East Europe Loan Revival Needs Stronger West Rebound, Fitch Says

Eastern Europe needs a more robust economic recovery in the continent’s west and an improvement in loan quality to spur credit growth, Fitch Ratings said.

Western Europe, home to lenders that control three-quarters of the east’s banking industry, must display “a longer and sustained period of stability,” according to Artur Szeski, Warsaw-based director of Fitch’s financial-institutions department. That would help banks in Bulgaria, Croatia, Romania, Hungary and Slovenia as they grapple with bad loans, he said.

“There’s some pickup in the euro zone but it’s still not enough to increase the demand for lending across the central and eastern European market,” Szeski said in an Oct. 14 phone interview. “Banks are very much focused on solving the issue of non-performing loans. That’s the most important challenge for them now. Credit growth isn’t at the top of the agenda.”

Eastern Europe relies on its western neighbors as a market for exports and a source of investment for banks and businesses. The economy of the 17-nation euro area will shrink 0.4 percent this year before expanding 1 percent in 2014, according to the International Monetary Fund, which raised previous forecasts for a 0.6 percent contraction and 0.9 percent growth.

Western lenders with units in eastern Europe include UniCredit SpA, Raiffeisen Bank International AG and Erste Group Bank AG. A stronger recovery in the west would buoy corporate profitability, increase appetite for credit, limit banks’ loan losses and free up resources to lend, according to Szeski.

‘Weak’ Lending

Private credit growth remained “weak” at the start of the year, advancing 1 percent in the first quarter, the Vienna Initiative, a group of banks, regulators and policy makers that helped prevent an eastern European financial collapse in 2008 and 2009, said in a July report.

Europe’s financial industry remains fragile and next year’s planned balance-sheet assessment by the European Central Bank “provides a critical opportunity to put the system on a sounder footing,” according to the IMF. The spotlight will be on eastern European loan losses as credit quality may be worse than reported because banks there have less rigorous rules for recognizing bad debt, the fund said last month.

The Vienna Initiative said in July that there was an “urgent need to deal with rising non-performing loans.” Bad debt accounted for 18 percent of total lending in Lithuania last year, while the ratio was 16.9 percent in Bulgaria, 16.8 percent in Romania and 13.2 percent in Slovenia, according to data compiled by Bloomberg Industries.

2014 Peak

Bad-loan ratios should peak in Bulgaria, Romania, Croatia, Hungary and Slovenia next year while they may deteriorate slightly in Poland and will probably remain unchanged in the Czech Republic and Slovakia, according to Szeski.

The MSCI World Bank Index of developed-market lenders has risen 20 percent this year, compared with a 0.7 percent decline for the MSCI Emerging Markets Bank Index.

Emerging Europe’s gross domestic product will grow 2.3 percent in 2013 and 2.7 percent next year, according to the Washington-based IMF.

Funding withdrawals by western European banks accelerated in the first quarter, according to the Vienna Initiative, which said its assumption that “the second wave of funding reductions that started in mid-2011 would taper off did not prove correct.”

The process has remained orderly and when economic growth picks up, western lenders will provide more funding to their eastern subsidiaries because that region “still offers very good returns” even if “funding has become more expensive,” according to Szeski.

“Parent banks are very unlikely to provide billions of euros of funding as in the past,” he said. “Reliance on parental funding will decrease and sources of funding for growth will be much more diversified and balanced.”

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