International Macroeconomic Environment: Subdued Economic Growth As External Environment Worsens

International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Advanced Economies: Diverging a combination of fiscal consolidation Developments and elevated uncertainty among busi- Muted growth The global recovery lost steam over the nesses and investors, both weighing on of the U.S. first half of 2012. GDP growth rates domestic demand. The majority of economy slowed down further in the major econ- business and consumer confidence indi- omies in the second quarter. After the cators points toward a further eco- summer, however, the outlook for the nomic weakening and a recovery no U.S. and the Chinese economy bright- earlier than the first half of 2013. The ened somewhat while the recovery in European Commission expects moder- Japan and the euro area was again put ate growth of only 0.1% in 2013. At the on hold. At the same time, the risks to same time developments within the growth remained elevated and tilted to euro area have remained quite hetero- the downside. geneous. Real GDP dropped substan- In the U.S.A., domestic demand tially in Spain and Italy whereas growth has been the main engine of economic was still positive in Germany, where it growth. Private consumption was sup- is also expected to lose momentum, ported by positive signals from the however. Inflation in the euro area has labor and housing markets. More re- remained elevated, driven by unpro- cently, leading indicators pointed also cessed food and oil prices. toward increased business confidence. Throughout 2012 the euro area suf- According to the recent forecast of the fered from increased financial fragility. European Commission, the U.S. econ- According to the IMF, funds worth omy is set to expand by 2.1% in 2012 15% of GDP were withdrawn from and by 2.3% in 2013. Monetary policy Italy and funds worth 27% of GDP has remained expansive at a policy rate from Spain between mid-2011 and mid- of 0% to 0.25%. In September the 2012. In July 2012, the Governing Board of Governors of the Federal Re- Council of the ECB cut its key interest serve System (Fed) announced its third rates by 25 basis points, bringing the round of quantitative easing (QE3). interest rate on main refinancing oper- Markets expect that the Fed will buy ations to a historical low of 0.75%. In up to USD 600 billion of mortgage- early September 2012, the ECB initi- backed securities. At the beginning of ated a new government bond purchase 2013, major tax cuts are set to expire, program termed Outright Monetary and government expenditure cuts will Transactions (OMTs) program, under take effect. Without a political agree- which the Eurosystem may make sec- ment, the U.S.A. may slip back into ondary market purchases (limited nei- recession in 2013, according to the ther by volume nor by time) of sover- Congressional Budget Office (CBO). eign bonds issued by countries that are Financial tensions in Since the end of 2011 euro area eligible and have applied for support the euro area ease growth has decelerated steadily. After under the European Financial Stability zero growth in the first quarter of 2012 Facility/European Stability Mechanism real GDP decreased in the second and (ESM). Together with the envisaged in the third quarters (quarter on quar- steps toward a single supervisory mech- ter). The downturn has been driven by anism (SSM), this measure is an impor-

10 FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

tant element in calming the markets continued to report contracting eco- and thus in contributing to a prospec- nomic activity (Croatia). It needs to be tive resolution of the government debt noted, however, that despite a decelera- crisis. After the announcement of the tion, growth remained comparatively OMTs program, risk spreads for gov- solid at around 3% and above in some ernment bonds narrowed considerably, other countries (Slovakia, Russia).2 especially for short maturities. This, in Economic dynamics in most coun- turn, has supported the functioning of tries were increasingly driven by net the monetary transmission mechanism. exports, which constituted the only For monetary policy to be effective it is component contributing positively to essential that interest rate cuts actually growth in Slovakia, the Czech Repub- feed through to retail lending conditions, lic, Hungary and Croatia. Although which are often linked to bond yields. losing some steam, export growth re- The Swiss National Bank (SNB) has mained in positive territory, while im- SNB defends remained committed to its exchange ports stagnated or even declined against exchange rate rate ceiling of CHF 1.20 per euro. The the background of anemic domestic ceiling SNB established this cap in September demand in these countries. Domestic 2011 in the wake of a new wave of capi- demand growth in these countries was tal inflows triggered by increasing un- held back by weak or even negative certainty in the euro area in spring credit growth, ongoing fiscal consoli- 2011. The necessary exchange rate in- dation, below-average capacity utiliza- terventions by the SNB inflated its for- tion, subdued labor market conditions, eign exchange reserves and, conse- declining real wages and deteriorating quently, its balance sheet risks. sentiment. Contrary to that, private consumption continued to be a notice- CESEE: Recovery in Financial able driving force of growth in Ukraine Markets Contrasts with Subdued and Russia and as of late also in Bul- Profitability in the Banking garia. In these countries consumption Sector and Deteriorating Real benefited from more dynamic real wage Economy growth as above-average (in cases sub- Growth Decelerates Further as stantial) nominal wage increases were External Positions Improve and coupled with moderating price pressure Price Pressures Increase in the first half of 2012. Capital forma- Economic growth in the CESEE re- tion was the most important compo- gion1 slowed down markedly in the first nent of growth only in Romania, where half of 2012. Average annual growth construction activity boosted invest- declined from its peak of 4.4% in the ment. third quarter of 2011 to 2.7% in the According to the current OeNB second quarter of 2012. Some coun- and BOFIT (Bank of Finland Institute tries even slipped into technical reces- for Economies in Transition) outlook sion (Czech Republic, Hungary) or for selected CESEE countries,3 average

1 The CESEE region comprises Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Russia, Romania, Slovakia and Ukraine. 2 Flash estimates for growth in the third quarter available by the cutoff date point toward a further weakening of economic dynamics. 3 See Outlook for Selected CESEE Countries: Renewed Slowdown Followed by Modest Recovery. In: Focus on Euro- pean Economic Integration Q4/12. OeNB. 38–46. The group of countries included in the OeNB-BOFIT Outlook comprises Bulgaria, the Czech Republic, Hungary, Poland, Romania, Croatia and Russia.

FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 11 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Chart 1 Current and Financial Account Balances and Their Financing Moving sum of four quarters in % of GDP of this rolling period 15

5 4.2 5.4 2.9 2.6 3.2 1.6 0 –0.7 –1.2 –0.4 –0.6 –4.0 –2.9 –2.3 –3.3 –2.6 –2.4 –4.2 –7.0 –5

–10

–15 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Q2 11 Q2 12 Slovakia Czech Republic Poland Hungary Bulgaria Romania Croatia Ukraine Russia Current and financial account balances FDI inflows (net) Portfolio investment inflows (net) Credit and other investment inflows (net)

Source: Eurostat, national central banks, OeNB.

growth in the region will amount to the hryvnia’s quasi-peg to the U.S. dol- some 2.6% in 2012 before accelerating lar, which recently appreciated against to 3.0% in 2013. Regional growth the currencies of most of Ukraine’s momentum will be fueled primarily by trading partners, may have also con- Russia, whose economy will expand at tributed to this development. an above-average rate in both 2012 and The financial account was positive 2013. This compares with growth pros- or balanced in most countries under re- pects of 0.1% and 1.4% for the euro view in the first half of 2012. Only Rus- area in 2012 and 2013 (according to the sia and Hungary reported a deficit European Commission’s autumn fore- (both countries had a current account cast). surplus, however). In Bulgaria, the Current account The international financial crisis Czech Republic, Romania and Ukraine, positions continue triggered a marked reduction in exter- net FDI inflows made up the largest to improve in many nal imbalances (combined current and positive component of the financial ac- CESEE countries capital account balances) in the CESEE count. By contrast, (net) portfolio in- region from 2009 onward. In most CE- vestment represented the financial ac- SEE countries (e.g. Slovakia, the Czech count’s largest positive component in Republic, Poland, Hungary, Romania, Slovakia, Poland and Croatia. (Net) other Croatia and Russia), this trend contin- investment – in particular loans – were ued in the first half of 2012 (chart 1). negative in all countries under review. Especially trade balances improved in In Russia, capital outflows in all three many countries. A smaller deficit in the categories were reported. Net FDI in- income account of the Czech Republic flows covered more than 100% of the and a higher surplus in Romania’s capi- current account deficits in the Czech tal account, however, played a role too. Republic, Bulgaria and Croatia, around Only Bulgaria and Ukraine saw their 85% in Poland and around 50% in external accounts deteriorating as trade Romania and Ukraine. Fiscal consolidation deficits trended upward. In both coun- With the exception of Croatia, bud- continues tries this was related to strong con- get deficits decreased in all the coun- sumption growth. In Ukraine, a weak- tries under review in 2011. In Russia ening of price competitiveness, given and Hungary, deficits even turned into

12 FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

surpluses. In Hungary one-off receipts cerned, the deficit in Croatia is set to from the de facto abolition of formerly decrease, while Ukraine will post a compulsory private pension funds (the higher budget deficit and Russia a lower pension system’s second pillar) had a budget surplus in 2012. positive impact on the budget. The Price developments in CESEE can Increasing price European Commission, however, be roughly divided into two periods: pressures since deemed this development to be unsus- disinflation in the first half of the year summer tainable and thus inadequate for termi- and some rise in price pressures since nating Hungary’s ongoing excessive summer. Inflation declined in nearly deficit procedure (EDP) at its target each country under observation in the date of 2011. The Council thereafter first and second quarters of 2012. This set 2012 as the new target year for a development was most pronounced in credible and sustainable correction of Ukraine, where an annual inflation rate Hungary’s budget deficit and concluded of 5.1% in the final quarter of 2011 in late June that Hungary had taken the turned into deflation by the second necessary measures to achieve this goal. quarter (–0.4%). Notable spikes in Bulgaria managed to reduce its budget inflation rates in the Czech Republic, deficit to 2% of GDP in 2011. Hence, Hungary and Croatia were related to the EDP against the country was abro- VAT hikes at the beginning of the year gated on June 22, 2012. The other EU (in the case of the former two and in Member States in the CESEE region March in the case of Croatia). Inflation, are still in an EDP (with the target however, generally started to pick up in dates for reducing their excessive defi- summer, with only few countries cits being 2012 for Poland and Romania reporting continuing disinflation (e.g. and 2013 for the Czech Republic and the Czech Republic and Poland). This Slovakia). development was strongly driven by The majority of CESEE EU coun- rising prices of unprocessed food items tries continued fiscal consolidation in brought about by the impact of hot, dry 2012. The deficits are set to decrease weather in many CESEE countries and most strongly in Poland and Romania also by higher world market prices. and should decline to (or stay) below Contrary to the development of head- the level of 3% of GDP in Bulgaria, line HICP and CPI inflation, house Hungary, Poland and Romania, accord- prices in the region continued to de- ing to the budget plans of early 2012. cline in the review period (within a While fulfilling the 3% of GDP crite- range from –0.1% in Hungary to rion, Hungary’s headline budget bal- –8.9% in Romania year on year in the ance, however, is set to deteriorate second quarter).4 markedly given last year’s substantial In the review period, the central one-off receipts. Budgetary targets had bank of Russia increased its policy rate to be adjusted in many CESEE EU by 25 basis points to 8.25% in Septem- countries already in the course of the ber in view of accelerating inflation. year as the pace of growth decelerated The Czech central bank (CNB) cut its Most central banks (e.g. in Slovakia, the Czech Republic, key interest rate in June and September cut policy rates Poland and Hungary). As far as the by 25 basis points each and in Novem- remaining non-EU countries in the ber by 20 basis points to 0.05%; the CESEE region under review are con- National Bank of Poland (NBP) low-

4 Comparable house price indices are not available for Poland, Croatia, Russia and Ukraine.

FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 13 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Chart 2 National Currencies and the Euro Euro per unit of national currency, change in % 30 22.2 23.9 20 16.1 12.3 9.0 10 5.5 6.8 3.5 3.3 3.5 4.1 2.6 0.5 1.5 0.1 1.3 0 –0.7 –2.3–1.7 –1.8 –0.8 –2.6 –4.9 –3.6 –10 –5.3 –6.5 –10.9 –13.4 –12.4 –20 –17.1 –16.2 –22.0 –21.1 –30 –31.0 –34.6 –40 Czech koruna Polish złoty Hungarian forint Romanian leu Croatian kuna Ukrainian hryvnia Russian ruble September 12, 2008 – February 17, 2009 February 17, 2009 – April 28, 2011 April 28, 2011 – November 18, 2011 November 21, 2011 – June 8, 2012 June 11, 2012 – November 15, 2012

Source: Thomson Reuters, OeNB.

Exchange rates ered its key interest rate by 25 basis Looking at the currencies of the appreciate moder- points to 4.5% in November and the countries under review that have not ately in many CESEE Hungarian central bank (MNB) did so yet adopted the euro and operate a float countries in August, September and October (25 or a managed float, most currencies basis points each to 6.25%). The CNB traded broadly stable against their ref- argued that the monetary policy-rele- erence currency from mid-June 2012 vant inflation rate (CPI adjusted for to mid-November 2012.5 Several cur- first-round effects of changes in indi- rencies, however, came under tempo- rect taxes) will be in the lower half of rary pressure. In Ukraine, households’ the tolerance band around its inflation depreciation expectations and spikes of target over the policy horizon (12 to 18 risk aversion in international financial months in the future). The NBP stated markets led to interventions of the cen- that incoming data confirm a consider- tral bank to support the hryvnia’s quasi- able economic slowdown, which has peg to the U.S. dollar. Together with contained wage and inflationary pres- sovereign debt repayments they were sure. The interest rate cuts by the MNB responsible for a steady decline of for- were based on the view – held by a slim eign exchange reserves before a euro- majority of MNB Monetary Council bond issue of USD 2 billion in July members – that the inflation target was made them temporarily rise. The still likely to be met despite a substan- Ukrainian foreign exchange reserves tial upward revision in the central stood at EUR 22.7 billion at end-Sep- bank’s inflation forecasts for 2012 and tember (about 17% of GDP). The 2013. The Monetary Council members Romanian leu too had to be supported backing the interest rate cut pointed at by foreign exchange interventions due significant spare capacity and weak to political turbulences, according to domestic demand as well as an ex- market participants. When the central pected fall in domestic risk premiums. bank started to restrict leu liquidity by

5 With the exception of Ukraine (U.S. dollar) and Russia (basket of currencies consisting of U.S. dollar and euro at a ratio of 55% to 45%), the reference currency of these countries is the euro.

14 FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

capping the volumes allocated at weekly premiums in Hungary is attributable repo operations, the currency stabi- partially to positive signals from the lized. The Croatian central bank (HNB) government about signing a precaution- also intervened several times to miti- ary credit line with the IMF and the gate exchange rate pressures. In its EU. In the other countries of the re- most recent intervention in September, gion, risk premiums declined between the HNB purchased foreign currency 66 basis points (Czech Republic) and from the market (EUR 58 million) af- 167 basis points (Poland). In parallel ter having sold foreign currency (total- with risk premiums, eurobond spreads ing EUR 1.5 billion) between Novem- declined throughout the region. Short- ber 2011 and mid-2012. Croatia’s for- term interbank rates remained broadly eign exchange reserves decreased by stable in most CESEE countries. Since 7.5% between April and August 2012 June 2012 they have declined strongly and amounted to EUR 11.4 billion in Hungary and the Czech Republic, (about 25% of GDP) at the end of Sep- primarily owing to two policy rate cuts tember. Finally, the Russian central totaling 50 basis points in both coun- bank widened the ruble’s fluctuation tries. corridor slightly in mid-July to provide Total outstanding (domestic and Swift credit growth greater exchange rate flexibility. cross-border) loans to the private sec- in Russia, deleverag- tor – i.e. to households and nonfinan- ing in Hungary Improvements in Risk Premiums cial corporations – increased in most amid Subdued Profitability in the CESEE countries between end-2011 Banking Sector and mid-2012. In particular, Russia saw In line with global trends, financial a marked rise of 7.1% in total outstand- markets picked up in CESEE through- ing loans on an exchange rate-adjusted out the review period (June 2012 to basis. In the Czech Republic, Ukraine mid-November 2012). The introduc- and Poland, credit growth was in the tion of the Outright Monetary Transac- range of 2% to 2.5% in the first half of tions program of the ECB as well as re- 2012, while in Slovakia and Bulgaria cent institutional steps within the euro modest increases of 1.3% and 0.4%, re- area and improvements in the regula- spectively, were recorded. In contrast, tory framework for the banking sector total outstanding loans fell markedly in increased investor confidence, which, Hungary (–4.5%) and Croatia (–2%) Pronounced in turn, had a positive impact on finan- and modestly so in Romania (–0.1%). improvements in cial market developments in almost all At 52% to 77% at mid-2012, the share eurobond and CDS market segments in CESEE. Improve- of foreign currency loans in total loans markets ments were most pronounced in euro- to households remained at a very high bond and CDS markets, but also equi- level in Ukraine, Hungary, Romania ties performed broadly well. Only in and Croatia. In Ukraine and Hungary, Ukraine stock markets incurred mod- this share slumped sharply (on an ex- erate losses. Since June 2012, 5-year change rate-adjusted basis) compared CDS premiums have been downtrend- with end-2011, while a marginal de- ing, with pronounced decreases having cline was registered in Poland. In Hun- been recorded in Hungary and Croatia gary the reduction of foreign currency (by 320 basis points each), Bulgaria (by loans, in particular those to house- 274 basis points), Romania (by 221 basis holds, contributed strongly to the de- points) and Ukraine (by 215 basis cline in total outstanding loans. These points). The strong reduction of risk dynamics were influenced by several

FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 15 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Chart 3 in foreign currency-denominated (or Banking Sector: Domestic and Cross-Border Credit to -indexed) debt of corporates. Although Private Nonbanks by Sector and Currency foreign currency debt of households in As a percentage of GDP at mid-2012 Ukraine was shrinking at a consider- 120 able rate, total outstanding loans still 100 grew in the first half of 2012 owing to a

80 strong increase in cross-border credit to the corporate sector. Cross-border 60 loans to businesses also grew markedly 40 in the Czech Republic and Poland 20 while falling in Hungary, Bulgaria and Romania. 0 Slovakia Czech Rep. Poland Hungary Bulgaria Romania Croatia Ukraine Russia The ratio between (foreign and na- Cross-border credit to the corporate sector tional currency-denominated) domes- Domestic loans to nonfinancial corporations in foreign currency Domestic loans to nonfinancial corporations in national currency tic household borrowing and domestic Domestic loans to households in foreign currency corporate borrowing (including cross- Domestic loans to households in national currency border credit) was relatively balanced Source: ECB, Eurostat, national central banks, national statistical offices, OeNB. Note: Domestic credit comprises loans to households and to nonfinancial corporations, except for Russia, in Slovakia, the Czech Republic, Hun- where it includes also loans to other financial institutions (OFIs). Domestic foreign currency loans also gary and Poland as at mid-2012 (see include exchange rate-linked loans denominated in national currency. Cross-border credit to the corporate sector comprises cross-border credit to 'other sectors' (including OFIs), excluding trade credit chart 3). By contrast, in Bulgaria, Cro- and intra-company loans. atia, Romania, and in particular in

Chart 4 Ukraine and Russia, the volume of outstanding corporate loans was markedly Banking Sector: Gap between Loans and Deposits and higher than that of outstanding house- Net External Position hold loans. Comparably strong lending As a percentage of GDP in the four quarters until mid-2012 growth in Russia in the first half of 25 2012 was driven almost equally by the 20 20 growth of loans to households and 15 that of loans to corporates. In Bulgaria,

10 2 Romania and Ukraine the positive con- tribution of growth in lending to cor- 5 7 7 6 5 5 3 10 porates was partially offset by a decline 0 2 in total loans to households. Household –4 –6 –5 –7 sector and corporate sector loan dy- –10 –10 namics showed similar trends in the –14 –15 –16 Czech Republic and Poland (i.e. an in- –15 –16 crease in outstanding loans) on the one –20 hand and in Hungary and Croatia (a Slovakia Czech Rep. Poland Hungary Bulgaria Romania Croatia Ukraine Russia Domestic credit less private sector deposits decline in outstanding loans) on the Net foreign assets (positive value) or liabilities (negative value) other hand. Total loans to households Source: ECB, Eurostat, national central banks, national statistical oﬃces, OeNB. expanded only in Slovakia, where loans to corporates declined, though. In the majority of the countries un- measures introduced by the govern- der review, total outstanding domestic Divergent trends ment to reduce outstanding household loans continued to exceed total domes- in lending to debt denominated in foreign currency. tic deposits (relative to GDP) at mid- corporates and In Croatia the fall in total outstanding 2012 (see chart 4). However, this fund- households loans was driven by a firm reduction ing gap broadly continued to narrow in

16 FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Chart 5 Banking Sector: Credit Quality Nonperforming loans (NPLs) and loan loss provisions (LLPs) in % of total credit at end of period 25

21.921.6 19.9 20

16.4 16.7 15.4 15.4 15 14.6 14.1 12.8 11.7 11.7 9.8 9.8 10 8.4 8.6 8.7 8.3 8.6 8.4 6.6 7.0 5.8 6.1 6.2 5.3 5.1 5 4.3 4.0 4.4 3.7 3.4

n.a. n.a. n.a. n.a. 0 NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs NPLs LLPs Slovakia Czech Republic Poland Hungary Bulgaria Romania Croatia Ukraine Russia Q2 11 Q2 12

Source: IMF, national central banks, OeNB. Note: Data are not comparable between countries. NPLs include substandard, doubtful and loss loans. Poland including so-called irregular loans. the first half of 2012. The gap between Croatia and Hungary net external lia- domestic loans and deposits declined in bilities – in part comprising liabilities particular in Hungary and Croatia, pri- to foreign parent banks – were still Further reductions marily owing to domestic loans shrink- substantial (relative to GDP) and con- in funding gaps ing more strongly than domestic depos- siderably higher than in the other coun- its. In Ukraine and Bulgaria, the gap tries of the region. narrowed due to a strong increase in Credit quality still remains a chal- Credit quality deposits outpacing growth in total out- lenge in CESEE but improvements be- improves in some standing loans. In Romania, an increase tween mid-2011 and mid-20126 were countries in domestic deposits coupled with fall- recorded in some countries (see chart ing total outstanding loans was respon- 5). Credit quality improved modestly sible for the gap narrowing. In Russia, in Romania, Slovakia and the Czech by contrast, the gap widened markedly Republic. The banking sectors of Rus- owing to the swift growth in domestic sia and Ukraine witnessed more pro- loans. Only Slovakia and the Czech Re- nounced reductions in the share of public continued to show a surplus of nonperforming loans in total loans domestic deposits over loans, which is (–3.2 percentage points and –1.3 per- also reflected in the positive net exter- centage points, respectively, year on nal assets registered by both countries’ year). In Russia, the decline can be par- banking sectors. The surplus further tially attributed to positive lending increased in the course of the first half growth. By contrast, the share of non- of 2012 in Slovakia, while it decreased performing loans in total loans was in the Czech Republic. In Romania, higher in Hungary (+3.7 percentage

6 In line with profitability developments in the banking sector, which tend to show a seasonal pattern, credit quality is assessed on a year-on-year basis.

FINANCIAL STABILITY REPORT 24 – DECEMBER 2012 17 International Macroeconomic Environment: Subdued Economic Growth as External Environment Worsens

Chart 6 Banking Sector: Proﬁtability Return on equity (RoE) und return on assets (RoA) in % 25 20.0 18.918.9 20 17.7 15.8 15 13.3 11.9 11.4 8.9 10 7.6 6.3 6.2 6.3 5 2.6 1.6 1.4 1.6 1.3 1.2 1.9 2.4 1.0 1.0 0.8 0.8 0.6 0.1 1.1 0.9 0.3 0 0.0 0.0 –0.1 –0.2 –1.1 –1.5 –5 RoE RoA RoE RoA RoE RoA RoE RoA RoE RoA RoE RoA RoE RoA RoE RoA RoE RoA Slovakia Czech Republic Poland Hungary Bulgaria Romania Croatia Ukraine Russia H1 11 H1 12

Source: IMF, national central banks, OeNB. Note: Data are not comparable between countries. Data are based on annual after-tax proﬁt, except for Russia’s, which are based on pretax proﬁt.

points year on year), Bulgaria (+2.9 per- and owing to very high sectoral taxes centage points year on year) and on banks. Romania is the only country Croatia (+1.2 percentage points year on that recorded losses in the banking sec- year) at mid-2012 compared with the tor. By contrast, profit growth was reg- same period of the previous year. In istered by the Ukrainian, Russian and Poland, the share of nonperforming Czech banking industries. In the first loans remained more or less unchanged half of 2012, Ukrainian banks posted (+0.2 percentage points year on year). profits for the first time since 2008. Banking sector Intra-year data show that the rise The banking sectors in CESEE re- remains well in nonperforming loans accelerated mained well capitalized in the first half capitalized slightly in Croatia and Bulgaria in the of 2012. In Poland, Russia, Romania, first half of 2012. In Hungary, by con- Hungary and the Czech Republic, capi- trast, growth in the share of nonper- tal adequacy ratios ranged between forming loans slowed during 2012. The 13.6% and 16.3% at mid-2012. The reduction in the share of nonperform- banking sector’s average capital posi- ing loans in total loans accelerated in tion was particularly strong in Ukraine Romania and Slovakia in the first half of (18%) and Croatia (20.2%). Compared 2012, while it lost momentum in Russia to end-2011, capital adequacy increased and the Czech Republic. modestly in Poland (+0.5 percentage Subdued profit- Banking sector profits continued to points), Croatia (+0.6 percentage points) ability in CESEE be subdued in the first half of 2012 in and the Czech Republic (+1.1 per- banking sectors most CESEE countries, as is evident centage points) and more strongly in from chart 6. Compared to the same Hungary (+1.8 percentage points) and period in the previous year, profits de- Slovakia (+1.9 percentage points). In clined strongly in Hungary and Slova- the case of Hungary the broadening of kia and modestly in Poland, Romania, the capital base was partially driven by Croatia and Bulgaria. In Hungary, prof- capital injections from parent banks. itability fell to zero due to government Capital adequacy decreased slightly in measures to reduce outstanding foreign Romania (–0.2 percentage points), currency debt of households, the main Bulgaria (–0.8 percentage points) and burden of which was put on the banks, Russia (–0.9 percentage points).

18 FINANCIAL STABILITY REPORT 24 – DECEMBER 2012