Credit growth still not very strong, but could improve in some CEE countries

Mixed picture in credit dynamics across region, retail loan growth above corporate loan growth in many cases

‘How much can credit growth help the economy this year?'

Croatia: Credit growth in 2016 showed some signs of recovery, but overall remained in low gear and volumes remained affected by the banking sector NPL sales actions. In 2017, we anticipate modest acceleration of credit activity, though dynamics are envisaged to remain moderate (below the nominal GDP growth rate), driven to some extent more by the corporate side. Hence, the credit channel is seen being a bit more supportive of GDP formation than that seen in 2017, albeit remaining in a healthy zone.

Czech Republic: The Czech economy's development is favorable and its forecast indicates another improvement, which means low credit risk and NPLs. We expect high demand for corporate loans, which will also be supported by better economic conditions in the Eurozone. In our view, the growth rate of corporate loans will arrive at 6%, which will support fixed investment. With respect to households, we expect a slowdown in loans (around 7% y/y in this year), due to tightened regulation in the mortgage segment and the overall market saturation. However, the growth rate will remain relatively high.

Hungary: Lending activity will be worth watching this year. Even though new lending volumes to households have been gradually strengthening since 2015, the stock of household loans has substantially decreased, to 16.2% of GDP by end-2016. Since net real wage growth is very likely to continue to soar in 2017 and consumer confidence has been steadily improving, the new lending volumes should continue to firm, the decrease of the household loan stock should finally stop, and increase once again in 2017. Corporate (especially SME) lending has been aided by the central bank's Funding for Growth Scheme since 2013. The program will be terminated at end-1Q17, and its place will be taken over by the Market-Based Lending Scheme. The total corporate loan stock was 16.8% of GDP at end-2016. It remains to be seen how effective the new program will be in spurring corporate lending.

Poland: Over last year, credit growth has slowed compared to 2015. While the economic situation of households has improved, driven not only by the increase in social benefits (500+ program), but also due to improving labor market conditions, weak investment activity has strongly limited the demand for loans among firms. On the supply side, a new levy, legislative risks (FX conversion proposals) as well as uncertainty about economic development could raise the costs of credit and limit the bank's lending activity. This year, further tightening of the labor market should be positive for household demand for loans. A more restrictive policy considering mortgages, however, is likely to constrain the amount of lending. The improving economic outlook, in particular the expected increase in investment activity, should support the growth of corporate loans.

Romania: New loans are currently concentrated in the LCY component and particularly in the retail market. Labor market improvements and the decrease in interest rates to record lows boosted both consumer and mortgage lending. Mortgage loans were affected for several months by new legislation which strengthened debtors' rights, but recently they have started to grow again. New corporate loans in RON gained some speed beginning with the summer of 2016, but their progress is still hampered by the limited increase in public investments and alternative financing resources available for large companies like those in energy. As a result, lending activity could make a smaller contribution to this year's economic growth compared to the loose fiscal and wage policies followed by the government.

Serbia: Loan developments in 2016 show that lending activity in the retail sector accelerated to 10% y/y, from 5% y/y in 2015, while growth of loans to the corporate sector remained relatively flat, around 2% y/y. Looking into 2017, we expect additional gradual acceleration of lending activity, supported by the expected strengthening of domestic demand in both segments, private consumption and investments. In addition, the NPL resolution strategy implemented by banks, the central bank and MoF is having some effect, with the NPL ratio falling from 21.5% at year-end 2015, to 19.6% in 3Q16, thus making additional room for new loans. That said, we expect that loans to the household sector will stay in a double-digit region, moving towards 12% y/y, while lending to the corporate sector could pick-up towards 4-5% y/y this year.

Slovakia: Slovak retail loans grew by as much as 14% in 2016, following the double-digit growth rate of the previous two years. The central bank sees the growth dynamics as too excessive and imposes limits on lending (High-LTV, debt-to-income limits), which is the reason why we expect the loan growth dynamics to slow down to around 10% in 2017. Corporate loans finally recovered in the past year or two, growing by 5% in 2016. We expect the more moderate rate of corporate loans to continue, with the growth at around 4% in 2017. Total loan growth is expected at 7.5% y/y, an increase of 2.6 percentage points of GDP.

Slovenia: As far as the credit channel is concerned, the corporate sector is still showing signs of deleveraging, and while the trend could moderate throughout 2017, we do not see corporate credit playing a supportive role in GDP formation in this year. Household credit, on the other hand, remains in the phase of modest expansion, supported by improving labor market conditions, sentiment and banks' risk appetite. We see a similar pattern evolving in 2017, supporting the GDP growth trajectory.

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