Baltic banks' outlook still positive

RIGA - An in-depth survey of the banking sector across the whole Central and Eastern Europe (CEE) region has drawn the conclusion that Baltic banks are among those considered "still the right bet".

The banking market in the Central Eastern European  countries is still dominated by foreign international players, who continue to profit from their investments in the region, says the "CEE Banking Study 2008" from the Austrian UniCredit Group.

"Our study shows that foreign ownership is significant at the CEE level, accounting for 75% of banking assets in Central Europe, 83% in South East Europe and the Baltics and 19% in Broader Europe", said UniCredit's Federico Ghizzoni.

Recent mergers and acquisitions efforts have been directed towards new markets or specialised segments, while in the current global context, growth strategies are now most likely to focus on organic growth and branch openings, the report adds.

Economic activity in CEE remains lively, says the report, despite the repricing of risk at the international level. The economic dependence on capital inflows is the main risk, while inflation is particularly pressing in the Baltic countries, due to the weight of food and oil in the region's consumption basket. However, "real income convergence remains a driver of further realignment in living standards," the generally upbeat report says.

Fears about the continuing credit squeeze in the region are lessened by the widespread presence of international players in the market, UniCredit believes 's which is good news for the Baltics with their proliferation of Scandinavian banks.

"Securing sound funding remains a key priority for the local banking sector and for the local economies", said Debora Revoltella, CEE Chief Economist of UniCredit Group. "The Baltic countries... are already facing the challenges of a credit squeeze - with lower capital inflows resulting in lower lending growth and thus a slowdown in economic activity."

"Households' lending penetration gap is closing, but the growth potential remains related to the strong demand for a higher living standard", said Revoltella.

"The main risks are related to households´ exposure to potential depreciation of the local currencies and some possible deterioration in credit quality. Households in the region are indeed not able to save so much anymore and are more and more depending on loans, while they have accumulated a large proportion of their debt in foreign currency, particularly in the area of mortgages," added Revoltella.

On the corporate side, cyclical stabilisation is partially balanced by renewed corporate demand for bank loans. Banks increasingly compete in providing additional services like leasing, cash management and structured finance, which are the main growth drivers for corporate business in CEE.