Bancherul - BANCI / Analiza / RZB Group CEE Banking Sector Report 2008: Banking Assets showed record growth in CEE in 2007

� CEE banking markets grew strongly in 2007 (+31 per cent)
� Global financial crisis has slowed growth momentum in 2008
� Long-term growth potential at sustainable level
� Deposits move into spotlight as funding diversifies
� Two Austrian banking groups among Top 3 in CEE
� Raiffeisen International has strongest distribution network

After several years of tremendously high growth rates of the banking markets in Central and Eastern Europe (CEE) the development is coming back to more moderate and sustainable levels, reports the latest edition of the annual CEE Banking Sector Report prepared by analysts of Raiffeisen Zentralbank �sterreich AG (RZB) and Raiffeisen Centrobank AG (RCB).

The CEE Banking Sector Report offers an in-depth coverage of the 16 most important banking markets of the region. For a better comparison the CEE region was split into the sub regions Central Europe (CE), Southeastern Europe (SEE) and the Commonwealth of Independent States (CIS).

Record asset growth in 2007 despite global financial crisis

In 2007 banking assets in CEE recorded a growth of 31 per cent in EUR terms compared to 2006. This is strongest expansion of banking assets in volume terms to date. Total banking assets grew by 333 billion euros to 1,417 billion euros, i.e. by 100 billion euros more than the increase of 2006. Total banking assets were growing at an annualised rate of around 20 per cent year-on-year in the first half of 2008. For the period from 2008 to 2013 the analysts forecast an annual banking asset growth of 15 per cent compared with 26 per cent between 2003 and 2008. "Despite the lower growth rates, CEE remains a highly dynamic region with outstanding prospects for growth and prosperity in the years to come", explained Walter Demel, senior analyst of RZB and co-author of the study.

Banks shift asset structure towards customer loans

Also total loans showed a record growth of 42 per cent year-on-year in EUR terms in 2007, boosted by an environment of booming domestic economies. Loan growth in SEE and the CIS continued to outpace that of CE. For the SEE countries total loans reached almost 48 per cent of GDP in 2007, surpassing the CE countries (45.7 per cent of GDP), while the CIS countries reached the 40 per cent mark. "There is still considerable long-term catch-up potential for the CEE banking markets. The gap between the CEE countries and the eurozone remains substantial", Demel added. Small and medium-sized enterprises will further boost the corporate loan business, but also the demand for retail loans will remain at a very high level.

Deposits move into the spotlight

Banking assets and loan growth remained very strong overall in 2007, defying the impact of the US subprime mortgage crisis on the availability and pricing of external funding for the most part. However, the contagion of the crisis to other parts of the financial market and the global economy, as well as its extended duration, have left their marks on the banking sector development in CEE in the first half of 2008. The global financial crisis has lead to a protracted difficult situation for funding via financial markets. Therefore, deposits have gained in importance for banks in the region and have lead to an advantage for those banks which already have a solid customer base.

Although deposit growth continued to lag behind loan growth, deposits recorded an increase measured as a percentage in GDP in all CEE countries. In SEE banks managed to sustain the strong growth in deposits from recent years amounting to 48 per cent of GDP in 2007, which is twice as much as in the year 2000.

Improved regulation and the entry of foreign banks also had a positive effect on deposit growth in the CIS. Banks have become reliant on external funding sources whose availability ebbed away with the global financial crisis. Therefore, the majority of banks in the CIS had to rely on deposits to fund the strong structural demand for loans. Total deposits in the CIS region amounted to almost 25 per cent of GDP in 2007.

The loan/deposit ratio, at almost 104 per cent in SEE and about 100 per cent in CE, has shown a diminishing overhang of deposits in these two regions. But there are also some significant differences between the individual countries. For instance, in SEE the ratio of total deposits as a percentage of total loans ranged from 46 per cent in Albania to 115 per cent in Romania. In the CIS the situation was different, as total deposits did not suffice by far to cover total loans.

The strong reliance on wholesale funding of the CIS banking sector for financing its credit expansion has turned out to become problematic when the global liquidity situation deteriorated as a result of the US subprime mortgage crisis. The funding of the persisting demand for loan growth has become one of the key challenges even for countries whose ratio between loans and deposits is more balanced. The analysts from RZB and RCB forecast that the volume of outstanding loans in CEE should increase by 1,250 billion euros in the period from 2008 to 2013, whereas deposits should increase only by around 950 billion euros in the same period. This would leave an additional loan volume of 300 billion euros, most of which in the CIS, to be funded through different channels. In addition to this, part of the loan volume extended in recent years was funded on short-term basis, the refinancing of which will add to the challenge of financing the future expansion.

Two Austrian banking groups among the Top 3 in CEE

Among the top five international banks in terms of total assets Raiffeisen has outstripped Erste Bank on the second position, mainly due to its large CIS exposure. Both Austrian banking groups (with a market share of 4.6 per cent of total assets in CEE) have managed to reduce the gap to the still leading UniCredit with a market share of 6.4 per cent in CEE.

"We have also compared the average annual growth rates for the period from 2002 to 2007 to see which banks managed to have a continuous high level of asset growth within the past five years. The result was that Raiffeisen ranks first with an average annual asset growth rate of about 38 per cent, whereas UniCredit holds the second place with about 30 per cent and Soci�t� G�n�rale on the third place grows at about 28 per cent", stated Stefan Maxian, co-author and head of Company Research at RCB.

Branch network expansion continues � Raiffeisen with strongest distribution network

The banks� network of branches in CEE increased substantially in 2007. For instance, the four largest Western banks had 9,193 outlets in 2006, and 10,577 in 2007 (plus 15 per cent). This goes to reflect the competitive nature of the region's banking sector and also shows that the market is far from being saturated. For example, the acquisition of a controlling share in Rosbank by Soci�t� G�n�rale added 600 branches to its network and 11.4 billion euros to its total assets. In Ukraine, IntesaSanpaolo recently acquired Pravex Bank with total assets of 783 million euros and 580 branches, while Alpha Bank took over Astra Bank with 50 branches, and Soci�t� G�n�rale bought Ikar Bank with 14 branches.

Overall, Raiffeisen International offers the strongest distribution network with a total of 3,077 branches in 15 CEE markets followed by Italy's UniCredit with 2,858 branches in 16 markets. French Soci�t� G�n�rale ranks third with 2,727 branches in 14 countries.

You can download the Banking Sector Report from http://www.rzb.at/ceebankingreport2008.