CEE Banking Study 2012:
CEE banking sector still to generate above-EU average growth
- Long-term outlook for regional convergence remains intact, while average economic growth will likely be structurally lower and growth differentials within the region wider than in the past
- 2012 should remain a challenging year for CEE banking, with regulatory changes and European debt crisis as main risk factors, but Western European banks´ deleveraging should be a manageable drag
- CEE remains the "engine for growth" for UniCredit with a newly defined strategy aimed at maintaining leadership through a focused country approach
Over the medium to long term there is still potential for the CEE banking sector to generate above-EU average growth in banking volumes and profitability, as the financial penetration gap still exists and economic convergence prospects remain broadly intact. This is one of the key findings of the latest CEE Banking Study, conducted by UniCredit´s CEE Strategic Analysis department. Although total loans in the CEE region should have approached EUR 1.5 trn at the end of 2011, which is an increase by roughly 9% yoy, loans to GDP stood finally at an estimated 49% for CEE compared to 120% in the Euro area. Market potential is in place especially for corporate loans and mortgage financing, whereas this is hardly the case for consumer lending. Large divergences remain also by geographies, with Russia and Turkey expected to contribute the most in terms of lending growth over the 2011-2015 period.
CEE: A region of two halves
"Future economic growth will likely be structurally lower on average and growth differentials within the region wider than in the past", said Gianni Franco Papa, Head of CEE Division at UniCredit, "CEE should remain a region of two halves with larger economies likely to keep growing almost at full steam while others may suffer from their structural weaknesses and high correlation with the performance of peripheral Europe." Over the medium term UniCredit researchers continue to see decent catch-up potential, underpinned by improving productivity and convergence of income levels, something that is echoed by their long-term GDP growth forecasts averaging above 4% for the CEE region. In the long run regional convergence should be pursued through broader economic diversification and an increasing role for tradable sectors. In this context bank lending will be decisive and should support this switch.
A more balanced funding structure should clearly prevail
During last year, lending activity continued expanding in CEE region, although at a slower pace than in 2010 and with growth slowly dissipating in 2H on the back of the continuing turmoil in the financial markets and a rapidly deteriorating funding environment. Lending was driven by the corporate segment, which profited from the cyclical recovery in the economy posted in 2010 and 1H 2011. "At the beginning of last year, following the restoration of better liquidity conditions and increasing evidence that competition for deposits (visible in 2010) was starting to be detrimental to banks' profitability, the focus on deposits became less acute with some re-leveraging taking place", stated Fabio Mucci, Head of CEE & Poland Strategic Planning at UniCredit. "In 2H 2011, however, banks have reversed tack, as liquidity substantially tightened on the back of the Euro area crisis and the fight for deposits again became the name of the game." To some extent, the tightening of liquidity came as a result of weaker funding inflows from abroad, compounded in some cases by restrictive central banks' policies in an attempt to stem local currencies weakening.
Despite the observed deterioration in funding conditions during the second half of last year and pressures on the revenue side, the banking sector performance improved on a range of parameters. In particular, credit quality has generally stabilised on the back of recovery in lending and the improvement in macroeconomic conditions. "The average impaired loans ratio for the region has not increased since year-end 2010, drifting to an estimated 14% at the end of last year", reckoned Mucci, "In the majority of CEE countries impaired loans ratios have peaked or stabilised by mid-2011. Improvements in asset quality were also clearly reflected in a further contraction in the cost of risk, which proved to be supportive for banks' profitability both in 2010 and 1H 2011." Provisioning levels declined in all countries except Kazakhstan, with the strongest drop being recorded in the Baltics, Russia, Bosnia, Hungary and Ukraine. As a result, the share of provisions over average banking volumes halved in 2011 compared to 2010.
Looking ahead, lending activity should converge toward a lower growth rate path compared to the pre-crisis period, but remain in the low double-digits. Under the ‘new normal' a more balanced funding structure should also prevail, particularly in countries featuring high funding gaps.
EMU bank deleveraging impact on CEE is a manageable drag
The severity of the current crisis in the Euro area contributed to the rising fears that capital needs and funding pressures faced by Western European banks may heighten pressure to deleverage in Central and Eastern Europe. Western European financial institutions are important owners of banks in CEE. Out of EUR 2.5 trn of bank assets in the region 46%, is controlled by foreign owners. Multiple capital linkages between CEE and Western European banks have made the region exposed to knock-on effects from the current crisis in the Euro area. For many years some banking sectors in CEE have been relying strongly on foreign funding, mainly parent funding, and foreign liabilities currently account for a significant part of their assets.
According to UniCredit researchers the short-term risk for CEE stemming from Western European banks' response to the EBA capital requirement remains limited. This expectation is based on the information from particular banks on how they plan to achieve a 9% CT1 ratio by the end of June 2012. In the mid-term the economist does not rule out that a less favourable macroeconomic environment and persistent regulatory pressure may force some Western European banks to implement more rebalanced, self-sufficient business models in their CEE subsidiaries.
UniCredit maintains its leadership in CEE and reaffirms its commitment to the region
"In the light of recent developments in the global economy and European banking sector, the significance of the CEE region to the growth and profitability of international players has become even more evident", said Gianni Franco Papa, Head of CEE Division at UniCredit, "The region strongly contributed to the revenue stream of international banking groups in 2011 and is set to remain a key driver for their growth, as the region's performance should continue surpassing that in home markets."
While diversification in the geographical footprint remains a key pillar in the strategy of international players, some re-shaping of the business strategy with a clearer focus on specific markets became visible throughout the year. Recent events have clearly contributed to accelerating the number of divestments of operations in the region by subscale players facing difficulties in their home markets.
The ranking of international players active in CEE shows UniCredit hold its leading position in the region outperforming its main international peers in terms of size and profitability. Ranking within the top-5 banks in the majority of CEE countries where it operates, UniCredit enjoys a sound positioning in the region's most attractive markets such as Russia and Turkey. "In the coming years, we are going to strengthen our leading position in CEE through a focused country approach with profitability and liquidity defining our local strategy, while a clear emphasis will be put on markets where the Group has a strong footprint", Papa pointed out, "Through a number of strategic initiatives aimed at an intensified optimization of investments, the value of CEE operations will be further maximized."
UniCredit is a leading European bank with strong roots in 22 countries. Our overall global network embraces approximately 50 markets, with over 9,500 branches and more than 160,000 employees (as of 30 September 2011).
In the CEE region, UniCredit runs the largest international banking network with more than 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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