• EIB expects the resilience of lending activities to be tested over the next six months with tighter supply conditions and potential increases in non-performing loans
  • Profitability remains higher for subsidiaries in Central, Eastern and South-Eastern Europe (CESEE) than at overall group level
  • Czech banks expect the quality of loan applications to decrease and credit supply to decline further
  • Rapidly rising interest rates and the war in Ukraine have continued to temper risk appetite and reduce demand for loans, particularly for mortgages in the Czech Republic

The European Investment Bank (EIB), the bank of the European Union, has published its CESEE Bank Lending Survey, an overview of the banking sector, credit demand, supply conditions and credit quality in Central, Eastern and South-Eastern Europe. The survey is based on data collected in September 2022 and outlines the expected trajectory of the EU banking sector for the next six months.

Loan applications in the CESEE region have increased driven by increased corporate demand for liquidity, and household demand for housing loans. Banks expect overall credit demand to rise further over the next six months, albeit at a more moderate pace. The main driver of this rise will be the firms’ working capital requirements to cover liquidity needs. The banks surveyed by the EIB expect to see a decline in the fixed investments and retail segments, including for consumer credit and housing.

EIB Vice-President Lilyana Pavlova said: “The role of monitoring banks through a survey like this is crucial to understand how the economy will evolve and accurately assess the financial conditions across the European Union. Thanks to the efforts of the EIB’s economists, we have an overview of CESEE’s economic environment, which will enable us to provide the necessary financing to respond appropriately to the needs of people and businesses in the region.”

Chief economist at the EIB Debora Revoltella said: “Despite unfavourable economic expectations, banks in Central, Eastern and South-Eastern Europe again report solid access to funding thanks to sustained improvements in retail and corporate deposit funding. Going forward, in the context of deteriorating global conditions, banks anticipate tightened supply conditions and are preparing for a potential increase in non-performing loans.”

EIB Bank Lending Survey 2022 findings in the Czech Republic

All parent banks operating in the Czech Republic reported that the country’s banking market has high or medium potential and see little reason to change their positioning in terms of group assessment of positioning and market potential.

These banks report higher profitability in the Czech Republic than at group level. However, over the last six months, rapidly rising interest rates and the outbreak of war in Ukraine have dampened risk appetite and reduced the affordability of loans on the Czech market. As inflation surged, the Czech National Bank continued to raise its repo rate, which reached 7% in June 2022.

While, on balance, banks reported no change in overall demand for loans, there were important differences across market segments. Demand for mortgages declined for all reporting banks, whereas most saw increased demand for loans from large companies.

The supply of loans declined across all product groups as the macroeconomic environment deteriorated. Almost all reporting banks reduced their supply of mortgages. On balance, banks reported that the quality of loan applications decreased, and they expect further deterioration over the next six months.

Most banks expect to further reduce the supply of loans across most product groups, except for mortgages.

Most banks in the Czech Republic forecast an increase in non-performing loans, reversing the decline over the last six months. Access to funding does not appear to have changed significantly for Czech banks. Funding conditions remain supportive, with most banks finding it easier to access retail funding in the last six months. Banks were already largely funded by stable domestic deposits.

Significant deterioration of credit supply across CESEE

Banks expect conditions for credit supply (the financing banks are willing to provide to their clients) to deteriorate significantly over the next six months. Credit standards have tightened, particularly in the mortgage market, especially because of the war in Ukraine, higher inflation and interest rates, and the general slowdown of economies. Hence, robust credit demand will be confronted with tighter supply conditions.

Parent banks: an optimistic overview

Cross-border banking groups see market potential in most of the CESEE region, particularly in Romania and the Czech Republic. The main reason is that, in all cases except Poland, profitability is higher for their CESEE subsidiaries than for the overall group.

Looking at long-term strategy, cross-border banking groups show positive intentions towards their operations in the region, with more than half planning to maintain their current level of operations, while almost one-third intend to selectively expand. However, 10% of banking groups (compared to zero in the previous survey wave) have signalled their intention to selectively reduce activity in the region. Despite uncertainty and increasing risks, most international banking groups remain confident in the region’s potential.

Background information

About the EIB Economics Department

The EIB Economics Department conducts economic research and studies, as well as providing 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.

About the EIB CESEE bank lending survey

The EIB CESEE bank lending survey is 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, terms and conditions as well as various domestic and international factors that may be responsible for changes in lending. Demand for loans is also examined. 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 current state of the banking sector in the CESEE region. The survey is developed and managed by the EIB Economics Department and is part of a series of reports produced alongside the European Bank for Reconstruction and Development (EBRD), the International Monetary Fund (IMF) and the World Bank for the Vienna Initiative.

For more information on our economic surveys, see here.