• Feelings are positive although full recovery from the crisis will take time;

• “The expectations for catastrophic development of CEE turned out exaggerated. Although we go through a difficult time, we have excellent preconditions to achieve the much postponed restructuring of the economy”, Levon Hampartsumian said;

• The scale and firmness of the commitment of the international financial groups operating in CEE helped overcome the negative attitudes to the region

• UniCredit Group wins from the diversification of its business;

• The bank business in the region will start full recovery in 2011, and long-term prospects remain unchanged.

In the latest survey on the development of the banking sector in Central and Eastern Europe UniCredit Group’s economists forecast interest drop for loans and deposits. According to UCB’s Chief Economist Kristofor Pavlov, who presented the part from the analysis devoted to the Bulgarian banking sector, interests on deposits in 2012 will come close to the levels of 2008. “On the whole in the post-crisis period (2012 – 2015) we expect that interests on deposits will remain higher than the levels in the period 2003 – 2007, especially as regards interests on deposits for the households”, Pavlov said. The good news for the households is that the interests on loans will also go down, and even faster than interests on deposits. The tendency for reduction of the spread between interests on loans and on deposits, which in practice means that Banks take on part of the burden of the increased price for the financing, will continue also in 2010, although in 2010 banks will absorb the better share of the losses in their credit portfolios as a result of the recession in the real sector.

UniCredit Group’s experts forecast that non-performing loans (by definition, loans delayed for more than 90 days) will reach their peak in the second half of 2010, and even then this country will face safe levels of 10% from the total credit portfolio. According to the calculations this means that loss for the Bulgarian banking sector caused by crisis-driven assets write-offs will approximate BGN 3.7 billion or around 6% of the GDP in 2008. These losses will be absorbed over a three-year period starting in 2009, whereby the burden of the written off receivables will be highest in 2010. “With such levels of losses in the credit portfolios of the Banks we think that no recapitalization of banks on a consolidated basis will be necessary”, Pavlov explained.

In response to the pressure on profitability, a result of the impairment of the loans’ quality, drop in the spread between interests on loans and on deposits and drop in the business growth rate, banks will make efforts to optimize their administrative costs and the product and services distribution, the analysis of UniCredit Group reads.

“Despite the crisis the long-term potential of the banking sector in Bulgaria remains unaffected. This means that this sector will remain attractive both for the existing and for the new players. The players who have a good risk assessment and are committed to continue channeling capital to the region will probably take the best advantage of the considerable long-term potential of the Bulgarian market of financial services”, Pavlov said.

“The full recovery from the crisis takes time, but our commitment to the region definitely proved the best strategy”, said Federico Ghizzoni - in charge of UCG’s CEE Business.

He said that banking business will start full recovery in 2011 and UniCredit Group is absolutely ready to take advantage of it. “The Group definitely wins from the diversification of its business. The recently announced capital increase will further enhance our positions and readiness to support the development of this region”, Ghizzoni said.

The overall recovery of the banking sector in Bulgaria will take time, and the process will probably begin in 2011 when the economy will return on the path of the positive economic growth, UVB’s economists think. Banking penetration will persist but at a more balanced speed, they believe. Offering of new products will have to be adjusted to the drop in investment activity and consumer costs of the households.

The poor lending growth at the moment is to be explained mostly with the low demand for loans in the economy. Taking into account the exchange rate fluctuations loans in the CEE region slowed down to 4% p.a. during the first half of 2009. We do not expect immediate recovery of the lending cycle, especially in view of the forecasted even slower return of the Bulgarian economy on the path of growth close to the potential one. More over, the experience of other countries having gone through recession shows that lending growth begins to speed up 9 to 12 months after the economy has reached its lowest point.

Banks will have to bind their lending growth in the future to a greater extent to the growth of residents’ deposits, UniCredit’s economists think. Meanwhile banks that belong to international financial groups that are ready to continue channeling capital in the region in general and to Bulgaria in particular will have a key competitive advantage compared to the players that are not part of international financial groups or such that cannot rely to a sufficient degree on support from their patent companies abroad.

Foreign liabilities of the Banks in CEE are currently estimated at EUR 450 billion or 21% of the total liabilities on a consolidated level. This indicator for Bulgaria is close to the average – BGN 16.6 billion as of September or 22.7% from the net worth. So, although the global liquidity crisis was felt through the much higher external financing price, a global shock on the region was avoided. Most banks acting in CEE belong to international banking groups which at the hardest times acted as last instance lender to their subsidiaries. The scales and firmness of the commitment of the international financial groups operating in CEE helped turn around the negative attitude towards the region and thus avoid the worst case scenario, UniCredit’s report reads.

About UniCredit Group

UniCredit is a major international financing institution with strong presence in 22 European countries and represented on other 27 markets with around 10,000 branches and more than 168,000 employees as of 30 June 2009.

In the CEE region UniCredit operates the biggest international branch network with over 4,000 branches.

The Group operates in the CEE following countries: Azerbaijan, Bosna Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Kazakhstan, Kirgizstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.