The banking sector in Central and Eastern Europe (CEE) was facing a more challenging environment with the global credit crunch showing no signs of abating soon, but it was a risk worth taking for big-name banking groups, a report published by UniCredit Group in July said.
The Banking Outlook 2008 report, drafted by UniCredit’s research network, said that the main danger to the regions economies was the way in which they were dependent on capital inflows. The shortage of financial resources on global markets heightened the risk in CEE, as highlighted by the widening spreads on debt instruments on international markets.
“Securing sound funding remains a key priority for the local banking sector and for the local economies,” the banking group’s chief economist for the region Debora Revoltella said. Already, the Baltic states and Ukraine felt the consequences of diminishing capital inflows as their economies slowed.
Bulgaria is in the same group of countries where a drop in outside financing would cause “relevant slowdown” of economic growth, or more than two percentage points to its annual gross domestic product (GDP) growth rate.
Even in a reduced capital inflow scenario, annual regional growth would likely be above four per cent for the period 2008/10, the report’s authors said. The figure is still more than double what the bank’s analysts forecast for the eurozone, where economic growth over the same period is expected to be 1.7 per cent.
In Bulgaria, the base scenario, without reduced capital inflows, estimated annual economic growth at 5.2 per cent on average for the same period. So far, Bulgaria has been overshooting forecasts, reporting seven per cent GDP growth for the first quarter and a good harvest is expected to provide an additional boost later in the year.
The risks in the banking sector were partially offset by the presence of international groups and adequate capitalisation, offering a buffer against potential shocks, while at the same time the opportunities for continued growth are strong, the report said. The compound annual growth rate of profits for 2007/2010 was forecast at 17 per cent for the 17 countries covered by the report.
In Bulgaria, that figure is expected to be 15.8 per cent. The loan portfolio over the same period is expected to grow by 23.7 per cent. Although the focus throughout the region remains on expanding retail presence, in Bulgaria corporate loans (26 per cent) are expected to grow faster than household loans (19.7 per cent).
Overall, the banking groups that have invested heavily in the region will continue to profit from it, although the period of regional mergers and acquisitions is now mostly over, the report said. The focus is now on organic growth and opening new branches.
UniCredit, already the biggest international banking group in CEE with assets of 118 billion euro, will continue its strategy of expansion in the region, with 1300 new branches to be opened by 2010.
The focus will be on Romania and three countries from what the banking group called “broader Europe” – Russia, Turkey and Ukraine – where UniCredit will open a total of 900 new branches. The group’s main competitors in the region, which include domestic rival Intesa, Austria’s Raiffeisen and Erste, Belgium’s KBC and French Societe Generale, are expected to follow similar strategies.
