UniCredit New Europe Research Network:
International banks continue their strong expansion in CEE
- Two-thirds of the banking industry in CEE owned by international banks in "established" CEE markets
- New opportunities arising from a widening of the perspective, in terms of single markets (Russia, Turkey and Ukraine) or in terms of global growth strategies of the players involved (such as UniCredit – HVB/BA-CA)
The banking market in Central and Eastern Europe (CEE)1 continues to be dominated by international banks, which consider the region as a second home market with strong growth potential. At the end of 2005, international banks' market share was 78 per cent (excluding Russia, Ukraine and Turkey). The banking markets in "established" CEE countries have been privatised to a large extent and now offer very few opportunities for major acquisitions. Therefore international investors are increasingly turning their attention to markets such as Russia, Turkey and in the medium-term also Ukraine where the process of internationalisation and consolidation has not yet reached an advanced stage. These countries offer significant growth potential: if they are included in the market share calculation, international banks account for only 46 per cent of the CEE banking market. This is the result of a recent study conducted by UniCredit New Europe Research Network – the research network including all the research departments of the Group focused on the CEE region.
In Turkey, international banks currently have a market share of 19 per cent. The privatisation process is advancing, while further market consolidation should also be expected. Foreign banks’ market share in Russia is even lower, at currently 9 per cent, and, with a total of 1,200 banking institutions, a process of structural transformation is clearly in place. The highest concentration of international banks is to be found in the new EU member states Estonia (99 per cent) and Slovakia (98 per cent), followed by Croatia (91 per cent), an EU candidate country.
"Russia, Turkey and in the medium-tem also Ukraine are clearly the new frontiers of a regional strategy for international players active in the region. Still, on a more general perspective, we expect the consolidation process at the international level to become another significant driver for structural transformation in the region, like in the case of the UniCredit-HVB merger, which created by far the largest player at the regional level and led to a renewed process of consolidation at the individual level," says Andrea Moneta, Member of the UniCredit Group Management Committee and BA-CA Managing Board Member responsible for CEE operations.
The leading international banks in CEE
A few international players consider the region as a second home market. Such international players are among the top players in several countries of the region and profit from a widespread cross-regional network. The top 7 players control about one quarter of the entire banking market in Central and Eastern Europe (26 per cent, measured by total assets).
Among the largest international banks operating in the region, UniCredit Group ranks first, with total assets of EUR 86.2 billion2 and net income after taxes (before minority interests) of EUR 1.3 billion2. This means that UniCredit Group is almost twice as large as the nearest competitor. Erste Bank is in second place, with total assets of EUR 48.7 billion2 and net income after taxes (before minority interests) of EUR 711 million3. KBC of Belgium ranks third, with total assets of EUR 42.7 billion and net income after taxes (before minority interests) of EUR 556 million.
Ranking behind the three leading banking groups are Raiffeisen International (total assets: EUR 42.3 billion4, net income after taxes: EUR 481 million4), Société Générale (total assets: EUR 30.1 billion4, net income after taxes: EUR 531 million5), Banca Intesa6 (total assets: EUR 22.1 billion, net income after taxes: EUR 326 million) and Hungary's OTP7 (total assets: EUR 19.1 billion, net income after taxes: EUR 609 million). The largest networks are those of UniCredit Group / BA-CA (17 countries8) and Raiffeisen International (15 countries8), followed by Société Générale (10 countries8) and Banca Intesa (9 countries8).
"It is interesting to note that among the 7 top regional players, only 3 are among the top 20 European banks market capitalisation. This confirms our idea that the international process of consolidation can bring further structural transformation at the regional level", says Debora Revoltella, UniCredit CEE Chief Economist.
Bank profitability remains high
The banking market in Central and Eastern Europe will continue to be a key growth market for international banks operating in the region. In 2005 alone, the combined net income before taxes of banks in the CEE-9 countries9 rose by EUR 4.5 billion, from EUR 16.5 billion in 2004 to EUR 21 billion in 2005. UniCredit Group's experts think that profits in the region will double to about EUR 32 billion from 2004 to 2008. For the period 2005-2008, this translates into annual growth of 15.2 per cent.
"We expect the banking sector in Russia to achieve the strongest increase in profitability," says Debora Revoltella. She forecasts average growth of 21 per cent in pre-tax profits in Russia from 2005 to 2008. The Turkish banking sector will as well continue to grow dynamically, even despite current volatility in financial markets. Profitability will be strong also in Bulgaria (13 per cent) and Romania (11 per cent), two countries which are preparing for EU accession.
These figures make Russia one of the most attractive banking markets in Central and Eastern Europe. "This underlines the enormous potential available in this country. The Russian banking market is booming. For this reason we will continue to expand in Russia. As a first step we will double the number of our branches to around 50 by the end of this year and above 100 by 2008 through organic growth," says Andrea Moneta.
Retail loans are driving growth
The main driver for volume growth in the region will continue to be retail lending. Retail loans in Central and Eastern Europe as a whole are expected to grow at an annual average rate of about 31 per cent until 2008. The strongest increase will be seen in Russia, where this sector will grow by 56 per cent, almost double the rate achieved by the CEE market as a whole (including Russia).
"We think that retail lending business will triple over the next three years. At present 51 per cent of the Russian population holds a bank account. This figure indicates the enormous potential available," says Debora Revoltella. Russia is followed by Serbia and Turkey, where retail loans are expected to grow by above 30 per cent annually.
At 24 per cent, average annual growth of lending volume in the entire CEE region is much stronger than in the euro area (6 per cent). Data for individual countries as at year-end 2005 show that the total volume of loans, expressed as a percentage of GDP, was highest in Croatia with 68 per cent, far above the CEE average of 32 per cent. In Romania, the comparative figure was 22 per cent, indicating the potential available in the market. Generally speaking, throughout the region, we expect lending growth to continue to be supported by a combination of strong economic growth and a remaining gap in terms of market penetration. As mentioned above, the retail market will be the main driver of growth. Good macroeconomic prospects and strong investment demand will support a favourable corporate lending performance.
"The banking market in Central and Eastern Europe will continue to grow strongly. As the region offers large potential for business, this market will remain a focus of attention of international players. CEE is a core market for UniCredit Group. We will take advantage of the strong momentum of the CEE banking market and will continue to grow with it," says Andrea Moneta.
1 CEE = Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey, Ukraine.
2 excl. Splitska banka in Croatia, units in Turkey included at 50%
3 incl. Erste Bank Serbia and BCR in Romania
4 incl. Impexbank in Russia, Aval Bank consolidated as from October 2005
5 incl. Splitska banka
6 incl. KMB, Intesa Beograd, Ukrsdbank and UPI banka
7 incl. Niska Banka and Zepter Banka and OTP Hrvatska since Q2 2005.
8 excl. representative offices
9 CEE 9: Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, Turkey
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