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  • 1Please note the risk notifi cations and explanations at the end of this document

    www.raiffeisenresearch.com

    CEE Banking Sector ReportCEE Banking Sector Report June 2017, annually

    Banking Sector Convergence 4.0

    CEE: Return of decent profi tability options

    RoE back at 10%; NPLs well below 10%

    Major players accomplished repositioning

    Digital banking needs go beyond retail

    NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE US

    Editor:

    Gunter Deuber, Raiffeisen Bank International AG, Vienna [email protected]

  • 2 Please note the risk notifi cations and explanations at the end of this document

    Content

    Executive Summary 3

    Defi nition of subregions, economic overview 5

    Banking trends in CEE

    Ownership structures and market concentration 6

    Focus on: Update on deleveraging and de-risking in CEE banking and EE markets 8

    Focus on: AT banks – committed players; CEE exposure down due to UniCredit/BA asset transfer 9

    Financial intermediation and asset growth 10

    Loan growth, growth by segments (retail, corporate) 14

    Funding, deposit growth, L/D ratios and capitalization 17

    Asset quality (NPL ratios) 19

    Profitability (Return on Assets, Return on Equity) 21

    CEE banking growth and overall market outlook 23

    Overview: Digital Banking in CEE 26

    Focus on: MREL in CEE 30

    Country Overviews

    Poland 32

    Hungary 34

    Czech Republic 36

    Slovakia 38

    Slovenia 40

    Croatia 42

    Romania 44

    Bulgaria 46

    Serbia 48

    Bosnia and Herzegovina 50

    Albania 52

    Russia 54

    Focus on: Foreign banks in Russia 56

    Ukraine 58

    Focus on: Nationalization of Privatbank and outlook on re-privatization 60

    Belarus 62

    General regulation update 64

    Market players in CEE 68

    Key CEE banking sector data 93

    Key abbreviations 94

    Risk notifi cations and explanations 96

    Disclosure 97

    Disclaimer 98

    Table of contents

  • 3Please note the risk notifi cations and explanations at the end of this document

    Executive Summary

    Dear Reader of the CEE Banking Sector Report 2017!

    We dedicated last year’s report to the so-called "New Normal" of banking and focused on the burden on CEE banking prof- itability due to stricter capital requirements, the high degree of regulatory involvement and the ultra-low interest rate envi- ronment. Moreover, de-risking in CEE and the EE markets in particular had been the name of the game in recent years. This year’s report shows that the transition work of the past years finally starts to pay off across the region and outlines growth and business opportunities in the CEE banking sectors. However, this year’s title "Banking Sector Convergence 4.0" also indicates that the CEE banking sector is facing a new round of convergence, which is – this time – linked to numerous tech- nological challenges and opportunities. Hence, we have dedicated a section of this year’s report to an overview on digital banking in CEE (starting on page 26). The CEE region is an ideal "testing field" for cross-border digital banking solutions, as the size of some CEE banking markets is comparably small and the users seem to be quite open to accept new products and services as well as innovative retail and communications channels.

    Overall, 2016 was characterized by a solid development of new net loans, stabilizing or improving asset quality as well as an ongoing recovery on several CEE key markets such as Russia, Romania or Hungary. On aggregate, Ukraine was the only loss-making banking market in 2016, due to massive one-offs related to the large-scale Privatbank nationalization. The regional CEE RoE stood at around 10% and was supported by an ongoing recovery in SEE, a rebound in Russia and overall decent profitability options in several CE banking sectors (mainly the Czech Republic, Slovakia and Hungary). All in all, the CEE region started to significantly outperform Western European banking profitability once again. Within the euro area, the banking sector RoE stagnated at around 5-6% in 2016. Therefore, the year 2016 ended years of down-trending profitability in CEE banking.

    Following two years of partial setbacks with regards to total CEE banking assets (in EUR-terms), we saw solid asset growth (in EUR-terms) in 2016. On a regional level, total annual asset growth amounted to some 15% in the EE region (mainly Rus- sia), around 4-5% in CE and 2-3% in SEE. Due to overall higher balance sheet expansion compared to the euro area, the occurrence of relative banking sector catching-up returned. Hence, we think we are back in a sort of banking sector con- vergence trend: the "Banking Sector Convergence 4.0". The stock of CEE banking assets grew from some 8.3% of euro area banking assets in 2015 to around 9% in 2016, which translates into total CEE banking assets of some EUR 2,400 bn. Russian banking assets also recovered, with total assets at around EUR 1,200 bn currently just marginally (-1.7%) below their peak level in 2013. Due to the decent recovery in Russian banking, the share of CE/SEE assets in CEE banking assets once more inched closer to the 40% level. The return of growth on the Russian market opens up the question of how much appetite for asset growth Western players bring along.

    To answer this question, one needs to look at another development of 2016: the noteworthy changes to the market structures of the CEE banking sector. The overall market share for foreign-owned lenders reached its lowest level in a decade, mainly due to the increasing market share of state-owned banks in the EE subregion (Belarus, Russia and Ukraine), but also due to growing local/state ownership in CE (mainly Poland and Hungary). In order to tackle recent market share developments in the EE region we dedicated two sections to this development: "Foreign banks in Russia" on page 56 and a special focus on the Ukrainian banking market in "Nationalization of Privatbank and outlook on re-privatization" on page 60. However, the ownership trends in CEE are also a reflection of more selective market strategies of leading Western banks, which are pur- suing much more risk-disciplined lending policies and are not in aggressive "market share buying mode". Since 2007/08 overall cross-border banking exposures on a global level and in Europe (euro area and CE/SEE) have been on a down- trend due to a mix of various factors: less cross-border risk taking, more local re-financing, overall balance sheet adjust-

    Executive Summary

     Downtrend in profi tability in CEE banking currently halted  CEE returns to a healthy growth outlook  CEE region as ideal "testing fi eld" for cross-border digital banking solutions

  • 4 Please note the risk notifi cations and explanations at the end of this document

    Executive Summary

    ments of large international banks and European players in particular, re-focusing of international banks on core/home mar- kets. However, when looking at most recent developments we assume that the times with the most striking adjustments are definitely over. On aggregate, cross-border exposures in the euro area and CE/SEE remained largely constant in 2016. In Russia, we see that the share of Austrian, French and Italian banks in cross-border exposures towards Russia inched above the 50% level as of year-end 2016 (2015: 45%). As deleveraging and de-risking in CEE cross-border banking (especially with regards to Russia-related exposures) continues to be a relevant topic, we once again dedicated a section to it (page 8). In 2016, the regional CEE NPL ratio stabilized at around 8%. This development was supported by a decent improvement in the CE/SEE NPL ratio, while the asset quality deterioration in Russia has reached its peak somewhat earlier than ex- pected. In Russia, the NPL ratio inched down from 7.2% in 2015 to 7% in 2016. The regionwide NPL ratio improvement was also supported by a decent appetite for NPL selling transactions for retail and corporate NPL portfolios. This holds true for smaller transactions on niche markets (like Albania, Bulgaria or Serbia) as well as large transactions in key markets like Poland, Romania and partially Russia.

    In line with a constructive macro-outlook there is room for another round of banking sector convergence. According to our estimations, current financial intermediation levels in all CEE subregions are below fundamentally-backed levels – a set- ting that implies a potential for banking sector growth somewhat above GDP growth going forward. Our furthermost con- structive financial deepening outlook for the CEE region since years has been backed by an overall stabilization in Euro- pean banking. Moreover, from a "big picture" point of view, the long-standing financial intermediation trend in CEE still looks much healthier than in large parts of the euro area. Hence, we see a fair chance for another round of financial deep- ening in CEE, with much less imbalances attached at the micro- and macro-level (e.g. more local refinancing, less aggres- sive growth, less dispersion among individual markets, less FX exposure, lower macroeconomic imbalances). We labelled this return to a decent financial deepening outlook "Banking Sector Convergence 4.0" – a scenario that comes along with a return of attractive profitability options in CEE banking. To learn more about current individual market players’ strategies within the "Banking Sector Convergence 4.0" setting in CEE, please read our ov