Ing TLV BRD Ro Banks 29feb2012

Romanian banks
EQUITY February 2012 RESEARCH
Sector update
28 February 2012
Romanian banks
Stocks covered
Upside/ downside TP potential (RON) (%) 12.50 0.95 13.6 -7.0
See you next year

We expect no growth in Romanian banking in 2012. De-risking is costly, and both top- and bottom-line growth are expected to be affected in 2012. At the top-line, credit demand is in FX, but supply from banks is currently in RON. Switching from lower-rate EUR loans to higher-rate RON lending will stifle the fragile growth seen in 2011. At the bottom-line, banks are bidding up rates for scarce local savings, in order to plug FX funding and duration gaps. We do not expect the central banks excess short-term RON liquidity to stop, or address the FX and duration mismatch. Net interest margins are likely to take a further hit in 2012 after coming under pressure in 2H11.
Cost cutting is the only way to keep the bottom-line flat: management responds to lower revenue by cutting internal costs, as this is the only expense under its control. Exogenous costs (minimum reserves, market risk costs, under-developed financial markets) cannot be avoided and are unlikely to decrease. As a result, we believe 2012 will be characterised by accelerated layoffs and network closures. All fundamental upside is in the distant future: banks could achieve flat RoEs in 2012 vs 2011 through good cost efficiency and, arguably less likely, lower risk costs. However: (a) profitability is on a par with, or below, peer group averages; (b) growth prospects for 2012 and 2013 appear below average; and (c) country risk is higher than the median. Our fundamental valuations, even using conservative assumptions, suggest there is upside to current share prices, but we believe there will only be value in the long term. We see no apparent short-tem reasons for the market to factor this into current prices and reduce the discounts at which Romanian banks trade to their CEE peer group average multiples. If there is money and appetite in Romania, energy public offerings will steal the show: we expect the Romanian government to seek public offerings for large energy companies (OMV Petrom, Romgaz, Hidroelectrica) in the coming 12 months. Depending on pricing, we believe these could fetch well in excess of 1bn. However, the Romanian market sees only 10m a day of trading on average, hence we believe liquidity could migrate away from banks and into energy. Catalyst for BRD is lower FX funding gap; for Banca Transilvania, it is BRD: in our view, BRD could trim its current 30% discount to CEE peers to 20% if it reduces its funding dependence on Societe Generale by issuing an MTN (medium-term note) in 2Q12. For BT, market behaviour seems to favour a pattern whereby BRD share price outperformance results in local flows partially recoiling into BT shares. Share overhang is risk for BRD; risk for Banca Transilvania is under-provisioning: up to 30% of BRD is held in large institutional stakes, some of which reported significant unloading in 2011. Overhang risk is mitigated by the fact that large trading volumes in the shares are executed as block trades. The trading behaviour of the shares explains why BRD usually lags the wider market dynamics. We believe Banca Transilvania could be haunted in 2012-13 by its low provision coverage ratio (estimated at 30% in 2011F). However, BT receives support from the central bank, which provides it with cheap liquidity. This enables it to buy BTs government securities purchased with the money, thus benefitting BTs interest income and capital ratio (which improves mechanically through the higher marking to market of its available-for-sale portfolio).
Rating BRD GSG Banca Transilvania Source: ING Hold Sell
Price-to-earnings ratio
11F BRD GSG Banca Transilvania Peer group Source: ING 7.8 9.7 11.3 PER (x) 12F 13F 7.7 10.8 10.7 6.3 9.5 9.5
Price-to-book ratio
11F BRD GSG Banca Transilvania Peer group Source: ING 1.2 0.8 1.6 PBR 12F 1.0 0.7 1.5 13F 0.9 0.6 1.5
Return on equity (%)

11F BRD GSG Banca Transilvania Peer group Source: ING 16.0 8.7 17.1 ROE 12F 14.3 6.8 15.4 13F 15.4 6.8 15.9
Metrics (%)
Loan Risk Yield to dep costs 12F ratio 11F 11F BRD GSG Banca Transilvania Peer group Source: ING 1.6 0.0 1.6 108 76 99 2.3 3.8 1.1
Florin Ilie
Bucharest +40 21 209 1218 florin.ilie@ing.ro
research.ing.com
1 SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
Romanian banks
February 2012
Contents
Romanian banks Sector overview 1 3
Sector growth .....................................................................................................................5 FX funding gap...................................................................................................................8 QE Romanian style ..........................................................................................................11 Banking costs...................................................................................................................14 What about Greek banks?................................................................................................15 Impact of switch to IFRS ..................................................................................................16 Central bank future policy.................................................................................................18 Market forecasts...............................................................................................................18 Companies 21
BRD Groupe Societe Generale ........................................................................................23 Banca Transilvania...........................................................................................................37 Disclosures Appendix 51
Romanian banks
February 2012
Sector overview
Deleveraging in the Romanian banking sector is proving hard to execute. An FX funding squeeze is pushing up deposit rates, despite the National Bank of Romania (NBR) providing excess liquidity. Balance-sheet stagnation, currency and duration mismatch, and high risk costs are keeping sector profitability in negative territory, although there are significant differences between individual players. Asset-quality deterioration shows signs of flattening; however, weak revenue streams mean that the sector is set for cost-cutting via layoffs and network downsizing in 2012. A move to international accounting and reporting standards from January 2012 should have a positive impact on capital ratios. In our view, the central banks policies appear to be designed to: (1) maintain excess RON liquidity; (2) support vulnerable locally-held operators; (3) stop the relaxation of minimum reserves; and (4) develop a bridging bank to take over eventual bankruptcies.
Deleveraging and NPLs

Deleveraging is slow and costly; currency and duration mismatch is the main risk, with mid-term EUR funding the prime concern The Romanian banking sector is finding it both difficult and costly to deleverage and decrease its reliance on parent bank funding. Indeed, the sector leverage ratio has been hovering at c.8% for much of the current financial crisis. Overall, capitalisation (tiers I and II) is 650bp above the regulatory minimum, but this sector-wide average figure obscures significant variations among individual banks. Euro funding is the main concern, amid a sector EUR loan-to-deposit ratio of 233%, meaning it is imperative that the reliance on parent banks is reduced. Currency and duration mismatch between local assets and liabilities burdens the system with market and, above all, liquidity risk: long-term EUR-denominated assets vs short-term RONdenominated liabilities. Local long-term savings are scarce, which bids up deposit rates.
Fig 1 Deleveraging is proving hard to execute Fig 2 Funding FX lending is the primary concern
16.00 15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 Mar-08 Mar-09 Mar-10 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Mar-11 Sep-11 Dec-11 Jun-08 Jun-09 Jun-10 Jun-11 7.3 8.1 7.6 8.1 7.9 13.8 13.8 14.7 15.0 14.5
250% 200% 150% 100%
225%
119%
65% 50% 0% 2007 LDR - RON (%) 2008 2009 LDR - FX (%) 2010 2011
Capital adequacy ratio ( 8%) (%)
Leverage ratio (x)
LDR - total* (%)
Leverage ratio = Tier 1 capital/total average assets Source: NBR
*Total = Non-governmental, residents. LDR = Loan-to-deposit ratio Source: NBR
Romanian banks
February 2012
2012 is likely to be the third consecutive year of negative overall sector returns
Balance-sheet stagnation, currency and duration mismatch, and high risk costs are keeping sector profitability in negative territory. Over-leveraged banks have suffered significant losses, while better-off players have recorded positive returns on equity (RoEs) below their cost of equity. We believe 2012 looks set to be the third consecutive year that the sector makes a loss as a whole. Note that losses are unevenly distributed across the sector, with those players marking sizeable losses most likely to need additional capital. In 4Q11, NPLs flattened out a touch above 14%, but we believe weak economic growth and earnings forecasts could push them higher still in 2012. Perhaps counter-intuitively, NPLs have been higher for RON loans than for FX loans. RON loans were previously sold only to customers with lower bargaining power (riskier consumer lending and smalland medium-sized enterprises); they also came with a high interest rate differential, due to the NBRs policy of maintaining high interest rates for the local currency in an effort to rein in an overheating pre-crisis economy and subsequently reduce FX rate volatility.
Fig 4
25.0 20.0 15.0 10.0 14.2 14.1
NPLs flattened in 4Q11, but further increases are likely in 2012 on weak economic growth and earnings forecasts
Fig 3
20% 15% 10% 5%
Sector profitability remains negative
Asset quality deterioration is slowing for now
17.0%
23.3
1.6% 0%
2.9% 0.3% -0.2% -1.7% -0.1% -1.4% 2011
6.5 5.0 0.0 Mar-10 Sep-09 Sep-10 Mar-11 Sep-11 Dec-09 Dec-10 Dec-11 Jun-10 Jun-11
-5% 2008 2009 ROA (%) 2010 ROE (%)
NPLs ratio (%)
Credit risk ratio (%)
Profitability is heterogeneous across sector with big differences among banks Source: NBR
Please refer to Impact of switch to IFRS section for important explanations. Romanian rules are different from IAS, which can affect the international comparability of data Source: NBR
NPLs put Romania in a risky league with Hungary, but the loan-to-deposit ratio is in line with wider CEE region
NPLs put Romania and Hungary in a different, much riskier league to the Polish and Czech markets. However, high loan-to-deposit ratios are a common feature in CEE banking, and Romania is no exception; Romanian banks share the same relative dependence on external FX funding as their Polish counterparts.
Romanian banks
February 2012
Fig 5
16 14 12 10 8 6 4 2 0
NPL ratios in CEE (%)
Fig 6 Loan-to-deposit ratios in CEE (%)

160 150 140 130 120 110 100 90 80 70 60 May-08 May-09 May-10 May-11 ROM 2011
Nominal growth (%)
Sep-08
Sep-09
Sep-10
May-10
May-11
Sep-09
Sep-10
Sep-11
CZE
HUN
POL
ROM
CZE
HUN
POL
Source: National sources, ING estimates
Households and non-financial companies loans and deposits Source: National sources, ING estimates
Sector growth
Single-digit growth in 2012F Romanias macroeconomic situation is stable and the primary future concern is meagre growth, not the fiscal deficit. Banking penetration is at a virtual standstill and growth prospects for 2012 are in single-digit territory.
Fig 8
42% 41% 40% 40% 39% 18% 36% 0% -4% 2007 2008 2009 2010 2011 0% 41% 40% 39% 38% 37% 36% 35% 34% 33% 0 2007 2008 2009 2010 150,000 100,000 1% 50,000 -3% 200,000 25% 20% 10% 0% -10%
Fig 7
Banking penetration is at a standstill
Non-government loans are inching up

40% 33% 30%
40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10%
37%
250,000
5%
7% 4%
-3%
Assets real growth (lhs, %)
Non gov't loans / GDP (rhs, %)
Non-gov't loans (RONm)
Real growth (%)
Source: NBR, NIS
Source: NBR, NIS
Relative pick-up in corporate lending, but widening FX funding gap
Economic growth in 9m11 spurred an increase in corporate lending. However, the downside is that the Euro funding gap widened with the timid pick-up in lending as clients continue to seek EUR-denominated loans, given the interest differential and also emboldened by the continued NBR-vetted relative stability of the exchange rate.
Sep-11
Jan-08
Jan-09
Jan-10
Jan-10
Jan-11
Jan-11
Romanian banks
February 2012
Fig 9
Timid (and fragile) pick-up in corporate lending

90 80 70 60 50 40 30 20 10 0 -10 Apr-08 Apr-09 Apr-10 Apr-11 Jan-08 Jan-09 Jan-10 Jan-11 Oct-08 Oct-09 Oct-10 Oct-11 Jul-08 Jul-09 Jul-10 Jul-11
Fig 10
80 70 60 50 40 30 20 10 0 -10 -20
EUR lending is still outpacing local currency
Jul-08
Jul-09
Jul-10
Apr-08
Apr-09
Apr-10
Jan-08
Jan-09
Jan-10
Jan-11
Apr-11
May-11
Oct-08
Oct-09
Oct-10
Jul-11
Sep-11
Household lending (% p.a.)
Corporate lending (% p.a.)
RON lending (% p.a.)
EUR lending (% p.a.)
Source: NBR
EUR lending growth rate calculated excluding exchange rate effect Source: NBR
Growth rates are in line with the region
Slow growth rates are a problem also found across the rest of the CEE region. The main drivers of this trend are the constraints generated by over-dependence on foreign funding and weakness in local consumption.
Fig 12
45 40 35 30 25 20 15 10 5 0 -5 -10 May-08 May-09 May-10 Sep-08 Sep-09 Sep-10 Jan-08 Jan-09 Jan-10
Fig 11
80 70 60 50 40 30 20 10 0 -10 -20
Loan growth in CEE (% pa)
Deposit growth in CEE (% pa)
May-08
May-09
May-10
May-11
Sep-08
Sep-09
Sep-10
CZE
HUN
POL
ROM
Sep-11
Jan-08
Jan-09
Jan-10
Jan-11
CZE
HUN
POL
Banking penetration rates are where they should be
The prolonged contraction in consumer and SME lending was counter-balanced in 2011 by larger corporate loans and government-sponsored mortgage schemes. On the positive side, penetration of various lending segments in GDP terms is far lower than EU or CEE averages, which bodes well for the long-term growth perspective. However, convergence in higher banking penetration rates seen in more advanced economies is unlikely to be smooth or occur anytime soon. Penetration is tied to the absolute level of discretionary disposable income in a tradable price-equalisation common market such as the EU; from this standpoint, we believe Romanian is currently where it should be in terms of banking penetration in GDP.
Jan-11
ROM
Oct-11
Romanian banks
February 2012
Fig 13
25% 20% 15% 10% 5%
Chance of growth: corporate and mortgages
Fig 14
Corporate lending leads the field (RONm)
250,000
18% 13%
18% 14%
19%
21%
21%
200,000 150,000
15% 13% 11% 5% 6% 6%
100,000 50,000 0
3%
4%
0% 2007
2008
2009 Housing / GDP
2010
2011
2007
2008 Retail loans
2009
2010
2011
Consumer / GDP
Corporate / GDP
Non-financial company loans
Source: NBR, NIS, ING
Source: NBR
Mortgages schemes are a function of government discretion and consumer lending is falling away; corporate lending is a function of EU economy
We expect government-sponsored mortgage schemes to continue for the near future, as they appear to be politically acceptable across the spectrum and are currently in their fourth phase. However, consumer lending is set to slump further, due to strict new restrictions on the currency and maturity of consumer loans, coupled with weak demand as a result of low consumption and earnings. Corporate lending in Romania is a function of the European economy. The most dynamic corporate segments are multi-national subsidiaries and local medium-sized corporations (near-abroad sub-contractors of choice for Western European integrators and multinationals), both of which are directly connected to the health of the broader EU economy.
Fig 15
Stalled retail lending hides mortgage growth (RONm)
Fig 16
Strong exports have spurred investment (RONm)
120,000 100,000 80,000 60,000
140,000 120,000 100,000 80,000 60,000
40,000 20,000 0 2007 2008 Consumer 2009 Housing 2010 Other retail 2011
40,000 20,000 0 2007 2008 2009 Corporate 1-5yrs 2010 2011
Corporate <1yr
Corporate >5yrs
Source: NBR
Source: NBR
Weak domestic consumption is main drag on growth
But, with exports highly dependent on fragile European demand, domestic consumption appears to be the only substantial source of growth in the future. For the moment, this is not the case as consumption remains weak. Corporate lending appears most correlated with new consumer goods orders.
Romanian banks
February 2012
Fig 17
GDP components show weak consumption
Fig 18
45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 5.0
Consumer goods orders drive corporate lending
25% 15% 5% -5% -15% -25% -35% 1Q08 3Q08 GDP 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
Aug-10
Feb-11
Apr-11
Aug-11
Dec-10
New manufacturing orders total (% p.a.) New orders consumer goods (% p.a.) Corporate lending (% p.a.)
Household consumption
Fixed investment
Source: NIS
Source: NBR, NIS
2012 has started on a soft note
In our view, domestic consumption is unlikely to take-off in 2012. Improvements in real wage growth in 2H11 have been driven by a favourable base effect and soft inflation. With local elections scheduled for June and general elections for November, the incumbent government could be tempted to increase pensions and civil servant salaries in 2Q12, but any such move will be limited by the constraints of Romanias agreement with the IMF. The growth in salaries has a weak pull effect on household lending, as the population is still dealing with high leverage ratios and significant loss of revenue in 200910. Improvements in industrial confidence and output have now levelled off, and we expect further softening, tracking EU sentiment.
Fig 20
10
Fig 19
6.0 4.0 2.0 0.0 2.0 4.0 6.0 8.0 10.0
Real wage growth is a weak pull on loans
Industry provides support for growth

20% 15% 10% 5% 0% -5% -10% -15% -20%
5 0 -5 -10 -15 -20
May-11
Feb-11
Mar-11
Apr-11
Aug-11
Sep-11
Dec-10
Nov-11
Dec-11
Jan-11
Jun-11
Oct-11
Jul-11
-25 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Industrial confidence (sa, lhs) Industrial output (3MMA, %YoY, rhs)
Real salary growth 3MMA (% p.a.) Real household loans growth 3MM (% p.a.)
Source: NBR, NIS
Source: NIS, DG ECFIN
FX funding gap
FX funding gap, and attached liquidity risk, grew in 2011 Despite international banking groups seeking to reduce FX exposure, a goal shared by the central bank, the incipient pick-up in lending in 2011 came as FX lending increased. The FX funding gap and liquidity risk attached to it grew, rather than fell as intended. Longer maturity loans are overwhelmingly in EUR, while short-term lending facilities have a stronger RON component, thus adding duration mismatch to currency mismatch. But there is a silver lining: exposure to exotic currencies (non-EUR, non-US$ foreign currencies; mostly CHF) is only 9% of the total lending portfolio (rising from 8% at the
Exposure to exotic currencies is not a concern; it is all about EUR
Dec-11
Jun-11
Oct-10
Oct-11
Romanian banks
February 2012
onset of the crisis only because of the statistical effect of RON depreciation against these currencies). Most FX loans are EUR-denominated.
Fig 21 Foreign currency lending exposure still growing Fig 22 Positive: small exposure to exotic currencies
250,000 200,000
100%
7%
8%
8%
9%
9%
47% 150,000 100,000 50,000 0 2007 2008 2009 2010 2011 0% 2007 46%
49%
52%
57%
57%
43%
40%
34%
34%
2008
2009 EUR loans (%)
2010
2011
LCY-denominated loans (RONm)
FCY-denominated loans (RONm)
RON loans (%)
Other ccy loans (%)
Source: NBR
Source: NBR
Riskier retail clients get higher-rate RON loans and generate higher risk costs
The currency structure of the different retail lending segments reflects the bargaining power of Romanian borrowers vs banks: (1) mortgages have previously been accessed by much-sought-after more affluent retail clients asking for lower EUR rates; and (2) consumer loans appealed to lower- and middle-income segments, which had less choice and took on higher RON rates. Therefore, riskier retail clients received higher-rate RON loans and generated higher risk costs. Going forward, consumer lending if any is likely to be almost exclusively in local currency.
Fig 24 Housing loans: currency structure (Dec 2011)
Other currencies 13% RON 5%
Fig 23
Consumer loans: currency structure (Dec 2011)

Other currencies 15%
RON 42%
EUR 43% EUR 82%
Source: NBR
Source: NBR
EUR dominates longer maturities in corporate lending with shorter maturities in RON
Corporate lending is mostly in RON for short maturities and in EUR for longer maturities, mirroring the retail lending picture. Indeed, the reasons are similar; longer maturities have previously been available for larger, more secure borrowers. However, this sort of adverse selection functioned to the detriment of all parties involved clients and banks.
Romanian banks
February 2012
Fig 25
Corporate lending <one-year currency structure

Other currency 5%
Fig 26
Corporate lending >five-year currency structure

Other currency 2% RON 26%
EUR 41%
RON 54%
EUR 72%
Source: NBR
Source: NBR
High interest differential continues to favour EUR loan demand
We believe banks are now trying hard to push local currency lending, but recent trends show that EUR lending is particularly resilient. This is due to the strong client preference for EUR loans as a result of the still-sizeable interest rate differential, as detailed in the QE Romanian style section. Meanwhile, the central bank is trying to narrow the differential (also detailed in the following section), but to no avail as it currently provides short-term excess liquidity with little or no bearing on the long-term funding needs of commercial banks lending portfolios.
Fig 27
Local currency lending needs a push
Fig 28
Euro-denominated lending particularly resilient
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 65,309 80,398 76,950
CAGR: +2% 71,847
35,000 30,000 CAGR: +11% 26,114 23,352 18,653 23,839 27,914
68,102
25,000 20,000 15,000 10,000 5,000 0
2010
2011
2007
2008
2009
2010
2011
Local currency loans (RONm)
EUR-denominated loans (EURm)
Growth calculated in nominal terms. Only loans specifically reported as RONdenominated are included Source: NBR
Growth of stock calculated in EUR-equivalent to eliminate exchange rate influence. Only loans specifically reported as EUR-denominated included Source: NBR
RON remains the currency of choice for local savings due to the interest rate differential and relatively stable FX rate
Local savings are almost entirely short term, both in local and foreign currency. The interest rate differential and relatively stable exchange rate continue to make RON more attractive to savers, hence the widening funding gap vs the structure of the loan portfolio.
10
Romanian banks
February 2012
Fig 29
Mismatch: local funding is short term (RONm)
Fig 30
RON remains attractive for savers (RONm)
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2007 2008 2009 2010 >1 yr deposits 2011
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2007 2008 2009 EUR deposits 2010 2011
O/N & <1 yr deposits
LCY deposits
Other ccy deposits
Source: NBR
Source: NBR
EUR lending rates are likely to rise in the near future to reflect country risk and the funding gap
The spread between Romanian and Eurozone lending rates is on the low side. For example, the spread between Romania and the Eurozone for new EUR-denominated loans to households for house purchases on a ten-year initial fixed rate is currently c.200bp (widening from as low as 100bp in mid-2010 and a negative spread as at end2008). This spread is lower than CDS spreads against much of the Eurozone, suggesting that, if anything, lending costs at least for EUR-denominated loans are set to rise in the near future rather than moderate down.
Fig 32
12.0 10.0 8.0 6.0 4.0 2.0 0.0 May-07 May-08 May-09 May-10 May-11 Sep-07 Sep-08 Sep-09 Sep-10
Fig 31
900 800 700 600 500 400 300 200 100 0
Country risk is reflected in funding costs
Lending rates reflect funding constraints
Apr-09
Apr-10
Jan-09
Jan-10
Jan-11
Apr-11
Jan-12
Oct-08
Oct-09
Oct-10
Oct-11
Jul-09
Jul-10
Jul-11
Eurozone EUR housing loan rate (% p.a.)
Romania 5Y CDS (bps)
Hungary 5Y CDS (bps)
Romania EUR housing loan rate (% p.a.)
Source: Reuters
New loans to households for house purchases on a ten-year initial fixed rate Source: NBR, ECB
QE Romanian style
In Romania, the central bank is currently enforcing an inflation-targeting policy. The experience of hyperinflation in the 1990s continues to skew current monetary policy towards cautious and slow relaxation. Moreover, the NBR is sometimes seen to be targeting exchange rate stability at the expense of high and volatile local currency interest rates. Irrespective of the central banks rationale and intentions, this has certainly been the outcome, which in turn has encouraged EUR borrowing and RON savings.
Sep-11
Jan-08
Jan-09
Jan-10
Jan-11
11
Romanian banks
February 2012
Excess RON liquidity lowers inter-bank rates, RON FX swap yields, government debt yields; provides support for locally-held banks
Fig 33
25 20 15 10 5 0 Jun-06 Jun-07 Jun-08 Jun-09
The NBR recently engaged in providing excess short-term liquidity in local currency. While this move cannot alleviate the long-term funding gap, it offers marginal help to the FX swap market, which we estimate to have daily volumes of 150-200m on 1-3 months. However, this is just a short-term partial and ineffective solution to the broad long-term funding gap among Romanian banks.
Fig 34
8 7 6 5 4 3 2 1 0 May-11 Mar-11 Jan-11 Jun-11 Feb-11 Aug-11 Sep-11 Dec-10 Nov-11 Jun-10 Dec-11 Jan-11 Jan-12 600 500 400 300 200 100 0 May-11 Feb-12 Jul-11 Sep-11 Aug-11 Dec-11 Nov-11 Feb-11 Apr-11 Oct-11 Apr-11 Jul-11
Slumping inflation allows NBR to pump liquidity
Swapping RON for EUR for FX funding
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Jun-11
Dec-11
RON FX swap implied yield 1M (%) RON FX swap implied yield 3M (%)
Interbank deposits rate (%)
Policy rate (%)
CPI (%)
Source: NBR, NIS
Source: Reuters
Instead, the excess liquidity goes mostly into lower yields for government securities which we feel could also be one of the NBRs targets. In addition, the list of market markers in the latest government fixings (auctions of government securities) are predominantly locally-held banks, some of whom received NBR support when they got into trouble in the past. At the same time, repo market volumes have risen dramatically, further supporting this assessment. Locally-held banks are uniquely placed to take on NBR liquidity and place it into government securities We believe that NBR support for locally-held banks will continue, thus benefiting players such as Banca Transilvania and, to a lesser extent, Banca Carpatica. Local banks are most likely to benefit from current excess RON liquidity because they do not have groupimposed limits on sovereign exposure to Romanian government debt, as is the case for foreign-owned banks, for risk management purposes. This means that locally-held banks are uniquely placed to take on NBR liquidity and place it into government securities, which we expect to continue for much of 2012.
Fig 36
7.9 7.8 7.7 7.6 7.5 7.4 7.3 7.2 7.1 7.0 6.9 6.8
Fig 35
8.00 7.50 7.00 6.50 6.00 5.50 5.00
Extra liquidity helps treasuries, inter-bank rate

25,000 20,000 15,000 10,000 5,000 0 May-11 Feb-11 Mar-11 Apr-11 Aug-11 Sep-11 Nov-11 Dec-11 Jun-11 Jan-12 Oct-11 Jul-11
Treasuries fixing yields vs country risk
Repo volume (rhs, RONm) ROBOR 3M monthly avg (lhs, %) 3Y Gov't securities fixing latest date of month (lhs, %)
5Y GS Bid price (lhs, %)
Romania 5Y CDS (rhs, bps)
Source: NBR, NIS
Source: NBR, Reuters
12
Romanian banks
February 2012
NBR intervention has merely slowed deposit rate growth
The central banks move to provide additional RON liquidity could also be a reaction to concern about the dampening effect of the banking liquidity squeeze on domestic consumption. The competition for scarce local savings intensified in 2H11, resulting in deposit rates being bid up steeply. However, NBR measures have met with limited success so far on this front, as they have merely slowed the pace of deposit rate growth.
Fig 38
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 5,000 0 May-11 Mar-11 Jun-11 Feb-11 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11 Nov-11 Dec-11 Jan-11 Jul-11 15,000 10,000
Fig 37
10 8 6 4 2 0 -2 -4
RON deposit rates reflect liquidity squeeze
NBR easing is due to tight funding market

25,000 20,000
May-07
May-08
May-09
May-10
May-11
Jan-07
Jan-08
Jan-09
Jan-10
Sep-07
Sep-08
Sep-09
Sep-10
Jan-11
Real spread RON new loans (%) Real interest rate RON new deposits (lhs, %)
Sep-11
Repo volume (rhs, RONm) Real interest rate RON new deposits (lhs, %)
Source: NBR
Source: NBR
Excess RON liquidity set to continue in 1H12
In our view, the NBR can reasonably be expected to continue to provide excess RON liquidity in 1Q12 and probably 2Q12. The growth of money does not create inflation, hence avoiding influencing the inflation target in the current environment. In an economy that has adopted an inflation-targeting framework by using interest rates as the main instrument of control, the role of monetary aggregates has decreased. Romanian data show that even very rapid growth of money is not necessarily linked to higher inflation, and the NBR is clearly aware of this.
Fig 39
60 50 40 30 20 10 0 -10 -20
Growth of money does not create inflation
Fig 40
12.00 10.00 8.00
Policy rate shows still-cautious NBR stance
VAT increase
VAT increase
6.00 4.00 2.00 0.00 Jul-06 Jul-07 Jul-08 Jul-09
Apr-08
Apr-09
Apr-10
Jan-08
Jan-09
Jan-10
Jan-11
Apr-11
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jul-10
M2 (% p.a.)
M1 (% p.a.)
CPI (% p.a.)
Policy rate (% p.a.)
CPI (% p.a.)
Source: NBR, NIS
Source: NBR, NIS
Easing likely to be hindered by a strong revealed preference for a stable exchange rate
To sum up, the funding squeeze will push up local deposit rates despite the NBRs attempts to counter this by providing excess liquidity. Moreover, monetary policy easing is likely to be hindered by the central banks strong preference for a stable exchange rate, and a quick look at Romanian inter-bank rates is quite revealing.
Jan-12
Oct-08
Oct-09
Oct-10
Oct-11
Jul-08
Jul-09
Jul-10
Jul-11
13
Romanian banks
February 2012
A helping hand for vulnerable players to meet MRR obligations?
If we look more closely, the inter-bank market shows yet another helping hand from the NBR for more stretched market players: lower rates to fulfil minimum reserve requirement (MRR) obligations (note that the MRR observation period and the maintenance period are one-month long and successive, and the observation period lasts from the 24th day of the previous month to the 23rd day of the current month).
Fig 42
9.0
Fig 41
55 45 35 25 15 5 -5
Trade-off: stable FX, but volatile interest rates
Inter-bank rate follows MRR period
RON under pressure
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Extra liquidity by NBR
May-07
May-08
May-09
May-10
May-11
May-11
Mar-11
Jul-11
Feb-11
Oct-11
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Nov-11
Dec-11
Aug-11
Sep-11
ROBOR 3M (%)
Spread ROBOR-ROBID 3M (%)
ROBID overnight (%)
ROBOR overnight (%)
Source: NBR
Source: NBR
Banking costs
A mixed picture in terms of profitability; differences and losses are due to risk costs The profitability of Romanian banks is a mixed picture. Some players post deep losses while others make a profit, although in most cases, the return is less than their cost of equity. Internal costs represent the difference between these banks, namely risk costs stemming from varying capacity to perform risk management during high-growth stages. Several players also suffer from inefficient distribution networks. During the boom time, most branches were opened in more affluent cities and towns. As banks vied for market share, they overcrowded areas where eligible clients were located, a problem compounded by the fact that only 55% of Romanians live in urban areas. Branch economics show that break-even can be achieved with a minimum of 2,500 active clients, while current figures imply less than 1,500. As such, we believe further sector restructuring is likely in 2012.
Over-extended distribution networks mean the sector is set for more restructuring in 2012
Fig 43
Rank 1 2 3 4 5 6 7 8 9 10
Top ten Romanian banking operations

Bank BCR BRD Banca Transilvania CEC Bank Raiffeisen Unicredit Tiriac Bank Volksbank Alpha Bank ING Bank Bancpost Parent Erste Societe Generale N/A Government Raiffeisen UniCredit N/A Alpha ING EFG Country 2009 Austria France Romania Romania Austria Italy Austria Greece Holland Greece 62.9 46.4 19.5 20.8 20.0 20.3 21.7 21.2 10.9 14.6 Assets (RONbn) 2010 2011 67.6 47.5 21.6 21.6 21.7 20.4 19.7 21.3 12.0 13.5 71.2 48.0 25.7 24.7 23.6 22.3 17.7 16.5 14.3 12.2 Market share (%) 2009 2010 2011 19.1 14.1 5.9 6.3 6.1 6.1 6.6 6.4 3.4 4.5 19.8 13.9 6.2 6.4 6.5 6.0 5.8 6.2 3.6 3.9 20.1 13.6 7.3 7.0 6.7 6.3 5.0 4.7 4.0 3.5 Net profit (RONm) 2011 -327 472 146 38 316 103 -635 -118 127 17
Source: Company data, ZF
High exogenous operating costs and rising product pricing stifle growth
Romanian banks also face relatively high exogenous operating costs, which they cannot control and which they pass on to clients. Competition among market players does not affect these costs in client pricing, and higher pricing is a dampener on growth.
Feb-12
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-11
Jun-11
Jan-12
Apr-11
14
Romanian banks
February 2012
In addition, recent regulations that impose/affect costs include:
Prohibition of using internal rates when setting lending prices and using fixed rates or
floating rates pegged to a market index.
Scrapping of early repayment fees. Lending restrictions on FX loans and strict limits on the tenor of consumer loans. Cost of guarantee funding rising from 0.2% in 2010 to 0.3% in 2011.
However, exogenous costs come in other different forms:
FX rate stability has a price: the FX market is atrophied, which means lower trading
profits for the banking sector.
Fig 44
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Oct-07 Oct-08 Oct-09 Oct-10 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Oct-11
FX rate stability has a price: weaker FX market

3,000 2,500 2,000 1,500 1,000 500 0
Fig 45
75.00 70.00 65.00 60.00
Cost-to-income ratio reflects weaker revenue
68 64 65
56 55.00 50.00 45.00 Mar-08 Mar-09 Mar-10 Dec-08 Dec-09 Dec-10 Mar-11 Dec-11 Jun-08 Jun-09 Jun-10 Sep-08 Sep-09 Sep-10 Jun-11 Sep-11
FX trading volume (rhs, EURm) EUR/RON avg rate (lhs, RON)
Cost-to-income (%)
Source: NBR
Source: NBR
What about Greek banks?

Impact significant, but ultimately manageable We believe the Greek fallout for Romania will continue to be significant, but ultimately manageable, strictly from the perspective of banking asset exposure; this notwithstanding the collateral effects and contagion risk. According to publicly-available data, Greek banks owned 13% of total net assets in the Romanian banking market at end-2011, ie, 10.6bn of total net assets.
Fig 46
Rank 8 10 11 12 25
Greek banks operating in Romania

Bank Alpha Bank Bancpost Piraeus Bank Banca Romaneasca ATE Bank Total Parent Alpha EFG Piraeus NBG ATE Country 2009 Greece Greece Greece Greece Greece 21.2 14.6 9.5 8.6 1.4 55.3 Assets (RONbn) 2010 2011 21.3 13.5 9.4 7.6 1.9 53.7 16.5 12.2 8.1 7.4 1.6 45.8 Market share (%) 2009 2010 2011 6.4 4.5 2.9 2.6 0.4 16.8 6.2 3.9 2.7 2.2 0.6 15.6 4.7 3.5 2.3 2.1 0.4 12.9 Net profit (RONm) 2011 -118 17 44 -122 -160 -340
Source: Company data, ZF
If we assume significantly more stringent ratios for Greek banks in Romania than overall sector averages, as shown in the hypothetical stress-test scenario in Figure 47, this still implies a funding gap of 4.0bn. In this example, half of the gap is covered by EUR funding from parent banks, which represents c.3% of Romanias GDP.
15
Romanian banks
February 2012
Fig 47
Indicator
Stress-test scenario for Greek bank exposure

Scenario assumption 12.9 10.6 220 70 3.4 4.0 Source Based on publicly-available data Based on publicly-available data Assumption (119% for the sector) Assumption (64% for the sector) Scenario calculation Scenario calculation
Market share in total banking assets (%) Total net assets (bn) Loans-to-deposits (%) Loans-to-assets (%) Deposits (bn) Gap (bn)
Note: unless otherwise indicated, the figures used above represent only a hypothetical scenario analysis Source: ING estimates
The scenario considered in Figure 47 is also based on conclusions drawn from looking at individual Greek operations in Romania, given available information from parent bank reports. Figure 48 presents a scenario analysis of Alpha Banks 2010 numbers (the bank has the largest presence in Romania among Greek banks).
Fig 48 Estimate of Alpha Banks Romanian funding gap scenario analysis (m)
2010 Assets Equity Liabilities Estimated liabilities from group (based on transactions with group companies by parent) Implied loans (assuming 70% of assets, as in scenario above) Local liabilities Loans/deposits (if all local liabilities are considered deposits) (%)
Note: this table reflects scenario analysis by the analyst and does not necessarily reflect the actual situation. Source: Company data, ING estimates
5,036 363 4,673 2,930 3,525 1,742 202
Romania is targeting a 3% budget deficit in 2012, after ending 2011 slightly above 4%. On the budget revenue side, even incremental improvements in revenue collection (currently only 34% of GDP vs 40% in Bulgaria, for example) and EU fund absorption would visibly help with the deficit. Public debt stands at c.34% and, all things being equal, we believe Romania can, in extremis, absorb costs of the magnitude estimated above.
Impact of switch to IFRS

The Romanian banking sector switched from Romanian accounting standards (RAS) to international accounting and reporting standards (IFRS) in January 2012. Switch from RAS to IFRS starting January 2012 should give a one-off boost to capital ratios Based on our analysis, the change in accounting standards will have three material effects: (a) loan impairment provisions will be lower (profit before tax will be higher, as will tax on this profit); (b) capital adequacy ratios (CAR) stand to look better; and (c) banks with sizeable assets available for sale could see noticeable swings in capital. In Figure 49, we show the key accounting differences between local standards, valid until December 2011, and international standards, with our assessment of the impact of a move to IFRS from January 2012.
16
Romanian banks
February 2012
Fig 49
IAS/IFRS vs RAS
IAS/IFRS RAS Each client is classified into a prudential category. There are five categories based on three criteria: (a) financial performance; (b) debt service; and (c) judicial status. The five categories are: (1) standard; (2) watch; (3) sub-standard; (4) doubtful; and (5) loss. For each category, the NBR regulation sets a standard impairment coefficient: (1) 0%; (2) 5%; (3) 20%; (4) 50%; and (5) 100%, respectively. All loans to a specific client are impaired based on client classification, irrespective of the individual situation of each of the loans granted to that client. RAS is stricter (and generates higher impairment than IAS) because, for instance, if the term is past >90 days, 100% impairment automatically occurs regardless of any other criteria or existing collateral or any cash flow recovery. Impact Two impacts: (1) Provisions under IAS are lower (profit before tax is higher, all things being equal, vs RAS). (2) Banks can reduce their FX positions (by selling EUR) held for net provisions on impairments on loans denominated in EUR (much of this occurred in lateDecember, but banks may be waiting for the go-ahead from the NBR, following January 2012 prudential reporting, before decreasing FX positions further thus providing support for the local currency in the short term).
Impairment (accounting)
The portfolio of loans is split into two categories: significant and nonsignificant, based on pre-set criteria. Impairment is determined individually for the first category, and collectively for the second category. Impairment is determined only on objective proof of an already existing reason that would justify the impairment. If a specific reason is not found for a loan in the significant category, the loan is classified in the second category and subject to collective impairment treatment (based on general risk assessment: country risk, industry, etc). Similarly, a non-significant loan that has a specific individual impairment will be transferred to the first category (individually impaired). Impairment is calculated against the net present value of the impaired assets cash flow.
Impairment (prudential reporting)
As of January 2012: (a) accounting will be IAS/IFRS; and (b) prudential reporting will be performed according to NBR regulations. There are two categories of prudential reporting: (i) impairment (according to NBR Regulation 11/2011); and (ii) indicators (own capital, solvency ratio, large exposures, etc). Prudential reporting is only done to NBR, and investors can only see the aggregated indicators for the banking sector as a whole as reported by the NBR. To calculate own capital, for instance, all inputs (share capital, reserves, retained profits, etc) are taken from IAS/IFRS accounting, but they are adjusted for any adverse difference between Regulation 11/2011 P&L net impairment provisions and IFRS net impairment provisions. No hyper inflation adjustments to share capital.
Calculation of the Capital Adequacy Ratio (CAR) is still different from IFRS, as bank capital used in the calculation is not IFRS-determined, but influenced by NBR Regulation 11/2011. This means that while the CAR stands to look better than before, it will not be fully IFRS compliant and will still be lower than it would be under IFRS solely. Capital structure changes accordingly (share capital is higher under IFRS).
Hyper inflation adjustments In the event of hyper inflation (eg, in (IAS 29) Romania in the 1990s), a hyper inflation restatement surplus is calculated and included in the share capital. Financial assets available for sale Any difference from marking to market, regardless of whether it is positive or negative, is booked through the balance sheet (capital) and not through the income statement.
Only the negative difference from marking to market is booked via the income statement. Positive differences are not booked.
Banks with sizeable AFS could see significant swings in capital (capital for solvency is still calculated according to the local central bank standard, but starts from IFRS figures, with some adjustment for impairments, as shown above), due to differences resulting from mark to market. Deferred tax liabilities will be higher under IFRS, while current tax will be lower.
Deferred tax
Starting in January 2012, accounting-wise, net provision income/(expense) is booked according to IFRS, while tax-wise, it is still NBR Regulation 11/2011, which is the norm. This entails a taxable income difference. As RAS is harsher on net provisions, the fiscal treatment is more favourable than IFRS, and banks need to book a deferred tax liability. Loans held off-balance-sheet under RAS are taken back on balance sheet under IAS. Loans taken off-balance-sheet until July 2007 (on several criteria) and held offbalance-sheet until recovery or write-off. Loans were no longer taken off-balancesheet from June 2007.
Off-balance-sheet loans
Loans on the balance sheet could be slightly higher under IFRS, depending on a banks individual situation. There is a chance of a small increase in retained profits (and, consequently, capital) from this change in accounting. Impact depends on accounting policies enacted by each bank before the change. Depends on the decision of the accountant, but not a material impact. Smaller items formerly treated as neither expenses or fixed assets will now either be expensed or be classified as a fixed asset (plenty of discretion left to accountant).
Amortisation of origination commissions
IAS only allows effective interest rate (EIR) for the amortisation of originating commissions. Conditions: (1) life >one year; (2) generates benefits; (3) useful for economic activity. No value threshold.
RAS allows two alternatives for amortisation of originating commissions: (1) linear; or (2) EIR. Two conditions: (1) life >one year; (2) value above government decisionprescribed level.
Fixed assets
Source: ING
17
Romanian banks
February 2012
Central bank future policy

Excess liquidity, support for locally-held banks, no MRR relaxation, bridge bank The central banks policy line, in our view, seems to be: (1) generating excess RON liquidity; (2) support for locally-held players; (3) no significant relaxation of minimum reserves; and (4) a bridge bank to take over eventual bankruptcies. Excess RON liquidity is certainly pushing down short-term inter-bank rates and government debt yields, while in the process offering a helping hand particularly to locally-held banks, as detailed in this report. Hence, we expect the NBR to continue to provide excess liquidity into 2012. However, excess short-term RON liquidity is not helping to address the FX funding and duration gaps that are stifling growth in the Romanian banking sector. RON lending fell in January for the first time in the past 12 months, providing further proof that excess liquidity from the NBR does not help private lending. Our assessment is also supported by the trend in RON deposits, which grew 2.4% in January (14% YoY). We expect the race for scarce local savings, which manifests itself by pushing up deposit rates, depressing net interest margins and reducing the scope for growth, to continue for the foreseeable future. While the NBR could relax the MRR, and we believe it will probably do so at the margins, significant relaxation appears unlikely. Freeing up FX funding from foreign parent banks would most likely result in a cancellation of the corresponding funding line to Romanian subsidiaries to reduce the funding gap. Indeed, the NBR would only see its FX reserves diminish without any additional benefit to lending and the economy at large. Against this backdrop, we anticipate the central bank attempting to negotiate another (gentlemens) agreement with the foreign banking groups in Romania, modelled on the one agreed in 2009, to prevent a steep reduction in FX funding for their Romanian subsidiaries. According to the NBRs deputy governor, meetings to this effect will start in March 2012. Regardless of the outcome, we do not see these talks as a potential gamechanger. Romania has c.30 banks with market shares ranging between 0% and 3% these are particularly vulnerable in a funding squeeze scenario. In this context, the central bank is reportedly setting up a bridge bank, under the Deposit Guarantee Fund administration. We view this as a positive step for the sector; introducing an efficient and effective instrument to deal with any extreme situations should these arise in the future. The risk is that should the bridge bank be put to use in the future, the state be tempted to prolong its ownership of these banking operations, thus increasing the states presence in the banking sector, which could affect competition and distort market incentives.
Market forecasts
Based on our analysis, Figure 50 shows the macro and market assumptions we use as the basis of our company financial forecasts.
18
Romanian banks
February 2012
Fig 50
Macro and market assumptions

2007 2008 515 7.3 7.9 13.0 4.6 10.6 314,442 25 61.1 198,056 34 38.5 63 131 151,439 17 29.4 18 40 2009 498 -7.1 5.6 11.3 1.3 10.8 330,184 5 66.3 199,887 1 40.1 61 119 168,076 11 33.8 15 25 2010 514 -1.3 6.1 6.8 0.9 7.3 341,946 4 66.5 209,294 5 40.7 61 118 178,088 6 34.6 15 25 2011F 570 2.5 5.8 5.8 1.4 7.3 354,009 4 62.1 223,034 7 39.1 63 119 188,188 6 33.0 15 20 2012F 610 0.8 3.0 5.5 1.1 7.0 364,629 3 59.8 234,185 5 38.4 64 119 197,598 5 32.4 15 20 2013F 680 2.5 5.6 6.5 0.9 7.4 390,153 7 57.4 252,920 8 37.2 65 117 215,382 9 31.7 10 20 2014F 731 3.0 4.3 6.0 1.0 7.2 421,366 8 57.7 275,683 9 37.7 65 116 236,920 10 32.4 5 20
Macro Nominal GDP (RONbn) Real GDP growth (%) CPI (average %YoY) 3-month rate (ROBOR) 3-month rate (EURIBOR) 5-year yield (%) Banking assets Total net assets (RONm) Assets growth rate (%) Assets/GDP (%) Loans Loans, gross - total (RONm) Loans growth rate (%) Loans/GDP (%) Loans/assets (%) Loans/deposits (%) Deposits Total deposits (RONm) Deposits growth rate (%) Deposits/GDP (%) Minimum reserves (MRR) Regulatory MRR RON (%) Regulatory MRR FX (%)
Source: NBR, NIS, ING estimates
416 6.3 4.8 7.9 4.3 7.5 251,426 46 60.4 148,181 35.6 59 115 129,063 31.0 20 40
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Companies
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22
BRD Groupe Societe Generale
Romanian banks
February 2012
Hold (previously Buy)

Price (23/02/12)

Steady as she goes
BRD will likely focus on downsizing, deleveraging and cost-cutting in 2012. With expected profitability in line with CEE peers, BRD operates in a riskier environment with a wide FX funding mismatch and a low provision coverage ratio. We downgrade to HOLD (from Buy) and cut our TP to RON12.5 (from RON15.0). Downsizing, deleveraging and cost-cutting likely to dominate 2012. Given the weak economic backdrop, management will likely focus on those items under its control (costs, risk management) while also seeking to reduce its funding exposure to Societe Generale. We expect continued growth in NPLs, although a 43% cost-to-income ratio should help to keep the net result flat YoY. In 2012-13, we expect growth to continue to be affected by the large FX funding gap, compounded by the widening loan duration mismatch. BRDs profitability is in line with its CEE peer group average due to its better cost-efficiency. Valuation: conservative forecasts justify upside, but risks are high. Our target price implies a 2011F PBR of 1.2x, which we believe is justified as: (1) it reflects an estimated 100bp RoE spread over the cost of equity for the year and higher spreads going forward; (2) more upside implied by the DDM and relative valuations is likely to be limited by the share overhang risk stemming from large institutional stakes in the company; and (3) a higher country risk would prevent BRD from losing its discount to safe haven Polish banks, while posting similar mid-term RoEs. Share overhang could be main drag on stock. BRD is a closely-held stock, despite its seemingly generous 39% free float. SIFs have been gradually selling down their holdings in BRD, but we estimate that up to 30% of its shares are still held in large institutional stakes. Based on SIFs reporting, we estimate that they sold a net 2% of BRD in 9m11, which is equivalent to the shares total trading volume over the past three months. Overhang risk is partially mitigated by the fact that large trading volumes in the company occur as block trades. However, BRDs shareholding structure and trading behaviour mean the company usually lags wider market dynamics. Three-year EUR MTN planned for 2Q12 is catalyst for lower discount to peers. BRDs operating cost efficiency and higher net interest margins counter its increased cost of equity and greater cost of risk. We believe the shares could trim the current 30% discount to peers to 20% if BRD reduces its funding dependence on Societe Generale estimated to be 1.9bn, ie, 19% of liabilities as at December 2011F by issuing an MTN (medium-term note) in 2Q12.
Forecasts and ratios
Year end Dec (RONm) Revenues Pre-provision profit Net profit Normalised EPS (RON) Dividend per share (RON) Normalised PER (x) Dividend yield (%) Price/book (x) Normalised ROE (%)
Source: Company data, ING estimates
RON11.00
Target price (12-mth) RON12.50 (RON15.00) Forecast total return
15.2%
Banks Romania Bloomberg: BRD RO Reuters: ROBRD.BX Share data

Avg daily volume (3-mth) Free float (%) Market cap (RONm) Dividend yield (12F, %) 223,524 39.0 7,666 1.6
Share price performance

16.0 14.0 12.0 10.0 8.0 01/11 05/11 09/11 01/12 BRD RO BET-XT rebased
Source: Bloomberg
2009 3,693 2,056 1,146 1.65 0.73 6.7 6.6 1.6 25.2
2010 3,664 2,111 1,008 1.45 0.28 7.6 2.5 1.3 19.0
2011F 3,510 1,965 982 1.41 0.18 7.8 1.6 1.2 16.0
2012F 3,544 2,020 996 1.43 0.17 7.7 1.6 1.0 14.3
2013F 3,718 2,119 1,211 1.74 0.50 6.3 4.5 0.9 15.4
Florin Ilie
23
Romanian banks
February 2012
Valuation
BRD could trim its trading discount to peers by reducing dependence on parent funding BRDs operating cost efficiency and higher net interest margins counter its increased cost of equity and greater cost of risk. We believe BRD has room to trim its discount to peers if it reduces its funding dependence on Societe Generale by issuing an MTN in 2Q12. We use a blended valuation methodology (DDM and relative valuations, using price-toearnings and price-to-book, respectively) to calculate a valuation range and a fundamental average valuation. The valuation range for each of the two methods is provided by: (a) scenario analysis in the case of the DDM model; and (b) the minimum and maximum value yielded by a range of peer group multiples in the case of the relative valuation. Our target price is the average valuation with a liquidity discount.
Fig 51
25.0
Valuation output
Fig 52
14.0x 12.0x
Implied multiples
20.0
15.4 Target price 12.5 14.3
10.9x 8.7x 7.7x
10.0x 8.0x 6.0x 4.0x
15.0
10.0
11.0 Market price
2.0x 0.0x PER
1.2x PBR PER
1.0x PBR PER
1.5x
5.0
PBR
0.0 Multiples DDM
Target price
Current price 2011F 2012F 2013F
Peer group
Source: ING estimates
DDM reflects downsizing, deleveraging, cost control

Fig 53
The assumptions used in our base-case DDM model are those reflected and discussed in the Operations and Financials sections, in conjunction with the main Sector overview.
DDM model assumptions (base-case scenario)

2012F 2013-17F Avg 2018F+ Comment 13.2 13.1 11.9 Risk-free rate = Yield on five-year government bonds (mostly liquid) using macro assumptions, risk premium = 6%. Reported preference risk premium could be up to 200bp higher for different investors. 9.2 Downsizing until 2015F, followed by marginal reclaim of market share. 8.4 Significant increases in first phase are due to base effect (very low dividend payout in 2010-11). 2.3 Bottom-up calculation (see Financials section). 17.8 Migrating from a depressed state to a steady profitability level. 63.6 Payout level allows a capitalisation of 400-700bp in excess of the regulatory minimum, and leverage of the 2011F maximum level for the entire forecast period. 12.7 Deleveraging until 2015F, followed by a conservative marginal re-leveraging in a steady state.
Assumptions Cost of equity (%)
Asset growth (CAGR, %) DPS CAGR (%) ROAA (avg %) ROAE (avg %) Dividend payout (avg %) Equity/assets (avg %) Source: ING estimates
-0.1 186.0 2.0 14.2 35.0 14.1
6.6 24.9 2.6 15.7 56.1 16.6
24
Romanian banks
February 2012
Fig 54
DDM valuation (base-case scenario)

2012F 0.50 13.2 0.44 14.29 2013F 0.87 13.4 0.68 2014F 1.05 13.2 0.72 2015F 1.21 13.2 0.74 2016F 1.34 13.0 0.72 2017F 1.52 12.9 0.73 10.26
Dividend discount model DPS (RON) Discount rate (%) PV of DPS (RON) PV of LT DPS (RON) Cumulative PV per share (RON) Source: ING estimates
Fig 55
Model and forecast changes vs last published

Old New 14.3 17.8 14.6 12.7 35.0 63.6 7.2 5.0 Comment Distressed market, bank affected by NPLs and FX funding gap Less friendly regulatory framework, less leveraged model Deleveraging and downsizing already well under way Structurally less leveraged model Lower profitability, need to deleverage Move towards a structurally less leveraged model Country risk comes off Paradigm shift leads to a more conservative growth pattern
2012F RoE (%) LT RoE (%) 2012F equity/assets (%) LT equity/assets (%) 2012F dividend payout (%) LT dividend payout (%) 2012F risk-free rate (%) LT growth rate (%) Source: ING estimates
22.4 19.0 9.4 6.3 49.7 68.4 10.5 6.0
Fig 56
DDM valuation sensitivity analysis (RON)

Risk premium (%) 4.00 5.00 6.00 5.00 14.99 16.57 18.70 6.00 13.13 14.29 15.79 7.00 11.65 12.53 13.63
LTG 2018+ (%) Source: ING estimates
Fig 57
Valuation output and target price calculation (RON)

Relative valuation DDM valuation 18.3 11.0 14.2 14.3 (15% liquidity discount)
Max Min Avg Valuation output (base case) Target price Source: ING estimates
21.6 7.4 15.4 15.4 12.50
BRD trades at an average discount of 30% to peers

Fig 58 Relative valuation
Bloomberg code Komercni OTP BRE BZ WBK Handlowy PKO BP Garanti Peer median BRD GSG KOMB CP OTP HB BRE PW BZW PW BHW PW PKO PW GARAN TI BRD RO Rating Hold Buy Buy Sell Buy Buy Buy Hold
BRD trades at an average 30% discount in PER and PBR terms against its peer group median. Our target price implies reducing this discount to 20%.
Target price (lc) 3,720.0 4,100.0 314.3 203.2 86.5 41 8.5 12.5
Mkt cap (US$m) 7,244 5,035 4,011 5,380 3,252 13,752 15,449 2,343
11F 9.4 11.2 11.3 13.6 14.8 11.5 8.6 11.3 7.8
PER (x) 12F 10.4 9.6 10.9 13.0 13.3 10.7 8.1 10.7 7.7
13F 9.6 6.3 8.9 11.7 11.2 9.5 6.2 9.5 6.3
11F 1.7 0.8 1.6 2.3 1.6 1.9 1.4 1.6 1.2
PBR (x) 12F 1.6 0.7 1.4 2.0 1.5 1.7 1.3 1.5 1.0
13F 1.5 0.7 1.2 1.8 1.5 1.6 1.1 1.5 0.9
11F 18.5 11.4 14.9 17.1 10.8 17.1 17.9 17.1 16.0
ROE (%) 12F 15.4 9.9 13.5 16.4 11.7 17 16.8 15.4 14.3
13F 15.9 12.1 14.6 16.2 13.2 17.4 19.2 15.9 15.4
Prices as at 23 February 2012 Source: Bloomberg, Company data, ING estimates
We believe BRD is riskier than its peers, but more costefficient due to higher margins
We believe BRD is riskier than its peers; the companys country risk is reflected in a higher cost of equity and a greater cost of risk. However, BRDs return on assets is in line with its CEE peers, as is its yield, while we do not consider the companys capitalisation to be an issue even in a pessimistic scenario. This is because the bank makes up for its
25
Romanian banks
February 2012
higher risk through better cost efficiency and, to some extent, higher net interest margin. In our view, BRD needs to deleverage faster, given that it is more dependent on parent funding than its peers, and that this dents short-term growth.
Fig 59 Peer group valuations (%)
Rf rate Komercni OTP BRE BZ WBK Handlowy PKO BP Garanti Peer median BRD GSG Source: Bloomberg 3.4 8.5 5.5 5.5 5.5 5.5 9.6 5.5 7.2 3yr EPS Mkt cap/ CAGR dep 2012F 2.3 13.6 30.1 14 5.8 12.2 12 12.2 10.7 24.2 18.8 23.9 36.3 44.7 28.3 29.9 28.3 22.8 Yield 2012F 7.2 0.0 0.0 0.0 3.4 4.4 1.6 1.6 1.6 Loan/ deposit 2011F 77 109 132 84 58 100 99 99 108 Cost/income 2011F 2012F 41 47 49 48 60 40 43 47 44 42 48 48 47 58 40 43 47 43 Risk costs 2011F 2012F 0.5 3.0 0.6 1.1 0.7 1.4 1.1 1.1 2.3 0.7 3.0 0.7 1.1 0.7 1.2 1.2 1.1 2.3 ROA Equity multiplier (x) 2011F 2012F 2011F 2012F 1.4 1.0 1.2 2.2 1.9 2.1 2.3 1.9 2.0 1.7 1.1 1.2 2.3 2.0 2.1 2.1 2.0 2.0 9.0 7.0 12.0 8.0 6.0 8.0 8.0 8.0 7.6 9.0 7.0 12.0 7.0 6.0 8.0 8.0 8.0 6.7
We feel BRD should trade at a discount to Komercni

Fig 60
14 12 10 8 6 4 2 0
In our view, BRD deserves to trade at a discount to Komercni (also owned by Societe Generale), given its lower risk (risk costs, cost of equity and loan-to-deposit ratio).
Fig 61
2.5 2.0 1.5 1.0 0.5 0.0 BRD GSG
PER ranking
PBR ranking
BRD GSG
Handlowy
Handlowy
Garanti
Garanti
Komercni
Komercni
PKO BP
PKO BP
BRE
BRE
OTP
OTP
PER 2012F
PBR 2012F
Source: Bloomberg (prices as at 21/02/12), ING estimates
BRD has a strong management team, good cost control and the second-largest distribution network in Romania (and the most effective one). With several competitors in a state of distress, we believe BRD could consolidate the market over the medium term; however, it is too early for this expectation to be reflected in the companys share price.
Risks and catalysts

Share overhang is main drag and MTN plan is the main potential catalyst for shares BRDs shares are subject to systemic risks that can affect the market as a whole. We focus on BRDs company-specific idiosyncratic risks.
BZ WBK
BZ WBK
26
Romanian banks
February 2012
Fig 62
Type Risk
Risks and catalysts

Item Share overhang Comment We estimate that up to 30% of stock is still held in large institutional stakes. Based on SIFs reporting, we estimate that they sold a net 2% of BRD in 9m11, which is equivalent to the shares total trading volume over the past three months. With an FX loan-to-deposit ratio of 153%, BRD is dependent on Societe Generale for EUR funding. The company needs to reduce its dependency due to pressure to downsize and deleverage. BRDs 2011 IFRS coverage ratio will only be known in April 2012, but the company ended 2010 with a coverage ratio of c.37% under IFRS (40% under RAS, which, according to management, rose to 60% at the end of 2011), which implies the strong possibility of further significant expenses. In our assumptions, we factor in continued high NPLs and cost of risk. From a political perspective, there are currently no specific plans for legislative measures targeting banks. However, 2012 is an election year in Romania (general elections are due to be held in November). As such, we believe any aggressive government position against banks over the next few years could be a risk, and upside potential could be reduced via increased taxation or changes in regulations. In our view, BRD has a better chance of being able to cope with change than local peers thanks to its economies of scale and cost efficiency. According to management, BRD intends to issue a 1-1.2bn three-year note by mid-2012, depending on the evolution of Societe Generale CDS vs the local cost of funding in FX. This would substantially reduce liquidity risk and BRDs scope for downsizing.
Risk Risk
Parent funding Low coverage provision
Risk
Political risk
Catalyst
MTN
Source: ING
27
Romanian banks
February 2012
Operations
Downsizing and deleveraging
Downsizing, deleveraging and cost-cutting In 2012, BRD will likely focus on downsizing, deleveraging and cost-cutting. We believe management plans to focus on those items under its control and reduce its exposure to its parent company. BRDs downsizing is a direct result of Societe Generales need to reduce its exposure to Romania. We expect BRD to pursue a strategy of continued moderate downsizing of its business in the medium term in light of the weak economic outlook. Hence, we anticipate a CAGR of only 3.4% over the next three years, but any resulting decrease in market share is likely to be mostly due to a reduction in non-core assets.
Fig 64
110% 100% 90% 80% 70% 60% 50% 2011F 2012F 2013F 2014F 2007A 2008A 2009A 2010A 2015F 0.0 2011F 2012F 2013F 2014F 2014F 2007A 2008A 2009A 2010A 2015F 2015F 15.0 10.0 5.0 25.0 20.0 Positive impact from introduction of IAS/IFRS in Jan 2012 but local prudential rules will still apply
Downsizing and deleveraging already well under way
Fig 63
30% 25% 20% 15% 10% 5% 0%
Downsizing
Deleveraging
Mkt share assets (lhs, %) Mkt share deposits (lhs, %)
Mkt share loans (lhs, %) LDR total (rhs, %)
Total capital adequacy ratio (%)
Leverage (x)
Net interest margin has suffered from competition to procure local savings and the need to reduce funding gap
In our view, BRDs need to reduce its FX funding gap (almost entirely in EUR) is of paramount importance; however, this has not yet happened (the companys loan-todeposit ratio actually increased in 2011 vs 2010). In a bid to procure local savings, banks have been bidding up deposit rates. BRD joined the race in 2H11, thus eroding its net interest margin for the year, and we expect this to again be the case in 2012.
Fig 66
5.4
Fig 65
180% 160% 140% 120% 100% 80% 60% 40% 20% 0%
Funding gap
Competition for deposits
147%
153%
5.2 5.0 4.8
85%
83%
4.6 4.4 4.2 4.0 2011F 2012F 2007A 2008A 2009A
2010A Loans/deposits RON
2011A Loans/deposits FX
Source: Company data (RAS)
2010A
Net interest margin (%)
2013F
28
Romanian banks
February 2012
From a liquidity risk perspective, BRDs currency structure worsened in 2011, as was the case with the rest of the market (FX loans grew faster).
Fig 67 Currency structure of loans Fig 68 Currency structure of deposits
Loans in RON 45% Loans in FX 55%
Deposits in FX 40%
Deposits in RON 60%
Source: Company data (RAS), Company management
Based on previous annual reporting of transactions by related parties and what can be inferred from subsequent quarterly reporting, we believe that as at end-2011, funding from Societe Generale made up c.1.9bn, or 19%, of BRDs total liabilities (from 21% in December 2010). The liquidity risk was much worse at end-2010 compared with the previous year. Indeed, a large swing in deposit maturity terms in 2010 resulted in a wide funding gap in the 1-5 year bracket, on top of the existing long-term gap. We expect BRDs annual report, due in April 2012, to shed some light on the development of this duration mismatch over the past year.
Fig 69
2,500 2,000 1,500 1,000 500 0 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011F
Funding from Societe Generale

25% 20% 15%
Fig 70
Liquidity risk Duration funding gaps (RONm)
10,000 5,000 0
10% 5% 0% -5,000 -10,000 -15,000 2009A Borrowings from related parties (lhs, EURm) Related parties/total liabilities (rhs, %) Gap <1 yr Gap 1-5 yrs Gap >5 yrs 2010A
Source: Company data
Cost-cutting
In our view, BRDs operating environment will probably worsen in 2012. However, the companys pre-provision profitability is relatively high and should provide a buffer against higher provisions, although this needs to be reinforced through cost-cutting. Cost-cutting is likely to arise as a result of revenue weakness triggered by a combination of factors, all of which are exogenous to BRD managements control:
29
Romanian banks
February 2012
Shrinking net interest margins due to faster re-pricing of deposits. Weak credit demand, which continues to favour EUR over domestic currency. Atrophied FX market due to tight control by the central bank. Currency mismatch between assets and liabilities is partially and temporarily mitigated
by RON FX swaps, which hit financial market results. In our view, the FX minimum reserve requirement is unlikely to be lowered in the near future, while political risk looms large in this electoral year. As such, we expect high exogenous costs (as discussed in previous sections) to remain constant at best with risk to the upside. In addition, we believe managements focus will likely be on controllable costs:
General expenses: further layoffs (on top of 5% net layoffs in 2011) and a possible
marginal reduction in the number of outlets (flat at 937 in 2011).
Risk management to bring down risk costs.

Fig 71
14 12 10 8 6 4 2 0 (2) (4) (6) (8) 2011F 2012F 2013F 2014F 2015F 2004A 2005A 2006A 2007A 2008A 2009A 2010A
ROAA by component
Fig 72
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00
Asset quality
2011F
2012F
2013F
2014F
2007A
2008A
2009A
Net interest/assets (%) Opex/assets (%)
Non-interest/assets (%) Risk cost/assets (%)
Impaired loans/gross customer loans (%) Credit loss expense/avg gross customer loans (%)
According to BRDs management, non-performing loans (NPLs) are equivalent to impaired loans as reported in the annual IFRS statements; namely loans that do not perform according to the contract, and for which an impairment allowance is booked. As a result, the ratio of impairment allowance to impaired loans can be considered to fairly represent the IFRS provision coverage ratio (36.8% as at December 2010), while impaired loans to gross customers loans reflect the weight of NPLs in BRDs total lending portfolio. While the value of its provision coverage ratio is a useful starting point when forecasting BRDs IFRS income statement going forward, it is not necessarily the appropriate measure to use when calculating the banks future CAR. According to management, the provision coverage ratio in December 2011 under RAS and NBR prudential regulations was 60% for doubtful and loss (rising from 40% at end-2010) and 90% for loss (>90 days), respectively. We believe these figures are relevant from a capitalisation standpoint, given the NBRs Regulation 11/2011 when calculating own capital, all starting inputs are taken from IFRS accounting. However, these are adjusted for any adverse difference between net impairment provisions under Regulation 11/2011 and net impairment provisions under IFRS. Based on annual reporting data, we calculate that restructured loans represented 3% of total gross loans as at end-2010, rising from 2.5% a year earlier. However, BRD has
30
2010A
2015F
Romanian banks
February 2012
provided no disclosure on the level for 2011, or indeed what proportion of restructured loans go on to become NPLs.
Fig 73 Gross loan structure (RONm) Fig 74
120.0 100.0 80.0 60.0 40.0 20.0 0.0 2011F 2012F 2013F 2014F 2007A 2008A 2009A 2007A 2008A 2009A 2010A 2010A 2015F
Provision coverage ratio

18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Loans neither impaired nor overdue Overdue but not impaired loans Impaired loans
Impairment allowance/Impaired loans (lhs, %) Impaired loans/gross customer loans (rhs, %) Credit loss expense/avg gross customer loans (rhs, %)
We estimate NPLs will continue to grow at a marginal rate in 2012, while risk costs could see a continuation of the softening that was visible in 2011, unless the low coverage ratio generates a surprise on this front.
31
Romanian banks
February 2012
Preliminary 2011 RAS results

Prudential indicators are calculated according to stricter local (noninternational) regulations BRD reported preliminary 2011 results on 14 February 2012 based on Romanian accounting standards (RAS). Unless otherwise specified, all financials used and forecast in this report are based on IFRS reporting. Note that all prudential figures (CAR, NPL, RWA) are based on local regulations and will remain so, even after the switch to international standards from January 2012. We include analysis identifying material differences between local and international standards, which can be found in the Impact of switch to IFRS section. Looking at the mechanics of these differences, we can infer BRDs IFRS results with a margin of error, which can be significant for certain items on the balance sheet and income statement. The 2011 estimates in this report are derived from preliminary RAS figures, based on our understanding of the accounting differences.
Fig 75 Income statement (RAS, selected lines, RONm)
2010 Net interest income Net fee & commission income Net trading income Other income General operating costs Tangibles & intangibles depreciation Other operating costs Net provisions Profit before tax Tax Net income
Our 2011 IFRS estimates are based on recently-reported preliminary RAS figures
2011 2,279 680 334 105 (1,152) (139) (261) (1,289) 562 (97) 465
%ch -2 3 -39 14 2 8 13 -17 -7 -6 -7
2,336 660 547 92 (1,129) (129) (230) (1,549) 604 (103) 501
Fig 76
Balance sheet (RAS, selected lines, RONm)

2010 2011 4,781 30,447 48,028 10,968 30,078 48,028 %ch 24 2 1 5 2 1
Treasury bills Loans and advances to customers, net Total assets Amounts owed to credit institutions Amounts owed to customers Total liabilities and equity
3,861 29,755 47,494 10,419 29,625 47,494
Fig 77
Income statement (RAS, selected lines, RONm)

4Q10 4Q11 576 171 124 43 (290) (36) (73) (420) 99 (16) 83 %ch -7 1 28 3 -1 11 14 -16 207 171 215
Net interest income Net fee & commission income Net trading income Other income General operating costs Tangibles & intangibles depreciation Other operating costs Net provisions Profit before tax Tax Net income
617 170 97 42 (294) (33) (64) (503) 32 (6) 26
32
Romanian banks
February 2012
Fig 78

3Q11 4Q11 576 171 124 43 (290) (36) (73) (420) 99 (16) 83 %ch 0 -3 198 109 2 6 14 38 -24 -46 -17
Net interest income Net fee & commission income Net trading income Other income General operating costs Tang. & intangible depreciation Other operating costs Net provisions PBT Tax Net income
578 177 42 21 (285) (34) (64) (305) 130 (29) 101
4Q11 showed signs of a resumption in provision growth
While 2011 was in many respects a better year than 2010, we believe 4Q11 showed signs of weakness vs the previous quarter, thus confirming the conclusion detailed in our Sector overview section. In conjunction with our analysis in the Impact of switch to IFRS section, we believe it is useful to look at the empirical variations between IFRS and RAS figures for the banks individual financial statements. Note that BRD undertook no individual IFRS bank reporting before 2009 (it only reported consolidated local group statements under IFRS). Hence, this report uses consolidated statements, which have been made public since listing. Clearly, quarterly reporting has always been carried out in RAS, and only for the bank individually. Future quarterly reporting will be IFRS compliant, which means that there is no historical comparable other than end-2011 results. As such, we believe the following analysis is a useful informative exercise.
Fig 79
IFRS vs RAS (BRDs individual financial statements, selected lines, %)

2009 2010 0.0 0.8 -55.4 7.2 -11.7 1.7 7.9 -0.1 17.1 1.7 -3.9 -1.0 -5.6 16.6 -19.9 -4.1 -0.5 -2.4 -5.4 -46.3 99.7 102.8 99.0 Comment
Assets Cash and current accounts with central bank Loans and advances to customers, gross Loans impairment Loans and advances to customers, net Tangible assets, net Total assets Liabilities & shareholders equity Deposits from customers Total liabilities Total shareholders equity Total liabilities and shareholders equity Income statement Interest income Interest expense Net interest income Fees & commissions, net Total other income Operating income Depreciation & amortisation Operating expenses Profit before credit loss expense Credit loss expense Profit before income tax Income tax Net income
0.0 0.5 -55.7 5.0 -11.2 0.4 23.0 -0.3 7.4 0.4 1.6 -0.1 3.7 20.1 -29.8 -1.3 8.9 0.7 -2.8 -51.1 51.7 89.9 43.8
Different impairment regulations (NBR vs IAS); local is stricter Impairment difference, plus some loans are held off-B/S under RAS Less discretion on capitalising or expensing certain items under RAS
Differences above this line are due to classification only Net profit is much higher under IFRS, due to lower cost of risk
Local provisioning is significantly different and stricter than IAS
Main difference is cost of risk (plus higher tax accordingly)
We note one final point about BRDs accounting the company holds c.8% of its total assets in available-for-sale assets. Under RAS, only the negative difference from marking to market is booked through the income statement; positive differences are not booked.
33
Romanian banks
February 2012
Under IFRS, any difference from marking to market, whether positive or negative, is booked through the balance sheet (as capital), not through the income statement. In our view, banks with significant available-for-sale assets could see a noticeable impact on capital in cases where there are big differences in marking to market (capital for solvency continues to be calculated according to local central bank standards, but uses IFRS figures with some adjustment for impairments).
34
Romanian banks
February 2012
Financials
Fig 80 Financials
2007 2008 2009 2010 2011F 2012F 2013F 2014F Year end Dec (RONm) Income statement Interest income Interest expense Net interest income Fees & commissions, net Foreign exchange gain Gain on derivative financial instruments (Loss)/Income from associates Other income Operating income Contribution to Deposit Guarantee Fund Salaries and related expenses Depreciation, amortisation Other operating expenses Operating expenses Credit loss expense Profit before income tax Current income tax expense Deferred tax (expense)/income Total income tax Profit for the year Profit/(loss) attributable to minority Profit attributable to majority Balance sheet Cash in hand Due from central bank Due from banks Derivative financial instruments Loans & advances to customers, net Financial lease receivables Financial assets available for sale Investments in subsidiaries and associates Tangible assets, net Goodwill, net Intangible assets, net Deferred tax assets, net Other assets, net Total assets Total deposits Borrowed funds and debt issued Derivative financial instruments Current tax liability Deferred tax liability Other liabilities Total liabilities Shareholders' equity Total liabilities & shareholders' equity Per share data Reported EPS (RON) Normalised EPS (RON) Normalised EPS growth (%) Dividend per share paid last year profit (RON) Dividend paid growth (%) Payout ratio (%) BV/share (RON)
2,838 -1,338 1,499 632 325 0 6 43 2,505 -12 -553 -136 -446 -1,146 -144 1,215 -175 -21 -196 1,019 -2 1,022
4,136 -2,240 1,896 774 482 0 273 86 3,512 -18 -672 -119 -619 -1,429 -297 1,785 -266 48 -218 1,568 -5 1,573
4,754 -2,515 2,239 810 462 70 -2 114 3,693 -36 -739 -171 -691 -1,637 -605 1,450 -163 -148 -311 1,139 -7 1,146
3,690 -1,370 2,320 783 330 99 0 132 3,664 -38 -699 -132 -684 -1,553 -883 1,228 -113 -106 -219 1,009 1 1,008
3,830 -1,561 2,268 783 324 0 0 134 3,510 -58 -664 -137 -685 -1,544 -770 1,195 0 0 -213 982 0 982
4,059 -1,773 2,286 783 336 0 0 139 3,544 -60 -631 -134 -699 -1,524 -808 1,212 0 0 -216 996 0 996
4,402 -2,013 2,389 815 364 0 0 151 3,718 -66 -637 -137 -759 -1,599 -645 1,474 0 0 -263 1,211 0 1,211
4,542 -2,044 2,498 872 398 0 0 165 3,933 -72 -650 -140 -830 -1,691 -620 1,621 0 0 -289 1,332 0 1,332
938 10,288 801 0 25,225 1,056 118 61 1,166 50 37 17 224 39,983 28,608 7,811 0 90 0 376 36,885 3,098 39,983
914 13,313 584 175 31,935 1,366 866 83 1,211 50 55 65 303 50,920 36,947 9,071 210 123 0 301 46,652 4,268 50,920
632 9,219 585 90 32,680 1,082 2,275 79 1,206 50 80 0 312 48,291 35,719 7,137 63 0 90 337 43,346 4,944 48,291
612 9,429 662 86 32,243 872 4,082 78 1,177 50 98 0 279 49,667 31,901 11,373 92 2 193 356 43,918 5,749 49,667
712 8,682 486 83 32,276 772 5,114 70 1,128 50 107 0 278 49,758 32,368 10,182 87 2 196 348 43,183 6,575 49,758
722 8,305 504 81 32,817 685 4,985 63 1,092 50 113 0 283 49,700 33,592 8,028 85 2 203 346 42,255 7,445 49,700
764 6,993 546 83 35,324 616 5,053 58 1,089 50 124 0 302 51,003 36,400 5,633 86 1 219 359 42,698 8,305 51,003
816 5,572 597 85 38,449 536 5,144 51 1,098 50 143 0 324 52,865 39,803 3,332 87 1 239 376 43,837 9,028 52,865
1.47 1.46 45 0.37 18.9 40.4 4.4
2.26 1.91 31 0.59 61.2 32.3 6.1
1.64 1.65 -14 0.73 23.0 17.0 7.1
1.45 1.45 -12 0.28 -61.6 12.4 8.2
1.41 1.41 -3 0.18 -35.7 12.4 9.4
1.43 1.43 1 0.17 -2.6 35.0 10.7
1.74 1.74 22 0.50 186.0 50.0 11.9
1.91 1.91 10 0.87 73.7 55.0 13.0
35
Romanian banks
February 2012
Valuation, ratios and metrics

Year end Dec Profitability Net interest margin (%) Reported ROE (avg equity) (%) Normalised ROE (avg equity) (%) Normalised return on tangible equity (avg equity) (%) Normalised ROA (%) Efficiency Cost income ratio (%) Personnel cost to income (%) Costs to total assets (%) Asset quality Impaired loans/gross customer loans (%) Impairment allowance/Impaired loans (%) Impairment allowance/gross customer loans (%) Credit loss expense/avg gross customer loans (%) Credit loss expense/operating profit (%) Capital adequacy Total capital adequacy ratio (%) Tangible equity/tangible assets (%) Leverage (x) Income breakdown Net interest income/total revenues (%) Fee income/total revenues (%) Trading income/total revenues (%) Effective tax rate (%) Income & cost growth Net interest income growth (%) Non-interest income growth (%) Revenue growth (%) Operating costs growth (%) Reported pre-provision profit growth (%) Reported pre-tax profit growth (%) Reported net profit growth (%) Normalised net profit growth (%) Balance sheet structure Gross loans/customer deposits (%) Net customer loans/customer deposits (%) Net customer loans/total assets (%) Interest-earning assets/total assets (%) Interest-bearing liabilities/total assets (%) Customer deposits/total assets (%) Balance sheet growth Asset growth (%) RWA growth (%) Gross loans growth (%) Total deposits growth (%) Customer deposits growth (%) Impaired loans growth (%) Tangible BV growth (%) Valuation PER (x) Normalised PER (x) Price/book (x) Dividend yield (realised) (%)
2007 4.8 38.0 37.8 39.0 3.0 45.8 22.1 2.87 4.41 66.6 2.94 0.65 10.6 12.0 7.5 12.9 59.9 25.2 13.0 16.1 26.5 52.8 35.9 17.4 56.8 52.9 45.7 45.2 93.2 90.5 63.1 93.8 91.1 69.7 39.4 41.0 43.2 35.1 38.5 33.7 7.5 7.5 2.5 3.3
2008 4.6 43.1 36.6 37.5 2.9 40.7 19.1 2.81 2.93 98.8 2.90 1.01 14.3 11.7 8.1 11.9 54.0 22.1 13.7 12.2 26.4 60.7 40.2 24.7 53.2 46.9 53.9 31.1 113.6 110.3 62.7 94.4 90.8 56.9 27.4 36.0 26.5 29.1 3.9 -15.8 37.9 4.9 5.8 1.8 5.4
2009 4.9 25.1 25.2 25.8 2.3 44.3 20.0 3.39 7.27 51.0 3.70 1.81 29.5 13.2 9.9 9.8 60.6 21.9 12.5 21.4 18.1 -10.0 5.2 14.5 -1.3 -18.8 -27.1 -13.8 114.8 110.6 67.7 94.9 88.9 61.2 -5.2 0.8 3.2 -3.3 2.1 155.6 16.0 6.7 6.7 1.6 6.6
2010 5.1 19.0 19.0 19.5 2.1 42.4 19.1 3.13 13.22 36.8 4.87 2.60 41.8 14.6 11.2 8.6 63.3 21.4 9.0 17.9 3.6 -7.6 -0.8 -5.2 2.7 -15.3 -12.1 -12.2 112.9 107.4 64.9 95.2 87.3 60.5 2.9 3.5 -0.1 -10.7 1.6 81.8 16.5 7.6 7.6 1.3 2.5
2011F 4.9 16.0 16.0 16.4 2.0 44.0 18.9 3.10 14.80 38.7 5.72 2.26 39.2 14.7 12.9 7.6 64.6 22.3 9.2 17.9 -2.2 -7.6 -4.2 -0.5 -6.9 -2.7 -2.6 -2.6 108.5 102.3 64.9 95.1 85.7 63.4 0.2 -0.7 1.0 1.5 5.1 13.0 14.8 7.8 7.8 1.2 1.6
2012F 4.9 14.3 14.3 14.6 2.0 43.0 17.8 3.07 15.30 43.0 6.58 2.33 40.0 16.0 14.6 6.7 64.5 22.1 9.5 17.9 0.8 1.4 1.0 -1.3 2.8 1.4 1.4 1.4 106.2 99.2 66.0 95.2 83.9 66.6 -0.1 3.9 2.6 3.8 4.8 6.1 13.6 7.7 7.7 1.0 1.6
2013F 5.1 15.4 15.4 15.8 2.4 43.0 17.1 3.13 15.00 45.9 6.89 1.77 30.4 17.4 15.9 6.1 64.2 21.9 9.8 17.9 4.5 5.6 4.9 4.9 4.9 21.6 21.6 21.6 106.4 99.0 69.3 95.2 82.6 69.9 2.6 2.6 8.0 8.4 7.8 5.9 11.7 6.3 6.3 0.9 4.5
2014F 5.1 15.4 15.4 15.8 2.6 43.0 16.5 3.20 13.00 54.0 7.02 1.56 27.7 18.4 16.7 5.9 63.5 22.2 10.1 17.9 4.6 7.9 5.8 5.8 5.8 10.0 10.0 10.0 106.0 98.6 72.7 95.1 81.8 73.8 3.7 3.3 9.0 9.3 9.3 -5.5 8.7 5.8 5.8 0.9 7.9
Company profile
BRD Groupe Societe Generale is the second-largest Romanian bank by assets. It offers a full range of banking and investment services to corporate and retail clients, through a 900+ branches nation-wide distribution network.
36
Banca Transilvania
Romanian banks
February 2012
Sell (previously Hold)

Price (23/02/12)
Banca Transilvania
Growth fatigue
Banca Transilvania (BT) has historically been a growth story, but as the company prepares for consolidation (in the words of its board) in 2012, we believe growth will stop in 2012. The bank has never been a profitability or yield play and we do not expect this to change in the medium term. As such, we downgrade to SELL (from Hold) and cut our TP to RON0.95 (from RON1.65). End of the growth story in 2012: in our view, Banca Transilvanias perceived main advantage its low loan-to-deposit ratio (76%) is actually the only way the bank can operate and grow (it is needed to cover the minimum reserve requirement and BT has no access to other significant funding sources). We believe the company needs to maintain this low ratio out of necessity, and hence BT should not command a premium to peers. Downward pressure on growth is compounded by the fact that BT currently punches above its weight in terms of capitalisation (it is the No.3 bank in Romania in terms of assets, but with a capital adequacy ratio of 11.9% vs No.2-ranked BRD at 14.6%). As other banks intensify competition to attract local savings, we expect BTs margins to come under increasing pressure. In our view, BT deserves its current 35% discount to peers, as we see the company as riskier and structurally less profitable than its rivals. Banca Transilvania has three factors in its favour, none of which is under its control: (1) central bank support (by virtue of it being the only independent, large locallyowned bank); (2) share price support from an ad-hoc group of investors close to the companys management team; and (3) a strong position in local currency loans to SMEs (due to BTs lack of access to cheap FX funding before the financial crisis).
RON1.02
Target price (12-mth) RON0.95 (RON1.65) Forecast total return
-7.0%
Banks Romania Bloomberg: TLV RO Reuters: ROTLV.BX Share data

Avg daily volume (3-mth) Free float (%) Market cap (RONm) Dividend yield (12F, %) 604,791 51% 1,813 0.0
Share price performance

1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 01/11
05/11
09/11
01/12
TLV RO
Source: Bloomberg
BET-XT rebased
Support comes from NBR policy and the main catalyst is BRDs share price: the National Bank of Romania (NBR) provides Banca Transilvania with cheap liquidity, which enables it to buy BTs government securities purchased with the money. As the central bank continues to pump in excess liquidity, this lowers government debt yields and BTs capital ratio improves mechanically (and temporarily) as a result of the higher marking to market of its available-for-sale portfolio. In terms of catalysts, market behaviour so far seems to follow a pattern, whereby BRD share price outperformance results in local flows partially recoiling into BT shares. Under-provisioning could bite if economic situation worsens: we believe Banca Transilvania faces risks from: (a) its low provision coverage ratio (on our estimates, this is only 30%) amid a steep increase in impaired loans; and (b) its low capitalisation (which entails dilution risk if the bank decides to, or is obliged to, increase its coverage ratio).
Forecasts and ratios
Year end Dec (RONm) Revenues Pre-provision profit Net profit Normalised EPS (RON) Dividend per share (RON) Normalised PER (x) Dividend yield (%) Price/book (x) Normalised ROE (%)
2009 1,366 649 139 0.05 0.03 18.8 2.8 1.0 5.5
2010 1,547 805 134 0.07 0.00 14.0 0.0 0.9 6.6
2011F 1,552 776 188 0.11 0.00 9.7 0.0 0.8 8.7
2012F 1,527 756 168 0.09 0.00 10.8 0.0 0.7 6.8
2013F 1,632 802 191 0.11 0.00 9.5 0.0 0.6 6.8
Florin Ilie
37
Banca Transilvania
Romanian banks
February 2012
Valuation
Its discount to peers cannot come down while BT is under-cutting its only advantage: top-line growth Banca Transilvania is riskier, less efficient and less profitable than its peers, in our view. Given the need to closely monitor its capitalisation ratio, contain provisioning and ultimately cover its cost of equity, we expect the bank to lose its only trump card in the short term: top-line growth. In addition, we believe BTs discount to peers stands to widen a notch in 2012. We use a blended valuation methodology (DDM and relative valuations, using price-toearnings and price-to-book, respectively) to calculate a valuation range and a fundamental average valuation for Banca Transilvania. The valuation range for each of the two methods is provided by: (a) scenario analysis in the case of the DDM model; and (b) the minimum and maximum value yielded by a range of peer group multiples in the case of the relative valuation. Our target price of RON0.95 is the average valuation with a liquidity discount.
Fig 81
3.5 3.0 2.5 2.0
1.59
Valuation output (RON)
Fig 82
14.0x 12.0x 10.0x 8.0x
Implied multiples
10.0x
10.8x
10.9x
1.5 1.0 0.5 0.0 Multiples
Market price 1.02 1.06
6.0x 4.0x 2.0x 0.0x 0.6x PER PBR PER 0.7x PBR PER 1.5x
0.95 Target price
PBR
Target price DDM
Current price 2011F 2012F 2013F
Peer group
Resilient, historical P/B discount to peers is in line with higher-risk profile and ROE below the cost of equity
Banca Transilvanias relative valuation implies a Hold in PER terms and a Buy in P/B terms, based on its current or short-term estimated financials. What the banks relative valuation fails to reflect, though, is BTs higher risk and lower profitability vs its peers. BT fails by a significant margin to achieve its cost of equity and its prospects of future profitability are at risk from the continued rise in NPLs (impaired loans represented 34% of gross loans as at December 2010). In our view, the market does include these factors in its valuation of BT, given the banks resilient historical P/B discount to peers. However, it only partially factors them in we believe BTs financials do not reflect the fair amount of risk the bank took on during its growth spree, which leaves the current earnings and book value levels looking fragile and vulnerable. Our DDM valuation is based on 2012-17 forecasts and a terminal value that uses a 5% long-term growth rate. We reach a deep SELL recommendation for two reasons: (1) we expect a low-to-moderate EPS CAGR for the period, which accounts for the impact of subdued top-line growth and a gradual rise in the provision coverage ratio; and (2) the banks relatively low capitalisation means that one cannot assume significant payout ratios, and hence a low DPS for the same period. We believe much of its potential future value will only be generated by the bank when it is in a steady state, with stable returns eventually in excess of the cost of equity and higher dividend payout ratios not reflected
38
Two-stage DDM does not capture future value from mature banking operation, with higher ROE and payout
Banca Transilvania
Romanian banks
February 2012
in this methodology. As such, it could be argued that a two-stage DDM like the one described above does not do justice to a banking operation that has yet to reach maturity. In our view, Banca Transilvania needs to undergo a transitory phase before it reaches a steady state. Thus, we perform a 30-year forecast without calculating a terminal value. This allows the smooth migration from the current situation (depressed profitability, stretched operations) to a mature stage, with returns in excess of the cost of equity and dividend payout ratios in line with the wider sector. The resulting model a variation of the three-stage DDM is much more reflective of the value BTs future promise. We believe this valuation would yield a Buy based on the assumptions shown below. For our fundamental valuation, we use an average of a two-stage DDM and multi-stage DDM, to balance risks and short-term underperformance against long-term promise DDM reflects the end of the high-growth period, for now
Fig 83
In order to balance the need to take into account the banks long-term potential (which is affected by significant uncertainty) and the expected short-term underperformance, we use the average of the outputs yielded by the two valuation methods described above (we detail the assumptions for both below). The valuation remains long-term heavy, given that both methodologies suggest between 85% and 93%, respectively, of the total valuation is generated by bank results beyond 2017. The assumptions used in our base-case DDM model are those reflected and discussed in the Operations and Financials sections of this report, in conjunction with the main Sector overview.
Model assumptions for two-stage and multi-stage DDM (base-case scenario)

2012F 2013-17F Avg 2018F+ Comment 13.2 13.1 11.9 Risk-free rate = Yield on five-year government bonds (mostly liquid) using macro assumptions, risk premium = 6%. Reported preference risk premium could be up to 200bp higher for different investors. 8.4 Short-term slowdown, followed by moderate resumption of growth by 2017F and consolidation thereafter. 14.4 Tight capitalisation would only allow BT to start paying a cash dividend from 2014F, with low payouts. Significant increases in the longer run are also due to the base effect and moving towards higher distribution levels. 1.5 Bottom-up calculation (see Financials section). 15.9 Migrating from a high-growth/low-profitability model to a steady-state above CoE profitability level. 52.2 Pay-out level allows a capitalisation of 400+bp in excess of the regulatory minimum, and leverage of which does not rise above the 2011F maximum level for the remainder of the forecast period. 9.1 Deleveraging until 2015F, followed by a conservative marginal re-leveraging in a steady state.
Assumptions Cost of equity (%)
Asset growth (CAGR, %) DPS CAGR (%)
1.3 n/a
8.8 n/a
ROAA (avg %) ROAE (avg %) Dividend payout (avg %) Equity/assets (avg %) Source: ING estimates
0.6 6.8 0.0 10.1
0.8 8.1 20.2 10.0
Fig 84
Two-stage DDM valuation (base-case scenario)

2012F 2013F 0.00 13.4 0.00 2014F 0.01 13.2 0.01 2015F 0.03 13.2 0.02 2016F 0.06 13.0 0.03 2017F 0.07 12.9 0.04 0.54
DPS (RON) Discount rate (%) PV of DPS (RON) PV of LT DPS (RON) Cumulative PV per share Two-stage DDM (RON) Cumulative PV per share multi-stage DDM (RON) Average DDM value per share (RON) Source: ING estimates
0.00 13.2 0.00 0.64 1.47 1.06
Terminal value makes up an excessive 85% of the total value per share Terminal value makes up an excessive 94% of the total value per share
The multi-stage DDM yields a cumulative present value of RON1.47 DPS (30-year forecast; model assumptions shown in Figure 83; no terminal value), with value beyond 2017 representing a remarkable 94% of the total valuation.
39
Banca Transilvania
Romanian banks
February 2012
Fig 85
Model and forecast changes vs last published estimates

Old New 6.8 15.9 10.1 9.1 0.0 52.2 7.2 5.0 Comment Market in distress; bank affected by lower revenue and higher risk costs. Less friendly regulatory framework, less leveraged model. Old level had higher equity value; new one actually means less leverage. Structurally less-leveraged model. Tight capitalisation does not allow for cash dividend. Towards a structurally less-leveraged model. Country risk comes off. In line with the market and LT nominal GDP growth prospects.
2012F RoE (%) LT RoE (%) 2012F equity/assets (%) LT equity/assets (%) 2012F dividend payout (%) LT dividend payout (%) 2012F risk-free rate (%) LT growth rate (%) Source: ING estimates
13.1 18.0 9.3 9.5 0.0 62.4 8.7 5.0
Fig 86
DDM valuation sensitivity analysis (RON)

Risk premium (%) 4.00 5.00 6.00 5.00 1.21 1.25 1.31 6.00 1.03 1.06 1.10 7.00 0.87 0.90 0.93
LTG 2018+ (%) Source: ING estimates
Fig 87
Valuation and target price calculation (RON)

Relative valuation DDM valuation 1.31 0.87 1.07 1.06 (28% discount on liquidity and scarce short-term value)
Max Min Avg Valuation output (base case) Target price Source: ING estimates
3.07 0.67 1.59 1.59 0.95
BT trades at an average discount to peers of 35%

Fig 88
BT trades at an average discount to its peer group of 35% on 2012F PER and PBR. Our target price of RON0.95 implies a discount of 40%, as we expect BTs growth to slow.
Peer group relative valuations

Bloomberg code Rating Target price (lc) Mkt cap (US$m) 7,244 5,035 4,011 5,380 3,252 13,752 15,449 554 PER (x) 2012F 2013F 10.4 9.6 10.9 13.0 13.3 10.7 8.1 10.7 10.8 9.6 6.3 8.9 11.7 11.2 9.5 6.2 9.5 9.5 PBR (x) 2012F 2013F 1.6 0.7 1.4 2.0 1.5 1.7 1.3 1.5 0.7 1.5 0.7 1.2 1.8 1.5 1.6 1.1 1.5 0.6 ROE (%) 2012F 2013F 15.4 9.9 13.5 16.4 11.7 17 16.8 15.4 6.8 15.9 12.1 14.6 16.2 13.2 17.4 19.2 15.9 6.8
2011F 9.4 11.2 11.3 13.6 14.8 11.5 8.6 11.3 9.7
2011F 1.7 0.8 1.6 2.3 1.6 1.9 1.4 1.6 0.8
2011F 18.5 11.4 14.9 17.1 10.8 17.1 17.9 17.1 8.7
Komercni OTP BRE BZ WBK Handlowy PKO BP Garanti Peer median Banca Transilvania
KOMB CP OTP HB BRE PW BZW PW BHW PW PKO PW GARAN TI TLV RO
Hold 3,720.0 Buy 4,100.0 Buy 314.3 Sell 203.2 Buy 86.5 Buy 41 Buy 8.5 Sell 0.95
Prices as at 23 February 2012 Source: Bloomberg consensus estimates for those companies not under our coverage, company data, ING estimates
Riskier, less efficient and now expected to slowdown, too
BT is riskier, less efficient and less profitable than its peers. Given the need to closely monitor its capitalisation ratio, contain provisioning and save at the bottom-line through cost-cutting, we expect the bank to lose its only trump card in the short term: top-line growth.
40
Banca Transilvania
Romanian banks
February 2012
Fig 89
Peer group valuations (%)

Rf rate 3yr EPS CAGR 2.3 13.6 30.1 14 5.8 12.2 12 12.2 3.3 Mkt cap/dep 2012F 24.2 18.8 23.9 36.3 44.7 28.3 29.9 28.3 8.7 Yield 2012F 7.2 0.0 0.0 0.0 3.4 4.4 1.6 1.6 0.0 Loan/ deposit 2011F 77 109 132 84 58 100 99 99 77 Cost/income 2011F 2012F 41 47 49 48 60 40 43 47 50 42 48 48 47 58 40 43 47 50.5 Risk costs 2011F 2012F 0.5 3.0 0.6 1.1 0.7 1.4 1.1 1.1 3.8 0.7 3.0 0.7 1.1 0.7 1.2 1.2 1.1 3.5 ROA Equity multiplier (x) 2011F 2012F 2011F 2012F 1.4 1.0 1.2 2.2 1.9 2.1 2.3 1.9 0.8 1.7 1.1 1.2 2.3 2.0 2.1 2.1 2.0 0.6 9.0 7.0 12.0 8.0 6.0 8.0 8.0 8.0 11.5 9.0 7.0 12.0 7.0 6.0 8.0 8.0 8.0 9.6
Komercni OTP BRE BZ WBK Handlowy PKO BP Garanti Peer median Banca Transilvania Source: Bloomberg
3.4 8.5 5.5 5.5 5.5 5.5 9.6 5.5 7.2
We expect the discount to peers to widen a notch

Fig 90
14 12 10 8 6 4 2 0
Bearing in mind the above-mentioned factors, we believe Banca Transilvanias 35% discount to peers is likely to widen to 40% in 2012F.
Fig 91
2.5 2.0 1.5 1.0 0.5 0.0 Handlowy Handlowy
PER ranking (x)
PBR ranking (x)
Garanti
PKO BP
Garanti
Komercni
Komercni
BZ WBK
PKO BP
BRE
BRE
BT
OTP
BT
OTP
PER 2012F
PBR 2012F
Risks and catalysts

Under-provisioning is the main risk; NBR policy the main mitigant; and BRD share price performance the main catalyst
Fig 92
Type Risk
Banca Transilvanias shares are subject to systemic risks that can affect the market as a whole. In Figure 92, we focus on BTs company-specific idiosyncratic risks. It is worth noting that all catalysts come from outside the bank. Fundamentally, on the banks operations alone without NBR, EBRD or other third-party covert/overt support or implications we do not see any clear short-term catalysts.
Risks and catalysts

Item Low coverage provision Comment BTs 2011 IFRS coverage ratio will only be known in April 2012, but the company ended 2010 with a coverage ratio of c.30% under IFRS (consolidated statements), which implies the strong possibility of further significant expenses. In our assumptions, we factor in continued high NPLs and cost of risk. The bank currently punches above its weight in terms of capitalisation (No.3 in Romania in terms of assets, but with a CAR of 11.9% vs No.2-ranked BRD at 14.6%). Market behaviour seems to follow a pattern whereby outperformance by BRDs share price sees flows partially rebalance by recoiling into BT shares.
Risk Catalyst
Source: ING
Capitalisation BRD price performance
BZ WBK
41
Banca Transilvania
Romanian banks
February 2012
Operations
From growth to consolidation
New management favours consolidation and repositioning over previous high top-line growth Banca Transilvanias strategy is currently being overhauled. The bank is now headed by an interim CEO, following the resignation of Robert Rekkers on 19 January 2012 following more than nine years in the role. The departure of Rekkers who just a couple of months earlier expressed his intention to continue in his position for another term strongly suggests a switch from a high-growth strategy to one of consolidation and repositioning. In fact, consolidation and repositioning were the same words used to describe BTs future strategy in the press release announcing the appointment of the interim CEO.
Fig 94
95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 2011F 2012F 2013F 2014F 2007A 2008A 2009A 2010A 2015F 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2011F 2012F 2013F 2014F 2007A 2008A 2009A 2010A 2015F Positive impact from introduction of IAS/IFRS in Jan 2012 but local prudential rules will still apply
Fig 93
12% 10% 8% 6% 4% 2% 0%
What consolidation could look like
Deleveraging
Mkt share assets (%) Mkt share deposits (%)
Mkt share loans (%) LDR total (%)
Total capital adequacy ratio (%)
Leverage (x)
The CEO position will be filled for an interim period, as delegated by BTs directors, starting 1 February 2012, by Peter Franklin, EBRDs representative on the board. Franklin has a 37-year track record in finance and banking (General Electric, HSBC, Chase Manhattan Bank). EBRD currently holds 14.6% of Banca Transilvania and is the single largest institutional shareholder in the independent bank.
Fig 95 Shareholder structure
Stake (%) European Bank for Reconstruction and Development Bank of Cyprus SIF Moldova SIF Oltenia SIF Banat-Crisana Fondul Proprietatea Others
Source: BSE, Bloomberg, SIF1-5 reports (latest available data)
14.6 10.0 5.0 5.0 4.5 2.9 58.0
Net interest margins will suffer from competition to procure local savings and the need to increase revenues
In our view, BT will have to reverse its aggressive stance from 2011, and increase lending rates to compensate for its stalled growth and stiffer competition in the deposit market. In a bid to procure local savings, banks have been bidding up deposit rates and BTs deposit base must be flexible to such developments. As a result, we expect net interest margins to stay flat in 2012F, but only if BT manages to obtain rates for its loans without losing too much business in the process.
42
Banca Transilvania
Romanian banks
February 2012
Fig 96
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Competition for deposits vs re-pricing of assets
2011F
2012F
2013F
2014F
2007A
2008A
2009A
2010A
Net interest margin (%)

A positive: no FX funding gap
One positive for BT is its assets-liabilities currency match. The bank does not have an FX funding gap problem, although this has occurred due to its lack of access to cheap FX funding prior to the crisis. BTs FX loan-to-deposit ratio has to be below 100% by default, given that the bank has to cover the 20% MRR as well.
Fig 98 Currency structure of deposits
Fig 97
Currency structure of loans
Loans in FX 31%
Deposits in LCY 36%
Loans in RON 69%
Deposits in FCY 64%
Banca Transilvania also derives some relief from the central bank, which provides it with cheap liquidity, only to repo BTs government securities purchased with the money. This could help BTs bottom-line, and we expect to find out if this is the case at the 1Q12 results. With the central bank continuing to pump in excess liquidity, thus lowering government debt yields in the process, we believe BTs capital ratio should improve mechanically (and temporarily) by the higher marking to market of its available-for-sale portfolio.
Risk management
In our view, BTs operating environment will probably deteriorate in 2012. The companys pre-provision profitability is relatively low and does not provide a strong buffer against higher provisions; we believe it needs to be reinforced through cost-cutting. In our view, cost-cutting is likely to arise as a result of revenue weakness triggered by a combination of factors, all of which are exogenous to BT managements control (eg, shrinking net interest margins due to faster re-pricing of deposits; weak credit demand, which
2015F
43
Banca Transilvania
Romanian banks
February 2012
continues to favour EUR over domestic currency). Moreover, the FX minimum reserve requirement is unlikely to be lowered in the near future, while political risk looms large in this electoral year. Management likely to focus on cost containment Against this backdrop, we expect high exogenous costs (as discussed in previous sections) to remain constant at best with the risk to the upside. In our view, managements focus will likely be on controllable costs: general expenses (layoffs or network closures) and risk management to bring down risk costs.
Fig 100
40.00 35.00 30.00 5 0 (5) (10) (15) 2011F 2012F 2013F 2014F 2015F 2007A 2008A 2009A 2010A 25.00 20.00 15.00 10.00 5.00 0.00 2011F 2012F 2013F 2014F 2015F 2007A 2008A 2009A 2010A 2015F 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2011F 2012F 2013F 2007A 2008A 2009A 2010A 2014F
Fig 99
15 10
ROAA by component
Asset quality
Net interest/assets (%) Opex/assets (%)
Non-interest/assets (%) Risk cost/assets (%)
Impaired loans/gross customer loans (%) Credit loss expense/avg gross customer loans (%)
Cutting operating costs may not be enough, and may have to happen along with an increase in lending rates
Fig 101
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2007A 2008A
Of course, cutting operating and risk costs will probably not be enough. Therefore, we also expect management to move towards increasing pricing for its assets, resulting in higher lending rates for customers. This adds further to our negative outlook for BTs growth in the coming year.
Fig 102
60.0 50.0 40.0 30.0 20.0 10.0 0.0 2009A 2010A
Gross loan structure (RONm)
Provision coverage ratio
Neither past due nor impaired Past due but not individually impaired Individually impaired and past due
Impairment allowance/Impaired loans (lhs, %) Impaired loans/gross customer loans (rhs, %) Credit loss expense/avg gross customer loans (rhs, %)
Note: provision coverage ratio is calculated based on reported IFRS consolidated figures for impaired loans recognised as loans individually impaired and past due, and the impairment allowance for loans, respectively. Source: Company data, ING estimates
Coverage ratios appear low, except for PAR 90 overdue & litigations
According to Banca Transilvanias management, NPLs are equivalent to loans individually impaired and past due, as reported in the annual IFRS statements. Until more detailed information on IFRS NPLs is made available by management, the ratio for the allowance for impairment of loans individually impaired and past due can be considered to fairly represent the IFRS provision coverage ratio (30% as at December
44
Banca Transilvania
Romanian banks
February 2012
2010). Given managements lack of a clear-cut position on IFRS NPLs at present, and in order to reflect BTs provision coverage as accurately as possible, we calculate the following ratios, based on information available in the banks consolidated annual IFRS statements.
Fig 103 Provision coverage ratios
2007 Total allowance for impairments on consolidated balance sheet/loans individually impaired and past due, gross (%) Allowance for impairment of individually impaired and past due/loans individually impaired and past due, gross (%) Allowance for impairment, total/loans individually impaired and past due, gross (%) Allowance for impairment for PAR 90 overdue & litigations/loans PAR 90 overdue & litigations, individually impaired (%) Source: Company data, ING estimates 41.2 27.2 42.8 27.2 2008 33.7 20.2 35.4 85.7 2009 40.4 33.2 43.3 70.3 2010 29.7 26.3 31.5 72.1
Collateralisation is above 100%, but real estate makes up 81% of total collateral and is exposed to continued weakness in the real estate market
Fig 104 Collateralisation
BTs coverage provision ratio was c.30% for all measures as at December 2010, while for PAR 90 overdue & litigations, it was a more prudent 72%. Collateralisation is another mitigating factor, as collateral covers more than 100% of gross exposure. However, real estate made up 81% of total collateral as at end-2010, and the question remains over how much real estate collateral has been revalued following the bursting of the real estate bubble.
2007 Property/total collateral (%) Collateralisation for past due and individually impaired (%) Collateralisation for past due, but not individually impaired (%) Collateralisation for neither past due nor impaired (%) Source: Company data, ING estimates 77.0 117.3 45.6 115.7
2008 90.4 120.4 813.5 106.1
2009 77.3 126.5 143.5 135.6
2010 81.5 110.2 108.9 137.1
While the value of the provision coverage ratio is relevant to help forecast BTs IFRS income statement going forward, it is not necessarily the measure to use when forecasting the banks future CAR. According to management, RAS losses (>90 days) represented 8.6% of total gross loans as at December 2011, a significantly better performance than the overall banking sector. Disclosed data suggest, on our calculations, a RAS provision coverage ratio of 137% as at December 2011 (compared with 136% as at December 2010). From a capitalisation standpoint, the NBRs Regulation 11/2011 stipulates that when calculating own capital, all starting inputs are taken from IFRS accounting, but these should be adjusted for any adverse difference between Regulation 11/2011 net impairment provisions and IFRS net impairment provisions. Therefore, we believe the high RAS coverage ratio is positive for BT, as it means potentially less pressure on capitalisation going forward.
45
Banca Transilvania
Romanian banks
February 2012
Preliminary 2011 RAS results

Prudential indicators are calculated according to stricter local (noninternational) regulations BT reported preliminary 2011 results on 1 February 2012 based on Romanian Accounting Standards (RAS). Unless otherwise specified, all financials used and forecast in this report are based on IFRS consolidated reporting. Note that all prudential figures (CAR, NPL, RWA) are based on local regulations and will remain so, even after the switch to international standards from January 2012. We include analysis identifying material differences between local and international standards, which can be found in the Impact of switch to IFRS section. Looking at the mechanics of these differences, we can infer BTs IFRS results with a margin of error, which can be significant for certain items on the balance sheet and income statement. The 2011 estimates in this report are derived from preliminary RAS figures, based on our understanding of the accounting differences.
Fig 105 Income statement (RAS, selected lines, RONm)
2010 Net interest income Net fee & commission income Net trading income Other income General operating costs Tangibles & intangibles depreciation Other operating costs Net provisions Profit before tax Tax Net income
Our 2011 IFRS estimates are based on recently-reported preliminary RAS figures
2011 1,004 371 85 25 -653 -49 -64 -480 186 -54 132
%ch 2 3 -33 37 6 -9 58 -20 38 45 35
981 361 127 18 -617 -54 -41 -600 135 -37 98
Fig 106
Balance sheet (RAS, selected lines, RONm)

2010 2011 5,256 13,813 25,745 2,623 20,364 25,745 %ch 53 13 19 71 17 19
Treasury bills Loans and advances to customers, net Total assets Amount owed to credit institutions Amount owed to customers Total liabilities and equity
3,436 12,184 21,589 1,532 17,474 21,589
Fig 107

4Q10 4Q11 256 98 26 10 -165 -12 -23 -136 42 -17 25 %ch 4 7 -37 85 3 -5 47 10 20 150 -11
Net interest income Net fee & commission income Net trading income Other income General operating costs Tangibles & intangibles depreciation Other operating costs Net provisions Profit before tax Tax Net income
246 91 41 5 -160 -13 -16 -124 35 -7 28
46
Banca Transilvania
Romanian banks
February 2012
Fig 108

3Q11 4Q11 256 98 26 10 -165 -12 -23 -136 42 -17 25 %ch 4 3 1,572 97 -5 1 65 73 -28 -3 -39
Net interest income Net fee & commission income Net trading income Other income General operating costs Tang. & intangible depreciation Other operating costs Net provisions PBT Tax Net income
247 95 2 5 -174 -12 -14 -79 59 -17 41
4Q11 showed signs of a resumption in provision growth
While 2011 was in many respects a better year than 2010, we believe 4Q11 showed signs of weakness vs the previous quarter, thus confirming the conclusion detailed in our Sector overview section.
47
Banca Transilvania
Romanian banks
February 2012
The M&A story

The usual M&A story underpinning BTs shares is no longer valid in the short run For many years, Banca Transilvanias appeal to investors was based on the bank being the only game-changer M&A play left in Romanian banking at least until 2010. Following the prolonged crisis, we do not feel it would be an understatement to say that many (if not most) of Romanians banking operations are up for sale provided two conditions are fulfilled: (1) that there is a voluntary solvent bidder that can take on the risk involved (funding gap, provision coverage ratio); and (2) that the NBR agrees to the takeover. We believe the chances of these conditions being met in 2012 are slim, including for BT. Nevertheless, we expect Banca Transilvania to have an edge against other banking operations that are up for sale in the future, given: (a) it has attained critical mass in terms of sustainable market share; and (b) its chance of emerging from the current crisis in a better position than rivals due to probable continued NBR support. NBR support makes all the difference for BTs prospects If the NBR manages to offer significant and continuous relief through excess liquidity and less aggressive regulation (such as allowing gradual collateral revaluation schedules, or relaxing its MRR at the margins), then we believe BT will have to shrink less in the future than its rivals. As an indication of the NBRs thinking, Banca Transilvanias former CEO, Robert Rekkers, was quoted in January 2012 as saying that in autumn 2008 (at the apex of speculation against the RON and when the liquidity crisis had reached its peak in the Romanian market), BT asked for and received a three-month 600m emergency loan from the NBR. To the best of our knowledge, this is the first time that someone closely involved with the situation has offered confirmation and precise clarity on the size and extent of NBR support for BT during the financial crisis. Throughout the financial crisis, BTs controlling shareholders apparently tried to sell (controlling) stakes in the bank to strategic investors. According to the former CEO, and as quoted in a Romanian financial daily (ZF, 23 January 2012), there were four concrete series of negotiations between 2007 and 2010 involving: (a) Societe Generale: a BRD-BT share swap, in which BT would have been acquired by BRD, was allegedly pre-empted by the exposure of the Jerome Kerviel trading fraud at the time; (b) the National Bank of Greece: the Greek bank, always outside the top ten players in Romania, allegedly discussed offering 1.3x price-to-book for BT, but this was considered to be too low by BT shareholders who sought a valuation of 1.7x price-to-book; (c) Marfin Bank: it is reported that there were tentative discussions over a takeover, but the NBR is unlikely to have viewed this favourably; and (d) the Bank of Cyprus: local significant individual shareholders independently negotiated the sale of a 10% minority stake in BT to the Bank of Cyprus at end-2009. If we weigh up the most positive potential scenarios for BT in the future, we believe they would be along the following lines: (1) Support from the NBR remains steadfast and sufficient to ensure a smooth transition from growth to consolidation. (2) EBRD becomes more involved in the management of the bank (this is already happening with the appointment of the new interim CEO) and steers BT towards lower risk levels (but also shrinks the bank in the process). (3) Eventually, EBRD takes over BT in 2-3 years or when conditions are right for a strategic investor to finally step in.
A first-hand account of the existence, size and extent of NBR support for BT in 2008
Former CEO lifts the lid on recent history of failed M&A negotiations
Most positive possible scenario: continued NBR support and increased EBRD involvement
48
Banca Transilvania
Romanian banks
February 2012
Financials
Fig 109 Financials
2007 2008 2009 2010 2011F 2012F 2013F 2014F Year end Dec (RONm) Income statement Interest income Interest expense Net interest income Fees & commissions, net Foreign exchange gain (Loss)/Income from associates Other income Operating income Salaries and related expenses Depreciation, amortisation Other operating expenses Operating expenses Credit loss expense Discontinued operations Profit before income tax Current income tax expense Deferred tax (expense)/income Total income tax Profit for the year Profit/(loss) attributable to minority Profit attributable to majority Balance sheet Cash in hand Due from Central Bank Due from banks Derivative financial instruments Loans & advances to customers, net Financial lease receivables Financial assets available for sale Investments in subsidiaries and associates Tangible assets, net Goodwill, net Intangible assets, net Deferred tax assets, net Other assets, net Total assets Total deposits Borrowed funds and debt issued Other liabilities Total liabilities Shareholders' equity Total liabilities & shareholders' equity Per share data Reported EPS (RON) Normalised EPS (RON) Normalised EPS growth (%) Dividend per share (RON) Dividend growth (%) Payout ratio (%) BV/share (RON)
911 (474) 437 299 122 (1) 19 876 (282) (48) (235) (566) (117) 144 337 (37) 9 (28) 309 2 308
1,536 (953) 582 394 70 240 43 1,329 (386) (63) (297) (746) (158) 0 426 (75) 9 (66) 360 (2) 362
2,109 (1,355) 754 371 143 49 48 1,366 (349) (68) (300) (717) (490) 0 158 (25) 4 (21) 137 (2) 139
1,894 (898) 996 383 119 5 44 1,547 (373) (61) (307) (741) (647) 0 159 (40) 16 (25) 134 0 134
2,017 (1,011) 1,007 390 104 0 52 1,552 (392) (65) (319) (776) (554) 0 222 0 0 (34) 188 0 188
2,129 (1,147) 982 390 104 0 51 1,527 (404) (41) (326) (771) (557) 0 199 0 0 (31) 168 0 168
2,355 (1,298) 1,057 400 121 0 54 1,632 (384) (45) (401) (830) (576) 0 226 0 0 (35) 191 0 191
2,389 (1,300) 1,089 416 136 0 57 1,698 (391) (47) (454) (892) (562) 0 244 0 0 (38) 206 0 206
288 3,229 683 0 8,484 298 657 69 300 8 8 0 59 14,083 10,467 2,146 197 12,810 1,273 14,083
278 3,421 829 0 10,885 381 824 29 385 8 15 21 73 17,149 12,135 3,181 176 15,492 1,656 17,149
316 2,871 1,536 0 11,482 271 2,630 42 305 8 12 17 122 19,613 15,248 2,415 111 17,775 1,838 19,613
330 3,371 1,237 0 12,216 224 3,894 0 288 8 49 30 84 21,731 17,612 1,851 177 19,640 2,090 21,730
518 4,488 647 8 13,911 207 5,486 4 292 8 61 29 186 25,845 20,701 2,691 204 23,596 2,249 25,845
493 4,362 1,550 17 14,062 196 4,913 8 292 8 64 22 200 26,186 20,748 2,516 200 23,463 2,722 26,186
497 3,725 3,087 26 14,425 197 4,604 13 291 8 71 15 227 27,187 22,077 1,987 208 24,272 2,916 27,187
503 3,085 4,680 38 15,813 199 4,273 19 319 8 81 8 260 29,286 23,692 2,251 218 26,161 3,125 29,286
0.17 0.17 0.00 n/a 0.0 0.7
0.20 0.09 -49 0.00 n/a 13.8 0.9
0.08 0.05 -39 0.03 n/a 0.0 1.0
0.08 0.07 35 0.00 n/a 0.0 1.2
0.11 0.11 44 0.00 n/a 0.0 1.3
0.09 0.09 -11 0.00 n/a 0.0 1.5
0.11 0.11 14 0.00 n/a 0.0 1.6
0.12 0.12 8 0.00 n/a 10.0 1.8
49
Banca Transilvania
Romanian banks
February 2012
Valuation, ratios and metrics

Year end Dec Profitability Net interest margin (%) Reported ROE (avg equity) (%) Normalised ROE (avg equity) (%) Normalised return on tangible equity (avg equity) (%) Normalised ROA (%) Efficiency Cost income ratio (%) Personnel cost to income (%) Costs to total assets (%) Asset quality Impaired loans/gross customer loans (%) Impairment allowance/Impaired loans (%) Impairment allowance/gross customer loans (%) Credit loss expense/avg gross customer loans (%) Credit loss expense/operating profit (%) Capital adequacy Total capital adequacy ratio (%) Tangible equity/tangible assets (%) Leverage (x) Income breakdown Net interest income/total revenues (%) Fee income/total revenues (%) Trading income/total revenues (%) Effective tax rate (%) Income & cost growth Net interest income growth (%) Non-interest income growth (%) Revenue growth (%) Operating costs growth (%) Reported pre-provision profit growth (%) Reported pre-tax profit growth (%) Reported net profit growth (%) Normalised net profit growth (%) Balance sheet structure Gross loans/customer deposits (%) Net customer loans/customer deposits (%) Net customer loans/total assets (%) Interest-earning assets/total assets (%) Interest-bearing liabilities/total assets (%) Customer deposits/total assets (%) Balance sheet growth Asset growth (%) RWA growth (%) Gross loans growth (%) Total deposits growth (%) Customer deposits growth (%) Impaired loans growth (%) Tangible BV growth (%) Valuation PER (x) Normalised PER (x) Price/book (x) Dividend yield (realised) (%)
2007
2008 4.0 24.9 10.9 11.0 1.0
2009 4.4 8.0 5.5 5.6 0.5 52.5 25.6 3.66 15.60 40.4 6.30 4.18 75.6 13.5 9.2 10.7 55.2 27.2 10.5 13.3 29.5 -18.1 2.7 -3.9 11.2 -62.8 -61.6 -39.1 81.7 76.6 58.5 95.8 90.1 76.4 14.4 -2.5 9.5 25.7 23.9 114.3 11.5 13.1 18.8 1.0 2.8
2010 5.1 6.8 6.6 6.8 0.6 47.9 24.1 3.41 33.70 29.7 10.00 5.01 80.3 13.0 9.4 10.4 64.4 24.7 7.7 15.5 32.1 -10.0 13.3 3.4 24.2 0.2 -3.6 34.6 78.6 70.7 56.2 96.4 89.6 79.5 10.8 23.2 10.8 15.5 15.3 139.3 12.2 13.5 14.0 0.9 0.0
2011F 4.4 8.7 8.7 8.9 0.8 50.0 25.3 3.00 36.00 30.3 10.90 3.80 71.4 11.9 8.4 11.5 64.9 25.1 6.7 15.5 1.0 -0.9 0.4 4.7 -3.6 40.0 40.2 44.5 76.6 68.2 53.8 95.7 90.5 78.9 18.9 5.8 15.0 17.5 18.0 22.9 7.3 9.7 9.7 0.8 0.0
2012F 4.0 6.8 6.8 7.0 0.6 50.5 26.4 2.95 37.00 35.1 12.98 3.51 73.7 11.5 10.1 9.6 64.3 25.6 6.8 15.5 -2.4 -0.1 -1.6 -0.6 -2.6 -10.5 -10.5 -10.5 78.7 68.5 53.7 95.8 88.8 78.4 1.3 24.5 3.5 0.2 0.7 6.4 21.5 10.8 10.8 0.7 0.0
2013F 4.2 6.8 6.8 7.0 0.7 50.9 23.5 3.05 35.00 42.5 14.88 3.48 71.8 11.9 10.4 9.3 64.8 24.5 7.4 15.5 7.6 5.5 6.9 7.6 6.1 13.9 13.9 13.9 77.5 66.0 53.1 95.8 88.5 80.4 3.8 3.8 4.9 6.4 6.4 -0.8 7.0 9.5 9.5 0.6 0.0
2014F 4.1 6.9 6.9 7.1 0.7 52.5 23.0 3.04 32.00 48.9 15.65 3.15 69.7 11.8 10.4 9.4 64.1 24.5 8.0 15.5 3.0 5.9 4.0 7.4 0.6 8.1 8.1 8.1 79.9 67.4 54.0 95.8 88.6 80.1 7.7 7.5 10.6 7.3 7.3 1.1 6.9 8.8 8.8 0.6 0.0
64.6 32.2 4.02 4.39 41.2 1.81 2.70 37.6 12.2 8.9 11.1 49.9 34.2 13.9 8.3
56.1 29.0 4.35 7.97 33.7 2.69 1.59 27.0 12.0 9.5 10.4 43.8 29.6 5.2 15.4 33.4 70.1 51.8 31.9 88.2 26.1 17.5 -10.2
83.2 81.7 60.2 94.8 89.6 73.8
92.5 90.0 63.5 95.3 89.3 70.5 21.8 33.7 29.5 15.9 16.4 135.1 30.2
5.9 5.9 1.4 0.0
5.0 11.4 1.1 0.0
Company profile
Banca Transilvania (BT) is the third-largest Romanian bank by assets. It is the only top ten bank that is independent and locally controlled. BT offers a full range of banking and investment services to corporate and retail clients, through a 555-outlet nationwide distribution network.
50
Romanian banks
February 2012
Disclosures Appendix
ANALYST CERTIFICATION The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. IMPORTANT DISCLOSURES
For disclosures on companies other than the subject companies of this report visit our disclosures page at http://research.ing.com or write to The Compliance Department, ING Financial Markets LLC, 1325 Avenue of the Americas, New York, USA, 10019.
US regulatory disclosures One or more members of ING Group holds 1% or more of the equity shares (as at the end of the month preceding this publication) in the following subject company/ies of this report: Banca Transilvania Valuation & risks: For details of the methodologies used to determine our price targets and risks related to the achievement of these targets refer to main body of report and/or the most recent company report at http://research.ing.com. European regulatory disclosures One or more members of ING Group holds 1% or more of the equity shares (as at the end of the month preceding this publication) in the following subject company/ies of this report: Banca Transilvania The remuneration of research analysts is not tied to specific investment banking transactions performed by ING Group although it is based in part on overall revenues, to which investment banking contribute. Financial interests: One of more members of ING Group may hold financial interests in the companies covered in this report other than those disclosed above. Securities prices: Prices are taken as of the previous days close on the home market unless otherwise stated. Job titles. The functional job title of the person/s responsible for the recommendations contained in this report is equity research analyst unless otherwise stated. Corporate titles may differ from functional job titles. Conflicts of interest policy. ING manages conflicts of interest arising as a result of the preparation and publication of research through its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by ING Compliance. For further details see our research policies page at http://research.ing.com. FOREIGN AFFILIATES DISCLOSURES Each ING legal entity which produces research is a subsidiary, branch or affiliate of ING Bank N.V. See back page for the addresses and primary securities regulator for each of these entities. RATING DISTRIBUTION (as of end 4Q11)
Equity coverage Buy Hold Sell 53% 37% 10% 100% Investment Banking clients* 44% 50% 44%
RATING DEFINITIONS
Buy: Forecast 12-mth absolute total return greater than +15% Hold: Forecast 12-mth absolute total return of +15% to -5% Sell: Forecast 12-mth absolute total return less than -5%
Total return: forecast share price appreciation to target price plus forecast annual dividend. Price volatility and our preference for not changing recommendations too frequently means forecast returns may fall outside of the above ranges at times.
* Percentage of companies in each rating category that are Investment Banking clients of ING Financial Markets LLC or an affiliate.
51
Romanian banks
February 2012
PRICE & RATINGS HISTORY TO 02/02/12: BRD (ROBRD.BX)

27 22 17 12 7 B
2 2/2/09
2/5/09
2/8/09
2/11/09
2/2/10
2/5/10 Price
2/8/10
2/11/10 Target price
2/2/11
2/5/11
2/8/11
2/11/11
2/2/12
B = Buy; H = Hold; S = Sell; NR = Not Rated; R = Restricted Chart shows ING coverage: current analyst may or may not have covered the stock for the entire period shown Where ING coverage is longer than three years, chart shows recommendation current at start of the share price history
Source: ING
PRICE & RATINGS HISTORY TO 02/02/12: BANCA TRANSILVANIA (ROTLV.BX)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 2/2/09 H
2/5/09
2/8/09
2/11/09
2/2/10
2/5/10 Price
2/8/10
2/11/10 Target price
2/2/11
2/5/11
2/8/11
2/11/11
2/2/12
B = Buy; H = Hold; S = Sell; NR = Not Rated; R = Restricted Chart shows ING coverage: current analyst may or may not have covered the stock for the entire period shown Where ING coverage is longer than three years, chart shows recommendation current at start of the share price history
Source: ING
52
Romanian banks
February 2012
AMSTERDAM
Tel: 31 20 563 8417 Bratislava Tel: 421 2 5934 6111 Bucharest Tel: 40 21 222 1600 Budapest Tel: 36 1 235 8800 Buenos Aires Tel: 54 11 4310 4700 Dublin Tel: 353 1 638 4000
Amsterdam Bratislava Brussels Bucharest Budapest Istanbul Kiev London Manila Milan Mexico City Moscow Mumbai New York Prague Singapore Sofia Warsaw
BRUSSELS
Tel: 32 2 547 7534 Geneva Tel: 41 22 593 8050 Hong Kong Tel: 852 2848 8488 Istanbul Tel: 90 212 367 7011 Kiev Tel: 380 44 230 3030 Madrid Tel: 34 91 789 8880
LONDON
Tel: 44 20 7767 1000 Manila Tel: 63 2 479 8888 Mexico City Tel: 52 55 5258 2000 Milan Tel: 39 02 89629 3610 Moscow Tel: 7 495 755 5400 Paris Tel: 33 1 56 39 32 84
NEW YORK
Tel: 1 646 424 6000 Prague Tel: 420 2 5747 4111 Sao Paulo Tel: 55 11 4504 6000 Seoul Tel: 82 2 317 1800 Shanghai Tel: 86 21 6841 3355 Sofia Tel: 359 2 917 6400
SINGAPORE
Tel: 65 6535 3688 Taipei Tel: 886 2 2734 7600 Tokyo Tel: 81 3 5210 0100 Warsaw Tel: 48 22 820 5018
Research offices: legal entity/address/primary securities regulator

ING Bank N.V., Foppingadreef 7, Amsterdam, Netherlands, 1102BD. Netherlands Authority for the Financial Markets ING Bank N.V., pobocka zahranicnej banky, Jesenskeho 4/C, 811 02 Bratislava, Slovak Republic. National Bank of Slovakia ING Belgium S.A./N.V., Avenue Marnix 24, Brussels, Belgium, B-1000. Financial Services and Market Authority (FSMA) ING Bank N.V. Amsterdam - Bucharest Branch, 11-13 Kiseleff Avenue, 011342, Bucharest 1, Romania. Romanian National Securities and Exchange Commission, Romanian National Bank ING Bank N.V. Hungary Branch, Dozsa Gyorgy ut 84\B, H - 1068 Budapest, Hungary. Hungarian Financial Supervisory Authority ING Menkul Degerler A.S., Resitpasa Mahallesi Eski Buyukdere Cad. No:17, 34398 Sariyer, Istanbul , Turkey. Capital Markets Board ING Bank Ukraine JSC, 30-a, Spaska Street, Kiev, Ukraine, 04070. Ukrainian Securities and Stock Commission ING Bank N.V. London Branch, 60 London Wall, London EC2M 5TQ, United Kingdom. Authorised by the Dutch Central Bank ING Bank N.V. Manila Branch, 20/F Tower One, Ayala Triangle, Ayala Avenue, 1226 Makati City, Philippines. Philippine Securities and Exchange Commission ING Bank N.V. Milano, Via Paleocapa, 5, Milano, Italy, 20121. Commissione Nazionale per le Societ e la Borsa ING Grupo Financiero (Mxico) SA de CV, Bosque de Alisos 45-B, Piso 4, Bosques de las Lomas, 05120, Mexico City, Mexico. Comision Nacional Bancaria y de Valores ING BANK (EURASIA) ZAO, 36, Krasnoproletarskaya ulitsa, 127473 Moscow, Russia. Federal Financial Markets Service ING Vysya Bank Limited, Plot C-12, Block-G, 7th Floor, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051, India. Securities and Exchange Board of India ING Financial Markets LLC, 1325 Avenue of the Americas, New York, United States, 10019. Securities and Exchange Commission ING Bank N.V. Prague Branch, Nadrazni 25, 150 00 Prague 5, Czech Republic. Czech National Bank ING Bank N.V. Singapore Branch, 19/F Republic Plaza, 9 Raffles Place, #19-02, Singapore, 048619. Monetary Authority of Singapore ING Bank N.V. Sofia Branch, 49B Bulgaria Blvd, Sofia 1404 Bulgaria. Financial Supervision Commission ING Securities S.A., Plac Trzech Krzyzy, 10/14, Warsaw, Poland, 00-499. Polish Financial Supervision Authority
Disclaimer
This report has been prepared on behalf of ING (being for this purpose the commercial banking business of ING Bank NV and certain of its subsidiary companies) solely for the information of its clients. ING forms part of ING Group (being for this purpose ING Groep NV and its subsidiary and affiliated companies). It is not investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. ING Group and any of its officers, employees, related and discretionary accounts may, to the extent not disclosed above and to the extent permitted by law, have long or short positions or may otherwise be interested in any transactions or investments (including derivatives) referred to in this report. 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Ing TLV BRD Ro Banks 29feb2012

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Romanian banks

EQUITY February 2012 RESEARCH

See you next year

Rating BRD GSG Banca Transilvania Source: ING Hold Sell

Return on equity (%)

BRD Groupe Societe Generale ........................................................................................23 Banca Transilvania...........................................................................................................37 Disclosures Appendix 51

Deleveraging and NPLs

250% 200% 150% 100%

Capital adequacy ratio ( 8%) (%)

Leverage ratio (x)

LDR - total* (%)

Leverage ratio = Tier 1 capital/total average assets Source: NBR

*Total = Non-governmental, residents. LDR = Loan-to-deposit ratio Source: NBR

Sector profitability remains negative

Asset quality deterioration is slowing for now

2.9% 0.3% -0.2% -1.7% -0.1% -1.4% 2011

-5% 2008 2009 ROA (%) 2010 ROE (%)

NPLs ratio (%)

Credit risk ratio (%)

NPL ratios in CEE (%)

Fig 6 Loan-to-deposit ratios in CEE (%)

Source: National sources, ING estimates

Banking penetration is at a standstill

Non-government loans are inching up

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

Assets real growth (lhs, %)

Non gov't loans / GDP (rhs, %)

Non-gov't loans (RONm)

Real growth (%)

Source: NBR, NIS

Source: NBR, NIS

Relative pick-up in corporate lending, but widening FX funding gap

Timid (and fragile) pick-up in corporate lending

EUR lending is still outpacing local currency

Household lending (% p.a.)

Corporate lending (% p.a.)

RON lending (% p.a.)

EUR lending (% p.a.)

Growth rates are in line with the region

Loan growth in CEE (% pa)

Deposit growth in CEE (% pa)

Source: National sources, ING estimates

Source: National sources, ING estimates

Banking penetration rates are where they should be

Chance of growth: corporate and mortgages

Corporate lending leads the field (RONm)

15% 13% 11% 5% 6% 6%

2009 Housing / GDP

2008 Retail loans

Non-financial company loans

Source: NBR, NIS, ING

Stalled retail lending hides mortgage growth (RONm)

Strong exports have spurred investment (RONm)

120,000 100,000 80,000 60,000

140,000 120,000 100,000 80,000 60,000

40,000 20,000 0 2007 2008 2009 Corporate 1-5yrs 2010 2011

Weak domestic consumption is main drag on growth

GDP components show weak consumption

Consumer goods orders drive corporate lending

Source: NBR, NIS

2012 has started on a soft note

Real wage growth is a weak pull on loans