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bne July 2020 Central Europe I 31
This extends from the more advanced economies of Central Europe to the aspiring EU members in the Western Balkans.
“Essentially it seems the Western Balkans' banking sector is very much behaving in an aligned manner to the broader CEE banking sector. This is also a characteristic of the region per se, which sees a large presence of foreign banks that operate cross-border in 10+ countries of the region,” said Gattini. “The shock we have been facing and which is still unleashing its effect is a common demand and supply shock to the economy, including the banking sector, which by and large affects the whole region, including the Western Balkans.”
Lending slowdown looms
Data on loan growth rates shows a year-on- year increase in credit to the private sector of over 6% for the last seven quarters. The highest y/y growth rate in the region was in Hungary, at 13.2% in 4Q19 and above 10% since 4Q18. There had also been double-digit growth in Kosovo since 4Q16. In the final quarter with data provided, 4Q19, there was a regional average of 6.1% y/y and growth was above 5% in
all countries except Croatia.
According to the report, banking groups operating in the region reported a continued rise in demand for loans in the last six months, and were expecting a further increase pre-pandemic. However, says the report, demand
in the coming months is expected
to drop sharply, with it driven more by households than corporates or SMEs. In addition, “the quality of loan
A. Total demand conditions over time
applications is ... expected to deteriorate sharply across the client spectrum,” according to the report.
Looking at supply conditions for financing, the report notes that pre- pandemic banks in the region were mildly easing credit standards, which are now set to tighten sharply. “In addition to the local and international economic environment, non-performing loans,
the quality of loan applications and local capital conditions are expected to exert significant negative pressure,” according to the EIB.
“Credit quality has continued to improve over the last six months. The positive trend is expected to invert dramatically.” adds the report, noting that the crisis has brought about a sharp reversal in expectations for the next six months, whereby the positive landscape has turned abruptly negative.
Just under two-thirds of banks surveyed, 64%, expect that the number of NPLs will increase going forward.
This follows a period during which NPL ratios were on a declining trend across the region, as banks dealt with the legacy of the previous crisis.
In Q1 2019 NPLs were as high as 24.0% in Albania and averaged 11.5% across the region. In Q4 2019 the averaged had dropped to 4.9%, ranging from 8.4% in Albania to 2.0% in Kosovo.
Support needed
On a more positive note, EIB officials commented on the strong support for European businesses rolled out in response to the pandemic.
“The coronavirus pandemic is an unprecedented crisis. But co-ordinated action and support at a European level
“Demand for loans is expected to contract and supply conditions to tighten even faster on the back of deteriorating expectations”
“As a result, demand for loans is expected to contract and supply conditions
to tighten even faster on the back of deteriorating expectations regarding NPLs, capital conditions and funding. Against this backdrop, a financing
gap is expected to persist, whereby compressing demand conditions are expected to be frustrated by even more sharply tightening supply conditions and declining approval rates.”
B. Demand breakdown by client segments – Spring 2020 wave only
has [been] and will be unprecedented as well,” said EIB vice-president Lilyana Pavlova.
“In light of the grim expectations by
the banking sector in the region and
an increased likelihood of declining financing opportunities, we are particularly glad to have approved the pan-European Guarantee Fund. It is a timely and targeted response to alleviate the hardship endured, especially by entrepreneurs and smaller companies. We will work closely with national institutions to make sure that businesses in need can quickly access the support provided by the EIB.”
“For the banking sector to return to pre-crisis activity levels and to ensure financing for smaller companies
and corporates, providing support through instruments like the European Guarantee Fund and others will be essential. They can support a faster and forceful rebound,” said Revoltella.
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