Report on the activities of the CEE banking sector in 2017, "the Convergence of the banking sector 4.0"
- Banking assets in CEE rose to € 2,400 billion or nearly 9 percent of Eurozone assets
- Return to tangible growth and return: return on equity (RoE) again at 10 percent
- Total non-performing loans in CEE are well below 10 per cent; tangible improvements in CEE / see
- Major market players have completed repositioning; the market share of foreign banks in CEE is gradually declining
- Digital banking: CEE region as an ideal "testing ground" for testing solutions in international business
In General, the banking sector in the CEE countries[1] in 2016, was encouraging. The year was characterized by significant development of new net assets, stabilization and improvement of asset quality, as well as continued economic recovery in several key CEE markets such as Russia, Romania or Hungary. Due to the growth of the consolidated balance sheet in comparison with the Eurozone, there are again signs of relative economic competition in the banking sector – a kind of convergence trend of the banking sector, or as it is called – "Convergence of the banking sector 4.0".
The stock of banking assets increased from 8.3% of The Eurozone banking sector assets in 2015 to almost 9% in 2016, i.e., total banking assets in CEE amounted to 2400 billion euros. The growth of banking assets in the CEE/see region remained exceptionally strong, reaching around € 1070 billion at the end of 2016. There was also an improvement of the Russian banking assets; total assets now amount to almost 1,200 billion euros (a minus of only 1.7% compared with the peak value in 2013). However, the times of extraordinary growth in the CEE banking sector have come to an end, which to some extent also affected the fact that the market share of foreign creditors in CEE has reached its lowest level in the last decade. 2016 brought an increase in the market share of state-owned banks in the Eastern European subregion, as well as an increase in state ownership in Central Europe. Only Western enthusiast banks in CEE, such as RBI, which have adapted their business models and market strategies over the past few years, continue to tap the potential of the banking business in CEE.
"We expect a more stable growth rate of new loans and assets. Banking markets in CEE countries still provide opportunities for decent income, given their potential and diversification," said Johann Strobl, Chairman of the Board of Raiffeisen Bank international AG (RBI).
Its assessment is based on the key results of the latest issue of the annual report on the banking sector in CEE – a publication prepared by the analytical division of Raiffeisen RESEARCH RBI for the participation of banks of the RBI network in CEE and Raiffeisen Central Bank AG. This report was presented during a press conference in Vienna on 8 June 2017.
Returning to significant growth and profitability: the level of profitability of own capital again at around 10 percent
In 2016, the profitability indicators of the banking business in the CEE region have again started to significantly exceed similar indicators of the Western European banking sector after years, the dominant trend in the decline of profitability of banking in CEE. Within the Eurozone, the return on equity in the banking sector was around 5-6% in 2016. Taking into account the extraordinary one-time effect in Ukraine (primarily associated with the nationalization of PrivatBank), the average yield (RoE) in CEE rose to about 10%.
"The General trends of market development in the banking sector of CEE contribute to the realization of goals to achieve in the region of at least 10% of equity – the level of profitability that would provide creditors the opportunity to cover their costs of capital. We estimate the cost of capital for most CEE lenders at around 9-11%, depending on the individual business model. In this context, it is important to emphasize that in 2016, the sectoral RoE index reached a minimum of more than 10% in eight of the fourteen banking markets covered by this report. In 2015, the 10-percent level of profitability of own capital was achieved only in four markets. In General, Ukraine was a single banking sector in CEE, which worked with a loss in 2016, " said Gunter Deuber, head of the research division of fixed-income securities and currency Raiffeisen RESEARCH, one of the leading authors of the report on the activities of the CEE banking sector.
The positive dynamics of income in the CEE banking sector was facilitated by the reduction of macroeconomic imbalances, more homogeneous and positive development of lending, as well as the absence of major market or regulatory shocks (for example, the currency crisis, enhanced credit conversions). Moreover, according to Raiffeisen RESEARCH, the next stage of convergence of the banking sector looks moderate. The current levels of financial intermediation in all CEE subregions are lower than in the real economy. "This environment creates a likelihood of another round of financial sector development, i.e. the growth rate of the banking sector will exceed future GDP growth" – suggests Gunther Teuber.
Total non-performing loans in CEE are well below 10 per cent; tangible improvements in CEE / see
In 2016, the share of non-performing loans in the region stabilized at 8%. In addition, there has been a significant improvement in non – performing loans in CE and see, where the share of NPL now stands at around 7% (CE – 6%; COE-12%) of total loans, which is the lowest since 2010. The slight lag in non-performing loans in CEE compared to CE and see can easily be explained by recent developments in the Eastern European region. In Belarus, the NPL measurement standards have changed, leading to an increase in the NPL level to about 12%, whereas previously it was measured in single digits. In Ukraine, the official share of non-performing loans remains at almost 30%. In Russia, asset quality deteriorated somewhat earlier than expected. The share of NPL here decreased slightly – from 7.2% in 2015 to 7% at the end of 2016.
In General, Raiffeisen RESEARCH experts expect that the share of NPL in CEE will gradually decrease in 2017 due to a noticeable improvement in the quality of assets in CEE, see and Russia. However, the NPL share in Eastern Europe is likely to remain above its long-term average over the next two to three years, reflecting the difficult conditions in the banking sector in Ukraine and Belarus, as well as much less credit opportunities in Russia.
The total ratio of loans to deposits in CEE is 86%
Loan-to-Deposit ratios continued to decline gradually in all markets and subregions of CEE in 2016, with an overall loan – to – Deposit ratio of 86% in CEE (90% in CEE; 81% in see; 85% in CE). As for L/D ratios in the regions, we have reached the level typical of banks a few years ago, that is, before the mass credit boom in the years preceding 2008-2009. Moreover, only two banking markets in CEE (Ukraine and Belarus) have an L/ D ratio, which is much higher than 100% - the situation is similar to that in 2004. Among other CEE markets only in Serbia, the L/D ratio still remains at about 100%, all other markets showed below 100% at the end of 2016.
Digital banking: CEE region as an ideal "testing ground" for testing solutions in international business
The title of the report "banking sector Convergence 4.0" shows that the banking sector in Central and Eastern Europe is experiencing a new round of convergence, which this time is associated with numerous technological challenges and opportunities. So, one of the sections of this report is devoted to the review of digital banking in CEE.
Hans Cizek, head of digital banking at RBI group, explains: "digital transformation encourages banks to adapt their business models, accelerate their market activities and be on an equal footing with "new" competitors. For Western banks such as RBI, the CEE region is an ideal "testing ground" for testing solutions in the field of international digital banking, because the size of some of the CEE markets is relatively small, and users look open for perception of new products and services and innovative retail channels and communications. So, we are very proud that the independent report of Deloitte [2] notes that the subsidiary Bank of RBI in Slovakia – Tatra banka – is a model of digital banking for the entire CEE region".
Mr. Cizek also noted that RBI has recently launched the FINTECH accelerator program Elevator Lab (www.elevator-lab.com), which will offer FINTECH startups the opportunity to become a long-term partner of RBI and its 14 network banks in CEE with 16.6 million customers.
The report on the activities of the CEE banking sector in 2017 is available here:
http://www.rbinternational.com/ceebankingsectorreport2017
Financial analyst Gunter Deuber
RBI. Vienna
[1] the report on banking sector activities in CEE defines the Central and Eastern Europe (CEE) region as including the Central European (CE) subregions: Czech Republic, Hungary, Poland, Slovakia and Slovenia;
South-Eastern Europe (see): Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia; and Eastern Europe (BE): Belarus, Russia and Ukraine.
[2] based on the results of a study by Deloitte and the European financial management Association (EFMA) for Q3 2016
