1. Rome, June 8, 2004 HOUSEHOLD WEALTH: GROWTH PROSPECTS IN NEW EUROPE Alessandro Profumo CEO UniCredit

2. 2 EXECUTIVE SUMMARY The analysis provides a new picture of individuals' wealth in New Europe countries The major gap highlighted vs. existing EU-15 members provides a new way of looking at the challenge in terms of EU convergence Bridging of that gap and growth of the financial sector appear to be compatible with non-increase of individuals' propensity to save, provided that macroeconomic stability is assured For this reason, the efforts of both policy-makers (in terms of tax control and improvements in competitiveness) and financial institutions (in terms of product offerings and support of Foreign Direct Investments) is needed

3. 3 AGENDA Market overview Key conditions for a convergence process Prospects for the New Europe financial market

4. 4 FOR NEW EUROPE MARKETS THE BIGGEST MARGINS FOR CONVERGENCE CONCERN FINANCIAL WEALTH …. Note: (1) As of 2002; (2) The NE(12) – New Europe - definition includes 8 CEECs that are new EU members, plus other candidates or or countries approaching the EU (I.e. Bulgaria, Romania, Croatia and Turkey). Malta and Cyprus are excluded. Slovenia has been excluded due to unavailability of data on personal financial assets; (3) As of 2002; (4) Proxy for the EU aggregate including Italy, France, Germany, The Netherlands, Spain and UK. Sources: PFA Database, New Europe Research Network, and Eurostat 2003 data Population (mn) EU-15 (1) 380 NE-12 (2) 177 Per capita financial wealth (euro) 1,897 Per capita GDP (euro) 24,174 3,998 Per capita liabilities (euro) 41,628 (4) Home ownership 14,498 (4) 362 62% 64% # of Bank Accounts / Inhabitants 53% 134% ITALY (3) 76% 57 21,930 35,800 5,296 63% New Europe countries feature a much bigger gap in terms of financial wealth than in terms of income (GDP) Despite home-ownership levels, substantially aligned with those of EU-15, there is still a gap in terms of quality, suggesting need for further requalification

5. 5 Households’ Financial Wealth as % of GDP (2003) … WHICH TODAY LAGS SIGNIFICANTLY BEHIND THE EU AVERAGE, ALBEIT WITH BIG DIFFERENCES BETWEEN THE VARIOUS COUNTRIES … Italy (1) = 163% Portugal (1) = 195% Note: (1) As of 2002 Source: New Europe Research Network (1) The difficult process of transition to a market economy, plus the banking and financial crises of the early 1990s, slowed down accumulation of wealth in New Europe countries – which today are still significantly lagging behind the EU-15 average The countries featuring the highest levels of financial wealth are those that have been better able to manage the transition to a market economy

6. 6 … … WHICH MAKES ACCUMULATION OF FINANCIAL WEALTH MAINLY A QUESTION OF FLOWS AND NOT OF STOCKS Note: (1) As of 2002. Proxy for the EU aggregate including Italy, France, Germany, The Netherlands, Spain and UK; (2) As of 2002. Source: PFA Database, New Europe Research Network Per capita Financial Wealth 2003 – EUR 40,000 NE Average = 1,897 EU Average (1) = 41,628 Italy (2) = 35,800 2003 EUR Average NE per capita wealth is less than 5% of the EU-15 level There is a strong direct correlation between per capita income and per capita wealth, meaning that accumulation is above all a matter of flows and not of stocks

7. 7 Present status of the lending market - where the delay versus EU-15 is less accentuated than in the case of financial wealth – is the result of a credit boom fuelled by consumer spending growth and a simultaneous decrease in the cost of debt HOUSEHOLDS’ LIABILITIES percentage of GDP and billion € - 2003 ON THE LENDING MARKET THE DIFFERENCES ARE LESS ACCENTUATED Note: (1) As of 2002. (2) As of 2002. EU aggregate includes Italy, France, Germany, The Netherlands, Spain and UK Sources: PFA Database, New Europe Research Network 3.2% 4.0%4.5% 5.0% 7.1% 7.4% 9.3% 11.1% 12.5% 16.5% 29.1% 9.1% 59.3% 0.5 1.8 9.1 0.4 2.1 1.3 7.3 0.7 21.7 11.7 7.2 63.9 4,568 Italy (1) = 24% Portugal (1) = 71% Spain (1) =53% (2)

8. 8 AGENDA Market overview Key conditions for a convergence process Prospects for New Europe financial market

9. 9 THE ENLARGEMENT PROCESS ASSURES NEW MEMBERS PROSPECTS OF STEADY LONG-TERM ECONOMIC GROWTH … The experience of past EU enlargement processes shows that catching up implies decades of average growth above EU standards For 20 years Spain, Portugal, and Ireland experienced growth of 2 to 3% above the EU average A 2000 EU Commission report states that growth in New Europe countries will exceed average EU levels for the next 13 to 35 years Note: *EU only for this figures is referred to EU12; **2004-2006 CAGR New Europe Excl. Turkey EU* 2000200120022003e2004-06** 3.9 3.5 2.8 1.6 2.8 0.9 4.1 0.4 1.9 4.4 GDP Growth Per capita GDP in PPP (EU12=100) 1973 Ireland in EU 1986 Spain and Portugal in EU Ireland Spain Portugal

10. 10 … AND ASSURES EU-15 MEMBERS ROOM TO IMPROVE THEIR COMPETITIVENESS IN INTERNATIONAL MARKETS INCREASING EU COMPETITIVENESS - The relatively cheap and highly skilled labour in New Europe countries would further increase the competitiveness of European goods in the world market. The manufacturing system has in fact already initiated a profound relocalisation process aiming for better use of production factors – combined with coverage of new commercial geographies HUMAN CAPITAL – The high educational and professional levels of workforces in New Europe countries aid a profitable exchange of human capital within the EU TRADE BENEFITS (mainly long-term) – A foreseeably rapid and sustainable economic boom of the countries concerned could result in a further acceleration of import growth which would further boost the growth of EU countries' GDP INCREASING ROLE IN INTERNATIONAL TRADE (mainly long-term) - Enlargement represents a chance for the Union to increase its weight in world economy and trade. Enlargement (with 10 CEE candidates) has brought more than 110 million new customers into the Union increasing the European single market to 500 million. 61.1 Poland 55.0 Hungary 59.2 Czech Rep. 51.6 Slovakia 67.3 Slovenia 48.7 Baltics 43.0 Turkey 49.6 Bulgaria Romania 57.6 Weight of EU-15 in total IMPORT (2003 - %) Weight of EU-15 in total EXPORT (2003 - %) 68.8 73.7 69.8 60.8 58.4 54.8 52.2 56.7 67.7 Labour costs per hour – 2003 USD 22.47 EU-15 New Europe 1 2.44 % population aged 25-64 with at least upper secondary education (2002) 65 EU-15 New Europe 2 81 Note: (1) Considering only Eastern Central European countries; (2) Including only new EU members Source: EIU, Eurostat

11. 11 THE DIFFERENT PROSPECTS OF GROWTH IN THE PROPENSITY TO SAVE …  Real convergence means growth in income levels that have two contrasting effects on individuals' propensity to save: A positive impact from increase in the number of households able to save A negative impact from increase in consumption appetite  On balance, we foresee non-increase in individuals' propensity to save  Such non-increasing saving propensity of individuals can be associated to sustainable growth pattern and catching up to EU standards. However two conditions have to be met: Fiscal control should be guaranteed (no crowding out) Current Account deficits should be financed by FDI (thus avoiding external indebtedness of the country)

12. 12 … ATTRIBUTE A KEY ROLE TO POLICY-MAKERS  Tax discipline  Competitiveness Policy-makers FocusActions  Control on budget spending (avoiding crowding-out effects)  Infrastructures development  Tax competitiveness  Legal and regulatory framework  Support for Small and Medium Enterprises  Credit quality  Monitoring credit quality without unduly weighing down market development

13. 13 AGENDA Market overview Key conditions for a convergence process Prospects for the New Europe financial market

14. 14 NUMEROUS FACTORS REQUIRE THAT THE BANKING INDUSTRY MODIFY ITS OFFERING … Interest rates convergence towards EU levels Decreasing overall risk driving reduction in government bond spread over EU yield curve Macroeconomic environment Integration in a pan-European market More opportunities with lower risks Pension reform Financial markets Expectation of increase in personal income and wealth Individuals Less attractiveness for traditional banking products Switch towards more diversified and structured products Development of innovative services able to respond to new needs

15. 15 … CALLING ON IT TO PERFORM A MAJOR ROLE IN THE CONVERGENCE PROCESS Financial Institutions  Support for consumption and intermediation  Support for development of financial sector Focus Actions  In low income countries (*) : traditional intermediation, gradual increase in lending in anticipation of consumption and support for FDI  In medium income countries: lending to support anticipation of consumption (target selection), supply of more sophisticated products and support for FDI  Investment banking  Product development  Services development Note: (*) An approximate threshold could be fixed at 5,000 EUR GDP per capita

16. 16 Baltics Poland Slovak R. Slovenia Czech R. Hungary Euro Area Bank deposits of non Banks (as % of GDP 2002) Debt Securities (as % of GDP 2002) Stock Market Capitalisation (as % of GDP 2002) Bank Oriented System Market Oriented System The convergence process will cause New Europe banking systems to gradually move from being “bank-oriented” towards being increasingly “market-oriented” … AND TUTORING MOVING TOWARDS MORE MARKET- ORIENTED SYSTEMS

17. Rome, June 8, 2004 HOUSEHOLD WEALTH: GROWTH PROSPECTS IN NEW EUROPE Alessandro Profumo CEO UniCredit