UniCredit Group's CEE Analysis:
CEE households navigating troubled waters
- Higher unemployment and slower wage growth weighing on households
- Consumption went down, but higher saving propensity
After years of solid income growth and rapidly improving living standards of the households in Central and Eastern Europe (CEE), the recent past has been marked by a visible deterioration in the sector's overall standing. "Households have reacted to the crisis with a decline in consumption and an increase in their saving propensity, despite the lower saving capacity," so Federico Ghizzoni, Head of the CEE Banking Division, UniCredit Group.
"The crisis has lead to peaking unemployment and falling income growth, which means a temporarily reversal of the usual income convergence process," adds Debora Revoltella, Head of CEE Strategic Analysis of UniCredit Group, referring to the Group's study "CEE Households' Wealth and Debt Monitor", which was presented today in Vienna.
The increasing financial stress recorded by the CEE households has clearly damaged consumer confidence and influenced the spending behaviour. In the aftermath of the Lehman Brothers collapse households were forced to retrench their spending to deal with a much dimmer economic outlook and a rise in the debt servicing ratio. "Uncertainty over income and employment prospects coupled with a tightening of credit standards have been the main factors for the adjustment in the consumption pattern of CEE households," explains Revoltella.
Value of CEE households' financial assets rebounding
Lower consumption and lower debt mean a high saving propensity. Despite disappointing income performance, household net financial savings recovered in 2009, from the 2008 deep, also thanks to some positive stimulus stemming from the capital market's performance and higher returns on savings.
Full recovery in household confidence might take some time
Households' financial assets at the regional level are anticipated to have rebounded, up by more than 12 % last year (from -5.5 % recorded in 2008) to reach 44 % of GDP (2008: 33 %). This is supported by attractive returns on bank deposits and the good performance of local bond markets. Rallying stock markets have also helped to push up the value of the CEE households' assets. Turkey and Hungary, together with Romania and the Czech Republic, have led the turnaround, although the rest of the CEE financial markets also turned in robust performances.
Household financial savings ratio (% of GDP)
Tailor made solutions to cope with possible unemployment and slower wage growth
In the current framework we can expect only a moderate recovery in household credit growth, with both demand and supply factors having a weight. "Credit quality will remain a challenge," so Revoltella. "A peak in distressed assets related to this segment is expected toward the end of 2010."
There is still a long term potential for the market, though, mostly on the mortgage component. In the short term however higher unemployment, slower wage growth and higher financial leverage are likely to weigh on the demand for housing going forward. "Especially in this critical phase we continued lending and supported our clients, by offering specific and tailor-made measures to ease their financial difficulties", said Federico Ghizzoni. In this respect, UniCredit Group offered tailored solutions to clients who lost their jobs or faced other difficulties to restructure their loans and thereby ease their monthly cost management. Solutions include a prolongation of the tenor and a grace period, as well as a reduction of the instalments to a sustainable level.
Furthermore already before the collapse of Lehman brothers many of the CEE subsidiaries of UniCredit had a credit protection insurance for mortgage loan customers in place, so the customers felt safe to keep their properties despite the risk of loosing their job and this offer of a credit protection insurance has been even further expanded and deepened in many of the subsidiaries. Looking forward, CEE households' financial conditions look more stretched than in recent years, but a combination of factors – measures taken by the banks to ease the pain of their customers as well as rising saving ratios – have helped individuals and families to limit the damage. Navigating through troubled waters will continue in 2010, until the recovery fully affirms itself.
Expectation of labour market pressure easing somewhat except for SEE
About UniCredit Group
UniCredit is a major international financial institution with strong roots in 22 European countries as well as representative offices in 27 other markets, more than 10,000 branches and approximately 166,000 employees at 30 September 2009.
In the CEE region, UniCredit operates the largest international banking network with around 4,000 branches and outlets.
The Group operates in the following CEE countries: Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.
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