UniCredit Group's CEE Banking Study 2008:
Banking in CEE - still the right bet
- Growth of banking business slowing down but still strong
- Some increase in the cost of risk and in funding costs, but banking profitability and capitalisation remain strong
- International players to continue to profit from their CEE strategy - UniCredit Group is market leader
- Under the current market conditions, economists expect fewer mergers & acquisitions and sharper focus on organic growth
The banking market in the Central Eastern European1 countries is still dominated by foreign international players, who continue to profit from their investments in the region. A fully integrated regional market has emerged, with some sub-segments and little room for further local acquisitions. "Our study shows that foreign ownership is significant at the CEE level, accounting for 75% of banking assets in Central Europe, 83% in SEE & Baltics and 19% in Broader Europe2", says Federico Ghizzoni, Head of Poland´s Markets Division of UniCredit Group and Management Board Member for CEE at Bank Austria.
Therefore, recent mergers & acquisitions (M&A) efforts have been directed towards new markets or specialised segments, while in the current global context, growth strategies are now most likely to focus on organic growth and branch openings.
Liquidity issues might represent a constraint on the growth plans of some of the regional players in CEE, because of the increase in funding costs for banks resulting from the new international environment. Network rationalisation or global M&A can contribute to modifying the shape of the regional banking market. This is the result of the "CEE Banking Study 2008" conducted by UniCredit Group economists.
CEE economic outlook: lively growth
Economic activity in CEE remains lively, despite the repricing of risk at the international level. The economic dependence on capital inflows is the main risk, but even in a reduced capital inflow scenario, regional growth will probably be above 4 % for the period 2008-2010. Inflation is particularly pressing in the CEE countries, due to the weight of food and oil in the region’s consumption basket, potentially hurting both households and the corporate sector. Still, real income convergence remains a driver of further realignment in living standards.
Financial penetration is moderating but continues, with volumes growing at around 23 % CAGR (compound annual growth rate) in the period of 2008-2010 and lending growth exceeding deposit growth. A banking model which implies the need for external funding means a risk of a credit squeeze. Such a risk is partly balanced by the widespread presence of international players in the market.
"Securing sound funding remains a key priority for the local banking sector and for the local economies", says Debora Revoltella, CEE Chief Economist of UniCredit Group. The Baltic countries, Kazakhstan and Ukraine are already facing the challenges of a credit squeeze – with lower capital inflows resulting in lower lending growth and thus a slowdown in economic activity. Capitalisation of the CEE banking sector remains high, however, providing a good buffer to absorb potential shocks, while profitability is estimated at around 17 % CAGR in the period 2008-2010.
Financial penetration gap and strong role of international players
All banking systems in the CEE region are characterised by dynamic players, despite a much more challenging environment, dependence on capital inflows and a gloomy inflationary outlook.
The entire regional CEE banking sector consists of 2,609 banks, with total assets of almost EUR 2,000 billion. The ranking of the top banks in CEE is led by UniCredit Group, operating through Bank Austria in CEE3, with total assets of EUR 118.0 billion and a net profit after taxes (before minority interest) of EUR 2,125 million. Raiffeisen ranks second, with total assets of EUR 72.7 billion and net profit after taxes (before minority interest) of EUR 973 million. Erste Bank is in third place, with total assets of EUR 72.0 billion but with its net profit after taxes (before minority interest) of EUR 1,026 million in second place. UniCredit holds the strongest position in the region, with an unrivalled presence in 20 countries with about 3,700 branches. Raiffeisen follows with a network covering 16 countries, closely followed by Société Générale with 2,340 branches in 15 countries in the CEE region.
Overall, the leading international banking groups in the region are planning to open some 4,100 new branches in CEE, most of them in new markets such as Russia and Ukraine. UniCredit Group accounts for approximately one third of these new branches, as the bank plans to focus on strong organic growth in the coming three years. "We know the market and we are able to manage strong growth even in the new context of higher risk. For the coming three years, we are planning to grow by 19.3 per cent annually. The CEE region remains a key focus of our Group, with around 1,300 branches to be opened by 2010. We are fully concentrating on our organic growth and a strong expansion of our branch network, especially in Turkey, Russia, Romania and Ukraine," says Federico Ghizzoni.
Retail business still growing faster than corporate banking
The economists of UniCredit Group see opportunities for further transformation of households´ asset portfolios, despite capital market volatility and risk aversion. "Households’ lending penetration gap is closing, but the growth potential remains related to the strong demand for a higher living standard", says Revoltella. "The main risks are related to households´ exposure to potential depreciation of the local currencies and some possible deterioration in credit quality. Households in the region are indeed not able to save so much anymore and are more and more depending on loans, while they have accumulated a large proportion of their debt in foreign currency, particularly in the area of mortgages," says Revoltella. The potential demand for housing will support the further development of mortgage business in the CEE countries. Especially the Broader Europe region has the largest potential in this segment.
On the corporate side, cyclical stabilisation is partially balanced by renewed corporate demand for bank loans. Banks increasingly compete in providing additional services like leasing, cash management and structured finance, which are the main growth drivers for corporate business in CEE.
|1||Central Eastern European countries include the Baltics, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Kazakhstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.|
|2||Broader Europe includes Russia, Kazakhstan, Ukraine, Turkey|
|3||and through Pekao in Poland|
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