- Loans expected to grow by 14 per cent per annum over the next ten years.
- Deposits expected to grow by 10 per cent per annum over the next ten years.
- Increasing importance of alternative investment products, such as life insurance policies and pension planning products.
- Banks in CEE will continue to operate more profitably than West European banks.
These are the key findings of a new study presented by Bank Austria Creditanstalt. The study covers the banking markets in the Czech Republic, Slovakia, Hungary, Slovenia, Poland, Estonia, Latvia, Lithuania, Bulgaria, Romania and Croatia.
“There are many indications that the banking market in Central and Eastern Europe will maintain the strong growth achieved in the past few years,” says Marianne Kager, Chief Economist at Bank Austria Creditanstalt and publisher of the report, “and there is still enormous pent-up demand.”
“We expect incomes in CEE to double over the next ten years (CEE 2003: EUR 4,800 per inhabitant; euro area: EUR 23,700 per inhabitant), positively increasing private monetary wealth. At present, even in the more prosperous CEE countries such as Poland, Hungary and the Czech Republic, monetary wealth in the form of financial assets held is as low as EUR 2,400 per inhabitant, only 8 per cent of the average for the euro area. The average monetary wealth figure for the entire CEE region is about EUR 1,900 per inhabitant.”
“We see strong potential for growth especially in the area of personal loans from the very low current level – at about 12 per cent of GDP, compared with 49 per cent in the euro area.”
The research study found that, over the past three years, total lending volume in Central and Eastern Europe has grown by 12 per cent, compared with 4 per cent in the euro area. Within this total, personal loans have increased at an annual rate of about 20 per cent (euro area: 6 per cent), confirming the strong growth potential in the CEE region.
“Nevertheless,” Marianne Kager comments, “at about EUR 550 per inhabitant, the volume of personal loans is still considerably lower than the figure of EUR 11,500 for the euro area. Even in those CEE countries where per-capita figures for personal loans have reached the highest levels, like Croatia (EUR 1,653) and Slovenia (EUR 1,364), they are as low as 14 per cent and 12 per cent, respectively, of the figure for the euro area.”
The report highlights that experience in the “old” EU member states shows that deposits are not replaced by other assets. Alternative financial products are preferred for new investments. Therefore it is important for banks in Central and Eastern Europe to firmly establish themselves in business areas such as asset management, life insurance policies and pension planning products. The related increase in non-interest income and further efficiency improvements will help to offset the expected further decline in interest margins. However, interest margins on many products in Central and Eastern Europe are already at the same levels as in the euro area. As the economic environment continues to improve and margins decline, especially in deposits business, banks will expand their higher-margin lending business.
Overall, in the next few years, the top banks in Central and Eastern Europe will achieve a return on assets that will be higher than the EU-15 average. “In the future, market growth will benefit banks which operate efficiently, further enhance their productivity and use professional risk management instruments,” concludes Marianne Kager.
Status quo
Despite the progress made in the past few years, the banking industry in Central and Eastern Europe is still relatively small compared with that in the European Union. Some 300 banks currently have aggregate total assets of EUR 350 billion. This is equivalent to 2.4 per cent of total assets of all banks in the euro area. In the countries covered by the study, the level of concentration – i.e., the market share of the five largest banks – is 62 per cent, slightly higher than the euro area average of 54 per cent.
The number of inhabitants per bank employee is 274, significantly higher than the EU average of 136, indicating that the CEE countries are underbanked. At EUR 1.4 million, assets per employee amount to 16 per cent of the comparative figure for the EU, which is clearly lower than one would expect in view of the difference in income levels (23 per cent). According to Bank Austria Creditanstalt, this indicates that there is still scope for efficiency improvements.
“Nevertheless, banks in Central and Eastern Europe operate more profitably than those in Western Europe, especially if the return on assets is taken as a yardstick: the ROA of banks in Western Europe is 0.4 per cent, while the figure for the CEE region is 1 per cent,” says Marianne Kager.