The last CESEE bank loan survey of the European Investment Bank (EIB) shows that international banking groups remain engaged in the region of central, eastern and south-eastern Europe, with their strategies tilted “towards expansion or stability” despite the pandemic coronavirus (COVID-19).
The survey, carried out in the spring of 2021, showed that around 60% of banking groups intend to maintain their operations in the region, while 30% intend to expand their operations selectively. This is a more positive image than in previous surveys.
Over 80% of banking groups surveyed expect their profitability in the region to be equal to or greater than their group’s total profitability over the next six months.
“Following the great negative shock of COVID-19, bank exposures in net balances to the region have started to increase over the past six months,” the report said. The survey showed that the number of banks reporting a reduction in their exposures to the region was lower than those reporting an increase in exposures.
“Our latest survey shows that the policy responses to the COVID-19 shock have helped limit the most abrupt and negative effects for the banking sector in Central, Eastern and South-Eastern Europe in 2020 and early 2021”, said the Vice-President of the EIB. responsible for economic studies, Ricardo Mourinho Félix.
Only a few banking groups reported a contraction, and this only in terms of intra-group financing. At the same time, banking groups expect an increase in cross-border exposures.
However, views differ among countries in the region, with banks citing Bosnia and Herzegovina and Kosovo as showing signs of slightly increasing market potential, while in other countries they see potential for growth. medium to reasonable market.
However, the report added: “Prior to the COVID-19 pandemic, exposures had fluctuated, reflecting an increased level of global uncertainty and volatility. This calls for a cautious approach when interpreting current results. “
Demand for loans and lines of credit increased in the six months preceding the survey’s development, recovering from the sharp contraction recorded in the second and third quarters of 2020. This was the first contraction in demand. overall in six years.
“The increase in demand has been mainly supported by working capital requirements, debt restructuring but also the positive outlook for the housing market,” according to the report.
“Debt restructuring has started to be a positive contributor since March 2020, when its contribution was close to zero in the pre-pandemic years. On the other hand, the contribution of the investment remained negative, as had already been detected during the spring and autumn 2020 waves of the survey. This is a significant turnaround, as fixed investments were among the highest positive contributors before the COVID-19 pandemic. “
On the supply side, the report says credit standards have tightened – the tightening was observed across the customer spectrum, but particularly for small and medium enterprises (SMEs) and business loans. Going forward, banks expect aggregate supply conditions to gradually shift to a neutral position, but will not ease over the next six months.
“The financial system of Central, Eastern and South-Eastern Europe demonstrates remarkable resilience [the] in the face of one of the biggest economic shocks it has ever faced. International banks continue to show their commitment to the region, ”said Debora Revoltella, EIB chief economist.
However, Revoltella added: “Nonetheless, our survey shows weak investment demand and ever stricter conditions on loans to small businesses and businesses. A continued joint effort from the public and private sectors as well as multilateral partners is needed to boost investment activities, to help the region not only recover, but continue to thrive and meet the challenges of the green and digital transition.
The survey showed uneven expectations among client portfolios. The household segment is expected to benefit from the easing of standards, while SMEs and large companies are still expected to face tightening credit standards, the survey found.
However, the report adds: “Despite a tightening of offer conditions, approval rates have increased over the past six months compared to the significant drop recorded from April to September 2020. Loan offer conditions tightened in terms of loan sizes. and only slightly in terms of maturity.
At the same time, the requirements for guarantees have increased, in particular for SMEs. As for the reasons for the tightening of conditions, the survey reveals that the prospects of the local market and Nonperforming Loans (NPLs) are limiting factors, as well as some international factors, in particular the outlook for the global market and the regulation of the EU. At the same time, changes in the national regulatory environment and the financing of local banks have played a role in easing.
“Access to finance has continued to improve in the CESEE region over the past six months, supported by almost all funding sources,” the report says. He added, however: “Easy access to personal and business deposits supports a positive outlook. In addition, CESEE affiliates report that easier access to short-term funding contributes positively to overall fundraising activities. Funding from IFIs has made a positive contribution.
On the other hand, he added: “Longer-term financing conditions have eased only slightly. The subsidiaries have not indicated a positive contribution from access to international and intragroup finance over the past six months. “
Non-performing loan ratios had fallen since the region’s economies began to recover from the international economic crisis more than a decade ago. With the pandemic, however, non-performing loan ratios deteriorated during the fall 2020 wave, although, as the report indicates, the impact was smaller than expected. The report’s authors predict that the current negative trend will continue over the next six months.
“The COVID-19 crisis has brought about a significant change in the quality of portfolio assets. The drop in NPLs recorded until early 2020 has ended, ”the report said.
“The expectations of banks[s] both spring 2020 and autumn 2020 were more negative with regard to the development of NPLs compared to what the same banks actually recorded during the same ex post period. This suggests that the banks’ policy and strategic responses may have played a mitigating role. NPL ratios are expected to generally deteriorate further over the next six months.
Of the bank subsidiaries surveyed, around 43% said their NPL ratios had increased, while 32% said they had continued to decline in the past six months. 65% of banks expect NPL ratios to increase over the next six months, while only 10% expect a decrease.
Banks have reported an “important positive role” of regulatory and policy measures to support lending. He quotes banks that have taken advantage of government guarantee programs as saying that they were “very effective” in supporting loan extensions. long-term central bank refinancing operations, which most believed were favorable to credit conditions. Commenting on the most effective measures to support lending to the economy, banks highlighted the flexibility in the treatment of NPLs and capital relief measures such as the release of regulatory buffers.
As the study notes, many countries and banks in the region have adopted moratorium measures on loans. According to the report, this covers between 0% and 20% of the total outstanding loan portfolio for about 70% of the banks surveyed, and between 20% and 60-70% for the rest.
Another impact of the pandemic has been to boost digitization. According to the study, banks continued to accelerate their propensity for digitization, particularly in customer awareness and risk management.