CEE braced for further rise in bad loans

Non-performing loans have not reached their peak and still hinder lending by banks in Central and Eastern Europe (CEE), a survey by the European Investment Bank showed on Friday.

However it showed the deterioration in their loan portfolio had slowed and that sentiment had improved over the past two years.

The EIB presented the survey to the steering committee of the Vienna Initiative, which was established in 2009 as a framework for banks and regulators active in emerging Europe to manage the fallout of the Lehman Brothers collapse.

It was updated in 2011 as eurozone banks were hit by a new credit shortage, resulting in widespread deleveraging in CEE.

“The banks basically tell us that there is one factor that is the strongest constraint to their capacity to provide lending, and that’s non-performing loans – both of the domestic bank and the international bank,” Debora Revoltella, the chief economist of the EIB, told Emerging Markets.

“They continue to say that they have not reached the peak on non-performing loans,” she says. “But the deterioration is always smaller, so it could be that we are getting close to the peak.” Regulation, both domestically and at the EU level, is also holding back lending, she adds.

“In general, we see some easing of some of the pressures we have seen in the past, but there are issues to be resolved, and I think the issue of non-performing loans is the most important one... this is something where the banks have to take more action in terms of cleaning up their balance sheets.”

The banking sector in the region remains in transition. Prior to the eurozone crisis it had been dominated by international players from Austria, Italy, Greece and other Western European countries, which had expanded eastwards into the region’s liberalizing markets.

Since the crisis, lending growth has been constrained both on the demand side and the supply side, with banks struggling to find quality businesses to lend to but also to get the funding they need to advance the loans.

The EIB’s most recent survey, conducted in September, suggested the situation seemed to be improving, Revoltella said. Banks were more confident about market conditions, despite the selloff of emerging market assets over the summer.

There remain some supply side constraints, but the demand side is improving at a faster pace. Funding constraints have eased, she added. Over the past few years, a new funding model has developed, whereby a rise in domestic deposits at local subsidiaries has offset a fall in funding from parent banks.

“We believe this is sustainable so long as there is not much demand,” Revoltella said. “When there is stronger demand, this will be another important constraint.”

International banks remain committed to the region as a whole, the EIB found, but they will be much more selective in terms of their expansion. In October, Unicredit CEO Federico Ghizzoni said that the bank was considering an offer for Rabobank’s Polish subsidiary BGZ and that it was looking for buyers for one of its Ukrainian units, Ukrsotsbank. Poland and the Czech Republic are often quoted as appealing, Revoltella says, while Slovenia and Croatia have slipped down the priority list.