UniCredit Group's CEE Banking Study 2009:
Banking in CEE – challenging times but recovery on the horizon
- Prospects for a recovery of world growth to boost CEE, but economic growth remains below potential
- International financial markets are now out of a "liquidity-crisis mood" – credit quality is the main constrain for lending
- Long term prospects of CEE banking remain untouched
"The international financial crisis has dominated the banking market for some time now, leaving its mark on the sector. All Central and Eastern European banking players have been affected in terms of liquidity, cost of funding and credit quality, but the appeal of CEE banking is still there", says Debora Revoltella, Head of Strategic Analysis for CEE of UniCredit Group, referring to the recent banking study by UniCredit Group. Some positive signals start to materialize, giving hope for a recovery of world growth, which will boost the recovery of Central and Eastern Europe (CEE) as well. Following the significant reduction of economic activity in 2009, the economists of the Group forecast a slow regional growth of 1.1% for 2010, which is a positive sign, but remains below the potential of the CEE region. Strong regional differentiation is confirmed, with Central European countries and Turkey better prepared to quickly catch the international recovery.
The entire regional CEE banking sector consists of 2,455 banks, with total assets of more than EUR 2,100 billion. The ranking of the top banks in CEE is led by UniCredit Group, operating through Bank Austria in CEE1, with total assets of EUR 121.6 billion and a net profit after taxes (before minority interest) of EUR 2,577 million in 2008. With 12% of its Group assets in CEE, UniCredit is also a well diversified player. Raiffeisen ranks second in terms of size in the region, with total assets of EUR 85.4 billion and net profit after taxes (before minority interest) of EUR 1,078 million. Erste Bank is in third place, with total assets of EUR 79.3 billion but with its net profit after taxes (before minority interest) of EUR 1,569 million in second place.
Banking growth will continue on a sounder base
International financial institutions are actively supporting the market to help facing the crisis. IMF, EBRD, World Bank and EIB are jointly acting, together with the EU. International banks active in CEE have been confirming their intention to stay in the region. The IMF has even been securing the firm commitment of the international banks to single markets (as part of the IMF support packages to the countries) by getting them to sign a bilateral agreement with the local central banks to keep their exposure and to eventually recapitalize their subsidiaries over the next years.
Today, markets are out from a "liquidity-crisis mood" and, especially for those banks featuring foreign ownership, liquidity is not the key issue. "Now credit quality and risks are the constraints for the CEE banking sector", so Revoltella. "2009 and 2010 will remain challenging, but the long term prospects of the region remain untouched." The gaps in terms of banking penetration and the promise of fast income convergence are still given. Financial penetration will continue in CEE, even if with a more moderate pace of growth. Recovery on the lending side will start from the corporate sector, but a significant gap in terms of banking penetration is still very much clear in retail, as concerns the mortgage component. The availability of funding on domestic or external level will remain one of the main drivers for growth.
Performance of market players differs as the competitive environment changes
The crisis has accelerated the implementation of cost-efficiency measures all over the world and CEE banking is not an exception. Some bubbles of the last years, in terms of network or salary costs, might now be rebalanced. With revenues' growth decelerating but still sound and effective cost-efficiency measures in place, credit quality will be the main constraint for banking profitability. Important to note, today's quality of the credit portfolio is the key discriminating factor among banks - performance of the banks in the same market might thus widely differ.
The changing competitive environment also offers opportunities. International banks active in the region – especially the top players - might strengthen their position, leveraging on their existing network and on their better access to international funding, providing the risk appetite is adequate. In some countries, the crisis is leading to a resurgence of state power in the local banking sector. New entrants could take opportunities, while unfocused players might exit the market. This however does not affect the committed top international players, where no big changes are to be expected. All in all, we expect the winners to be either new entrants or international players already active in the region, provided their ability to show adequate risk appetite and to leverage on strong funding position.
CEE Baning Study (PDF; 1.1 MB)
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