While the economies of emerging Europe (non-EU, including the CIS and south-east Europe) continue to grow at a healthy clip, their banking sectors present a more turbulent picture. The CIS, for example, hosts some of the world's riskiest banking systems, which remain vulnerable to external shocks. Romania and Bulgaria – the more developed economies in south-eastern Europe – are taking vital steps to shore up their financial sectors, as are their neighbours in the Balkans, while courting foreign investors.
All banks in the region, however, face similar challenges: to develop financial intermediation, expand their products, diversify revenue and improve efficiencies. At the same time they need to bring in more sophisticated tools for operations and risk management. The Russian banking system is still reeling from a mini-crisis last summer that threatened to cripple the entire financial system. In a move to limit fallout, the government has accelerated its reform programme. The central bank is pressing ahead with a deposit insurance fund, which aims to evaluate the country's banks.
The lack of access to capital, however, is the biggest hurdle to faster growth for all of Russia's banks, most of which lack funds for long-term financing and can only cover about 20% of the market demand. Foreign investment is key to plugging the funding gap. Retail banking and SME lending are the two sectors with the most appeal for banks looking to grow in the sector, and foreign banks are lining up to help boost mortgage lending in the country.
Foreign bank penetration across the CIS, however, remains low. Kazakhstan is one of the more advanced markets in the region. It is also one of the most lucrative. Over the past 12 years, the number of banks has fallen from 230 to 35 but total assets are up from $1billion to $19 billion. Still, total assets-to-GDP remain low, and bankers caution about a fall in loan quality. Like much of the CIS, bankers maintain that Kazakhstan's market needs more capital – foreign capital.
South-east Europe is drawing interest from foreign banks, partly because of the eventual promise of EU accession. Romania's banking system is in relatively good shape, having undergone restructuring and consolidation after crisis in the 1990s. Most of the system has been privatized, and foreign ownership stands at about 61%.
As part of its EU accession bid, Romania's banking system is poised for more improvements, including closer regulation, a move towards Basel II and international financial reporting standards.
Foreign banks are racing to enter the Serbian banking market, one of the few in eastern Europe that still has large assets for sale and strong growth potential. The Serbian government has begun privatizing assets it acquired in the banking crisis of 2000, including some of the biggest banks. Austria's Raiffeisen has stolen a march on its rivals but Italian and Greek banks are eager to build up business as well.
Leading foreign banks are also actively competing for market share in Bosnia-Herzegovina. The EBRD regards its banking system as one of the success stories of transition. More than 84% of the sector has now been privatized and about 70% of banking assets are now foreign owned (total banking assets exceed €4.4 billion). The sector as a whole has become increasingly profitable in recent years, and looks set to improve further.
Emerging Markets profiles three leading banks in non-EU member countries
Sberbank
Sberbank is the largest bank in Russia, and in central and eastern Europe. Its domination of the Russia's retail banking market – it holds just less than 70% of all Russian deposits – makes it a crucial part of the country's financial infrastructure. It accounts for about 30% of the banking sector, so keeping it afloat is a priority.
Because of the sharp fall in interest rates on the domestic market, the bank has shifted its focus from the securities market to lending. Last year its credit portfolio, which now stands at more than $40 billion, accounted for about 70% of the bank's assets. Sberbank represents about 50% of the retail lending market in Russia and 32% of the corporate lending market.
All of Russia's commercial banks are aiming at the more lucrative middle-class customers, and Sberbank is no exception. The bank had been accused of enjoying a monopoly position on Russia's retail market, as its deposits were state-guaranteed. However, it says that since the banking deposit insurance scheme came into effect last year, it has had no privileges.
Sberbank has been trying to raise the capital markets. In February, it followed Vneshtorgbank (VTB) to market, selling Russia's second international subordinated debt issue.
Vneshtorgbank
Vneshtorgbank (VTB), the second largest bank in Russia, is busy cementing its position as one of the country's leading financiers. It is best known as the country's leading trade finance bank and regularly participates in joint projects with international institutions, including the EBRD. It was the first Russian bank to take part in the development bank's trade facilitation programme, and remains the most active user of the programme's guarantee facility. VTB was also the first bank in Russia to use EBRD's pre-export finance facility.
In March it announced plans for a public flotation. It will also spin off its retail business into a new subsidiary, and may sell shares in the subsidiary to international investors.
The potential for growth in Russian consumer credit is large, with a population that has still to experience its first credit boom.
Foreign penetration of the Russian financial sector is low. In eastern Europe and the Baltic states about 80-90% of financial assets are foreign managed, compared with less than 20% in Russia. However, if the IPO of VTB – and those of Rosbank, MDM Bank and Bank Vozrozdenie – is successful, it could provide the boost the Russian financial sector needs to develop.
Banca Comerciala Romana
Banca Comerciala Romana (BCR) is Romania's largest bank, with about a 30% market share and 4 million customers. Despite its size, it has set about transforming itself into one of the most sophisticated banks in its region. Traditionally used by the Romanian government to finance parts of the inefficient state-owned industrial sector, BCR has turned itself around to try to capitalize on the retail-led boom.
Traditionally, much of BCR's market share derived from its strong corporate banking division and its long-running ties to Romania's industrial sector. This is changing.
BCR has started to play an increasingly important role in the burgeoning consumer finance sector. The ability to place relatively large volumes into consumer and mortgage lending bodes well for securitization opportunities, which will be crucial when the market matures.
With more than 700 ATMs and over 1.3 million active cards, BCR has also managed to secure a leading position in the card market. Last year the EBRD and the International Finance Corporation bought a 25% stake in BCR, reducing the state's holding to 37% and its share in the banking sector to less than 20%. BCR will hope to take advantage of Romania's accession plans.