Central eastern Europe second quarter 2010

by Unicredit research

The Central Eastern Europe banking sector’s vulnerabilities played a relevant role during the crisis. Despite the absence of toxic assets, most of the banking sectors in the region were exposed to high external funding needs, high “leverage” (i.e. elevated loans over deposits ratio), relevance of lending in foreign currency, credit quality issues.
One year later, we can say that in Central Eastern Europe the wall held: the various banking sectors emerged, not unscathed but functional. Only the banking sectors in the Baltics, Ukraine and Kazakhstan posted losses in 2009 (profitable in all the other countries). Impaired loans remain extremely high in Ukraine, Kazakhstan and Russia.
For the other countries, impaired loans doubled or tripled in 2009 (more than tripled only in the Baltics, Romania, Ukraine, Kazakhstan) but remained under control, between 5% and 10% for most of the countries. As regards the top 7 groups operating in Central Eastern Europe (they control around one third of total assets in the banking sectors of Central Europe and South Eastern Europe, dominated by foreign banks, which control around 80% of total assets) only one posted losses at group level in 2009. Thus, these leading groups, despite more than EUR 25bn of provisions booked last year, are in a position to re-start lending activity in the region.
In summary, the banking sector shouldn’t be a brake for the Central Eastern Europe economies in the coming years. Despite the widespread worries for the banking sector, it seems that in Central Europe and Eastern Europe this sector will not determine a collapse of the financial system.
The upturn in exports and inventories has started, but the household sector will need more time to join the recovery process. What’s more the recovery is fragile and depends on the strength of the resurgence of Central Eastern Europe's key trading partners, risk appetite toward emerging markets and the pace of the implementation of domestic reforms, including progress in EU funds absorption. We have thus decided to stick to our existing projection, that the Central Eastern Europe economy will remain in a difficult situation for the most part of 2010, and that prospects for a meaningful recovery look better in 2011 and thereafter. The manufacturing sector, where the recovery process has started, continued to shed jobs. More worryingly, labor market adjustment, which is instrumental for the economy’s rebalancing under the currency board, has predominately taken the form of rising joblessness rather than a sharper slowdown in wages. This is a negative development, as it threatens to make the adjustment socially more painful, thus further eroding the flagging public support for reforms.

Original title: Central eastern Europe second quarter 2010