Raiffeisen Research CEE Banking Sector Report 2022

The latest Raiffeisen Research CEE Banking Report confirms some rather expected trends, but the detailed analysis of the regional banking markets also reveals some little-noticed developments. "In principle, developments in the CEE region are very ambivalent," says Gunter Deuber, Chief Economist at Raiffeisen Research. "The Russian banking market in aggregate could suffer a forced record loss in 2022, while the banking markets in Central and Southeastern Europe should see the return to the solid profitability of the pre-COVID and war outbreak period with a return on equity of 12-14% in 2022." Contributing to the positive regional profit development in the local banking sectors has been the inevitable and imperative drastic monetary policy normalisation in Central and Southeastern Europe. "The average key interest rate in countries with an active monetary policy is currently above 9 %. These are levels like in the 'Eastern European boom time' before the global financial crisis," explains Gunter Deuber.

Regarding the regional banking market development, the Raiffeisen Research analysts also see the degree of maturity achieved in recent years and in the context of the COVID-19 crisis as well as the financial inclusion on and in the regional CEE banking markets as positive. "On relevant indicators such as account penetration or the use of digital payments, the Central European region is now clearly in a league with high-income countries," explains senior banking analyst and study author Ruslan Gadeev. "Here, the aggregated figures show the fruits of individual players' investments in innovation and banking infrastructure," Gadeev continues.

In addition to the trends outlined above, some of which are rather expected, the new Raiffeisen Research Banking Report also points to trends that are somewhat surprising. On the one hand, profitability is currently increasing, but less strongly than historical experience with monetary policy normalisations or tightening would indicate. The Raiffeisen Research analysts attribute this to an intensified competitive situation. On the other hand, there are also interesting market share shifts unfolding in the region. Also, many other additional factors are currently weighing on profitability: higher refinancing costs for deposits and on the capital market. "The large Austrian CEE banks Erste Bank and Raiffeisen Bank International continue to lead the regional ranking of the largest cross-border credit institutions. As number three, Belgium's KBC Group is catching up strongly and is now the largest player in Central Europe, while Hungary's OTP is now the fifth largest regional bank." The Raiffeisen Research analysts see the outlined expansion strategies as confirmation of the general attractiveness of the regional banking markets. The rise of the "regional player" OTP into the top league of the largest CEE banks can also be seen to a similar extent in the Western Balkans. Here, too, with the exception of Serbia, local players are currently participating in the market consolidation.

Part of the regional consolidation in the CEE banking markets is also due to geopolitics. According to Raiffeisen Research analysts, the regulatory-driven liquidation of Sberbank Europe has led to some unexpected M&A activities. "Overall, there is also a broader re-focus on M&A activity in the region," said senior CEE banking analyst Jovan Sikimic. "However, market concentration in many CEE banking markets, meanwhile, is already so advanced that there are no longer easy options to achieve economies of scale. Therefore, we expect more focused M&A activity," says Jovan Sikimic.

The geopolitical upheavals in the context of the Ukraine war are also reflected in drastic changes in the Eastern European banking markets. "In Russia, 80% of the banking market is under the toughest Western sanctions," explains Ruslan Gadeev. In Ukraine, non-performing loans are going up, but here too the reforms of recent years are paying off. "It is no surprise that credit quality is deteriorating because of the war. The share of non-performing loans in the banking sector increased from 31.5% to 37.5% in the corporate sector and from 15.9% to 27.6% in the household sector in the first seven months of the war. We assume that non-performing loans will continue to rise due to the war. But they are unlikely to exceed the peak of 55 % recorded after the last crisis in 2014-15, as the central bank has since determinedly and successfully implemented comprehensive reforms in the banking sector," says Oleksandr Pecherytsyn, head of research at Raiffeisen Bank in Kyiv, Ukraine.

The Raiffeisen Research analysts attribute the fact that the geopolitical upheavals of the Ukraine war do not pose an existential threat to the large Western CEE banks, some of which are also active in Russia, to the fact that cautious regional market strategies have already been adopted since 2014/2015. "Since 2014/2015, the share of Russia and Eastern Europe in the portfolios of Western CEE banks has fallen from just over 20 % to below 10 %. Geopolitical naivety is not evident here. Since 2013/2014, major Western banks have adjusted their regional portfolio allocation in such a way that a significant geopolitical escalation in the Eastern European region does not endanger the existence of regional CEE business strategies," says Gunter Deuber.

Raiffeisen Research analysts are constructively optimistic about the CEE banking market outlook. Credit expansion in retail banking could remain subdued, but corporate banking could benefit from EU co-financed investments, say the study authors. They expect more headwinds on the profitability side. This is driven by rising refinancing costs, declining lending margins and the political trend to burden the banking sector with (fiscal) costs of the current cost-of-living crisis, with currently particularly high inflation rates in Central and South-Eastern Europe compared to the EU. "Just as the Ukraine war in 2022 brought the regional and broad-based economic recovery in the region to a standstill for the time being in the aftermath of the COVID 19 crisis, the same could happen to the regional banking market recovery in 2023 in light of current policy measures," explains Gunter Deuber. However, the regional interest rate environment should support banking sector profitability in CE/SEE well into 2023.

As a registered Raiffeisen Research user, you can access the entire CEE Banking Report here. A shorter comment-style version is available (without registration) here.

The CEE Banking Sector Report is the annual flagship study of Raiffeisen Research. Once a year, all Raiffeisen Research teams in CEE and Vienna analyse the dynamics of the banking sector in the CEE region in detail. In addition to a country report, the specialists once again document market shares, balance sheet totals and financial ratios of the leading (Western) international CEE banks. The same applies to cross-country trends in market shares, business dynamics, asset quality and profitability. A shorter comment-style version is available (without registration) here.The CEE Banking Sector Report is the annual flagship study of Raiffeisen Research. Once a year, all Raiffeisen Research teams in CEE and Vienna analyse the dynamics of the banking sector in the CEE region in detail. In addition to a country report, the specialists once again document market shares, balance sheet totals and financial ratios of the leading (Western) international CEE banks. The same applies to cross-country trends in market shares, business dynamics, asset quality and profitability.