Press Release

The banking sector in Central and Eastern Europe (CEE) grew at a more moderate pace in 2008 as the global economic crisis impacted the sector’s participants in the form of rising non-performing loan rates and more restricted liquidity, reports the latest edition of the annual CEE Banking Sector Report prepared by the analysts of Raiffeisen Zentralbank Osterreich AG (RZB) and Raiffeisen Centrobank AG (RCB).

The CEE Banking Sector Report offers an in-depth coverage of 15 important banking markets in the region and profiles CEE’s leading banking groups. To provide a better comparison among the countries it covers, the report also addresses CEE’s sub-regions, namely Central Europe (CE), Southeastern Europe (SEE) and the Commonwealth of Independent States (CIS).

Asset growth continues in 2008 despite global financial crisis

In 2008, banking assets in CEE posted an annual growth of nearly 25 per cent in euro terms, down from the 31 per cent growth rate the sector had posted in 2007. At the end of 2008, total banking assets stood at €1,772 billion, i.e. an increase of €353 billion against the same period a year earlier. On a regional basis, total banking assets in CIS at the end of 2008 were €163 billion (or 25 per cent) higher than those in CE. However, as a result of the global economic and financial crisis, banking assets in euro terms are likely to decline far more sharply in CIS countries in 2009 than those in the CE states.

More generally, CEE’s banking sector is likely to experience an outright decline in total banking assets in 2009, as its growth dynamic has decreased sharply starting in the fourth quarter of 2008. «While we expect the sector’s total assets to shrink in 2009, our updated forecasting model suggests that these will rise again by an average of around 10 per cent in 2010», explained Walter Demel, senior analyst at RZB and a co-author of the banking study.

Despite the region-wide economic downturn as of the end of 2008, the majority of CEE countries still managed to increase their financial intermediation, as measured in total banking assets as a percentage of gross domestic product (GDP), last year. In 2008, the financial intermediation level in CE countries averaged 100 per cent, compared to 80 per cent in SEE states and 70 per cent in the CIS countries. In comparison, the Eurozone average for financial intermediation stood at above 260 per cent last year. Slovenia remained the CEE country with the highest degree of financial intermediation, while the level of financial intermediation in a number of SEE states including Bulgaria, Croatia and Serbia actually declined in 2008.

Lehman collapse, G-20 summit provide turning points

Although its impact was truly global, the collapse of Lehman Brothers ultimately had a particularly strong impact on Central and Eastern Europe in the form of sagging exports, far lower levels of FDI, and in the market’s sharply higher aversion to risk, both real and perceived. Against this backdrop, the region’s banking sector was challenged by tightened liquidity and rising rates of non-performing loans, particularly as of the final quarter of 2008.

However, the measures agreed to by the international community’s leading political and economic actors at the G-20 summit in London in April 2009 have helped to strengthen market confidence that no country in the CEE region is likely to fail to meet its debt obligations. Additional steps taken by such supra-national institutions as the IMF, World Bank and EBRD, as well as by national authorities, have also improved the general credibility of the region’s banking sector. In addition, the majority of foreign-owned banking groups active in CEE have underlined their commitment to maintain their operations in the region, including in countries generally perceived as being «risky».

Non-performing loans command attention

The development of non-performing loans was one of the most discussed issues for the banking sector since the global financial and economic crisis struck CEE. The magnitude of currency depreciation together with the share of unhedged foreign currency borrowing, the severity of economic recession and the resulting increase in bankruptcies and unemployment, as well as the extent of the decline in real estate prices are major factors for the development of non-performing loans. Differences between the individual countries are significant in all aspects, as are their prospects and risks. Although the CEE currencies appear to have stabilised at what the authors of the report consider sustainable levels after the G-20 summit, and most actually have regained some of their previous losses, the other economic adjustments are set to run their course in 2009 and well into 2010.

Spotlight continues to shine on deposits

The drive to raise deposit levels has taken on a new prominence given the fact that CEE banking subsidiaries face reduced (or, partly, non-existent) potential for wholesale funding and that their parent companies have limited possibilities to provide wholesale funding on a group level based on country limits. Since then competition for deposits of corporate customers is fierce.

However, other funding resources such as corporate bond placements (both with and without state guarantees) and issuances of covered bonds have picked up in volume recently.

No changes in composition of region’s Top 5 banks

The year 2008 saw no changes take place in the ranking of CEE’s top 5 international banks on the basis of consolidated asset volumes at year-end. However, Raiffeisen International’s 4.7 per cent share of the overall CEE banking market in asset terms saw it extend its second-place ranking ahead of Erste Group, whose market share stood at 4.4 per cent in 2008. Both Austrian banks tightened the gap between them and Italy’s UniCredit, whose market share dropped to 6 per cent compared to 6.4 per cent in 2007.

According to the CEE Banking Sector Report, a new wave of takeovers could take place in the sector in the near future. However, it remains unclear at what acquisition price levels potential buyers and sellers are able to reach agreement. «Current market prices generally reflect a significant deterioration in asset quality, earnings potential distress and the mid-term macro-economic outlook. As long as the predictability of these factors remains extremely short, there will be fewer potential buyers of banking assets», stated Stefan Maxian, co-author and head of Company Research at RCB.

Branch network expansion continues, but far more slowly — Raiffeisen retains strongest distribution network

The banks' network of branches in CEE increased in 2008, but at a slower pace than in previous years. For instance, the four largest foreign-owned banks had 11,215 outlets in 2008, compared to 10,577 a year earlier. While the total number of branches operated by the top four players continued to rise, the annual growth rate slipped from 15 per cent in 2007 to 6 per cent in 2008, in a reflection of the sector’s increasing focus on controlling costs and the absence of substantial M&A activity in the changed macro-economic environment.

Overall, Raiffeisen International continues to offer the strongest distribution network, with a total of 3,231 banking and leasing branches in 17 CEE markets at the end of 2008. Raiffeisen International is followed by Italy’s UniCredit with 3,033 branches in 16 markets and France’s Societe Generale with 2,852 branches in 14 countries.

The CEE Banking Sector Report is available at

Raiffeisen Bank International
Date: 25.06.2009

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