Nov 14 - The new joint international financial institution action plan to support growth in central and south-eastern Europe is unlikely to give an immediate boost to credit expansion by the banks in the region, Fitch Ratings says. But the pledge to provide over EUR30bn of financial support could replace some foreign funding outflows from CEE banks since the onset of the global financial crisis. This may help ease supply-side credit pressure for local banks, and support economic growth in the region.
We believe the main driver of the current subdued credit growth in CEE is limited attractive lending opportunities, rather than funding pressure. Although bank funding has become more constrained, much of the foreign funding withdrawn has been replaced with local customer deposits. Greater risk-aversion among lenders and potential borrowers is also constraining credit growth.
The programme is unlikely to change lenders’ risk appetite and reverse the deceleration in loan growth in the short term. But, in the longer term, it could support credit expansion as CEE banks lend alongside the European Investment Bank Group, the World Bank Group and the European Bank for Reconstruction and Development - the three institutions supporting the plan. The EIB, which has pledged the biggest portion of funds (EUR20bn), can lend directly (typically to larger projects) or provide funds indirectly (typically to smaller projects) via commercial and state-owned banks.
We believe the provision of credit by the programme will support economic recovery and growth in CEE. Receipt of long-term funds will lengthen the funding profiles of banks in the region. Better matching of assets and liabilities will reduce liquidity risk.
Our survey of 43 foreign-owned CEE banks indicates that parental funding decreased by 20% between end-2008 and mid-2012 to EUR62bn. Parent banks increasingly want subsidiaries to be self-sufficient for funding. We expect the withdrawal of foreign funding to continue at a moderate pace.
The survey results are broadly in line with the trends in foreign funding indicated by Bank of International Settlements data for the same period. This shows a contraction in foreign funding of around EUR37bn for banks in the eight largest markets in the region (Poland, Hungary, Slovakia, Slovenia, Czech Republic, Bulgaria, Romania and Croatia). The outflows were slightly higher in Q212 than in Q1, but much lower than in H211.
The action plan, announced on 8 November 2012, pledges to support economic recovery and growth in CEE through increased availability of long-term credit and equity injections, mobilising export trade finance and supporting policy reform. The financial support will be provided to Albania, Bosnia & Herzegovina, Bulgaria, Czech Republic, Croatia, Estonia, Hungary, Kosovo, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia.