Page 12 - bne_Magazine_July_2017

12 I Companies & Markets bne July 2017
Banking convergence returns to Central and Eastern Europe, says RBI
Robert Anderson in Prague
The banking downturn in Central and Eastern Europe (CEE) is over, with profitability surging last year, according to the annual CEE Banking Report by Austrian lender Raiffeisen Bank International.
The de-risking and capital strengthening drive forced by
the 2007-08 global financial crisis is largely over, and banks are now increasing their assets above GDP growth, while profitability is covering the cost of capital. In short, banking convergence, or catch-up with Western Europe, has returned, the lender announced.
Return on equity (ROE) across the CEE region (which
for RBI does not include Turkey or Eurasia) more than doubled to 10.5%, well above the 5-6% achieved in the Eurozone. Eight of the 15 CEE markets are now covering their cost of capital, compared to four in 2015. Looking forward, the bank predicts an average of more than 10% ROE.
“All in all, the CEE region started to significantly outperform Western European banking profitability once again,” the
“2016 ended years of down-trending profitability in CEE banking”
report said. “Therefore, the year 2016 ended years of down- trending profitability in CEE banking.”
Large Western players in the region are making even higher profits than the average, around 12-14% ROE. This could reawaken interest in CEE banks, and lead to an end to foreign banks' retreat from the region in recent years. “From now on the appetite is there once again from foreign players,” Gunter Deuber, RBI’s chief economist, tells bne IntelliNews.
The market share of foreign lenders fell last year to the lowest level for a decade, mainly due to an increase in the market share of state-owned banks in Eastern Europe and growing local or state ownership in Central Europe, notably Poland and Hungary. But RBI expects this trend now to peter out.
In fact, the rebound in profits could have unwelcome reper- cussions if banks once again attract the attention of govern- ments, Deuber says. “We must watch carefully how politi- cians and regulators react to the current situation. There could be certain claims on bank profits, for example in the
www.bne.eu
Czech Republic and Hungary. This could be a problem for profitability going forward.”
The recovery was strongest in Russia, Romania and Hungary. Southeast Europe continued its solid rebound, while Central Europe has already been growing strongly for a few years, though RBI said the Polish market has begun to soften.
The fast recovery of the Russian market was the big surprise
of last year, according to Deuber, with ROE bouncing back to 10% after just 2.5% in 2015, and assets growing by 15% across the Eastern European region led by Russia.
Western players in Russia maintained a ROE of 18%. “Foreign banks have shown they can operate in the niches,” Deuber says. “Now they have proved this for a second year.”
On aggregate, Ukraine was the only loss-making banking market in 2016, according to RBI, because of massive one-offs related to the nationalisation of PrivatBank. Non-performing loans (NPLs), at an average of 30% of total lending, remain a serious problem across the sector.
Deuber also highlights Belarus as a worry because of the “substantial increase” in the NPL ratio to 12%, and the overall contraction in lending.
Apart from Russia, one of the main drivers for the overall improvement in banking profitability was the faster than expect- ed progress in restructuring NPLs, which have stabilised at 8% across the region. As well as workouts by banks themselves, sales of NPL bundles have taken off, particularly in Poland, Romania and Russia, enabling banks to write back provisions.
CEE: Return on Equity in the subregions (%)
25 20 15 10
5 0
-52000 2002 2004 2006 2008 2010 2012 2014 2016
* excl. Ukraine for 2016; Source: national sources, RBI / Raiffeisen Research