CEE Banking Study 2013:
Looking for sound growth, CEE banks rebalance their business models

  • The CEE banking sector keeps showing good profitability with revenue margins narrowing but still above Western European levels
  • Total assets and lending have grown steadily since 2008, even though at a slower pace than before the crisis and with a stronger focus on domestic funding sources
  • Foreign players have an important role in the local markets and increased the share of CEE assets within their groups' total assets over the last years

Although still in the grip of an uncertain global economic environment and EMU turbulence, the Central and Eastern European banking sector keeps showing good profitability. With an average return on equity expected at 10.9 per cent in the years 2012 – 2015, the region will reveal an attractive and more sustainable double-digit profitability ratio than Western Europe. This is one of the key findings of the latest CEE Banking Study, which was conducted by UniCredit´s CEE Strategic Analysis department and which covers 17 different countries. Revenue margins are narrowing in CEE, nevertheless they are double of those seen in Western Europe. Cost efficiency and risk management will remain the determining factors for the banks' performance in the region. A clear differentiation across CEE countries is discernable, with Turkey and Russia over-performing, while the profitability of the banking sectors in the Balkans and Ukraine is subdued. Asset quality is a source of risk, at least until 2014.

Long-term economic growth potential intact, competitive versus other EM
"In comparison to more developed countries the long-term growth potential of the CEE economies is intact", outlined Gianni Franco Papa, Head of CEE Division at UniCredit. "Some of them are looking particularly attractive when measured against other emerging markets." For instance, real GDP growth of CIS countries and Turkey is forecast to reach 4.4 per cent on average in the period 2013 – 2017, leaving the Middle East / North Africa region (plus 4.2 per cent) and Latin America (plus 4.0 per cent) behind. At the same time the eurozone economy will expand by 1.2 per cent on average. The strengths of the CEE region are its competitiveness, labour flexibility and labour costs. In the short-term a stimulus is expected to come from low interest rates and low inflation as well as from run-down inventories and stronger external demand. Furthermore, some positive signals have recently emerged from sentiment indicators and real economy data.

2013-17 real avg. GDP growth, by region (%)
SOURCE: IMF WEO (Oct  2012)
(1)  CE: PL, CZ, HU, SK, SI
(2) SEE: BH, BG, HR, RO, SRB
(3) ASEAN-5: Indonesia, Malaysia, Philippines, Thailand, and Vietnam

Lending and asset growth in the CEE banking sector have never stopped since the peak of the global financial crisis in 2008. As a matter of fact banks' total assets in the CEE region have grown steadily, with EUR 700 billion being added between September 2008 and September 2012. The pace of growth has decelerated in comparison to pre-crisis years. "The slower growth in total assets comes on the back of a more prudent stance, asset quality deterioration and limited investment opportunities", stated Aurelio Maccario, Head of CEE Strategic Analysis at UniCredit. "Additionally the loans-to-deposits ratio is playing a more important role, stressing the need to improve the funding structure of the balance sheet." Subsequently the importance of external liabilities as a source of funding is diminishing, although those funds remain a relevant factor for local credit dynamics. Over the past four years CEE banks have raised around EUR 130 billion in additional capital, which is a cumulative increase of 49 per cent. The consolidated claims of European banks on the basis of direct and FX loans vis-à-vis CEE have declined since 2008. Moreover they are fluctuating around the 'new average' recently.

CEE Banking Sector - Balance Sheet Structure
* CAGR: for loans was at 6.8%, external assets 7%, deposits 7.7%; debt issued 14.1%, capital 10.5%, external liabilities -1.7%.
** Other assets include: loans to MFIs, holdings of securities and shares, as well as fixed and remaining assets
*** Other liabilities include: deposits from MFIs, money market funds and remaining liabilities

Despite weak demand the most recent evidence shows that lending growth has been positive in many CEE countries in 2012, although uneven across the region. Russia and Turkey lead the pack, each displaying not only the strongest gains in loans to customers but also a very favourable loans-to-deposits ratio. Concerning interest rates, CEE central banks are once again back to an easing mode.

International banking groups adjust their funding structure
Foreign players have an important role in the CEE banking system. Including Russia and Kazakhstan, 43 per cent of total assets in the region are owned by international banking groups as of 30 June 2012, a slight decrease from a 46 per cent share seen at year-end 2010. But if Russia and Kazakhstan – where domestic banks have more than 70 per cent market share – are excluded, nearly two-thirds of total assets in the region are held by foreign groups. Foreign players recorded an increase in CEE assets in their groups' total assets, from 12.8 per cent to 13.5 per cent over the past four years. "International banking groups in CEE give more attention to the liability side, supporting their domestic funding, rather than to the asset side", said Aurelio Maccario. "On this basis, cross-border groups have improved their average CEE loans-to-deposits ratio from 107.2 to 98.2 per cent." As a result the leverage ratio measured as Assets / Equity is coming in lower than in pre-crisis years, but higher than in 2009 / 2010.

Confidence in the further growth of the CEE banking sector
Going forward, it is important to restore growth and thereby the demand for loans, something that banks will provide support for. In this respect, regulators, governments and banks need to strike the right balance between regulatory safeguards and efforts to boost growth. "In many CEE countries corporate loans constitute more than 30 per cent of the banks' balance sheets. On the other hand enterprises are dependent on bank financing, replicating Western European structures", noted Gianni Franco Papa, Head of CEE Division at UniCredit. "We are ready to meet our customers´ needs and to support them in their business objectives."

UniCredit currently has a Core Tier 1 capital ratio of 10.7 per cent and an unrivalled international network in approximately 50 countries. The Group is the prime partner for supporting customers' cross border business development and operations through its local banks in 22 countries with a seamless service model. It has unique in-depth knowledge of the various CEE markets and serves some 10,000 active corporate customers from Germany, Italy and Austria operating in CEE. UniCredit people are dedicated to a strong quality service and committed to retain the Group's leading position in CEE, including high customer satisfaction.

UniCredit is a leading European commercial bank with strong roots in 22 countries. Our overall global network embraces approximately 50 markets, with over 9,400 branches and more than 158,000 employees (as of 30 June 2012).
In the CEE region, UniCredit runs the largest international banking network with more than 3,700 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.

Enquiries: International Media Relations 
 Tiemon Kiesenhofer, telephone: +43 (0) 50505 - 56036 
 e-mail: tiemon.kiesenhofer@unicreditgroup.at

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