Banks in Eastern Europe go from punching bags to growth leaders

Bloomberg

Consumer spending is booming. Interest rates are bottoming out. Eastern Europe’s banking sector is on an upswing.
After surviving the toxic mix of near-zero borrowing costs, harsh regulatory curbs and damage from foreign-currency mortgages, lenders are benefiting from economic expansion accelerating to the fastest in years across much of the European Union’s east. Polish banks’ combined net income rose 8 percent in the first nine months of this year excluding the sale of their Visa Europe stake last year. Hungary’s OTP boosted profit by a fifth in that period.
Even politicians have mostly stopped using lenders as their punching bags. Take the top players in the region’s biggest market. Poland’s Bank Pekao SA and PKO Bank Polski SA both signalled higher windfalls to shareholders. Units of Erste Group Bank AG and Societe Generale SA got boosts from early monetary tightening in the Czech Republic, while Romanian peers are benefiting from the economy growing at a near double-digit pace. Even Hungary, which has experimented with Europe’s highest banking tax, has declared a truce with the industry.
“There are many reasons for being optimistic,” ING Bank Slaski’s Chief Executive Officer Brunon Bartkiewicz told reporters in Warsaw after announcing a jump in third-quarter earnings. “We’ve started to see a rebound of investments. Regulations seem to be softer than we thought. The
economy is strong and sound.”
The increased lure of the financial industry is attracting stock investors and pushing up valuations, with stocks trading near multi-year highs across the region. The average price to book value ratio of Polish lenders surged to a two-year high of
1.44 this month from 1 early last year. This compares with ratios hovering below 1 for western
European peers.
It’s the “perfect environment for lenders,” said Cezary Stypulkowski, the CEO of MBank SA, Poland’s fourth largest. The improved fundamentals are also emboldening executives to embark on acquisitions. OTP Bank Nyrt., Hungary’s biggest, is seeking to extend a string of purchases, riding a wave of consolidation it hasn’t witnessed in decades. Raiffeisen Bank International AG has also revived attempts to sell a majority stake in its Polish unit after it was approached by one or more potential buyers.
Banks are benefiting as the region’s economic growth is surging at the fastest rate in the European Union. Romania delivered the biggest surprise, with an 8.8 percent advance in the third quarter, though the Polish and Czech economies also delivered healthy growth rates around 5 percent. That compares with an average 2.5 percent in the euro area.
“Solid consumption, wage growth and cautious monetary tightening in countries such as the Czech Republic, Romania and Poland are among key trends that shall be very supportive,” said Gunter Deuber, head of economics, fixed income and research at Raiffeisen.
In a further boon, many politicians in the region have stopped treating banks as the source of cash for election promises. Hungary has cut its banking tax and completed its costly cleanup of foreign-currency mortgages.