Eastern European credit quality may worsen further this year as the euro area’s economic weakness hampers demand for loans and harms the finances of lenders’ parent banks, Standard & Poor’s Ratings Services said.
Slovenian and Hungarian banks are most vulnerable, S&P analysts led by Paris-based Pierre Gautier wrote today in a research note. Non-performing loans in those countries, which are near or exceed 20 percent, will probably grow, they said.
Lenders in eastern Europe, including UniCredit SpA, Raiffeisen Bank International AG and Erste Group Bank AG, have struggled to contain the effect of the debt crisis in the euro area, the main destination for export from the continent’s former communist nations. New capital and liquidity terms for western lenders, which control three quarters of the region’s banking assets, have curbed credit to companies and households.
“We continue to view the Czech, Slovak and Polish banking sectors as the strongest in the region,” the S&P analysts wrote. “In other countries -- notably Slovenia and Hungary --we expect the credit quality of rated banks to continue to be under pressure, despite being at low levels after various downgrades in past years.”
Polish, Czech and Slovak banks have sufficient buffers to absorb a likely increase bad debts and “should remain adequately profitable,” S&P said. Slovenian lenders, which have suffered because of a slump in the construction industry, and Hungarian banks, which are burdened by Swiss franc-denominated mortgage loans, will probably continue to lose money, it wrote.
Most of the region’s banks, which relied on loans from western parents in the last decade to finance expansion, will have to change their business model in the next two years by collecting more local-currency deposits, better matching the maturity and currencies of their assets and liabilities and accumulating more liquid assets, according to S&P.
“This rebalancing will take longer for foreign-owned banks in Hungary, as well as banks in Croatia, Slovenia and Romania, as their loan-to-deposit ratios exceeded 150 percent until very recently,” S&P said. “The historically fundamentally sound funding position of Czech and Slovak banks, and also top Polish players, put them in a more favorable position and do not require material adjustments to their business model.”
Slovenian banks are the most vulnerable to funding risks, especially when long-term refinancing operations from the European Central Bank mature next year, the ratings company said.