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Industry Outlook

Impact of consolidation on the banking  sector

The continuing consolidation of the banking sector in many countries in Central Europe is inevitable. The financial sectors of many countries have low concentration rates.  Some owners of banks in the region, facing problems in their local markets, have decided to sell their CE assets in order to improve their standing in their key markets.  The benefits of scale, particularly reduced operating expenses, justify the current wave of bank mergers.  Bringing businesses together is providing opportunities for growth through investments in new banking technologies, increasing the range of services offered and improving their quality.  Reduced operating expenses mean a growth in earnings, which in turn supports further development and increases capital ratios, so improving overall business security.

Institutional investors need new strategies and business areas to succeed in the demanding environment.  Emerging markets continue to enjoy fast growth and high profitability, which, once the problems of Western banks have been solved, may drive the renewed transfer of capital and new opportunities for geographical expansion, mergers and acquisitions.  The winners will take it all. The borders of capital markets will change.  

  • So just what will the market look like following mergers and acquisitions in the Central European financial sector?
  • What new products or operating models will be offered in retail and corporate banking?  Will acquisitions deliver the benefits of synergy – or, just the opposite, will we see deteriorating efficiency among those financial institutions that act both as acquirers and sellers?  
  • What factors may cause banks to sell their assets that are based in emerging markets?  
  • Who will enter the markets: organizations that are new to banking  or the existing players? 
  • Is there any room left for new banks (start-ups)? 
  • How much can a business grow based on organic growth alone?  
  • Can any bank afford not to be universal these days? 
  • What does “universal bank” mean nowadays?

The Center is testing ways to achieve true long-term operational excellence using the effects of scale, as well as M&A, managing the costs of complexity, using investment instruments and global resources.

Funding banking operations in Central Europe

In many countries in the CE region, the loan to deposit ratio exceeds 100%.  Before 2008, banks were mostly funded by their parent companies, which allowed mortgage loans to be granted on a previously unseen scale.  At the time, CE markets had only just seen their first securitization deals, one of the incremental small steps that brought them closer to the advanced models of banking finance that existed in more mature markets.  

At that precise moment, one of the world’s largest investment banks, Lehman Brothers, collapsed, clearly demonstrating all the inherent weaknesses of these “advanced” models.  Financial engineering was found not to be a sufficient replacement for key liquidity factors. Mortgage loans were found to be more risky due to uncertain property prices, and transferring currency risk to customers was found to cause even more credit risk on the banks’ side.  
All these factors have combined to cause the loan to deposit ratio to drop.  As a result, banks now seek to fund their local operations with deposits collected from individuals and businesses.  The level of accumulated funds is low, however, significantly restricting the growth potential of banks.  

  • Are banks in Central Europe capable of exceeding 100% of the LTD ratio? 
  • What alternative funding sources are available? Why does asset securitization not work? 
  • What can mortgage bonds be used for? 
  • How much work does the market have to do, and what is the role of regulators and lawmakers?

New sources of revenue for the banking sector

The ROE of the banking sector in Central Europe has been diminishing, but in some countries it is still higher than in certain others with more developed banking systems.  Growing competition will certainly contribute to further deterioration of banks’ ROE.  Banks may seek to address this problem by increasing the revenue they generate through services based on “traditional” interest and commissions.  

  • Which additional services can be coupled with banking to result in increased market potential? 
  • How can a bank support its customers in negotiating lower prices and improved service quality?  
  • What is the future of combining telecoms and banking services – is doing so an opportunity or a threat for existing banks?

Related publications:

  • The Banking Sector in Central Europe - Performance Overview
    The analysis of the banking sectors in Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Serbia, Slovakia and Romania.
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