Cold winter: Central and Eastern Europe's largest banks and insurers see their business shrink.

Had the Chinese known that in the autumn of 2008 the foundations of the global economy would be shaken, it is unlikely that they would have organised the most expensive Olympics to date, leaving them now wondering how to return at least some of it. And if two or three years ago bankers in Central and Eastern Europe (CEE) suspected how difficult their business would become after the Lehman Brothers crash, maybe they would have been more cautious in handing out loans left and right, using the money mostly borrowed on Western markets.

Instead, despite the early signs of the credit crunch in 2007 and the US market's subprime collapse, the CEE region was still doing well and lenders recorded their best year ever. What happened in September 2008 changed the financial world order and that inevitably left a mark on the booming banking sector in the region.

Shrinking replaces expansion

Most lenders in the region, Bulgaria included, are owned by Western financial groups, whose problems left a mark on CEE subsidiaries. The cash squeeze on global capital markets and the sudden loss of access to re-financing put a clamp on the business of CEE banks, who mainly banked on growth and market expansion by lending on money they borrowed abroad. In their search for extra liquidity to keep their operations, financial institutions in the region have turned to boosting their deposit base and in a number of countries that led to deposit wars with rising interest rates, which in turn had an effect on interest rates charged on loans. Where lending did not freeze altogether, loan conditions became stricter and costs skyrocketed.

Another problem for Central and Eastern European banks was the rising share of bad loans in their portfolios. More expensive loans, reduced access to re-financing and rising unemployment in the region have put pressure on banks' customers, an increasing share of whom are now making their monthly payments with delays, or have stopped servicing their loans altogether. According to the forecast of the International Monetary Fund from early 2009, if data from previous crises is any indicator, the share of bad loans in the region could reach as high as 25 per cent of the total loan portfolio.

"Next to securing government payments, the recapitalisation of banks is the most pressing issue in the region," said Elisabeth Denison, senior economist at Deloitte Germany. "There are worries about the stability of the banking system should the recession prove to be longer and more severe than anticipated, due to the likely effect this would have on corporate default rates."

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Problems in the real economy are expected to lead to a worsening of loan portfolios, the president of the Polish Bank Association Krzysztof Pietraszkiewicz said.

Not easy to be big

Deloitte's data on the top 50 lenders in CEE is also telling. Before the financial crisis, their assets grew by an annual 30 per cent, but in 2008, the growth rate slowed to 4.2 per cent. The trend for their business to shrink is seen in individual figures--if in 2007, all top 50 banks recorded an increase in their assets, a year later eight of them reported a decline. Furthermore, it hardly looks like the difficult months for the region are over, as seems to be the case in the rest of Europe. The proof is the available data for the first quarter of 2009, which shows that the number of lenders that reported declining assets on an annual basis was 21.

The main names in the Top 50 remain the same, the only changes being to their positions. Last year, Hungary's OTP Bank, which owns DSK Bank in Bulgaria, returned to the top spot, but Polish banks remain the most dominant in the ranking, with 13 entrants.

It is no different with insurers. In 2007, only Bulgaria's DZI in the Top 50 reported a decline in premium revenue, but a year later, nine companies are losing ground. First quarter data showed that 21 insurers saw a drop in their premium revenue.

Poland's PZU kept its top spot in the insurers' Top 50 after posting a 50 per cent increase in premium revenue. Polish insurers dominate the ranking with 16 entrants, including five among the top 10. Nine Czech insurers and seven Hungarian firms join the rankings and only Slovenia's Zavarovalnica Triglav, which showed an interest in stepping on the Bulgarian market in 2008, breaks into the top 10 from outside that group.