Graphic: Central European banks set to outshine Western rivals

Banca Transilvania

30/03/2017 15:24

By Gergely Szakacs and Sandor Peto 
    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  OTPB.BU , as well as Poland's PKO  PKO.WA  and Romania's 
Banca Transilvania  ROTLV.BX  have outperformed the STOXX Europe 
600 banks index  .SX7P , as this graphic shows: (http://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.  urn:newsml:reuters.com:*:nL5N1F812V urn:newsml:reuters.com:*:nL5N1F31M6 
    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.  urn:newsml:reuters.com:*:nL5N1GY3XF  
    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.  urn:newsml:reuters.com:*:nL8N1FZ2DE  urn:newsml:reuters.com:*:nW8N1G5016 
    Poland's Alior Bank  ALRR.WA  reported net profit of 618.3 
million zlotys ($157 million) for 2016, almost double the level 
in 2015, while PKO  PKO.WA , 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.  urn:newsml:reuters.com:*:nFWN1FS0GK 
    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: (http://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) 
 ((gergely.szakacs@tr.com Twitter: https://twitter.com/szakacsg 
 ; +36 1 327 4748; Reuters Messaging: 
gergely.szakacs.thomsonreuters.com@reuters.net)) 
 
Keywords: CENTRALEUROPE BANKS/