New EIB survey: geopolitical uncertainty negatively affecting expectations for the banking sector in Central, Eastern and South-Eastern Europe
22 June 2022
International banking groups remain confident in the region’s potential, in particular for the Czech Republic, Hungary, Poland and Romania, amid higher profitability
Credit supply is likely to tighten in the next six months, and credit quality to worsen
Small firms to be hit the hardest
Countries in the Central, Eastern and South-Eastern Europe (CESEE) region are particularly exposed to fallout from the war. Tighter financial links with Russia, the flow of refugees, reliance on foreign direct investment and energy dependence are worsening expectations. Banks are signalling a potential tightening of credit supply, and credit quality is expected to deteriorate. Despite uncertainty and the increasing risks, international banking groups remain confident in the region’s potential. They signal positive strategic intentions towards their regional operations, amid higher profitability: two-thirds of banking groups intend to maintain operations in the region, while one-third expect to selectively expand operations in certain countries. This is despite some top banking groups in the region also having a direct presence in Russia, Belarus or Ukraine.
“The new edition of the EIB Bank Lending Survey uncovers the first signs of financial tightening in the region. Small and medium-sized firms and young corporates will be the first to feel the tightening in the coming months,” said EIB Chief Economist Debora Revoltella. “Deepening the financial sector and making it more prone to innovation financing remains a priority.”
“Elevated geopolitical tensions are inducing a deteriorating economic outlook which will negatively impact funding conditions in most of Central, Eastern and South-Eastern Europe,” said EIB Vice-President Ricardo Mourinho Félix. Small and medium-sized businesses will be the most affected. Almost half of our financing last year, about €45 billion, was extended to small and medium-sized companies. As credit supply is expected to tighten, the EIB Group remains committed to providing continued access to funding either directly or via financial intermediaries in the region.
The war in Ukraine: a new turning point
After a significant improvement in credit supply and demand, funding and credit quality, Central, Eastern and South-Eastern European banks are now signalling a turning point, with geopolitical uncertainty negatively affecting their expectations. The impact of the COVID-19 crisis was strong but credit demand rebounded in 2021, and supply conditions started to ease slowly towards the end of 2021 and early 2022. The ample policy responses of national governments and EU institutions to the crisis prevented harsh deleveraging. However, the war in Ukraine is negatively influencing banks’ expectations. Demand from bank clients is expected to remain strong, despite being tilted more towards working capital and less towards investment finance. Credit, however, appears to be tightening, and bank expectations are souring amid uncertainty over the markets’ reaction to the crisis, questions about policy intervention and inflationary pressures.
Banking outlook in CESEE
Source: EIB CESEE Bank Lending Survey.Note: All indicators are in net percentages. Supply/demand: Positive figures refer to increasing (easing) demand (supply). Access to funding: Positive values indicate increased access to funding. Non-performing loans (NPL): Negative figures indicate increasing NPL ratios
Deteriorating credit conditions and quality
Funding conditions will be less favourable than before and credit quality is expected to deteriorate. Non-performing loans are expected to rise substantially. An increase in non-performing loans at the beginning of the pandemic immediately dissipated as the economic recovery began in the second half of 2021. The latest survey shows that expectations have turned negative again since the start of the war, and more substantially so than during the COVID-19 crisis. Both corporate and household exposures are expected to be affected.
About the Economics Department of the EIB
The EIB Economics Department provides economic research and studies, as well as unique analyses of investment activities in the European Union and beyond. It supports the Bank in its operations and in the definition of its positioning, strategy and policy. Chief economist Debora Revoltella heads the Department, a team of 40 economists.
The EIB CESEE Bank Lending Survey is a unique survey carried out every six months, polling around 15 international banking groups and 85 local subsidiaries or independent local banks in Central, Eastern and South-Eastern Europe. It collects information on credit standards, credit terms and conditions, and various domestic and international factors that may be responsible for changes in lending. Demand for loans is also investigated. The survey includes specific questions on credit quality and funding conditions for banks. It is designed to build a panel of observations that can provide an almost real-time assessment of the health of the banking sector in the CESEE region. The survey is developed and managed by the Economics Department of the EIB, and is part of a series of reports produced alongside the EBRD, IMF and World Bank for the Vienna Initiative
During the UN Ocean Conference, the European Investment Bank announced €97 million co-financing to support the resilience of Romanian Black Sea coast to erosion and floods. This new investment is allocated under the Structural Programme Loan ‘Romania EU Co-financing for Environment for the programming period 2014-20’.
The countries of Central, Eastern and South-Eastern Europe (CESEE) are particularly vulnerable to the effects of the war in Ukraine. Financial ties with Russia, the influx of refugees, dependence on foreign direct investment and reliance on energy imports are worsening expectations. Banks are signalling a potential restriction on the supply of loans, and the quality of loans is expected to deteriorate. Despite the uncertainty and growing risk, international banking groups believe in the potential of the region. Two-thirds of banking groups are going to maintain their activity there, and one-third foresee a selective expansion of activity in some countries, even though some of the leading banking groups in the region are also directly present in Russia, Belarus or Ukraine.
The European Investment Bank (EIB) signed the first agreement with Kontakt Micro-Location sp. z o.o. (Kontakt.io) - an indoor spatial intelligence company developing transformative digital building services that help people secure the space, equipment and support they need to be productive and safe. Kontakt.io’s solutions enable people to interact in a smarter, safer and more efficient way using the Internet of Things and AI cloud technology.