Page 12 - bne magazine February 2022_20220208

12 I Companies & Markets bne February 2022
NPLs (% of total loans)
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.
* CE-3: CZ, SK, HU
Source: national sources, RBI/Raiffeisen Research
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.
Regional and overall RoE CEE banking (%)
* CE-3: CZ, SK, HU
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Source: national sources, RBI/Raiffeisen Research