Page 68 - bneMag bne_December 2020_20201201

68 Opinion
bne December 2020
saying that clients in CE/SEE are nowadays clearly shifting from long-term deposits to demand deposits. Moratoria and credit holidays will also contribute to a decline in interest income. On some markets like Croatia and Bulgaria euro area entry (prospects) will eat into profitability as well. Mid-term we see some 10-15% of the current local banking sector profit pool at risk in both countries. On those two markets in particular and more general in the region the only way out
of this situation is scale and consolidation.
Overall, we expect a profitability drop by 30-50% in 2020 and 2021 compared to a non-COVID scenario. The profitability drops in the CE/SEE markets could be at the higher end of this range.
For 2020 and 2021, we continue to expect return on equity to be in the single-digit range of 4-9% in most CE/SEE markets, with possibly more downside risks in 2021 than in 2020. Overall, a low double-digit RoE in CEE banking would be still possibly feasible in 2020 and 2021, but only when and if the EE markets and Russia continue to perform.
The profitability situation in the EE region was and is extremely pleasing with a RoE of 18% – the highest value since 2016 – in 2019 driven mainly by the banking market in Russia and Ukraine (RoE of 19.6% and 34% in 2019 respectively).
In the first half of 2020, return on equity was still around 15% or moderately below the previous year's figures (~14% in Russia, ~26% in Ukraine). In this respect, we believe that
a double-digit RoE is possible here in 2020 and that the positive earnings differential between the EE and CE/SEE region could remain at around 9-10 percentage points. In
this respect, the EE region could once again become a major revenue driver for some leading Western CEE banks in 2020, as it was in 2011-2013, when the banking sectors of the CE/ SEE region suffered from the double-dip recession in the context of the euro area crisis, with a single-digit RoE,
while the RoE in the EE region remained double-digit.
During the Global Financial Crisis or the Russia/Ukraine crisis, earnings ratios naturally turned in favour of the CE/SEE banking sectors. Overall, the sketched earnings patterns show, that diversification across the whole CEE region remains a viable business strategy. Moreover, one has to stress that unconventional monetary policy measures in CE/SEE have not yet achieved such market-distorting effects or dimensions like in Western Europe and are not expected to achieve them, which is why the yield curves
are still steeper here.
Belarus risks manageable
Macroeconomic and banking sector challenges are definitely on the rise in Belarus – a market that was also profitable in times when other markets were in red territory in the past. However, we do not think that the challenging political and economic situation in Belarus could have a material impact
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on the profitability of both large Western European CEE banks (overall and in the EE region) and large Russian banks, in terms of negative earnings ratios. For Western banks, Belarus is of about the same importance as Albania, while exposures to countries such as Bosnia, Slovenia or Ukraine are twice or three times as high. And also, for Russian
banks (with a market share of about 30% in Belarus),
the exposures are not material or are below 1% of the domestic market exposure.
A lot of balancing acts for politicians, regulators
and banks ahead
At the policy and regulatory level, it will be crucial in the coming 12-18 months to find meaningful co-ordinated solutions to important issues such as moratoria, the expiry of moratoria, tax deferrals and home/host-country regulatory issues.
The same applies at political level to national fiscal and/or supranational support programmes (e.g. with regards to the potential extension of support programmes supported by the EU's SURE initiative).
Curtailing the regulatory reliefs comprises another
important question, which calls for precise timing and proper co-ordination with other (fiscal) policy measures. Indeed, delaying the recognition of banks’ credit losses for too long inhibits the accurate supervisory assessment of systemic risks, while lifting the forbearance early might threaten a credit crunch. It will require deft action by authorities to navigate these confines.
Another key question will be is how the authorities manage to accommodate the inevitable step-up in government borrowings, so they do not crowd out the much-needed credit supply to
the real economy. Against this backdrop, one can reasonably assume an increase in banks’ exposure to sovereign risk.
Moreover, banks will have to continue to invest. Customers are currently re-evaluating their approach to banking services and are much more open to digital offers. This implies a further reorientation of the branch networks plus investments. In this context of digitalisation, we would like to point out once again the particularly competitive situation on the Russian market. Competition from neo-banks in the EU banking markets in CE/SEE will certainly increase massively in the coming years in view of the previously outlined increased digital affinity of many customers. Here, it will be important for the leading CEE banks to offer similar services in terms of customer experience and at the same time achieve economies of scale. We also see the potential for established CEE banks to win back customers and market shares from FinTechs and challenger banks, as the lending business is regaining importance alongside payment transactions. In addition, some banks may take the opportunity to acquire customers and technology from FinTechs now operating under more difficult market conditions.