• Western lenders struggle to earn capital costs with 10% RoE
  • Regional credit growth slows, driven by Poland, Russia

Western European banks are under increasing pressure from regulators and investors to boost profits in central and eastern Europe to justify staying there, according to a study by Raiffeisen Bank International AG, one of the biggest lenders in the region.

Banks face an “uphill battle” to raise their return on equity to 10 percent in the former communist countries of Europe, from less than 5 percent last year, and even that wouldn’t match the cost of equity seen at about 11 percent to 13 percent, Raiffeisen Research analysts Gunter Deuber and Elena Romanova told reporters in Vienna.

“There are some open issues in CEE banking that are currently difficult to answer,” the analysts wrote in a report. “It is still unclear what level of profitability is feasible and how much of pick-up regulators and investors will demand on CEE markets and for Western CEE banks compared to lenders with a focus on more mature Western European markets.”

Banks including Raiffeisen, UniCredit SpA, France’s Societe Generale SA and Austria’s Erste Group Bank AG dominate lending in most of central and eastern Europe. They enjoyed high profit margins before the 2008 financial crisis as they combined cheap liquidity with high emerging market-style lending rates, a model that led to a severe downturn for the financial industry and economies when loans turned sour in the region.

Selected Markets

Profit margins are lower now as growth has receded and regulators are forcing banks to raise liquidity locally, which is more expensive than transferring funds from west to east, Deuber said. Competition is focusing on selected markets, such as consumer credit, and countries like the Czech republic, Slovakia or Romania, adding further pressure on lenders.

“Banks try to simplify and take out some risky elements, for instance by staying in Russia but being much more selective, to lower cost of equity,” Deuber said. “On the other hand they need to raise profitability, which creates the problem that ever more competitors focus on the same markets. That’s a difficult balance and we don’t expect that pressure to ease for the next couple of years.”

Raiffeisen’s analysts see credit growing in the region by 7.5 percent annually in local currency terms until 2021, with the biggest contributions coming from Russia, Poland, the Czech Republic and Romania. That’s about 2 percentage points less than expected a year earlier, according to the study. In euro terms, average annual growth will be 4.1 percent, the analysts predict.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE