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Challenges Ahead: Navigating CEE Banking Sector In A Shifting Landscape

The banking sectors in Central and Eastern Europe experienced both – positive and negative – changes
throughout 2022. Although there were some setbacks in our Eastern operations, higher interest rates in non-euro Central and Southeast European markets resulted in increased interest income for banks. 

  • By Ruslan Gadeev & Gunter Deuber
  • Market Trends

The past year in Europe and CEE banking was marked by a mix of positive and negative outcomes.
The aggressive rate increases have supported bank profits in CE/SEE markets, but the war and sanctions have adversely impacted the economies and banks in EE. Looking ahead, banks are likely to face obstacles such as a slowing economy, higher funding costs, and increased government interventions that may limit earnings. Although some Western CEE banks still have direct exposure to the Ukraine-Russia conflict and sanctions, we believe that the core CE/SEE banking sectors are better equipped to navigate the difficult times ahead.

In an ironic twist, major CEE banks have indirectly benefited even more from the COVID-19 crisis than anticipated in 2021, from a big-picture perspective and with the benefit of hindsight. The CE/SEE markets experienced strong credit expansion supported by policy, leading to a reduction in the Eastern European shares in the CEE banking business, including 2020 and 2021, due to growth elsewhere. The share of Russia in the CEE exposures dropped to less than 9% from just under 12%.

Regional banks profited strongly from bold regional monetary tightening in CE/SEE. However, the post-COVID-19 upswing in the European economy halted due to the Ukraine war, and it is difficult to extrapolate favorable CE/SEE banking sector trends of 2021 and 2022 well into 2023. The effects of drastic rate hikes in CE/SEE are already fading, and there are challenges in refinancing, refinancing costs, capital buffers, or the overall banking sector environment that resembles the challenging 2012/2013 years in CE/SEE banking. We will cover key dimensions of the regional banking outlook in this note, drawing on our annual flagship report, the CEE Banking Sector Report.

The full version of the report is available to registered Raiffeisen Research users, and a shorter
comment-style version is available without registration:

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