On November 10, four Banking & Finance experts from Croatia, Hungary, Romania, and Serbia sat down for a virtual round table moderated by CEE Legal Matters Managing Editor Radu Cotarcea to discuss banking consolidation, financing availability, the effects of high interest rates, bank capitalization, green financing, the specter of loan restructuring, and the other challenges the sector is facing.
- Claudia Chiper, Partner and Head of Banking and Finance, Wolf Theiss (Romania)
- Gabor Erdos, Partner, Erdos | Katona (Hungary)
- Milos Petakovic, Senior Associate, Gecic Law (Serbia)
- Pavo Miskovic, Partner, Miskovic & Miskovic Law Firm (Croatia)
You can also listen to the conversation as a podcast below.
CEELM: A broad question for starters: what would you say is the current state of the banking sector in your country?
Miskovic: The Croatian banking sector is very mature at this point, especially in commercial banking, and is primarily dominated by large EU banks, such as UniCredit, Intesa, Erste, and Raiffeisen. The commercial market average is a bit sovereign overexposed, and there is a certain level of risk towards the country and local authorities compared to other EU members.
While the market is considered to be developed, private equity is still in a developmental phase – though on a constant increase, it is still behind the EU average. 2022 was primarily focused on the euro conversion, which will take place on January 1, 2023. The euro conversion on the path of our country joining the eurozone stands at over EUR 300 million. This is a one-off cost, but it is expected that joining the eurozone will surely benefit the Croatian market overall. The costs will be borne primarily by the banking sector – not including FTEs from March. The costs for legal entities outside the banking sector will not be significant.
Petakovic: Serbia is in a very similar situation – the majority of banks are EU-based and are part of the bigger EU banking groups. Still, we do have banks present in the market that come from outside of the EU, in addition to strictly domestic ones.
The statistics show that the sector is stable, at least for the first half of 2022. All the trends that existed before the inflation crisis began are continuing, for example, an evident consolidation trend. Looking at the back half of 2022, however, we still have to wait a bit to check on developments.
Erdos: Hungary is also quite populated with European banks. Additionally, we do have strong Hungarian banks as well, such as OTP, that also have strong regional coverage. Besides, a new bank was formed via a combination of three Hungarian banks and has positioned itself as a strong competitor. Even with such intense competition levels, the sector is in good shape.
Chiper: We were lucky, in Romania, in the sense that some of the largest banks in the market are EU-based (Austrian) – Unicredit, Raiffeisen, and Erste – in addition to the largest one, Banca Transilvania, which is a local bank.
Looking at the past few years, there have been two key driving factors of activity. One is, of course, the COVID-19 pandemic, with regulatory regimes loosening in order to deal with all the economic downsides. The other one is the conflict in Ukraine, and although it did not directly impact the banking sector in Romania, due to its relatively low exposure towards Russia, it did affect the energy sector, which is, in turn, impacting the banking sector (and the economy as a whole), including the price related to lending.
Aside from the traditional framework of credit institutions, in Romania we see the rise of alternative financing, especially crowdfunding, following the EU-wide regulation. There is more variety now when it comes to financing options and opportunities. Nonetheless, the traditional banking sector is still rather powerful and greatly supports all businesses financially.
In a nutshell, the system in Romania is stable. It has been so for quite a while now, given that the supervising authority applies a conservative approach and follows the market closely.
CEELM: Are the consolidation trends that are present likely to continue?
Miskovic: The Croatian market has been stable for the past few years. The last significant transaction was OTP’s acquisition of the local Societe Generale bank – Splitska Banka.
2022 has seen an extraordinary measure put in place on account of the war in Ukraine and given bank run fears, because Sberbank had a fair market presence. Fearing for Sberbank’s liquidity, the EU resolution board applied a moratorium that led to a transfer of Sberbank shares to the predominantly state-owned Hrvatska Postanska Banka. This prevented economic disruptions and protected the bank’s clients and the public.
While we do not foresee any incoming M&A transactions in the sector, we do see a certain amount of informal due diligence processes for smaller banks – it might be the case that we see a consolidation of these market players in the coming years.
Erdos: Hungary had a similar experience with Sberbank to that of Croatia – the bank is currently in a wind-up process. With the local subsidiary of Commerzbank also leaving the market, and the previously mentioned three-way merger of local banks, I’d say that there has been a trend of consolidation present.
However, there is still a high number of banks in the market, so there is a lot of competition and space for further consolidation – but we are not aware of any incoming exits or impending M&A talks.
Chiper: While I don’t think Romania is overbanked, there are certain banks that either lack the necessary resources to upgrade and keep up with all the requirements or cannot continue developing, given that other banks have been better adjusting to customers’ expectations.
Of course, there were transactions – both mergers and acquisitions – that supported the growth of established banks, like, for example, Banca Transilvania and other smaller banks were consolidated into stronger ones over the years. This is not a sign that the market is not doing well, but rather that it is a vibrant, maturing market. On the other hand, it is also a sign that resources are needed to keep up with all the regulatory requirements and all the technical upgrades required to keep up with customers’ expectations.
Romania is a bit of a paradox – we still need bankability for the rural parts of the country, yet the urban regions are rather well-banked. This creates room for the underbanked segment to develop further. Also, there is pressure on traditional banks from new, innovative entries such as fintech.
Petakovic: Currently, 22 banks are operating in Serbia – a drop from the 34 present in the market in 2009. While smaller banks were mainly bought out, we have also seen significant mergers – for example, Eurobank merging with Direktna Banka and NLB merging with Komercijalna Banka.
As in Hungary and Croatia, Sberbank was acquired by one of the strongest domestic banks, AIK, and Raiffeisen acquired Credit Agricole. There aren’t any announcements of future significant mergers, but we do see a trend, and we expect it to continue – 22 banks is a bit of a high number for the size of the Serbian market.
CEELM: Looking at the current state of the markets, how are the levels of financing?
Chiper: Financing is still available but perhaps harder to access. It’s hard to say whether the financing level has dropped or increased based on the current economic backdrop. There have been slowdowns, of course, given the neighboring conflict, the associated uncertainties, and the energy crisis that put specific projects on hold. Some of these have since resumed, especially in relation to clean energy production – which is quite the buzzword lately.
There is money on the market and, therefore, perhaps it is more accurate to say that financing has become more expensive than that it has decreased. We were, for example, involved in a EUR 410 million financing for the Iulius Group this year, which is quite an order of magnitude for the Romanian market and shows that the markets have continued to be active and with a good appetite to provide finance.
Erdos: The Hungarian financing market is very similar to Romania’s. The year started really well, and then the war came into the picture, and the energy crisis hit along with the high inflation and economic recession fears, all of which led to a drop in financing. Both corporate and retail loans dropped.
High inflation, which caused high-interest rates for loans, had a chilling effect on the borrowers. Coupled with a fear of an economic recession, the demand for financing dropped overall. Yet, of course, there are still very active sectors in which financing is very much alive, for example, energy and logistics.
Miskovic: According to the reports of the Croatian National bank, financing has increased compared to 2021, and we can only guess why. The first nine months of 2022, compared to 2021, have seen an increase of about 9%, primarily in corporate financing. Retail didn’t see a similar increase – a lot of cash was being deployed into real estate.
Still, we do see growth, and we do not feel that it will decrease, yet we cannot say for sure with the war ongoing. Some percentage of this increase is probably driven by inflation and the overall sector issues. On top of this, we see that financing has been increasing in other parts of the economy, such as project financing, real estate, or refinancing other loans, despite the increased interest rates.
Petakovic: I agree with Pavo; it is more or less the same in Serbia – financing levels are on the rise, looking at October 2022 data. However, the prognosis is a bit different – the banks are very cautious with predicting what will happen – yet, for now, it is increasing. Commercial loans are the main drivers, and we expect, for a number of reasons, for consumer loans to decrease in the future.
CEELM: Given the shifts in financing: who is winning and who is being left behind?
Erdos: The winners are clearly in the energy sector because of the high energy prices. In Hungary, in particular, solar projects are being favored by banks. Another heavily financed sector is logistics.
What was left behind were real estate sub-sectors, like hotel and office space developments. These are clearly less attractive to the banks, among others, due to increasing energy prices and operating costs. Having said that, we still see openness for financings for good location hotel and office projects developed by well-known developers.
Chiper: Romania is in a similar position – energy is at the top of the chart regarding developing projects. In addition, the logistics sector is also very active.
Aside from that, the HoReCa industry still suffers in terms of attractiveness because of the pandemic ramifications. As things slowly return to normal, with the relaxation of COVID-19 measures, the HoReCa sector is recovering, although it is still not on the banks’ favorites list. Also, production is interesting, for example, beer and other consumer goods – there seems to be a renewed need for FMCGs financing in the aftermath of the pandemic.
On the other hand, startups and SMEs are being left behind. There are some state-backed relief programs, but there is much room for improvement.
Petakovic: Serbia saw a rise in energy financing at the beginning of the year, yet other sectors have also picked up the pace – transportation, real estate, and production. On the other hand, agriculture, trade, and, surprisingly, construction have been left behind in terms of commercial loans.
As for retail loans, cash and mortgage and housing loans are the main drivers, even with housing loans dropping a bit in the face of rising real estate prices.
Miskovic: Croatia differs little from Hungary and Romania – the focus is green energy, renewables, transportation, FMCG, and goods. Of course, the sector here is still focused on tourism and hospitality, which are the backbone of Croatian GDP and cannot be neglected.
Apart from loans, however, there have been other sources of financing – we’ve seen several bond issuances lately, including the first ESG-linked one, which was very well taken by both banks and investors alike.
CEELM: What have been the effects of now months-long higher interest rates?
Petakovic: Serbia followed suit with global trends when it came to inflation. We initially had an optimistic regulatory prognosis, but we’re not isolated from the region or the EU. As a consequence of inflation, the banking sector had to increase interest rates and associated prices, which pushed tightened conditions for approving new loans leading to decreased credit activities of the banks.
Erdos: High inflation causes high-interest rates, which is a massive problem for financing. Engaging in new projects with high-interest rates does not make for a good business model, so borrowers think twice about whether to get financing in forints. There is a trend of obtaining loans in euros, which is more and more the case with Hungarian banks due to lower interest rates.
Miskovic: We are lucky to be entering the eurozone – it will positively affect the increasing interest rates. Still, this increase is relatively modest compared to the region. We do expect a certain increase, although not to such a great extent. The National Bank will alter its policies and restrictions, which will, in turn, liberate some cash for the banks to be placed back in the market. I hope the banks will use this to reinforce financing efforts to reduce interest rates.
Chiper: Our situation is quite similar to what is happening in Hungary. We are not close to joining the eurozone; there is still a while to go. However, for consumers, it’s been a roller coaster ride, with the interest rates doubling at times. Even if a loan was given out in euros, considering that borrowers earn their salaries in lei – with the overall levels of income decreasing – this means that paying back a loan in euros has become more burdensome. The other effect on the consumer side is that it is more difficult to take out a loan, given the decrease in overall income. Unfortunately, the consequences are dire and are felt on a daily basis.
On the corporate level, the interest rates were very low last year, so any increases are impactful. Still, corporate loans are an active segment with large deals happening on the market. Recently, we have seen a postponement of financing to 2023 because banks reached their targets and wanted to apply a wait-and-see approach to the interest rate hike.
CEELM: Are the banks successful in drawing in additional deposits? What are the overall capitalization levels of banks?
Chiper: There is a difficulty in drawing funds driven by two overall elements. The first is that people do not have much money to spare. The value of money has decreased a lot. Secondly, the deposit rates are not attractive because they are so low it makes no sense to put your money in the bank. Inflation is sure to devalue it immensely, so people are placing it elsewhere.
On the other hand, the level of capitalization of Romanian banks is very good, according to the National Bank of Romania, being above the EU average. The system is quite healthy, and there is no need for an injection of capital. The National Bank of Romania stated that – if there is a need for an increase in capitalization – it will not be passed to consumers, but rather it will be a requirement imposed on the shareholders, to prevent negative social consequences at a time when consumers face the high burden of inflation anyway.
Miskovic: It is very interesting to see how things develop in Romania – it is very similar in Croatia. Still, according to the Croatian National Bank, the levels of overall deposits are increasing – perhaps due to the eurozone entry. People need to deposit their money to make the conversion to euros. Real estate prices are going up daily, but we can assume that the upcoming switch is why: 30% of all real estate transactions are done in cash.
Also, the banks are very well capitalized, above the EU average, and the reason for this is a rather restrictive regime that has since loosened – the National Bank has decided to decrease the ratios and abolish the minimum liquidity levels for foreign currencies – which again stands to liberate some cash to the market.
Erdos: Similarly to Romania, the people in Hungary have traditionally tended to keep their savings in banks. Now, however, they are looking elsewhere to place their savings because of the rising inflation. The Hungarian state offers bonds with attractive interest, and we see a trend that people prefer these to bank deposits.
Petakovic: There are a lot of similarities between Serbia and the other markets, but the deposit levels remained more or less the same, even with a booming real estate market, mainly due to the unattractiveness of offered savings interest rates. The National Bank sees a rising inflation rate and a decrease in purchasing power.
The people of Serbia have had issues with placing their savings since a few decades ago – ever since a Ponzi scheme was uncovered that brought about a lot of damage. In addition, the National Bank monitors banks quite closely, so there is no risk of undercapitalization. However, smaller banks could be in a bit of a pickle, which might lead to an increase in NPLs, but we will have to wait and see.
CEELM: Do you see the banking sector preparing for a hike in the number of restructuring loans?
Petakovic: The cost of this is already up due to policy changes, yet there is a lot of demand for restructuring loans. While there isn’t any data to support this claim 100%, I believe that – with closer monitoring of NPL levels – the banks might be instructed to provide better loan conditions or even that the state might interfere, like it did when it pushed to counteract the pandemic blowback.
Erdos: From our mandates, we can see that there is more attention on potential restructuring scenarios. Banks are trying to take a closer look at projects that might be in danger due to the economics of increased fear. They are preparing for restructuring or non-performing scenarios in the sectors that are in danger. But: we have not seen any big NPLs or restructurings yet.
Miskovic: The Croatian banking sector went through a cleaning of NPL portfolios in the past six years – we have seen about a dozen or so sales of such portfolios – so the current levels are much, much lower than, say, ten years ago.
Still, there is an increase in the share of loans that are in IFRS Stage 2 – there is a deterioration of the state of loan quality. The NPL ratio might be affected and subsequently restructured and sold as portfolios, depending on global factors like the war and the energy price increase. This could happen by the end of 2023 or the beginning of 2024.
Chiper: Our situation is similar to that of Croatia and Hungary. We have not seen a very high increase in the NPL rate. Still, it is a bit early currently, due to the moratorium laws which were in place, meaning that there have been payment deferrals at the end of 2021 and then in 2022.
Further, it is a bit early to look at large NPL transactions. There has been a clean-up of NPL portfolios in Romania, and– based on the statistics published by the National Bank of Romania – NPL rates are at approximately 5.3% for the corporate segment and 1.3% for the retail segment. These ratios have been affected by a volatile environment as of late, but data is not available yet, so the impact cannot be fully assessed. Certainly, there will be changes in these numbers, but the expectations are that in late 2023 and 2024 we will see what happens to the quality of the loan portfolios.
By that time, the effects of the state-supported measures would have worn off, and businesses will resume in normal economic circumstances, subject, of course, to any other geopolitical events that might impact the economic reality in the meantime. This is not to say that there are no clean-ups to be made. There are talks of further NPL portfolio transactions being in the pipeline. However, this is not necessarily related to the overall state of affairs, but also a part of the general clean-up process on the side of banks that have gone through several acquisitions and consolidations over the past few years.
Yet, certain legislative aspects make the selling of NPLs less favorable for sellers, which certainly does not contribute to the revival at a fast pace of this type of transaction.
CEELM: Comparing current conversations to those of 2021, where does green financing stand?
Chiper: I’d say it is still relevant – with the EU pushing for green financing and overall zero emissions by 2050, there is a drive for this to happen. The other buzz is, of course, ESG. Everything ESG-related is very interesting, even though the market could still benefit from some ESG education. Banks are very interested in implementing the taxonomy regulation, even though much work lies ahead. 2022 has seen a lot of work put into understanding what ESG is, what it requires, how it translates into agreements, what green loans are, how they could apply in a traditional financing scenario, etc.
Miskovic: I agree with Claudia. We see that companies that issue ESG reports are not necessarily those in the most impacted industries. Mid-sized and small companies try to draw attention to themselves by being ESG-compliant. And the banks are supporting all things ESG. Still, there have been changes in how ESG is interpreted, and I think there will be a focus on clean-up once all the hype passes.
Petakovic: ESG has become such an integral part of the vocabulary. Still, we have to see what its actual effects will be. I believe that green energy projects will be on the rise, especially in creating new energy, given the problems Serbia has been experiencing with energy sources dependence. The banks have been encouraged to finance new renewables projects, predominantly in the area of solar power.
Erdos: ESG and green financing are very positive trends – Hungarian banks offer better conditions for green financing, and the Hungarian National Bank also supports the financing of green projects. It is a long trend that started in Hungary and has strong momentum.
However, as of November 2022, we see threats, economic crises, and rising rates – banks and borrowers are less focused on ESG financing nowadays. We see that there are issues that banks deem to be more severe, and they give more attention and focus to these.
CEELM: What, looking at the banking sector in 2023, is the one biggest challenge right now? And what is the one thing you’d like to see happen?
Chiper: Cybersecurity is one of our time’s largest and most dreadful threats. Given the number of investments and attention around it, this is the one aspect that must be strengthened.
As for something that I’d like to see happen – that would be more guidance in digital financial products in Romania.
Erdos: My biggest fear is that the economic downturn might come and see us face more and more NPLs and restructurings.
On the other hand, my biggest wish is that the war ends, and we finally get to see peace. Not only do I wish for this as a human being, but I also think that this would be beneficial for both the banking sector and the overall economy.
Petakovic: The biggest threat is a poor outcome of all our current fears – a weakened economic output and rising interest rates which would limit the entire sector and give room for an NPL rise.
As far as wishes go, I would like to see more good examples in the future, such as Serbia passing the act on digital assets and making further way for crypto and NFT financing. There haven’t been many moves yet, only a single white paper was published, but it will be exciting to see how these areas develop and if they will become a much-needed source of SME financing.
Miskovic: I, too, would like to see more of a digital focus from our regulatory bodies. When it comes to fears, I’d wish for more loosening of AML interpretations.
I agree with all that the monetary policies of the ECB are tightening up, which will, in turn, influence the loans and the levels of financing. Still, I think that the biggest challenge is whether the banks can retain top talent and continue hiring top performers, given that the traditional banking sector is facing fierce competition from new entrants such as private equity, venture capital, and fintech players.
CEELM: Thank you all for taking the time and sharing your insights! It was an absolute pleasure.