Raiffeisen Bank International : Research CEE Banking Sector Report 2021

Economists and financial analysts should be cautious about concluding that one crisis is different from a previous one. But this is definitely true for the development of the banking sectors in Central and Eastern Europe (CEE). The research teams of Raiffeisen Bank International (RBI) based in Vienna and 13 CEE countries prove this with impressive facts and figures in the current edition of the CEE Banking Sector Report. Compared to previous crises, exposures of Western banks to the CEE region have increased significantly in the crisis years 2020/2021, towards the CE/SEE regions even in the double-digit percentage range. This had been totally different in the aftermath of the Global Financial Crisis. Moreover, the Return on Equity (RoE) in the CEE banking market stood at 7 to 9 per cent back in 2008/2009. In 2021, the regional RoE reading should reach at least 15 per cent. On the Russian and Ukrainian banking markets, the highest RoE seen over the last ten to fifteen years are currently within reach, topping the 20 per cent mark. Overall, the CEE banking sector profitability rebounded nicely to pre-COVID-levels in the course of 2021.

RBI CEO Johann Strobl interprets the findings benevolently. "The CEE banking markets have proven their resilience and earnings power in 2020 and 2021. This year, double-digit returns on equity are possible. This applies to stable Central European banking markets such as the Czech Republic, Hungary or Slovakia, but also to Ukraine or Russia. Such values are only conceivable on a few Western European markets." Russia and Ukraine currently stand out in terms of RoE readings according to the Raiffeisen Research analysts. However, these returns should definitely be considered in risk-adjusted terms. And yet, such key earnings figures certainly justify a selective and risk-conscious market presence.

However, RBI Chief Economist Gunter Deuber points out that the overall market appetite of foreign banks towards Russia has possibly reached an all-time low. "We see that total exposures of international banks towards Russia currently account for only 9 per cent of all Western bank exposures into the wider CEE region. Twenty years ago, this ratio stood at 30 per cent, and in the early 2010s it was hovering around 20 per cent. Since the sharp reduction in Russia-related exposures of international banks in 2014 to 2016, this value has fallen below 14 per cent and is currently just at its low point." Still, Deuber emphasizes, this relative downward trend should not be overinterpreted either. "Western banks have grown much more strongly in Central and Southeastern Europe than in Eastern Europe or Russia in recent years and especially during the Corona crisis. Therefore, this region has lost some importance in comparison. Nevertheless, Russia is currently still the third-largest banking market in terms of total CEE exposure of Western banks."

Deuber also emphasizes the different role and market positions of foreign banks in CE/SEE compared to Russia or Ukraine, which also explains the relative decline in exposure in Eastern Europe. "In our neighboring countries, foreign banks are systemically important players with high double-digit market shares. They were part of the necessary systemic stabilization based on fruitful cooperation with central banks and regulators at both national and international levels. In Eastern Europe, such measures have been taken on a large scale mainly by the dominant state-owned or state-related banks. An expansion of balance sheets in the same speed and magnitude like in CE/SEE was not to be expected there." But Deuber also points to the increasing influence of geopolitical and geoeconomical risks on economic interdependencies. Currently, there are no signs of a sustainable easing of tensions in the relationship between the West and Russia regarding Ukraine in the short and medium term.

According to the Banking Sector Report, the biggest winner in terms of rediscovered market attractiveness is the region of Central Europe. In the portfolios of international (large) banks operating in the CEE region, Central European countries currently account for almost 70 per cent of total assets, which is about ten percentage points more than ten years ago and close to the values of the pre-EU accession period. The Raiffeisen Research analysts hold several factors responsible for this. The Hungarian banking market has become more attractive again, in the Czech Republic there have been attractive market and growth prospects for years and the Slovakian market is also coping better and better with the low interest rate environment. In addition, geopolitical risks in this region remain low, and intra-EU frictions should not be overestimated in terms of their real economic effects. The Polish banking market, however, was not able to benefit from the positive regional trend; exposures here have been rather constant for years.

According to the Raiffeisen Research analysts, CEE banks will have to gradually get back to a life with less policy stimuli and tighter monetary policy after the stellar run in 2021. While the latter is generally a positive factor (especially in CE/SEE), a certain slowdown or normalization in economic growth might test the sector for unresolved credit risks. That said, any pressure should be moderate for the moment, and Raiffeisen Research has a cautiously optimistic outlook for the next year, which is thanks to economies becoming more adaptive to the pandemic and vaccination rates rising steadily. Senior Fixed Income & ESG Analyst Ruslan Gadeev said, "Despite being a highly competitive market with a sanction background, the Russian banking market remains well-placed to continually provide support to the CEE banks' performance at a group level and a benefit of diversification for international players. Moreover, the external environment in terms of commodity prices is a good sign for asset quality in the banking system." Apart from the COVID-19 developments, international CEE banks must also address other challenges, above all technical transformation and ESG-related regulation.

The specialists at Raiffeisen Research observed a remarkable pick up in M&A activities in the region with more than € 34 billion of assets being subject of executed or signed transactions since the breakout of the pandemic. The main M&A stage was the SEE region (incl. Slovenia), followed by the Czech Republic. Like in the previous years, the "usual suspect" OTP was most active, but other players like RBI, NLB or KBC have demonstrated increasing appetite for inorganic expansion. According to Senior Equity Research Analyst Jovan Sikimic, there is a clear desire to scale up local operations due to unabating competitive pressure, cross-sell potential, and extraction of cost synergies. "In addition, the benign outlook for banks triggered by the monetary tightening cycle, digitalization progress and strong macro backdrop played an important role. In our view, it should keep the consolidation wave elevated in the next years, although it would be fair to assume gradually increasing takeover multiples amid double digit RoE prospects."

The superiority of performance indicators at the CEE operations of large international banking groups has picked up again during 2021 after some temporary squeeze at the peak of the crisis in 2020. Regardless whether it is measured by CIR, net interest margin or loan growth, Sikimic expects the positive gap to further widen over the course of the next years despite the inevitable overall moderate slowdown of the regional economies.

Overall, the researchers conclude, the solid (post-)crisis performance in the CEE banking markets was only possible due to prudent pre-crisis expansion and market standards. A lot of lessons were learned, they say. "As good as it gets in (post)crisis times" reflects the hope that we are finally approaching post-crisis times in the course of 2022. On a positive note, Raiffeisen Research finally points out that recent balance sheet data show that the largest lenders in CEE are once again two Austrian banking groups, Erste Group and RBI, the latter once again slightly ahead of friendly competitor UniCredit.

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The CEE Banking Sector Report is a well-established co-creation and annual flagship study of Raiffeisen Research. Once a year the entire Raiffeisen Research teams in CEE and Vienna analyze banking sector dynamics in the CEE region in detail. In addition to a country coverage, the specialists once again documented market shares, balance sheet totals and financials of the leading (Western) cross-border CEE banks. The same holds true for cross-country trends for market shares, business dynamics, asset quality and profitability.