March 1 (SeeNews) - Italian lender UniCredit Group expects to see a resurgence in investment volumes in Eastern Europe in the second half of the year as the capital expenditure allocations of clients get back on track, the bank’s regional head and vice-chair of the supervisory board of UniCredit Bulbank, Teodora Petkova, told SeeNews.
"Working capital financing will strongly evolve in line with contingency planning by businesses but also in light of the continued supply chain disruption," Petkova told SeeNews in an interview last week.
UniCredit strives to consolidate its leadership position in corporate lending through a solid pipeline of transactions which would align with its risk appetite, Petkova stressed.
European funds derived from the individual national plans from the EU's Recovery and Resilience Facility (RRF) will significantly drive lending growth. The strict reforms agenda of measures, set by European Commission together with the individual countries, is both a stimulus and a challenge for the countries in the region. In Central and Eastern Europe (CEE), only Croatia was fast enough to implement in full the reforms required to unlock the two tranches of grants in 2022. While the real positive impact of the RRF will be measured within a couple of years, it is important that up to now it has unlocked sizeable belated investments in public health, education and infrastructure, along with those in the important areas of digitalisation and green transition of economies.
Croatia is sharing lessons learnt, namely that the combination of rigid pre-defined rules with cumbersome tender procedures has led to the cancellation of a number of projects. Therefore, funds absorption in the countries of the region will be facilitated by simplifying the selection procedures and ensuring flexibility within a pre-defined risk frame.
While the RRF is sizeable when compared to the countries’ GDP, private investments in the economy transition are actually several times higher.
LENDING FOR GREEN ENERGY PROJECTS PICKS UP PACE
The bank expects lending activity in its renewables portfolio to be even more dynamic in 2023, after it exceeded the 500 million euro ($533.4 million) target for Eastern Europe last year, Petkova also said.
“We managed to significantly outperform our 2022 targets already in the second quarter of that year. In 2023, expectations for green project financing are, let's say higher, and we do believe that we will be able to do even better,” Petkova said.
She noted that in all the countries of Southeast Europe where UniCredit is present – Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia - the bank has amassed the largest loan portfolio in terms of renewable energy exposure as well as output capacity, having backed some of the region’s largest wind, solar or energy storage projects. In Bulgaria, for instance, UniCredit Bulbank holds a 26% market share of the renewables lending portfolio.
Looking at UniCredit’s corporate lending activity in Eastern Europe, the bank today holds a market share of 18% in corporate loans and above 18.5% in corporate deposits, according to Petkova.
Despite the changed macroeconomic and geopolitical scenario, banks in the region performed strongly in 2022. However, they will need to factor in a regional GDP rise of just 0.5 percentage points for 2023, a significant annual drop from 4.4% last year, she noted, adding that the real economy is expected to expand by 3.3% in 2024.
“This slowdown, coupled with the steep climb in European interest rates which began last year, will define the appetite for lending of our customers,” Petkova continued. "The volatility of the interest rate environment will likely mean that the bank’s credit portfolio would not remain purely volume-driven once clients’ interests are taken into account."
That said, overall book lending in the regional banking sector is expected to grow between some 4% and 4.5% this year, and UniCredit is likely to maintain a growth momentum in line with the market.
POSSIBLE M&A TARGETS SHOULD BE THE RIGHT FIT
Regarding further merger activity in the Eastern European banking sector, Petkova noted that even before the current geopolitical disruptions, the ratio of return of capital versus cost of capital was in decline for many banks in the region and hence a major driver for consolidation. However, the geopolitical pressures and the fragmented nature of some markets, like Romania, Serbia or Bosnia and Herzegovina, may speed up the pace of consolidation, she thinks. In Serbia, Romania and Bosnia, for instance, the top three banks have a market share of below 50% whereas the combined market share of UniCredit and the other two biggest banks in Bulgaria is approaching 60%. In Croatia, the market is even more concentrated - UniCredit and the next two biggest lenders hold a combined 65% market share.
"For us, mergers and acquisitions (M&A) is not a strategy on its own. We have proven in the last eight quarters of outstanding delivery that we are organically able to generate capital that significantly exceeds what banks may expect to generate even through successful M&A transactions," Petkova concluded.
($ = 0.9374 euro)
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