Bank lending to the private sector in emerging European markets ended 2014 in very different ways, depending on the geographical area and the borrowers. A slight improvement was noted in the area of the European Economic Community (EEC) and the European Economic Area (EEA), although they remained negative in Croatia, Romania, Hungary and Slovenia. The trend of bank loans in the Commonwealth of Independent States (CIS)Instead, it turned out quite dynamic. In November 2014, in Russia, the nominal increase in loans was 22% yoy (y/y), but due to the depreciation of the ruble, the increase fell to a more modest 12%. In Ukraine, on the other hand, the change, net of the depreciation of the hryvnia, is even more evident. An initial 10% increase in loans drops to a resounding -30%. The cause of the depreciation of exchange rates and the volatility of loans can be attributed to the consequences of the conflict afflicting the two countries.
The dynamics of loans to the private sector also greatly depend on the recipients of the loans, depending on whether they are businesses or households. THEn Croatia and Romania, the decline in loans mainly regards the corporate sector, where the reduction was respectively 3.9% y/y and 6.3% y/y in December. In Hungary, on the other hand, against a drop in credit lines granted to households (-1,7%), there was an increase in loans to businesses (+1,2%). Slovakia, which confirms itself as the best performing country in the area, records an increase in both business and household loans. The data on loans reported so far refer to 2014 and are therefore not affected by the provision, which took place in January 2015, by the Swiss Central Bank to remove the minimum threshold of 1,20 francs in defense of the exchange rate. The reactions to the news from the Central Authorities of the various countries have not been the same. The Croatian Central Bank, by virtue of the high number of households indebted in francs (4%), has established that all payments in the next 12 months must be made at the exchange rate prior to the decision of the Swiss Central Bank (6,39 kuna per franc). The difference between the conversion rate and the rate thus defined will be charged to local institutions, for a total cost of 400 million kuna. However, considering the already high CAR (Capital at Risk) of the banks, equal to over 20%, no effects are expected on the stability of the Croatian banking system. In reverse, in Serbia, where the share of francs held by households is 13% of loans, the Central Bank has declared that it does not intend to adopt particular measures on the matter. In Romania, the reaction was more media than anything else. The Central Bank has established that banks must adopt solutions on a case-by-case basis, in relation to the financial and economic conditions of the customer. For 2015, the employment forecasts reflect the 2014 trend. In Slovakia, Albania, Bosnia and Serbia, despite the weakness of investments and the deleveraging process of the private sector, the level of financing is expected to remain positive; while in Hungary the contraction of loans at 6,9% remains confirmed. Uncertainty remains in the CIS (Commonwealth of Independent States) area due to ongoing tensions. However, even if a quick solution to the conflict were to be found, growth rates in Russia and Ukraine would still remain lower than in past years, negatively affecting lending.
As a result of the funding slowdown, there was also a decrease in bad loans, especially in Albania, Serbia and Romania. However, in many of the countries of the area the non-performing loans/lending ratio is still high. In Russia, according to Intesa Sanpaolo analysts, non-performing loans account for around 6% of loans and could increase to 10% by the end of the year. In Ukraine, on the other hand, the level of non-performing loans amounts to 20% of loans, even if, in 2015, non-performing loans could increase further. Despite its reduction to 13,2% in the last year, the level of non-performing loans in Slovenia continues to frighten markets and businesses. A hypothetical solution to the problem could be represented by the transfer of debt by local banks. In Albania and Serbia the ratio of non-performing loans to loans remains above 20%; between 15% and 20% in Bosnia and Croatia, and stable at 18% in Hungary. The high level of non-performing loans in these markets is attributable to theexcessive degree of indebtedness of local businesses and the low level of coverage of banking institutions. The ratio of provisions/non-performing loans, in the area analysed, is between 40% and 60%, with Hungary and Croatia which have the lowest degree of coverage. On the other hand, considering the degree of capitalization as a proxy for the level of coverage, the situation seems to improve slightly. With the exception of Ukrainian banks, the level of coverage of the banks, thus assessed, is above the supervisory minimums. However, the relationship between non-performing loans and equity curbs enthusiasm and confirms the weakness of the banking systems of Albania, Romania and Ukraine, with index values above 100%.
In the area considered, deposits closed positively at the end of 2014. In Bosnia (+10.2% y/y), Romania (+9% y/y), but also in Slovenia (+6.8% y/y), this increase is due to the balance sheet cleanup and the recapitalization of local banks. In Russia deposits increased by 22,6% y/y. However, considering that one third of these deposits are in dollars, the figure is reduced to around 8% due to the unfavorable exchange rate effect. Even in Ukraine, the exchange rate effect is having its effects, plunging the already disheartening - 2% of deposits to the more dramatic -30% approximately. During 2015, deposits will grow again but at a more moderate pace, in view of the low level of interest rates in the area.
In 2014, the profitability of credit institutions, measured by the interest margin, was very positive, except for Ukrainian banks. In most of the markets analysed, however, this index is between 2-3%; well beyond that recorded by European banks. In Ukraine, on the other hand, bank margins are deeply negative, with losses of around 53 billion hryvnia. In fact, in 2014, against a 25% increase in revenues compared to the previous year, bank intermediation costs increased by 57%, reaching 263 billion hryvnia. In 2015, support for bank profitability could come from tax relief, provided in many countries (such as Hungary), for institutions that finance local businesses. Another aspect that should not be underestimated is the decrease in foreign liabilities. It is becoming fashionable again for companies and households in emerging European markets to rely on domestic sources of finance. The rebalancing achieved in liability items, the reduction in foreign funding and the increase in domestic deposits contributed to the financial rebalancing of the banks in the countries considered. This evidence is confirmed by the loan/deposit ratio, reduced to 100% in almost the entire area. The new balance will allow banks not only to face external shocks in better conditions than in the past, but also to finance the economic recovery of local companies. Hence the growth in loans to the private sector will help the much-acclaimed recovery.
