The strategic case for banks to remain in central and eastern Europe remains intact: that is the official line from Scope Ratings at least. The agency found that faster growth and higher interest rates in CEE have, overall, boosted the profitability of western European banks present in the region.
This outperformance in CEE banking has been particularly evident over the past year, despite the war in Ukraine. Profitability at western banks’ CEE subsidiaries reached record highs in 2023 thanks to higher interest rates and low costs of risk, according to Scope – even if there are challenges, including the prospect of rate cuts, windfall taxes and the need to issue subordinated debt at high cost.
Raiffeisen Research gives a similarly upbeat message in a recent overview of the CEE banking sector. Return on equity in CEE banking surpassed 22% in 2023, according to Raiffeisen. The same research noted that profitability was even higher in Russia and Ukraine.
However, western banks can no longer easily repatriate the high profits they are making in Russia, while outside Russia they are suffering severe reputational damage from having a presence there. There appears to be no easy way out, and this issue is casting a shadow over otherwise healthy regional operations of some banks.
Thankfully for Erste Group, central and eastern Europe’s best bank, it has no such problems to deal with, having taken the strategic decision long ago to stick to markets closer to home, above all those inside the EU.
Last year, Erste Group posted net attributable profit of almost €3 billion, an increase of 38% over 2022. Return on equity rose to 15.9% and the cost-to-income ratio fell to 47.6%. Unlike many banks focused on western Europe, Erste also continues to see growth in both loans and deposits. At the end of 2023, its non-performing loan ratio was only 2.3% while its common equity tier-1 ratio was a healthy 15.7%, up from 14.2% at end of 2022.
Although its lack of a large Polish universal bank remains a question mark – and perhaps something its new chief executive, Peter Bosek, will seek to resolve – the group already enjoys a market share of retail deposits of over 10% in most of the EU member states in central and southeastern Europe, namely Croatia, Czech Republic, Hungary, Romania and Slovakia.
Erste Group posted net attributable profit of almost €3 billion, an increase of 38% over 2022
Moreover, Erste has shown signs of its commitment to the region in terms of its strategic moves. In November, for example, it bought back two 15% stakes in its Hungarian subsidiary owned by the Hungarian government and the European Bank for Reconstruction and Development (EBRD). It is now the Hungarian entity’s sole shareholder; and the transaction comes after its Czech subsidiary bought the active loan portfolio of Sberbank’s Czech business in 2022.
Erste’s digital offering is developing further, with the introduction of an app for children in Romania, George Junior, and the launch in Romania of its corporate clients’ app, George business.
Meanwhile, its social banking department reached a milestone of €600 million in loans granted across CEE and Austria, covering social organizations, startups and small businesses. Last year, the bank signed an InvestEU guarantee agreement with the European Investment Bank for €53 million for social entrepreneurs operating in Austria, Czech Republic, Hungary, Romania and Slovakia. It launched a mobile branch in Romania to provide cash transactions and advice to underbanked rural communities.
In corporate and investment banking, Erste expanded a referral agreement with Commerzbank for corporate clients to nine countries in CEE. It was one of the global coordinators on the region’s seminal deal of 2023, Hidroelectrica’s €2 billion IPO in Romania. And it has been focusing on sustainable finance across its wholesale business, supporting an Orlen-Northland offshore windfarm in Poland and providing €66 million for a sustainable chemicals project for Spolchemie via its Czech branch.
