UniCredit Group CEE analysis:
CEE households continue to improve their standards of living
- Financial wealth of CEE households rose to EUR 583 billion in 2006
- Investment in one's home is becoming a primary objective of households in CEE
In 2006, financial assets held by CEE households1 continued to increase, posting double-digit growth for the third year in a row to reach EUR 583 billion (+14 per cent, 2005: EUR 510 billion), or 57 per cent of GDP. This is a result of the solid performance of CEE economies, a strong asset price rally and sustained accumulation of funds in pension schemes. Now, the CEE region accounts for roughly 1% of global wealth, expected to have topped EUR 81 trillion2 in 2006.
Financial deepening on the assets side was matched by even faster expansion of households' indebtedness throughout the CEE region. 2006 was another year of dynamic growth in banks' lending activity, with household debt climbing by 33 per cent year-on-year (2005: 43 per cent, 2001: 6 per cent) to almost EUR 180 billion. Nevertheless, as a proportion of GDP, households' indebtedness appears to be still relatively low in the CEE region: in 2006, households' liabilities reached the level of 17 per cent, compared with 54 per cent in the euro area. "This shows that despite fast convergence, there is still potential for further growth in the CEE region", says Erich Hampel, Head of the CEE Division of UniCredit Group and CEO of Bank Austria Creditanstalt.
Households are increasingly investing in real estate; there is strong demand for housing financed by mortgages. Households are actually continuing to save, but they are gradually shifting their savings to the real estate market. "Households in CEE are adapting their consumption habits to new and improved standards of living. At the same time, they are increasingly investing in their home. Consumption in the region is marked by fast income growth and improved access to the credit market, which in turn is also supported by a wealth effect arising from fast growth of house prices", says Debora Revoltella, CEE Chief Economist of UniCredit Group.
Regional differences remain
Nevertheless, there are important regional differences. Investment in tangible assets and consumption have not yet crowded out financial wealth accumulation in Bulgaria, Poland, Slovenia and more recently Croatia, where both net wealth3 and corrected net wealth over GDP ratios have been on a steady upward path.
An opposite trend can be seen in Romania, Slovakia, Russia and Turkey. In these countries, individuals seem to be extremely keen on quickly taking advantage of new opportunities. They are increasingly relying on the convergence process to improve their living standards, benefiting from bright economic prospects and soaring asset prices. It should be noted that, due to the marked polarisation of incomes in the case of Russia and Turkey, care should be taken in drawing any conclusions as to the average behaviour of households.
In the case of Hungarian and Czech households, a declining trend in the net wealth over GDP ratio is accompanied by an upward trend in the corrected measure of wealth, signalling that strong demand for housing is still driving the switch from financial savings towards tangible assets.
Financial portfolio of households in CEE becomes more sophisticated
With regard to asset allocation, the gradual switch from traditional to alternative and specialised savings instruments made further progress in the CEE region last year. This development was supported by strong increases in asset prices and a strong performance of local capital markets. The increasing diversification of financial assets held by households reflects generally low deposit rates and high returns on other types of investment, with equities and mutual fund investments benefiting the most.
While cash holdings remained almost constant over time, savings kept in traditional bank deposits continued to lose ground, dropping to 51 per cent as a percentage of total wealth (2000: 65 per cent). Clearly, the decline was more visible in countries with more highly developed financial markets (i.e. Poland, Hungary and the Czech Republic), while bank deposits continue to play a strong role in the case of Romania, Turkey, Croatia and Bulgaria, where financial markets still tend to be bank-based and interest rates are still relatively high (as in the case of the first two countries). Similar trends are discernible in Russia, where growth in deposits is benefiting from changes in the behaviour of the conservative part of the population, who used to rely on cash (mainly in foreign currencies) under the mattress as their main savings vehicle.
The increasingly stable macroeconomic environment also had a positive effect on insurance business, with demand in the segment of life insurance products rising faster than incomes, especially in countries where a fully reformed pension system is not yet in place (i.e. Romania, Slovenia, Turkey, and to a lesser extent, the Czech Republic). "Pension funds remain by far the most promising and fastest growing component of financial assets", says CEE economist Debora Revoltella. They have almost tripled their share in total wealth to reach 9 per cent at the end of last year. Clearly, participation in fully funded pillars and the relative size of assets accumulated is already high in those countries which were the first to introduce the 2nd mandatory pillar – e.g. in Poland and Hungary with a participation ratio of 83 per cent and 68 per cent, respectively, as well as in Bulgaria and Croatia. Further rises in the near future are expected in those countries where the 2nd pillar started recently (Slovakia) or is supposed to start in the near future (Romania).
Mortgages continue to have the largest potential
In line with developments in the euro area, mortgages remain the main driver of the recent boom in credit (outpacing consumer loans in terms of overall weight in total liabilities). Mortgage loans have grown by an average 44 per cent over the 2000-2006 period, fuelled by both demand and supply factors. But overall, mortgage credit is only 7 per cent of GDP in the CEE region, significantly lower than the level of 38 per cent recorded in the euro area. "These figures indicate a huge potential for further growth in the mortgage loan business in the longer term", says Erich Hampel. "International banks such as UniCredit Group have substantial experience in this field and are able to contribute know-how and state-of-the-art products to the CEE countries. This generates added value, both for people in CEE and for banks."
Bright economic prospects
Good economic prospects will continue to support the accumulation of households' financial wealth in the region. Improvements in the financial position of households in CEE will further increase the level of wealth penetration compared to GDP, expected to reach 61 per cent in 2009 (2006: 57 per cent). Particularly strong growth (in the range of 20 to 25 per cent p.a.) in the accumulation of wealth is anticipated in fast-developing countries like Russia, Serbia, Romania, and Bosnia and Herzegovina. Sustained growth on the assets side will be accompanied by an even faster expansion of households' indebtedness, propelled by increasing demand for durables, a far-from saturated housing market and fierce competition in the financial sector. Based on those factors, the CEE economists of UniCredit Group anticipate an average annual increase of 19 per cent in CEE households' liabilities in the 2007-2009 period, to reach 22 per cent of GDP in 2009 (2006: 17 per cent). Mortgages are expected to display the largest potential increasing by 22 per cent per year and accounting for most of the growth in households' indebtedness in the whole region. "Investment in one's home will remain the primary objective of households. A significant part of households' savings continues to be directed towards the real estate market, against the background of a fast-developing mortgage market", says CEE Chief Economist Revoltella.
UniCredit Group will continue to grow
Based on the excellent economic outlook for the region, UniCredit Group aims to further expand its leading position and pursue further growth in the fast-growing region of Central and Eastern Europe. Through organic growth, the Group will open some 200 new branches by the end of 2008. The main destinations for expansion are the growth markets of Russia, Turkey and Ukraine as well as Hungary. The Group is planning to win a total of at least one million new customers in these countries by the end of next year. In addition to expanding its branch network, the Group also wants to open up new markets: as a first step, it will open representative offices in Montenegro, Belarus and Kazakhstan. "We are pursuing our course in a consistent manner. As market leader in Central and Eastern Europe, our objective is to get even closer to our customers and their needs. The new branches and offices in three new markets which we will make available to our customers will enhance our presence while enabling us to use opportunities in the CEE growth markets," says Erich Hampel, Head of UniCredit Group's CEE Division.
UniCredit Group ranks among the five leading financial services groups in Europe, with a market capitalisation of over EUR 70 billion, 142,000 employees, 35 million customers and 7,200 branches in 20 countries. The Group has total assets of EUR 823 billion (as at 31 December 2006). UniCredit Group operates the largest banking network in the CEE region: 65,000 employees serve 24 million customers in 17 countries. With total assets of EUR 114 billion in CEE, the Group is about double the size of its nearest competitor.
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1CEE: BG, HR, CZ, HU, PL, RO, SI, SK and TK. RU excluded.
2PGMA estimate based on preliminary data of OECD, CBs and BCG including North America (US & Canada), Europe (East and West), Asia, Pacific, Latin America and Middle East.
3Measured as gross financial wealth minus the non-mortgage component of debt