A few pages in the CEE Banking outlook report mentioned below talked particularly about the outlook in our region. Here follows the SEE part of the report.
The economic outlook deteriorated in the SEE region at the beginning of this year as the feared transmission channel passing through lower capital inflows and the internationally induced credit squeeze took effect. Particularly in Romania, the economic adjustment is proceeding faster than previously expected with recession deepening in Q2 to 8.7 %. A sharp contraction in domestic demand – with consumption hampered by accelerating unemployment and investment by higher interest rates – and no visible improvement in exports are a common denominator in SEE in the current phase of adjustment. The anti-crisis measures implemented by local governments and IMF aid packages to Romania, Serbia and Bosnia are providing some relief in the context of a high external financing requirement, but cannot be considered a panacea. Although there are signs that SEE economies are bottoming out, the economic outlook remains quite uncertain with regional GDP growth not expected to return to positive territory before the second half of next year. The outlook for the SEE banking system remains challenging as well, with ongoing deterioration in credit quality and slackening volumes growth expected to put further pressures on banks’ profitability.
A clear credit crunch has materialised in the first months of 2009 in Romania, Bulgaria and Bosnia, while some lending activity has been recorded in both Croatia and Serbia, mostly thanks to governmentguaranteed schemes or infrastructural projects. Some very moderate growth is expected for the next year in Croatia, Bulgaria and Bosnia, as retail lending will continue to be hampered by low consumption demand and corporate lending by weak investment spending. In Serbia and Romania some more dynamic acceleration is possible. On the deposit side, the liquidity crunch felt by the corporate sector at the global level is also confirmed in the region. In 2009 all countries (except for Serbia) will record negative growth in corporate deposits, which will also be reconfirmed in 2010 in Croatia and Bulgaria. Retail deposit growth is subdued in Croatia. In the other countries, while the saving capacity of the households sector will remain limited, we expect some emergence of hidden funds as competition for deposits in the banking sector is high. All countries indeed feature a loans-to-deposits ratio well above 100 %, which indicates dependency on external funding.
Deleveraging in 2009 will be recorded only in Romania and Bosnia, though, while the loans-to-deposits ratio will continue to increase in the other countries. Looking ahead we expect some further deleveraging, mostly due to low demand and to strong pressure for expanding the deposit base, despite increasing competition from alternative products in some countries, as capital markets rebound. It is important to note that deleveraging is not coming from lack of external funding to local institutions. With parent banks of the top local institutions having signed commitments with the local central banks (as part of the IMF support packages) to maintain on their cross-border exposure to Serbia, Romania and Bosnia, liquidity should not be an issue for the banks in those countries. Funding also does not seem to be a concern for banks in Bulgaria and Croatia.
Banks’ profitability is being hit by economic recession throughout the region. Reduced banking activities and accelerated non-performing loans constrain banks’ profitability.We forecast the peak in terms of non performing loans in the region between the end of 2010 and the first half of 2011, with the peak in cost of risk in 2010.We forecast a strong drop in profits in Romania to a still positive EUR 135 mn (compared to EUR 1.5 bn last year), despite strict cost control and in Bulgaria, where profits are forecasted to halve both in 2009 and 2010. In Serbia as well, profits will be halved in 2009 with respect to 2008, with some recovery, albeit slow, expected for 2010–1. The Croatian banking sector should be slightly more resilient, with profits declining by 15 % in 2009 and 5 % in 2010. In Bosnia we see the currency board remaining stable given an IMF agreement is in place, implying minimal risk to EUR-linked loans (CHF-linked loans are less than 5 % of all outstanding loans). The banking sector is well capitalised and the support of parent banks will ensure this remains the case in spite of the expected increase in non-performing loans.