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CEE banking: Is the boom time on hold?

Banks in central and eastern Europe are still posting results that laugh in the face of the credit crisis. But bad – or at least worse – times might be just around the corner for some. Charles Piggott reports.

JUDGING BY THE region’s banks’ first-half profit figures, you could be forgiven for wondering if the heavy clouds of the international credit crisis might break up before they reach central and eastern Europe. Banks are still enjoying double-digit profitability and asset growth, and many forecast returns on equity of between 20% and 30% for the next few years. Thanks to strong economic growth in recent years and the entrance of several large foreign banking groups, the banking sectors of Poland, Hungary, the Czech Republic and Slovakia are in good shape.

Even so, they are unlikely to escape the international credit crisis unscathed. While Czech and Slovak banks remain liquid (see chart), their counterparts in Poland and especially Hungary are becoming increasingly reliant on external funding, making them more vulnerable to external shocks. There is also a wisp of suspicion that lending growth might not just be a sign of healthy economic growth, but could be masking lower incomes in some quarters of the economy.

Foreign ownership has strengthened the region’s banking system but it could also be a mechanism by which the credit crunch eventually spreads into these markets. Irakli Pipia, Moody’s financial institutions analyst in London, says: "If there are difficulties in the home markets of the bank’s foreign parents this could be passed down to their subsidiaries."

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