| BUDAPEST, March 30
BUDAPEST, March 30 Profits at Central European
banks are set to rise faster than at Western rivals over the
next two years thanks to improving loan portfolios, rising
interest rates and stronger economic growth, analysts said.
While margins at most banks in Western Europe are coming
under pressure, their rivals to the east are seeing profits pick
up as political pressures on the sector abate following a series
of tax increases.
Central Europe's largest independent lender, Hungary's OTP
Bank, as well as Poland's PKO and Romania's
Banca Transilvania have outperformed the STOXX Europe
600 banks index, as this graphic shows: (reut.rs/2opUyHw)
Analysts say there is room for further outperformance in the
coming years given the relatively benign backdrop.
"Compared to the Western-EU peers ... CEE banks offer good
quality for the long term," said Norbert Harcsa, an equity
analyst at Ipopema Securities.
Banks in Hungary have recorded the biggest turnaround. In
2016, the sector reported pre-tax profits of half a trillion
forints ($1.7 billion), nearly 10 times the level in 2010, when
Prime Minister Viktor Orban imposed a huge windfall tax.
The government started cutting bank taxes in January 2016,
the economy is set to expand by 3-4 percent over the next two
years and non-performing loans have fallen to 13-15 percent of
The upswing in the economy has also enabled banks in Hungary
to sell distressed mortgages and project loans to private
investors seeking higher returns. That could further reduce the
overall rate of bad loans this year.
OTP's profits more than doubled in 2016 from a year earlier
and its chief executive flagged in an interview this month that
it was looking for acquisitions in the region.
In Poland, bank profits are also improving as economic
growth accelerates, allowing lenders to find ways to shift some
of the costs of a new annual bank tax worth 0.44 percent of
assets to clients by raising fees.
The economy grew at its fastest quarterly rate in the last
three months of 2016 since late 2007 and the government expects
growth this year to be at least 3.6 percent, up from 2.8 percent
Poland's Alior Bank reported net profit of 618.3
million zlotys ($157 million) for 2016, almost double the level
in 2015, while PKO, the biggest lender in the country
boosted profits by 10 percent.
In Romania, the banking system got a boost from a court
ruling rejecting a potentially costly conversion of Swiss franc
loans into the local currency at historical rates.
Two of its top three banks posted double-digit profit
increases last year and the economic landscape there is also a
positive factor. The economy grew 4.8 percent last year and
analysts expect growth of 4.1 percent this year, while the
government is predicting an increase of 5.2 percent.
The generally positive economic backdrop is also raising
expectations central banks in the region will increase interest
rates, which should help lenders improve their margins after
years of downward pressure.
The Romanian central bank is expected to raise its benchmark
rate by 25 basis points at the end of 2017 from 1.75 percent now
and economists predict Poland, Hungary and the Czech Republic
will follow with rate rises next year too.
That should keep return on equity (RoE), a measure of
profitability closely watched by investors, at many Central
European banks strong.
OTP, for example, now has an RoE of 14.1 compared with the
average among European banks in the MSCI index of 5.6, while PKO
and Banca Transilvania have also outperformed, as this graphic
"The relatively higher RoE and RoA (return on assets) levels
make CEE banks particularly attractive in the current
environment of depressed profitability for EU banks," Berenberg
($1 = 287.9900 forints)
($1 = 3.9281 zlotys)
(Additional reporting by Radu-Sorin Marinas in Bucharest, Jason
Hovet in Prague and Marcin Goclowski in Warsaw; editing by David