Eastern European bank funding has improved as financial-market tension in the euro area abated and western lenders with units in the region shifted to local financing, according to Capital Economics Ltd.
Banks in the Czech Republic, Slovakia and Poland are the most stable, William Jackson, an economist at London-based Capital wrote in an e-mailed report. Lenders in Bulgaria, Romania and Hungary remain “extremely fragile” because of non-performing loans, while a lending boom has increased external funding needs in Turkey, he said.
“The good news is that external risks appear to be easing,” Jackson said. “Banks in central Europe look fairly healthy, but those in southeast Europe remain fragile. And Turkish banks are now more vulnerable to a shock than in 2008.”
Emerging Europe was hit hardest when the global financial crisis that followed Lehman Brothers Holdings Inc.’s collapse prompted western lenders such as UniCredit SpA and Raiffeisen Bank International AG, which control three-quarters of the region’s banking industry, to cut lending and financing. They kept reducing exposure as tighter capital rules were introduced.
Emerging Europe is the only developing region where private-sector credit has fallen as a share of gross domestic product since 2008, according to Jackson. While external funding remains high, it’s fallen after financial-market liquidity improved in the euro region, he said.
Banks’ efforts to become less reliant on foreign financing have improved their funding positions, with loan-to-deposit ratios falling, Jackson wrote. Even so, ratios exceed 100 percent in every country in the region except the Czech Republic and Slovakia, leaving them vulnerable, he said.
Non-performing loans remain high, partly because weaker local currencies have made foreign-currency loans more difficult to repay, according to Jackson.