UniCredit Group's CEE Banking Study 2009
Banking in CEE - adequate risk appetite crucial to win the upside
- The mood is positive, though full recovery from the crisis needs time
- Credit quality remains the main constraint for lending
- UniCredit Group clearly benefited from its business diversification
- Full rebound of banking business most likely starting from 2011 with long term prospects for CEE banking remaining untouched
"Full recovery from the crisis needs time, but the appeal of CEE banking is definitely there and our commitment to the Central and Eastern European region has proven to be the right strategy," says Federico Ghizzoni, Head of the CEE Banking Division of Bank Austria, referring to the recent banking study by UniCredit Group. "The good news is that we will see positive growth in 2010 in most of the countries of the region. Growth will, however, remain below the long-term potential and strong regional differentiation is confirmed," adds Debora Revoltella, Head of UniCredit CEE Strategic Analysis.
Central European countries such as Poland and the Czech Republic or Slovakia show better recovery prospects. Turkey, which was only marginally affected by the global liquidity crisis, will rebound quickly, while Russia will profit from the oil and raw materials price recovery, other than from a strong fiscal stimulus. South Eastern European countries and the Baltics will remain in recession in 2010, in need of some further rebalancing. Ukraine and Kazakhstan, as well as Russia, will record positive growth, but need time to fully readjust and exploit their potential.
The banking business will most likely start to fully rebound from 2011, so the forecast by the analysts of the Group. "UniCredit Group is well prepared to catch the upside," so Federico Ghizzoni. "The Group clearly benefited from its diversification, with the CEE business accounting for some 12% of the total banking assets at the end of 2008. The announced capital increase, which will be performed in the market, will further strengthen the Group's capital position, allowing more buffers and more room for growth." The diversification is also matched with a good access to funding, in a period where availability and cost of funds apart from an adequate risk appetite remain the key competitive advantages for banks in the region.
The analysts of UniCredit Group forecast an 8 % growth in 2010 in banks lending for the region, following a 5 % drop in 2009, with recovery starting on the corporate side. After some correction in 2009 and the first part of 2010, the analysts expect the loan deposits ratio to gradually increase over time. "Rebalancing will continue and is already more pronounced in those countries which had a stronger gap in terms of domestic funding, while it is less pressing and might even be counterproductive in the other countries", so Revoltella. "In terms of business, there is more diversification needed, away from solely retail lending strategies, towards a more balanced mix."
Now that the liquidity crisis is over, credit quality will remain the key challenge. Profitability will have to account for structurally higher costs of risk through the cycle, but will benefit from a leaner cost structure. The crisis has accelerated the implementation of cost-efficiency measures all over the world and CEE banking is not an exception. Some bubbles of the last years, in terms of network or salary costs, might now be rebalanced. Profitability is likely to stay subdued in the next two years mainly due to the impact of higher provisioning against bad loans, with a loss at banking system level most probable between 2009 and 2010 in countries such as the Baltic States, Russia, Ukraine and Kazakhstan.
"It is extremely important to note however that in the current environment the performance of different kinds of banks in the same market can differ widely, as profitability very much depends upon the quality of an individual bank's portfolio and cost of risk," says Revoltella.
In such a framework, those are likely to be the key years for reshaping the positioning as well as the strategies for the banks in CEE. The changing competitive environment also offers opportunities. International banks active in the region - especially the top players - might strengthen their position, leveraging on their existing network and on their better access to international funding, providing the risk appetite is adequate. In some countries, the crisis is opening room for repositioning. Unfocused players might exit the market, new entrants could take opportunities. All in all, the analysts of UniCredit Group expect the winners to be either new entrants or international players already active in the region, provided their ability to show adequate risk appetite and to leverage on their own strength.
This text can be found also on the homepage www.bankaustria.at
About UniCredit Group
UniCredit is a major international financial institution with strong roots in 22 European countries as well as representative offices in 27 other markets, with approximately 10,000 branches, over 168,000 employees at 30 June 2009.
In the CEE region, UniCredit operates the largest international banking network with over 4,000 branches and outlets.
The Group operates in the following CEE countries: Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.
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