Page 86 - bne Magazine February 2023

86 Opinion
bne February 2023
power towards domestic banking groups in smaller markets of the Western Balkans, which has already been underway in the last five years.
Otherwise, in larger CE/SEE markets the lively consolidation trend did not alter much the participation rate of foreign players in 2021/2022, i.e. recent redistributions and combinations of market shares were largely within the groups of either foreign or local players. From a longer-term view, Serbia is perhaps a rare exception where the market share of foreign banks has increased notably in the last five years to top 75% on the back of acquisitions of local banks by OTP and NLB.
Echoing the brisk M&A activity in the last few years, the market concentration ratios (top-5 banks) have trended up across the largest CE/SEE markets, which, in turn, mean that there are now fewer “easy” options to pick up business scale, so a more prudent approach to choose future M&A targets will be warranted.
Refocus on Central Europe
Overall, it seems that Western players are more and more coming back to square one of their regional banking sector expansion. The longer-lasting regional re-focussing of Western CEE banks – well ahead of the Ukraine war –
has translated in a rise of the CE banking markets and (current) EU markets in regional portfolios of Western- owned CEE banks.
Currently, EU markets represent 86% of exposures (2013 "only" 71%, 2003: 84%), Central European markets are back to the all-time heights at the early stages of the regional CEE banking boom at close to 70%, relative exposure ratios last seen in 2002-2005.
The "return" to EU and Western CEE markets reflects a complex interplay of various factors over time. First, simple "convergence bets" have not materialised on many levels. The adoption of the euro by CE/SEE markets has progressed more slowly than expected at the beginning of the 2000s
or has been put on the back burner in some cases. Moreover, through-the-cycle profitability in more risky/exotic
markets had been possibly less favourable than assumed
(or economic/political convergence had been less successful than hoped for).
“Overall, it seems that Western players are more and more coming back to square one of their regional banking sector expansion”
Secondly, political and geopolitical risks have long been a relevant factor in CEE business. This applies to the issue of Russia/Ukraine and also the Western Balkans. It remains to be seen whether clearer EU-perspectives in the Western Balkans may change the calculus once again. On an interesting note, the traditionally more emerging market risk tolerant RBI is currently gearing towards CE markets, having grown into #4 market position in CE-3 (Czechia, Hungary, Slovakia).
European or EU banks have been particularly exposed to the Russian market for years. Some European banking sectors (among them France, Italy and Austria) have even made significant (market share) gains there in some cases. In the short term, these trends could intensify. In the future, EU banks should be careful with strategies that carry an element of catching market share from “geopolitical more sensitive actors" such as banks from the USA or UK. Credit institutions from the Anglo-Saxon world trimmed their Russia-related exposures much earlier than EU banks.
However, it should also be noted that EU banks are currently less exposed to China than credit institutions from the USA or UK. As we will show later on, further differentiated country or geographic strategies of international banks should continue to emerge, driven by country-specific risk factors related to relevant ESG classifications or ESG country ratings.
Russian exit dilemmas
Moreover, recent developments in the international banking business in Russia show how complex it is to scale back exposure once a geopolitical confrontation is well underway. And the potential market exit in case of Russia is currently hitting several regulatory and practical hurdles. This holds especially true for major cross-border CEE banks. In this environment, many of the Western players resort
to a downsizing strategy (increasing local loss absorption
Major CE-banks (total assets)
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