CESEE Bank Lending Survey: Banks Constrict Credit Offerings Amid Profitability Concerns, Contrary to Expansion Goals

Most parent banks in Central, Eastern and South-Eastern Europe (CESEE) countries have maintained their level of exposure in the last six months. Some mergers and acquisitions activity took place among major players in Serbia and Romania, reads the latest Central, Eastern and
South-Eastern Europe (CESEE) Bank Lending Survey conducted by the European Investment Bank (EIB).

When asked about their long-term strategies, cross-border banking groups signalled they wanted to “selectively expand” (50%, up from 45% in the last round and 30% in the round before that) or maintain the same level of operations in the region (40%). Market potential in the region is seen as medium in most cases: banks are more optimistic about Czech Republic and Romania, more pessimistic about Bosnia and Herzegovina. However, banks say profitability compared to overall group operations deteriorated significantly since the previous survey round, with more than 50% of banks now signalling lower profitability in Albania, Croatia, Hungary, Poland and Romania.

When looking at the local market, credit demand from bank clients has remained resilient and is expected to improve slightly. Fixed investments and retail, especially the housing market, contributed negatively. However, credit needs for fixed investments are expected to resume. Credit demand is expected to remain relatively strong (with Hungary and Poland as exceptions), despite the expected continued weakness on the retail side.

The total exposure of groups to Central, Eastern and South-Eastern Europe did not increase, contrary to optimistic expectations in the previous survey round. Most banks (64%) maintained the same level of exposure to the region (in terms of intragroup funding to the subsidiaries, and capital) in the last six months, while 18% reduced exposure and 18% increased it.
For the next six months, banks expect an overall neutral stance towards the banking markets in the region: 9% of the international banking groups plan to increase their exposure in the region (compared to 27% in the previous survey round), 9% to reduce their exposure, and the large majority (82%) suggest they will be happy to maintain their current level of exposure. Still, 9% of banks suggest they might reduce their
exposure. Capital and intragroup funding are also expected to remain stable for around 80-90% of banks.

Romania case

The EIB survey says that credit demand remained strong in Romania over the last six months, driven mainly by corporates. In contrast, credit supply conditions deteriorated further. While banking market potential remains high, the system’s profitability started to deteriorate, in line with the regional trend.

Group assessment of positioning and market potential: Most surveyed banks perceive the Romanian banking market as having high potential — in the third best position in the region. Most banks also describe their market positioning in Romania as satisfactory. Nevertheless, banks’ profitability in Romania deteriorated compared to the previous survey round, in line with the regional trend.
Credit demand improved further over the last six months — driven particularly by robust demand in the corporate segment. Demand for housing loans remained unchanged. Banks expect overall credit demand to continue to grow over the next six months.
Credit supply conditions continued to tighten in the last six months across the board following patterns observed throughout Central, Eastern and South-Eastern Europe. Banks in Romania expect credit supply to stay unchanged over the next six months.
Access to funding continued to improve over the last six months after a deterioration in the first half of 2022. Funding conditions are expected to be good in the next six months.
Credit quality in Romania remained strong, contrary to previous expectations, and no major change is expected for the next period.

Romania’s banking market continues to have high potential, according to most survey participants. This is also reflected in the recent expansion of UniCredit, one of the major groups operating in the region, which bought 90% of Alpha Banks’ Romanian business and
became the third biggest player in the local market. Romania’s market potential is among the highest in the region, but it decreased slightly from the previous survey round, when two-thirds of parent banks considered it high. The ratio of banks reporting satisfactory market positioning also decreased since the last survey round (when it was 67%).
Bank profitability compared to overall group operations deteriorated. For most banking groups, Romanian operations were less profitable compared to the overall group, while in the previous period 75% of banks said Romanian operations were higher in terms of return on assets.

Credit demand in Romania was slightly above the expectations expressed in the last survey round. Increased uncertainty over the winter caused by rising energy prices did not turn into an economic recession.
Demand remained robust and was above values recorded in the rest of Central, Eastern and South- Eastern Europe.
Banks in Romania continue to be optimistic about credit demand growth in the next six months. The expected increase in demand likely reflects the strong wage and profit growth recorded in 2022, which almost kept up with inflation.

Demand components and segments (in %)
Overall demand for credit increased over the last six months. Demand from companies and consumer credit drove the increase, while credit demand for house purchases remained unchanged. Demand increased for all segments in terms of maturity and currency denomination.
Over the next six months, banks expect demand to continue growing, but to a lesser extent, driven mainly by demand for large companies and long-term loans. Demand for mortgage loans is also expected to recover slightly.

Investments in fixed assets and inventories were responsible for the increase in demand on the corporate side, while all household factors contributed negatively. The same factors are expected to contribute to loan demand in the same way in the coming months. Demand for loans related to debt restructuring is expected to pick up over the next six months.

Credit supply conditions deteriorated for the second period in a row, following the post-COVID-19 easing.
Rising rates dampened the ability of banks to finance themselves at low rates, and this was mirrored in a tightening of bank loan supply. Banks expect a further tightening in the supply of credit during the next six months.

Alpha BankbanksCESEE Bank Lending SurveycreditEuropean Investment Bank (EIB)inflationlendingRomaniaUniCredit
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