• Balance-sheet total of all banks in CEE increases by almost one third in 2005.
• Continual strong growth potential in the long term, analysts expect doubling of assets by 2009.
• Business with personal customers booms, Southeastern Europe and CIS are regional growth motors.
• Raiffeisen International grows stronger than other international banks in the region and displays the largest branch network.

The well-established strong growth of the banking markets in Central and Eastern Europe (CEE) has further accelerated during the last year. This is evidenced by the current issue of the annual CEE Banking Sector Report prepared by the analysts of Raiffeisen Zentralbank Österreich AG (RZB) and Raiffeisen Centrobank AG (RCB) and published on the occasion of the imminent annual meetings of the International Monetary Fund (IMF) and the World Bank in Singapore. After growing by 15 per cent in 2004 (to € 645 billion), the industry's aggregate balance-sheet total increased by 31.3 per cent to € 846 billion in 2005. This represents the strongest annual advance since the full set of data has been available.

Apart from Central Europe (CE) and Southeastern Europe (SEE), the survey covers the Commonwealth of Independent States (CIS, for the purposes of the study comprising Belarus, Russia and Ukraine), which has substantially contributed to that growth. Ukraine (plus 91 per cent), Belarus (plus 63 per cent), Romania (plus 54 per cent) and Russia, the region's largest banking market (plus 51 per cent) showed the highest growth rates in euro terms. With a still respectable 15 per cent, Hungary had the smallest growth rate.

Doubling of the banking market forecast by 2009

For the first time, the CEE Banking Sector Report includes a long-term prognosis on the development of the banking market. A key result of that model is the expectation that it should more than double by 2009 from today's € 846 billion to more than € 1,700 billion. By 2014, the analysts expect a total market volume of more than € 3,700 billion, corresponding to an average annual growth rate of approximately 18 per cent. The forecast model is based on the relation between GDP per capita and the level of financial intermediation, measured as banking assets as a percentage of GDP.

Growth rates highest in the CIS

Another result of the forecast model is the prognosis that the banking markets in the CIS will develop significantly faster than those in the new EU-member states. Until 2010, average annual growth of 25 per cent is expected for the CIS, as against 16 per cent per annum for SEE and 15 per cent for CE. Therefore, the analysts expect total assets in the CIS to exceed those in CE at some time during 2008.

Due to the continual high growth rates, the CEE region remains attractive for banks. While economic growth is unbroken and high – projected at 6.1 per cent in CEE for 2006, against 2.5 per in the eurozone – the banking industry's growth potential is still a multiple of that. During the past three years, banks have been growing on average three times as much as the whole economy, and this trend is expected to hold.

Business with personal customers is key growth motor

The most important growth motor is business with private individuals that keeps expanding strongly. Increasing levels of disposable income for broad segments of the population in the region's countries have led to growing demand for banking products, both in financing and deposits. Therefore, practically all international banks active in the region focus on that particular customer segment.

In 2005, a regular boom could be noticed in loans to private customers. In Ukraine, loans to private households grew by 175 per cent year-on-year, in Russia by 111 per cent and in Belarus by 97 per cent (in euro-terms). These rates reflect the immense need for catching-up in the countries of the former Soviet Union. Even in the much higher developed Czech banking market, this figure went up by 41 per cent. "We see the highest demand in financing apartments, cars and consumer goods. On the one hand, there is an enormous back-log and on the other hand, demand is further fuelled by rising income," said Herbert Stepic, CEO of Raiffeisen International.

The segment's potential becomes obvious when comparing outstanding private loans with GDP. While the ratio averages at 53 per cent in the eurozone, it is 14.4 per cent in CE, 15 per cent in SEE and only 5.7 per cent in the CIS. "The regions show different economic stages of development, and the significant differences in growth rates support this fact," added Stepic.

Asset Management – boom ante portas

Not only do banking customers in CEE borrow more and more, they also stock up on their deposits with growing prosperity. As is the case with loans, growth rates are highest in the CIS. In Ukraine, deposits by private individuals increased by 113 per cent, in Belarus by 64 per cent und in Russia by 52 per cent year-on-year, in euro-terms. In CE and SEE, growth rates are considerably lower, the exception being Serbia. This is, among other things, due to the fact that customers in developed markets do not invest their money in savings books alone, but increasingly chose alternative forms of saving such as investment funds. In many countries, investment fund volumes have grown significantly. For example, total funds in relation to GDP grew from 4.1 to 6.2 per cent in Poland and from 5.3 to 8.4 per cent in Slovakia. Asset management business may therefore well expect a boom in the short term.

UniCredit largest western bank in CEE

With assets in CEE amounting to € 72.4 billion, Italian UniCredit is the largest western banking group in the region. The runner-ups are Austrian Erste Bank (€ 48.7 billion) and Raiffeisen International (€ 41.7 billion). If one included local banks, Russian Sberbank would be the region's leader with total assets of € 73.8 billion. The Austrian banking industry continues to be well-represented. Four banks (Erste Bank, Raiffeisen International, Hypo-Alpe-Adria and ÖVAG) are among the 16 largest banking groups, and a fifth, Bank Austria-Creditanstalt plays a decisive role in steering this regional segment within UniCredit group.

Raiffeisen International grows strongest

International banks in CEE grow significantly stronger than the overall market, which is due to, among other things, to their activities in mergers and acquisitions. Raiffeisen International displays the strongest dynamic with an average growth rate of 37 per cent between 2001 and 2005. Because of the take-over of HypoVereinsbank last year, UniCredit achieved 33 per cent and Hungarian OTP, also very keen on acquisitions, came in at 22 per cent per annum.

"We have executed our early-mover strategy consistently ever since we started our commitment to the region. One result is the constant growth rate," commented Stepic the position of the Raiffeisen International Group, which had opened its first subsidiary bank in Hungary back in 1987 and has since then repeatedly proven its pioneer role.

Raiffeisen International with the widest distribution network

Business success with private customers largely depends on an extensive branch network. With 2,629 business outlets (as of year-end 2005 with ownership structure as of 31 August 2006), Raiffeisen International disposes of the largest distribution network of all international banks operating in the region. UniCredit follows with 2,373 branches and Erste Bank with 1,668. "More than half of our branches are located in markets with the highest growth rates. As the largest international banking group in the CIS we are excellently positioned to keep growing stronger than our competitors," said Stepic.

With subsidiary banks in 15 markets, Raiffeisen International and UniCredit boast the widest reach among international banking groups. Six banks are active in eight markets: Banca Intesa, Citigroup, ING, OTP, ÖVAG and Société Générale.