Increasingly Positive Outlook For Emerging Europe's Banks
BMI View: Following a challenging few years, the outlook for banks in Emerging Europe is beginning to look much more promising, as improving external demand bolsters economic activity. However, direct and indirect FX exposure remains a major risk to recovering profitability, particularly in light of the potential for domestic bond market dynamics to create exchange rate pressures.
As signs point towards an ongoing recovery in eurozone demand, the outlook for Emerging Europe has improved considerably, and an export driven recovery across Central (CE) and South-Eastern Europe (SEE) is already underway. While 2012-13 was a challenging period for the banking sector, which struggled against a sharp slowdown in domestic demand, financial market volatility, FX weakness and deteriorating asset quality, the outlook for 2014 is much more promising. In CE and SEE markets, domestic demand should continue its recovery throughout the year, leading a recovery in both retail and corporate credit. Meanwhile, Turkish credit growth will remain at risk of rate hikes, which we believe will have to be implemented in order to stem capital outflows, while Russian credit growth will remain robust, but is liable to decelerate slightly next year.
While the outlook is increasingly positive, we identify several thematic trends across the region that pose risks to recovering profitability, and in some cases, sector stability. In particular, we highlight the risks arising from direct and indirect FX exposure, particularly in light of the potential for exchange rate pressures to arise from the high level of foreign investors present in illiquid domestic bond markets such as Romania and Hungary.
|Turkey Remains The Most Vulnerable|
|Excess Credit Growth & Current Account Balances|