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Favourable growth outlook for banking markets representing 80 per cent of total assets in CEE
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Lending volume growth in the region accelerated in 2010 and first half of 2011
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Global economic slow-down suggests caution in near-term outlook for CEE banking sector
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Total loan volume in CEE corresponds to 7.5 per cent of volumes in Eurozone
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No changes in ranking of region’s Top 5 EU-based banking groups
While loan growth in Central and Eastern Europe (CEE) will not occur in the same manner witnessed during the past decade, the medium- to longer-term outlook for banking sector growth remains very favourable in at least six CEE markets that collectively represent 80 per cent of total banking sector assets in the region. This and other findings are detailed in “Banking Sector Convergence 2.0â€, the latest edition of the annual CEE Banking Sector Report prepared by the analysts of Raiffeisen Bank International AG (RBI) and Raiffeisen Centrobank AG.
The CEE Banking Sector Report offers in-depth coverage of 14 important banking markets in CEE and outlines developments among the region’s leading banking groups. To provide a better comparison among the countries it covers, the report also addresses CEE's sub-regions, namely Central Europe (CE), Southeastern Europe (SEE) and the Commonwealth of Independent States (CIS).
Growth still possible under changed model of banking sector convergence
The expected lower availability of external financing for the CEE banking markets suggests that deposits will retain the attractiveness they gained in the region in recent years. As a result, sustainable loan growth in CEE will be more closely tied to deposit growth than in the past. Moreover, some CEE economies may well face a more prolonged period of relatively low loan growth. Loan-to-GDP ratios are at a relatively high level in some CEE economies with lower income levels. Moreover, some market segments such as household lending do not appear to be underpenetrated in any CEE economy anymore. Consequently, loan growth in CEE will not occur in the same manner witnessed during the past decade.
However, the medium- to longer-term outlook for banking sector growth does remain very favorable in Russia, Poland, the Czech Republic, Romania, Slovakia and Albania. These six countries, which together represent 80 per cent of total banking sector assets in CEE, are likely to remain high growth markets in which nominal loan and asset growth is likely to clearly outpace nominal GDP growth going forward.
In contrast, gradually decreasing loan-to-GDP ratios might be in the pipeline for some SEE and CIS economies from a fundamental and longer-term perspective. However, as the CEE Banking Sector Report points out, even declining loan-to-GDP ratios in the still rather fast growing SEE or CIS economies do not imply zero nominal growth. Nominal loan growth in these economies will just remain below the sustainable nominal GDP growth, which could return to high single-digit or even low double-digit levels.
The macroeconomic environment for CEE started to deteriorate in the second half of 2011 due to the expected slowdown of the world economy and in the Eurozone in particular. For this reason, the Report’s authors urge caution regarding the near-term banking sector outlook in CEE. Moreover, recent negative developments with regard to the regulatory landscape in some CEE countries (e.g. outsized bank levies or interference in private loan agreements) must be watched carefully, as they set flawed standards and may undermine the attractiveness of the respective banking sectors.
According to Raiffeisen Research, the agreement reached at the end of October regarding the Eurozone debt crisis could indirectly lead to a potential drop in lending activity in CEE in the next 6-12 months, as the EU-based banking groups active in the region feel the substantial burden associated with both the Greek debt restructuring and the banking recapitalization measures. However, the accuracy of any predictions for the short-term impact of the Eurozone debt crisis on the CEE banking sector is further complicated by the uncertainties that continue to distinguish developments in Greek domestic politics.
Russian and Polish markets offer biggest growth opportunities
In absolute terms, Russia and Poland – together representing 60 per cent of banking sector assets in CEE -- will offer the biggest growth opportunities among the CEE banking markets moving forward. This reflects both the absolute size of the two markets, as well as their expected sustainable nominal double-digit annual loan and asset growth rates over the forecast horizon (2011-15).
In CE, apart from Poland, the Czech banking market may offer attractive growth opportunities, given sustainable low double-digit nominal growth rates in terms of loans and assets over the CEE Banking Sector Report’s forecast horizon (2011-15). Slovakia's banking sector is also likely to experience a decent and healthy expansion, with high single-digit nominal growth rates over the forecast horizon.
With the possible exception of Albania, high nominal double-digit loan and asset growth rates are unlikely in nearly all banking sectors in SEE over the forecast horizon. Nevertheless, the Romanian banking market is set to be the most attractive SEE market, reflecting its position as the largest banking market in SEE and the decent expansion that looks sustainable (i.e. nominal loan and asset growth rates in the range of 8-11per cent year-on-year in EUR-terms over the period 2011-15).
Corporate lending currently driving uptick in region’s lending activity
The total loan volume across the entire CEE region amounts to some EUR 1,120 EUR bn, which corresponds to about 7.5 per cent of total loans inside the Eurozone. In contrast, the CEE region’s nominal GDP stands at some 24 per cent of the Eurozone. Loan-to-GDP ratios thus also indicate a significant catching-up potential for the CEE banking sectors. However, the CEE Banking Sector Report points out that it is difficult to address the long-term loan growth outlook in CEE on the basis of such considerations, which mostly reflect the overall lending stock, as well as current Eurozone averages. Indeed, according to the Report’s authors, the Eurozone might not be the ideal benchmark for all CEE countries (at least over the next decade).
As an aggregate, the total banking sector assets in CEE amounted to some EUR 1,940 billion as of the end of June 2011, which corresponds to about 5.5 per cent of total banking sector assets in the Eurozone. In contrast, the nominal GDP of the CEE region stands at some 24 per cent of the Eurozone. Consequently, asset-to-GDP ratios in CEE remain far below the current Eurozone average of some 330 per cent of GDP.
Loan growth in CEE accelerated in 2010, a development reflected in the aggregated data for the region's banking sectors and major banks. UniCredit, Erste, RBI, Société Générale (SocGen) and Intesa Sanpaolo all posted loan growth. Data for the first six months of 2011 indicate a sluggish uptick of lending activity in CEE. This holds especially true for those countries in which 2010 had been a tough year (e.g. Hungary, Slovenia and Ukraine). Assuming that current lending trends could be more or less sustained, loan growth in EUR-terms for the full year 2011 might come in at around 9.5 per cent in CE, 7 per cent in SEE and roughly 13 per cent in the CIS region.
Comparing the business segments of household and corporate lending, current lending activity is clustered in the segment of corporate lending. The corporate sector in CEE still profits from the cyclical recovery posted by the Eurozone and the broader world economy in 2010 and the first half of 2011, while domestic drivers remained more subdued in most CEE economies. There appears to be enough potential left with regards to corporate lending in CEE, which remains well below the importance corporate lending holds in the Eurozone’s bigger financial sectors (40-70 per cent of GDP).
Non-performing loans generally at or near peak
All in all, there has been a broad-based improvement in banking sector resilience in CEE. This improvement was driven by a stabilising economic backdrop in 2010 and the first half of 2011. Given this backdrop and with lending volumes returning to growth, non-performing loans (NPLs) are almost at the peak or already past it at all major CEE banks, which is also confirmed by aggregated banking sector data. However, Hungary and some SEE markets remain challenging with regard to loan quality.
Data for the first half of 2011 show that NPLs may already have peaked in some CEE economies such as the Czech Republic, Slovakia, Russia and Ukraine and are at least close to their peak in Poland and Serbia. Thus, the analysts at Raiffeisen Research believe that the year 2011 might mark the peak for NPLs in these economies. Accordingly, NPL ratios in some CEE economies might also peak at comparatively low single digit numbers, i.e. figures comparable to more mature banking markets like Germany or UK, where NPLs peaked at the 5.5-6 per cent level in 2010/11.
In other CEE economies (with the possible exception of Hungary and Belarus), NPL growth at least slowed down substantially in the first six months of 2011. In those economies, NPLs might still continue to rise into 2012, but NPL peak levels should remain close to the levels seen in the first half of 2011. On a positive note, NPLs in nearly all CEE countries (with the possible exception of Ukraine) will peak at levels well below those seen in other emerging market crises.
Depending on the economic and loan growth the CEE states post in 2012 and 2013, as well as the eagerness to tackle NPL stocks, NPL ratios in the region could decrease over the course of 3-4 years to around one-third of their current level in an optimistic scenario or to around two-thirds of current levels in a more pessimistic scenario, according to the authors of the CEE Banking Sector Report.
No changes in composition of region's top 5 banks
In 2010 and the first half of 2011, no major changes took place in the rankings of the Top 5 (in terms of total assets) EU-based banking groups active in CEE: UniCredit continued to lead the field, followed by Erste, RBI, SocGen, and KBC. After the dynamic shifts among the banks ranked 6-10 in 2009, the past year was quite uneventful in this segment: Intesa Sanpaolo still heads the grouping as the No. 6 in the region ahead of OTP, with a stable gap to the Top 5 pool. In contrast, a certain consolidation and new market entries were observable among the banks ranked 11-20. Spain’s Santander joined the Top 11-20 basket by buying into significant additional market share in Poland, while the Greek banks Eurobank EFG and Alphabank announced merger plans, and Volksbank International sold its CEE banking subsidiaries (with the exception of Romania) to Russia’s Sberbank, which if non-EU based banking banks are taken into account would be the largest banking group in the region due to its strong homebase in Russia.
The CEE Banking Sector Report is available at
http://www.rbinternational.com/ceebankingreport2011
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