Russian, Polish, Romanian Lending Growth to Outpace GDP, Raiffeisen Says

Written by Patrick Fisher November 16, 2011 0 comment

By Boris Groendahl – Nov 8, 2011 10:13 AM CT – Bloomberg

Russian, Polish and Romanian lending is set to outpace economic growth, while Croatia, Hungary and Ukraine are paying for past excesses with a prolonged period of weak credit expansion, Raiffeisen Bank International AG (RBI) said.

Russia will be both the biggest banking market in the former communist part of Europe and the fastest growing in the years to 2015, according to a study by analysts Gunter Deuber and Jovan Sikimic. Lending there may rise 14 percent per year in euro terms. Poland, the second-biggest, will see credit expanding 11 percent per year in euro terms, Raiffeisen said.

That contrasts with countries like Ukraine where loans in relation to gross domestic product “overshot a fundamentally backed level,” the analysts said. Expectations were “possibly based on far-too-optimistic convergence assumptions for the respective banking sectors” in countries also including Bulgaria, Belarus and Bosnia and Herzegovina, they said.

Western European lenders bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. The expansion was funded in part by parent banks, a model that is undermined as liquidity turns scarce and expensive, Raiffeisen said. Bad loans shot up and are now weighing on bank balance sheets. The boom boosted lending in some countries and segments to levels that exceed other emerging markets and may not be sustainable, creating an overhang set to depress growth.

Raiffeisen is the region’s third-biggest lender by assets. It entered the market with a Hungarian unit before the Berlin Wall came down.

‘Sustainable Growth’

“Loan growth in central and eastern Europe will not occur in the same manner witnessed during the past decade,” the analysts said. External funding that is more expensive and less accessible means that “sustainable loan growth in eastern Europe will be more closely tied to deposit growth than in the past,” they said. “In addition, some eastern European economies may well face a more prolonged period of relatively low loan growth.”

Total banking assets in the region stood at 1.9 trillion euros ($2.6 billion) as of June, equivalent to less than eastern Europe’s combined economic output, Raiffeisen said. In the euro area, banking assets are about 3.3 times the combined GDP.

While this suggests eastern Europe “has potential left for catching up,” several arguments “challenge the still prevailing consensus view that all central and eastern European banking markets are largely underpenetrated in terms of their loan stock,” the analysts said.

‘Too Optimistic’

The consensus view might be too optimistic because it ignores that many economies have a “relatively low stock of accumulated private financial wealth,” which means that the local resources that banks can lend are limited. Additionally, the growth potential in corporate lending is limited in economies where large multinationals dominate because they borrow at home.

Household lending outside of mortgages, meanwhile, was the area that grew particularly fast in the boom and is “already rather saturated when compared to more mature banking sectors.”

“Not all central and eastern European banking markets can still be regarded as being highly under-penetrated in terms of total loans in relation to GDP and income levels,” the analysts said.

Loan Growth

Loan growth in nominal euro terms is expected to be above 10 percent per year in the Czech and Slovak Republics, Romania, Albania and Serbia until 2015, which means that 80 percent of the entire market will remain a high-growth market, Raiffeisen said. Croatia, Slovenia andHungary will have annual growth of less than 5 percent, while lending will expand between 5 percent and 10 percent in Bosnia, Belarus, Bulgaria and Ukraine, Raiffeisen estimates. This is likely to undershoot real GDP growth in those countries, according to the report.

Bad debt in eastern Europe is set to peak or has peaked this year in most countries except for Hungary, where non- performing loans are set to continue to grow until 2013, the analysts said. Apart from Ukraine, where they peaked at 40 percent of total loans, they remained at less than 20 percent, falling short of past crises in emerging markets, Raiffeisen said.

The share of delinquent loans to total loans could drop to around a third of their current level in the next three to four years in an optimistic scenario where growth picks up again in the second half of next year. That would free up capital for lending again, Raiffeisen said. In a pessimistic scenario, they would remain at two-thirds the current level.

More than three-quarters of the region’s banking assets outside of the former Soviet Union are owned by foreign banks, Raiffeisen said. UniCredit SpA (UCG) still led the ranking at the end of June, followed by Erste Group Bank AG (EBS), Raiffeisen, Societe Generale (GLE) SA andKBC Groep NV. (KBC) In Russia, Ukraine and Belarus, state-owned banks led by OAO Sberbank and VTB Group are bigger than their western peers.

To contact the reporter on this story: Boris Groendahl in Vienna at