Banks will face difficult climate this year

RIGA - Eastern European banks will continue to face difficult times as the outlook for the financial services industry in these countries, which will likely stay stuck in recession this year, remains “worrying,” says Capital Economics, reports Bloomberg. “Funding positions remain weak” in Hungary, Romania, Bulgaria and the Baltic states of Latvia, Lithuania and Estonia, reports Capital’s London-based senior emerging-markets economist Neil Shearing. “Credit conditions are at best likely to remain extremely tight as the excesses of the past decade are unwound.”

These six economies will continue to shrink this year for a second straight year, stifling demand for credit such as consumer loans and mortgages, forecasts Shearing. The slow pace of credit expansion is due more to an ongoing “deleveraging” by households and companies, rather than to prudent lending standards, he wrote.

East European banks and their parent companies in Austria, Italy, Germany and Sweden have reported a surge in delinquent loans after the region’s currencies weakened last year, boosting servicing costs on foreign-exchange denominated loans. The IMF had to step in with rescue plans for Hungary, Romania, Latvia and Ukraine as these countries failed to finance external debt.

“Another significant deterioration in the global financing environment could trigger a fresh wave of banking troubles,” Shearing warns.
He adds that Latvia, Estonia, Romania and Bulgaria have the highest proportion of non-performing loans in the region, at 14.5 percent, 12 percent, 11.2 percent and 10.1 percent of total loans, respectively. Hungary’s delinquent loans are 9.5 percent of the total and the figure for Lithuania is 8.2 percent, says the economist.

Foreign-currency loans account for 91 percent of the total in Latvia, 87.1 percent in Estonia and 71.8 percent in Lithuania, says the report. In Hungary, Romania and Bulgaria, foreign-currency loans account for about two-thirds of outstanding credit.
Russian banks’ funding positions appear “sound,” capital ratios are high and bad debt is low, says Shearing. Official data, however, may understate the extent of non-performing loans, at 6 percent of the total, as Shearing puts the actual number “closer to 20 percent.” While the four largest banks in Russia, all state-owned, are backed by the government’s “strong” balance sheet, the more than 1,100 smaller lenders will be hit hard should oil prices decline, according to Shearing.

Polish, Czech, Slovak and Turkish banks are “in reasonable shape,” he said, with a lower proportion of foreign-currency loans, secure funding positions and better access to credit by households and businesses than elsewhere in the region.