Download Banking in SEE: moving into the spotlight

Banking in SEE: moving
into the spotlight
Debora Revoltella
UniCredit Group CEE Chief Economist
Euromoney Conference, Dubrovnik October 16th
EXECUTIVE SUMMARY
 A region which continues to deliver strong growth with moderate risk, but with rising
disequilibria
 Strong banking growth and profitability. The retail segment remains the most
dynamic at the regional level, with households financial penetration increasing both
on the assets and the liabilities side
 Banking sectors are generally well-capitalised and profitable with the widespread
presence of foreign players having contributed to the significant improvement in
market conditions. Prudential requirements are also strict
 Although risks on the households’ side are still controlled, possible source of
vulnerabilities remain connected to the fast pace of growth in credit - which is
leading to widening external disequilibria, households’ exposure to FX risk and
increasing financing gap
 Intense monitoring and adequate policy responses are crucial to prevent major
deviations from an healthy convergence pattern
2
Agenda
Persistently strong growth and rapid financial
deepening…
…but increasing risks!
3
The SEE region continues to deliver strong growth and
moderate risk…
 GDP growth in SEE is well above EU driven by lively consumption and investment activity
 Significantly improved risk profile: 82% of the Region’s GDP investment grade
Risk profile - S&P rating weighted per GDP(1)
Real GDP growth
8.0
Sep 2007
Sep 2004
SEE
7.0
EU-12
6.0
'BBB'
36.0%
5.0
'BB'
18.3%
'BBB'
81.7%
'BB'
64.0%
4.0
3.0
2.0
+45.7 pps
1.0
> BBB36.0%
0.0
2002
2003
2004
2005
2006
2007
2008
2009
4
Note: SEE: Bulgaria, Romania, Croatia, Bosnia & Herzegovina and Serbia
Source: UniCredit Group New Europe Research Network
‘ BBB’ : Croatia, Bulgaria, Romania ‘BB’: Serbia
(1) For Sep 2007 S&P ratings, GDP as per end of 2006
For Sep 2004 S&P ratings, GDP as per end of 2003
> BBB81.7%
… but shows increasing external unbalances
CA deficit and its financing (% of GDP)
18.0
 Strong consumption and investment
lead to strong import demand and
thus CA unbalances
CA deficit
FDI inward
16.4
15.8
This might be a natural phase in the
15.0
13.9
11.6
11.6
10.7
10.3
9.3
9.5
transition process, amid the need of
upgrading the country capital stock
and households desire to increase
living standards
11.0
8.3
7.8
7.5
6.1
6.0
4.4
3.9
3.5
In the short term, FDI inflows can
help financing the saving gap
To evaluate sustainability in the long
2006 2009f 2006 2009f 2006 2009f 2006 2009f 2006 2009f
Bosnia
Bulgaria
Serbia
Romania
Croatia
5
Source: UniCredit New Europe Research Network
term, it is crucial to understand if the
national saving gap is endangering
the long term competitiveness of the
country
The financial deepening scenario is expected to continue…
Banking penetrations in 2006
(Loans+Deposits)/ GDP
SEE Loans’ volumes growth (2000 =100, in € terms)
Total loans
Retail
Corporate
1,800
25%
p.a.
1,500
214%
CAGR
‘06-’09
1,200
23%
p.a.
900
600
20%
p.a.
300
82%1
0
2000
EMU2
SEE
2002
2004
2006
2008
SEE Dep.’ volumes growth (2000 =100, in € terms)
Branches per mln inhabitants
700
Total deposits
Retail
Corporate
CAGR
‘06-’09
19%
p.a.
540
350
19%
p.a.
197
16%
p.a.
EMU2,3
0
SEE
2000
2002
2004
2006
6
Note: (1) Total loans/deposits include general gov.t, non-financial corporations, households and when available non-profit institutions serving households
(NPISHs) and non-monetary financial institutions (Non-MFIs); SEE: Croatia, Bosnia, Serbia, Romania and Bulgaria; (2) European Monetary Union; (3) as of
2005. Source: UniCredit Group New Europe Research Network based on data from local Central Banks.
2008
…being supportive for still strong banks’ profitability
Lending volumes and revenues growth
SEE PROFIT BEFORE TAX(1,2)
CAGR revenues mkt growth (’06-’09)
25.0
Romania
20.0
16%
Bosnia
22% Serbia
Croatia
10.0
5.0
42%
5%
15.0
Euro bn
Bulgaria
15%
CAGR
+19%
4.0
5.0
3.0
0.0
0.0
5.0
10.0
15.0
20.0
25.0
Weight on SEE revenue pool (’07-’09) ~ 35bn €
30.0
35.0
40.0
CAGR total loans (’06-’09)
Impact on revenues

Volumes

Spreads
2.0
1.0
0.0
2005

Retail vs. corporate mix

Fees & Comm. vs. interest income mix
7
Note: (1) SEE: BG, BiH, HR, SRB and RO; (2) Before tax and extraordinary items
Source: UniCredit New Europe Research Network
2006
2007F 2008F 2009F
Agenda
Persistently strong growth and rapid financial
deepening…
…but increasing risks!
8
Is the current pace of lending growth sustainable?
Private sector loans penetration potential vs actual
(as a percentage of GDP)1
 Data still indicate the persistence of
70.0
some penetration gap on the
lending side, but this is shrinking in
SEE
Potential
60.0
2006
50.0
 Good macroeconomic performance
40.0
and further convergence in interest
rate levels will be major drivers of
future banking growth
30.0
20.0
10.0
0.0
CEB
SEE
Other
Notes: (1) CEB: V4 and the Baltics; other: Russia, Turkey and Ukraine. Based on
out-of-sample estimation by regressing the level of loans’ penetration on GDP per
capita in PPS and real interest rates using Eurozone countries as a benchmark
Source: UniCredit New Europe Research Network
9
Are households getting too much indebted?
Household indebtedness (% of GDP)
 Risks on the households side are still
controlled…
54.2
2000
2006
44.4
39.0
 … with rapid credit growth observed in the
recent past reflecting, by and large,
adjustments from very low initial levels in the
context of a relaxation of liquidity constraints
23.0
3.9
 Number of evidences show that on aggregate
there are no major risks on the horizon…
19.7
15.3
12.1
2.3
Bosnia
2.0
0.5
Bulgaria
Croatia
9.8
Romania
Serbia
EMU
Loans denominated in FX (2006, % of total)1
 … despite potential sources of vulnerability
like the one connected to rising exposure to
FX risk
~80.0%
76.0%
 Prudent macro policies and strict monitoring
of risk remain crucial to prevent deviation
from an healthy convergence pattern
39.1%
17.8%
n.a.
Bosnia
10
Note: (1) Data for Serbia refer to share of credit to the non-government sector denominated or indexed in FX
Source: UniCredit New Europe Research Network
Bulgaria
Croatia
Romania
Serbia
Is there a risk of a credit squeeze?
Banks’ financing gap (loans minus deposits, € bn)
5Y Credit Default Swaps (USD, bps)
100
8.0
2007
250
Croatia
Romania
2008
Bulgaria
Serbia- RX
6.0
4.0
50
125
2.0
0.0
Bulgaria
Serbia
Bosnia
set-07
lug-07
gen-07
nov-06
set-06
lug-06
mag-07
Romania
mar-07
Croatia
mag-06
-2.0
mar-06
0
gen-06
0
 Reduced liquidity following the recent turbulence on the international markets and increases in credit spreads
might determine some gradual credit squeeze in the medium to long term
 The likelihood and extent of which is likely to be influenced by single countries macroeconomic unbalances and
other institutional settings (relevance of foreign ownership in the banking sector)
 In a generally benign scenario, we see some more risks of a possible credit squeeze for countries with higher
external unbalances in the CA or where credit growth is increasingly being financed with banks´external
borrowing
11
Source: UniCredit New Europe Research Network, Bloomberg
The presence of foreign banks with a strong commitment to the
region could be a stabiliser effect in SEE…
Top Players in CEE
Contr. to Group’s profits
Total Assets (€ bn)
UniCredit
Share of foreign ownership
(% of total assets)
109
UniCredit
91%
19%
89%
81%
ERSTE
62
ERSTE
75%
RZB
56
RZB
79%
KBC
49
KBC
16%
SocGen
41
SocGen
8%
IntesaSP
30
IntesaSP
9%
OTP
29
OTP
n.s.
76%
48%
16%
Croatia Romania Bulgaria
(i) 100% of total assets, revenues and profit after tax (before min.interests) for controlled
Companies (stake > 50%) and share owned for non controlled companies
(ii) proforma results include also banks acquired during 2006 and until May 2007
12
Source: UniCredit Group CEE Research
79%
Serbia
Bosnia
CEE
EMU
… in the context of strenghtened prudential regulation and bank
supervision
Capital adequacy ratio (2006)
 Throughout
the region, credit risk
procedures are clearly in place, banking
supervision is strong – and has
significantly improved in countries like
Serbia
30.0
25.0
 Prudential requirements are also strict with
20.0
15.0
most of the countries having implemented
credit bureaus and with deposit insurance
mechanism already in place
10.0
 To ensure sufficient capitalization, banks
are also required to maintain capital
adequacy ratios above Basel requirements
5.0
 In light of risks associated with fast
0.0
Bosnia Bulgaria Croatia Romania Serbia
Legal requirement
lending
growth
and
significant
‘euroisation’, several CBs have recently
tighten regulatory and prudential norms
(like in Bulgaria, Croatia and Serbia)
Basel
req
Excess capitalisation
13
Source: UniCredit New Europe Research Network
EXECUTIVE SUMMARY
 A region which continues to deliver strong growth with moderate risk, but with rising
disequilibria
 Strong banking growth and profitability. The retail segment remains the most
dynamic at the regional level, with households financial penetration increasing both
on the assets and the liabilities side
 Banking sectors are generally well-capitalised and profitable with the widespread
presence of foreign players having contributed to the significant improvement in
market conditions. Prudential requirements are also strict
 Although risks on the households’ side are still controlled, possible source of
vulnerabilities remain connected to the fast pace of growth in credit - which is
leading to widening external disequilibria, households’ exposure to FX risk and
increasing financing gap
 Intense monitoring and adequate policy responses are crucial to prevent major
deviations from an healthy convergence pattern
14