As part of one of the most committed players in the region, analysts from Raiffeisen Bank International's Raiffeisen Research unit once again worked intensively on documenting and analysing trends in the banking sector throughout the CEE region. The results can be found in the flagship publication CEE Banking Sector Report 2019.
The core message for bankers and investors active in the CEE region should be: close to old records, potential for more but watch out for late cycle phenomena!
For the first time in several years, no single market in CEE was loss-making on aggregate in 2018. Moreover, there were also no major shocks (economic and/or political) in 2018. Profitability ratios reached their highest level in the last five to six years in 2018 in CEE banking, a situation that continued in 2019. The CEE return on equity (ROE) surpassed the 12% threshold. Particularly noteworthy is the broad-based nature of the profit recovery. All core regions of Central Europe (CE), Southeast Europe (SEE) and Eastern Europe (EE) recorded double-digit ROE ratios in 2018. The respective ratios are at 11.2% (CE), 13.5% (SEE) and 12.7% (EE). The banking markets in Russia and Ukraine recovered nicely. The positive earnings situation was supported by further improvements in credit quality, the highest credit growth since 2011 and a stabilisation of the net interest margin (NIM) in important markets. There were successes on the non-performing loan (NPL) front in CEE in 2018 almost everywhere. The overall CEE NPL ratio reached its lowest level since 2010 in 2018 at 7.7%. In the CE/SEE region the regional NPL ratio (5.2%) fell to its lowest level since 2008. Therefore, we would estimate the total amount of NPLs in CE/SEE markets at around €35bn currently, down from some €60bn some years ago.
Overall, Southeast Europe is currently the star in CEE when it comes to profitability ratios — even though the SEE banking profit pool is still relatively small with some €4.5bn compared to CE (approx. €9.5bn) and EE (approx. €20bn), but there state banks have a market share of just under 70%! That said, the overall profit pool in CEE banking in 2018 (at over €30bn) almost reached its historic peak seen in 2011/2012 (which we estimate at just over €35bn). In CE/SEE, the estimated profit pool of almost €14bn in 2018 well exceeded earlier highs from times before the global financial crisis (2008). Developments in the region are also supportive for foreign banks. In the Czech Republic (the most stable but highly profitable market in CEE) as well as in the turnaround marketplaces Romania and Russia — all core markets of major Western CEE banks — an average ROE of over 14% was recorded in 2018 (the highest level since 2007/2008). However, 2018 also brought some disappointments. The Polish market once again underperformed in terms of profitability, while the ROE in the euro area market of Slovakia also remained in single-digit territory. The Czech and Hungarian markets are currently clearly outperforming in the CE region.
Interestingly, for the first time in several years the market share of 100% foreign-owned banks in Russia increased marginally (up to 7.3% from 6.1% or 6.2% in 2016/2017). We attribute this development to the ongoing restructuring among (larger) domestic banks as well as an ongoing appetite of leading foreign banks (among them SocGen, UniCredit and Raiffeisen) to continue doing business on a selective and opportunistic basis. In Russia local foreign-owned banks must remain in the market to serve customers and ultimately also to preserve their own company name and company value, on a recovering market. Moreover, other foreign banks are withdrawing from Russia, resulting in business opportunities for the remaining dedicated and risk-disciplined players.
In SEE the consolidation has led to a moderate increase in the market share of the five largest banks (to 63%), while the aggregated market share of domestically owned banks also grew at the expense of foreign lenders. Currently, the market share of foreign banks in SEE stands at 78%, down from 85% some years ago. However, this development has been largely driven by the Romania market (and to a minor extent Bosnia & Herzegovina). In Romania a locally-owned lender (Banca Transilvania) became the largest lender in the country and the sixth largest SEE bank. In all other SEE countries, the market share of foreign banks did not drop materially as foreign-owned banks (e.g. OTP) are also actively taking part in the consolidation (e.g. via taking over large parts of the SocGen franchise in smaller SEE markets). In CE, a similar and possibly even somewhat stronger trend towards lower market shares of foreign banks had been visible in recent years. The market share of foreign lenders in CE dropped by some 10 percentage points in recent years (from 75% to 64%; 53% when excluding OTP from the calculations) mainly based on past restructurings in Hungary and Poland. However, in 2017 and 2018 the market share of foreign-owned banks in CE also remained stable as foreign-owned banks actively participated in the restructuring on the Polish market. Santander is now the second largest lender there, BNP has the ambition to make it into the Top-5, Millennium took over Eurobank (SocGen) and ING continues to play a strong role on the market. Given the names mentioned it is also clear that there is an increasing divergence between Western banks represented in Poland and banks operating in the other CE-3 countries (the Czech Republic, Hungary, Slovakia) and SEE or EE markets (i.e. the likes of RBI, UniCredit and partially Erste). In the whole CE region the largest banks are as follows: Erste, PKO (only present in Poland), KBC, Santander, Pekao (both present only in Poland), UniCredit, SocGen and RBI. For the CE-3 countries the list is as follows: Erste, KBC, UniCredit, SocGen, RBI, OTP, Intesa (none present in Poland). In SEE the largest players are UniCredit, Erste, RBI, OTP, Intesa. And Austrian banks seem to have more appetite and/or leeway for growth once again. Their market share among major Western banks operating in CEE rose again in 2018 to previous record levels of just over 40% (with Erste and RBI among the three largest Western CEE banks).
In the short term, the outlook for banking in CEE remains positive. Most economies in CE/SEE had a good start into the year, credit growth is solid, but not exuberant. Risk taking is modest, while local currency loans dominate in new retail business. Currently, we do not see massive downside risks in view of solid and tightening lending standards. As some markets are showing significant growth in retail, certain regulatory brakes have been lifted in almost all “hot markets”. These should take effect in the coming 12-24 months. We currently see a clear trend towards micro- and/or macro-prudential vigilance or measures in at least ten of the CEE markets (among them Belarus, Bulgaria, Croatia, the Czech Republic, Romania, Russia and Slovakia). Those measures make sense in view of the sectoral credit growth trends outlined above, even if the overall credit and retail loan expansion is not yet in the range of overheated growth rates a decade ago (at 15-30% y/y). That said, we can clearly see late cycle phenomena in some CE/SEE economies and banking sectors. In this respect, it will not be easy to outperform growth and earnings developments of 2018 again in 2019. Nevertheless, we are confident that the CEE banking assets will surpass the €3,000bn mark in the next one to two years (currently ~€2,500bn).
We expect large parts of the loan volume growth to take place in the dominant markets of Poland and Russia in the next three years. In other words: more than 60% of the overall loan stock growth in the CEE region should take place in these two markets (approx. €180bn). However, both markets are unlikely to be among the fastest growing regional banking markets over the next two to three years, i.e. Raiffeisen Research analysts do not expect sustained double-digit loan growth in the two countries. There is more potential for such growth rates in Romania, Hungary, Ukraine and, to some extent, Belarus. Overall, Raiffeisen expects the highest loan growth rates in the SEE region going forward, reflecting the solid growth prospects in Romania and Serbia as well as the overall debt and NPL relief in the region (coupled with decent earnings prospects). Except for Hungary, credit growth rates in CE are expected to be more subdued than in previous years. Here a moderation of loan growth shall largely reflect tighter regulation, cyclical developments as well as fierce margin pressure. Nevertheless, the mix of market size, market maturity and growth prospects will mean that nearly two-thirds of the regional credit volume growth in CEE (excluding Russia and Poland) should take place in the Czech Republic, Hungary, Romania and Ukraine, followed by Slovakia and Serbia in terms of growth prospects. Overall, the loan stock is projected to grow by some €95bn-100bn in the CE-3 countries, the SEE region and the EE countries (excluding Russia) in 2019-2021.
So far so good, but it's also worth considering that CE/SEE bank assets are still just under 5% of euro area bank assets! Therefore, pressure remains to achieve the necessary economies of scale, at a country level and across borders, in conventional banking and digitisation. However, the earnings situation should create the necessary scope for organic growth, M&A and/or investments in digitisation.