Long-term outlook for regional convergence so that CEE overcomes the lag behind the Western economies, remains intact, but pace to slow down and growth differentials between the countries will broaden

2012 to remain a challenging year for CEE banking, with regulatory changes and European debt crisis as main risk factors

CEE remains the “engine for growth” for UniCredit thanks to a newly defined strategy aimed at maintaining leadership through a focused country approach

Over the medium to long term there is still potential for the CEE banking sector to generate above-EU average growth in banking volumes and profitability, as the financial penetration gap still exists and economic convergence prospects remain broadly intact. This is one of the key findings of the latest CEE Banking Study, conducted by UniCredit´s CEE Strategic Analysis department. Although total loans in the CEE region should have approached EUR 1.5 trn at the end of 2011, which is an increase by roughly 9% yoy, loans to GDP stood finally at an estimated 49% for CEE compared to 120% in the Euro area.

Market potential is in place especially for corporate loans and mortgage financing, whereas this is hardly the case for consumer lending. Large divergences remain also by geographies, with Russia and Turkey expected to contribute the most in terms of lending growth over the 2011-2015 period.

CEE: A region of two halves

“Future economic growth will likely be structurally lower on average and growth differentials within the region wider than in the past”, said Gianni Franco Papa, Head of CEE Division at UniCredit, “CEE should remain a region of two halves with larger economies likely to keep growing almost at full steam while others may suffer from their structural weaknesses and high correlation with the performance of peripheral Europe.”

Over the medium term UniCredit researchers continue to see decent catch-up potential, underpinned by improving productivity and convergence of income levels, something that is echoed by their long-term GDP growth forecasts averaging above 4% for the CEE region. In the long run regional convergence should be pursued through broader economic diversification and an increasing role for tradable sectors. In this context bank lending will be decisive and should support this growth.

A more balanced funding structure should clearly prevail

During last year, lending activity continued expanding in CEE region, although at a slower pace than in 2010 and with growth slowly dissipating in the second half on the back of the continuing turmoil in the financial markets. Lending was driven by the corporate segment, which profited from the cyclical recovery in the economy posted in 2010 and the first half of 2011. “Since the credit/deposit ratio in CEE in the pre-crisis period was unstable, the banks started competing for attracted funds from clients offering high interests”, said Fabio Mucci, Head of CEE & Poland Strategic Planning at UniCredit. “Thus in 2010 we saw an impressive growth of deposits in the range of 21% on average for the CEE region, with particularly strong dynamics in the former Soviet republics and Turkey. This led to a considerable improvement in the credit-to-deposits indicator which reached 102% in 2010, compared to 105% a year earlier.

In the beginning of 2011 the return of liquidity and the increasing signals for deposit battle, has a negative impact on the bank’s profits which shifted the focus from the high interests on deposits. However, in the second half of the year, as the euro debt crisis tightened, the fight for deposits again became the name of the game.” To some extent, the tightening of liquidity came as a result of weaker funding inflows from abroad, compounded in some cases by restrictive central banks’ policies in an attempt to stem local currencies weakening.

Despite the observed deterioration in funding conditions and pressures on various parts of the bank’s balance sheets, the banking sector performance improved on a range of parameters. “The average impaired loans ratio for the region has not increased since year-end 2010, drifting to an estimated 14% at the end of last year”, reckoned Mucci, “In the majority of CEE countries impaired loans ratios have peaked or stabilised by mid-2011. Thus provisions decreased in all countries exclusive of Kazakhstan”.

The severity of the current crisis in the Euro area contributed to the rising fears that capital needs and funding pressures faced by Western European banks may heighten pressure to deleverage in Central and Eastern Europe. Out of 2.5 trillion of bank assets in the region, 46% is controlled by foreign owners. Multiple capital linkages between CEE and Western European banks have made the region exposed to knock-on effects from the current crisis in the Euro area.

UniCredit maintains its leadership in CEE and reaffirms its commitment to the region

“In the light of recent developments in the global economy and European banking sector, the significance of the CEE region to the growth and profitability of international players has become even more evident”, said Gianni Franco Papa, Head of CEE Division at UniCredit, “The region strongly contributed to the revenue stream of international banking groups in 2011 and is set to remain a key driver for their growth, as the region’s performance should continue surpassing that in home markets.”

While diversification in the geographical footprint remains a key pillar in the strategy of international players, some re-shaping of the business strategy with a clearer focus on specific markets became visible throughout the year.

The ranking of international players active in CEE shows that after the first six months of 2011 UniCredit holds its leading position in the region outperforming its competitors. Its presence in 19 countries which together have led to one fourth of the revenues of the Group, show UniCredit’s strong commitment to the region as well as CEE’s place in the Group strategy for achieving a diversified and balanced business model.

Ranking within the top-5 banks in 11 countries, UniCredit enjoys a sound positioning in the region’s most attractive markets such as Russia and Turkey. “In the coming years, we are going to strengthen our leading position in CEE through a focused country approach with profitability and liquidity defining our local strategy, while a clear emphasis will be put on markets where the Group has a strong footprint”, Papa pointed out, “Through a number of strategic initiatives aimed at an intensified optimization of investments, the value of CEE operations will be further maximized.”

UniCredit

UniCredit is a leading European bank with strong roots in 22 countries. The overall global network embraces approximately 50 markets, with over 9,500 branches and more than 160,000 employees (as of 30 June 2011).

In the CEE region, UniCredit runs the largest international banking network with more than 3,900 branches. The Group operates in Austria, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Germany, Hungary, Italy, Latvia, Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

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