"Eastern Europe's capital markets are weak, but the banks are strong. The combination is even raising eyebrows in the financial sector.
Complaints about small-state mentality, fragmented and therefore inefficient capital markets in the east and southeast of Europe, "divided along national borders", are old. Companies are thus missing "an important source for diversifying financing" and investors are missing out on attractive investment opportunities, Austria's Erste Group stated back in 2020. In addition, integrated capital markets could better cushion unexpected economic disruptions.
Two crises later - Corona and Ukraine - little has happened, as Erste chief economist Fritz Mostböck recently noted regretfully: "The region's capital markets are still underdeveloped." Italy's Unicredit, one of the region's leading banks, once again mocked the fragmented stock market landscape last year. The European Investment Bank (EIB) is concerned about the lack of access to green financing for small and medium-sized businesses. There are more examples.
None of this is to the detriment of the banks in Central and Eastern Europe. They are making good money under the existing conditions. Their profit growth, fueled by interest surpluses, far exceeded that of their Western European competitors last year and things are not going badly this year either. The continued interest in takeovers and consolidation in the financial markets speaks volumes. But the further concentration of banking power seems ambivalent.
"Diversified sources of financing"
Debora Revoltella does not think it is a good thing that "finance in Central and Eastern Europe is almost exclusively bank-based". The upcoming structural economic changes and innovations - key words are green restructuring and digitalization - require "more diversified sources of financing and better developed and EU-integrated capital markets", states the EIB's chief economist in a report that has just been published. The report deals with the stability of banks operating in the region. As long as banks dominate access to financial sources for large parts of the economy, their importance is even greater than it already is.
How badly volatile financial institutions can affect the economy was shown 15 years ago at the height of the financial crisis. The "Vienna Initiative" was founded in 2009 as a fire brigade. It consists of international financial institutions such as the EIB, the Eastern European Bank (EBRD), the International Monetary Fund, the World Bank and the EU Commission. Supported by the private credit industry, supervisory authorities and central banks, they have put out many a fire. Since then, they have been making sure that the fire does not break out again. Half-yearly surveys on the state of the industry and the supply of credit to the markets are one of their methods of choice. Two new ones have just been presented. Their summary in seven words: The situation is stable, vigilance remains necessary.
Demand for credit from companies and consumers is growing and banks want to significantly expand their credit offering, writes the EIB. As if to confirm this, Unicredit announced at the end of June that it would issue 2.6 billion euros in loans by December, primarily to small and medium-sized companies, for digitization, competitiveness and sustainability.
Demand for mortgages and corporate investments is increasing
The burgeoning growth in the region is providing an additional boost.
The tight labor supply is causing real wages to rise significantly.
This is driving domestic consumption and increasing consumers' willingness to take on debt. The Eastern European experts at the Vienna Institute for Comparative Economic Research summed this up in early July with their economic forecast for the summer. EIB Vice President Kyriacos Kakouris points out that high profits have strengthened the banks' equity base, giving them more flexibility in lending. He expects further progress in economic convergence in the region, higher investments, the creation of new jobs and an improvement in living standards in the triangle between the Baltic, Black and Adriatic Seas.
The shortage of credit supply, which has been triggered by inflation and higher interest rates since 2022 due to the sanctions on Russia, has come to an end and the trend is reversing. Demand for mortgages is growing the most, but corporate investment should also "recover after a phase of slow growth". Improved market prospects and better financing conditions are fuelling the "increased willingness of banks to grant loans to their customers".
The ECB is not the only one to have lowered its key interest rate by 0.25 percentage points to 4.25 percent. Many central banks in the region that are not part of the euro area have the interest rates cut early and in some cases significantly. The Hungarians and Czechs led the way. But the central banks in Poland, Serbia and now probably on Friday in Romania are also loosening their strict monetary policy - even if some, such as in Poland, are currently refraining from further cuts. In return, the government in Warsaw plans to subsidize up to 175,000 mortgages over the next five years due to the high interest rates and thus stimulate the construction market.
Other indicators such as credit quality in the region are also improving. After a further decline last year, the ratio of non-performing loans in the region is also expected to fall in 2024. There is no longer any talk of a possible "zombification" of parts of the economy with years of non-performing loans and restructuring needs, as the European Bank for Reconstruction and Development (EBRD) had predicted just a year and a half ago. Their analysis of non-performing loans presented at the beginning of July concluded that their ratio remained stable despite ongoing economic uncertainty, although commercial real estate loans appeared to be vulnerable.
Although loan default volumes increased slightly by 0.9 percent in 2023 for the first time since 2020, they remained "under control" at EUR 27.5 billion. In fact, the average ratio of bad loans to the total volume measured in Central and Eastern Europe fell to 2.1 percent in 2023, the lowest value ever measured. This does not mean that there are no deviations upwards (Western Balkan countries, Bulgaria) and downwards (Czech Republic, Slovenia, Estonia, Kosovo)." [1]
1. Die große Macht der Banken in Osteuropa. Frankfurter Allgemeine Zeitung (online) Frankfurter Allgemeine Zeitung GmbH. Jul 8, 2024. Von Andreas Mihm
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