Bank deleveraging in most of CEE has finally ended, Vienna Initiative report says

Bank deleveraging in most of CEE has finally ended, Vienna Initiative report says
By bne IntelliNews November 19, 2015

Deleveraging by foreign banks active in Central and Eastern Europe finally came to an end in the second quarter – if Russia and Turkey are excluded – according to a new report by the committee of the Vienna Initiative of Western banks, which is based on banking statistics released by the Bank for International Settlements (BIS). 

The new figures could indicate that banks are poised to become a motor of economic growth once again, in a region that has had a patchy recovery since the global financial crisis.

The external positions of banks towards the region, excluding Russia and Turkey, rose by 0.1% of regional GDP in the April-June period, marking the first increase since the first quarter of 2011, the report published on November 18 said. Including Russia and Turkey, banks still took money equivalent to 0.3% of GDP out of the region, compared with an outflow of 0.5% in the first quarter. Since the third quarter of 2008, when the global financial crisis struck, banks have taken 8.3% of GDP off the table in the region, or 14.3% if Russia and Turkey are excluded.

The rise in the second quarter reflected a significant increase of BIS banks’ external positions in the booming Czech Republic and Poland (over 1% of GDP for each country). Apart from those two, most countries in the region continued to experience reductions in foreign bank funding, except for Bosnia and Herzegovina, Estonia, Macedonia, and Moldova. The most dramatic outflows – exceeding 1% of GDP – were in Bulgaria, Croatia, Montenegro, Slovakia and Slovenia.

The BIS figures mostly match balance of payments figures, which show that the region as a whole received positive bank inflows in the second quarter, compared with outflows in the first. The inflows turned positive for the Czech Republic, the Slovak Republic and Poland in the second quarter. A few Southeast European countries (Albania, Bosnia and Herzegovina, and Croatia) and most of the Baltic countries (Estonia and Latvia) also had positive flows. In contrast, countries of the former Soviet Union continued to experience outflows, which moderated noticeably in Russia, but resumed in Ukraine following inflows from official creditors in the previous quarter.

Credit where credit is due

In terms of overall domestic credit across the region, again excluding Russia and Turkey, there was stronger growth, helped by credit to non-financial corporations turning positive in July-August. There was robust growth in the Czech Republic, Estonia, Macedonia, Poland and Turkey, but weak growth in Serbia and contraction in other countries (Hungary, Slovenia, Russia, and Belarus), often linked to a backlog of non-performing loans.

Domestic deposits continued to expand at a steady pace in most countries in the April-June period, except in Ukraine and Moldova. The increase in deposits continued to more than offset the decline in foreign bank funding for many countries (except for Ukraine, Moldova, Bulgaria, Hungary, and Russia).

The regional banking systems’ loan/deposit ratios continued to decline, with the average falling to around 107% in July compared with well over 130% at its peak in 2009.

However, according to the latest CESEE Bank Lending Survey carried out in September, only about a fifth of the banking groups in the region expect a further decrease in group-level loan/deposit ratios.

Also almost 60% of the groups expected to expand their operations, up from an average of 40% for 2013-2014, while around 30% consistently indicate that they may reduce operations over the next 12 months — most but not all of such banking groups are based in Greece.

The banks reported an increase in demand for credit and almost unchanged supply conditions over the past six months. However, while demand is expected to grow at a solid pace, supply conditions are expected to improve only marginally in the next six months. This may lead to a growing demand-supply gap, the report warned, indicating that it might take some time before banks properly resume their former role as a growth engine.