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Central European Banks are on the Improvement Trail

CE Banking Outlook

There is still a clear divide between the relative performance of the banking sectors of the northern and southern countries in the Central European region. But both are on a visible road to improvement, enabled by growing business confidence as GDP growth accelerates (averaging 1.1% across CE in 2013, rising to 2.5% this year and to 3.0% - 3.5% in 2015-16).

This is a key finding of the latest Deloitte report, CE Banking Outlook. North-South Divide on the Road to Recovery, which analyses the performance and prospects of the top 10 banks in each of eight CE countries: the Czech Republic, Poland and Slovakia to the north; and Bulgaria, Croatia, Hungary, Romania and Slovenia in the south.

“Our research shows that six years after the financial crisis we can finally claim that the outlook for the CE banking sector is positive across the region,” comments Juraj Moravek, Deloitte Partner for Financial Services and Real Estate.

This positivity is despite continuing macro-economic challenges such as the ongoing fragility of the eurozone and instability in Ukraine, which have resulted in recent downward revisions of the CE economic outlook. But according to senior Deloitte manager Sanja Petračić, “Expectations remain for the region to stay on a positive trajectory”.

The report highlights the differing positions of northern and southern banks in terms of a range of factors such as asset quality and growth, loan and revenue growth, cost/income ratio and profitability. Of these, the report authors conclude, the two key drivers that most clearly highlight the main “two-speed” differences between north and south are asset quality and loan growth. These in turn are having an impact on banks’ profitability levels and their future strategies.

In northern countries, asset quality is very strong, with falling NPL ratios and low costs of risk. In the south, on the other hand, NPL ratios have been rising. But these and the current high cost of risk are expected shortly to enter a downward trend, which will accelerate during 2015 and 2016.

Loan growth, meanwhile, is picking up in the north, with Slovakia performing particularly well and Poland accelerating strongly. Loan volumes continue to decline in the south, with Hungary and Romania set to bottom out this year, followed by Slovenia and Croatia in 2015.

The impact on profitability of these trends – a generally stable outlook in the north and forthcoming improvement in the south – is seen as broadly positive. Following a decline from 6.4% in 2012, regional return on equity (ROE) is expected to rise from 3.9% in 2013 to 5% this year and 8.1-8.7% in 2015-16.

The report concludes that banks to the north and south of the region will need clearly different strategies moving ahead. In the north, the emphasis will be on customer growth, driving larger banks to focus on retention while smaller players prioritise customer acquisition. Northern banks also require effective strategies addressing changing customer behaviour, optimising the channel mix with new technology and analytics. Cross-selling will also be a priority in a lower-margin banking environment.

In the south, banks need to focus on managing their NPLs with stronger collection operations. Restructuring will also have a strong role to play, as southern banks seek to compensate for weak revenue growth by cutting costs through optimised distribution, process improvement and exiting non-core businesses.

Consolidation is a further important factor affecting banks in the region; this is forecast to continue and even accelerate into 2015 and beyond. According to Moravek, “M&A activities have in the past been largely focused on the north, Poland in particular, but the focus might now move south with stabilising asset quality and recovering profitability.”

This might lead to further improvements for southern-based banks. “Our research shows that size and critical mass are very important to achieve profitability,” he continues. “Banks that have more than 5% market share are typically much more profitable than those with less. We believe that the global banks with sizeable positions in Central Europe will be more open to consolidation, and a pipeline of possible transactions is visibly emerging in the south.”

Anyone wishing to download a copy of Deloitte CE Banking Outlook. North-South Divide on the Road to Recovery should visit

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