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bne December 2020
Crisis, crisis, but credit volume is rising much more strongly than in previous crises
Credit growth in CEE markets in the first half of 2020 was much stronger than in a "classic" macroeconomic and/or macro-financial crisis. This development reflects a strong turnaround after the first lockdown phase and above all in new retail business, which came to a virtual standstill during the lockdown.
Lending in some CE/SEE countries has been much more robust than expected. As in Western Europe, this is particularly true for residential real estate lending
(e.g. in the Czech Republic, Slovakia or Romania, Croatia and Russia). Lending was supported by ongoing support and subsidy programmes and the rapid reduction of systemic capital buffers, additional capital buffers and/or the removal of micro- or macro-prudential regulations/tightening measures in many countries (e.g. Poland, Czech Republic, Slovakia, Bulgaria).
The reduction of bank taxation in Romania at the beginning of the year 2020 also had a positive effect. Not to forget that the special bank taxation schemes in Hungary introduced in 2020 has been rather bank-friendly from a mid- to long-term perspective.
Currently, credit growth in CE/SEE is in the range of 5-7% year on year on average. In some markets, such as Hungary, Serbia or perhaps Albania, even double-digit (!) credit growth rates (in local currency) are possible this year. The same may apply to the Russian market.
By comparison, previous crisis years in CEE were characterised by negative values or credit growth rates of 2-4% maximum.
It goes without saying that courageous support measures
of a fiscal, monetary and regulatory nature have made the COVID-19 hit very manageable so far. After all, in this crisis we expect a fiscal impulse of 5-10% of GDP in CE/SEE, whereas in the Global Financial Crisis it has averaged around 3% of GDP – often followed by a rapid pro-cyclical cut.
Unemployment rates should therefore also rise less than in the aftermath of the Global Financial Crisis of 2008. On top of fiscal support liquidity support, regulatory forbearance and capital relief measures had been implemented in a swift and pragmatic way. This is positive news, as it was often feared that additional capital buffers won’t be cut in a bold and timely manner in crisis times.
Short-term crisis impacts manageable, substantial medium-term challenges
The short-term crisis impact is manageable due to
a substantial degree of accumulated resilience. Foreign currency lending is less widespread in the region (excepting Belarus). The share of FCY loans in the CEE region declined once again significantly in 2019, bringing it close to 10-20%
Opinion 67 of the total loan portfolio in many of the CE countries and
also in Russia.
In the SEE region and Ukraine plus Belarus, the figure is still 30-40%. However, with the exception of Belarus, the share of FCY loans is some 20 percentage points lower in all CE/ SEE countries and Ukraine than at the beginning of Global Financial Crisis. Moreover, overall lending strategies had been prudent, and risk disciplined. Sectorial overheating tendencies were counteracted with foresight (e.g. in the Czech Republic, Slovakia, Romania and Russia).
Asset quality deterioration remained modest so far, with NPL increases by 10-50 basis points up to now. Nevertheless, we expect NPL ratios in the CE/SEE region to rise to a maximum of between 4-8% in the CE region and 7-10% in the SEE region. This would mean that the increases in the SEE region in particular would be much less dramatic than ten years ago.
In CE, the increase in the aggregate could be as strong as ten years ago, but much flatter this time than in the exceptional
“Courageous support measures
of a fiscal, monetary and regulatory nature have made the COVID-19 hit very manageable so far”
case of Hungary (where the NPL ratio from 2011-2015 was in the double-digit range). Overall, the imminent asset quality deterioration, especially in CE/SEE, should be less dramatic for a number of reasons (no excessive lending in the past, experience and appetite of distressed debt investors in the region, improved NPL handling frameworks), and above all flatter over time. We see the bulk of the expected NPL rise starting in 2021 until the end of the year and possibly still in H1 2022. Much will also depend on how quickly moratoria finally expire, how tax reliefs are treated going forward and at the same time when and if the fiscal impulses also take effect. The second wave of COVID-19 currently unfolding
is inducing additional risks to retail and SME portfolios.
Elevated profitability and earnings pressure in Central and Southeast Europe, Russia and Ukraine as hedges
for some Western CEE banks
The biggest mid-term challenges we are foreseeing are on the interest rate front. We arrived at rock-bottom interest rates in CEE in 2020, while this situation may at least stay with us in going into 2022.
In CE/SEE the interest rate landscape is nowadays much more challenging than in Russia or Ukraine and closer to the situation we are having in Western Europe. It goes without
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