1 bn) and 2019 (EUR 20.1 bn). 10 The Cypriot economy has a stock of NPEs (€20.1bn), which is equivalent to Cyprus' GDP (€20.7bn) – the figure for NPEs does not exclude non-banking sector NPEs

SECTION II. CYPRUS NPES MARKET

NPEs in the Cypriot economy (2019Q2)

Banking sector EUR 9,7 bn

14,7%

48,4% Asset management EUR 7.4 bn companies 36,9%

Credit acquiring EUR 2.9 bn companies

Total NPES EUR 20.1 bn (2019 Q2)

Source: Central Bank of Cyprus, The Economist World 2020 Greek Note: GDP data for Cyprus in nominal terms based on World Bank’s most recent country report where Edition, Loizou&Co estimates. GDP is estimated at EUR 20.7 bn. 11 The main reason for perpetuating this inactivity is moral hazard. There are no 'magic wand' solutions, but…

SECTION II. CYPRUS NPES MARKET

Main Challenges in the Cypriot NPE Market

1. Reform to reveal strategic NPEs and reveal moral hazard

2. Reforms in the regime governing the sale of NPEs

3. Acceleration of repossession procedures (auctions or legal action)

4. More equity investments in conjunction with loan restructuring

Source: Central Bank of Cyprus, The Economist World 2020 Greek Note: GDP data for Cyprus in nominal terms based on World Bank’s most recent country report where Edition, Loizou&Co estimates. GDP is estimated at EUR 20.7 bn. 12 …deepening the capital markets in Cyprus will provide opportunities for local corporates and SMEs to raise equity and debt capital; this will form the basis for achieving higher NPE reduction

SECTION II. CYPRUS NPES MARKET

CSE Capitalisation – GDP Growth CSE Capitalisation – Investment Formation 9 120 8 Boursa 110 Kuwait 7 100 6 90 5 80 Warsaw S.E y = 0,0251x + 1,6448 Athens S.E. 4 Malta S.E. Vienna S.E. Luxembourg 70 Prague S.E Euronext 3 Dublin (ex S.E. 60 Irish S.E.) 2 Tel-Aviv 50 S.E. Net Investment as a % of GDP of % a as Investment Net 1 40 Cyprus S.E.Budapest 0 S.E. 09 2015 09 2016 09 2017 09 2018 0 20 40 60 80 100 -1 Stock Market Capitalisation GDP (Nominal) Stock Market Capitalisation as a % of GDP

Sources: IMF, Loizou&Co estimates. 13 Article in The Economist “World 2020”

Source: The Economist World 2020 Greek Edition. 14 Agenda

Section I. European NPEs Market 2-8 Section II. Cyprus NPEs Market 9-14

Section III. Future-Ready Bank? 15-36

15 Neobanks do not “suffer” from holding legacy assets and running legacy systems in contrast to traditional banks

SECTION III. FUTURE-READY BANK?

Legacy problems and legacy systems create a burden for traditional banks

traditional neobanks banks

16 Digitalising a traditional bank does not “create” a neobank

SECTION III. FUTURE-READY BANK?

Important Considerations Yes or No? And why?

If you digitalise a traditional bank No They would still fail will that make it a neobank? the “smell-test”

Will neobanks be in a position They would need to turn profitable, but to undercut traditional banks Maybe indefinitely? their cost structure is lower

“culture eats strategy for breakfast”

17 Take a step back and reflect from past and current tech examples

SECTION III. FUTURE-READY BANK?

Will traditional companies innovate in a fast-changing world?

Which banking corporation owns the online bank Marcus?

Which company owns the online dating app Tinder?

Was the acquisition of Whole Foods by Amazon an isolated case?

Was it Google that invented the performance-based pay-per-click search?

18 Do not ignore the big elephant in the room

SECTION III. FUTURE-READY BANK?

Big Tech and financial services Will the “winner take it all” when it also comes to “banking”? ▪ The likes of Amazon, Facebook, AliPay, and others are entering the financial services industry ▪ Besides, Goldman Sachs is partnering with Amazon in offering small business loans

“#Big Tech is the real threat to #banking, not #FinTech”

19 Will you bank with a online-only financial institution?

SECTION III. FUTURE-READY BANK?

How likely are you to switch to the following What bank or financial institution would you be companies if they were to offer banking services? most likely to switch to?

Online Bank with no Branches 14% 25% 15% 5% 9%

13% 21% 15% 4% Local/Commu 19% nity Bank 11% 21% 12% 4% 51%

11% 20% 12% 2% 21% Top Ten Credit Retail Bank 5% 10% 6% 1% Union

Source: CG42: Retail Banking Vulnerability Study. Notes: Based on a survey conducted in the US. 20 From Brick & Mortar Traditional Banks to Neobanks, fully digital banks offering services through the internet and/ or mobile apps and focusing on the customer convenience

SECTION III. FUTURE-READY BANK?

Brick & Mortar Traditional Banks NeoBank Branch locations Traditional banks Service Physical Banking Primarily digital, Platform Institution apps Backed by large Time Decades ago Within last 5 years Financial institutions established Customer Log-term, tries to Virtual, flexible, no

Online banking Relationship keep customers long contracts Digital banks In person, telephone, Telephone, online, mobile apps Support online in-app Complicated, Transparent, few Fees No Brick & Mortar ongoing costs costs locations Banking License Full None, partial or full

NeoBanks 100% mobile Bank Branches Yes No start-ups Approval Lengthy, manual Quick, automatic Processes

21 Global Neobank Value is estimated to be almost $30bn in 2019, with an annual growth of ~20%, while digital banks have reached more than 70mn users collectively

SECTION III. FUTURE-READY BANK?

Global Neobank Value, Users and Accounts # of customers for Top European Neobanks

Mn customers, 2019 70,00 250,00 20,0

Billions 18.2 Millions

Billions 60,00 200,00

50,00 20.2

150,00 40,00 8,0

30,00 5,0 100,00 20.4 3,5 3,0 20,00

50,00 10,00 Nubank Revolut Chime N26

- - 2018 2019 2020E 2021E 2022E 2023E 2024E

Value Users Accounts

Source: Bloomberg, Company Filings, Business Insider Intelligence Note: Latest data available in the public domain. 22 UK is leading the development of the neobank business model. Globally.

▪ UK ▪ Sweden – Qapital SECTION III. FUTURE-READY BANK? – – Monese – Tide – Monizo – Monzo – Monzo Bank – Revolut – Osper ▪ Denmark – Monese – Pockit – Lunar Way – – Secco Bank – Civilised Bank – Tandem – Ffrees – Tide – Lintel – Shawbrook Bank ▪ Netherlands – Loot – Bung ▪ Russia – Rocket Bank ▪ France – InstaBank – Compte Nickel – Hello Bank – Morning ▪ USA – Qonto ▪ Poland – Aspiration – Soon – mBank – Empower – fortuneo – Nest Bank – Marcus – ING – Boursorama ▪ Germany – N26 ▪ Spain – Fidor Bank – ImaginBank

▪ Greece – Viva Wallet ▪ Italy – BuddyBank – Soldo ▪ Cyprus – Ancoria

23 The neobank “smell-test”

SECTION III. FUTURE-READY BANK? Customer Centric Experience Processes re-designed from a customer perspective

Automated Products & Services Flashy Marketing & Efficient Fully automated products and communication services, providing ease of access as well as convenience Interactive marketing through social media, cheap customer acquisition through referrals

Simplified Operations Agile Thinking/ Organization Digital core with no front, back or Flat organization with innovation middle office, minimizing fees at it’s core & entrepreneurial thinking

24 Digital banks offer instant, fully automated products and services, which provide ease of access and convenience, as well as new types of products such as peer to peer lending and cryptocurrencies

SECTION III. FUTURE-READY BANK?

▪ Revolut offers free international money transfers and short-term 84% 68% 60% personal loans at very competitive rates with instant Payments Fund Transfer Personal Finance notifications ▪ N26 offers a checking account with debit card, cash withdrawals at ATMs and a rewards program ▪ Starling Bank is a mobile-only bank offering money transfers, personal loans all accessible via 56% 49% 38% 38% the mobile app Personal Loans Traditional deposits/ Insurance Wealth Management Savings account

Source: PWC Global FinTech Survey 2017 25 A Sectoral snapshot of select neobank players in Europe indicates that the majority of the players are focusing on the B2C segment B2C - DEBIT B2B - DEBIT SECTION III. FUTURE-READY BANK? Underbaked/Unbanked SMB/SMEs

Expense Management

Payments Blockchain Students Freelancers

Tech Startups Millennials Kids

CREDIT OTHER

Home owners Tech Startups InsurTech

Underbanked/Unbanked SMB/SMEs

26 Processes are built to bypass laborious applications through quick sign-up forms and automatic checks of credit history and identity, minimizing personal contact to get approval for a loan or account creation

SECTION III. FUTURE-READY BANK?

Provide key personal Instantly use your account Take a selfie and a clear Download app on your phone details ( name, date of image of your passport Wait a couple of days for birth etc.) card to arrive

Estimated Time: Neobank 3-5 minutes

Provide set of documents, Wait 4-5 working days to Wait a week for you card Book an appointment incl. Proof of living and have access to your to arrive passport account

Estimated Time:

Few days Traditional Bank Traditional

27 Marketing slogans of neobanks in the UK

“the digital current LOGO NAME SLOGAN COUN Loot account aimed at U.K SECTION III. FUTURE-READY BANK? TRY students and millennials” “It's all about Atom Bank you, you, U.K “The banking service you” Monizo targeted solely at U.K freelancers” “Do Tide Bank Less Banking” U.K “Mobile banking for Osper young people” U.K “Banking Monzo made easy” U.K “The simple, easy Pockit current account” U.K “Never ”The U.K’s Revolut settle” U.K Secco Bank ‘Blockchain-Inspired’ U.K ” “Best banking Monese for business” U.K “We're here to get Tandem you and your money U.K “Feel good moving in the right Starling about money U.K direction” Bank with better Shawbrook “A bank that banking” Bank understands you” U.K Civilised ”The bespoke bank SME bank” U.K Nickel “Bankless account” France “A better Ffrees place to be” U.K “The first 100% Hello Bank digital mobile bank France “A digital in Europe” Lintel bank with U.K traditional Morning “The account that values” Bank wakes up the bank” France

28 UK Neobanks – Key Profitability Metrics

SECTION III. FUTURE-READY BANK?

[ ] Net Fee Income (EURm) [ ] Net Operating Income (EURm)

▪ Monzo Bank had a Net Fee Income of EUR7.7m ▪ Shawbrook’s NOI at circa EUR322m

322,0 7,7

1,2 11,5 10,8 8,2 0,9 0,0

Monzo Bank Shawbrook Bank Tandem Group Starling Bank Atom Bank Shawbrook Ffrees (CFS) Monzo Tandem Starling Allica Atom Bank Revolut (0,4) (0,5) (1,2) Bank Bank Group Bank (6,4) (11,9)

[ ] Total Operating Expenses (EURm) Net Profit (Loss) (EURm)

▪ Total Operating Expenses at EUR191,3m for Shawbrook Bank and EUR70,7m for ▪ Shawbrook Bank, CFS and Pockit were profitable Monzo Bank ▪ Monzo Bank and Atom Bank with Loss

191,3 96,8 70,7 51,2 38,1 36,7 28,3 10,5 5,7 4,3 6,7 5,6

(10,0) (14,8) (31,4) (31,9) (38,7) (55,7) (94,7)

Source: Public disclosures, beta.companieshouse.gov.uk/company Note: Data only where available 29 European Neobanks – Key Profitability Metrics

SECTION III. FUTURE-READY BANK?

[ ] Net Operating Income (EURm) [ ] Net Profit (Loss) (EURm)

▪ LunarWay reported negative NOI (EUR)2.4m) ▪ Only mBank and InstaBank with Net Profit

262,8 Net loss/profit Bank EURm 18,6

2,3 0,6 mBank 76,5 mBank InstaBank Qapital Soldo Lunar Way (2,4) InstaBank 2,6 Fidor Bank 0,0 [ ] Total Operating Expenses (EURm) Lunar Way (3,6) ▪ Total Operating Expenses for mBank at EUR132,3m Soldo (8,1)

) Monabanq (9,1) 132,3 Bunq (11,1)

15,7 ) Qapital (18,4) 10,6 8,9 1,5 Boursorama banque (28,2) mBank Qapital InstaBank Soldo Lunar Way Orange Bank (169,8)

Source: Public disclosures Note: Data only where available 30 UK Neobanks – Key Balance Sheet Metrics

SECTION III. FUTURE-READY BANK?

[ ] Customer Deposits (EURm) [ ] Customer Loans (EURm)

▪ Shawbrook Bank’s Customer Deposits reached EUR5,8bn at previous year ▪ Shawbrook Bank’s Customer Loans at circa EUR6,9bn

6.898,2 5.873,9

2.089,9 2.831,8 1.094,7 544,9 455,0 238,7 38,3 412,9 18,9 10,3

Shawbrook Atom Bank Revolut Monzo Bank Tandem Starling Bank Ffrees (CFS) Shawbrook Bank Atom Bank Tandem Group Monzo Bank Starling Bank Bank Group

[ ] Total Assets (EURm) Shareholders’ Equity (EURm)

▪ Shawbrook Bank, Atom Bank and Revolut with total assets above EUR1bn ▪ Shawbrook Bank’s equity at EUR803,7m

803,7 8.046,5

3.301,9 249,5 226,0 1.350,9 136,5 80,5 725,0 602,8 276,9 62,5 24,8 3,0 1,3 0,7 30,7 21,4 19,1 0,5 (0,6) (3,0)

Source: Public disclosures, beta.companieshouse.gov.uk/company Note: Data only where available 31 European Neobanks – Key Balance Sheet Metrics

SECTION III. FUTURE-READY BANK?

[ ] Customer Deposits (EURm) [ ] Total Assets (EURm)

▪ mBank’s Customer Deposits reached EUR23.291m at previous year ▪ mBank’s Total Assets exceeded EUR33.5bn

23.292,1,0 Bank Total Assets EURm

455,0 277,5 211,2 mBank 33.522,5 mBank Qapital InstaBank Bunq Boursorama banque 14.967,5

Orange Bank 5.295,5 [ ] Shareholders’ Equity (EURm) Fidor Bank 1.470,5

▪ mBank’s Shareholders Equity at EUR3,5bn Monabanq 475,6

) InstaBank 334,7

3.499,7 Bunq 230,5

47,4 ) Qapital 13,4 7,5 2,2 1,5 Soldo 9,5 mBank InstaBank Qapital Soldo Lunar Way Lunar Way 3,6

Source: Public disclosures Note: Data only where available 32 UK High Street comparison – fees

SECTION III. FUTURE-READY BANK?

[ ] Fee Comparison

Bank: Transfer fees: ATM withdrawals costs and limits: Forex fees: Other monthly fees:

Monzo Bank Free £400 per day or £5500 per month 0.0% Free Standard - Free Premium - £6.99 pm Revolut Free £200 per month free, 2% afterwards 0.0% Metal - £12.99 pm Simple - Free Classic - £5.95 pm Monese Free £200 per month 0.0% Premium - £14.95 pm Starling Bank Free Free 0.0% Free Basic - Free Monizo Free £1 per withdrawal 2.0% Grow - £5 pm Metrobank Free £300 per day 3.0% Free Free Free 2.8% Free HSBC Free Free 3.0% Free Santander Free Free 2.8% Free Free Free 3.0% Free Natwest Free Free 2.8% Free Tide £0.2 per transaction £1 per withdrawl 0.0% Free

Pockit £0.99 per transaction £0.99 per withdrawl, £250 per day £0.99 per transaction £0.99 per month Public information from official websites of each institute as of 11 Transfer fees: local transactions February 2020 ATM fees: figures for domestic transactions and bank’s own ATM 33 UK High Street comparison – savings rates, microloan and overdraft rates

SECTION III. FUTURE-READY BANK?

[ ] Savings Rates

1,5

1

0,5

0 Atom Shaw OakNorth Metro Revolut Monzo Tandem Sainsubry Tesco Virgin HSBC Santander Barclays Natwest Halifax Monese Starling

Micro-loans Rates

10

5

0 Tesco Sainsubry Santander Virgin HSBC Natwest Halifax Monzo Atom Metrobank Barclays Starling

Overdraft Rates

30

20

10

0 Monzo Starling Tandem Virgin Barclays HSBC Santander Sainsubry Halifax Tesco Natwest Metrobank Tide

Public information from official websites of each institute as of 11 Savings rate: 1-year fixed rate Traditional banks February 2020 Challenger banks 34 Neo-banks European High Street comparison – savings rates, microloan and overdraft rates

SECTION III. FUTURE-READY BANK?

[ ] Savings Rates

2 1,5 1 0,5 0 Unicredit Santander ING Atom Shawbrook OakNorth Metrobank Revolut Monzo Tandem Sainsubry Tesco Virgin Monese Starling BNP

Micro-loans Rates

10

5

0 Tesco Sainsubry Virgin Monzo Unicredit Metrobank Atom Santander ING Starling

Overdraft Rates

30

20

10

0 Monzo Starling Tandem Virgin Sainsubry Tesco Satander Metrobank Unicredit ING Tide

Public information from official websites of each institute as of 11 Savings rate: 1-year fixed rate Traditional banks February 2020 Challenger banks 35 Neo-banks Food for thought…

SECTION III. FUTURE-READY BANK?

Quotation from the local press: Quotation from Financial Times:

“Σύμφωνα με τα στοιχεία, οι κυπριακές τράπεζες “It is a transformation, that is likely to lead to είναι πρωταθλήτριες στις χρεώσεις και μάλιστα με widespread automation, a blur in the dividing line μεγάλη διαφορά από τον μέσο όρο της ευρωζώνης” between finance and technology and, ultimately, widespread sectorial consolidation”

“Το κόστος δανεισμού είναι 112% πιο υψηλό για τις επιχειρήσεις στην Κύπρο σε σύγκριση με τον μέσο “US antitrust watchdog presses Big Tech over 10- όρο στην ευρωζώνη” year buying spree for start-ups”

“Τα νοικοκυριά πληρώνουν 48% περισσότερα στα “Growing payments firms may pose systemic risk: στεγαστικά τους δάνεια σε σύγκριση με τον μέσο όρο Regulators must keep pace with the στην ευρωζώνη” innovation in digital money”

Source: Stockwatch as of 10 February 2020. Financial Times as of 13 Notes: data as quoted by the media. February 2020, 20 March 2019, 17 January 2017 36