Fitch: Fragile CEE Bank Recovery Flags a Two-Tier System

Thu Feb 6, 2014 10:23am EST

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: CEE & Polish Banking Sector Outlook here LONDON, February 06 (Fitch) The fragile recovery for banks in central and eastern Europe highlights the gap between the region's banking systems, Fitch Ratings says. Poland, Czech Republic and Slovakia are outperforming weaker markets in profitability and asset quality. The gap is widest in asset-quality trends. Non-performing loans (NPLs) in Poland, Czech Republic and Slovakia plateaued at just under 6%, but have risen quickly in five weaker markets (Slovenia, Hungary, Romania, Bulgaria and Croatia) to 15%-25% at end-3Q13. Slovenia has the highest level of bad debt, but this should improve after the transfer of problem assets to the country's "bad bank". We also expect some deceleration in NPL growth in other weaker markets as their economies slowly recover. Foreign-currency loans are common in the region and can be more vulnerable to deterioration. The strongest three countries are less exposed to this risk. The proportion of foreign-currency loans within their portfolios is 27% or below, compared with over 60% in Hungary, Romania, Bulgaria and Croatia. The currency peg in Bulgaria partly offsets risks related to foreign-currency lending. Low interest rates, limited growth opportunities and deleveraging have constrained revenue across the region. Nevertheless, there is also a profitability gap between stronger and weaker countries, largely reflecting loan impairment trends. Polish, Czech and Slovak banks generate the highest returns on average assets, at or above 1%. We expect the moderate pick-up in lending growth in these countries to continue and for them to continue to outperform regional peers in 2014. Polish banks have been resilient, with loan growth almost reaching 5% in the first nine months of 2013. The impaired loans ratio peaked in 1Q13, earlier than we expected. NPLs are likely to be broadly stable or marginally improve in 2014, continuing the trend from the latter part of last year. Polish banks managed pressures from interest rates falling quickly to historically low levels better than we expected. But there is limited scope for upgrades of Polish Banks' Viability Ratings over the short to medium term. Long-Term IDRs driven by support from foreign banks remain vulnerable to parent rating downgrades. However, three Polish banks have VR-driven Long-Term IDRs at the same level as or higher than those of their western European parents. Fitch discussed the outlook for CEE banks with a focus on Polish banks at its Emerging Europe Sovereign & Bank Outlook in Warsaw on Tuesday 4 February. For more details see our presentation "CEE & Polish Banking Sector Outlook". Contact: Artur Szeski Senior Director Financial Institutions +48 22 338 6292 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Malgorzata.Socharska@Fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: CEE Banks - Amended here EM Banking System Datawatch here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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