CEE banks will face revenue challenges in 2016-17

Profitability of banks in Central and Eastern Europe (CEE) will be pressured over the coming 18 months as low interest rates and only limited credit growth cut into revenues, says Moody’s Investors Service in a report published Tuesday.

“Banks will likely register lower net interest income in an environment of limited lending growth and low interest rates. Weaker revenues make banks’ profitability more vulnerable to a significant rise in loan-loss provisions in the event of deteriorating economic conditions,” said Armen Dallakyan, a senior analyst at Moody’s.

Over the next 12 to 18 months Moody’s expects annual loan growth in Poland, Czech Republic and Slovakia will be around 6%. In Hungary, Romania and Slovenia volumes of new loans are increasing, however the stock of loans will rise on average by 3% only due to sizable repayments of existing loans.

CEE banks’ fee income may also be pressured by modest business volumes and regulatory measures. Furthermore, in the years ahead, banks will likely encounter increasing competition with nonbank companies, including financial technology companies that are entering the market.

Declining revenues will prompt banks to improve efficiency, with larger banks likely turning to cuts in operating expenses, says Moody’s. Smaller banks with limited room to cut costs may decide to merge with larger banks or become narrowly specialized institutions such as credit card or car lenders.