Wide Angle Shot: Back and forth in CEE Banking ... plus geopolitics

A dramatic year for Europe and a controversial year for CEE banking yielded a mixed bag of results. Bold rate hikes have lent a great deal of support to banks' profitability in CE/SEE markets, while the war and sanctions impact caused significant hardship for EE economies and banks. The year ahead does not offer a smooth sailing either, as the economic slowdown, rising funding costs and additional government levies/interventions will likely temper earnings for banks. Despite drastic exposure reductions and/or market exits, some Western CEE banks are still directly exposed to the war and sanctions in Ukraine and Russia. That said, we find core CE/SEE banking sectors well-positioned to traverse a more challenging landscape in the forthcoming quarters.

Ironically, from a big picture point of view and with the benefit of hindsight major regional CEE banks have benefited indirectly even more from the COVID-19 crisis than we thought last year. Strong and policy-supported credit expansion in the CE/SEE markets, where Western players have much larger market shares than in Russia, has now contributed even more to the fact that the Eastern European shares in the CEE banking business (due to strong growth elsewhere) have fallen to crisis-tolerable proportions in recent years (incl. 2020 & 2021). The share of Russia in the CEE exposures fell again from just under 12% to below 9%. Meanwhile, regional banks strongly profited from the bold regional monetary tightening in CE/SEE. So far so good, because the post-Corona upswing in the European economy has unfortunately come to a standstill due to the Ukraine war. In this respect, we think that one cannot simply extrapolate very favourable CE/SEE banking sector trends of 2021 and 2022 well into 2023. This holds especially true since the effects of drastic rate hikes in CE/SEE are already petering out. In this respect, we currently see a constructively cautious outlook for the CEE banking market, but we do see some challenges in the area of refinancing, refinancing costs, capital buffers or an overall banking sector environment that resembles somewhat the challenging 2012/2013 years in CE/SEE banking. We will touch upon key dimensions with regards to the regional banking outlook in this note, capitalizing on our annual flagship report CEE Banking Sector Report.

Interest margins - how much more can the cash cow be milked for?

Overall, we see the CEE banking sectors experiencing both swings and roundabouts throughout 2022, with immense drags on the business in our Eastern remit balanced by the boon to banks' interest income from higher interest rates in non-euro CE/SEE markets. That said, the slowing economic growth will have its mark on the dynamics in CEE banking. The overarching income-supportive factor of high interest rates may carry over well into 2023 for the largest non-euro CE/SEE markets (and will kick in at a fuller pace for euro countries), but banks will also see more risk factors woven into the business narrative. Among those are a greater focus on credit risks, cost pressures associated with (double-digit) inflation and additional government measures/levies (including “windfall taxes”), and a catch-up in funding costs. The latter includes a shift in customer deposits towards more expensive term placings, up trending loan-to-deposit ratios plus more challenging capital market refinancing conditions (including the regional “MREL-funding challenge” for EU countries). Nevertheless, we see core CE/SEE banking sectors as well-placed to endure a bumpier ride ahead (e.g. the NPL rates there are around multi-year lows), while major CEE banks are likely to adapt further to geopolitical realities in the region.

Speaking of CE/SEE banking markets, the rampant increase in interest rates has beefed up banks’ net interest income, hence cementing the sturdy after-COVID recovery in profitability with the regional Return on Equity climbing to 12-14% in the course of 2022. In this respect, central banks have been in the driving seat when it comes to commercial banks’ profitability factors in 2022. This is especially true for the largest CE/SEE markets, which led front-loaded tightening cycles where lenders capitalized on the steep ascent in policy rates. Average monetary policy rates in CE/SEE (i.e. in countries with active and independent monetary policy) being currently at 9%+, higher than prior to the Global Financial Crisis and in times of the CE/SEE "bonanza boom". Essentially, this confirmed one part of the classical relationship between monetary policy and banks’ profitability, i.e. the positive link between short-term key rates and lending margins. The other factor in this equation — the rates’ term structure — the banks could so far largely dispense with, notwithstanding the prevailing inversion of regional benchmark government bond yield curves. This was thanks to conservative banking sector funding profiles dominated by low-cost and sticky current accounts which fostered high inertia in blended cost of deposits. Asset yields, in the meantime, were adjusting faster driven, inter alia, by resets under floating-rate loans.

Return on equity (%)
weighted by total assets
* end point for EE is 10M 2022 with the RoE of -4.2% (RU). +5.8% (UA), +12.7% (BY)
Source: National sources, RBI/Raiffeisen Research
Net interest margin (%)*
weighted by total assets
* Net interest income/average total assets
Source: ECB, IMF, national sources, RBI/Raiffeisen Research

It is probably not yet a wide transformation but the customers’ shift toward higher-yielding term deposits has been afoot, even though low-cost sight deposits remain to be the core product. Looking for instance at Czechia, Hungary and Romania, in terms of new business volumes term deposits have supplanted around 5-7% of current/overnight accounts in the household segment since the beginning of 2022. At first blush, this shows only marginal change in composition, however its impact on the blended cost of deposit funding is actually nontrivial when one considers the large difference in applied interest rates. Thus, while the market rates on overnight accounts in the given countries have barely bottomed out from virtual zero, the cost of new <1y term deposits in local currency has exceeded mid-single digits. Notably, the latter represents the most expensive bucket in the term structure reflective of the inverted benchmark yield curves in the markets. Moreover, one interesting point we derive from a longer retrospective view is that the transmission of the upswing in monetary policy rates into banks’ margins seems now more limited than historically. Thus, the recent recovery in NIM constituted only a marginal move as compared to the central banks’ key rates, which have largely approached (and in some cases topped) the levels of 2008/2009. We attribute this to the changed operating environment toward increased market penetration levels and stiffer competition (incl. the digital space). We expect these factors to keep a lid on further widening of margins, while some major regional central banks might be also ready to call time on the rate-hiking cycle (Poland, Czechia, Hungary).

The regional MREL-funding challenges plus cost sharing in the “cost of living crisis”

Overall, even though core CE/SEE markets on average still feature a <80% loan-to-deposit ratio, the funding situation becomes less favourable as compared to recent years. Together with certain catch-up in deposit prices, CEE banks’ funding profiles are now also challenged by required MREL debt issuance. Here, in contrast to Western markets, the eastern part of the EU proved slower to implement the bail-in regulation on both the national and single-bank levels. As a result, lenders are now running into a pitfall of generally elevated capital markets volatility and uneasy borrowing conditions coupled with a short time to market before final legally binding MREL targets (1 January 2024). In principle, banks have some leeway in terms of the local debt markets’ capacity and support from multilateral creditors — we calculate that EBRD alone invested more than EUR 300 mn in MREL bonds (local and international) of CEE banks in 2022, for a ~20% participation rate on average. Indeed, MREL issuance in local currency is actively used, for example, by Czech and Romanian systemic banks, where they can often secure a relative price advantage as compared to the international market. We envisage a similar strategy for Polish majors given the relative depth of the local debt market. Having said that, there is still little alternative to the Eurobond market when seeking to borrow larger tickets. International investors, however, prove much more demanding when it comes to CEE risk these days. Therefore, even established subsidiaries of European MPE [Multiple Point of Entry resolution strategy] banks and entrenched investment-grade local players have to pay considerable premiums currently to get the deal done.

Regional champions, role of Austrian banks and “geopolitically” included Sberbank Europe winddown

From a sub-regional perspective, KBC took over the leading position among large foreign cross-border lenders in both the CE and CE-3 (CZ, HU, SK) country groupings among foreign lenders from Erste on the back of active organic growth in Czechia. RBI also moved one position up in the CE-3 ranking to #4 (outstripping SocGen on the margin and being hard on UniCredit’s heels) following acquisitions in Czechia and solid growth in Slovakia and Hungary. In SEE, UniCredit and Erste remain ahead of others. Overall, on an interesting note there are also new challengers on the block. The large Austrian CEE banks Erste Bank and Raiffeisen Bank International continue to lead the regional ranking of the largest credit institutions. Belgium's KBC Group, number three, is catching up strongly and is now the largest player in Central Europe, while Hungary's OTP is now the fifth largest regional bank (still behind UniCredit, but ahead of SocGen). We see the outlined expansion strategies as confirmation of the general attractiveness of the regional banking markets for well-established regional players. It is much harder to gauge the market trends in Eastern Europe due to currently limited disclosures by Russian banks (latest sector data from January 2022). Still, what is worth noting in terms of recent developments are the strengthening position of VTB due to the government-approved acquisition of Bank Otkritie FC, the exit of SocGen from the capital of Rosbank and downsizing of the Russian subsidiaries of RBI and UniCredit (i.e. (shrinkage of loan portfolios in local currency by 20-40 %). Depending on further rouble exchange rate developments, possible further local balance sheet reduction and/or active exposure reduction (until market exit), the continuation of Russian business at RBI and UniCredit could again significantly shift the CEE bank ranking in 2023.

Total assets in CEE (EUR bn)
* 9M 2022 (RBI,Erste,OTP,SocGen,NLB) and H1 2022 (KBC,UniCredit); accounts for M&A announced but not yet completed
Source: Company data, RBI/Raiffeisen Research

On a special note, the regulatory closure/failure of Sberbank Europe group (~EUR 11 bn assets in CE/SEE) made a splash on the market testing national resolution frameworks (both in and outside the EU) and also contributing to the M&A streak. Ironically, the group had been already on track for an orderly sale of select CEE subsidiaries in the end of 2021, however the deal largely failed upon the bank’s crisis and the sanctions hit in Feb/Mar 2022. Eventually, among the acquirers in the course of selective bail-outs there were local players able to make a swift decision on the takeover and hence gain market share, including markets like Croatia, Slovenia or Bosnia and Herzegovina. Overall, we see the much-needed resolution of Sberbank Europe as managed rather smoothly. Sberbank’s (enforced) withdrawal hence added to the changing balance of market powers toward domestic banking groups in smaller markets of the Western Balkans, which has been already underway in the last five years.

Top-5 banks market share
% total assets
* Q2 2022; ** top-3 banks
Source: ECB, national sources, RBI/Raiffeisen Research
Market share of foreign banks
% total assets
Source: ECB, national sources, RBI/Raiffeisen Research

Otherwise, in larger CE/SEE markets the lively consolidation trend did not alter much the participation rate of foreign players in 2021/2022, i.e. recent redistributions and combinations of market shares were largely within the groups of either foreign or local players. From a longer-term view, Serbia is perhaps a rare exception where the market share of foreign banks has increased notably in the last five years to top 75% on the back of acquisitions of local banks by OTP and NLB. Echoing the brisk M&A activity in the last few years, the market concentration ratios (top-5 banks) have trended up across the largest CE/SEE markets, which, in turn, means that there are now fewer “easy” options to pick up business scale, so a more prudent approach to choose future M&A targets will be warranted.

Russian & Ukrainian banking sector plus geopolitics

Russian lenders faced a much stricter-than-expected sanctions environment in 22, which triggered unseen losses for the sector on aggregate. Currently some 60 % of the Russian banking sector is “De-Swifted”. Asset freezes imposed by the US, EU or UK embraced nearly 80% of the Russian banking sector and triggered a large loss of RUB 1.5 tn (~EUR 18 bn) in H1 2022 driven, inter alia, by forced liquidation of derivative positions. According to the CBR comments, the loss has narrowed to RUB 400 bn (~EUR 5.6 bn) as of 10M 2022, but we think for the full year the sector may stay in the red. In Ukraine, non-performing loans are going up, but here, too, reforms of recent years are paying off. It is no surprise that credit quality is deteriorating due to the war. The share of non-performing loans in the banking sector increased from 31.5% to 37.5% in the corporate sector and from 15.9% to 27.6% in the household sector in seven months of war. We assume that non-performing loans will continue to rise due to the war. But they are unlikely to exceed the peak of 55% recorded after the last crisis in 2014-15, as the central bank has since determinedly and successfully implemented comprehensive reforms in the banking sector.

Regional breakdown CEE exposures Western banks
% of total
Source: BIS, company data, RBI/Raiffeisen Research

On a positive note, geopolitical upheavals in the context of the Ukraine war do not pose an existential threat to the large Western CEE banks, some of which are also active in Russia. We attribute this to cautious regional market strategies that have been in place since 2014/2015. Since 2014/2015, the share of Russia and Eastern Europe in the portfolios of Western CEE banks has fallen from just over 20% to below 10%. Geopolitical naivety is not evident here. Since 2013/2014, major Western banks have adjusted their regional portfolio allocation in such a way that a significant geopolitical escalation in the Eastern European region does not endanger the existence of regional CEE business strategies.

Share EU markets (% of total)*
Exposures Western CEE banks
* current EU members: PL, HU, CZ, SK, SI, RO, BG, HR
Source: BIS, company data, RBI/Raiffeisen Research
Share Russia (% of total)
Exposures Western CEE banks
Source: BIS, company data, RBI/Raiffeisen Research

Market maturity continues its positive trends – also during COVID-19 times

Without downplaying the importance of the regulatory and other fundamental topics or geopolitics, it would be very remiss of us to lose sight of the broader picture for CEE banking, which shows the steady improvement in financial inclusion in the region. Referring to the latest (post-pandemic) World Bank Findex data based on nationally representative surveys, the rate of account ownership in CE has largely converged to the level of high-income countries since 2011 (2021: ~96%) and also increased notably in SEE (74%) and EE (84%). A similar positive trend can be observed in penetration of digital payments (spurred by the COVID-19 pandemic), while there seems to be still a gap to close in terms of borrowings from financial institutions and credit cards use. We think CEE banks deserve recognition for their key role in these accomplishments underpinned by the effort and dedicated investment in innovation and financial infrastructure.

World Bank population financial inclusion index (Findex)
* (HI) High-income countries
Source: World Bank, RBI/Raiffeisen Research

The CEE Banking Sector Report (available for registered users) 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 granular country coverage with local flavour, we 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.

Profile pic


location iconAustria   

Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.

Profile pic


location iconAustria   

Ruslan Gadeev is a Senior Financial Analyst in the Fixed Income team at Raiffeisen Research and a CFA Charterholder covering banking markets in the CEE space. Before joining the Research division in 2017, Ruslan had spent five years in the corporate risk management and credit analysis roles in Citigroup and RBI. Outside the working hours, Ruslan’s family is a priority, though in the rare minute of free time he might enjoy playing guitar or a game of chess.