Corporate Lending in Central and Eastern Europe 2013:
Western Europe downturn leaves long-term potential of the CEE region untouched
· The "convergence" story continues to hold, with the modernisation of outdated infrastructure and the introduction of new technologies being particularly supportive
· Naturally, economic growth in CEE should outperform core Western European countries, driven by investments and external trade rather than consumption
· Lending activity will accelerate in line with economic growth and the revived demand
In the coming years, economic growth in CEE should outperform the core Western European countries, provided that the right conditions are in place. This revived growth is likely to be driven by investment rather than consumption, as outdated infrastructure needs to be modernised and advanced technologies have to be introduced. This is one of the key findings of a recent analysis of corporate lending in Central and Eastern Europe conducted by UniCredit CEE Strategic Analysis. Subsequently, lending activity is to accelerate in line with economic growth. Moreover, banks face the challenge of adequately addressing evolving customer needs, as the CEE region remains largely dependent on bank financing. Some specific segments such as SME financing, trade finance and tailored consumer loans call for immediate action.
Competitiveness indicators already ahead of Latin America, EU / EMU accession to further boost quality of business environment
"In spite of the EMU crisis, the long-term potential of Central and Eastern Europe is intact. The 'economic convergence' story continues to hold, being supported by the necessary improvement of regional infrastructure and the institutional environment," said Gianni Franco Papa, Head of CEE Division at UniCredit. For example, GDP per capita is still roughly one third of the euro area average. Thus, the catch-up potential of CEE remains significant and the enhancement of competitiveness indicators, which are already ahead of Latin America, will only strengthen the growth path of the region.
Concerning the ease of doing business, a strong differentiation is evident among the various countries, with the Baltics, Slovenia and Slovakia presenting the most favourable environment. According to a World Bank survey, "securing credit" seems to be relatively easy overall, whereas other criteria from "construction" to "insolvency resolution" deserve more attention. Indeed, the accession of numerous CEE countries to the EU and the EMU should provide a further boost to improving the business environment in the region in the coming years. "After their collapse in recent years, foreign direct investments into CEE are projected to gradually recover, doubling until 2020. Compared to the past, these fresh inflows will be composed of more sustainable projects," pointed out Gianni Franco Papa.
Similarly, external trade will remain a key driver of economic performance in the CEE countries, with Germany, Russia, Italy, China and the Netherlands being the region´s top five trading partners. At the same time, close links with Western Europe also represent a source of vulnerability, at least for some CEE countries.
Willingness to lend and corporate credit standards are improving
As a result of expectedly stronger demand, lending activity will accelerate in line with economic growth. "Over the first three months of 2013, the willingness to lend and credit standards continued to improve in most segments, responding to demand dynamics" reported Aurelio Maccario, Head of Group Strategic Planning at UniCredit, based on IIF's regular survey. In concrete terms, corporate lending is expected to outpace consumer loans, reaching cumulated average growth rates of plus 7.1 per cent in Southeastern Europe in 2013 to 2015 and plus 9.6 per cent in 2016 to 2020. By contrast, consumer finance and housing are projected to pick up pace in both, Central and Southeastern Europe, in the long run. In Turkey and Russia overall retail lending growth is posed to outperform corporate dynamics.
The current figures on lending penetration underline the mid- to long-term potential of the banking sector in CEE. In the European Monetary Union, loans to corporates accounted for an average of 48 per cent of GDP in 2012, but amounted to only 16 per cent in Poland, 22 per cent in the Czech Republic, 28 per cent in Russia and 31 per cent in Turkey. Housing loans to individuals made up an average of 40 per cent of the EMU GDP, whereas they amounted to only 3 per cent in Russia, 6 per cent in Turkey, 20 per cent in Poland and 21 per cent in the Czech Republic. Nevertheless, the retail market potential of CEE must be seen not only in terms of lending opportunities, but also in terms of deposit taking and banking services usage, both of which are less pronounced than in Western Europe.
Given their relevance for CEE economies, SMEs need to be the focus of joint efforts
"Considering the high relevance of the segment for CEE economies, small and medium-sized enterprises need to be one of the focal points of bank financing," urged Aurelio Maccario. "In order to supply them with sufficient liquidity, EU-subsidised financing and the principle of co-financing have turned out to be very effective, as SMEs are also one of the riskiest segments," he added. In the period of 2007-2013, EUR 180 billion from the EU Structural Funds were channelled to the CEE region. A similar amount could be available for 2014-2020. As the EU normally finances only 50-85 per cent of the project value, commercial banks play a pivotal role in providing additional money. Moreover, the World Bank, the EIB and the EBRD have committed another EUR 30 billion for growth in CESEE, addressing priority areas such as SMEs, renewable energy, energy efficiency and innovation. In the end, the acceleration of economic growth in CEE will stem from enhanced domestic competitiveness, the dynamics of which will again be determined by the cooperation of regulators, IFIs and banks.
"We, as UniCredit, are ready to meet our customers´ needs and support them in their business objectives," noted Gianni Franco Papa, Head of CEE Division at UniCredit. UniCredit currently has a Core Tier 1 capital ratio of 10.84 per cent and an unrivalled international network in approximately 50 countries. The Group is the prime partner for supporting customers' cross-border business development and operations through its local banks in 16 countries with a seamless service model. It has unique, in-depth knowledge of the various CEE markets and serves some 10,000 active corporate customers from Germany, Italy and Austria operating in CEE. UniCredit's people are dedicated to high-quality service and committed to retaining the Group's leading position in CEE, including high customer satisfaction.
Istanbul, 10 May 2013