Mortgages and consumer loans provide momentum to retail banking

PRAGUE, 13 June 2007 — Primarily driven by the increasing volume of mortgages and personal loans, the retail banking market in Central and Eastern Europe is growing rapidly and we expect it to keep up this pace. A recently-published sector review by Deloitte, an accounting and consulting firm, entitled Central European Retail Banking maps the current situation and indicates the market’s future development.

“Possibilities for further development of the retail banking sector remain large in Central and Eastern Europe, which is attracting foreign investors who strive to establish solid positions in these markets. Examples of successful business in this industry confirm the fact that foreign capital is still welcome in retail banking in the Central European region.”

—Mike Jennings,
Financial Services Industry Partner, Deloitte Central Europe

Double-digit growth

The retail banking sector in Central and Eastern Europe is currently growing at a double-digit pace and even triples the Eurozone’s growth rate in some countries. Two prime examples come from Bulgaria and Romania, where banking assets went up by 30.4 percent and 31.3 percent respectively year-on-year as of September 2006.

These outstanding results and promising perspectives are attracting new players who strive for the largest possible share in the rather saturated Central European market. “ This situation is visibly reflected in the measures taken by banks in order to win an advantageous position on the market and attract suitable clients to support the banks’ further development,” says Mike Jennings, Financial Services Industry Partner of Deloitte Czech Republic. “ Examples of banks operating on the Czech market prove that achieving outstanding results is possible in Central and Eastern Europe, which could be an incentive to prospective investors. It’s clear that there is still room on the market and available opportunities to set up a successful retail banking business in Central Europe.”

New play

The development of retail banking in Central and Eastern European countries has several common features. In the first phase of development, there were a limited number of banks in each country that underwent privatization and, because retail clients were not considered attractive, these banks provided services, which were usually of poor quality and expensive, primarily to large debtors only. Although new smaller banks started to be formed, they were also unable to work with retail customers.

The second phase was characterized by the completion of privatization, entry of foreign investors, mergers and acquisitions, and the elimination of bankrupted or seriously endangered banks from the banking system. In the Czech Republic, privatization was preceded by market rescue which, according to an estimate of the Ministry of Finance, cost over CZK 300 billion and represented approximately one third of the state budget.

The third phase of the retail banking development was characterized by an effort to redistribute the market share and attract new clients, most frequently covering long-term projects relating to the provision of loans. Establishing various types of branches adjusted to specific customer needs, using agents and forming networks of franchise points of business, banks focused on building a modern distribution network, expanding customer segments to which services are provided, enhancing business processes as well as developing and managing risks.

As banks’ activities are streamlined, counter and back-office operations are automated and attention is paid to maximizing the potential ensuing from operating cost savings, the portion of income from fees and commissions in total income is growing because of its greater stability as compared with interest rates.

Returns on investments made by foreign owners in the banking business in Central and Eastern Europe are generally very fast. Predominantly, money institutions with foreign capital show very clearly that the Central and Eastern European markets generate much higher proceeds as compared to their owners’ home countries. Erste, an Austrian savings bank, may serve as an example as it owns Česká spořitelna in the Czech Republic and also banks in Slovakia, Hungary, Croatia and Romania.

Prosperity is the source of growth

The Central European retail banking sector continues to grow. This trend is expected to continue in the upcoming years thanks mainly to positive developments in traditional Central European markets such as Poland, Russia, Ukraine and the Balkans, which are making huge strides in banking sector reforms.

Retail banking growth will be supported by the economic growth pace. The current economic situation is reflected positively by increased household income and, consequently, in higher consumption, and is also connected with the present need of short-time funding as well as the willingness to receive long-term banking products such as mortgage loans.

“ Possibilities for further development of the retail banking sector remain large in Central and Eastern Europe, which is attracting foreign investors who strive to establish solid positions in these markets. Examples of successful business in this industry confirm the fact that foreign capital is still welcome in retail banking in the Central European region,” concluded Mike Jennings.

As compared to Western Europe, the retail banking segment shows significant differences. While in Central and Eastern Europe the primary target of banks is establishing a stable position and increasing market share, financial institutions in Western Europe focus on programs of consistent cost optimization and process reorganization. In Central and Eastern Europe, banks compete in winning a significant market share, which is the major source of increasing their income. Because of the double-digit growth pace (e.g. the volume of mortgage loans for retail clients in the Czech Republic increased by nearly 43.1 percent last year) and ever-increasing competition, less attention is usually paid to increasing efficiency and minimizing operating risks and costs there.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 140 countries. With access to the deep intellectual capital of 135,000 people worldwide, Deloitte delivers services in four professional areas — audit, tax, consulting, and financial advisory services — and serves more than 80 percent of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names.

Deloitte Central Europe is a regional organisation of entities organised under the umbrella of Deloitte Central Europe Holdings Limited, the member firm of Deloitte Touche Tohmatsu in Central Europe. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited which are separate and independent legal entities. The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through nearly 3,400 people in more than 30 offices in 17 countries.

In the Czech Republic, the services are provided by Deloitte Advisory s.r.o., Deloitte Audit s.r.o. and Deloitte BPO G&I a.s. (jointly referred to as “Deloitte Czech Republic”), which are affiliates of Deloitte Central Europe Holdings Limited. Deloitte Czech Republic is one of the leading professional services organizations in the country providing services in four professional areas — audit, tax, consulting, and financial advisory services — through over 625 national and expatriate professionals.