The current report reviews the developments in the banking sector in the region of Central and Eastern Europe (CEE) and in the following countries in particular (in alphabetical order): Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, and Ukraine. It tracks the major recent market developments, with data available up to June 22, and provides an overall picture of the current trends and the outlook for the sector, including consolidation and mergers and acquisitions (M&A) activity. The report provides also an insight into the specifics of the banking sector in each separate country.
o The CEE banking sector, which is dominated by Western European banks (with the exception of Russia, where the sector is dominated by the government), is still suffering from an outflow of liquidity towards parents. This, combined with weak credit demand (amid soft economic recovery) and reduced risk appetite by banks, has led to subdued lending activity;
o Most CEE countries' banking sectors were profitable last year, with Poland hitting an all-time high. The exceptions are Hungary, where banks reported a record high loss in 2014 due to regulatory-ordered one-off foreign currency loan settlements, Romania, where the industry started to recover after a massive cleaning of the loan portfolio, and war-torn Ukraine;
o Interest margins across the region, although tightened, are still much higher than in Western Europe. Growth potential is also much stronger amid low levels of indebtedness compared to the more developed economies;
o M&A activity is focused mostly in Poland (where the regulator opposes further consolidation in the sector), Hungary (where the state is the major buyer of bank assets,) Romania, the Czech Republic and Slovakia;
o With a few exceptions, the non-performing loan (NPL) ratio remains uncomfortably high across the region, hurting profitability and credit growth;
o The major risks for the CEE banking sector are related to the ongoing Russia/Ukraine conflict, as well as to the developments in the Greek debt crisis. A potential banking crash in Greece could have a spillover effect, mainly on Bulgaria, where 23% of the banking system assets are held by Greek lenders.
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