Corporate Lending in Central and Eastern Europe 2012:
Financing to the corporate sector is holding up well, but a diverging performance among countries is likely to persist
- Cyclical sectors, which have been at the forefront of the economic recovery, look set to lose further strength in 2012
- Survey data reveal banks' willingness to give sufficient financing improved over 2011 in the context of still low demand
- Availability of credit remains an essential pre-condition for output to return to its long-term trend
To date, bank lending to the corporate sector in the CEE region is holding up well, but a diverging performance among countries is likely to persist over the coming months. This is one of the key findings of a recent analysis on corporate lending in Central and Eastern Europe conducted by UniCredit's CEE & Poland Strategic Planning department. Larger economies such as Turkey and Russia saw strong double-digit growth in the demand for commercial loans until February 2012, whereas in smaller countries like those in the Baltics, corporate financing is more than lacklustre, with some countries even showing shrinking volumes.
Improved business environment, but FDI is recovering slowly
"As pointed out by the latest business climate indicator, the forward-looking business sentiment of companies has improved recently. Nevertheless, industry growth in the CEE region will be slightly negative in the first quarter of this year due to weaker external demand," said Gianni Franco Papa, Head of the CEE Division at UniCredit. Important elements of differentiation will remain in place, with short-term indicators pointing to still fragile growth particularly in SEE. Apart from that, cyclical sectors have lost some of their impetus since January. The only exception is machinery and equipment, which is benefitting from steady demand in China. "Overall, the business environment has improved significantly over the past few years, but regulation, the judicial system, taxation and political factors are still reported as major obstacles to doing business in CEE," explained the top executive.
Following the 2008 crisis, the CEE region experienced a large shift in the composition of capital flows. The portfolio component is now dominating in CEE, whereas FDI inflows have only marginally recovered from the trough compared to other emerging markets like Latin America or Asia and remain well below pre-crisis levels. Generally speaking, the trend is toward more short-term portfolio capital instead of medium- to long-term capital. In the end, fostering competitiveness remains a key challenge for the CEE region, which still enjoys more favourable production costs than the EU-15 in the context of still lower productivity on average.
Cost of credit and collateral perceived as major obstacles to the availability of credit
Firm-level data suggests a strong positive relationship between bank credit and investment activity especially in the recovery phase, confirming that the availability of credit is an essential pre-condition for output to return to its long-term trend. At the same time, one must not neglect the important role of demand-side factors. Empirical evidence also indicates that the contraction in investment activity has been the largest in areas that experienced an accelerated or booming dynamic in lending in the pre-crisis period, such as Bulgaria or Romania.
"The contraction in the availability of credit at the peak of the crisis led to a visible substitution in the sources of financing and the implementation of cost cutting measures," pointed out Fabio Mucci, Head of CEE & Poland Strategic Planning at UniCredit. Thus, many enterprises substituted bank loans with refinancing from parent companies and, to a lesser extent, with bond issuance. Companies that experienced the largest contraction in the availability of credit during the crisis were also the ones which recorded a significant adjustment in labour costs to overcome liquidity problems. In the aftermath of the crisis, investment activity of most leveraged sectors lagged substantially behind that of the least dependent ones.
"According to a TNX survey conducted for UniCredit with over 12,000 companies in 16 CEE countries, banks' willingness to give sufficient financing improved over 2011 in the context of still low demand," stated Fabio Mucci, adding, "On a scale from 1 to 5, where 5 is the best mark, interviewees rated banks 3.77 on average in 2011 compared to 3.67 the previous year." In a complementary poll, however, the majority of enterprises reported a tightening of credit conditions in 2011, citing cost of credit and collateral requirements as major obstacles to the availability of credit. Demand-side factors are also playing a role, with 44 per cent of companies having reported "no need" among the major reasons not to apply for a loan.
The corporate sector remains one of the most attractive business segments as the level of indebtedness is significantly lower than the Western European average with particularly high untapped potential related to cross-border business. In the EMU, corporate lending is about 50 per cent of the regional GDP, whereas in Turkey it accounts for 32 per cent, in Russia 28 per cent and in the Czech Republic 21 per cent, for example.
UniCredit is the leading corporate bank in CEE
UniCredit supports cross-border business development and operations of companies through its extensive network of local banks in different CEE countries and through direct financing from its Western European subsidiaries in third countries. Over 1,650 relationship managers serve around 4,500 active German and between 2,000 and 3,000 Austrian and Italian clients operating in Central and Eastern Europe. They combine personal, in-depth knowledge of the local CEE markets and global banking product expertise leveraging on the products' hubs in London, Munich and Vienna.
Cross-border business is a key pillar of UniCredit's strategy for corporate customers, which is also confirmed by the bank's superior performance in serving international clients. In the latest customer satisfaction index, all UniCredit segments performed better than the nearest global competitor, with international clients being the most satisfied customer group.
UniCredit is a leading European commercial 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 31 December 2011).In the CEE region, UniCredit runs the largest international banking network with more than 3,800 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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