Raiffeisen Research has once again examined the banking markets of Central and Eastern Europe in its CEE Banking Sector Report. After a record-breaking year 2019, the market trends are still respectable in the light of the COVID crisis. In 2020, non performing loans in Central Europe (CE) and Southeastern Europe (SEE) will remain close to last year’s lows of 2 to 5 per cent, and return on equity in the Eastern European markets Russia and Ukraine was about 15 per cent in the first half of the year.

The Raiffeisen analysts remain confident about the CEE banking market outlook
“The banking sectors in Central and Eastern Europe are in a solid position to meet the challenges ahead. Compared to previous crises, we see a high degree of accumulated resilience, which is based not least on the appropriate risk discipline of recent years,” said Gunter Deuber, author of the study and head of the Economics, Interest Rates and FX Research department at Raiffeisen Research, on the occasion of the publication of the CEE Banking Report.
“A solid local funding base is an additional risk mitigating factor. Therefore, commercial banks can make a significant contribution to cope with the external shock of the COVID crisis. Lending volume in CEE will increase significantly in 2020 compared to the previous year and thus exceed the growth rates of the past crises”
Johann Strobl, CEO of Raiffeisen Bank International
Overall, the aftermath of the COVID crisis will keep the CEE banking sectors busy for the next 12 to 24 months. Raiffeisen Research expects a significant and creeping deterioration of asset quality in 2021 and possibly beyond. The current second COVID wave brings additional risks for retail and SME portfolios. Overall, NPL ratios are expected to increase to 4 to 8 per cent in the CE region and 7 to 10 per cent in SEE. This would mean that the increases in SEE in particular will be much less dramatic than ten years ago.

In the crisis year 2020, new low interest rates have been achieved in CE and SEE, which could remain at least until 2022. This is weighing on earnings, especially as savers are now increasingly switching from savings to sight deposits. To this extent, Eastern Europe (EE) could become an important source of earnings again for some leading CEE banks in 2020 and beyond, as was the case between 2011 and 2013. At that time, the banking sectors of the CE/SEE region suffered from the double-dip recession in the context of the euro area crisis, while Eastern Europe showed strong profitability ratios. The Russian banking market in particular could thus continue to
act as an important driver of profitability and innovation for the banking industry in CEE. However, in the opinion of Raiffeisen Research analysts, competitive pressure is increasing significantly here, for instance due to increasing market concentration or the convergence of banking and online services. This also affects Western foreign banks with their niche business models, and of course the (US) sanction risks that still exist. Nevertheless, the Russian units of the leading Western banks in CEE remain a valuable asset.
“We see disproportionately high market shares of Western banks in Russia in terms of foreign currency deposits or turnover on corporate current accounts. This underlines the service quality, brand awareness and systemic importance of Western banks in Russia.“
Ruslan Gadeev, Raiffeisen Research’s specialist for the Russian banking market
In the medium term, Gunter Deuber expects some easing on the interest rate front in CE and SEE: “The earnings pressure from the now very low interest rates in Central and Eastern Europe could ease slightly from 2022 onwards. This assumption is based on the consideration that decisive monetary and fiscal policy stimuli at the national and supranational levels in 2021 and 2022 could lead to tangible reflation in the smaller and open economies in CE and SEE. Another positive aspect is that unconventional monetary policy measures in CE and SEE do not yet have the same market distorting effects as in Western Europe.”
For the leading Austrian CEE banks, the development of the CE/SEE banking markets remains a decisive driver, as they continue to represent almost 90 per cent of their assets. According to the Raiffeisen Banking Sector Report, Austrian banks remain market leaders in CEE. “Not taking into account the large state-owned banks in Russia and Poland, Erste Group and RBI, as the regional number one and three, have market shares of 7.4 and 6 per cent, respectively, in terms of CEE assets, with UniCredit in between with 7.0 per cent”, says Deuber.