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    CEE Banking Sector: 2015 as a transition year

    • „New normal“ has arrived in the CEE banking sector
    • Western CEE banks are realigning their market presence
    • Upside on some CE/SEE markets; HU and RO are making good progress
    • NPL ratio: improvements in CE/SEE; downside in EE
    • Profitability: RoE in CEE at 6 per cent with not much upside for 2015
    • L/D ratio: sufficient room to finance a new, but more cautious, lending cycle

    “It was foreseeable that 2014 would be a key year for the European banking sector and that banks with a presence in Central and Eastern Europe (CEE)* would be tested. Back then our assessments were based on the stricter regulatory measures regarding capital strength and risk evaluation. However, the conflict between Russia and Ukraine, that worsened throughout the year, as well as the disappointing economic growth in the euro area were both factors that resulted in even bigger than expected pressure on the banking sector. At this point the “new normal” has arrived in the banking industry and all market players are at least partially forced to realign their business strategies. Hence, I see 2015 as a transition year that is likely to result in banks closing down business segments or even exit entire markets. Nevertheless, the decision to be present on the CEE banking sector is still important and right. I am personally convinced that the banking business, after this phase of realignment and even though under new conditions, will again contribute a significant share to the economic and social development of the entire region,” said Karl Sevelda, CEO of Raiffeisen Bank International AG (RBI).

    His assessment is backed by the key findings of the latest edition of the annual CEE Banking Sector Report – a joint publication by the analysts of RBI/Raiffeisen RESEARCH and Raiffeisen Centrobank AG (RCB). The report was presented at a press conference in Vienna on 10 June.

    Upside on some CE/SEE markets; Hungary and Romania are making good progress

    “We continue to consider Poland, the Czech Republic and Slovakia as high-growth markets, characterized by modest levels of financial intermediation and hence a fair chance that lending and asset growth can outpace GDP growth on a sustained basis. From a fundamental perspective, the turnaround markets of Hungary and Romania may be added to this group of countries. Both banking markets did see an economic and banking sector turnaround in recent years based on deleveraging, harsh one-off losses and NPL restructuring. However, at this point it is difficult to predict if the restructuring of the past few years has been yet sufficient to start a decent upturn already in 2015,” explained Gunter Deuber, Head of CEE Bond and Currency Research at RBI and one of the leading authors of the CEE Banking Sector Report.

    NPL ratio: improvements in CE/SEE; downside in EE

    Regarding the ratio of non-performing loans (NPL), 2014 was finally a turnaround year in the CE and SEE banking sectors and brought dropping ratios after years of increases. In Romania, for example, the NPL ratio decreased from 21.9 per cent in 2013 to 13.9 per cent at year-end 2014 after the central bank implemented a range of measures to speed up the balance sheet clean-up. In CE, the positive regional NPL ratio trend got support from solid and/or improving asset quality and new lending activity in markets like Poland, the Czech Republic and Slovakia. Asset quality was also finally improving in Hungary (NPL ratio down from 14 per cent to 13.3 per cent) and Slovenia (NPL ratio down from 22 per cent to 16 per cent). The overall NPL ratio in the CE region improved from 9.1 per cent to 8.5 per cent, the regional NPL ratio excluding Hungary dropped from 7.1 per cent to 6.8 per cent in 2014. Hence, on a regional level (whole CE aggregate) the NPL ratio dropped by 0.6 percentage points in 2014 following five consecutive years of a cumulative increase by 5.2 percentage points. It is likely that an even larger drop in the regional CE NPL ratio would have been possible, however, the Asset Quality Review (AQR) and stress testing by the European Central Bank (ECB) and the European Banking Authority (EBA) led to more cautious assessments of the asset quality.

    In total, the diverging NPL ratio trends in the three CEE subregions were still somewhat offsetting each other in 2014, resulting in a fairly stable overall CEE NPL ratio of 8.5 per cent. However, in 2015 the developments in EE could overshadow positive NPL trend in other CEE markets, a scenario that may lead to an increase of the total CEE NPL ratio to above 9 per cent until year-end 2015.

    Profitability: RoE in CEE at 6 per cent with not much upside for 2015

    Profitability in CEE banking was a mixed bag in 2014. The overall CEE banking Return on Equity (RoE) has reached its lowest level at some 6.9 per cent since the year 2000. This disappointing performance can be attributed to several factors. First, the lower RoE margins in the CEE area reflect the new European regulatory requirements that are pushing banks towards larger capital buffers.

    Second, in 2014, three CEE markets, namely Hungary, Romania and Ukraine, turned negative, which is a significant worsening compared to 2013, when only Slovenia made a loss, and hence marks one of the worst years in CEE banking. Only in 2010/11 the situation in the region was worse, with four loss-making banking markets.

    Finally, in 2014, the overall profitability pressure was notable also in profitable CE markets like Poland, the Czech Republic and Slovakia and resulted in a further round of profit compression from already low levels by historical regional standards. The regional CE RoE dropped from 10.3 per cent to 9.2 per cent; excluding Hungary, the regional RoE decreased from12 per cent to 11.7 per cent. Due to the relative maturing of the CE markets, the risk premium in the region went down, supporting the respective downwards pressure on profitability. Nevertheless, it needs to be emphasized that the CE countries currently have the greatest potential for banking business in CEE.

    L/D ratio: sufficient room to finance a new, but more cautious, lending cycle

    The past years’ trend in core funding dynamics in CEE, and its relation to the lending base, saw a continuation in 2014 as well. The aggregated loan-to-deposit (L/D) ratio across the CEE banking markets remained stable at some 97 per cent (i.e. notably below its peak at 114 per cent in 2008).

    2014 was another good year for deposit funding growth in the entire CEE area, notwithstanding some countries’ headwinds, that left the respective banking systems in a tougher funding situation (as seen in Bulgaria, Russia and Ukraine). It is possible that the CEE region’s low L/D ratio may witness something like a turning point in the lending cycle. Given the rebalancing of the L/D ratio in most of the countries, and especially in those countries with the strongest macro-performance, the analysts see sufficient room to finance a new, but more cautious, lending cycle going forward. In particular in those CE markets without secular deleveraging needs (i.e. the Czech Republic, Poland and Slovakia) the trend of loan and deposit growth continued in 2014 at more or less similar levels, with a slightly stronger deposit growth in comparison to loan growth. Banking markets with secular deleveraging needs (i.e. SEE as well as Hungary and Slovenia) continued to show a significantly stronger growth in deposits than in loans.

    Western CEE banks are realigning their market presence

    In 2015, caution and selectiveness will be the core business elements for Western European CEE banks. The overall business strategies in CEE banking are likely to be dominated by balance sheet optimization, cost-cutting, selective growth and investments strategies focusing on product optimization, modernization and operational efficiency.

    “Given the current developments on CEE banking markets from both a fundamental and/or a regulatory point of view as well strategic repositioning of some players we might expect an uptick of M&A activities in the region during the next twelve months. However, it is unlikely that there will be large-scale expansions of existing branch networks. Although we still expect 2015 to be a transition year in CEE banking, we also see players that are already positioned to profit from the increasing upside and next credit cycle in CE and SEE banking. They are placed to gain market share and to lay the foundations for future growth and profitability,” said Jovan Sikimic, analyst at RCB and one of the authors of the CEE Banking Sector Report.

    Bulgaria: Digesting the consequences of the bank crisis

    In 2014, the Bulgarian GDP grew by 1.7% posting some improvement over 2013. The increase came on the back of positive dynamics of all three major GDP components on the production side (services, industry and agriculture), which has happened for the first time since 2009. The banking sector, however, could not fully benefit from the overall positive economic dynamics, as the behavioral patterns of both banks and customers were negatively affected by the banking crisis in June 2014.

    Obviously, the banking sector was affected by these developments. The banks’ total assets shrank by 0.7% as at year-end 2014. Corporate loans contracted by 6.7%, while the retail segment recorded a decline of 1.2%. In total, the aggregated loan stock declined by almost 5.0%. On a positive note, household savings recovered again during the second half of the year. Household deposits increased by more than 4.5% to BGN 41 bn. This growth, however, was strongly supported by the Deposit Insurance Fund (DIF), which paid reimbursements to the depositors on account of the CCB collapse. The majority of these funds remained in the sector, since only 2.0% of them were withdrawn in cash by year-end. At the same time, corporate deposits declined by 1.2% to BGN 22.7 bn. Nevertheless, the total deposit base grew by 2.4% overall. Despite the negative impact from the mid-year crisis, the Bulgarian banking sector registered a net profit of BGN 746 mn in 2014, which is about 25% above the results of 2013. That, on the back of a shrinking asset size, caused an improvement in both aggregate RoA and RoE figures.

    In 2014, the Bulgarian banking sector saw a number of important legal and regulatory developments. First, in order to join the SSM, the Bulgarian regulator implemented the EU CRD and CRR. As a result, the banking sector‘s overall CAR increased to 22.0%, and its liquidity ratio reached 30.1%. Second, and as a direct consequence of the crisis, the government introduced amendments to the legislation on bankruptcy for the banking sector. The overall NPL ratio remained at 16.8% and continues to be subject to upside risk. The major risks stem from possible vulnerabilities, which can still emerge in the system that could be somehow related to the recent banking crisis.

    The CEE Banking Sector Report is available at

    * The Banking Sector Report defines Central and Eastern Europe (CEE) as consisting of the subregions Central Europe (CE) – the Czech Republic, Hungary, Poland, Slovakia and Slovenia; Southeastern Europe (SEE) – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia; and Eastern Europe (EE) – Belarus, Russia and Ukraine.


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