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    CEE Banking Sectors: performing well in challenging times

    06.06.2012
     
    • CEE banking sectors gained in profitability in 2011
    • High-growth markets Russia, Poland, Czech Republic, Slovakia, Romania, Serbia and Albania with good performance in 2011
    • Loan growth at healthy levels, no signs of a credit crunch
    • NPL ratio stabilised at around 7 per cent in 2011

    “Despite the current turbulences in the Eurozone, which have also had their impact on Central and Eastern Europe (CEE) , the CEE banking markets have proven to be more resilient than initially anticipated. Especially Poland and Russia have developed solidly and are therefore the bright spots on the banking market,” the analysts of Raiffeisen Bank International AG (RBI) and Raiffeisen Centrobank AG (RCB) state in the newest edition of Raiffeisen Research's annual CEE Banking Sector Report titled “Performing in challenging times”.

    “When talking about the banking industry in CEE and its future growth potential we have to put its size in context with the Eurozone. In nominal terms and at current market prices, the entire CEE region corresponds to about 27 per cent of the Eurozone’s GDP, while total loans in the CEE region amount to only 9 per cent of the total loan volume inside the Eurozone,” Peter Brezinschek, chief analyst of Raiffeisen Research explains, pointing out the potential of CEE’s banking sectors. At the end of 2011, the total assets in CEE amounted to EUR 2,068 billion compared to EUR 1,846 billion at year-end 2010 and represented 7.7 per cent and 7.2 per cent of the Eurozone’s reading respectively. This is a smaller balance sheet total than that of single major banks, for instance that of Deutsche Bank amounted to EUR 2,164 billion at year-end 2011.

    The CEE banking sectors as a whole became more profitable in 2011. The average total Return on Equity in CEE grew to 12.8 per cent in 2011, compared to 10.4 per cent in 2010. Brezinschek: “The increasing profitability in the CEE banking sectors on aggregate was clearly supported by a stabilisation of non-performing loans (NPL) in the CEE region as a whole.” In terms of profitability, the banking sectors of Russia, Poland and the Czech Republic proved to be the most attractive markets in 2011. The aggregated banking sector return profile of the CEE region in the challenging year 2011 confirms the analysts’ view that a Return on Equity at around 15 per cent and a Return on Assets of about 1.5 per cent are feasible in the CEE banking sectors from a medium-term perspective and through-the-cycle.

    High-growth banking markets with average credit growth of 14 per cent in 2011

    According to the analysts, the CEE banking sectors showed a high degree of resilience in 2011. Loan growth remained at healthy levels, with an increase in 2011 of 19 per cent y-o-y in local currency terms and 13 per cent y-o-y in euro-terms. This increase followed a good loan growth in 2010. The growth potential of the CEE banking markets is underlined by cumulative 2009-2011 real loan growth figures which amount to about 25 per cent (CPI-deflated) in CEE, whereas the respective reading for the Eurozone stands at approximately 1 per cent. Generally, it has to be mentioned that loan growth levels in CEE, which tended to be very high in the period before the crisis have returned to a “new normal”. A lot of banking sectors in CEE improved their resilience via bringing down the loan-to-deposit ratios. “Since 2009, deposit collection has outpaced loan growth in CEE: on a cumulative basis from 2009 to 2011, the deposit base in CEE added some 38 per cent, while total loans increased by some 25 per cent. While loan-to-deposit ratios declined in most CEE markets over the past 24 to 36 months as a consequence, a certain divergence in terms of loan-to-deposit ratios and balance sheet liquidity still remains among the sub-regions,” Gunter Deuber, Head of CEE Research at Raiffeisen Research explains and is convinced that the current healthy deposit collection trends in CEE are good news, as future banking sector growth will in turn strongly depend on that deposit collection. Based on this development Deuber expects the region to be less vulnerable to adverse external shocks compared with 2008/09.

    The best performing banking sectors in the region, which the Raiffeisen Research analysts have identified as high growth markets already in last year’s CEE Banking Sector Report, represent 80 per cent of the overall CEE banking market. This group of countries, namely Russia, Poland, the Czech Republic, Slovakia, Romania, Serbia and Albania, showed a very good performance also in 2011 and achieved an average credit growth of 14 per cent y-o-y (in euro-terms). In contrast, the remaining countries, accounting for 20 per cent of the CEE banking market, showed a more modest performance in 2011, with an annual total loan growth that remained more or less flat. According to the analysts, this divergent performance should persist for some time. Despite these developments, the corporate and mortgage loan growth remained at healthy levels even in those CEE banking markets that did not show a strong total loan growth in 2011. This performance underscores that both business segments are underpenetrated in nearly all CEE markets.

    Generally, the analysts did not find signs of a credit crunch in CEE. “There are only a few countries, which experienced a rapid pre-crisis expansion, where the credit extension remains subdued,” Deuber adds.

    NPLs peaked in major CEE markets

    The decent performance of the CEE banking sectors was supported by a peak of the NPL ratio in the major CEE markets Czech Republic, Poland, Russia, Slovakia and Ukraine. On the other hand, most countries in SEE as well as the CE countries Hungary and Slovenia did not manage to follow the trend of stabilising asset quality in 2011. All in all, the NPL ratio for the CEE region as a whole stabilised slightly below 7 per cent in 2011.

    Generally, it has to be stressed that the CEE banking sectors are quite small in comparison to the banking sectors of the Eurozone. “As the CEE banking sectors currently amount to only 9 per cent of the Eurozone’s total loan stock, it comes as no surprise that the NPL stock in Spain is double as high as in the whole of CEE,” says Deuber.

    Poland and Russia: The most attractive CEE Banking Markets for future growth

    The analysts of Raiffeisen Research see the largest growth potential in Russia and Poland, which together represent 60 per cent of the CEE banking sector. This reflects both the absolute size of the two markets, as well as their expected sustainable nominal double-digit annual loan growth rates forecast for 2012 to 2016. According to these forecasts, Russia will post an average annual loan growth of 15.3 per cent between 2012 and 2016 which will translate into an increase of the loan stock by EUR 578 billion. Poland’s average annual loan growth for the same period is seen at 14.6 per cent and this growth rate should translate into an increase of the loan stock by EUR 170 billion in the Polish banking sector. Seeing these figures in context with CEE’s current loan stock of EUR 1,195 billion the huge potential of Poland and Russia becomes obvious.

    Composition of CEE’s top banks influenced by M&A transactions

    Societe Generale, UniCredit, RBI and Sberbank, all of them with high asset allocations in CE (excluding Hungary and Slovenia) and/or Russia could outperform their peers in terms of loan growth and asset quality. “The Top-10 ranking by assets has been largely influenced by M&A transactions: for example, the takeover of Polbank, a former branch of EFG Eurobank, made RBI the second-largest Western bank in CEE after UniCredit,” Stefan Maxian, chief analyst of Raiffeisen Centrobank, says. Santander's acquisition of Kredyt Bank pushed the Spanish bank into the Top-10. While Russian VTB focused on M&A in its home market Russia, Sberbank bought 100 per cent of Austrian Volksbank International and hence a presence in seven CEE countries. Maxian expects the consolidation wave to continue, but does not believe that the M&A volume of 2011 would be reached in the next twelve months.

    The CEE Banking Sector Report is available at
    http://www.rbinternational.com/ceebankingreport2012

    * * * * *
    Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets.

    RBI is the only Austrian bank with a presence in both the world's financial centres and in Asia, the group's further geographical area of focus.

    In total, around 61,300 employees service about 14.6 million customers through around 3,100 business outlets, the great majority of which are located in CEE (these figures include Polbank).

    RBI is a fully-consolidated subsidiary of Raiffeisen Zentralbank Österreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBI's shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country's largest banking group, and serves as the head office of the entire RZB Group, including RBI.

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