Report on the activities of the CEE banking sector in 2016

Expectations about growth in the banking sector of the countries of CE/see countries is carried out; Eastern Europe (VE) was under the influence of serious negative factors.

 Foreign credit institutions in Russia are demonstrating resilience; Western banks are returning to a narrower specialization in certain niches.

 The non-performing loan ratio in CEE rose to about 9%, while in CEE/see it fell to about 8%.

 Profitability: the profitability of own capital (RoE) in the CEE markets is less than 5%, and in CE/see countries – at the level of 9.7%.

 Credit-to-Deposit ratio: further significant improvement in the CEE region.

 "The so-called" new norm", which provides for stricter capital requirements, active participation of regulators in the work of banks and extremely low interest rates against the background of the unstable economy of Russia and Ukraine, obviously, has become a burdening factor that influenced the profitability of the CEE banking sector[1]. But despite the fact that the year 2015 has been another challenging year for the banking sector of the CEE countries has been notable progress in the markets of the countries of CE/see countries, where the level of profitability (ROE) of close to 10%. Progress in the CEE/see banking sector is associated with an improvement or at least stabilization in asset quality, while there is also a gradual increase in balance sheets. Total banking assets in CE/see exceeded the threshold of € 1,000 billion for the first time in 2015, demonstrating the region's growth potential. However, the banking regulatory measures in CE/see, which have recently been introduced and/or are currently under discussion (in particular, mandatory conversion of foreign currency loans or additional capital requirements), create more obstacles to the full use of potential and at the same time constrain the banking sector's momentum for further economic growth.

Russia and Ukraine in 2015 were under the influence of serious negative factors in the economy. In Russia, the leading CEE banks, including RBI, have made adjustments to their business models, focusing more on their core competencies in the "niche" premium markets. The level of investor confidence is now on the rise again, although amid political tensions in the region, economic forecasts remain restrained. However, despite all these challenges, the banking sector continues to grow in the CEE region and the commitment to the CEE region continues to bear fruit," said Carl Sevelda, Chairman of the Board of Raiffeisen Bank international AG (RBI).

This assessment is confirmed in the main results according to the latest version of the summer Report on the activities of the CEE banking sector, published by RBI/Raiffeisen research and prepared with the participation of banks of the Raiffeisen Bank international network in CEE and Raiffeisen Central Bank AG. The report was presented at a press conference in Vienna on 9 June 2016.

 "New norm" and 10 per cent boundary values

Under the "new norm", the CEE banking sector should achieve several indicators at the level of 10%. 1) Existing conditions require gains of at least 10% market share in small and medium markets for banking services in the countries of CE/see countries. 2) due to the change in the existing strategic orientation, the average number of countries with Western credit institutions in CEE is reduced to nine. 3) achieving a return on equity (RoE) of at least 10% is likely to remain a challenge in the coming years. For credit institutions present in the CEE region, investors will demand a minimum RoE premium of 1.5-2%. Under the current conditions, the cost of equity of Western banks in CEE will be 11-13% compared to 9-10% or even lower for credit institutions in Western Europe. ( 4) the next challenge for CEE credit institutions operating in the EE remains to reduce the share of non-performing loans in the subregion to below 10 per cent. (5) another aspect of the "new norm" in the CEE banking sector is the change in the weights of the subregions, taking into account the total volume of banking assets. As a result of the reduction in the volume of activity in the markets of Russia and other VE countries, Russia's share in the assets of leading Western banks in CEE in 2016 may be reduced to 10 percent or lower.

Expectations regarding the growth of the banking sector of the countries of CE/see countries is carried out; VE been under the influence of serious negative factors

"In the CEE banking sector, there are still opportunities for growth. In the short term, we expect significant growth in the CE/see markets, and in the short term — growth in the retail business. In the long term, there is a real possibility of achieving a credit growth rate of about 8-10% year-on-year. Our forecast FOR CE / see also confirms the General trends in the development of the situation in the banking sector of the West, where the process of reducing the debt burden has been largely completed. Taking into account the requirements to increase margins and profitability, do not underestimate the need for consolidation in the banking sector of CE/see", — explains Gunter Doiber, head of research division of securities markets and currencies of CEE in RBI/Raiffeisen research and one of the main authors of the Report on the activities of the banking sector of CEE.

In General, the VE in 2015 was under the influence of serious negative factors, as a result of which the quality of assets significantly deteriorated (the share of non – performing loans in the VE was 7-9%, while in Ukraine this figure was at the level of 20-40%), and even more they affected the decline in profitability and return on equity, which was minus 0.1% (for comparison, in CEE this figure was about 5%, and in the Eurozone-6%). According to Doiber, the main reason for the negative profitability was again a significant decrease in income of the banking sector of Ukraine due to certain challenges in operating activities and the need for significant recapitalization. In addition, in 2014-2015, the largest purification of the VE banking system in the last decade took place, and many banks in Russia and Ukraine were withdrawn from the market.

Western banks are returning to a narrower specialization in certain niches

In General, Western banks in CEE are no longer focused on a significant increase in market share in the CEE countries, but are trying to ensure their positioning in certain profitable (niche) segments (for example, retail business). They continue to evaluate common business models for CEE markets, which are highly heterogeneous in their development, and focus on cost optimization and risk reduction, focusing on premium customers. Therefore, today it is more likely to reduce the volume of activity of Western banks in CEE (in particular, the number of branches) or their exit from a certain segment of business or market than large-scale mergers and acquisitions in the region. However, there remains the possibility of certain smaller-scale situational mergers and acquisitions (for example, the purchase of portfolios in target business segments) by Western banks in CEE. The number of individual m & a transactions may even increase slightly as the struggle to improve profitability necessitates the expansion of market share in individual business segments.

The non-performing loan ratio rose to about 9% in CEE and fell to about 8% in CEE/see%

Asset quality, measured by the non-performing loan ratio (NPL), has declined significantly in CEE markets. In 2015, CE continued the General trend to improve the quality of assets, which contributed to a decrease in the ratio of non-performing loans to 7.3% (in 2014 this figure was 8.5%). With the exception of Hungary, where the non-performing loan ratio is still close to 10%, the rate in the CE countries is even lower at 6.4% (in 2014 it was 6.8%). In the markets of the see countries has also been an improvement in asset quality to a certain extent, and the ratio of non-performing loans in 2015 has decreased from 19% to 15%.

In contrast to the situation of improvement or at least stabilization of asset quality in CE/see, in all three markets in the VE during the previous 12-18 months there was a significant deterioration. Depending on the measurement approach, the non-performing loan ratio in Eastern Europe rose from 4-6% in 2013 to about 7-9% in 2015. In Russia, the ratio of non-performing loans increased from 4.5% in 2013 to more than 7% in 2015 (approximately 6.5% in the segment of lending to legal entities and 9-10% in the retail business). In 2016, analysts at Raiffeisen RESEARCH expect a moderate strengthening of negative trends in non-performing loan ratios in the VE banking sector, which is mainly related to Russia and, to a lesser extent, to Belarus.

According to günther Deuber, the primary challenge for 2016 is to maintain the ratio of non-performing loans in CEE at the level of the lower boundary value of 10%. The non-performing loan ratio continues to decline in CE/see and may fall to less than 8%. As the non-performing loan ratio in the CE may approach or exceed the 10 per cent threshold, it is expected to be slightly below 10 per cent in the CEE region.

 Profitability: the profitability of own capital (RoE) in CE/see countries at the level of 9,7%, while in the CEE markets – less than 5%

The profitability of the CEE banking sector in 2015, as before, was uneven. The total RoE in CEE fell below 5% (in 2014, the figure reached 6.9%) compared to 6% in the Eurozone. There has been a significant and large-scale decline in profitability in all VE banking markets. In 2015, the RoE rate in the VE countries was minus 0.1%. At the same time, significant progress has been made in the CEE/see countries, with RoE reaching 9.7%.

In contrast to 2014, when financial results were negative in the banking services markets of the three CEE/see countries (Hungary, Slovenia and Romania), in 2015 the loss result was only in Croatia.

Credit-to-Deposit ratio: further significant improvement in the CEE region

Following the trend of recent years, almost all CEE banking markets attracted a very significant amount of deposits in 2015, and in most cases the volume of deposits increased much faster than the volume of loans. Therefore, the overall credit-to-Deposit ratio in the CEE banking sector improved again in 2015, reaching its lowest level in many years. Currently, the ratios of loans to deposits in the countries of CE and see are, respectively, 92% and 86%, the best figure for the period 2005-2006. Taking into account the ratio of loans to BE deposits at 88%, the ratio of loans to deposits in CEE as a whole is slightly less than 90%. Large universal banks can still operate in the banking market of all CEE countries with a ratio of loans to deposits below 100%.
The report on the activities of the CEE banking sector in 2016 is published on the website http://www.rbinternational.com/ceebankingsectorreport2016
[1] In the context of the Report on the activities of the banking sector, Central and Eastern Europe (CEE) includes the sub-regions: Central Europe (CE) Czech Republic, Hungary, Poland, Slovakia and Slovenia; southeastern Europe (see) – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia; Eastern Europe (VE) – Belarus, Russia and Ukraine.