Digital Banking Innovation is Shaping CEE Growth

2018 will be the ninth year in a row that the world’s economy has grown at 3.5% or more. This has not happened since the 1960s. At almost nine years now, the current US expansion is already the second longest in history (after the post-1991 expansion). At the same time, economic growth in the Eurozone is strong and broadly based across all countries.

Central and eastern European economies are experiencing the strongest pace of growth since the financial crisis of 2009, and economic expansion has not been so broadly based since the eighties. GDP growth in the CEE averaged 3.7% in 2017, or 4.6% if you exclude Turkey and Russia.

UniCredit expects economic expansion in CEE to be sustained, with the growth of 2.8% in 2018 followed by some cyclical slowdown. Growth will average 4% in several countries: Hungary, Bulgaria, Romania, Slovenia, Turkey and Slovakia, driven by domestic demand (consumption and investment).

The CEE banking sector is in a more stable and sustainable position compared to past years, in terms of the rate of new loans, but also of funding and credit quality.

Lending in CEE will be sustained, in particular in CESEE (Central and Eastern Europe excluding Russia and Turkey) that will continue to have a positive growth trend close to 5% for three years in a row (2017-2019) following some moderation in 2012-2016.

In 2018, lending in CESEE will be in line with deposit growth for the first time in almost a decade, providing some optimism for shifting the region’s economic focus from savings to investment. Data on deposits support this, showing a peak in growth in 2017, though it is now expected to decelerate. Among countries, the highest lending growth in 2017 was experienced in Turkey (20.7%), Slovakia (9.9%), Bosnia-Herzegovina (6.5%) and the Czech Republic (5.7%). In line with economic trends, we expect lending growth to moderate for these countries while accelerating in countries that were lagging behind in 2017, like Croatia and Serbia.

Since 2011, the loans/deposits ratio has fallen rapidly to below 100% in the CEE banking system (excluding only Turkey and Slovakia), which means self-funding for the majority of CEE banks. Moreover, there is a high share of short-term deposits — both from corporations and individuals who are currently not investing in long-term instruments — remaining on hold, ready for opportunities.

In terms of credit quality, the non-performing loans (NPL) ratio is down due to the economic expansion in recent years, sales of NPLs and better collection, with clear benefits for the profitability of CEE banks. ALL CEE countries except Russia will reach NPL Levels below 9%, with Hungary, the Czech Republic, Slovakia and Turkey even below 5%.

Digitalisation and the fintech landscape in CEE countries

CEE countries are well equipped for the digital world.

Digital infrastructure – the Internet and mobile penetration – in CEE countries is at the same Level as in more advanced countries. Mobile penetration in most CEE countries is over 100 (1 mobile subscription per person) while Internet penetration surpasses 60%.

Demographic trends in the region are also in favour of accelerating digitalisation in future, with a significantly greater economic role for the “digitally native” younger generations — the so-called Millennials and Generation Z  — as almost 50% of the population are under 35 years old, compared to 40% in western Europe.

Personal digital banking is developing fast in CEE, with countries like the Czech Republic, Turkey and Serbia doubling the number of individuals using Internet banking since 2010.

Fintech in CEE has been booming in recent years

This UniCredit study is the first one of its kind to provide a broad picture specifically of fintech companies in CEE, and shows a boom in the sector. The study highlights the years 2012-2016 as particularly strong in terms of new companies being set up, incomparable with the past.

According to the database Tracxn, CEE is currently home to more than 600 fintech companies. More than 50% of these companies are working in transaction & payments or in financing, including peer-to-peer lending or crowdfunding, while 12% are companies involved in investment & asset management (trading platforms, robo-advice, analysis of personal finances, etc.). The rest cover a wide segment related to a variety of activities, including cryptocurrency, expense tracking, insurance (so-called insurtech), risk management and fraud prevention.

In terms of countries, Russia has Lion’s share of fintechs in CEE, followed by Turkey, Bulgaria, the Czech Republic and Romania.


Key statistics on digitalisation in CEE:

Most CEE countries have mobile penetration higher than 100 (1 mobile subscription per person). The gap with Western Europe was absorbed 10 years ago;

Internet penetration is rapidly surpassing 60%;

The demographics favour digitalisation in CEE: younger generations (digital natives) are playing an increasingly significant role in society and the economy: almost 50% of the population is under 35, against 40% in western countries;

Fintech boom in CEE in recent years: according to Tracxn, there are more than 600 fintech companies in the region. More than two-thirds of them were established between 2012 and 2016;

Two-thirds of CEE fintechs are active in the following sectors: 1) transactions & payments, 2) financing, and 3) investment.

 “The macroeconomic and banking fundamentals in CEE countries look very strong today, benefitting from a benign global environment. With a good penetration of mobile and online users, favourable demographic trends and fast increasing digitalisation, the region is ripe for making the most of digital banking that is becoming more and more embedded in the traditional macro and banking analysis” says Matteo Ferrazzi, Coordinator of CEE Strategy and Corporate Foresight team at UniCredit.


UniCredit in CEE

The Digital Path

CEE is the perfect testing ground for new digital and IT solutions thanks to the region’s innovative attitude.

UniCredit’s Digital Journey aims to enhance the customer experience through a multichannel and multi-country client approach making use of all points of digital interaction. The digitalisation of processes also increases the quality of advisory services and helps anticipate our clients’ medium-term evolution and needs, including their use of multiple channels. Our investment in digital aims to improve the customer experience as we continue to optimise our processes.

The underlying purpose of this digital path is to understand client needs in order to best serve them and continuously generate value. UniCredit has implemented common platforms offering cross-country solutions applicable to approximately 45,000 corporate clients.

Relevant transformational programmes have been launched, in particular, related to innovation and digitalisation, resulting in strong growth of the CEE digital customer base.

Our Digital Journey has only just started. It will continue to develop and cover more initiatives in more countries reaching an increasing number of clients. A further strengthening of our analytical capabilities will support relationship managers in their day-to-day activities with the aim of increasing market penetration and cross-sell.

“UniCredit is ranked number 1 in CEE overall, with a top 5 ranking in most CEE countries,” says Carlo Vivaldi, Head of the UniCredit CEE Division. “We aim to further consolidate our solid leadership position in the region with targeted and resilient organic revenue and customer base growth. This will mainly be driven by digitalisation and innovation which, together with more effective credit risk management and better cost discipline, can lead our profitability”.

Andrea Diamanti, Head of CEE Corporate & Investment Banking and Private Banking at UniCredit added: “CEE countries represent an ideal environment to push digital banking forward. Digitalisation is of course not a new topic, but we are certain that there is a significant CEE angle here and its full potential needs to be explored, particularly in the banking sector. Our unique CEE network is a clear opportunity to complement the current financial and market environment in CEE countries with a fully developed digital banking offering”.