An NPL overhang will crimp credit growth in Emerging Europe.
The European Investment Bank (EIB) has revealed that, while demand for loans across Central and South-eastern Europe (CESEE) improved in the second half of this year, the supply of credit remains constrained by the stringent regulatory environment for European banks, relatively weak economic recoveries and, crucially, persistently high levels of non-performing loans (NPLs), particularly in South-eastern Europe (SEE). There is still significant deleveraging by Western parent banks across the region, with international lenders reassessing their country strategies and taking a more discerning approach towards Central-Eastern Europe (CEE).
Extremely high foreign ownership in CEE banking is now perceived much less favourably thanks to cross-border deleveraging by parent banks.
Ultra-low interest rates due to ECB monetary stimulus will further erode CEE banks' profitability as lending and asset growth slows sharply.
Financial markets' relative resilience, especially in CEE currencies, is helping ease the strain on banks ahead of higher US interest rates.
Poland and the Czech Republic remain the most profitable markets, with relatively strong demand for credit.
By contrast, Hungary and Romania are now perceived as 'turn-around markets'.
