CEE Banking Sector Report 2017: Banking Sector Convergence 4.0



· CEE banking assets grew to EUR 2,400 bn or around 9 per cent of euro area
· Return of decent growth and profitability: RoE back at 10 per cent
· Overall CEE NPL ratio well below 10 per cent; decent improvements in CE/SEE
· Major players accomplished repositioning; market share of foreign banks in CEE inched down
· Digital banking: CEE region as ideal "testing field" for cross-border solutions

Overall, the 2016 performance of CEE1 banking sectors was promising. The year was characterized by a solid development of new net loans, stabilizing or improving asset quality as well as an ongoing recovery on several CEE key markets such as Russia, Romania or Hungary. Due to overall higher balance sheet expansion compared to the euro area, the occurrence of relative banking sector catching-up returned – a sort of banking sector convergence trend or as it is called the "Banking Sector Convergence 4.0".

The stock of CEE banking assets grew from some 8.3 per cent of euro area banking assets in 2015 to around 9 per cent in 2016, which translates into total CEE banking assets of some EUR 2,400 bn. The banking asset growth in the CE/SEE region remains exceptionally strong and amounted to some EUR 1,070 bn by year-end 2016. Russian banking assets also recovered, with total assets at around EUR 1,200 bn currently just 1.7 per cent below their peak level in 2013. However, the times of extraordinary growth rates in CEE banking is over, which is to some degree also reflected by the fact that the market share of foreign-owned lenders in CEE reached its lowest level in a decade. 2016 brought an increasing market share of state-owned banks in the EE subregion, but also growing local/state ownership in CE. Only committed Western CEE banks, like RBI, which adapted their business models and market strategies over the past few years, continue to tap on the potential of CEE banking.

“We expect the new loan and asset growth rates to be much more sustainable. The CEE banking markets still provide opportunities for decent revenue flows given their capacities and diversification”, said Johann Strobl, CEO of Raiffeisen Bank International AG (RBI).

His assessment is backed by the key findings of the latest edition of the annual CEE Banking Sector Report – a publication by RBI/Raiffeisen RESEARCH with contributions from RBI’s network units in CEE and Raiffeisen Centrobank AG. The report was presented at a press conference in Vienna on 8 June 2017.

Return of decent growth and profitability: RoE back at 10 per cent

In 2016, the CEE region started to significantly outperform Western European banking profitability once again and ended years of down-trending profitability in CEE banking. Within the euro area, the banking sector RoE stagnated at around 5 to 6 per cent in 2016. When corrected for the extreme one-off effects in Ukraine (which were largely related to the Privatbank nationalization), the average profitability (RoE) in CEE recovered to around 10 per cent.

“Overall market developments in CEE banking are supportive for the goal to achieve at least 10 per cent RoE in the region, a profitability reading that secures lenders to earn their cost of capital. We estimate the cost of capital for major CEE lenders at around 9 to 11 per cent depending on the individual business model. In this context, it is important to stress that in 2016 the sectoral RoE was at least above the 10 per cent threshold in eight out of the 14 banking markets we cover in this report. In 2015, a 10 per cent RoE was only achieved in four markets. On aggregate, Ukraine was the only loss-making CEE banking sector in 2016,” said Gunter Deuber, Head of Fixed Income and Currency Research at RBI/Raiffeisen RESEARCH and one of the leading authors of the CEE Banking Sector Report.

Positive earnings dynamics in CEE banking had been supported by reduced macroeconomic imbalances, more homogeneous and positive loan growth developments and the absence of major market or regulatory shocks (e. g. exchange rate crisis, enforced loan conversions). Moreover, according to Raiffeisen RESEARCH estimations another banking sector convergence round seems reasonable. Current financial intermediation levels in all CEE sub-regions are below fundamentally-backed levels. “Such a setting offers the room for another round of financial deepening, i. e. banking sector growth somewhat above GDP growth going forward”, assumed Deuber.

Overall CEE NPL ratio well below 10 per cent; decent improvements in CE/SEE

In 2016, the regional CEE NPL ratio stabilized at around 8 per cent. This development was supported by a decent improvement in the CE/SEE NPL ratio, where the average NPL ratio stands now at around 7 per cent (CE: 6 per cent; SEE: 12 per cent) of total loans – the lowest reading since 2010. The slight underperformance of the CEE NPL ratio compared to the CE/SEE NPL ratio can be easily explained by the recent developments in the EE region. Belarus has changed the NPL measurement standards, which led to an increase of the NPL ratio to around 12 per cent – previously it was in single digit territory. In Ukraine, the official NPL ratio remains close to 30 per cent. In Russia, however, the asset quality deterioration reached its peak somewhat earlier than expected. The NPL ratio slightly decreased from 7.2 per cent in 2015 to 7 per cent by year-end 2016.

On aggregate, the experts of Raiffeisen RESEARCH expect the CEE NPL ratio to inch down in 2017 due to solid asset quality improvements in CE/SEE and in Russia. However, the EE NPL ratio is likely to remain above its long-term average in the next two to three years, which is a reflection of the challenging conditions in the banking sector of Ukraine, Belarus and much more limited new lending options in Russia.

Overall CEE L/D ratio at 86 per cent

L/D ratios continued to inch down across all CEE markets and subregions in 2016, with the overall CEE L/D ratio now at 86 per cent (CE: 90 per cent; SEE: 81 per cent; EE: 85 per cent). In terms of regional L/D ratios, we have now reached the level where banks were operating some years ago, i.e. ahead of the massive boom prior to the years 2008/09. Moreover, currently there are just two CEE banking markets (Ukraine and Belarus) with an L/D ratio well above the 100 per cent level, a similar situation as in 2004. Among all other CEE banking markets, only Serbia is still characterized by an L/D ratio at around 100 per cent, all other markets are below 100 per cent as of year-end 2016.

Foreign banks in Russia

Elena Romanova, Senior Expert for CEE Banking at RBI/Raiffeisen RESEARCH and one of the leading authors of the CEE Banking Sector Report, focused in her analysis especially on the Russian market. In this year’s report she concentrated on foreign banks in Russia: “In 2016, the Western European banks in Russia could finally breathe in more relief, along with the ongoing market stabilization. Their strong intentions to reduce across all asset categories in 2014/15 are now seemingly turning to a softer stance and a more profit-seeking approach rather than the exposure cut standpoint of the past two to three years. In our view, there were several factors supporting this turn. First, the contractions in Russia by all major groups were already quite significant in the past three years. That resulted in shrinking lending portfolios, costs, and networks – all at the same time. Second, 2016 finally brought certain relief for credit risk issues. In asset exposure, the spike in asset impairment has hit in 2014/15, and forced banks to sharply increase the provisioning costs and also reconsider their risk appetite and asset mix. Banks chose different approaches with an emphasis depending on each group's specialization. However, they all had the same overall goal, which has been broadly achieved by now: to reduce risks and costs in Russia as much as possible.”

“On aggregate, the European banks have adjusted themselves and their results on the Russian market are already showing improvements. However, the "price" for this development was paid with a reduction in market share – once the key priority for European banks in Russia and the major driver behind their previous rapid asset base build-up. In 2016, the total market share of 100 per cent foreign banks’ subsidiaries in Russia accounted for 6.1per cent of assets – five years ago these banks held 8.5 per cent,” added Romanova.

Digital banking: CEE region as ideal "testing field" for cross-border solutions

The title "Banking Sector Convergence 4.0" indicates that the CEE banking sector is facing a new round of convergence, which is – this time – linked to numerous technological challenges and opportunities. Hence, a section of the report is dedicated to an overview on digital banking in CEE.

Hannes Cizek, Head of Group Digital Banking at RBI, explains: “The digital transformation challenges banks to adopt their business models, to boost their speed to market and to be on par with ‘new’ competitors. For Western banks, like RBI, the CEE region is an ideal ‘testing field’ for cross-border digital banking solutions, as the size of some CEE banking markets is comparably small and the users seem to be quite open to accept new products and services as well as innovative retail and communications channels. Hence, we are very proud that an independent report by Deloitte2 found out that RBI’s Slovakian subsidiary bank Tatra banka is the benchmark in digital banking for the entire CEE region.”

Cizek also pointed out that RBI recently launched the Fintech Accelerator Program “Elevator Lab” (www.elevator-lab.com) that will offer fintech startups the opportunity to become a long-term partner of RBI and its 14 CEE network banks with 16.6 million customers.

The CEE Banking Sector Report 2017 is available at:

Financial Analyst: Gunter Deuber, RBI Vienna

Editor: Elena Romanova, Financial Analyst, RBI
Cut-off for data: 30 May 2017, 6:00 PM CEST
Completed: 7 June 2017, 9:06 AM CEST
First dissemination: 8 June 2017, 9:00 AM CEST

1 The CEE Banking Sector Report defines Central and Eastern Europe (CEE) as consisting of the subregions Central Europe (CE) – the Czech Republic, Hungary, Poland, Slovakia and Slovenia; Southeastern Europe (SEE) – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia; and Eastern Europe (EE) – Belarus, Russia and Ukraine.
2 Benchmarking study developed by Deloitte and EFMA Q3 2016