The CEE banking sector keeps showing good profitability with revenue margins narrowing but still above Western European levels, Unicredit says in a report. 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.
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.
“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.
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.”
“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.
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.”