• Increasing importance of retail banking.
• International banks are driving force.
• Austrian banks with highest market share.
• KBC, Erste, Unicredito, HVB and Raiffeisen are the region’s largest international financial institutions.
• Raiffeisen, HVB, ING, Citigroup and ÖVAG have the widest reach.

A study prepared by the analysts of Raiffeisen Zentralbank Österreich AG (RZB) and Raiffeisen Centrobank AG shows that the banking market in the 20 markets of Central and Eastern Europe* (CEE) is further growing fast. Following an increase of 3.5 per cent in 2002, the balance sheet total grew by 10.1 per cent to € 572 billion in 2003. Whilst in 2002 the contraction of the balance sheet total in Poland and the Czech Republic took the main responsibility for the muted growth in €, in 2003 mainly Russia (+15.6 per cent), Hungary (+19.9 per cent) and the second wave accession countries (+13.1 per cent) proved to be growth engines. The balance sheet total in the new EU member countries came to only 0.8 per cent. The reasons were mainly exchange rate losses, especially of the Polish Zloty, and the lasting shrinking of the balance sheet total of the Polish and Czech banks. However, the international banks in CEE grow significantly faster than the whole market.

Leverage through undersupply and rapid economic growth

“Central and Eastern Europe is a banking market with continuous high growth potential. The region is still largely underbanked and the most important key figures show the huge catch up potential against the Western European benchmark“, says Herbert Stepic, Deputy Chairman of RZB and Chairman of the Managing Board of Raiffeisen International Bank-Holding AG (Raiffeisen International), which is the holding company for RZB most important subsidiaries in CEE. Hence, in 2003 the balance sheet total only amounted to 59 per cent of the CEE countries’ GDP (2002: 56 per cent), whereas the Eurozone had to show 201 per cent. “In contrast to Western Europe the accelerated economic growth results in an additional leverage, which positively effects the development of the banks in CEE“. In 2003 the economic growth in CEE was 5.5 per cent, in 2004 and 2005 5.9 or 5 per cent respectively are forecasted, whilst in the Eurozone it accounted for 0.5 per cent and 1.8 or 2.2 are in the forecast.

However, the examination of the CEE banking market shows the different stage of development within the single markets, so that the analysts put them in groups in order to make the trends more clear: these are the new EU member countries°, the second wave accession countries **, the South Eastern European (SEE) transition markets***, the Ukraine and Belarus as well as Russia. The differentiated development of this country groups can be seen well in the attached slides.

Retail Banking with growing importance

With the growth of broader middle classes and increasing incomes retail banking becomes more important, too: whilst the net loans in € went up by 14.7 per cent in 2003 (2002: 12 per cent), credits to households grew by 23.8 per cent (2002: 19.4 per cent). The share of credits to households of the overall net loans increased from 20 to 23 per cent. In this case too, the huge growth potential compared with the Eurozone takes one’s fancy: there credits to households correspond to 49 per cent of the GDP, whilst in CEE it is only 7 per cent.

“Due to the undersupply in this customer segments, both serving small and medium sized enterprises and retail banking promise particularly high growth rates“, says Stepic. Consequently, in spite of the quick distribution of the internet banking, branches or the necessity to build up a branch network will remain important in order to successfully serve this customer potential. So, Raiffeisen, e.g., has expanded its network from 100 to 800 branches in the previous five years, roughly half of it through organic growth, the rest through the acquisition of banks.

Differentiated development of deposits

Although total deposits in CEE grow, a differentiated picture can be seen. In the new EU member countries credit growth and increasing consumption caused the growth rate to shrink from 7.6 to 2.6 per cent. Also in the second wave accession countries growth is weakening, albeit on a higher level (8 per cent after 13.5 per cent), whilst the increase in the remaining markets is steady at roughly one fifth. “This development shows the growing trust in the banks“, explains Stepic. “It is positive for the economic development in these markets, when people put their money out from under their mattresses and put the money back into circulation through their banks.”

Shrinking interest rate spread

The average interest rate spread – that is the difference between the interest rates for deposits and loans – constantly dropped in recent years, which can be put down to decreased country risks on the one hand and increased competition on the other hand. „Good banks won’t have a problem to offset the shrinking margins through broader product ranges and volume expansions. The others will fall behind“, says Stepic, who considers the universal bank approach to be an advantage in the future.

International banks play a major role

International banks are of utmost importance to the development of the CEE banking market. Their market entry was and is not only a significant incentive for other companies’ direct investments, but primarily causes a sophisticated banking system and stronger competition. „The international banks play are an important driver of the CEE banking system’s further development. They fulfill an important role, which is especially reflected in more stable banking markets, new products and lower prices for customers“, comments Stepic.

Whilst Raiffeisen, Creditanstalt, Citigroup and ING have tapped into the CEE markets first, in the last years KBC, Unicredito, Société Générale, Erste Bank and Intesa BCI have joined and quickly gained market shares through the acquisition of former state-owned large banks. In turn, OTP, which previously was only active in the Hungarian market, has grown into an international bank with an expanding branch-network in CEE.

Disinvestment, consolidation and privatisation

Nevertheless, there are disinvestments continuously coming up. KBC just recently sold its subsidiaries in Lithuania and the Ukraine. The Bayerische Landesbank has gone out of the Czech Republic and Croatia, Société Générale and Rabobank withdrew from Hungary and so on. Other international banks consider this to be a market opportunities, to be used. As a consequence, for example, Erste Bank, Unicredito, HVB/BACA, BAWAG and Nordea have grabbed at such occasions. Together with the lasting privatisation of state-owned banks this leads to a progressive consolidation and concentration process. The Polish PKO Bank, e.g., – it is Central Europe’s largest bank – and BCR, Romania’s largest credit institution, are to be privatised. Even in Russia a privatisation of big state-owned banks, such as Vneshtorgbank, the countries second largest bank, can be seen to emerge.

Five Austrian banks amongst the 16 largest international banks

According to its balance sheet total, KBC is the largest international bank in CEE followed by Erste Bank, the Italien Unicredito, the HVB/BACA-Group and RZB’s subsidiary Raiffeisen International. Altogether there are five Austrian financial institution among the region’s largest 16 international banks: Apart from Erste Bank, BACA and Raiffeisen, these are Hypo Alpe Adria and the Österreichische Volksbanken AG (ÖVAG).

This is also reflected in the net loans’ market share: regarding the overall net loans of all CEE banks, Austrian Banks have the lead among international financial institutions with a share of roughly 14 per cent. Italian and Belgian banks come in second with 8 and 5 per cent. The Russian Sberbank has the largest market share with 5.9 per cent. However, it is not ranked, as it does not have an international branch network in CEE.

An interesting picture is provided by the examination according to country groups. Whilst the market shares of international banks in the new EU member countries is relatively high, they decrease step-by-step the less EU enlargement fantasies exist. One factor for the absence of many international banks in these countries can also be seen in the relativ smallness of many markets, which is offset by a larger growth potential. Therefore, international banks only have comparatively small market shares in Belarus, the Ukraine and Russia, but also in the SEE transition countries. In these markets Raiffeisen is No. 1 among the international banks followed by Citigroup (CIS-3^) and Hypo Alpe-Adria (SEE transition markets).

Société Générale and Raiffeisen grow fastest

Thanks to the takeover of the Czech KB, the French Société Générale is leading regarding the annual total asset growth of the previous four years followed by Raiffeisen and Erste Bank.

The examination of the CEE asset share in the international banks’ group total assets is also interesting. This share is a good indicator for the importance of the CEE business and the commitment to the CEE markets. Here Raiffeisen International and OTP are leading as CEE pure-plays. They are followed by Hypo Alpe-Adria with 27 per cent, Erste Bank with 22 per cent and BACA with 17 per cent (RZB 36 per cent and HVB five per cent).

Raiffeisen with widest reach, Unicredito with most branches

Being present in 15 markets of the region with subsidiary banks, Raiffeisen has the widest reach among the international banks. HVB/BACA comes in second with 13 markets, ING, Citigroup und ÖVAG share the No. 3 position with eight markets each.

With 1,318 branches Unicredito has the most banking outlets among international banks in CEE. Erste Bank is No. 2 (1.207), followed by HVB/BACA (904), KBC (795) and Raiffeisen (789).

*CEE-20: Poland°, the Czech Republic°, Slovakia°, Hungary°, Slovenia°, Estonia°, Latvia°, Lithuania°, Romania**, Bulgaria**, Croatia**, Bosnia and Herzegovina***, Serbia and Montenegro***, Macedonia***, Albania***, Kosovo***, Moldavia***, Belarus^, Ukraine^ and Russia^.
° New EU member countries
** Second wave accession countries
*** South Eastern European transition countries