Once a year, we at Raiffeisen Research take a close look at regional banking trends in our CEE Banking Report. And before what we hope will be a quiet and peaceful Christmas and New Year, here is a big overview of the most burning CEE banking sector issues.
To give the most important message right away: Leading Western CEE banks have made their contribution to overcoming the crisis. This can be seen in the almost double-digit credit growth rates of exposures to the CE/SEE region in the last 12-18 months.
We at Raiffeisen Research have been monitoring the business of Western banks in CEE – including our valued competitors – for decades. And we have only seen such balance sheet expansions as in the last 12-24 months – if then – in the so-called “CEE bonanza phase” i.e. in the run-up to the Global Financial Crisis and the following CEE banking confidence crisis.
But of course circumstances and market conditions are different this time around. Today, most of the business is (re-) financed locally and not built on imported capital. All major (Western) banking players in the region are running loan-to-deposit ratios in the range of 70-80%.
In this respect, the current business activities can be considered sustainable from a macro-financial perspective. There is no credit growth that leads to macroeconomic imbalances. And especially in markets like Russia, increasingly local (re)financing has become more and more important for major international banks for other reasons as well.
Banks support V-shaped recovery
This time there was no deleveraging during the crisis. Banks contributed to the V-shaped economic recovery. The latter has then led to low NPLs and low risk costs. Moreover, the rapid economic recovery has had an inflationary effect, leading to key interest rate hikes.
In concrete terms, non-performing loans in CEE are already lower than in pre-crisis times, policy rates are higher and return on equity in the CEE banking sector has returned to double digits in 2021. Currently the CEE NPL ratio stands at 6.8%, its lowest level over the last five years. Outside the EE region NPL ratios are currently in a range of 2.9-4.8%.
These are NPLs ratios of ‘developed markets’ – but with a totally different return profile attached. The average CEE return on equity (RoE) currently stands at around 15%, ranging from 23% (!) in the EE region to 10-12% in the CE/SEE region, taking the CE-3 region (Czechia, Slovakia, Hungary) here as a benchmark, with an average RoE of 12%. By contrast, the Polish market is still struggling with a RoE in the low single digits.
The magnitude of the profitability rebound, however, varies across the markets, specifically as Eastern European banks' RoE levels (mainly driven by Russia and Ukraine) actually overshot the pre-pandemic levels already in H1 2021, while CE/SEE banks are on average only half way out of the woods, with only Romanian and Slovakian banks (aided by the abolition of the bank levy starting in July 2020) beating their 2019 RoE levels as of H1 2021.
The Polish banking sector continues to be weighed down by the FX mortgage issue. The FSA’s proposal from late 2020 has not been implemented sector-wide as banks attempt to approach their own settlement programmes based on a cost-sharing principle with borrowers (most prominent here are Bank Millennium and mBank). Still court cases continue to rise (+84% ytd) as the first-instance rulings tend to side with the debtors rather than banks. During the first nine months of 2021 banks set aside more than PLN3.7bn (€806mn) of legal risk provisions for current and expected future litigation outcomes.
As good as it gets, more limited upside from here
Outside Poland, all sounds like a perfect alignment of many supportive trends and in principle we expect a solid development in the CEE banking industry also for 2022. Nevertheless, the 2021 trends cannot be extrapolated and the more we move into the post-crisis phase, the more regulatory and "normal" market/country drivers will be once again interesting to watch.
On the one hand we see the risk that there will be another dose of ‘extra’ banking taxation, with Slovakia being the prime example. We would also expect that regulators will return to the idea of capping too much loan expansion, as credit cycles in certain countries and/or market segments were already pretty mature pre-crisis. A step-up in the counter-cyclical capital buffer (CCyB) is planned in the Czech Republic (up to 2%), Bulgaria (1%) and Romania (0.5%) and the reinstatement of bank-specific O-SII buffers has been approved in Hungary.
On the flip side of the rate-hiking cycles, capital will also be hit by a negative revaluation of banks' portfolios of debt securities amid the corresponding spike in sovereign bond yields. The actual mark-to-market loss booked in the comprehensive P&L would of course depend on the amount of bonds accounted for at fair value as well as the portfolio's currency mix and average duration, but we generally note larger holdings of government bonds by banks in Albania, Romania, Ukraine, Hungary, Poland and Serbia.
In the case of Russia, slowing economic growth will test the sector’s unresolved credit risks, and a steep rise in interest rates heralds a moderation in lending. Hence the stellar results in terms of profitability might not be repeated in 2022. In 2021 the Russian banking sector is likely to achieve the highest profitability seen since 2007/2008.
Overall, most key CEE banking players have still not issued very tangible guidance for 2022 due to ongoing uncertainties around a mix of the pandemic, interest rate and CPI effects, supply chain disruptions and the like. Nevertheless, the upcoming year(s) should give reason for hope, as the monetary tightening cycle should provide a shield against reasonably normalising risk costs and inflationary pressure on operating costs. The main downsides come from volatile foreign currencies, regulatory interventions and the elephant in the room, i.e. geopolitical tensions. We will come to this risk factor later.
More and more ‘local’ champions
Apart from the overall market trends, it is also always good to know how market share trends that reflect the individual positioning of major banking groups on a country level are shaping CEE banking markets. Here we observe the following three interesting trends. First, more and more ‘local’ champions are emerging in individual banking markets in Central and Southeastern Europe. A good example is Banca Transilvania in Romania. The planned merger of PPF and Moneta Money Bank would also create a sizeable local champion that can compete with the three largest foreign-owned banks in Czechia. Sometimes politics also plays a role here. The Hungarian Bank Holding (a merger of MKB, Takarek and Budapest Bank) is set to become a large Central European bank in terms of total assets (with a 4% market share in the CE-3 asset base and 15% on the Hungarian market).
Secondly, more and more cross-border regional champions are emerging out of CEE. Hungarian OTP is THE winner in terms of upscaling in recent years. Based on solid M&A activity, the CEE asset base of OTP has passed the €60bn threshold and is now larger than the one of Intesa and ING, and is chasing the fourth-largest CEE bank (SocGen). The second regional champion NLB now has a regional asset base above €20bn. But so far there have been no cannibalisation of the Western European players in the region.
And this brings us to another important trend. All Western European banking or banking groups active in the region are strategically more inclined towards the region. The aggregate market shares of the leading banks have remained more or less constant in recent years. The three large pan-European CEE banks (Erste, RBI, UniCredit) continue to have market shares of close to 20% in Central Europe and 30% in SEE, while the leading 5-6 foreign banks continue to hold market shares of 30%+ in Central Europe and 45% in SEE. Recent balance sheet data also show that the two largest lenders in CEE are (once again) two Austrian pan-European lenders – Erste and RBI, the latter once again slightly ahead of the friendly competitor UniCredit. RBI and Erste are the only lenders with an asset base above €100bn in CEE.
M&A activity in CE/SEE vs divestment and/or organic market trends in Eastern Europe & Russia
The leading Western CEE banks are currently participating very actively in the consolidation process, which is regaining full momentum. Since the last edition of our CEE Banking Sector Report, we have witnessed remarkably stronger M&A activity and the return of the former main players to the scene, with more than €34bn of assets subject of either concluded or signed agreements in the region. The chief motive is operational upscaling as the best medicine against unabated competitive pressure.
On this front the recent headlines were made by RBI (acquisitions in Serbia and Czechia, divestment in Bulgaria), Erste (upscaling in Hungary), KBC (acquisitions in Slovakia and Bulgaria), Sberbank (divestment in Bosnia, Croatia, Hungary and Serbia) and OTP (divestment in Slovakia, acquisitions in Slovenia, Uzbekistan and Albania).
Interestingly, a certain stability of market shares – albeit at very different levels – also applies to the Eastern Europe region. Here the market share of the three banks operating in Russia (and also in the region) has remained constant at 3.8% since 2013/2014. This constant figure conceals slight shifts. Currently, RBI is the leading Western CEE bank with the most prominent presence in the region. It has a market share of 1.6% compared with 1.3% in 2013/2014. UniCredit's regional market share has decreased from 1.4% to 1.0% in the same period, while Societe Generale's market share has risen slightly from 1.1% to 1.2%.
These key figures naturally reflect above all the dynamics in the Russian market. Here, Raiffeisenbank is now slightly ahead of Societe Generale and UniCredit (1.2% and 1.0% respectively) with a market share of 1.3%. In 2013/2014, the competitors from France and Italy were larger than RBI's Russian subsidiary (market shares were then 1.6% UniCredit, 1.5% SocGen vs. 1.2% Raiffeisen).
Overall, the largest universal foreign lenders (RBI, UniCredit, SocGen) stay well entrenched in their niche on the Russian market, though somewhat behind the market average in retail loan growth and profitability (except for RBI) in 2021. With the departure of Citi from the Russian retail lending market (its local retail business represented <10% of total assets) the market share of the remaining entity will fall below 1%.
(Geo-)politics matter in EE but no deleveraging
We have already emphasised the positive business and volume development in the CE/SEE banking sectors. Consolidated cross-border claims of Western banks towards the CE/SEE region increased in double-digit territory over the last 12-24 months. (+12 % December 2019 to June 2021, +14% June 2020 until June 2021). In contrast, cross-border positions (on a consolidated basis, i.e. including local claims in LCY and FCY plus cross-border businesses) remained more or less flattish in the EE region over the last 12-24 months.
Measured from December 2019 to June 2021, cross-border exposures to the EE region dropped by 4%; from June 2020 to June 2021 they increased by 8%. However, this flattish development should not be seen as negative either, in the aftermath of the GFC (as well as in the context of the Russia/Ukraine crisis in 2014) there was a brutal (external) deleveraging in EE banking exposures. Therefore stability is also a certain success here. Moreover, everybody still operating in the region is doing so based on very selective and risk-oriented business policies.
Overall, aggregated exposure of Western banks towards the EE region has reached its lowest point in relative terms over the last two decades in 2021. The reference to geopolitics is also reflected in the fact that the relative decline trend accelerated substantially from 2014 to 2016. During this period the share of the EE region in international banking exposures into the CEE region dropped from 22% to 14% (based on substantial nominal cuts in exposures), and is now hovering around 11%. The Russian banking market currently represents some 9% of CEE exposures at Western banks. This sounds still substantial but has to be put into a broader context. Western banks have more or less the same amount of money at work in Slovakia as in Russia, while Slovak GDP represents some 6-7% of Russia’s economic wealth (in euro terms).
Some further modest downside with regard to Western bank positions towards Russia might be looming with the partial exit of Citi from the retail market in Russia. However, we would not overdramatise this development either. In total exposure terms the Russian market still represents the third-largest country-level exposure of Western banks in international banking statistics towards the CEE region, well behind Czechia and Poland, but still somewhat ahead of Slovakia and Romania.
Back to square one, is Central Europe again the place to be?
The “winners” in terms of increased importance in cross-border exposures in the CEE region are the Central European countries. We see this trend as a reflection of relative stability: solid growth in Czechia and Slovakia, a revival of attention towards the Hungarian market, while exposures towards Poland are not really moving in either direction recently (up or down). Therefore exposures of international banks towards the CE region in relation to overall CEE exposures are currently standing at their highest level since 2004 (close to 70% of total), while we still remain somewhat below historical peaks in SEE (and obviously well below historical peaks in EE).
At least in the mass business, it looks like the Western banks are returning to where they started their Eastern expansion. In the light of increasing geopolitical risks, this makes sense; from this perspective, Central European EU countries are much more suitable for mass business. Moreover, the regional markets here have retained their relative attractiveness, and we see further euro introductions by the end of this decade (beyond Croatia and Bulgaria), which will maintain market attractiveness.
Given all the trends and figures sketched above, we labelled our CEE Banking Report 2021 “As good as it gets in (post-)crisis times”. This title also reflects the hope that we are finally approaching post-crisis times in the course of 2022.
Gunter Deuber is chief economist of Raiffeisen Bank in Vienna. This article was prepared with Ruslan Gadeev & Jovan Sikimic of Raiffeisen Research in Vienna together with local research teams across CEE.
The CEE Banking Sector Report is a well-established annual flagship study of Raiffeisen Research. Once a year the entire Raiffeisen Research team in CEE and Vienna analyse banking sector dynamics in the CEE region in detail. In addition to country coverage with local flavour, we once again documented market shares, balance sheet totals and financials of the leading (Western) cross-border CEE banks. The same holds true for cross-country trends for market shares, business dynamics, asset quality and profitability. For more information plus data on CEE banking sectors see our 2021 edition of our flagship CEE Banking Sector Report (for registered users at the Raiffeisen Research Portal).