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Deloitte analyzes CEE banking, NPL, insurance sectors

A high level of M&A activity in the financial sector is accompanied by continuing opportunities on the market for non-performing loans (NPLs) and an insurance sector facing a boom in the CEE region, according to research by Big Four firm Deloitte.

The CEE and Baltic bank sectors are characterized by growing profitability, stable capital adequacy and improved asset quality, supported by positive macroeconomic developments, according to the Deloitte research obtained by the Budapest Business Journal.

While the NPL market saw an active year for non-performing portfolios, the near future may bring changes as transaction activity may decrease in some countries of the region, while the sale of new portfolio types may start.

In the insurance sector, an increase in the number of transactions can be expected on the basis of the large number of players and the reorganization of large international groups, all in the context of an increasingly tight regulatory environment.

Of Deloitteʼs three recently published analyses of regional financial institution markets, the Deloitte CEE Banking M&A Study shows the consolidation of the regional banking sector as the major trend aside digital transformation, driven by the sale of units that do not fit into the core strategic focus on the sales side, while exploiting economies of scale and other synergies through the acquisition side.

The rise in lending, increasing profitability and improving asset quality have gradually reduced the earlier transaction pressure that forced banks in difficult positions to sell their units. However, in the medium and long term, increasing cost efficiency can become a key factor on a sharply competitive banking market, says the study.

Banks with a market share of only 1-2% (a significant number in the CEE) are unlikely to be able to compete with leading banking groups, Deloitte notes. This may lead to an acceleration of consolidation and an increase in the number of transactions.

The most active buyer in the region was Hungaryʼs OTP Bank during the investigated period under review (six transactions), followed by the Polish state, which has carried out four indirect acquisitions since 2015. The most active sellers were Raiffeisen (four transactions) and Greek banks: Piraeus Bank, the National Bank of Greece, Alpha Bank and Eurobank together sold seven banks in the period 2015-2018. The most active markets in the region were Poland (with nine transactions), followed by Hungary, Romania and Serbia (eight each).

The research adds that banksʼ capital adequacy was stable in all 12 countries examined. The average capital adequacy ratio (21%) was significantly above the regulatory minimum. The quality of assets has improved significantly due to the derecognition of NPLs and the improving financial position of households and corporations, it adds.

The average ratio of non-performing loans in 2017 was nearing pre-crisis levels. Profitability increased slightly, but the average equity-based return (10%) was still below pre-crisis levels. Banksʼ profitability also increased in several countries by the resolution of previously qualified credit provisions.

NPL markets past their peak

According to the Deloitte CEE NPL Study, while some countries have an NPL rate below 10% nearing pre-crisis levels, others still had an over 10% rate at the end of 2018.

The company forecasts a slowdown of transaction activity in a number of CEE countries due to the considerable amount of realized NPL transactions between 2015 and 2018 decreasing the amount of non-performing portfolios.

In 2017 and the first half of 2018, NPL market activity became slower than the 2016 records, due to the decreasing number of NPLs. A decrease on the demand side is expected as well, as international investors are turning towards the currently active Greek, Spanish, and Italian markets. Still, Deloitte says that the pace of the decrease may be slower than expected.

The research also notes that asset quality indicators are improving, and that CEE NPL markets are still driven by leverage-reducing activities. Some previously untapped markets, like Ukraine, Albania, and Bosnia and Herzegovina, may experience a surge, it adds.

"The regulatory and oversight pressure experienced in the previous years, as well as the motivation of banks to concentrate resources on their core activities, led to active portfolio management, which assisted the development of well-operating NPL markets in most countries of the region," says Balázs Bíró, Deloitteʼs head of portfolio lead advisory services in Central Europe.

Active transaction period ahead in insurance

The Deloitte CEE Insurance M&A Study says that the CEE insurance sector has been characterized by stability and growth in recent times. Just as in the case of banking, it notes, the insurance sectorʼs most important trend alongside digital transformation is market consolidation, driven by sales due to strategical repositioning, growth due to acquisitions, achievable economies of scale, and the desire to reach other synergies as well.

The GWP of regional insurance companies grew by 12% in the investigated period year-on-year, with all countries posting stable growth. The high pace of growth was driven by the considerable expansion of the Polish market, Deloitte notes. Average GWP penetration stayed around 2.5% in all 12 countries, with GWP per capita increasing to EUR 360. Damage payouts were up 17% in 2017, also driven by the Polish market. The non-life branch was up 16%, while the life branch was up 6.5%.

The group of top ten life insurers possess 67.8% of the life insurance market in the CEE. A typical group is on average present in four to five countries in the region, and has EUR 879 million gross income. Similarly, the top ten group of non-life insurers also holds a 67.8% market share, with each typically present in five to six countries, and possessing an EUR 1.516 billion yearly gross.

The most active markets in the region in terms of transaction numbers were Poland (12), the Czech Republic (7), Hungary (5), Romania (5), and Slovakia (4).

"The large number of players on the regional markets, as well as the rearrangement of large international groups, make us expect an increase in the number of insurer transactions in the upcoming period, alongside tightening regulations," says Balázs Mérth, Deloitte Hungaryʼs financial services industry leader.