Banks across Central and Eastern Europe (CEE) and Southeastern Europe (SEE) defied expectations and reported impressive returns on equity (RoE), ranging between 15% and 20% in 2024, Raiffeisen Bank International (RBI) said in its most recent annual banking report on the region.

The bank’s surpassed earlier forecasts that anticipated a decline post-2023. This performance notably outstripped that of Euro Area banks by 5 to 10 percentage points, reinforcing the region's reputation as a resilient pillar within European banking.

The relative weight of the CE/SEE banking sectors has increased to 5% euro area banking assets now – doubling its share since 2007.

“From this perspective, we can again speak about the CE/SEE region as a corner of resilience in European banking, while still offering catching-up potential in certain markets and market segments,” says RBI.

Currently the banking sector profit pool in Central Europe (CE) is currently around €20bn, while in SEE it is €8bn. The profit pool is therefore currently adequately distributed along economic weightings (approx. 70% in CE, 30% in SEE).

The banking sectors in the booming Balkans in Southeast Europe have performed better than in CE over the last few years as the Balkans reaches a critical mass. The profit pool in SEE in EUR terms has increased sixfold when taking profits as of 2022-2024 compared to 2014-2016, while in CE it has “only” tripled. 

The sustained profitability is attributed to favourable lending margins and controlled risk costs, underpinned by robust macroeconomic conditions and historically low unemployment rates in the region. These factors have bolstered core earnings, effectively mitigating the impact of ongoing inflationary pressures on operational expenses and the imposition of additional banking taxes.

However, the landscape is becoming increasingly complex, with new sector-specific taxes introduced in Romania, Slovenia and Slovakia during 2024. Including existing levies in Hungary, Czechia and Poland, approximately 85% of the CEE/SEE banking market, by total assets, is now subject to special taxation. These levies vary in structure – encompassing different tax rates, bases and durations – but collectively pose a risk of becoming prolonged fiscal burdens amid ongoing consolidation efforts.

In terms of regional focus, major cross-border lenders are currently prioritising European Union markets within the CEE/SEE region, while adopting a more cautious approach in the Western Balkans. Following significant reductions, exposures in Russia have stabilised at minimal, non-systemic levels. Conversely, dedicated CEE lenders remain committed to operations in Ukraine, despite the challenging environment, due to the war with Russia.

Austria leads in the new markets

Austrian banks continue to lead in terms of local market share and cross-border business within the CEE/SEE region, maintaining their position as key players in this dynamic banking landscape. Large Austrian CEE banks and their regional subsidiaries account for around 20-30% of regional banking business in CE/SEE.

Two decades ago, Austrian banks led the charge into the newly opened Central European markets, buying up banks or opening affiliates, fuelling the growth of those markets.

Today the same story is repeating itself as Austrian banks move into the booming Balkans, which have now reached a critical mass in their development as the productivity/labour cost balance shifts to allow these countries to compete with their Central European peers.

The market share of foreign banks in the Western Balkans rose from just under 35% in 2000 to almost 94% in certain countries of the Western Balkans in 2008; in the entire region of Southeastern Europe, the corresponding increase in market share over the same period was from 67% to 89%, according to RBI. However, more recently the share has declined somewhat to around 78% in both regions at present.

“In our view, the outlined development shows the “financial” value of EU membership. This trend can also be seen indirectly in the exposures of Western banks in the Western Balkan countries. These have remained more or less constant in recent years in both absolute and relative terms, despite the very positive economic development in the region, which is more favourable than in some EU countries in CE/SEE,” RBI said in the report.

However, slow progress in the accession process of many candidate countries in the region is limiting the growth in exposure to the Balkans, which will accelerate when these countries are finally admitted to the EU. Since 2013/2014, the exposure of Western banks to Western Balkan countries have increased by only around 5% (vs. 40% in EU countries in CE/SEE), RBI reports.

Many of the banks from Central Europe have targeted the growing markets to the east as potential new markets and have actively expanded in the region.

Hungary’s OTP Bank has been particularly active and Hungary saw its share of CEE business grow to around 16% in the noughties, before falling to a low of 6% in 2018, as a result of the geopolitical tensions.

Poland has also been an extremely attractive regional market, on a par with pre-war Russia. But it was briefly overtaken by the Czech banking sector’s potential in the 2010s, although more recently Poland has returned to the top slot in terms of growth and potential, says RBI.

Still, Poland’s banking sector is expected see net profits of PLN36.3bn (€8.5bn) in 2025 fall by 7.6% year on year, a report commissioned by the sector lobby groups the Warsaw Institute of Banking and the Polish Banks’ Association said on January 15, the state-run newswire PAP reported.

Slovakia has developed into a key regional banking market for Western CEE banks in recent years compared to its initial starting point in the early days of the eastward expansion of Western banks into CE/SEE. Back in 1999 Slovakia accounted for 4.5% of CEE exposures at Western banks; as of 2024 this ratio stands at 10.4%, says RBI.

Russian banks in retreat

The extreme sanctions imposed on Russia has led to Russian banks withdrawing from the European market. Big banks like the Prague-based Sberbank Europe, that was a systematically significant bank in Czechia, have closed their doors and business with Russian banks has been de facto banned by financial sanctions imposed on Russia.

The Russian share of total Western banks' CEE exposures has fallen further from 10% in 2021 – an already  cautious positioning – to around 4% as of 2024.

Exposures will remain at this level for the time being, says RBI. This is because Western banks' exposures to Russia have remained relatively constant over the last 12 months or since the third quarter or the fourth quarter 2023.

Apart from French Societe Generale, no Western bank with a significant market share on the local market in pre-war times, has managed a comprehensive market exit and most remain unwilling to leave what has been a large and lucrative market – RBI itself being a prime example of this trend.

At the same time, Western banks have prioritised a rapid and drastic reduction of their international and cross-border business with Russia. In the categories relevant here, Russia exposures have fallen by 70-90% since the fourth quarter 2021, RBI reports.

However, despite sanctions regime, Europe remains dependent on many Russian imports, with continued, albeit reduced, imports of oil and gas being the most obvious, necessitating the continued contact between Russian and European banks.

Currently, the EU continues to export goods worth just over €2bn per month to Russia. In 2021, monthly export volumes amounted to approximately €7bn and the import of Russian LNG alone in 2024 was up 20% and worth an estimated €11.3bn for this product alone.

Banking services are also needed for the remaining – albeit small – Russian business of Western companies. Of the Western firms operating in Russia pre-war, only 9% have left the market, and of the franchises that did leave, many of them continue to export to Russia via third countries such as Turkey and Kyrgyzstan making banking relations more complicated.