RECENT TRENDS IN POLAND'S BANKING SECTOR AND BANK BPH – 3Q 2014 Summary December 2014 Inteliace Research AGENDA Recent trends the in banking sector Poland in and bank BPH, December 2014 . Banking sector . Bank BPH 2 Inteliace Research POLAND'S BANKING SECTOR: SUMMARY AS OF Q3 2014 SUMMARY 1 • All key banking volumes keep growing. Volumes • Most growth taking place in retail segment. • Deposits grow faster than loans. 2 Recent trends the in banking sector Poland in and bank BPH, December 2014 • Deposit margins have been under pressure again due to falling market interest rates Margins following central bank rate cuts. • Lending margins are in an increasing trend 3 • The overall lending quality is improving. Both consumer and corporate debt show decreasing NPL rates. Lending Quality • The only loan category where quality is falling is mortgage. The cause is ageing portfolios and only limited dilution from new loans due to very slow mortgage origination. 4 • Total interest revenues are increasing thanks to growing volumes. • Pressure on fee and commission income persists mainly due to regulatory developments Profitability (e.g. payment card interchange, fx mortgage repayment, bancassurance etc.). • However, slowing f&c income is more than compensated by interest income and falling risk cost. 3 Inteliace Research Source: Inteliace Research BOTH RETAIL DEPOSITS AND RETAIL LOANS ARE GROWING HOUSEHOLDS Annual growth rate in outstanding loans / deposits at banks Dec.2010-Oct.2014 in in % % 30 HH Deposits (billion PLN) 30 HH Loans (billion PLN) 28 28 • Household 26 26 deposits keep Recent trends the in banking sector Poland in and bank BPH, December 2014 24 24 growing. The term 22 22 structure is fluctuating inline 20 20 Demand deposits with changing 18 18 interest rates 16 16 expectations 14 14 • After a temporary Mortgage loans slow-down in 2014, 12 12 mortgage loans are 10 10 Total growing again faster 8 deposits 8 than consumer Total HH loans lending. 6 6 4 4 2 2 0 0 -2 -2 Consumer loans -4 -4 Term deposits -6 -6 Jun-11 Jun-12 Jun-13 Jun-14 Jun-11 Jun-12 Jun-13 Jun-14 Sep-11 Sep-12 Sep-13 Sep-14 Sep-11 Sep-12 Sep-13 Sep-14 Dec-10 Dec-11 Dec-12 Dec-13 Dec-10 Dec-11 Dec-12 Dec-13 Mar-11 Mar-12 Mar-13 Mar-14 Mar-11 Mar-12 Mar-13 Mar-14 4 Inteliace Research Source: NBP, Inteliace Research THE GROWTH IN CORPORATE VOLUMES HAS BEEN GRADUALLY ACCELERATING SINCE EARLY 2013 CORPORATE Annual growth rate in outstanding loans / deposits at banks Dec.2010-Oct.2014 in % 30 Corporate Deposits (billion PLN) 30 Corporate Loans (billion PLN) 27 27 Demand deposits 24 24 Recent trends the in banking sector Poland in and bank BPH, December 2014 21 21 • The growth in corporate volumes 18 18 Total deposits Total loans has been positive and 15 15 increasing since the 12 12 beginning of 2013. Investment & • Corporate deposits 9 9 other loans have been growing 6 6 slightly faster than 3 3 corporate loans 0 0 recently. However, looking forward, it is -3 -3 Loans in c/a corporate lending , -6 -6 which is expected to -9 -9 grow faster than deposits. -12 -12 Term deposits -15 -15 -18 -18 -21 -21 -24 -24 Jun-11 Jun-12 Jun-13 Jun-14 Jun-11 Jun-12 Jun-13 Jun-14 Sep-11 Sep-12 Sep-13 Sep-14 Sep-11 Sep-12 Sep-13 Sep-14 Dec-10 Dec-11 Dec-12 Dec-13 Dec-10 Dec-11 Dec-12 Dec-13 Mar-11 Mar-12 Mar-13 Mar-14 Mar-11 Mar-12 Mar-13 Mar-14 5 Inteliace Research Source: NBP, Inteliace Research MOST OF RECENT BANKING VOLUMES GROWTH TOOK PLACE IN THE RETAIL SEGMENT Recent changes in outstanding loans and deposits by business segment, Dec.2013-Oct.2014 in billion PLN Deposits (billion PLN) Loans (billion PLN) Retail clients 32.8 569.3 26.1 573.2 536.5 547.1 Recent trends the in banking sector Poland in and bank BPH, December 2014 (Households) Highest absolute volumes growth +6.1% in retail segment +4.8% Dec-13 ∆ Oct-14 Dec-13 ∆ Oct-14 Corporate clients* 244.7 16.9 261.5 208.0 2.4 210.4 +1.2% +6.9% Dec-13 ∆ Oct-14 Dec-13 ∆ Oct-14 6 *Corporate subjects only. Excluded: non-monetary financial institutions and public sector Source: NBP, Inteliace Research Inteliace Research THE QUALITY OF CONSUMER AND CORPORATE LENDING HAS RECENTLY IMPROVED. HOWEVER, MORTGAGE LOANS ARE STILL DETERIORATING The share of non performing receivables in total lending by segment/product, Jan.2010-Oct.2014 in % 20 19 18 Consumer loans 17 16 Recent Recent trends the in banking sector Poland in and bank BPH, December 2014 15 • Quality of lending portfolios of 14 SME loans banks is improving across all key 13 12 segments with exception of 11 mortgage loans. 10 • Mortgage lending quality is Corporate (big) loans 9 gradually deteriorating as 8 mortgage portfolios of banks are 7 getting older and there is little 6 dilution due to low new sales. 5 Mortgage NPL rates are growing 4 3 2 Mortgage loans 1 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Nov-10 Nov-11 Nov-12 Nov-13 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 May-10 May-11 May-12 May-13 May-14 7 Inteliace Research Source: NBP, Inteliace Research DEPOSIT MARGINS ARE SHRINKING AGAIN AFTER THE RECENT DROP IN REFERENCE RATES Dec.2011-Sep.2014, in percent, PLN volumes only Deposits* (stock, average) Loans* (stock, average) 8 16 7.5 7 14 6.5 6 12 • 5.5 Retail*** Deposit margins 5 10 are under pressure 4.5 Recent trends the in banking sector Poland in and bank BPH, December 2014 4 8 again after the drop Corporate 3.5 Corporate 3 6 of reference rates 2.5 in 2014. 2 4 1.5 1 Retail 2 • Lending margins or charged bank by charged or 0.5 Nominal Interest paid Interest Nominal 0 0 have stabilized (at Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 10% for consumer lending and ~2% for 1.00 12 corporate loans) as Retail banks are able to 10 0.50 pass changes in Retail (consumer)*** 8 market interest 0.00 rates on clients. Lending margins 6 are steady -0.50 Corporate Corporate 4 ( on WIBOR6M) ( on Deposit margins went -1.00 temporarily down after 2 Interest Margin** Interest CB rates were cut -1.50 0 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 * Stock of term deposits or loans respectively (loans and funds in current account excluded) ** Theoretical margin calculated against WIBOR 6M 8 *** Consumer lending : Loans to households other than mortgage Inteliace Research Source: NBP, Inteliace Research REDUCED EMPLOYMENT AND SHRINKING BRANCH NETWORKS CONTRIBUTE TO HIGHER PRODUCTIVITY IN POLAND'S BANKING SECTOR Change (in%) Evolution of bank outlets and employment at banks* Average bank* assets per bank outlet Dec.12-Sep.14 Dec.2012-Jun.2014 in million PLN +15% in thousand 101.0 94.6 97.2 87.6 88.8 90.7 93.0 91.8 176 15.6 Total number of bank outlets 175 (right-hand scale) 15.5 Thousands Thousands 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Recent trends the in banking sector Poland in and bank BPH, December 2014 174 15.4 173 15.3 Average bank* assets per bank employee 172 15.2 in million PLN 171 15.1 7.7 7.9 8.1 8.2 8.1 8.3 8.6 8.9 +16% 170 15.0 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Total employment 169 (left-hand scale) 14.9 168 14.8 Average number of employees per bank* outlet in FTE 167 14.7 0% 11.4 11.3 11.2 11.3 11.4 11.4 11.3 11.3 166 14.6 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 9 * Data for all banks operating in Poland including cooperative banks and foreign bank branches Source: NBP, KNF, Inteliace Research Inteliace Research AGENDA Recent trends the in banking sector Poland in and bank BPH, December 2014 . Banking sector . Bank BPH 10 Inteliace Research SINCE 2012, BANK BPH HAS BEEN SHRINKING WHILE THE BANKING MARKET HAS BEEN GROWING CAGR* UNCONSOLIDATED BANK BPH – total assets evolution, 4Q 2012-3Q 2014 ACCOUNTS PLN billion -5.7 33.5 33.7 33.5 32.7 32.1 Recent trends the in banking sector Poland in and bank BPH, December 2014 31.0 30.7 30.2 • BANK BPH has been continuously getting smaller since 2012. At the same time the banking market has been growing. • As a consequence of 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 negative growth rates, the market share of Market share evolution, 4Q 2012-3Q 2014 BANK BPH, if Percent (of commercial banks and foreign bank branches assets) measured by assets, has fallen to 2.1% in -12.3 third quarter of 2014.