See Macroeconomic Outlook

March-16
SEE Quarterly
EXTERNAL HEADWINDS, DOMESTIC TAILWINDS
CESEE CPI INFLATION

16
14
CPI current (%, yoy)
12 CPI average (%, yoy)
10 CPI 5Y range (% yoy)
8
Izvor: Bloomberg, HAAB research
-2
SRB MNE CRO SLO B-H
Slovenia: Slower GDP Growth, Fiscal Healing page 5
Croatia: Turning the Tide? page 11
Serbia: Wake Me Up When Elections End page 17
Bosnia and Herzegovina: IMF Lending Remains Top Priority page 23
Montenegro: Growth Gains Momentum page 27
READ US ON BLOOMBERG AT HAAB<GO>

SEE MACROECONOMIC OUTLOOK
EXECUTIVE SUMMARY
BOTTOM LINE: We have maintained our 2016 GDP projections for our SEE universe across
almost all countries, except for Slovenia, which was lowered. The SEE GDP growth has become
increasingly supported by domestic demand (including investments), driven by even lower oil
prices and stabilizing labour markets at a time when external demand is set to fall victim to
deteriorated outlook for the euro zone. In particular, the recent declines in business sentiment,
higher economic risk and weaker external demand will likely have the clearest negative impact on
European investments. Fiscal policy outlook for our SEE universe is quite diverse in that Croatia is
accelerating fiscal efforts, Serbia will likely reverse a part of last year's strong adjustment, whereas
others stay on the sidelines. While Slovenia and Croatia face another year of -0.5% average
deflation, we see inflation subdued elsewhere given the low imported inflation from the euro area,
and low oil prices.
3-month view Government yields FX vs EUR Monetary policy
Slovenia * easier
Croatia easier
Serbia easier
Bosnia and Herzegovina unchanged
Montenegro * unchanged
*vs USD
KEY POINTS:
1. In Croatia, we keep our sub-consensus 1.0% GDP growth forecast for 2016 as the benefits of
lesser fiscal squeeze, even lower oil price and further monetary support are offset by higher risks
for euro area resilience to dwindle. Sputtering EU demand and volatile financial conditions led us to
downgrade Slovenia's 2016 GDP growth by 0.3pp to 1.8%. In Serbia, we have kept our headline
GDP at 1.5%, with private investment the strongest driver and exports being the component mostly
exposed to downside risks. In Bosnia-Herzegovina, GDP growth is largely driven by private and
public investments, respectively.
2. The planned 1.1pp fiscal consolidation in Croatia to 3% of GDP shows some awareness of the
gravity of the situation just as MoF comments that public debt must be arrested, albeit the MinFin is
still largely banking on the revenue side of the budget. We see 2016 deficit at 4.1% of GDP on
weaker GDP/inflation forecasts, and uncertain public wage bill. In Slovenia, we see milder deficit
reduction to 2.7% of GDP, as unfreezing of public wages, pensions and transfers and refugee-
related costs largely counter tax-rich domestic demand acceleration, public capex slump,
permanent VAT hikes, E-tax collection and profit tax allowance cuts. Serbia is set to reverse a part
of the last year's 2.9pp fiscal consolidation, as unfreezing pensions and most salaries in the public
sector, lower SOEs dividend transfers and higher public capex will push 2016 deficit above 4% of
GDP. Slovenia is the only country set to reduce its public debt this year with a help from hefty fiscal
reserve and solid GDP growth.
3. In Slovenia and Croatia, our inflation forecast have been revised downwards considerably given
the renewed drop in oil prices, unusually mild food inflation and almost non-existent administrative
price hikes. Consequently, CPI inflation average is seen at -0.5% in both countries. In Serbia, we
see CPI around 2% yoy on average in 1H16, before the assumed moderate rise in primary
commodities and domestic aggregate demand pushes CPI back into the targeted band in 4Q16 or
early 2017.
4. The extension of the ECB's QE, reduced Fed rate hike expectations, subdued inflation
expectations and challenges over the credit impulse in Europe leave most key central banks on the
dovish sides. While the CNB is now more actively co-ordinating with the MinFin and the
government, we think the ECB-driven risk appetite, Croatia's strong external position and fiscal
consolidation create fertile ground for further monetary easing. Notwithstanding that, moderating
banks' risk provisioning, further fiscal risk mitigation, another record tourist season outlook and
improved country's external position underpin the kuna. As for the NBS, there is a room for a
cumulative 50-75bp policy rate cut in 1H16, while keeping a close eye on movements in
international financial markets and its assessment on potential inflationary effects .
Page 2 March-16
SEE data trends
Real GDP growth (%) CPI inflation (average, %, YoY)

4 5
2014
2014
2015F
2015F
3 4
2016F
2016F
2017F
2017F
2 3
1 2
0 1
-1 0
-2 -1
SLO CRO SRB B-H MNT SEE SLO CRO SRB B-H MNT SEE
Unemployment rate (ILO, average, %) Current account balance (% of GDP)

30 9
2014
6
2015F
25 3
2016F
2017F 0
20
-3
-6
15 2014
-9 2015F
-12 2016F
10
2017F
-15
5 -18
Government balance (% of GDP) Gross foreign debt (% of GDP)

0
150
2014
-2 135 2015F
2016F
120
2017F
-4
105
-6 90
2014
75
2015F
-8
2016F 60
2017F
-10 45
Source: national sources, HAAB research
Page 3 March-16
SEE banking sector trends
Gross loans (% of GDP) Loan-to-deposit ratio (%)

2014
90 2015F
114
2016F
80 2017F
2014
2015F 107
2016F
70
2017F
101
60
94
50
40 88
30 81
SLO* CRO SRB B-H MNT SEE** SLO* CRO SRB B-H MNT SEE**
Net interest margin (%) Cost-to-income ratio (%)
5
70
2014
2014
2015F
4 65 2015F
2016F
2016F
2017F
2017F
60
3
55
2
50
1
45
0 40
NPL ratio (%) Capital adequacy ratio (%)

28 21
2014
2014
2015F
2015F
25 2016F
2016F
17 2017F
2017F
22
19 13
16
9
13
10 5
CRO SRB B-H MNT SEE** SLO CRO SRB B-H MNT SEE
*Net loans; **Slovenia excluded; Source: central banks, HAAB research
Page 4 March-16
SEE MACROECONOMIC OUTLOOK SLOVENIA
Slower GDP Growth, Fiscal Healing

We have lowered our 2016 GDP forecast to 1.8% on deteriorating euro zone outlook on
weaker Chinese/EM growth, fading tailwind from the FX market and volatile financial
conditions. Given the renewed drop in oil prices, unusually mild food inflation and cheaper
services, we see another year of the average -0.5% CPI deflation. The record C/A surplus
alongside fiscal healing suggests the country is well prepared for any further turbulences
Slower economic Stronger-than-expected 4Q15 GDP (up 0.6% qoq, 2.6% yoy s.a. vs prev. 2.2% yoy) came in
growth in the first half contrast to weaker-than-expected euro zone growth, shaping the FY15 growth at 2.9%. The key
underlying drivers of growth were: (i) soaring private investment in line with our long-held positive
view on machinery capex, (ii) surprisingly dynamic public spending, and (iii) ongoing strength in
household consumption amid robust consumer sentiment, buoyant labour market and oil price
slump. Net exports contribution came to a halt since merchandise exports growth slowed in line
with slowing euro zone conjuncture and goods imports growth has re-accelerated in sympathy with
strengthening domestic demand. While the first hard data and sentiment gauges for 1Q16 are still
consistent with at least 3% yoy industrial output growth, consumer spending and exports are set to
moderate, which suggests 'only' 0.25%-alike quarterly GDP growth (or about 2% yoy) in the current
quarter.
Slovenia: contributions to quarterly changes in real GDP (in pps)

11
Households General government GFCF Net trade
-1
-7
Source: SORS, HAAB research

-13
1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15
External environment Notwithstanding a strong finish to 2015, we cut our 2016 GDP forecast to 1.8% from 2.1% on
and public capex deteriorating euro zone outlook on weaker Chinese/EM growth, fading tailwind from the FX market
causing headwinds and volatile financial conditions, despite the benefits of even lower oil prices and resilient domestic
demand. In particular, the recent declines in business sentiment, higher economic risk and weaker
external demand will likely have the clearest negative impact on European investments. While a
sharp decline in EU-funded capex affects public capex, we expect private capex to outperform
given the above-average capacity utilisation, better funding conditions and higher firms' profits.
Relatively mild scale of the GDP revision signals both our confidence in similar private consumption
footprint on firmer real disposable income growth, accelerating retail credit, decent hiring and
housing market recovery, as well as the ECB's policy re-design to safeguard confidence in financial
system. The risks to our baseline forecast are more on the downside - from a short-lived recession
in the euro zone amid larger-than-expected EM slowdown, tighter financial conditions on resurgent
fiscal concerns in the EMU periphery to higher political pressures (Brexit,migrant crisis). In 2017,
we expect GDP growth to re-accelerate to 2.3% on stronger domestic demand, notably
investments, and accelerating external demand.
Extended low-flation Given the renewed drop in oil prices, unusually mild food inflation and cheaper phone calls, we see
calls for further ECB another year of the average -0.5% CPI deflation. With stronger private spending growth and rising
easing
unit labour costs, we expect both the headline and core inflation to grind somewhat higher by end-
2016 to around 0%. But the sharp drop in oil prices at the beginning of the year has increased
downside risks to those numbers, given that it is still based on the oil price futures from mid-
December. At the same time, EUR has not weakened as much as we anticipated back then. Also
important, Slovenia will continue to display CPI below the euro zone's average, which effectively
protects competitiveness vis-a-vis the main trading partners. Since both growth and inflation will no
doubt continue to disappoint, we expect another round of ECB easing later in the year via further
upsizing and extending of bond buying, and posibly another deposit rate cut in H2.
Page 5 March-16
C/A surplus expected to Notwithstanding slowing external demand, we see C/A surplus at 7.5% of GDP in 2016 (a new all-
peak this year time high), largely due to both price and non-price competitivness gains, further corporate de-
leveraging, and the helping hand from cheaper oil. Such positive development is partly offset by
lower EU transfer and portfolio outflows, ie higher dividends and interest cost. With a renewed
strengthening of domestic (import-) demand and commody price normalization, we expect C/A
surplus to level off in 2017 and beyond as the C/A balance is becoming increasingly 'structural'. As
long as net external liabilities continue to decrease, we likewise see a further slide in the net
international investment position toward 40% of GDP.
With record surpluses and the latest EUR1.5bn 16Y bond issue, Slovenia'a funding position is on
extermely positive footing, as the sovereign continues to prefund for 2016. With further ECB easing
likely later this year, the MinFin may still exploit strong risk appetite in a further pre-funding for 2017.
While there has been some progress in restructuring and privatization of non-financial firms to the
benefit of export-oriented FDI, coupled with a sharp reduction of outflows of reinvested earnings,
big-ticket sales like those of NLB and Telekom Slovenija are still slow in coming. Hence, further
competitiveness reforms are needed to maintain healthy equity capital inflow as a preferrable
instrument in the ongoing process of firms' restructuring.
Slovenia: fiscal deficits (% of GDP)

Source: European Commission, HAAB research
-3
-6
2010 2015
-9
EST LIT ROM LAT CZE HUN BG B-H SLO POL SRB CRO
Fiscal hopes dependent The FY15 budget deficit fell to 2.9% of GDP thanks to higher-than-expected tax revenues (up
on the cycle... EUR0.4bn yoy, driven by PIT, CIT and VAT) and lower-than-pencilled spending (eg subsidy cuts),
which allows Slovenia to exit the Excessive Deficit Procedure. In 2016, we see much milder deficit
reduction to 2.7% of GDP (vs 1.1pp in 2015), as unfreezing of public wages, pensions and transfers
and refugee-related costs largely counter tax-rich domestic demand acceleration, much lower public
capex, permanent VAT hikes, E-tax collection and profit tax allowance rationing. Among other
consolidation measures, Slovenia is eyeing to save up to EUR90m on tax system overhaul,
including PIT and contributions cuts for high-income earners that would be partly offset by a small
CIT hike (from one of the lowest EU levels), with a net positive impact on competitiveness.
Downside risks include considerably higher costs pertaining to refugees, potentially larger impact of
the Bank Asset Management Company consolidation and the impact from the resolution of two
financial institutions currently in wind down. While fiscal consolidation heads into the right direction,
Slovenia needs to detail consolidation measures for 2017 when the structural fiscal position is set to
deteriorate by 0.5pp of GDP as the MinFin has also postponed real estate tax hike to 2018 at the
earliest.
... but public debt is After a further increase to 83.5% of GDP in 2015 on strong (pre)funding amid increasingly
expected to fall due to favourable market conditions, we expect public debt to decline this year and next below 80% of GDP
reduction in fiscal thanks to GDP recovery and a reduction in fiscal reserve. Namely, the apparent pre-funding 2017
reserve
exercise could be also combined by USD bond buybacks buybacks thanks to a hefty fiscal reserve
of about 17% of GDP. The latter may come down this year as the redemption profile in 2017 and
beyond is lower than in 2016 (about EUR3.7bn), ie just above EUR2bn in both 2017 and 2018. That
said, the ECB QE will continue to drive supply-demand dynamics in 2016 as QE purchases are
expected to hit EUR3.5-4bn that is about EUR1-1.5bn above the gross borrowing needs in 2016 (if
the BoS buys only Slovenian bonds) or almost in line with funding needs if the sovereign bonds
make up for 70% of BoS purchases. Last but not least, the pace of public debt reduction will to a
large extent depend on successful big-ticket privatizations and the adherance to a zero-budget
deficit rule. While corporate restructuring, including in the SME area of late, goes as planned and is
recently underpinned by the BAMC's capacity, a more lukewarm pace of adjustment process gives
some uncertainty over the medium-term path and commitments to fiscal consolidation and
privatization.
Page 6 March-16
China introduces Slovenian bonds have underperformed most CEE ones in the past few months given the ECB QE-
volatility in yields... driven hunt for yield, but performed in line with EMU peripherals (like Italy, Spain) amid sharp
decline in term premia in the core euro markets. While the bolder-than-expected and possible future
easing, spillovers from the corporate bond buying and new LTRO apparently act in the periphery's
favour, we'd not bet on further material tightening in peripheral spreads throughout this year.
Namely, in the latter part of our 3M forecast horizon, we see the UK referendum and the growing
(some in the) market's scepticism about the effectiveness of further central banks' measures adding
to upward voaltility. Beyond the ECB, we expect the sovereigns' macro and reform outlook, as well
as the US monetary outlook and/or the relevant forward guidance to influence performance of
peripheral bond yields.
Slovenian spreads in tandem with peers

470
Slovenia USD 2022
410 Romania USD 2022
Hungary USD 2021
350
290
230
170 Source: Bloomberg, HAAB research
110
Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Jan-15 Apr-15 Jul-15 Oct-15 Feb-16
... but more ECB easing We do not rule out more ECB easing this year as both growth and inflation will likely continue to
on the horizon disappoint, especially shoud Fed Funds forecasts (with now only 50bp of rate hikes priced by end-
2016, far less than FOMC median expectations of roughly 100bp) unsettle the markets.The debate
on 'delivering more' could flare up at the turn of 2Q/3Q16 with the ECB again raising the volume of
monthly bond purchases and dealing with the risks of tighter credit standards. That said, there is a
new case for peripheral spreads tightening as well as the peripheral spread curve flattening.
Namely, the ECB targeted credit easing approach comes with a particular support for the EMU
periphery's assets in that (i) refi rate cut(s) (including MRO and marginal lending rates) and the
overhauled 4Y constant maturity TLTRO primarily benefit periphery banks as dominant users of
ECB liquidity provision and also the belly of the peripheral sovereigns' curves. As before, we expect
the upsizing of the ECB QE to favour smaller euro zone sovereigns on the back of scarcity premium,
shallow liquidity in the local markets and very often the subsequent EUR CDS-cash outperformance.
With all that being said, we still see Slovenian bonds attractive to position for the QE expansion as
Slovenia exhibits a positive divergence on growth and fiscal metrics comapred to a number of the
EMU peripherals and also faces little political risks.
Page 7 March-16
Slovenia's data trends
Real GDP growth (% YoY) Economic confidence vs. GDP growth

120 12
4
110 8
2
0 100 4
-2
90 0
-3 Economic Sentiment Index

80 (lhs) -4
-5
70 GDP growth, 3m lag (yoy, rhs) -8
-7
60 -12
-9 4Q00 4Q02 4Q04 4Q06 4Q08 4Q10 4Q12 4Q14
2009 2010 2011 2012 2013 2014 2015 2016F 2017F
CPI inflation dynamics (% YoY) Business sentiment in manufacturing
20
9
Slovenia Euro area
8
7 0
5 -20
3 -40
Confidence indicator
2 Export order-books
Overall order-books
1 -60
-1
-2 -80
Jul-01 Jul-03 Jul-05 Jul-07 Aug-09 Aug-11 Aug-13 Sep-15 Jan-01 Sep-04 May-08 Jan-12 Sep-15
PMI vs Industrial production - Slovenia Unit labour cost for the total economy
65 12
10%
8
60
4%
4
55 -2%
0
50 -4 -7%
45 -8 -13%
-12
40 Germany mnfg PMI, (lhs) -18%
-16 1Q96-2Q15
Italy mnfg PMI, (lhs)
-24%
35
Slovenian industrial production, 3mma, -20
(YoY, w-d-a, rhs) -29%
30 -24 LUX ITA GRE SLO ESP FIN NL FRA BEL AT IRE GER
Jan-07 Mar-09 May-11 Jul-13 Sep-15
Source: Slovenian National Bank, Statistical office of the Republic of Slovenia, Ministry of Finance, ECB, European Commission, Bloomberg, HAAB research
Page 8 March-16
SELECTED ECONOMIC FORECASTS

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Activity
Nominal GDP (EURbn, current prices) 36,2 36,3 36,9 36,0 35,9 37,3 38,5 39,1 40,3
Nominal GDP (USDbn) 50,4 48,1 51,4 46,3 47,7 49,6 42,7 41,6 39,1
GDP per capita (EUR) 17.711 17.693 17.972 17.496 17.431 18.091 18.665 18.892 19.439
GDP per capita (USD) 24.704 23.471 25.028 22.499 23.150 24.034 20.701 20.120 18.856
Real GDP (constant prices YoY, %) -7,8 1,2 0,6 -2,7 -1,1 3,0 2,9 1,8 2,3
Private consumption (YoY, %) 0,9 1,1 0,0 -2,4 -4,2 0,6 1,7 1,7 2,0
Fixed investment (YoY, %) -22,0 -13,3 -4,9 -8,8 1,7 3,2 0,5 -1,4 3,4
Industrial production (YoY, %) -17,3 7,1 1,3 -1,1 -0,7 2,2 4,6 3,3 3,6
Unemployment rate (ILO, average %) 5,9 7,3 8,2 8,9 10,1 9,7 9,1 8,8 8,4
Prices
CPI inflation (average % YoY) 0,9 1,8 1,8 2,6 1,8 0,2 -0,5 -0,5 1,2
CPI inflation (end-year % YoY) 1,8 1,9 2,3 2,7 0,7 0,2 -0,5 -0,1 1,4
PPI inflation (average % YoY) -1,3 2,1 4,5 0,9 0,3 -0,6 -0,2 0,6 1,5
Net wage rates (% YoY, nominal) 3,4 3,9 2,1 0,4 0,6 0,8 0,7 1,8 1,5
Fiscal balance (% of GDP)

State budget balance (ESA-95) -5,8 -5,7 -6,6 -4,0 -14,9 -4,9 -2,9 -2,7 -2,2
Public debt 32,9 38,0 46,5 53,7 70,3 80,9 83,5 79,8 79,3
Gross public funding needs n/a 7,0 10,5 8,2 19,5 14,6 6,4 11,8 8,3
External balance
Export of goods and services (EURbn) 20,686 23,285 25,948 26,363 27,006 28,545 30,000 31,350 33,043
Import of goods and services (EURbn) 19,999 22,823 25,516 24,934 24,536 25,599 26,339 27,472 29,038
Merchandise trade balance (EURbn) -0,425 -0,748 -0,974 -0,081 0,708 1,210 1,613 1,939 2,066
Merchandise trade balance (% of GDP) -1,2 -2,1 -2,6 -0,2 2,0 3,2 4,2 5,0 5,1
Tourism receipts (EURbn) 1,804 1,925 1,975 2,008 2,040 2,057 2,237 2,300 2,369
Current account balance (EURbn) -0,203 -0,043 0,068 0,930 2,023 2,607 2,810 2,930 2,899
Current account balance (% of GDP) -0,6 -0,1 0,2 2,6 5,6 7,0 7,3 7,5 7,2
Net FDI (EURbn) -0,5 0,1 0,6 0,5 0,0 0,6 0,9 0,8 0,9
FDI (% of GDP) -1,4 0,3 1,7 1,3 0,1 1,6 2,3 2,1 2,2
FDI cover (%) n/a n/a n/a n/a n/a n/a n/a n/a n/a
Gross international reserves (EURbn) 0,749 0,803 0,767 0,722 0,669 0,837 0,760 0,760 0,760
Import cover (months of imports) -0,4 -0,4 -0,4 -0,3 -0,3 -0,4 -0,3 -0,3 -0,3
Debt indicators
Gross external debt (EURbn) 41,667 42,123 41,669 42,872 41,658 46,314 44,765 45,565 46,895
Government (EURbn) 6,573 8,190 8,748 11,092 15,459 22,416 23,008 23,758 25,008
Private (EURbn) 30,248 30,273 28,534 25,709 23,457 21,815 20,357 20,407 20,687
Gross external debt (% of GDP) 115,2 116,2 112,9 119,1 116,0 124,2 116,1 116,6 116,5
Gross external debt (% of exports) 201,4 180,9 160,6 162,6 154,3 162,3 149,2 145,3 141,9
Exchange rates and money

EUR/USD (end-year) 1,43 1,34 1,30 1,32 1,38 1,21 1,09 1,00 0,95
EUR/USD (average) 1,39 1,33 1,39 1,29 1,33 1,33 1,11 1,07 0,97
Money supply M1 (% YoY)* 7,7 13,5 1,5 4,4 0,1 18,5 24,9 8,5 6,2
Broad money M3 (% YoY)* 2,6 2,4 3,5 -1,4 -1,3 6,1 4,6 3,2 2,9
Domestic credit (% YoY) 1,1 1,6 -4,6 -5,8 -21,4 -11,5 -5,5 0,6 2,0
ECB reference rate (end-year %) 1,00 1,00 1,00 0,75 0,25 0,05 0,05 0,00 0,00
EURIBOR 3M interest rate (average %) 1,22 0,81 1,39 0,58 0,22 0,21 -0,02 -0,29 -0,30
SLO 5Y yield (average %) - 3,03 3,96 4,55 4,35 2,14 0,84 0,20 0,30
SLO 10Y yield (average %) 4,35 3,84 4,98 6,01 5,87 3,28 1,67 1,45 1,70
* Since 2007 ECB data

Source: Slovenian National Bank, Statistical office of the Republic of Slovenia, Ministry of Finance, IMF, HAAB research
Page 9 March-16
SELECTED BANKING SECTOR DATA

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Balance sheet
Assets (EURm) 51.612 50.319 48.748 46.125 40.344 38.714 37.411 37.598 37.786
Assets (%, YoY) 8,4 -2,5 -3,1 -5,4 -12,5 -4,0 -3,4 0,5 0,5
Assets (% of GDP) 142,7 138,8 132,1 128,2 112,4 103,8 97,1 96,2 93,9
Net loans (EURm) 33.910 34.450 32.875 30.964 24.338 21.540 20.358 20.471 20.876
Net loans (%, YoY) 1,1 1,6 -4,6 -5,8 -21,4 -11,5 -5,5 0,6 2,0
Net loans (% of GDP) 93,8 95,0 89,1 86,0 67,8 57,7 52,8 52,4 51,9
Deposits (EURm) 23.570 23.507 24.170 23.856 22.550 24.426 25.140 25.894 26.647
Deposits (%, YoY) 14,4 -0,3 2,8 -1,3 -5,5 8,3 2,9 3,0 2,9
Deposits (% of GDP) 65,2 64,8 65,5 66,3 62,8 65,5 65,2 66,3 66,2
Loan-to-deposit ratio (%) 143,9 146,6 136,0 129,8 107,9 88,2 81,0 79,1 78,3
Capital adequacy ratio (%) 11,6 11,3 11,6 11,9 14,0 16,7 16,9 17,4 17,2
Performance
Net interest income (EURm) 932 1.038 1.018 886 708 832 748 827 850
Net interest income (%, YoY) -1,3 11,3 -2,0 -12,9 -20,1 17,5 -10,1 10,6 2,8
Total operating income (EURm) 1.425 1.474 1.447 1.566 1.091 1.233 1.148 1.221 1.246
Total operating income (%, YoY) 4,8 3,4 -1,9 8,2 -30,3 13,0 -6,9 6,4 2,0
Pre-provision profit (EURm) 660 709 670 823 370 547 496 589 614
Pre-provision profit (%, YoY) 13,0 7,3 -5,4 22,8 -55,0 47,7 -9,2 18,7 4,2
Provision charges (EURm) 500 810 1.207 1.599 3.809 614 362 450 452
Profitability and efficiency

Net interest margin (%) 1,9 2,0 2,1 1,9 1,6 2,1 2,0 2,0 2,0
Pre-tax ROAA (%) 0,3 -0,2 -1,1 -1,6 -8,0 -0,2 0,4 0,4 0,4
Pre-tax ROAE (%) 3,9 -2,4 -13,3 -20,3 -92,9 -1,7 3,1 3,1 3,6
Cost-to-income ratio (%) 53,7 51,9 53,7 47,4 66,1 55,7 56,8 51,8 50,7
Operating expense (% of assets) 1,5 1,5 1,6 1,6 1,7 1,7 1,7 1,7 1,7
Credit quality and provisioning

NPA ratio (%) n/a 7,3 11,4 15,0 13,7 11,5 9,3 9,4 9,4
NPA coverage (%) n/a 65,7 58,6 60,4 91,6 80,0 98,5 105,1 109,6
Provision charges (% of loans) 1,0 1,6 2,4 3,4 8,8 1,6 1,0 1,2 1,2
Provision charges (% of PPP) 75,7 114,3 180,1 194,3 1.029,2 112,3 72,9 76,4 73,7
Source: BSI, HAAB research
In 2016 positive loan De-leveraging continued in 2015, with net loans down 5.5% yoy (vs. -11.5% in 2014) mostly as
growth rates corporate loans sank 10.0% yoy, but also due to 39.6% yoy slump in public sector loans. On a more
positive note, retail loans increased by 1.0% yoy (vs. -1.7% in 2014) on the back of improved
consumer confidence and record low interest rates. After five years of de-leveraging, we expect net
loans to show a slight 0.6% increase in 2016 mostly on the back of higher lending to households,
increasingly supported also by non-purpose consumer credit. We see retail credit supported with
ongoing employment, solid wage growth and housing market recovery. In addition, interest rates on
consumer loans are at record low levels, with housing loans priced at 2.2% - in the middle of the
euro zone average, and consumer loans closer to the lower bound of the euro zone range. On the
other hand, corporate is expected to see another year of de-leveraging (but at somewhat slower
pace) given the ongoing restructuring process. The NPL ratio decreased by 2.2pp to 9.3%, and we
expect to see similar rates going forth.
As for funding, deposits saw a 2.9% yoy increase in 2015 on the back of 13.5% yoy stronger
Deposits increased by corporate deposit collection, alongside 3.1% yoy higher retail deposits. Public deposits contributed
2.9% in 2015 negatively as they faced a 10.3% yoy decrease (vs. +11.4% in 2014). Looking ahead, we expect
2016 deposit collection to stay around current levels and again driven by private sector deposits.
Meanwhile, loan to deposit ratio declined by 7pp to 81% at the YE15, and we expect to see further
decrease in the medium term. Concerning profitability of banking sector, we expect the yet to be
published FY15 data to show a positive net profit result after five year of losses.
Page 10 March-16
SEE MACROECONOMIC OUTLOOK CROATIA
Turning the Tide?

While growth has recovered mainly thanks to export of services, Croatia still faces a
number of challenges ahead. We see GDP growth easing toward 1.0% in 2016 on EC-
mandated reforms and fiscal austerity post elections, and fading boost from net trade,
while we expect it to re-accelerate to 1.5% in 2017 on stronger domestic (investment)
demand. Without significant reform content given delays in the new cabinet set-up, we
expect another year of 5%/GDP-alike budget deficit, and see public debt on an
unsustainable path towards 95% of GDP by end-2016.
Domestic demand The 4Q15 GDP (1.9% yoy, prev 2.8% yoy) came in slightly below expectations, while wrapping
overtakes net exports the FY15 GDP growth at 1.6%. The key drivers behind Q4 GDP were household consumption
as growth enging in Q4 (2.4% yoy, the strongest growth since 2Q08), while net exports emerged as the main drag on
headline growth, thus once again confirming the import driven nature of local consumption.
Investments also surprised positively with the highest growth rate since late 2008 (3.7% yoy).
Despite election-related policy and legal uncertainty, most capex momentum can be attributed to
exporters' equipment capex, stronger confidence, soaring CBRD credit supporting mainly service
sector upgrades, and stabilized construction output before elections. The first 1Q16 high-
frequency data paint a mixed picture, with industrial output and real retail trade soaring 7.2% yoy
and 2.9% yoy (respectively) in January, whereas goods exports surprised negatively by falling for
the first time after eleven months.
Croatia: contributions to GDP (in pps)

12
8
4
0
-4
-8 Source: CBS, HAAB research
-12
-16
4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15
HOUSEHOLD STATE INVESTMENT STOCK NET TRADE GDP DOMESTIC DEMAND
We keep sub- We keep our sub-consensus 1.0% GDP growth forecast for 2016 as handsome benefits of lesser
consensus 1.0% GDP fiscal squeeze, even lower oil price and further monetary support are counterbalanced by higher
growth forecast for risks for euro area resillience to dwindle. That said, we expect weaker Chinese/EM growth and
2016 fading FX boost, alongwith volatile financial conditions to affect the main trading partners' activity
and credit conditions, and in turn Croatian exports and investment. Private consumption and EU-
funded capex is where we differ relative to consensus as entitlement spending prospects,
deleveraging, slower real income growth and poor jobs outlook temper enthusiasm, one-off
effects from PIT cut fade, and the absorption of EU money misses lofty expectations. Also,
monetary transmission stays impaired by risk aversion after CHF loan conversions (and huge
losses for banks), higher legal uncertainty and slow NPL resolution, which dilutes the benefits of
record low interest rates. In 2017, we expect growth to re-accelerate to 1.5% on stronger
investments and external demand. Downside risks lie also in stronger fiscal tightening after
negative EC comments on reform progress that would exert more drag on local demand by
dumping entitlement spending, public wage bill and consumption. Upside risks would stem from
sentiment-boosting internal devaluation efforts, incl pro-business tax system overhaul, improved
insolvency process, faster NPL sales, etc.
Another year of The renewed deepening of deflation reflects persistent declines in energy prices, lukewarm food
deflation prices and almost non-existent administrative price hikes. Price buoyancy has declined outside
energy and food as well, mainly in clothing and industrial goods, and reflects the fact that last
year's price-driving effect of the euro's sharp depreciation in 2H14 and early 2015 is fading,
depressing import prices. Services inflation has turned down afresh, despite stabilizing domestic
demand, last year's strongest real wage growth (3.7%) in eleven years and the recent minimum
wage hike. Taking all that into account, assuming 2016 Brent oil forecast around USD40/bbl (vs.
USD55/bbl in December), slowing real disposable income growth domestically and high sensitivity
of local prices to external shocks, we have significantly cut our 2016 average CPI forecast to -
0.5%. Given the anticipated turnaround in energy prices thereafter, alongside resuming core
inflation, we expect CPI inflation around 1.5% in 2017.
Page 11 March-16
Stable goods trade

Given deteriorating outlook for the key trading partners, export growth is set to slow, with external
deficit, C/A surplus will demand for investment goods the hardest hit. Of concern is the ongoing slide in the PMI order
be driven by EU books of the key trading partners mostly due to slowing Chinese economy. Given the expected re-
transfers and tourism acceleration in unit labour cost growth (after REER deflated ULC feel 11% since end-2011) and no
significant movement up the value chain since the EU accession, it will be crucial to foster internal
devaluation efforts, industrial/innovation policy changes, meaningful changes in the size of
distribution of Croatian companies (eg via strategic partnerships) and the quality of management.
Notwithstanding somewhat stronger local investment demand, we expect modest recovery in
consumer demand and even lower commodity prices to anchor goods trade deficit for 2016 around
15% of GDP. With the reversal of this year's slump in non-resident profit withdrawal given banks'
hefty losses after CHF conversions, we see C/A surplus down about 1.7pp to 2.8% of GDP. C/A
surplus will be, in our view, driven by EU transfers and another record tourist season.
Croatia: merchandise exports (seas.adj. 6mma, %, yoy)

30
20
10
-10
Source: Eurostat, CBS, HAAB research
Croatia CE4 average CEE average
-20
-30
Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16
CNB continues easing Improved net international investment position, lower short-term debt rollover needs (sub-30% of
amid stronger external GDP vs 32% in 2015), and the record 6-7% of GDP basic balance (C/A+FDI) surplus reduce
position and fiscal external vulnerability. Sunny C/A outlook, sound banks' net foreign position as utmost cushion
clarity
during external de-leveraging, and better 2015 fiscal outcome allowed the CNB to launch 4Y kuna
reverse REPO auctions, acting against soaring risk premia after CHF loan conversions. The
planned manadory reserve cuts to low single-digits by the end of the decade shows the CNB cares
about funding costs and pent-up demand for kuna lending in that the related steepening of the
kuna curve promotes kuna credit, and helps banks restore profit. While the CNB is now more
actively co-ordinating with the MinFin and the government, we think the ECB-driven risk appetite,
Croatia's strong external position and fiscal consolidation create fertile ground for further monetary
easing. The trigger for that would be either weaker credit impulse and/or deflation risks. Beyond
outright liquidity easing, CNB measures to relieve bank credit constraints could be conditional on
new lending and involve risk-sharing schemes with IFIs, incentive for securitization (openning the
space for new lending), de-leveraging benefits to the bank/customers, etc.
Lower EUR/HRK rate Despite stronger corporate FC demand, the kuna exhibited seasonally unusual strength thanks to
owes to high excess FC reduced risk perception after elections, positive banks' net foreign assets position, better 2015
liquidity fiscal outcome, early Easter and the start of tourist season. The sovereign rating affirmations
helped to price out the accumulated pre-election concerns over involuntary CHF loan conversions
and anti-banking policy, while Moody's downgrade only put Croatian rating on par with the
composite one by S&P and Fitch. Given constructive FX development, CNB's maintenance of
HRK10bn+ excess liquidity in the system, monetary easing bias, and the launch of structural
operations, short-end rates fell to record lows. After the beginning-of-year EM asset selloff, CESEE
credit has regained ground and term premia sank thanks to the further ECB easing and more
dovish Fed. Croatian bonds outperformed CESEE peers thanks to better fiscal newsflow, pre-
election policy risk mitigation and the CNB's 4Y reverse REPO.
With CHF loan conversions out of the way, moderating banks' risk provisioning, further fiscal risk
mitigation and another record tourist season, we expect the EUR/HRK to head south. We also see
goods trade development neutral for the local currency on average. Despite the CNB's dovishness
and ongoing private de-leveraging, we do not see ample liquidity easing as depreciationary since a
furhter build-up in banks' net foreign assets is acting as an offset, which importantly prevents any
negative impact on the market should banks' de-leveraging continue. Any adverse FX
development is limited by sound FC reserves, hefty C/A surplus, lower (external) refinancing
needs, manageable sovereign external funding options and the CNB's proven track record in
saferuarding FX stability. We see the EUR/HRK inside 7.50-7.65 in the near term, hence well within
boundaries of financial stability.
Page 12 March-16
Croatia: 5Y CDS spreads and EUR/HRK

5Y CDS spread EUR/HRK 7,73
590
7,59
480
7,45
370
260 7,31
Source: CNB, Blomberg, HAAB research

150 7,17
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Kuna rates stable Given the CNB's easing, still subdued bank credit and constructive FX outlook, we see short-end
rates around record lows. On top of HRK10bn+ interbank excess liquidity, the market is aware that
4Y reverse REPO could inject HRK3-4bn this year, depending on domestic lending outlook, banks'
limits, available collateral and future pricing. Notwithstanding pent-up demand for bank kuna credit
and refinancing of FX-linked kuna credit, new business volumes are still too low to exert a
meaningful impact on kuna rates. While we do not rule out profit-taking on Croatian bonds after
one of the strongest performance in CEE to date, hefty supply on the foreign markets in Q2/Q3,
and the Fed's resurgent tightening bias, we have constructive medium-term outlook. With the last
HRK4bn bond plus an overshoot in T-bill issues covering about a half of 2016 local issuance plan,
and the new EUR1.5bn Eurobond including pre-funding for 2017, we expect Croatian spreads to
re-tighten all the more in case of large fiscal/reform package for 2017, further ECB easing and
stronger demand for collateral in the CNB's structural operations. While refinancing risks are
contained for the time being, both push factors (less Fed accomodation) and pull factors will
increasingly challenge overall flows into EM assets over the medium term.
Is budgetary The 2016 net budget cuts of HRK3.3bn yoy show some awareness of the gravity of the situation
turnaround possible? just as MoF comments that public debt must be arrested. The planned 1.1pp consolidation to 2.7%
of GDP (3.0% on ESA 2010) is weighted three-fifths to revenue enhancement and two-fifths to cost
cuts. With the autonomous spending hikes (EU contributions, pension indexation, interest costs),
the nominal HRK2.5bn savings rest on material cost and subsidy cuts, as well as public wage and
social transfers freeze. Against relatively bullish macro forecasts, the 2016 tax projection (+4.7%
yoy) and fiscal deficit target are, however, at risk, as the key revenue drivers VAT and excises may
underperform should private spending disappoint as we expect.. We see 2016 deficit at 4.1% of
GDP on weaker GDP/inflation forecasts, and uncertain public wage bill. While the cabinet is
confident to re-negotiate an HRK1.95bn annualized public wage hike allowed by temporary 2%+
GDP growth, any further concession (eg unfreezing career-age-related wage hikes) has to be
offset by job/fringe benefit cuts. The last elephant in the room is the final EC-approved 2015 deficit
figure, where healthcare arrears (HRK2.5bn), unregistered debt (HRK1.8bn) and revolving credit
for shipyards (HRK0.5bn) also pose upside risks to 2016 fiscal targets. While in Phase 1 the idea
was to appease markets before more far-reaching 2017 budget, Phase 2 is more more compelling
though: given the assumed FX stability framework and concerns austerity is self-defeating, Croatia
must speed-up internal devalaution and supply-side measures via tax (and quasifiscal levy) system
overhaul and further labour reforms.
In defense of fiscal The main area Croatia will tackle to generate buy-in for consolidation strategy is the reform of
credibility public administration (saving HRK3-4bn), including rightsizing of many layers of management and
agencies, digitalization and procurrement synergies. The goal of administrative re-organization of
the country would be to have a smaller number of self-funded counties/municipalities, which also
cuts red tape in the local investment process. A special focus must be, in our view, on SOE
restructuring in light of paltry 1% of GDP return on state assets, especially when juxtaposed
against the size of assets (with 60%+ of GDP ranked 3rd in Europe), and compared to eg
Slovenia's 4.1% of GDP. The key entitlement reforms are seen in healthcare, plagued by costly
hospital network, and overspending in dyagnostics, procurrement, emergency service, followed by
the pension system. While the cabinet will further penalize early retirement, the extent to which
reforms finally tackle unsustainable pension outlays depends on further labour reforms and criteria
for war veterans' pension. . Come what may, some entitlement reforms are indeed low-hanging
fruits, and counter-cyclical monetary policy stimulus should not be underestimated as fiscal
credibility is maintained. The planned monetization of infrastructure (eg highways EUR1-2bn) and
privatization efforts (EUR500m) also show focus on de-leveraging operations.
Page 13 March-16
Croatia's data trends
CRO underperforms CESEE in growth terms Industrial production, 2010=100

10
120
Croatia Original indicies (ls) 114
8
Slovenia 115 Seasonally adjusted (ls)
6 Trend (rs)
Serbia 110 105
CESEE
4
105
2
100 96
0
95
-2
90 88
-4
85
-6
80 79
-8
75
-10
70 70
1Q08 2Q09 3Q10 4Q11 1Q13 2Q14 3Q15
Jun-99 Sep-01 Dec-03 Mar-06 Jun-08 Sep-10 Dec-12 Mar-15
Merchandise import cover (% 3mma) Change in export shares vs EU28, 2015-2008, (%)
70
35,0
30,0
67
25,0
64 20,0
15,0
61
10,0
2014 5,0
58 2015
2016F 0,0
55 -5,0
jan feb mar apr may jun jul aug sep oct nov dec
Budget balance and public debt (%/GDP) Spread on CRO USDs vs peers (bp)
CRO-ROM CRO-HUN
100
CRO-SRB CRO-SLO
160
95
-1
90 130
85 100
-3 80 70
75 40
-5 70
10
65
-20
60
-6 -50
BUDGET BALANCE (LS)
55
50 -80
PUBLIC DEBT (RS)
-8 45 -110
2009 2010 2011 2012 2013 2014 2015 2016F 2017F Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16
Source: Croatian National Bank, Central Bureau of Statistics, Ministry of Finance, European Commission, Bloomberg, HAAB research
Page 14 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Activity
Nominal GDP (HRKbn, current prices) 331,0 328,0 332,6 330,5 329,6 328,4 329,8 334,1 341,8
Nominal GDP (EURbn) 45,1 45,0 44,7 44,0 43,5 43,0 43,3 43,6 44,4
Real GDP (constant prices YoY, %) -7,4 -1,7 -0,3 -2,2 -1,1 -0,4 1,0 0,5 1,3
Private consumption (YoY, %) -7,5 -1,5 0,3 -3,0 -1,9 -0,7 0,6 0,4 0,9
Fixed investment (YoY, %) -14,4 -15,2 -2,7 -3,3 1,4 -3,6 1,0 2,3 3,6
Industrial production (YoY, %) -9,2 -1,4 -1,2 -5,5 -1,8 1,2 2,2 2,5 2,8
Prices
CPI inflation (average % YoY) 2,4 1,1 2,3 3,4 2,2 -0,2 -0,3 1,1 1,4
CPI inflation (end-year % YoY) 2,0 1,8 2,1 4,7 0,3 -0,5 0,6 0,9 1,8
PPI inflation (average % YoY) -0,4 4,3 6,4 7,0 0,5 -2,7 -2,9 1,9 1,9
Net wage rates (% YoY, nominal, euros) 0,9 1,3 -0,2 -0,4 -0,1 -0,4 3,5 0,8 0,7

State budget balance -5,9 -6,0 -7,5 -5,3 -5,4 -5,7 -5,5 -5,7 -4,6
Public debt 48,0 57,0 63,7 69,2 80,6 85,0 90,2 94,4 99,1
Gross public funding needs n/a n/a n/a n/a 16,3 21,3 21,6 19,5 22,1
External balance
Import of goods and services (EURbn) 17,236 17,153 18,291 18,092 18,555 19,083 19,755 20,516 21,338
Merchandise trade balance (EURbn) -7,456 -5,922 -6,382 -6,298 -6,589 -6,346 -6,116 -6,355 -6,626
Merchandise trade balance (% of GDP) -16,5 -13,2 -14,3 -14,3 -15,1 -14,7 -14,1 -14,6 -14,9
Current account balance (EURbn) -2,304 -0,487 -0,353 -0,057 0,354 0,280 1,248 1,197 1,075
Current account balance (% of GDP) -5,1 -1,1 -0,8 -0,1 0,8 0,7 2,9 2,7 2,4
Net FDI (EURbn) 1,3 0,9 1,2 1,2 0,9 1,3 1,8 1,8 1,9
FDI (% of GDP) 0 0
2,9 0 0
2,1 0 0
2,6 0 0
2,7 0 0
2,0 0 0
3,0 0 0
4,2 0 0
4,1 0 0
4,3
FDI cover (%) 56,8 193,1 333,9 2.072,4 n/a n/a n/a n/a n/a
Import cover (months of imports) 7,2 7,5 7,3 7,5 8,3 8,0 8,6 8,6 8,8
Debt indicators
Private (EURbn) 35,299 35,812 34,949 32,592 31,312 30,823 30,232 30,486 31,466

USD/HRK (end-year) 5,09 5,57 5,82 5,47 5,55 6,30 7,06 7,88 8,30
USD/HRK (average) 5,28 5,50 5,34 5,85 5,71 5,75 6,87 7,37 8,11
EUR/HRK (end-year) 7,31 7,39 7,53 7,55 7,64 7,66 7,70 7,72 7,72
EUR/HRK (average) 7,34 7,29 7,43 7,52 7,57 7,63 7,62 7,67 7,70
Money supply M1 (% YoY) -14,6 1,7 7,3 1,0 11,9 9,2 7,0 6,0 5,8
Broad money M4 (% YoY) 0,13 1,92 4,75 3,58 3,52 2,76 3,10 2,80 2,60
Domestic credit (% YoY, euros) 2,50 6,09 4,01 -2,55 -0,36 -2,61 -1,93 -0,84 1,76
ZIBOR 3M interest rate (average %) 8,90 2,40 3,30 3,19 1,26 0,73 1,05 1,68 1,95
HRK 1Y yield (average %) 7,39 4,19 3,72 3,93 2,54 1,56 1,64 2,05 2,35
HRK 10Y yield (average %) - 6,34 6,68 6,67 5,78 5,14 4,12 4,19 4,40
Source: Croatian National Bank, Central Bureau of Statistics, Ministry of Finance, HAAB research
Page 15 March-16
SEE MACROECONOMIC OUTLOOK SERBIA
Wake Me Up When Elections End

We see 1.5% GDP growth this year on still favourable investment outlook, as externa
downside risks prevail. We also see CPI around 2% yoy in 1H16, before moderate rise in
commodity prices and local demand push CPI into the targeted band in 4Q16 or early 2017
Following a bout of worsening in fiscal discipline this year, the key signposts to watch afte
elections are SOE restructuring and possible Eurobond issue.
2015 GDP growth driven The FY15 GDP growth - 0.7% yoy - was in line with our and market expectations of a mild recovery
by investments and driven by strong investments and export growth. The former can be attributed to the revival in
exports (post-flood) construction as new building permits jumped 26.3% yoy, while the value of completed
works soared 16.4% yoy. Net exports contribution was also positive, adding 0.3pp to the headline
figure on average, with positive trends mostly observed in the middle of last year. Persona
consumption decline slowed to -0.6% in 2015 from -1.3% in 2014, while fiscal consolidation
weighed on public spending (-1.3% yoy). While there are not many indicators to asses 1Q16
developments, the recent downgrades of the euro zones 2016 growth forecasts amid slightly
disappointing 4Q15 GDP print, softening external demand and volatile financial conditions suggest
exports growth and leveraged investments will likely moderate going forth.
Serbia: contributions to GVA (pps, %)

10
Agriculture Manufacturing 15%
Construction Wholesale/retail trade/transport
6 GDP (rhs)
10%
2 5%
-2 0%
Source: SRS, HAAB research
-6 -5%
1Q02 3Q03 1Q05 3Q06 1Q08 3Q09 1Q11 3Q12 1Q14 3Q15
Still favourable We keep GDP growth at 1.5% this year on still favourable investment outlook, and upgrade our
investment outlook for 2017 GDP forecast by 0.3pp to 1.8% yoy on better household consumption and private jobs
2016 meets external creation. While this years elections may render some delays in investments in 1H16, the new
downside risks cabinet may press ahead with reforms thereafter and make long-term investment growth more
sustainable. Investments should also profit from the NBS easing that bodes well for further banks
interest rates downfall. Beyond the apparent slowdown versus 2015, we expect capex-supporting
subsidies for a number of small-to-medium manufacturing FDIs (including that of German
Continental), 20 new Lidl retail outlets and Belgrade Waterfront project development to ensure still
decent 5% investment growth in 2016-2017 and in turn boost exports in the subsequent years.
Meanwhile, export growth should be capped by the slowing external demand, while imports are
driven by the aforementioned investments, implying largely neutral net export contribution this year.
The balance of risks seems skewed to the downside as Chinese/EM slowdown could be bigger
than currently implied. Domestic political risk in the mega-election year, if they were to materialize,
could also hit investor sentiment and aggregate consumption, while further worsening in financial
markets would see credit conditions tighten. Despite the planned public sector job cuts, we think
private job creation and real income gains, also thanks to subdued oil prices, pose some upside
risks to household consumption.
C/A deficit fully covered The FY15 C/A deficit fell 20% to EUR1.6bn, largely on the back of 56% higher service exports (IT,
by FDIs transport and tourism services) and 2.5% lower goods trade gap. These alongside 11.5% higher
remittances were large enough to offset 23.5% higher primary income deficit. Finally, FDI inflows
rose 45.6% to EUR1.8bn, covering the entire C/A deficit, while banks external de-leveraging
slowed down. In 2016, we see C/A deficit down to 4.4% of GDP as lower oil prices depress goods
imports, while disappointing 2015 financial results by some large dividend players like NIS Group
imply lower primary income deficit amid lower earnings repatriation. Meanwhile, notwithstanding
the weaker outlook for the key trading partners, it still remains overall positive. The latter implies
higher remittances that would also underpin domestic consumption recovery. Finally, still low core
rates bode well for interest expenses, lowering income deficit and so the overall C/A deficit.
Page 17 March-16
ECB QE opens up We think the C/A funding mix will remain largely unchanged this year. Given largely unchanged FDI
Eurobond possibilities outlook after the cancelled Telekom Serbia privatization, and ongoing private sector de-leveraging,
we expect the sovereign to rely on portfolio investments again. On the other hand, the IMF deal
gives the sovereign a source of stability, acting as a buffer in case of materialization of pessimistic
scenarios, and helping to reduce funding cost in the base case. While we think the ECB QE
expansion and drastically lower term premia give the sovereign a window of opportunity for a
favourable Eurobond issuance, the recent official statements suggest Serbia will not rush into new
bond issuance as long as the fiscal picture is favourable. The latter would also imply the sovereign is
likely to rely on credit lines with the UAE.
Inflation surprises on As for CPI inflation, although prices have recovered slightly from 1Q15 record lows, 4Q15 average
the downside inflation of just 1.4% yoy suggests still a long way to go before re-entering the NBS target band.
Such mild pressures reflect a continuing slide in global oil prices and agricultural commodities,
generally subdued import price pressures and domestic disinflation factors. Notwithstanding the fact
that January CPI print is the first positive after three consecutive months of deflation, the annual
inflation once again missed the target band. The observed slight acceleration in monthly price
pressures owe to higher food prices, notably that of vegetables in a seasonal fashion, while
downside pressures came from post-holiday clothes and footwear sales. Meanwhile, falling inflation
expectations may be filtering through to an increasing number of core subcomponents and once this
process has taken root, it will take a longer-lasting and powerful counter-pressure to reverse.
Looking ahead, we see CPI around 2% yoy on average in 1H16, before the assumed moderate rise
in primary commodities and domestic aggregate demand pushes CPI back into the targeted band in
4Q16 or early 2017. Upside inflation potential stems from possible administrative price hikes (not
likely in 1H16 due to elections) and low base effects. That said, we see average CPI inflation around
2.5% yoy in 2016.
Serbia: CPI inflation and NBS policy rate

18
16
CPI (% YoY) NBS policy rate (%)
14
12
10
8
6
4
2 Source: NBS, SORS, HAAB research
0
Dec-06 Dec-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
NBS treads cautiously, The dinar depreciation pressures early this year have been pronounced and mainly driven by the
further easing on the global uncertainties and resurgent broad-based EM outflows, shaping a similar trajectory seen in
cards
other regional free-floaters such as RON and HUF. Nevertheless, as Serbia suffers from still
relatively large (albeit narrowing) C/A gap (4.8% of GDP) compared to regional peers, we think the
dinar is seemingly on a mild depreciation trajectory in the medium term, whereas some upward
spikes might be largely caused by potential global risk-off episodes, re-accentuating carry trade
outflows from peripheral debt markets. That said, the NBS played it safe and executed only one
25bp policy rate cut during 1Q16. The NBS outlined external uncertainties (slowing global economy,
Fed policy outlook) as the key reason behind its cautiousness, which in our view (although not
explicitly mentioned) is influenced by the ongoing dinar depreciation pressures.
With the expectations of a low-flationary environment in the near term, the weak FX pass-through
effect and the observed de-coupling of wage growth and inflation, we see the NBS easing by a
cumulative 50-75bp in 1H16, while keeping a close eye on movements in international financial
markets and its assessment on potential inflationary effects. Namely, the NBS is taking advantage of
favourable timing to ease its monetary policy, alongside supportive domestic factors i.e. subdued
inflation, meek growth recovery and the IMF deal. At the same time, uncertainty over the pace of
Fed rate hikes also plays an important role on the EM external debt, together with the strong USD,
which could somewhat soften positive effects from the ECBs QE. However, should the sovereign
embark on SOE restructuring to the benefit of more fiscal consolidation, we see space for slightly
more monetary easing or at least delaying a rate lift-off for longer than currently assumed.
Page 18 March-16
Dinar continued to Notwithstanding the major fiscal consolidation in 2015, with the deficit cut by 2.9pp to 3.7% of GDP,
depreciate gradually the latter is still too high to ensure a durable recovery in public debt trends. This alongside relatively
large C/A gap is one of the key reasons behind a projected mild depreciation trajectory of the dinar.
However, the IMF-related 3Y pre-cautionary SBA acts as a credibility anchor, and with the recent
NBS acknowledgement it will intervene to offset exaggerated outflows, we expect relatively modest
2-3%-alike appreciation of EUR/RSD in 2016. At the end of January, FX reserves hit EUR10.1bn,
covering 261% of money supply (M1) and more than six months worth of imports of goods and
services. The mentioned implies the NBS has more than enough ammunition to offset dinar
depreciation pressures.
Serbia: T-bills/notes yields
91 days 182 days 365 days 53 weeks
18 months 2 years 3 years NBS REPO
16,4%
14,0%
11,6%
9,2%
6,8%
4,4%
Source: MinFin, HAAB research
2,0%
Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15
In its 2015-2017 Fiscal Strategy, Serbia envisaged its 3Y plan had three main elements (i) a deficit
Worsening fiscal
dislipline in the election reduction to below 3% of GDP, (ii) reform of SOEs and (iii) privatization. With the steps made in
year 2015, Serbia is only a half-way through, if so, to meet expectation before the overall fiscal agenda.
The most significant success was made concerning the budget deficit reduction, but this was still not
enough for a drop in public debt. The planned 0.75pp fiscal consolidation this year will be difficult to
achieve without major 2015-alike measures, and given that salary and pension freeze is partly
reversed and downsizing in the public sector came to a halt given disagreement on severance
payments with the IMF. We expect unplanned liabilities (SOEs, court decisions), poor budget
planning (subsidies, fines), lower SOEs dividend transfers to budget and potentially higher public
capex will likely push 2016 deficit above 4% of GDP. After unfreezing pensions and majority of
salaries in the public sector in 2016, the pressures will only increase in 2017 and for that reason it is
crucial that the sovereign proactively engages in reform of SOEs, resolves the status of strategic
enterprises in due time (without creative solutions), begins with tax administration reform and
ensures sustainable level of expenditures for pensions and salaries.
Domestic (re)financing as The combination of oil downside pressures with surprises out of Chinas economy weighed on the
planned emerging markets since early this year. Despite evident outflows from Serbias assets in 1Q16, the
MinFin still raised T-bill/T-bond stock by roughly RSD34bn in 1Q16, mainly in the 2-3Y sector, while
at the same time continuing to lower interest cost. Meanwhile, global risk aversion was evident in
Februarys planned RSD110bn 3Y benchmark bond placement, with the MinFin failing to issue not
even a third of the targeted amount. While the tide has recently shifted somewhat and the MinFin
relied more on domestic bank credit, with the sovereigns refinancing needs in 2016 as much as
EUR6bn (roughly half of that euro-denominated), we think it would be wise to consider tapping
foreign markets once election noise vanishes, given favourable ECB tailwinds.
Further spreads Going forth, we see risk appetite similar to that in 1Q16, except maybe for shorter (3M/6M) maturity
tightening only upon given relatively lower risk profile. The market is concerned about the impact of elections outcome on
more fiscal efforts long-overdue public sector agenda, delays in IMF program, lengthy reform implementation, and
potentially worse fiscal discipline this year. While Serbian spreads (above 330bp) have lagged the
recent CESEE spread tightening - largely due to early election noise, we expect them to compress
by 50-70bp (in the medium term, though) should the new government term open Serbia a window to
move forward with fiscal consolidation and open the EU accession chapters. Conversely, deviations
from the IMF programme, notably in case of poor SOEs restructuring and subdued GDP growth
would undermine debt valuations. Given finally constantly reduced expectations for (anyhow a lot
slower) global monetary policy normalization (relative to a historical norm) to the benefit of EM
assets better performance, we do not see material outflows from EM assets, nor a negative
spillover to Serbian assets for the time being. Banks readiness to take up the funding slack will
likely continue to act as a buffer to postpone issuances if the sovereign consider the market
environment as still too volatile. It nevertheless raises medium term concerns of crowding out and
potential risks if concerns about debt sustainability arise.
Page 19 March-16

2009 2010 2011 2012 2013 2014 2015F 2016F 2017F
Balance sheet
Assets (EURm) 51.252 53.386 55.395 54.123 54.564 54.719 53.625 53.357 53.624
Assets (%, YoY) -0,6 4,2 3,8 -2,3 0,8 0,3 -2,0 -0,5 0,5
Assets (% of GDP) 113,7 118,6 123,8 123,1 125,4 127,1 122,1 120,1 117,1
Gross loans (EURm) 35.040 37.173 38.665 37.678 37.543 36.561 35.856 35.555 36.180
Gross loans (%, YoY) 2,5 6,1 4,0 -2,6 -0,4 -2,6 -1,9 -0,8 1,8
Gross loans (% of GDP) 77,7 82,6 86,4 85,7 86,3 84,9 81,6 80,0 79,0
Deposits (EURm) 29.134 29.215 29.139 30.001 31.014 31.881 32.725 33.546 34.515
Deposits (%, YoY) 2,3 0,3 -0,3 3,0 3,4 2,8 2,6 2,5 2,9
Deposits (% of GDP) 64,6 64,9 65,1 68,2 71,3 74,1 74,5 75,5 75,4
Performance
Net interest income (EURm) 1.307 1.485 1.540 1.449 1.360 1.366 1.199 1.220 1.336
Net interest income (%, YoY) -3,9 13,6 3,7 -5,9 -6,2 0,5 -12,2 1,8 9,4
Total operating income (%, YoY) 6,7 5,3 2,0 -10,4 -4,5 0,0 -17,7 8,1 12,1
Pre-provision profit (EURm) 1.059 1.093 1.127 972 920 934 574 692 899
Pre-provision profit (%, YoY) 13,5 3,1 3,1 -13,7 -5,4 1,6 -38,6 20,6 30,0
Provision charges (EURm) 473 510 500 501 780 645 1.088 897 868

Pre-tax ROAA (%) 1,1 1,1 1,2 0,9 0,3 0,5 -0,9 -0,4 0,1
Pre-tax ROAE (%) 8,4 8,0 8,4 6,2 1,9 3,9 -7,3 -3,0 0,4

NPL ratio (%) 7,8 11,2 12,4 13,9 15,7 17,1 17,5 17,6 17,8
NPL coverage (%) 42,8 38,8 41,4 42,6 46,2 51,0 62,8 72,9 80,1
Provision charges (% of PPP) 44,7 46,7 44,4 51,5 84,8 69,0 189,6 129,7 96,6
Source: CNB, HAAB research
Corporate sector de- De-leveraging continued in 2015, with the net loans down 1.7% yoy mainly owing to accelerated
leveraging speeded up corporate credit contraction (-4.8% yoy), but also due to 1.2% decrease in household loans. That
said, de-leveraging would have been even more pronounced had it not been for 2.5% higher
lending to public sector. Looking ahead, given the generous CNB liquidity support, kuna interest
rates are expected to decline further going forth, which bodes well for new disbursements, bearing
in mind that 68.4% of new loans in January were in kuna. At the same time the uncertainty in the
aftermath of CHF loan conversions, subdued labour market developments and unfavourable
demographic trends are expected to stay the main drag. All in, we expect de-leveraging to slow
down in 2016 to -0.3% yoy, but solely on the back of higher lending to households, while corporate
loans are expected to exhibit overall negative yoy development, influenced by further tax-
incentivized NPL resolutions and some downside risks to private investments amid deteriorating
conditions in the euro zone and lower than expected EU funding absorption.
Deposit growth speeded On the other side, deposit growth speeded up to 5.6% yoy in 2015 (vs. prev 2.8% in 2014) thanks
up to strong growth of corporate and retail sector deposits (+22.2% and +3.1%, respectively) amid the
record tourist season and BAT takeover of TDR. In 2016, we expect somewhat slower deposit
collection at 4.1% given the fact that low passive interest rates imply stronger funds shifting to the
investment alternatives. LTD ratio declined by 0.8pp to 107.0% at YE15, and we expect similar
performance to continue as banks turn further to self-funded business models. After facing
significant losses in 2015 given unfavourable CHF solution, we expect the banking sector to face
headwinds in 2016 as well, as NII will stay pressured by lower active interest rates.
Page 16 March-16
Serbia's data trends
Budget and current account gaps (% of GDP) CPI contribution - key categories (pps)
vs. real GDP growth (%)
0 6 30 Transport Housing related items
Food Millk, cheese and eggs

26
Bread and cereals Food and beverages
4
-4 22
18
2
-8 14
0 10
-12 6
-2
BUDGET DEFICIT (LHS)
CAD (LHS)
2
GDP (RHS)
-16 -4 -2
2009 2010 2011 2012 2013 2014 2015 2016F 2017F Jan-07 Jun-08 Dec-09 Jun-11 Dec-12 May-14 Nov-15
External trade by key trade partners NBS active in the market NBS buys 123,8
70
GER NBS interventions
euros
2,4
(EURm, lhs)
ITA
Import of goods ( in EURbn, 12M15)
EUR/RSD (rhs)
45 122
2 RUS
CHI
20
1,6
120,2
1,2 -5
HUN
118,4
0,8 ROM B-H -30 NBS sells
euros
0,4 116,6
-55
Size of the bubble shows total trade share, (X+M)/GDP
0
-0,5 0 0,5 1 1,5 2 2,5 -80 114,8
Exports of goods ( in EURbn, 12M15) Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16
Consolidated government budget balance (RSDbn) Corporate external de-leveraging comes to a halt?
20 (EURbn)
0
-20 25 Corporate
-40 Banks
-60 Public
20
-80
-100
-120 15
2012
-140
2013
-160
2014 10
-180
2015
-200
-220 5
-240
-260 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-05 Oct-06 Jul-08 Apr-10 Jan-12 Oct-13 Jul-15
Source: National Bank of Serbia, Statistical Office of the Republic of Serbia, Ministry of Finance, Consensus Economics, Bloomberg, HAAB research
Page 20 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Activity
Nominal GDP (RSDbn,current prices) 2.880 3.067 3.408 3.584 3.876 3.908 3.983 4.121 4.340
Real GDP (constant prices YoY, %) -3,1 0,6 1,4 -1,0 2,6 -1,8 0,7 1,5 1,8
Private consumption (YoY, %) 0,0 -0,6 0,9 -2,1 -0,4 -1,3 -0,6 0,1 0,5
Fixed investment (YoY, %) -22,5 -6,5 4,6 13,2 -12,0 -3,6 8,1 5,1 5,0
Industrial production (YoY, %) -12,1 1,2 2,5 -2,2 5,5 -6,5 8,4 4,3 4,1
Prices
CPI inflation (average % YoY) 8,4 6,5 11,0 7,8 7,8 2,1 1,4 1,8 3,1
CPI inflation (end-year % YoY) 6,6 10,2 7,0 12,2 2,2 1,7 1,5 2,8 3,1
PPI inflation (average % YoY) 5,6 12,7 14,2 5,6 3,6 0,7 0,4 2,9 4,9
Net wage rates (% YoY, nominal, euros) -16,0 -1,8 12,3 -1,8 6,1 -2,8 -2,5 2,2 2,0

Public debt 32,1 40,8 44,2 55,9 58,8 68,3 76,5 80,9 83,3
Gross public funding needs 18,3 12,6 13,3 15,4 16,1 17,6 17,0 18,0 19,7
External balance
Export of goods and services (EURbn) n/a n/a n/a 11,498 13,937 14,451 15,618 16,271 16,852
Import of goods and services (EURbn) n/a n/a n/a 16,993 17,782 18,096 18,899 19,441 19,862
Merchandise trade balance (EURbn) n/a n/a n/a -5,634 -4,159 -4,111 -4,006 -4,024 -3,900
Merchandise trade balance (% of GDP) n/a n/a n/a -17,8 -12,1 -12,3 -12,1 -12,1 -11,3
Remittances, net (EURbn) n/a n/a n/a 1,989 2,217 1,931 2,155 2,263 2,286
Current account balance (EURbn) -1,770 -2,082 -3,305 -3,640 -2,098 -1,985 -1,590 -1,465 -1,371
Current account balance (% of GDP) -5,8 -7,0 -9,9 -11,5 -6,1 -6,0 -4,8 -4,4 -4,0
Net FDI (EURbn) n/a n/a n/a 0,7 1,3 1,2 1,8 1,9 2,0
FDI (% of GDP) n/a n/a n/a 2,1 3,8 3,7 5,5 5,8 5,9
FDI cover (%) n/a n/a n/a 18,4 61,9 62,3 113,2 131,2 149,4
Import cover (months of imports) n/a n/a n/a 7,7 7,6 6,6 6,6 6,6 6,9
Debt indicators
Private (EURbn) 14,724 14,710 13,352 13,460 12,581 11,543 11,043 10,743 10,683
Gross external debt (% of exports) n/a n/a n/a 223,0 184,7 178,1 168,0 160,0 154,2

USD/RSD (end-year) 66,73 79,28 80,87 86,18 83,13 99,46 111,64 125,09 134,13
USD/RSD (average) 67,47 77,91 73,34 88,12 85,17 88,54 108,94 117,71 131,19
EUR/RSD (end-year) 95,9 105,5 104,6 113,7 114,6 121,5 121,8 125,1 127,4
EUR/RSD (average) 94,0 103,0 102,0 113,1 113,1 117,2 120,8 123,6 125,9
Money supply M1 (% YoY) -0,8 -10,9 16,9 -3,3 24,8 5,2 12,5 13,0 8,0
Broad money M3 (% YoY) 12,3 2,6 11,2 0,7 3,7 3,0 6,2 7,0 5,4
Domestic credit (% YoY, euros) 7,4 15,3 8,9 0,8 -5,2 -2,3 2,4 2,7 2,3
NBS policy rate (average %) 13,08 9,13 11,54 10,14 11,00 8,79 6,08 4,48 5,58
NBS policy rate (end-year %) 9,50 11,50 9,75 11,25 9,50 8,00 4,50 5,25 5,75
6M BELIBOR interest rate (average %) 14,52 11,00 13,13 12,00 10,40 8,53 6,43 3,81 5,41
Source: National Bank of Serbia, Statistical Office of the Republic of Serbia, Ministry of Finance, HAAB research
Page 21 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Balance sheet
Assets (EURm) 22.530 24.015 25.211 25.322 24.827 24.545 27.202 28.194 29.043
Assets (%, YoY) 12,3 6,6 5,0 0,4 -2,0 -1,1 10,8 3,6 3,0
Assets (% of GDP) 73,5 80,7 75,4 79,9 72,5 73,6 82,5 84,6 84,3
Gross loans (EURm) 13.544 15.621 17.013 17.148 16.255 15.879 16.255 16.687 17.076
Gross loans (%, YoY) 7,4 15,3 8,9 0,8 -5,2 -2,3 2,4 2,7 2,3
Deposits (EURm) 11.440 11.897 13.099 13.310 13.634 13.967 14.788 15.147 15.661
Deposits (%, YoY) 14,2 4,0 10,1 1,6 2,4 2,4 5,9 2,4 3,4
Deposits (% of GDP) 37,3 40,0 39,2 42,0 39,8 41,9 44,8 45,4 45,4
Performance
Net interest income (EURm) 1.070 1.052 1.131 1.025 1.044 1.063 1.104 1.162 1.229
Net interest income (%, YoY) -9,2 -1,7 7,6 -9,4 1,9 1,8 3,9 5,2 5,8
Total operating income (%, YoY) -12,2 -3,5 3,2 -6,7 -3,3 3,8 4,2 6,1 7,7
Pre-provision profit (%, YoY) -20,3 -5,8 9,6 -7,5 -11,6 4,8 9,9 12,9 16,5
Provision charges (EURm) 384 316 313 339 510 490 495 527 625

Pre-tax ROAA (%) 1,0 1,1 1,2 0,9 -0,1 0,1 0,3 0,5 0,5
Pre-tax ROAE (%) 4,4 5,1 5,9 4,3 -0,3 0,6 1,7 2,5 2,6

NPL ratio (%) 15,7 16,9 19,0 18,6 21,4 21,5 22,7 23,9 25,2
NPL coverage (%) 50,9 47,2 51,0 50,0 50,9 56,7 60,0 60,2 60,8
Source: NBS, HAAB research
Corporate lending enters Following a two-year decline, loans increased by 2.4% for the FY15, driven by accelerating retail
positive territory segment growth (+4.1%). Households lending was mainly driven by refinancing needs debt,
followed by housing lending, with new disbursement data showing the strongest contribution from
dinar loans where interest rates downfall continued with the average interest rate almost 5pp yoy
lower at 12.05% at YE15. Corporate credit, which has been in the red since early 2013, eked out a
1.4% yoy gain at YE15. Lastly public sector saw a mild 0.5% yoy decline in 2015. Looking ahead,
we upgrade our 2016 loan growth forecast by 1.1pp to 2.7%, with retail segment staying the key
growth driver on the back of significantly looser lending conditions on dinar cash and refinancing
loans and FX housing loans, which together account for more than 85% of total retail loans. In spite
of corporate restructuring needs and ongoing balance sheet cleaning, we expect corporate to post a
moderate positive contribution to the overall lending thanks to looser lending conditions and
stronger private investments.
Deposits grew 5.9% in On funding, deposits grew 5.9% for the FY15, mainly supported by higher corporate deposits
FY15 (+11.5% vs. prev 0.5% in 2014) and followed by household deposits (+2.9%). Looking forward, we
expect somewhat lower deposit growth of 2.4% this year as multi-year low passive interest rates
may encourage movement into alternative savings instruments. Funding gap or excess of issued
loans above collected deposits is thus expected to increase to roughly 4.6% of GDP, while loan-to-
deposit ratio is at 110% with a tendency of slight declining in the mid-term. Regarding profits, we
expect yet-to-be published FY15 data will show roughly 4% higher TOI, which together with slightly
higher opex and provision charges implies pre-tax profit of around EUR90m.
Page 22 March-16
SEE MACROECONOMIC OUTLOOK BOSNIA AND HERZEGOVINA
IMF Lending Remains Top Priority

With our assumptions largely in place, we keep our GDP growth expectations of 3.1% in
2016 intact with investments staying the strongest growth driver. Meanwhile, concluding a
new loan arrangement with the IMF remains crucial as in the absence of the latter both
entities are cash strapped. Growing export and higher remittances will bring C/A deficit
lower while deflationary pressures that still prevailed early this year will begin to ease and
inflation is likely to pick up to 1.8% by year-end.
High frequency data After an average 3.3% GDP growth in the year to September, high frequency data suggest
suggest mixed somewhat mixed performance in 4Q15. On one hand, industrial production growth accelerated to
performance 3.9% yoy (vs. 3.1% average growth in 9M15), and although the latter has not spilled over into
higher export (-6.4% yoy in 4Q15), a simultaneous 18.3% yoy import slump pulled up the FY15
import cover by 407bp yoy to 56.8% (3mma), suggesting we can expect positive net export
contribution to GDP growth. On the other hand, slight increase in employment and real net wage
growth managed to keep real retail trade growth on relatively high levels (+5.3% yoy in 4Q15),
albeit slowing from 8.8% yoy average during 9M15. Furthermore, construction activity saw a 3.9%
yoy decrease in the 4Q15 (vs. -1.6% yoy in 9M15) given high base effect caused by reconstruction
in the aftermath of floods in 2014. All in all, we keep our view of a 2.4% GDP growth for the FY15
intact.
Investments continues With our assumptions largely in place, we keep our view of a 3.1% GDP growth in 2016, mainly
to support growth driven by higher private investment activity. Namely, according to the current information, the
contracted FDI is expected to exceed EUR450m in 2016 (vs. EUR111.9m during 9M15), with most
of it directed to the electricity, tourism and transport sectors. That said, the much vaunted
EUR2.3bn Buroj Ozon real estate project is starting this year, alongside several motorway section
constructions, and power plant Stanari and hydro power plant Ulog are expected to be completed
this year. In spite of generally lower domestic demand of key trading partners, we still see exports
driven by easier access to the EU markets (Stabilization and Association Agreement has been put
into force last summer), while domestic demand is expected to increase further on the back of
employment growth and wages. We see key risks to our forecasts stemming from ongoing political
uncertainties as any prolonged political stalemate poses risks to the sovereigns planned funding.
FY16 budget gap at Both entities have passed their 2016 budget bills, whereby Federation B-H expects to see 12.7%
2.6%/GDP yoy higher revenues mostly on the back of 9.9% higher tax collection, which in spite of solid
economic growth, looks to us a bit too optimistic with no concrete info on tax policy. In addition,
around EUR30m is expected to be collected from the sale of minority stakes in SOEs. Expenditures
are set to increase by 3.2% yoy, whereby 64% of total outlays goes to debt repayment. While
projected revenues surpass expenditures by 24.3%, the cabinet is still puzzlingly eyeing EUR360m
in new debt. Since the new R-S budget now includes contributions to pension payments, it is not
fully comparable to the last years one. However, it is targeting a surplus of around EUR5m, which
again seems too optimistic in the absence of the details how to achieve it. In our opinion, budget
deficit will decrease slightly to 2.6% of GDP.
The IMF support The growing excess liquidity in the euro zone, general lack of investment alternatives and favorable
remains a high priority financial conditions enabled both entities to secure cash through local debt issuance at lower
yields. In spite of increased debt issuance with the longer maturities, R-S and FBiH are faced with
EUR36m and EUR67m of maturities (respectively) in the rest of 2016. With both entities cash
strapped, this only highlights the importance of securing EUR1bn-alike IMF lending as top priority.
The latter has been primary conditioned by adopting labor reforms and budget bills for the current
year, but still prolonged political stalemate poses risks to the expected deal conclusion.
C/A deficit lower, 2016 As for the external balance, we expect yet-to-be published FY15 data to show 1.6pp lower C/A gap
average CPI inflation at of 6.1% of GDP on the back of moderate 3.5% export growth combined with 2.1% lower imports
1.1%
and slightly higher remittances. For 2016, we see the C/A gap narrowing further to 5.8% of GDP as
we expect further remittances growth, while goods trade gap will continue to narrow as export
growth is expected to outpace that of imports thanks to the aforementioned easier access to the EU
market. As for prices, we expect deflationary pressures that still prevailed early this year will begin
to ease toward stagnation by the spring and inflation to pick up to 1.8% by year-end, which would
shape the 2016 CPI average of 1.1%. Inflationary pressures mostly arise from low base effect as oil
prices faced significant decline in 2015, while risks to our view stem from possible further oil price
decline and low inflationary pressures abroad.
Page 23 March-16
Bosnia and Herzegovina's data trends
Budget and current account gaps (% of GDP) Industrial production (%, yoy, s-a, 3mma)
vs. real GDP growth
140
6 Intermediate
0 Non-durable goods
130 Energy
5 Industry Total
-3 120
3
110
-6
2
100
-9
0
90
-12 -1
BUDGET DEFICIT (LHS) 80
CAD (LHS)
GDP (RHS)
-15 -3 70
2009 2010 2011 2012 2013 2014 2015 2016F 2017F Mar-07 Dec-08 Sep-10 Jun-12 Mar-14 Dec-15
Key CPI contributions (pp) Private credit dynamics (%, YoY)
9,8
30
8,3 Food Housing Transport 25
Corporate
6,8
20
Retail
5,3 15
3,8 10
2,3 5
0,8 0
-0,7 -5
-10
-2,2
Jan-06 Jun-07 Nov-08 Apr-10 Sep-11 Feb-13 Jul-14 Dec-15
Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16
Basic balance (C/A+net FDI as % of GDP) Public finances (% of GDP)

0 50
0
-1
45
-3
-2
-3 40
-5
-4
35
-8
-5 State budget balance (lhs)
Public debt (rhs)

-6 30
-10
2009 2010 2011 2012 2013 2014 2015 2016F 2017F
2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Source: Central Bank of Bosnia and Herzegovina, The Agency for Statistics, IMF, Ministry of Finance, HAAB research
Page 24 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Activity
Nominal GDP (BAMbn, current prices) 24,3 24,9 25,8 25,7 26,3 26,8 27,1 28,3 29,7
Real GDP (constant prices YoY, %) -2,8 0,8 1,0 -1,2 2,5 1,1 2,4 3,1 3,0
Private consumption (YoY, %) -2,4 -0,8 2,6 -2,3 -1,0 1,8 2,4 3,0 2,7
Fixed investment (YoY, %) -21,4 -15,9 16,5 -3,1 2,0 4,5 6,5 7,2 6,2
Industrial production (YoY, %) -3,3 1,6 5,6 -5,2 6,7 0,1 3,3 4,8 5,0
Unemployment rate (ILO, average, %) 24,0 27,2 27,6 28,0 27,4 27,5 27,2 26,7 26,1
Prices
CPI inflation (average % YoY) -0,4 2,1 3,7 2,1 0,1 -0,9 -1,0 1,1 1,8
CPI inflation (end-year % YoY) 0,0 3,1 3,1 1,8 -1,2 -0,4 -1,3 1,8 1,6
PPI inflation (average % YoY) -3,2 0,9 3,8 1,5 -2,2 -0,5 2,6 1,8 1,0
Net wage rates (% YoY, nominal) 5,4 1,3 2,0 1,2 0,1 0,4 0,0 1,8 1,4

Public debt 36,2 39,3 39,7 43,6 41,6 45,1 48,4 48,9 48,3
External balance
Import of goods and services (EURbn) -6,180 -6,649 -7,484 -7,483 -7,414 -7,943 -7,891 -8,147 -8,448
Remittances (EURbn) 1,028 1,015 1,027 1,070 1,097 1,163 1,181 1,205 1,223
Net FDI (EURbn) 0,2 0,3 0,3 0,3 0,2 0,4 0,4 0,5 0,4
FDI (% of GDP) 1,4 2,1 2,6 2,0 1,7 3,1 2,5 3,5 2,6
FDI cover (%) 21,7 34,8 27,1 22,3 29,1 40,0 41,3 60,4 48,8
Debt indicators
Private (EURbn) 4,159 3,348 3,044 3,211 3,036 2,836 2,936 3,031 3,166

USD/BAM (end-year) 1,37 1,46 1,51 1,48 1,42 1,61 1,79 1,96 2,06
USD/BAM (average) 1,40 1,47 1,40 1,52 1,47 1,47 1,76 1,84 2,02
EUR/BAM (end-year) 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96
EUR/BAM (average) 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96 1,96
Money supply M1 (% YoY) 6,2 7,9 6,5 6,5 7,2 6,0 5,1 5,9 6,7
Broad money M2 (% YoY) 2,17 7,22 5,80 3,41 7,94 7,30 7,99 7,72 6,35
Domestic credit (% YoY) -3,17 3,51 5,28 4,12 0,53 2,79 2,38 4,69 5,90
EURIBOR 3M interest rate (average %) 1,22 0,81 1,39 0,58 0,22 0,21 -0,02 -0,29 -0,30
Source: Central Bank of Bosnia and Herzegovina, The Agency for Statistics, IMF, Ministry of Finance, HAAB research
Page 25 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Balance sheet
Assets (EURm) 10.742 10.828 11.196 11.414 11.794 12.299 12.758 13.407 14.183
Assets (%, YoY) -0,5 0,8 3,4 1,9 3,3 4,3 3,7 5,1 5,8
Assets (% of GDP) 86,4 85,1 85,0 86,7 87,8 89,8 91,9 92,7 93,5
Gross loans (EURm) 7.184 7.436 7.828 8.151 8.194 8.423 8.623 9.027 9.560
Gross loans (%, YoY) -3,2 3,5 5,3 4,1 0,5 2,8 2,4 4,7 5,9
Deposits (EURm) 6.183 6.407 6.643 6.814 7.285 7.861 8.454 9.111 9.602
Deposits (%, YoY) 1,8 3,6 3,7 2,6 6,9 7,9 7,5 7,8 5,4
Deposits (% of GDP) 49,7 50,4 50,4 51,8 54,2 57,4 60,9 63,0 63,3
Performance
Net interest income (EURm) 362 366 396 389 385 383 386 411 439
Net interest income (%, YoY) 1,0 1,1 8,2 -1,8 -1,0 -0,5 0,8 6,5 6,8
Total operating income (EURm) 581 609 620 610 618 623 640 682 715
Total operating income (%, YoY) -0,7 4,8 1,8 -1,5 1,2 0,8 2,8 6,5 4,8
Pre-provision profit (%, YoY) 6,7 15,7 -5,1 -0,8 -11,1 15,8 7,3 16,1 8,7
Provision charges (EURm) -175 -275 -125 -130 -192 -117 -100 -132 -158

Pre-tax ROAA (%) 0,1 -0,5 0,8 0,7 -0,1 0,8 1,0 1,0 0,9
Pre-tax ROAE (%) 1,3 -4,4 5,9 4,8 -0,5 5,6 7,1 6,8 6,3
Operating expense (% of assets) -3,6 -3,6 -3,7 -3,6 -3,7 -3,4 -3,3 -3,2 -3,1

NPL ratio (%) 5,9 11,4 11,8 13,5 15,1 14,2 13,7 14,0 14,9
NPL coverage (%) 34,5 43,7 66,3 65,9 66,7 69,7 71,0 66,3 63,2
Provision charges (% of PPP) -92,2 -124,8 -60,0 -62,8 -104,1 -55,1 -43,5 -49,8 -54,7
Source: CBBH, banking agencies, HAAB research
Corporate deleveraging Total loan growth decelerated somewhat in 2015 (+2.4% vs +2.8% in 2014) as public sector loans
decelerates towards faced a significant slowdown (+3.1% vs +22.0% in 2014) from a high base effect caused by 2014
stagnation floods-related funding needs. Furthermore, retail credit growth decelerated somewhat as well
(+4.8% vs +5.1% in 2014) in spite of generally rising employment and a solid net wage growth. On
the other hand, corporate sector de-leveraging managed to decelerate towards stagnation (-0.3%
yoy vs -1.4% yoy in 2014). Looking into 2016, we expect the overall lending growth to accelerate to
4.5%, given solid growth prospects, improved lending conditions and negative interest rates in euro
zone, which is apparently forcing banks to withdraw historically hefty foreign asset and increase
credit activity. As for the quality of loan book, NPL ratio continued its downward path and dropped to
13.7% at end-2015, from a 14.2% the year before. Bearing that in mind along with positive
economic developments, we have downgraded our 2016 NPL ratio expectations to 14.0%.
Private deposit growth In terms of funding, deposit growth decelerated slightly in 2015 to 7.5% (vs 7.9% in 2014) mainly on
accelerates the back of slower public deposit growth to 7.0% (vs 26.5% in 2014), whereby we do not exclude
stronger withdrawal of public deposits as both entities are cash strapped in the absence of the IMF
support. On the other hand, retail and corporate deposits growth accelerated by 1pp and 2.3pp to
9.1% and 4.7%, respectively. That said, we expect this year's deposit growth just a tad above
previous year level (+0.1pp to 7.6% yoy) as retail deposits will continue to be the main driver given
likely solid remittances growth, while generally better investment activity supports corporate deposit
growth. The YE15 LDR dropped to 102% (vs 107% at YE14), indicating stronger banks reliance on
domestic sources of financing. In the light of yet unpublished FY15 data on banking sector profits,
we kept our P&L assumption unchanged at 35% yoy increase in pre-tax profit in 2015.
Page 26 March-16
SEE MACROECONOMIC OUTLOOK MONTENEGRO
Growth Gains Momentum

We keep our view of a 4.2% GDP growth in 2016 intact, whereas the acceleration is expected
to be mainly driven by ongoing highway construction plus several tourist capacity
expansion projects. Budget deficit is expected to widen to 9.5%/GDP while public debt is
expected to increase towards 70% of GDP. CPI inflation is set to increase by 1.8% in 2016 on
the back of low base effect, early Easter timing and higher public wages and pensions.
GDP growth accelerates In line with our expectations, GDP growth accelerated in 2015, driven by strong investment and
on investments and tourism activity, as foreign tourist nights soared 19.1%. Both segments apparently spilled over into
tourism higher employment (unemployment rate down 1.2pp qoq in 3Q15) and boosted real retail trade
which accelerated in 2H15 (+3.7% yoy from 0.3% in 1H15). Furthermore, industrial production
increased by 5.9% in 2015 on the back of notably higher manufacturing production for highway
construction purposes that also boosted construction activity (+5.8% in 2015). On the other hand,
merchandise exports have been the main drag for the major part of the year, with the exception of
December when it skyrocketed on inventory sales, before again seeing a massive slump in January
(-38% yoy). All being said, we now expect a bit higher 2015 GDP growth of 3.7% yoy (vs. prev
3.4% yoy).
GDP expected to Looking ahead, we keep our view of 4.2% GDP growth for 2016 intact, with the acceleration driven
increase by 4.2% in by ongoing highway construction plus several tourist capacity expansion projects. Furthermore,
2016 personal consumption is expected to pick up on the back of the planned 5-15% public wage hike as
well as higher pensions and some social benefits. On the flip side, energetic highway construction
and stronger personal consumption recovery will spur goods import, thus leading to further
deepening of the goods trade deficit. The latter should be, in our view, more than compensated by
another strong tourist season, leading to the overall positive net trade contribution.
Highway related capital Given 10.5% higher budget expenditures (3% above plan) driven by substantial infrastructure
expenditures led to capex and slight underperformance of revenues, budget deficit hit 7.9% of GDP in 2015. As for the
strong increase of 2016 budget plan, the government targets budget deficit of 7.1% of GDP, with revenues seen 10%
budget deficit higher and expenditures up 7.4%. However, we find such forecasts rather optimistic as the
government reduced PIT rate by 1pp to 12% and expenditures stay under pressure given ongoing
highway construction funding needs, the aforementioned public wage hikes, new pension
provisions and social allowances. That said, within the gross funding needs of EUR688m (18.0% of
GDP) in 2016, EUR250m is secured through USD-denominated loan and the recent 5Y bond
issuance brought about another EUR300m. The latter is however below the targeted EUR500m,
also being rather expensive at 6% yield. For comparison, the sovereign paid just 4% on EUR500m
year-ago issue with the same maturity. Bearing all that in mind, we expect this years budget deficit
widening by 1.6pp to 9.5% of GDP, while public debt is expected to increase further towards 70%
of GDP.
FY16 average CPI The 2015 average CPI inflation of 1.4% yoy was just a tad lower than our expectations (1.6% yoy)
inflation at 1.8% with lower oil prices the main drag throughout the year. Looking ahead, we see CPI inflation around
1.6% (on average) in 1H16, and further acceleration toward 2% at the year-end, which would shape
the 2016 CPI average of 1.8%. Inflation will be mainly driven by low base effect given significant
decline of oil prices in 2015, early Easter timing and higher public wages and pensions. However,
risks to our view are mostly on the downside as deflationary pressures continue to stem from
declining prices of oil and food and a general lack of imported inflationary pressures.
Higher tourism receipts According to the currently available data in the year to the September, external imbalances have
leading to lower CAD narrowed significantly on the back of higher tourism receipts, which more than offset further export
deterioration and soaring imports driven by highway construction. That said, we expect a 1.1pp
wider merchandise trade balance at 41.7% of GDP in 2015, but C/A deficit is expected to narrow by
1.8pp to 13.7% of GDP. However, in 2016 we expect further widening of merchandise trade
balance towards 41.9% of GDP as exports is expected to stay subdued while import will be
additionally spurred with the ongoing recovery of domestic demand. The latter combined with
roughly 5% expected increase in tourist receipts will increase C/A deficit by 0.9pp to 14.6% of GDP.
Page 27 March-16
Montenegrin data trends

0,5
Balance of payments (%, yoy) Industrial production (%, yoy)
Capital Account
60
0,4 Errors Omissions Industrial production
Change in Reservs (+ is decrease)
Manufacturing
Other
Portfolio Investment 40
0,3
Net FDI
Current Account Deficit
20
0,2
0
0,1
-20
0
-40
-0,1
-60
-0,2
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
2009 2010 2011 2012 2013 2014 2015
CPI by key contributions (pps) Merchandise import cover (%, 3mma)

6 Transport 32
Housing
5 Alcoh. beverages, tobacco
Food
headline CPI 27
4
3
23
2
1 19
0
14
-1
-2
10
Jan-09 May-10 Sep-11 Jan-13 May-14 Sep-15
Mar-09 Jul-10 Nov-11 Mar-13 Jul-14 Nov-15
Tourism mil.
Budget revenue movements
700 9.000 170
8.200
155
600 7.400
6.600 140
500 5.800 125

5.000
110
400 4.200
Moving 4Q Net Tourism Revenues, EURm, 3.400 95

lhs
2014 2015
300 2.600
Moving 4Q Foreign Overnights, in 000 (rhs) 2016 - plan
80
1.800
200 1.000 65
4Q05 4Q07 4Q09 4Q11 4Q13 4Q15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Montenegrin National Bank, MONSTAT, Ministry of Finance, IMF, HAAB research
Page 28 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Activity
Nominal GDP (EURbn,current prices) 3,0 3,1 3,2 3,1 3,3 3,4 3,6 3,8 4,0
Real GDP (constant prices YoY, %) -5,7 2,5 3,2 -2,5 3,3 1,5 3,7 4,2 3,8
Private consumption (YoY, %) -7,7 4,2 7,0 -0,7 3,1 1,5 2,0 2,5 2,1
Fixed investment (YoY, %) -25,3 -21,2 -9,6 -1,8 10,1 3,5 17,0 12,2 12,0
Industrial production (YoY, %) -32,2 17,5 -10,3 -7,0 10,6 -11,4 5,9 7,9 6,5
Prices
CPI inflation (average % YoY) 3,4 0,5 3,3 4,0 1,8 -0,5 1,4 1,8 2,1
CPI inflation (end-year % YoY) 1,5 0,7 3,0 4,4 0,4 -0,6 1,7 2,0 1,9
PPI inflation (average % YoY) -3,2 -0,7 3,2 1,8 1,7 0,2 0,3 0,5 0,9
Net wage rates (% YoY, nominal) 11,4 3,5 1,0 0,7 -1,7 0,1 0,7 1,2 0,5

State budget balance (ESA-95) -5,3 -4,9 -6,7 -5,8 -6,3 -2,6 -7,9 -9,5 -8,7
Public debt 38,2 40,7 45,6 53,4 55,2 59,9 66,5 69,0 75,5
Gross public funding needs n/a n/a n/a n/a 6,0 8,8 20,3 21,6 17,8
External balance
Import of goods and services (EURbn) -1,949 -1,961 -2,100 -2,166 -2,066 -2,074 -2,213 -2,341 -2,421
Net FDI (EURbn) 1,1 0,6 0,4 0,5 0,3 0,4 0,6 0,7 0,6
FDI (% of GDP) 35,8 17,8 12,0 14,7 9,7 10,4 17,3 19,6 15,0
FDI cover (%) 128,5 77,7 67,9 78,5 66,6 67,3 128,5 135,7 105,6
Debt indicators
Private (EURbn) 2,087 3,087 3,275 3,432 3,687 3,857 4,126 4,576 5,078

EUR/USD (end-year) 1,43 1,34 1,30 1,32 1,38 1,21 1,09 1,00 0,95
EUR/USD (average) 1,39 1,33 1,39 1,29 1,33 1,33 1,11 1,07 0,97
Money supply M1 (% YoY)* n/a n/a n/a n/a n/a n/a n/a n/a n/a
Broad money M3 (% YoY)* n/a n/a n/a n/a n/a n/a n/a n/a n/a
Domestic credit (% YoY) n/a -4,8 -6,3 -0,7 3,1 -1,9 0,8 3,7 3,8
ECB reference rate (end-year %) 1,00 1,00 1,00 0,75 0,25 0,05 0,05 0,00 0,00
EURIBOR 3M interest rate (average, %) 1,22 0,81 1,39 0,58 0,22 0,21 -0,02 -0,29 -0,30
Source: Montenegrin National Bank, MONSTAT, Ministry of Finance, IMF, HAAB research
Page 29 March-16

2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Balance sheet
Assets (EURm) 3.025 2.944 2.810 2.808 2.959 3.136 3.477 3.651 3.815
Assets (%, YoY) n/a -2,7 -4,5 -0,1 5,4 6,0 10,9 5,0 4,5
Assets (% of GDP) 101,5 94,8 86,9 89,2 88,9 92,4 97,4 96,4 95,1
Gross loans (EURm) 2.644 2.518 2.359 2.342 2.414 2.367 2.386 2.474 2.569
Gross loans (%, YoY) n/a -4,8 -6,3 -0,7 3,1 -1,9 0,8 3,7 3,8
Deposits (EURm) 1.825 1.790 1.817 1.981 2.098 2.308 2.625 2.838 2.993
Deposits (%, YoY) n/a -1,9 1,5 9,0 5,9 10,0 13,7 8,1 5,5
Deposits (% of GDP) 61,2 57,7 56,2 62,9 63,0 68,0 73,5 74,9 74,6
Performance
Net interest income (EURm) 121 111 106 106 104 111 117 127 133
Net interest income (%, YoY) n/a -8,2 -4,8 -0,1 -1,6 6,6 5,3 8,1 4,7
Total operating income (EURm) 162 155 221 178 156 158 171 184 192
Total operating income (%, YoY) n/a -4,4 42,6 -19,5 -12,0 1,2 8,3 7,1 4,7
Pre-provision profit (%, YoY) n/a -13,0 114,7 -43,2 -26,7 -2,6 11,5 6,9 -0,9
Provision charges (EURm) 81 148 124 121 44 21 53 43 45

Net interest margin (%) n/a 3,7 3,7 3,8 3,6 3,6 3,5 3,6 3,6
Pre-tax ROAA (%) n/a -3,2 -0,3 -2,0 0,1 0,8 -0,1 0,3 0,3
Pre-tax ROAE (%) n/a -30,0 -3,2 -18,7 1,0 6,0 -0,4 2,5 2,1

NPL ratio (%) 13,5 21,0 15,5 17,6 17,5 15,9 12,5 12,8 13,0
NPL coverage (%) 42,6 28,6 27,6 32,7 44,7 46,0 48,2 38,1 28,7
Provision charges (% of loans) n/a 5,7 5,1 5,1 1,9 0,9 2,2 1,8 1,8
Source: CBCG, HAAB research
Private sector lending Net loans increased by 0.8% in 2015 on the back of higher lending to private sector (+2.9% vs. -
enters positive territory 1.5% in 2014). That said, both retail and corporative contributed positively with a 3.1% and 2.8%
increase, respectively. However, public loans continued their negative performance and decreased
further by 11.1%. That said, we upgraded our 2016 loan growth expectations by 0.5pp to 3.7%
solely on the back of the expected further increase in lending to private sector. We see the latter
supported with the higher public sector wages, PIT relief, subsidized housing loans as part of the
Thousand plus project and generally improved business sentiment as growth gains momentum.
Loans to public sector are expected to stay subdued as the government already secured roughly
80% of gross funding needs through USD-denominated loan and bond issuance. The NPL ratio
decreased by 3.4pp yoy to 12.5% at the YE15 as NPLs were transferred from bank balance sheets
to asset management companies owned by parent banks. Nevertheless, we see NPLs rising slightly
in the mid-term as majority of them is related to the real estate market that continues to suffer amid
high prices and the lack of domestic demand and given the failure of Podgorica approach (ie
framework for voluntary NPL resolutions).
Deposit collection
Deposit growth accelerated further in 2015 to 13.7% yoy (prev 10.0% in 2014), with the strongest
accelerates further positive contribution from soaring corporate deposits (+24.5% vs. prev 20.2% in 2014) on the back
of strong tourist season and 19.1% yoy higher tourist receipts. Furthermore, retail and public
deposits contributed positively as well with 8.1% yoy and 24.8% yoy growth, respectively. Looking
ahead, we keep our view of a 8.1% deposit growth in 2016 intact. Meanwhile, LTD ratio declined
further to 91% (vs. prev 103%), and we expect similar trend to continue. As for profits, Montenegrin
banks delivered 11.5% yoy higher pre-provision profit. However 2.5x stronger provisioning in 2015
led to pre-tax losses of EUR2m. In 2016, we see pre-tax profit back in the green, as we expect to
see somewhat lower provision charges.
Page 30 March-16
ABBREVIATIONS
AUM Asset Under Management

BAMC Bank Assets Management Company
BRICS Brazil, Russia, India, China, South Africa
CAD Current Account Deficit
CAR Capital Adequacy Ratio
CARDS Community Assistance for Resconstruction, Development and Stabilization
CBS Central Bureau of Statistics
CEE Central Eastern Europe
CIR Cost-to-income ratio
CIT Corporate Income Tax
CNB Croatian National Bank
CPI Consumer Price Index
EC European Commission
ECB European Central Bank
EE Eastern Europe
EMU European Monetary Union
EU European Union
FC Foreign Currency
FDI Foreign Direct Investment
Fed Federal Reserve
FX Foreign Exchange
GDP Gross Domestic Product
GFCF Gross Fixed Capital Formation
IEA International Energy Association
IFI International Financial Institution
IFRS International Financial Reporting Standards
IMF International Monetary Fund
IP Industrial Production
IPO Initial Public Offering
ISPA Instrument for Structural Policies for Pre-Accession
LDR Loan-to-Deposit Ratio
M&A Mergers and Acquisitions
M1, M4 Monetary aggregates (the narrowest and the broadest, respectively)
MinFin Ministry of Finance
MM Money Market
MoM month-on-month
NII Net Interest Income
NIM Net Interest Margin
NPA Non-Performing Assets
NPL Non-Performing Loans (Impaired Loans)
OECD Organization for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
PER Price vs. Earnings
Phare Pologne et Hongrie - Aide Restructuration Economique
PPI Producer Price Index
PPP Pre-Provision Profit / Public-Private Partnership
PSE Public Sector Entity
REER Real Effective Exchange Rate
SAPARD Special Association Program for Agriculture and Rural Development
S-D gap Supply-Demand gap
SPO Secondary Public Offering
T-bill Treasury bill
TOI Total Operating Income
VAT Value Added Tax
YE year end
yoy year-on-year
ytd year-to-date
ZIRP Zero Interest Rate Policy
Page 32 March-16
SEE ECONOMIC RESEARCH
Disclosures Appendix
ANALYST CERTIFICATION
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SEE ECONOMIC RESEARCH
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Slavonska avenija 6, 10000 Zagreb
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March-16

CESEE CPI INFLATION

10 CPI 5Y range (% yoy)

Slovenia: Slower GDP Growth, Fiscal Healing page 5

Croatia: Turning the Tide? page 11

Serbia: Wake Me Up When Elections End page 17

Bosnia and Herzegovina: IMF Lending Remains Top Priority page 23

Montenegro: Growth Gains Momentum page 27

READ US ON BLOOMBERG AT HAAB<GO>

Bosnia and Herzegovina unchanged

SEE data trends

Real GDP growth (%) CPI inflation (average, %, YoY)

Unemployment rate (ILO, average, %) Current account balance (% of GDP)

Government balance (% of GDP) Gross foreign debt (% of GDP)

Source: national sources, HAAB research

SEE banking sector trends

Gross loans (% of GDP) Loan-to-deposit ratio (%)

Net interest margin (%) Cost-to-income ratio (%)

NPL ratio (%) Capital adequacy ratio (%)

*Net loans; **Slovenia excluded; Source: central banks, HAAB research

Slower GDP Growth, Fiscal Healing

Slovenia: contributions to quarterly changes in real GDP (in pps)

Source: SORS, HAAB research

Slovenia: fiscal deficits (% of GDP)

Slovenian spreads in tandem with peers

170 Source: Bloomberg, HAAB research

Slovenia's data trends

Real GDP growth (% YoY) Economic confidence vs. GDP growth

-3 Economic Sentiment Index

CPI inflation dynamics (% YoY) Business sentiment in manufacturing

SELECTED ECONOMIC FORECASTS

Fiscal balance (% of GDP)

Exchange rates and money

* Since 2007 ECB data

SELECTED BANKING SECTOR DATA

Profitability and efficiency

Credit quality and provisioning

Turning the Tide?

Croatia: contributions to GDP (in pps)

HOUSEHOLD STATE INVESTMENT STOCK NET TRADE GDP DOMESTIC DEMAND

Stable goods trade

Croatia: merchandise exports (seas.adj. 6mma, %, yoy)

Croatia: 5Y CDS spreads and EUR/HRK

Source: CNB, Blomberg, HAAB research

Croatia's data trends

CRO underperforms CESEE in growth terms Industrial production, 2010=100

SELECTED ECONOMIC FORECASTS

Fiscal balance (% of GDP)

Exchange rates and money

Wake Me Up When Elections End

Serbia: contributions to GVA (pps, %)

Serbia: CPI inflation and NBS policy rate

SELECTED BANKING SECTOR DATA

Profitability and efficiency

Credit quality and provisioning

Serbia's data trends

Food Millk, cheese and eggs

SELECTED ECONOMIC FORECASTS

Fiscal balance (% of GDP)

Exchange rates and money

SELECTED BANKING SECTOR DATA

Profitability and efficiency

Credit quality and provisioning

IMF Lending Remains Top Priority