The banking sector in CEE is still operating in a much more profitable way than its peers in Western Europe, according to UniCredit CEE Strategic Analysis.
The banking sector in Central and Eastern Europe (CEE*) changed significantly as a result of the global financial crisis in 2008 / 2009. While its profitability still lies above Western European figures, it is moving closer to more sustainable levels than in the pre-crisis period. This is one of the key findings of the “Business Opportunities for Banks in CEE” study compiled by CEE Strategic Analysis at UniCredit. Loans remain the most important bank product overall, but alternative services should encounter higher customer demand.
Profitability levels off at more sustainable level
CEE banks are still more profitable than those in Western Europe, but their earnings power is noticeably levelling off at a more sustainable level. While their return on assets in the boom years before the crisis (2006 to 2008) stood at an average of 2%, between 2010 and 2014 it amounted to 1.4%. In 2015 and 2016, influenced by the situation in Russia, it should reach 0.8%. According to analysis by UniCredit experts, the return on assets for credit institutions in Central and South-Eastern Europe (CESEE**) in the above mentioned three periods is 1.6, 0.8 and 1.0%, respectively. Banks in Germany, Italy and Austria, by contrast, produce figures of 0.4, 0.2 and 0.4%.
“In Central and Eastern Europe roughly two thirds of all income in the sector is generated by net interest income, i.e. in traditional banking business. Against the background of pressure on margins it will be vital to push alternative sources of income such as fees and commissions and boost the earnings power of banks”, said Carlo Vivaldi, Head of CEE Division at UniCredit.
Lending will remain the most important bank product in the future as well. “We are expecting moderate lending growth in line with the economic recovery in the region”, revealed Mauro Giorgio Marrano, Deputy Head of CEE Strategic Analysis. “In CESEE we anticipate growth of 3.9% this year and 4.6% next year. In CEE the rates will be 5.1% and 7.8%.” The pace of credit growth will differ significantly from country to country. The share of non-performing loans will remain relatively high this year. However, some improvement is envisaged in some countries.
Products that go beyond lending will play a greater role
“Alternative services away from traditional banking loans will undoubtedly gain in significance”, said Carlo Vivaldi. “According to our analyses, corporate customers will in the future fuel greater demand for non-traditional financing. With private customers I see potential, particularly, with asset management services.”
In fact, not only bank loans but also debt securities account for a much lower proportion of companies’ debt financing for CESEE companies, compared to Western European industrialised countries; the net financial wealth of private households in CEE is still below those of households in Germany, Italy and Austria, and they are invested in comparatively basic products. Wealth growth will create capacity for a greater demand for wealth management services going forward.
Use of the internet for banking transactions in CEE also still lags behind Western European levels. “Banking customers in Central and Eastern Europe are extremely tech-savvy. This is shown by the strong growth in online banking in recent years”, analysed Mauro Giorgio Marrano. “Modern customer services over the internet are a crucial factor of success for banks in CEE.” Credit card payments in the region also display strong gains.
* CEE comprises Bosnia-Herzegovina, Bulgaria, Croatia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Czech Republic, Turkey, Ukraine and Hungary.
** CESEE means CEE excluding Russia, Turkey and Ukraine
Source: UniCredit press release distributed on the occasion of the EBRD Annual Meeting in Tbilisi, 14 May 2015