Banks across Central and Eastern Europe (CEE) suffered a slump in profits over the first quarter of 2020 as the banks set aside provisions for the impact of the coronavirus crisis on loan quality, says latest Moody’s report.
Hungary’s OTP Bank, reported a small quarterly loss. High provisioning charges and interest rates cuts will compress net interest income, in the coming quarters.
Profitability pressure will be particularly acute for Czech and Polish banks due to aggressive rate cuts by their central banks. Efficiency will suffer as lower revenues meet banks’ rigid cost base
Loan quality is stable so far
The banks have not automatically classified loans benefiting from payment moratoriums as Stage 2 (riskier) loans under IFRS 9 accounting standards.
Nevertheless, these riskier loans have increased at some banks. Moody’s expect further loan quality deterioration once the moratoriums expire.
Hungarian banks will be hit hard by the government’s blanket payment moratoriums on all loans, meaning borrowers must opt out to be excluded. Hungary’s central bank MNB expects an opt-out ratio of around 30%
Capital buffers show a mixed picture
Czech banks’ risk-adjusted capital position improved in the first quarter, although capital to total assets declined. The remaining banks reported broadly stable capital ratios.
CEE regulators have granted greater flexibility in capital management by reducing regulatory minimum capital requirements
Funding and liquidity are stable
Banks across all systems have ample access to liquidity through their central banks. Hungary, Poland and Romania have launched government bond purchasing schemes to support bond prices and reduced the regulatory reserve requirements, thereby increasing banks’ liquidity.
In the Czech Republic the government has amended the law to allow for quantitative easing by the central bank, although no use has yet been made of the tool