CEE Household Wealth and Debt Monitor 2011:
Conditions for households are normalising, but challenges persist
- Propensity to save continues to prevail over the one to consume with household financial assets having recorded solid growth last year and return of risk appetite supporting an increasing role of more sophisticated products
- Economic recovery and easing of job market tensions weighed positively on consumer sentiment, but increases in food and energy prices could negatively affect households' propensity to buy and hit low income earners especially hard
- Income growth should support some resumption of household debt appetite
The CEE economies showed convincing signs of economic recovery in 2010, although in the context of still fragile and uneven domestic labour market conditions and growth in household disposable income among countries. The more supportive macroeconomic environment translated into gradual normalisation of household financial conditions throughout Central and Eastern Europe. Overall, the propensity to save continues to prevail over the one to consume, with the strength in the dynamic of the household financial saving ratio clearly a positive function of the overall strength of the economic recovery process. Household financial assets expanded by a hefty 21 percent last year to reach around EUR 1,200 bn in the region, marginally accelerating over 2009, which displayed an increase of 19 percent. At the same time household financial liabilities also resumed growth, posting a 17 percent annual gain. However, the overall growth in household liabilities does reveal important cross-country differentiations and looks more contained when corrected for the effect of exchange rate movements. These are some of the key findings of the latest CEE Household Wealth and Debt Monitor released by UniCredit's CEE Strategic Analysis department.
Capital markets recovery and marginal return of risk appetite triggered sound growth in household financial assets
"The relatively positive performance of capital markets helped to boost the value of household financial assets and encouraged new inflows into more sophisticated financial instruments", said Gianni Franco Papa, Head of CEE Division at UniCredit.
In 2010 all asset classes recorded growth, with the exception of fixed income securities. The strongest gain was reported in the pension funds segment followed by mutual funds and bank deposits. A notable difference from 2009 was the much weaker growth in currency holdings, reflecting a general improvement in confidence as a natural post-crisis reaction. "After being interrupted by the crisis, we expect a gradual return of the trend in increasing sophistication of household financial assets. Mutual funds and equities should grow most rapidly in the near term, with local authorities' effort to promote private individuals' participation in IPOs as in the case of Kazakhstan, which for example should further stimulate household investment into listed shares", stated Fabio Mucci, Head of CEE Banking Analysis.
The development in household financial conditions in early 2011 looks promising, but it is confronted with a growing number of challenges. The recent increase in food and energy prices is an issue to monitor as are the related downside risks on economic activity. Apart from the negative psychological effects of perceived inflation on the consumer climate, the surge in prices might have a disproportionately negative impact on households' propensity to buy, as they spend a high proportion of their income on these items. Moreover, higher energy and food prices could hit low income earners especially hard. Austerity programmes are another risk factor, although the bulk of the adjustment is probably behind CEE region. Ongoing policy initiatives concerning pension systems also deserve careful monitoring. The re-nationalisation of pension schemes to fill budget needs may do substantial damage to the pension funds industry and undermine confidence in the level of safety of their investments.
"With economic recovery gaining momentum, we expect further normalisation in labour market conditions and consolidation in the growth of household disposable income to remain the key drivers for the accumulation of net financial assets over the next couple of years", reckoned Fabio Mucci. Overall, net financial wealth as a percentage of GDP is projected to marginally decrease this year on the back of some recovery in private consumption and debt appetite to 26 percent from roughly 27 percent recorded in 2010, then maintain a stable upward trend to reach around 32 percent by 2015.
Lending activity has restarted gradually, but fragile recovery in disposable income still weighs on its dynamic
"The gradual improvement in job market conditions and more solid income growth should also support some resumption of household debt appetite. Its overall pace of growth should, however, remain below the pre-crisis level", said Gianni Franco Papa, "Mortgages should continue to outperform consumer lending, supported by the penetration gap and increasing household needs to improve housing conditions." However, limitations on FX lending in some countries and tighter regulatory requirements could constrain growth in this segment. Local currency mortgages may become an alternative, but their feasibility depends substantially on further strengthening of policy initiatives to improve availability of long-term local currency funding and to develop domestic capital markets.
Although full resolution of NPLs might require some time, further normalisation of credit quality problems should generally remain supportive for a broader re-acceleration in lending activity. Household non-performing loans have already peaked in some countries such as Turkey and Estonia, while the peak is expected to be reached between 1H11 and the end of the year in the rest of the region, depending on circumstances in the different countries.
Being the number one franchise in CEE, UniCredit regards itself well-positioned to take advantage of the expectedly increasing customer demand of the upswing. Meanwhile the European banking group has turned from actions, aiming at the consolidation of its business model, to strategic measures to drive a sustainable business growth and a positive customer experience. "Customer experience is the focal point of our retail strategy in CEE", reckoned Gianni Franco Papa, Head of CEE Division at UniCredit, "Improving the accessibility of our banking services and increasing the proximity to our customers will be crucial to acquire and develop additional business. For this reason we invest in the expansion of our network, alternative direct channels as well as CRM."
UniCredit is a leading European bank with strong roots in 22 countries. Our overall global network embraces approximately 50 markets, with over 9,600 branches and more than 162,000 employees (as of 31 December 2010). Understanding the real-life situation and needs of individuals, companies and local communities is at the center of our professional commitment. We are all about providing concrete answers and real benefits to the challenges and opportunities our customers face.
In the CEE region, UniCredit runs the largest international banking network with nearly 3,900 branches. The Group operates in Austria, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Germany, Hungary, Italy, Latvia, Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.
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