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Public relations section
"In terms of growth and profit, the banking sector in Central and Eastern Europe (CEE) continues to outperform its Western European counterpart, as growth opportunities and margins in CEE remain significantly higher. New banking regulations in Europe and CEE will bring new challenges for the region," stated the analysts of Raiffeisen Bank International AG (RBI) and Raiffeisen Centrobank AG (RCB) in their latest edition of Raiffeisen Research's annual CEE Banking Sector Report titled "Commitment will be rewarded". The report was presented on the occasion of the annual meeting of the European Bank for Reconstruction and Development (EBRD) in Istanbul.
“Total 2012 loan growth in CEE came in at 14.8 per cent yoy in euroterms. Another year of expansions brings the cumulative 2010 to 2012 real loan growth in CEE to 21.8 per cent. In the Eurozone real loan growth was negative over the same period of time. The overall loan volume of the CEE banking sector compared to the Eurozone increased from 9.6 per cent in 2011 to 11.1 per cent in 2012. In terms of total assets, the growth of the CEE banking sector compared to the Eurozone in 2012 was the highest over the past decade,” explained Gunter Deuber, Head of CEE Research at Raiffeisen Research. For 2013, Raiffeisen Research expects total banking assets to exceed € 2,500 billion, which would be some 20 per cent above the total assets of Industrial & Commercial Bank of China (ICBC), the world’s largest bank in 2012.
As the economic cycle is expected to turn in 2013, the Raiffeisen Research analysts see an upside potential for lending in the second half of 2013. The loan-to-GDP ratios for six or seven high-growth CEE banking markets are expected to rise. The Russian and Polish banking sectors are expected to come in at the top of the group of high-growth markets with an annual loan growth of 13 per cent and 10 per cent, respectively (in euro terms from 2013 to 2017). The Czech Republic, Slovakia, Romania, Serbia and Albania follow with total annual loan growth in the range of 7 to 10 per cent in euroterms (6 to 9 per cent in local currency terms) appearing to be sustainable in the medium-term.
Banks in CEE benefit from higher growth opportunities and margins
According to the analysts, the solid aggregated profitability in CEE banking in 2011 and 2012 is clearly outpacing global Developed Markets and Eurozone banking profitability indicators. The solid profitability readings of 2011 in terms of Return on Assets (RoA) or Return on Equity (RoE) in 2011 were even slightly topped in 2012. The average RoE in the CEE banking sectors stood at 16 per cent in 2012 (compared to15 per cent in 2011), the average RoA amounted to 1.9 per cent in 2012 (compared to 1.7 per cent in 2011).
"The global banking RoE was around 7 to 8 per cent in recent years, inside the Eurozone the RoE turned into low positive territory in 2012, after being negative in 2011. Hence, well-diversified banks can earn more than their cost of capital in CEE, while this is a challenging task in Western European banking sectors. However, it is also clear-cut that the solid profitability in CEE banking was driven by a few well-performing markets," said Deuber.
On the Russian, Polish and Czech banking markets, the average RoA stood at 1.7 to 1.8 per cent in 2012, while the RoE was close to 20 per cent on average. The sound profitability performance of the CEE banking sector in 2012 was supported by a stable NPL ratio development across the region.
CEE markets show very divergent NPL ratios
"Although in 2012, the aggregate NPL ratio in CEE inched just 0.1 percentage points higher to 10.1 per cent, the overall picture with regards to NPL ratio levels and developments is a mixed bag," said Deuber. There are individual CEE markets with NPL ratios of 15 to 20 per cent. However, in other markets NPL ratios remained in a range of 4 to 8 per cent, almost unchanged versus 2011. Hence, NPL levels of well-diversified Western European CEE banks do not look overly high. In terms of NPL ratio increases, SEE has shown a strong rise in 2012 (up to 17.3 per cent from 14.5 per cent in 2011).
According to Raiffeisen Research, the high NPL ratios in Hungary and Slovenia still have a significant negative impact on the entire CE-region, overshadowing the stable or declining NPL ratios in the Czech and Slovak banking sector. In the CIS region, the average NPL ratio was on a slight downtrend, from about 7.5 per cent in 2011 to 7 per cent at year-end 2012.
CEE profitability decrease cannot be compared to global or Western European levels
The analysts emphasize that the relative decrease in profitability within the CEE banking sector since the start of the financial crisis cannot be compared to the observed downfall on a global or Western European level. Globally, banking sector profitability has more or less halved in recent years, and within the Eurozone the aggregated RoE of the post-crisis banking sector stands at less than one third of its pre-crisis level.
The environment of low interest rates in a lot of CEE markets is likely to challenge banks also in 2013. "However, this environment in CEE is set to last much shorter than inside the Eurozone. Therefore, we see no signs of a retreat of dedicated Western banks," Deuber added. At year-end 2012, the aggregated CEE exposure of the three most important banking sectors for the region (Austria, Italy and France) was more or less at the level reached in 2009.
CEE L/D ratio well below the Eurozone's
In nearly all CEE banking sectors, loan-to-deposit (L/D) ratios continued to stay well below the levels seen in the last pre-crisis boom years. On average, the CEE L/D ratio of 98 per cent is now well below the Eurozone's aggregate L/D ratio that also came down a bit in recent years (from 112 per cent in 2007 to 105 per cent in 2012).
In the medium-term perspective, the recent downtrend in CEE L/D ratios reflects just a correction of brisk lending activity at the final stage of the strong banking sector expansion during the pre-crisis years. In the early boom years, there had been still a significant deposit overhang in CEE. In contrast, L/D ratios for the Eurozone had always been well above 110 per cent for the past decade or so. The substantial rebalancing of the L/D ratio in CEE in recent years (i.e. a reduction by 15 to 20 percentage points) shows the high degree of balance sheet flexibility in the region.
Moreover, deposit collection in CEE showed a strong pick-up in 2011 and 2012 (following a more subdued expansion in 2008/09), a development not observed within the Eurozone. The majority of international banks operating in CEE considers current funding balances to be at very solid levels.
Ranking of top players almost unchanged
With respect to the strategies of individual banks, the overall picture in 2012 remained similar to 2011. UniCredit, RBI, Erste, SocGen and KBC still form the group of the five largest Western European CEE banks. UniCredit remained clearly ahead with consolidated total assets of € 121.6 billion, followed by RBI (€ 84 billion), Erste (€ 83.4 billion) and SocGen (€ 78.6 billion), which are all in a close range of each other. Despite its divestments, KBC ranks number five with € 53.1 billion, although the gap to the top four increased.
It is evident that there was no bank with an expanding branch network in 2012. On average, the aggregate number of branches went down by 4 per cent across the region. Obviously, the banks with a divestment program like KBC lost the most. RBI kept the number 1 position in terms of branch presence ahead of UniCredit. RBI increased its number of branches in Poland as a consequence of the takeover of Polbank, but at the same time cut its presence in Ukraine, Hungary and Romania.
When looking at core revenues (Net Interest Income and Fee & Commission Income), there was a pressure on NII from the lower rate environment, while weaker F&CI was triggered by lower loan origination in the second half of 2012. Banks with a relatively strong presence in the CIS region (UniCredit, RBI, SocGen, OTP) were able to defend their overall consolidated revenues thanks to Russia, including revenues from Ukrainian operations, which all in all were stable in 2012 yoy. On the other hand, banks with a sole exposure in SEE (like Greek banks), additionally burdened by asset reductions and a more aggressive deposit growth, have clearly faced the strongest decline yoy. With regard to the CE region, the analysts observed a moderate downward trend in revenue development, obviously more negative in Hungary and Slovenia than elsewhere. Poland, the Czech Republic and Slovakia contributed solid profits for international banks, although the introduction of the banking levy in Slovakia caused a negative momentum. "Banks with a balanced mix of activities in Russia, Poland and the Czech Republic were having a particularly good basis for volume and earnings stability, while those banks fully exposed to SEE and forced to rebalance SEE-business were suffering significantly," said Jovan Sikimic, analyst of RCB.
According to the view of the majority of banks, Hungary and Romania are concordantly the most challenging markets. However, recent political and economic developments give hope that the worst is over. "This holds especially true for the Romanian banking market, where some better performers are already preparing for the upside – as indicated by the sale of the Citibank household loan portfolio to RBI or the announced sale of the RBS retail banking business to UniCredit," said Sikimic. The ongoing gradual changes in the competitive landscape in CEE (exiting niche players) also support the committed players.
Apart from large takeover transactions looming already in 2011, the analysts of RCB have observed several smaller divestments. UniCredit sold its Kazakh ATF Group and reduced the majority stake in its largest subsidiary,Bank Pekao in Poland. Both Swedbank and Erste withdrew their operations from the Ukrainian market.
Bulgaria: Low loan demand and conservative lending policies dominate
In 2012, GDP growth slowed down to 0.8% yoy, mirroring the economic downturn in the Eurozone. As a result, the Bulgarian banking system had to operate within a challenging environment. Loan growth was subdued against the background of cautious lending policies, while NPL ratios continued to rise, even though more moderately than in 2011 (2012 NPL ratio at 16.6% up from 14.9%). On a positive note, conservative lending activity and a strong deposit growth – mainly provided by residents – boosted the overall liquidity within the banking system. Moreover, the sector maintained its high capital adequacy levels and still posted decent financial results.
The total number of banks remained unchanged at 31 (24 universal banks and 7 branches of foreign banks), whereas more than 96% of the sector’s total assets are controlled by privately-owned banks. There were no significant M&A activities.
The CEE Banking Sector Report is available at