Consolidation rejigs banking scene in SEE
by Nevena Krasteva
The banks in Southeast Europe (SEE) put up a solid performance in 2018, operating in an improving economic environment amid high liquidity and in the absence of major external or internal shocks. Expanding loan portfolios coupled with shrinking NPLs and asset impairments supported net profits which grew to historic highs despite low interest rates.
The combined net profit of the top 100 lenders by assets in the region rose to 4.354 billion euro in 2018, up by 24% as compared to the net profit of the entrants in last year’s ranking. The number of loss-making banks among the top hundred also declined, to only four from ten in 2017 and 12 in 2016.
At the same time, the total assets of the biggest banks in the region grew only marginally. The combined assets of the top 100 banks in SEE totalled 279 billion euro, up by a mere 1.45% as compared to 275 billion euro of the region’s biggest banks a year earlier.
The top five banks in SEE accounted for 25% of the total assets of the top 100 lenders in the region at the end of 2018, as the sector continued to consolidate. Most deals were related to the ongoing divestment by Greek lenders and French banking group Societe Generale. At the buying end, the main player was Hungary’s OTP. The other main foreign banks present in the region remain Italy’s UniCredit and Austria’s Erste and Raiffeisen.
The ongoing consolidation brought changes at the top of the ranking of the big- gest banks in SEE. With 15.9 billion euro in assets at the end of 2018, up by 25% year-on-year, Romania’s Banca Transilvania replaced Banca Comerciala Romana as the biggest bank in the region after buying Bancpost, a unit of Greece’s Eurobank.
Croatia’s Zagrebacka Banka kept its second position, boosting its assets by 10.89% while last year’s winner, Banca Comerciala Romana, fell to the third place as its assets stayed flattish.
Naturally, the biggest gains in terms of as- sets growth also came as a result of acquisition deals. Serbia’s Direktna Banka more than doubled its assets after buying the local unit of Piraeus Bank. A year earlier it bought from BNP Paribas its local unit Findomestic Banka Beograd.
Another lender to more than double its assets was OTP Banka Hrvatska. In December 2018 it completed the integration of Splitska Banka, which it bought from Societe Generale for 425 million euro in 2017.
In terms of profit, however, the leader was Romania’s BRD, a unit of Societe Generale and the region’s fourth largest bank in terms of assets. Its profit rose to 331.5 million euro last year on the back of business growth, improved operating performance and net cost of risk write- backs, BRD has said. BRD’s net operating income increased by 13%, while net interest income rose 16.5%, driven by solid volume growth
Banca Transilvania, the SEE TOP 100 leader, pocketed 261.5 million euro, an increase by some 3% on 2017. The bank’s operating income rose 34%, as net loans increased 22% and deposits from customers grew 27%.
Notably, Zagrebacka Banka increased its net profit to 250.4 million euro from 111.7 million euro, as its impairment losses and provisions more than halved. In June it sold a portfolio of retail and corporate non-performing loans worth a total 245.7 million euro to the Croatian unit of Norway’s B2Holding, B2 Kapital.
While higher loans and savings underlie the solid performance of lenders in SEE and consolidation is generally perceived as having a stabilising effect, controversial regulations in Romania give grounds for concern
At the beginning of the year Romania’s government adopted a decree introducing a 0.1%-0.5% quarterly tax on banks’ assets, to apply if money market rates top 2%. However, following severe criticism from analysts and international lenders, in March the government lowered the tax on the banks’ financial assets to 0.2%-0.4% a year based on market share and decoupled it from money market rates. Banks with a market share below 1% would pay a tax on assets of 0.2% and banks with a market share above 1% would pay an asset tax of 0.4%. The banks will pay the asset tax twice a year.
Commenting on the government’s decision to introduce an additional tax on banks’ assets, Banca Transilvania has warned that the banks’ capital and competencies have been built over time and can be quickly lost without the proper investments.
“The decrease of the available profit for capitalisation will slow down the development of the Romanian banking system and will affect the economic growth,” it has said.
Romania’s second biggest lender, Banca Comerciala Romana, thinks likewise.
“Unfortunately, at the end of 2018 we are working in a more unpredictable economic context than ever. The direction we are currently heading into can strongly influ- ence future generations. It is necessary to sit around the table and analyse what works and what doesn’t work. Recent his- tory shows that sectorial taxes do not help the economy and generate distrust,” the bank’s CEO Sergiu Manea has said.
Other reasons for concern in the banking sector of SEE are seen in the still high NPL ratios in some countries and the big share of grey economy.
EBRD economist Peter Tabak
Banks in the Western Balkans countries (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia) are well capitalised and generally highly liquid. Also, bank lending penetration (bank loans to the private sector-to-GDP ratio) is relatively low (ranging from 33% in Albania to 55% in Bosnia and Herzegovina vs. around 90% of GDP in the EU or the Eurozone), allowing further growth of their activities. All these factors, together with relatively stable and strong economic growth can help credit growth.
Nevertheless, NPL ratios are still high in some countries (notably at above 10% in Albania or close to 9% in Bosnia and Herzegovina and between 5% and 7% in Montenegro, North Macedonia and Serbia), despite significant decline in recent years. Also, often high informality in the economy or high indebtedness of large companies hold back lending.
* * *
Horia Braun, Banca Comerciala Romana chief economist
We expect around 4% lending growth evenly split between corporate and retail loans [in 2019]. This represents a slowdown compared to last year (7.9%) due to lower wage and overall economic growth, new regulations on household indebtedness as well as new taxation measures introduced by the government in several sectors.
* * *
Privredna Banka Zagreb Research Office
In 2019, we see a sustained positive trend of private sector lending, supported by steady economic growth, improved labour market conditions and investment rise.
Credit growth in Croatia is forecast at a level slightly lower than in the previous year owing to the tightening of household credit standards,
as well as continued NPL sales (affecting stock numbers), whereas in B&H we expect growth at previous year’s pace with somewhat stronger growth of loans to households than to corporates.
* * *
OTP Banka Hrvatska
We expect a moderate growth of credit activity within the population sector as well as in the economy. The positive macroeconomic movements and the present consumer optimism will give incentive to loaning, while on the other hand, increased absorption of EU funds will decrease the need for bank loans.
* * *
Raiffeisen Bank d.d. Bosnia
Bosnia and Herzegovina experienced the first signs of economic slowdown in Q3 and Q4 2018, which was further prolonged and deepened in Q1 2019, driven mostly by worsening of global economic outlook and Euro area outlook in the same period. Hence the slowdown in the euro area was directly channelled to slowdown and decline in exports of goods (73% toward EU in 2018) and export-oriented industry dynamics which will affect overall economic dynamics in 2019. Therefore, we expect moderate deceleration of economic growth in Q1 and Q2 and our overall economic growth target for 2019 is 2.7% real GDP yoy growth which is 30 bps lower compared to our average for Bosnia and Herzegovina.
However, the banking sector proved to be quite resilient in Bosnia and Herzegovina in previous years and slightly lower economic growth in 2019 is not expected to be a substantial drag on loan dynamics in the banking sector. This is especially true because in 2018 the retail sector was and in 2019 it is expected to be at the forefront of loan growth in the banking sector. Consumer loans to Retail have been key driver of loan dynamics in past several years and we expect similar trend of loan structure more in favour of retail again in 2019. As consumption in Bosnia and Herzegovina is still the largest component of GDP and proved to be very resistant and stable (1.5% real growth in expected in 2019), banks are mostly retail- oriented as retail clients proved to perform better during the stress time, having NPL levels on average twice lower than the corporate sector. However, revival of financing in the corporate and SME sector has been also visible in the past three years. Therefore, we expect overall loan dynamics to be in the range of 5-6% year-on-year in 2019.