CEE Banking Sector Report: A record year that is unlikely to be sustained

CEE Banking Sector Report: A record year that is unlikely to be sustained
Based on (incomplete) 2023 data, the average return on equity in the CE/SEE banking sector exceeded 16%, which corresponds to the most bullish years before the Global Financial Crisis. / National banks, ECB, RBI/Raiffeisen Research
By Gunter Deuber, Ruslan Gadeev of Raiffeisen Research in Vienna December 15, 2023

The key messages of this year's Raiffeisen Research CEE Banking Sector Report at the industry level are as follows: CEE banks will post record profits in 2023, and not only in the "new" core markets in Central and Southeastern Europe (94% of regional exposures), but also somewhat counter-intuitively in Russia and Ukraine.

Record profitability will not continue in 2024, but regionally diversified players will benefit from the dispersed interest rate cycles in the region – and the lagging EUR interest rate cycle.

Local players are currently participating strongly in the consolidation in CE/SEE, while Chinese banks in Russia are the "new" players that are increasingly taking over the previous function of Western banks.

A record year on the profitability side

We are in for a record year in CEE banking on various fronts. The aggregated return on equity across all markets may surpass the 20% level, a ratio last seen in 2005 or 2006. We must admit that the performance is well on track to exceed our most positive expectations, notwithstanding the multitude of challenges, be it ongoing geopolitical instability or external shocks (e.g. U.S. banking turmoil) or strong rates market volatility.

Banks active in Central Europe and Southeastern Europe (CE/SEE) banks could enjoy an extended momentum to their profitability, which stems from wider net interest margins (NIM) in combination with still contained risk costs amid low borrower defaults. The latter might change the longer the weak growth and elevated inflation environment continues. However, the slow-burning stagflation recession, which did not develop into a shock, seems to be well manageable for banks – although some credit risks may still materialise at a later stage.

Based on (incomplete) 2023 data, the average return on equity (RoE) in the CE/SEE banking sector exceeded 16%, which corresponds to the most bullish years before the Global Financial Crisis (GFC). To a certain extent, the boost to core banking revenues is a systemic factor in the global high-rate environment. However, CE/SEE markets have had an edge over the euro area, where the average RoE picked up to a lower 10%. More strikingly, for the first time since the year 2005 we are recording double-digit RoE readings in all major (12) CE/SEE banking sectors we cover. We have never seen such a broad-based and solid profitability. In the “CEE bonanza times” pre-GFC (2005-2006) “only” 10 out of 12 regional banking sectors posted a double-digit RoE.

Moreover, for the first time over the last decades, SEE banking sectors are slightly outperforming CE (or CE-3 markets) in terms of profitability (average regional RoE of close to 19% in SEE vs 16 % in CE). This is positive news, although one has to ask the question whether SEE profitability should not be well above CE levels due to (geo-political) risk considerations and mostly subscale market sizes.

Russia and Ukraine: record profitability in times of war

Overall, the excess return in the CE/SEE banking business is currently back at historically high levels, i.e. the RoE is around 6-7 percentage points higher than in the euro area (compared with a long-term outperformance average of around 5 percentage points). At over 22%, the RoE for the whole CEE region has even reached its highest level since 2005/2006 in 2023.

However, the aggregated earnings figure for the whole CEE region includes special effects in the Eastern European markets (especially Russia and Ukraine) that make such a comparison obsolete. To clarify: the RoE in the EE region is around 30% this year compared to "just" post figures of around 16-19 % in the CE and SEE banking markets.

In the Eastern European banking sectors, we are in for a disconcerting record at the same time. In war times the RoE is likely to reach a record high 27% in 2023, higher than in the period 2005/2006. The record profitability in EE comes on the back solid profit rebound in Russia – despite some concerns about its durability.

Moreover, record earnings in the war-driven interest and FX environment are supporting banking sector profitability in Ukraine, where the RoE may exceed the 50% level in 2023. This makes the Ukrainian banking sector the "earnings pearl" in the CEE banking business this year in unfortunate circumstances.

CE/SEE markets with an asset base close to €2,000bn, a profit pool of €19bn-20bn

Moreover, CE/SEE banking assets are approaching the €2,000bn mark. Previously such readings had been only possibly with the inclusion of the sizeable Russian banking market into regional business strategies (incl. Russia the CEE asset base currently stands at around €3,600bn, incl. the Russian market the €2,000bn mark was surpassed in 2011). Therefore, we see CE/SEE profit pools as sufficient to remain an attractive niche for dedicated cross-border CEE players, i.e. current results are especially remarkable when converted into “cash” terms. As of 2023 the CE/SEE profit pool has approached €19bn-20bn, which is the highest score in the last decade. Czechia remains the main profit engine (~25% of the CE/SEE profit pool), but Poland and Hungary have been closing in (at 18% and 13%, respectively).

Taxation plus additional headwinds to profitability will bite

It should come as no surprise that the record banking profitability (in times of higher interest rates and wide government deficits) has aroused the politicians' thirst – which is not just a phenomenon in CE/SEE. The practice of windfall taxes is spreading to more CEE jurisdictions, with Ukraine, Romania, Slovenia (and now Slovakia) to follow in the footsteps of Hungary and Czechia, where the levies were introduced already in 2022.

The special taxation co-exists with policy support measures for affected borrowers (loan moratoria, interest rate caps), which by and large are being rolled over into 2024, albeit possibly in a refined format. In some forms these have been active in Poland (“credit holidays” for PLN mortgages), Hungary (here now also mixed with voluntary caps agreed by banks for new housing and corporate working capital loans), Bosnia (limits to loan rates step-up by more than 200bp vs Q2 2022) and, since recently, Serbia (interest rate caps on outstanding variable-rate and newly originated fixed rate housing loans till end-2024).

For banks the measures typically lead to negative adjustments to net interest income, while the latter is also sapped by the central banks’ tweaks to remuneration of minimum reserves made in the course of 2023 (in Czechia and the euro area, a new tiering system in Hungary).

Nevertheless, generated core banking income proved strong enough to compensate for additional bank taxation, inflationary pressures on operating costs and transformation of the funding side toward a more expensive mix (increasing share of term deposits, costly MREL borrowings).

Direct and more indirect depositor competition

We do not think that the record profitability can be sustained going forward due to various reasons. From a mid-term perspective, regional banking sector profitability will be a complex mix of the monetary, financial and business cycle (outlook) and here we see headwinds on all fronts.

Inflationary pressure on operating expenses, higher funding costs, decreasing net interest margins and deposit rotation will be challenges for banks going forward, while monetary cycles are turning in 2024. Rollover of MREL-funding is also looming large in 2024 and 2025, which is unlikely to come in much cheaper than in 2023.

Speaking of households, their hunt for yield is not confined to deposit products only, as we spot a parallel pick-up in net acquisitions of debt securities, listed shares and funds. These capital market investments as well as bold sovereign bond issues targeting retail investors (e.g. in Hungary, Croatia) come in direct competition with traditional deposits.

We believe this trend will persist, especially given the convenience of the digitalised environment, which well-established Western CEE cross-border banking groups can turn into lower-risk fee income for their asset management and brokerage units.

On a positive note, the support to banks’ asset yields is likely to tail off unevenly across markets due to uncertainties over the future disinflation pace (which inhibit uniform rate-cutting) and the relatively lagging ECB cycle. This once again offers a diversification benefit for larger CEE banking groups in terms of core revenues across CE/SEE markets inside and outside the euro area. From where we stand, we will be cautious to simply extrapolate the renaissance of CEE “bonanza times” like in GFC-times to the coming quarters and 2024.

Cautiously optimistic loan growth outlook

Meanwhile, moderately easing monetary conditions comprise just one part of the loan growth equation. Speaking of the other important factors defining the credit supply side, CE/SEE lenders essentially remain preoccupied with economic uncertainty risks keeping their underwriting standards in a defensive mode. Referring to central banks’ surveys, the corporate loan criteria are foreseen to stay on the constricting path also in the forthcoming months, which means banks largely play the turn of the credit cycle by the book, and brace for the “credit repair” stage.

We note that the loan impairment trend has been rather benign throughout 2023, with the average cost of risk among larger CE/SEE banks residing near 50bp (though with certain dispersion across individual markets). This is 20-25bp lower than in 2022 and a far cry from the COVID-related spike in 2020.

While the corporate sector is seen to remain on a softer footing in 2024, retail lending might be set for a quicker turnaround. At least, some key prerequisites are there, including the strong labour market and generally higher elasticity of loan demand to the interest rate change. We note that consumer credit already gains ground not only in more consumption-driven economies (+5-10% yoy in Bosnia, Albania) but also in CE (+5-10% yoy in Czechia, Hungary and Slovakia). Of course, the nominal trend is supported by the effect of higher prices, however mild easing of lending conditions also takes place in some cases.

Speaking of the housing loan market, the period of tight monetary policy has substantially cooled down the sector, with new disbursements in larger CE/SEE economies collapsing two-three times in 2022/2023. Effectively, “pure” new business sagged even more given the notable households’ demand for refinancing/renegotiation operation, which are technically counted as new origination.

Among larger markets, Croatia constituted a rare outlier to skirt a downturn (Q3 2023: +10% yoy for the housing loan stock) due to a dedicated government subsidy programme for citizens (young families buying a residence for the first time). The latter law has been active since 2017, providing for spikes in new loan disbursements (once or twice a year) but will expire end of 2023, hence limiting the support to the sector next year.

Given massively corrected house prices in CE (especially in real terms) we would expect a cautious recovery of mortgage (loan) market activities in 2024.

Much-needed correction on housing markets underway

Importantly, the ebbing of the mortgage market helped set off a “healthy” correction for housing overvaluation, which seemed especially needed for the more overheated markets in Hungary, Czechia and Slovakia. As of Q2 2023, the three countries in question saw real housing prices falling ~15% off recent multi-year peaks reached in 2021/2022. Elsewhere, the downward price moves (CPI-deflated terms) were also tangible in Poland and Romania, with the latter currently hovering around levels close to the after-GFC trough.

By contrast, given its still vigorous lending dynamics to-date, Croatia proved again the one to have bucked the trend, seeing its housing prices on a steady rise in both real and nominal terms.

To be fair, notwithstanding the occurred adjustments, the valuations by and large remain above pre-COVID levels (Q4 2019), which keeps the risk of a further correction intact. That said, we believe certain cooling on the pricing side already contributes to the improving housing affordability, and in some cases financial authorities give an additional nudge to the housing loan market by means of dedicated subsidies (the new "2% Safe Mortgage" programme in Poland) or slight softening of borrower-based limits (deactivation of the DSTI/DTI ratios in Czechia).

Moreover, households can enjoy some breathing space given that residential mortgage lending rates have either passed the peak (PL, HU, RO) or are cresting (CZ, SK), and further (measured) easing of financial conditions should be on the cards.

Looking at the credit supply side, banks continue to derive comfort from steady asset quality in the sector (we put aside the still not fully resolved topic of CHF mortgages in Poland). Indeed, the median NPL rate for residential mortgage loans in CE/SEE markets stays around 2% vs ~1.5% for the EU average. Hungary and Poland stand out with somewhat higher ratios (>2.5%), though these are also the two countries with more extensive policy assistance to households (interest rate caps, loan moratoria). Beyond the government support measures which are seen to be extended in some form also into 2024, the sector should continue benefiting from low unemployment rates (in historical context) and recovering real wages.

The repricing of residential properties exerts pressures on collateral value for outstanding loans, however these are mitigated by more prudent underwriting standards in the recent past thanks to encouraging regulation (borrower-based limits). Thus, since 2020 the average LTV rate for new housing loans has trended below 70% in Slovakia, Romania and Hungary, and the share of new origination with LTV >80% (effectively the 80-90% bucket) has shrunk to 10-15% in Poland and Czechia.

Watch out for commercial real estate 

As usual, cyclical sectors are the lead candidate to be the weak link in a bearish business environment coupled with high interest rates. From a credit exposures perspective, CE/SEE markets seem well-placed, having about 15-30% of corporate loan portfolios allocated to borrowers from real estate and construction industries (according to NACE codes L & F). This compares to 30% for the EU on average, and only larger banks in Czechia and Slovakia feature similar levels in our remit.

On the other hand, NACE classification might not capture the full extent of underlying risks, since it leaves loans from unrelated industries but collateralised by real estate out of the picture. As a matter of fact, employing a wider definition of CRE loans would reveal a less comfortable situation. Here, Czech, Bulgarian, Slovak and Hungarian banks show greater exposures, with CRE loans accounting for 100-130% of tier 1 capital (vs about an EU average of 80%).

On a positive note, CE/SEE banks managed to clean up their books in the last years, reducing the average CRE NPL rate from roughly 10% in 2018 to 4% in 2023 (still higher in Poland at around 7%). Certain incentives had been coming from the regulatory side, be it individual risk assessment (SREP) or sector-wide macro-prudential measures. Notwithstanding these active safeguards, CRE risks should be among the ones to watch in the cyclical economic weakness.

Regional presence of leading CEE banks

It almost goes without saying that regional business activities of Western banks in CEE shifted further towards CE/SEE markets in 2023. This group of countries now accounts for almost 94% (!) of the balance sheet totals of Western banks in the CEE region. This is an all-time high since we have been observing CEE banking markets.

The shift in the relative weighting in favour of the CE/SEE is of course related to geopolitical factors. From 2003/2004 onwards (i.e. after the major expansion of Western banks into the "new" east of the EU), the regional CEE exposures of Western banks shifted in favor of "more juicy" business in Eastern Europe (EE: Russia, Ukraine, Belarus). This trend continued up until 2013/2014 (Crimea annexation). Since then, the trend has reversed again, with CE/SEE expansion taking place as briskly as it did in the early 2000s.

Moreover, the exposure of Western banks in CE/SEE is increasingly concentrated in EU markets. This is a function of EU enlargement and a deliberate focus. Currently, and almost constantly since Croatia joined the EU, Western banks have almost 96% of their CE/SEE exposures in EU countries, compared with only 88% in 2004. Indirectly, these figures also confirm the "value" of EU membership in terms of anchoring banking and investor confidence.

For the CE/SEE region as a whole, the positive developments of recent years mean that total exposure of Western banks to the region has exceeded the record level before the GFC (local exposure plus cross-border business).

70%+ of exposures in CE, Czechia, Hungary and Slovakia

Overall, the geopolitics-driven reorientation of Western banks' business strategies in CEE in recent years has led to a noticeable increase in business activity in Central Europe (CE). This region now clearly accounts for over 70% of regional bank exposures, the highest ratio since 2002.

However, a differentiated view is also necessary here. Over the last 10 years, there are "only" 3 CE/SEE markets with a higher share of Western banks' regional exposures than back then, namely the Czech Republic, Hungary and Slovakia. The long-term winners in the regional banking business are therefore the CE-3 markets.

There has been no clear exposure expansion trend towards Southeastern Europe (SEE) in recent years; i.e. SEE exposures of Western banks have remained constant for a long time at 20% of the total exposure of Western banks in CEE. The current market consolidation in Romania plus the increased attractiveness of the Croatian market could inject a little more dynamism here. Especially as the SEE banking markets even offer slightly higher earnings prospects than the CE markets for the first time in 2023. However, the development in the Western Balkans is rather disappointing, where the exposure share of Western banks continues to stagnate below 4% (of total CEE exposures).

In light of the aforementioned current developments, we see a certain potential in the SEE banking markets, as the strong focus on the CE markets naturally limits their earnings potential (not to mention the rather less prominent role of Western banks in Poland and Hungary).

In the medium term, however, the Polish banking market could become more attractive again for foreign banks – including in cross-border business. A more constructive attitude towards the EU could lead to the absorption of EU funds, with positive effects for corporate banking.

Russia banking sector: 75% state-owned banks on the back of the turn to a “war economy”

High involvement of the Russian government in the economic transformation (incl. a focus on military production) makes a consolidation of the banking sector around state-related players natural. This trend had been taking shape already for some years but it entered a new phase in 2022/2023. With a few sizable M&A deals closed recently, we see the market share of state-related banks (total assets) approaching 75%, where major advances were made by VTB (acquisition of Otkritie FC), PSB (acquisition of SMP-Bank) and Gazprombank (benefits from its non-SDN status and retained SWIFT connection); before 2021 the market share of state-owned lenders had remained below 70%.

Albeit supportive to sector stability, this structural shift further aggravates the challenge of the correspondent relationships in “unfriendly” currencies due to the broad-based sanctioning of most state-owned banks. Notably, despite a mass trade diversion with a migration into RUB and CNY (9M 2023: ~60% in exports and imports), the trade turnover with euro area countries is still sizable (9M 2023: ~€53bn) and of importance for Russian imports. In fact, euro-based net exports from Russia have been on average a negative €1-2bn per month in 2023, hence contributing to imbalances on the partly restricted local FX market.

Russia: Western banks downscaling – Chinese lenders on the rise

Along these lines, the deliberate expansion of asset-blocking (SDN) sanctions on Russian second-tier lenders, which had been long off the radar, slowly but surely narrows down available USD and EUR payment channels to a limited number of foreign banks. Moreover, among Western groups still locally present in Russia there prevails a downsizing strategy, while they also turn much more selective in payment transfers due to internal compliance policies and risks of secondary sanctions. That said, the maintenance of certain volumes of customer and interbank accounts that cater to an essential minimum of the Russia-West (or EU) trade basically keeps the balance sheet size of these subsidiary banks intact, although their local lending business is clearly contracting (market share in loans heavily down, no participation in strong double-digit local loan market growth).

In principle, only a few smallish Western lenders have been able to leave the Russian market since end-2022, whereas orderly exits for larger names such as Raiffeisen Bank International or UniCredit remain generally blocked by a special law (the reported waiver for Intesa still needs to be clarified). Probably in recognition of the Western banks’ importance to the financial system, the Russian government slightly opened the spigot for possible dividend payments recently (e.g. OTP said it secured necessary approvals in 2023). However, these are conditioned on certain investment commitments.

As of Q3 2023 we count at least 15 subsidiaries of major Western universal banks still formally present in Russia with a ~3.5% combined market share in assets. That said, the market share of top-4 Western lenders still present on the Russian market decreased to close to 1%, down from some 3% in 2021, in terms of total loans (reflecting the local downsizing in lending business).

Against this backdrop, one should not underestimate the quiet rise of Chinese banks on the Russian market, which comes along with Russia's coveted economic pivot to the East. Looking at the “Big Four” Chinese lenders with local operations – BOC, ICBC, China Construction Bank and Agricultural Bank of China – there has been an impressive 4x growth of their combined local assets since end-2021. In Q3 2023, the value stood at ~€10.6 bn, and BOC and ICBC have shoehorned themselves into the Russian top-30 list. Although this might be still a relatively small asset base ( around 0.7% combined market share), it also reveals a growing role in transactional business.

Thus, while still trailing with regards to corporate accounts and deposits, Chinese banks are already a hair’s breadth away from larger local subsidiaries of Western banks in terms of their interbank balances. Clearly, this reflects the "new normal" for Russia’s foreign trade profile which pictures a 34% share of settlements in CNY (Sep 2023), and the same is echoed by FX market trading patterns on MOEX, where 50% of trading volumes are in CNY-related currency pairs. We note that Russian state and larger private banks are likewise active in this niche, but in the end it also plays in favour of Chinese authorities promoting the role of China and Chinese banks as players in international finance (e.g. when it comes to currency and infrastructure). As one might say: “When two quarrel, the third one rejoices”.

Going forward we expect that Chinese banks are likely to play at least a similar role like Western banks before the Ukraine conflict as an anchor of stability and facilitator of foreign trade (especially to the East and to countries not sanctioning Russia), while Western banks will have to be even more selective with further declining foreign trade volumes with the Western world.

(Western) Russian banking exposures at or below Soviet Union levels?

Overall, exposures of Western banks to Russia decreased further by around 12% in 2023 (already down by 36% in 2021). In absolute terms (around $60-70 bn), Russia-related exposures of Western CEE banks are therefore on a par with a country like Croatia. Apart from certain payment transaction functions, Western banks therefore no longer play a de facto (systemic) role in Russia. From a longer-term perspective, Russia-related exposures of Western banks are 70% below the level of 2013 (i.e. the year before the first geopolitical escalation in the region). However, current developments on the Russian market also show that a further reduction in exposure (market exit) is difficult in a phase of geopolitical escalation and in the face of blockades that are entirely intentional in terms of political/sanction economic policy.

Where the "new normal" of Russian exposures lies – whether at or below the level of the links with the Soviet Union – is currently not foreseeable. At just under $60bn, Western exposures to Russia are currently close to the level with the Soviet Union (end of the 1980s, around $40 bn). In this respect, it is also important to note that in the early 1980s, Western banking exposures to the Soviet Union amounted to only $10 bn. And it will probably go in this direction for the time being.

However, this also makes it clear that, to a certain extent, the West may not be able to act completely without any financial/banking sector exposure to Russia in the coming years, as there will be possibly certain points of interaction in the exchange of economic goods and services. It should be noted, however, that the Soviet Union in the 1980s was presumably a more rational actor than Putin's Russia is today.

Ukraine: resilience and international banking exposure stability in time of crisis

We note that foreign CEE banks stay generally committed to Ukraine, having around 1% of their regional credit exposures (or ~$12 bn) allocated to the country. The National Bank of Ukraine (NBU) does its job to maintain financial sector stability, while the high interest rate environment lends significant support to commercial banks' earnings, translating into record high net profits in 2023. The real economy shows a high ability to adapt, which is reflected in the recovering real GDP growth this year, though asset quality should remain among major topics to digest further. We see signs of a tenuous revival in the lending activity in the last months (inter alia, thanks to government programme lending), however the prospects for a full-scale rebound are still constrained by high security risks.

Contrary to our estimates, there was no substantial deterioration in the quality of banking assets in 2023, though the recognition of problem assets has not been fully finished yet. NPL rates have actually decreased by 0.25pp to 37.9% over Jan-Sep 2023. This still exceeds pre-war levels (27%), however it compares favourably to the years of the banking crisis (50-55% in 2017/2018). We think the increasing volumes of new loans (provided under government programmes and having potentially better credit quality) have influenced the pattern in problem exposures this year. Even though the share of NPLs in the corporate sector increased by 1.5pp year-to-date (to 44.4%), it shows a declining pattern since autumn. Moreover, NPL dynamics in the private sector look even better, with the rate dropping from 30.4% to 26.8% over Jan-Sep 2023, which is definitely a positive signal.

The dynamic of loan loss provisions in 2023 demonstrates that the sector has basically passed the more active stage of the risk cost recognition. In general, banks have allocated UAH 107bn to loan provisions since the war started, which represents almost 13% of their performing loan portfolio as of February 2022. This might look rather optimistic if considering temporary occupied territories, the level of assets’ damages caused by the war, as well as the sharp economic downturn.

Against this backdrop, it was rather surprising to see net profit of the banking system of UAH 24.7bn in 2022, especially after the widespread conflict and rapidly deteriorating quality of banks’ assets because of the war. However, the positive trend in banks’ financial results over 2023 (which will become a historical annual maximum) is even more striking, though it clearly derives from the significant increase in net interest income. This P&L line has gradually risen from UAH 10bn per month within the first few months of the war to around UAH 18bn in Q3 2023. In contrast, net commission income, although consistently in the positive zone, hovered around UAH 4bn per month. The relatively low level of loan loss provisions ("only" UAH 5.7bn in 9M 2023 as compared to UAH 119bn in FY 2022) was an additional positive driver for banks’ financial result this year, which might be related to a partial overestimation of risks at the start of the war and the high level of adaptation of the business to the new risky environment.

Ukraine: record profitability and rational windfall taxation

We should stress that the extra-high profitability of the banking system would not be possible without the respective policies of the government and the NBU for ensuring macroeconomic stability and the solvency of financial market participants. In our view, this was reflected in high interest rates of monetary instruments and the implementation of government preferential lending programmes ("5-7-9%" for business and “e-Oselia” for householders).

Thus, the idea of the government to impose an additional windfall tax (i.e. 36% on banks’ profit received in 2024-2025) looks rational considering that a good portion of interest income for banks came from investment of their excessive liquidity into NBU deposit certificates and government bonds (income from these investments represents about 70% of interest revenues and close to 50% of banks’ total revenues over 9M 2023). Even though the more aggressive approach of the NBU to reducing both policy rate and the working rates of monetary instruments should weaken banks’ interest revenues, we think the rates will be still high enough to generate solid interest income in the coming months or even a year.

Although the banks recorded a moderate growth in their assets in 2023, this was caused mostly by increasing investments into both NBU deposit certificates and government bonds. The situation with lending was less rosy, as the loan portfolio continued to decline in the first half of 2023 (-5%). Even though it returned to a small growth in the third quarter, this has not compensated for the decline recorded in H1 2023. High interest rates and increased security risks reduced the demand for loans, while a substantial portion has to be supported by government programmes (primarily the «5-7-9%») in order to soften the negative impact on the corporate loan portfolio.

At the same time, contrary to the corporate segment, private loans remained relatively stable in H1 2023 and started to grow gradually in the third quarter. We expect the mild positive trend in banks’ loan stock to continue in the medium term, which is based on the economic recovery and growing credit demand amid declining interest rates and dedicated programme lending. Unfortunately, the prospects for a full-scale rebound in lending remain constrained by still high security risks. Having said that, continuing active missile attacks on Ukrainian territory (e.g. bombing agriculture storage and export facilities) may pose additional risk to the quality of banks’ assets.

CE/SEE banking: consolidation, local players and regional champions in the making

Excluding Eastern European units (mainly Russian), the regional banking leaders are the same, just with UniCredit now behind KBC if the Italian bank's position in Russia is excluded (Q3 2023: €12bn assets for the local subsidiary standalone). RBI and OTP are trailing the top three (Erste, KBC, Unicredit), staying a touch below the €100 bn asset mark. Overall, Erste leads the ranking of leading CE/SEE banks, while we see a close race among RBI and OTP for the fourth place after the podium.

Italian financial majors have been on a buying spree in Romania, a €150bn banking market in the region when measured by total assets (i.e. a market that is still fairly small, with huge long-term potential). Thus, Intesa Sanpaolo acquired First Bank (€1.5bn assets) from a US-based private investment fund (J.C. Flowers & Co), which will double the group's presence in Romania to around a 2.2% market share.

The news came just shortly after UniCredit communicated a cooperation with Alpha Bank, which involves a purchase of a 9% stake in the bank owned by Greece’s bailout fund (completed in November) and a merger of the banks’ Romanian subsidiaries. This will create the third-largest market player in Romania (~12% market share by asset size) after Banca Transilvania (local champion) and BCR (Erste). UniCredit is also exploring ways to enhance its operations in Slovenia, saying it will consider a transformation of its local subsidiary into a branch of UniCredit Bank Austria AG via a cross-border merger (the plan was put on hold for now).

MBH seventh largest CE-3 bank

Next to OTP as a rising local cross-border CEE champion, other CEE-based local champions are looking to expand in the region. Thus, Poland’s largest bank PKO BP plans to enter the Hungarian market in 2024 (as a representative office) and start operating as a corporate branch in Romania (the bank already has established foreign branches in Czechia and Slovakia). Likewise, Pekao seeks to increase its cross-border corporate banking activity in EEA with the “single European passport”.

Poland and Hungary remain the largest CE/SEE markets with local ownership well above the 50% mark. In Hungary, the newly emerged second-largest market player MBH Bank stays on the inorganic growth path, targeting to acquire a 76.35% share in local Fundamenta building society (German DZ Bank group). The transaction is expected to close in H1 2024 and should add around 1pp to MBH’s market share in assets (2022: ~19%) with a corresponding decrease in participation of foreign banks in Hungary (approaching 35%). Accounting for this deal, MBH will also entrench its position as the seventh-largest bank in the CE3 grouping of markets (Czechia, Hungary, Slovakia).

Banca Transilvania is similar to MBH and is currently already the sixth largest SEE bank – even if there are no clear regional ambitions here yet.

The strengthening of domestic banking groups also continued in SEE, where Serbia’s AIK banka acquired the local subsidiary of Greek Eurobank (Eurobank Direktna) this year. The deal added 5pp to AIK’s market share in assets, making it the third-largest lender locally, which basically negated recent advances of foreign banks in Serbia (RBI, OTP, NLB).

Despite the favourable operating environment, CEE financial majors waste no time and continue seeking options to improve their market positioning for better cost efficiency. Local acquirers also largely completed the merger of bailed-out units of Sberbank in Croatia, Slovenia. BNP Paribas closed its consumer finance business BNP Personal Finance in Bulgaria (loan portfolio sold to Eurobank) and Czechia (sold to Erste, Ceska Sporitelna) and also eyes similar exits from Romania and Hungary. We therefore see all signs pointing to consolidation in CE/SEE, at the upper and lower end of the market spectrum.

Gunter Deuber is head of research at Raiffeisen Bank International in Vienna. Ruslan Gadeev is a senior financial analyst at RBI in Vienna. The report first appeared here.