March 30, 2017 / 2:27 PM / 6 months ago

GRAPHIC-Central European banks set to outshine Western rivals

BUDAPEST, March 30 (Reuters) - Profits at Central European banks are set to rise faster than at Western rivals over the next two years thanks to improving loan portfolios, rising interest rates and stronger economic growth, analysts said.

While margins at most banks in Western Europe are coming under pressure, their rivals to the east are seeing profits pick up as political pressures on the sector abate following a series of tax increases.

Central Europe's largest independent lender, Hungary's OTP Bank, as well as Poland's PKO and Romania's Banca Transilvania have outperformed the STOXX Europe 600 banks index, as this graphic shows: (reut.rs/2opUyHw)

Analysts say there is room for further outperformance in the coming years given the relatively benign backdrop.

“Compared to the Western-EU peers ... CEE banks offer good quality for the long term,” said Norbert Harcsa, an equity analyst at Ipopema Securities.

Banks in Hungary have recorded the biggest turnaround. In 2016, the sector reported pre-tax profits of half a trillion forints ($1.7 billion), nearly 10 times the level in 2010, when Prime Minister Viktor Orban imposed a huge windfall tax.

The government started cutting bank taxes in January 2016, the economy is set to expand by 3-4 percent over the next two years and non-performing loans have fallen to 13-15 percent of overall lending.

The upswing in the economy has also enabled banks in Hungary to sell distressed mortgages and project loans to private investors seeking higher returns. That could further reduce the overall rate of bad loans this year.

OTP’s profits more than doubled in 2016 from a year earlier and its chief executive flagged in an interview this month that it was looking for acquisitions in the region.

In Poland, bank profits are also improving as economic growth accelerates, allowing lenders to find ways to shift some of the costs of a new annual bank tax worth 0.44 percent of assets to clients by raising fees.

The economy grew at its fastest quarterly rate in the last three months of 2016 since late 2007 and the government expects growth this year to be at least 3.6 percent, up from 2.8 percent last year.

Poland’s Alior Bank reported net profit of 618.3 million zlotys ($157 million) for 2016, almost double the level in 2015, while PKO, the biggest lender in the country boosted profits by 10 percent.

In Romania, the banking system got a boost from a court ruling rejecting a potentially costly conversion of Swiss franc loans into the local currency at historical rates.

Two of its top three banks posted double-digit profit increases last year and the economic landscape there is also a positive factor. The economy grew 4.8 percent last year and analysts expect growth of 4.1 percent this year, while the government is predicting an increase of 5.2 percent.

The generally positive economic backdrop is also raising expectations central banks in the region will increase interest rates, which should help lenders improve their margins after years of downward pressure.

The Romanian central bank is expected to raise its benchmark rate by 25 basis points at the end of 2017 from 1.75 percent now and economists predict Poland, Hungary and the Czech Republic will follow with rate rises next year too.

That should keep return on equity (RoE), a measure of profitability closely watched by investors, at many Central European banks strong.

OTP, for example, now has an RoE of 14.1 compared with the average among European banks in the MSCI index of 5.6, while PKO and Banca Transilvania have also outperformed, as this graphic shows: (reut.rs/2mIDS1i)

“The relatively higher RoE and RoA (return on assets) levels make CEE banks particularly attractive in the current environment of depressed profitability for EU banks,” Berenberg analysts said. ($1 = 287.9900 forints) ($1 = 3.9281 zlotys) (Additional reporting by Radu-Sorin Marinas in Bucharest, Jason Hovet in Prague and Marcin Goclowski in Warsaw; editing by David Clarke)

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