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Even after the catching-up process seen in the past years, banking markets in CEE are highly promising for a number of reasons. The various markets show different degrees of maturity.
1) Economic developments:
The CEE economies are expanding at real growth rates which in the more mature countries are at least double, and in the younger countries about two and a half times, the figures for the “old Europe”, i.e. West European countries in the EU. Our economists expect average annual growth to exceed 5% for the period 2006 to 2008, the years covered by our current 3-Year Plan. Economic growth is supported in the long term by the structural process of catching-up and modernisation, regardless of cyclical fluctuations, as it will take one or two generations for prosperity levels in CEE to get close to those in West European economies. In the short to medium term, additional impetus will come from current and prospective EU membership and the related liberalisation, from integration in the EU’s division of labour and, last but not least, from EU financial assistance and foreign direct investment.
2) Financial intermediation:
Beyond real and nominal economic growth, the process of financial intermediation is gathering momentum. Expressed as a percentage of nominal GDP, total loans plus deposits of the banking sector in CEE is around 78%; this compares with 246% for the countries in the euro area. We expect that in the period 2006-2008, bank loans (38% of GDP) and bank deposits (47%) will increase at an annual rate of 28% and 19%, respectively (data for CEE-16 incl. Poland, Russia, Turkey).
3) Expansion to include new markets:
Despite all differences, the countries in CEE may be broadly classified into three groups: based on average figures for 2006–2008, lending volume will rise by about 21% annually in the EU member states (incl. Poland) and by 27% annually in South-East Europe; this compares with 28% in Turkey and 38% annually in Russia. The markets newly added to BA-CA’s perimeter therefore offer exceptional prospects. This rejuvenation will prolong the life cycle of the business segment, all the more so as economic integration between these countries is intensifying.
4) Product penetration:
In CEE, banking services are not yet used as widely as in Western Europe. Even in the more advanced countries, people holding bank accounts are still a relatively low proportion of the population. For example, in Slovakia only 68% of persons over 15 years maintain an account, and in Bulgaria only 30%, which suggests significant growth potential. It should be noted, however, that – apart from the sociological aspect of prosperity distribution – demand for electronic banking services, mutual fund products, and capital market-related financing solutions and derivatives, is growing at a disproportionately high rate in CEE. Business with internationally active companies, which act as pacemakers of economic development, hardly differs from Western standards and practices. Especially in the large CEE markets, this offers opportunities for structured transactions, ECM business, investment banking, risk management, etc. on a state-of-the-art basis. Retail banking, on the other hand, has so far been slow to develop and will show above-average growth in coming years.
5) The supply side:
Today, foreign banks – welcomed by policy-makers many years ago to support the system transformation – are playing a role in CEE, especially in some of these countries, that would be inconceivable in Western Europe. Some 1,800 banks in CEE-12 have combined total assets of over € 1 trillion. International banks account for close to half of the total; this proportion is weighed down by the fact that in Russia, foreign banks make up only 10% of the banking market. International banks active in CEE help to avoid misguided developments such as those seen in the West European banking sector in the past decades. The strong commitment of international banking groups also has an influence on market trends: these banks are pursuing expansion while keeping capital requirements at a low level; they aim to promote capital market-based financing and investment in mutual funds and to use the locational advantages of a well-trained workforce for an efficient market of internal bank services.