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The Ukrainian banking sector is probably the worst off following the collapse of the economy, which is expected to shrink by 11% this year. A massive devaluation of the hryvnia, which has lost more than half its value, has nearly bankrupted the whole sector.

Russia and Belarus are not doing much better. Russia’s banks are now in an unof-ficial slow-motion crisis as the Central Bank of Russia (CBR) has been closing banks at the rate of several a week in recent months – to the point where the funds of Russia’s Deposit Insurance Agen-cy (DIA) have almost been exhausted and it has had to ask the CBR for more cash.

The Russian list is remarkable for the total lack of state-owned banks near the top of the league. The two biggest banks in the country, which enjoy significant competitive advantages thanks to their state ownership, did very badly on an ROE basis: VTB Bank earned a mere 5.51% ROE (308th place) whereas its

It has been a tough year for banks across the bne IntelliNews region. Economic stagnation, civil unrest

and even wars and terror attacks have weighed on banks’ profits and muted growth.

bne IntelliNews has been ranking banks every year for more than half a decade, but this year we have introduced a new methodology. In the past we ranked banks in terms of asset size as the entire region boomed on the back of the transition process. But now as the region moves into a more difficult low-growth phase, we decided to switch the focus to looking at profitability as the most relevant metric in this environment.

We chose to rank banks on the basis of return on equity (ROE) as the crucial variable and subdivided the bigger banking sectors into groups by asset size to be able to compare apples with apples. However, we have also taken into account asset growth and profitability

as a way of excluding the chaff of the more obvious scams and glorified treasury operations that some banks are – especially east of the European Union (EU) member states.

The list was compiled with help from our partners Standard & Poor’s and Fitch Ratings, which provided some of the numbers, in addition to bne IntelliNews’ own research. The final ranking is not a definitive list, but it is comprehensive and covers all the 30-plus countries in our patch.

The picture across the region is very mixed and the situation is highly dependent on the local story. Taken as a whole, ROE has fallen across the entire region to 3.0-3.5% in the first half of this year compared with 6% growth in 2014, according to data from Raiffeisen Bank International (RBI). Risks remain high and the worst problems are in Eastern Europe, which is dragging down the rest of the region.

Uphill battle to raise banking profitabilityBen Aris in Moscow

Special Report: CEE/CIS Bank Survey 2015

bne November 2015 bne November 201530 I Special report Special report I 31

sister Sberbank did slightly better with 6.80% (260th place).

Things are going better inside the EU accession countries in Central Europe where the economies are less volatile and financial sector regulation is stronger.

Banks have “more or less sustainable single-digit loan growth, solid profitabil-ity on aggregate and on-going soundness of the core funding base”, RBI analysts Gunter Deuber and Elena Romanova wrote in the bank’s annual banking report. However, the analysts warned that there might be some “underwater stones” in the second half of the year related to Poland’s changing regulations on foreign currency loans.

In Central Europe RBI predicts loan growth will come in at 4-6% year on year (y/y) this year, with the outlook for Czech Republic, Slovakia and Poland in particular all looking positive, as most of the bank sectors in the region will return to profit in the second half of this year.

In Poland, lenders are facing a large bill on mortgage loans denominated in Swiss francs. Since the Swiss currency spiked in January, the political pressure has been on. The current government has put together legislation to offer borrowers a conversion scheme that would cost the banks around PLN10bn (€2.35bn). However, with the populist Law & Justice (PiS) likely to win the October 25 elec-tion, the bill could shoot up to anywhere between PLN30bn-60bn, depending on how hard any new proposals prove post-election. On top of that, PiS has suggested it will levy some form of tax on the sector that could cost lenders PLN1.7bn-5.0bn.

In Hungary, meanwhile, banks could benefit from a cut in Europe's highest bank tax in 2016, with further reduc-tions promised in the coming years. However, they remain wary of poli-cymaking after several years of pain, including a big hit on forex mortgages in late 2014. In the face of that, the central bank is preparing measures to push them to raise lending if they want to benefit from the lowered tax.

Banks are also muddling through in Southeast Europe with “their perfor-mance and developments hampered by both macro-related and structural issues,” RBI said.

New loan volumes were sinking slowly in Southeast Europe in the first half of this year in real terms, especially in Croatia and Bulgaria. The only exception is Romania, which has clearly turned the corner and is recovering on the back of solid lending activity, but most of the countries in the region have to bear the millstone of non-performing loans (NPL).

And times are tough in Central Asia. Kazakhstan is the only country with a fully developed banking sector and banks there have been hit by the deci-sion of the government to free the tenge, leading to a 25% devaluation of the national currency.

“We would expect keeping overall profit-ability in CEE in 2015 at the 2014 level to be an uphill battle,” RBI concluded.

Russia Group A

Bank ROE

Promsvyazbank 14.22

FC Otkrytie 9.17

Raiffeisen Bank 7.47

Russia Group B

Bank ROE

ING Bank 38.08

Citibank 26.88

Ural Bank for R&D 8.97

Russia Group D

Bank ROE

Financial Settlement Centre 269.84

Rapida 204.65

StarBank 178.39

Ukraine

Bank ROE

Bank Petrocommerz Ukraine 124.13

Motor Bank 52.37

Bank Veles 51.40

Belarus

Bank ROE

Belagroprombank 5.38

ASB Belarusbank 5.08

Russia Group C

Bank ROE

Deutsche Bank 40.65

Sovcombank 32.34

HSBC 32.15

Eastern Europe

Promsvyazbank won in the Russian A category of biggest banks with an ROE of 14.22%. Russia’s leading commercial lender, the bank is part of a larger group owned by the conservative Russian Orthodox brothers Dmitry and Aleksey Ananyev, who both sport enormous beards and made their first money by laying fibre optic cables and computers before building a banking empire. The bank has always focused on quality mid-sized to large industrial enterprises in the private sector and seeks out quality customers with which it works closely, rather than chasing the easy-government money.

Runners up are Financial Company Otkrytie (9.17%), a fast growing mid-sized investment bank that specialises in pension fund management among other things, and the Austrian Raiffeisen Bank, which has been in Russia since the 1990s and was a pioneer of retail and corporate services in the country.

The B group was won by Holland’s ING Bank, which is Russia’s largest custodian bank with a ROE of 38.08%.

The winners in Group D highlight the problems of dealing with Eastern Europe’s banking sector. The winner is Financial Settlement Centre with a massive ROE of 269.84%, which would have made it the most profitable bank in the country – indeed the whole region – except the CBR pulled its banking license on August 3 when it was found to “not comply with anti-money laun-dering laws of proceeds from crime and terrorism”.

The Ukrainian results are a bit meaningless this year, as the whole banking sector is in crisis and the numbers they are reporting to the National Bank of Ukraine (NBU) are regarded as having little bearing on reality.

The winner of best bank in Belarus was Belagroprombank, the state-owned titan that funds the agricultural sector, with an ROE of 5.38%. Just behind is Belarusbank (5.08%), the biggest bank in the country. An honourable mention goes to Priorbank, a Group C bank set up in cooperation with the European Bank for Reconstruction and Development (EBRD), which had an impressive return of 35.46%, the highest in its class, despite the economic problems in the country.

Deutsche Bank wins in the C group with an ROE of 40.65%, but the German bank recently decided to close all its investment bank operations and scale back to only maintain its corporate banking services after its office was dogged by money-laundering allegations. However, that didn’t stop it earning the highest ROE in our Russian rankings so far this year.

And the winners are…

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Poland Group A

Bank ROE

mBank SA 13.28

ING Bank Śląski SA 12.10

Bank Millennium SA 11.12

Turkey Group A

Bank ROE

Türkiye Cumhuriyeti Ziraat Bankası A.S.

16.66

Türkiye Halk Bankası A.S. 14.22

Türk Ekonomi Bankası A.S. 13.91

Turkey Group C

Bank ROE

Citibank A.S. 18.43

Aktif Yatırım Bankası A.S. 13.39

Poland Group B:

Bank ROE

Alior Bank SA  5.47

Bank BPH SA 1.45

Hungary

Bank ROE

OTP Mortgage Bank 16.93

K&H Bank Zrt 9.85

Kereskedelmi es Hitelbank Zrt (K&H Bank Zrt)

6.24

Slovakia

Bank ROE

Tatra banka 15.46

Slovenská sporiteľňa, a.s. 14.40

ČSOB, a.s. 9.91

Lithuania

Bank ROE

AB Šiaulių bankas 22.41

AB Citadele bankas. 11.52

AB bankas „FINASTA“. 10.33

Estonia

Bank ROE

Swedbank 49.62

Versobank 30.10

LHV Pank 20.84

Czech Republic

Bank ROE

Československá obchodní banka, a. s. 5.38

Česká spořitelna, a. s. 5.08

Latvian

Bank ROE

ABLV Bank. 35.95

Rietumu Banka 21.73

Norvik Banka. 11.53

Poland Group C/D

Bank ROE

Idea Bank SA 14.00

Bank Pocztowy SA 10.08

Pekao Bank Hipoteczny SA 2.15

Central Europe Turkey

Two out of the three top banks in Poland’s Group A – mBank and Bank Millennium – are amongst the lenders with the biggest forex loans portfolios, and therefore stand to take a big hit should a costly "solution" be forced on the banks. Germany's Commerzbank, which owns mbank, has threatened possible legal action. However, banks with forex loans stand to make lower profits whether or not legislation arrives. The regulator KNF is already pushing exposed lenders to beef up capital buffers, hitting both financial results and dividends. The uncertainty only adds to a year already set to prove mediocre for bank earnings, because of record low interest rates and fierce competition between lenders to get Poland’s consumers to spend more. ING Bank Śląski, owned by the Dutch group, looks to be in a more comfortable place. It has few specific risks weighing on its balance sheet.

Turkish state-owned lenders dominated our list this year, led by state-owned Ziraat Bankasi, Turkey’s largest lender by asset size. French BNP Paribas’ Turkish unit Turk Ekonomi Bankasi (TEB) was the only private lender in the first group.

The Turkish banking sector is highly dependent on external funds because of low saving rates in the country. Turkish lenders have not faced visible problems in foreign borrowing yet, although the US Federal Reserve’s expected rate hike could curb capital flows to emerging markets, with Turkey seen as amongst the most vulnerable to that.

Citi started doing business in Turkey in 1975 with corporate banking services and began to operate as a branch in 1981. In 2007, Citi acquired Opus Menkul Değerler A.Ş. and has started to provide security services in Turkey as Citi Menkul Değerler A.Ş.

Top performers Alior Bank and Bank BPH are centre stage in ongoing speculation on a coming consolidation wave in Polish banking. Poland’s state-controlled insurer PZU took control of Alior in May, and was reportedly close to a deal to buy BPH from GE Capital until talks broke down in October. The uncertainty over the sector impeded the pair from agreeing on a price. Meanwhile, KNF remains opposed to any major acquisitions by existing large players, especially the foreign groups that mostly dominate.

The winner in Hungary is OTP Mortgage Bank with an ROE of 16.93%. The mortgage lender is owned by the country’s largest bank by assets, OTP. Runner up is K&H Bank, a unit of Belgium's KBC. All banks in Hungary are hoping to recover from tough treatment by the Fidesz government over the past five years, which has driven many into large losses.

Tatra banka was established in 1991 as the first private bank in Slovakia. It is owned by Raiffeisen Bank International. Like the Czech market next door, Slovakia is seen as a stable market, but offering limited opportunity to boost returns swiftly.

Siauliu Bankas is the least profitable of the Baltic winners, but its ROE still stands at over 22%. The EBRD is the bank’s biggest shareholder with a stake of over 18%. Siauliu took over investment bank Finasta and Finasta brokerage services earlier in 2014 from investment group Invalda LT.

Turkey Group B

Bank ROE

Türkiye Sınai Kalkınma Bankası A.S. 18.31

Şekerbank T.A.S. 5.17

İller Bankası A.S. 5.13

State-owned lenders Turkiye Sınai Kalkinma Bankasi (TSKB) and Iller Bankasi were among the top three lenders in the second group. Sekerbank was the only private lender in the leaders of the second group.

Turkey Group D

Bank ROE

Deutsche Bank A.S. 17.50

Nurol Yatırım Bankası A.S. 12.59

JPMorgan Chase Bank N.A. 10.25

Deutsche Bank Turkey is a provider of corporate banking services, while Nurol Yatirim Bankasi is an investment bank and JP Morgan Chase Bank is a provider of financial services to corporates.

The winner in Estonia is Swedbank, with an ROE of 49.62%, a result that leaves most European banks far behind. In September, the Swedish lender acquired the retail banking businesses of Danske Bank in Lithuania and Latvia, growing its consumer base and loan portfolio to strengthen its position in the Baltic region.

Ceskoslovenska Obhodni Banka (CSOB) is the winner in the Czech Republic with an ROE of 17.27%. The third biggest bank by assets is owned by Belgium’s financial group KBC. Alongside runners up Ceska Sporitelna and Komercni Banka, it was one of the three major banks in the country before the fall of communism. All are owned by major Eurozone banking groups and operate in what is often described as the perfect banking market: stable, but a bit boring.

ABLV Bank, with an ROE of nearly 36%, is significantly more profitable than the majority of its European peers. ABLV is Latvia’s biggest locally-owned bank; Oleg Fils and Ernests Bernis – who control the lender – regularly top the charts of richest Latvians. Its expansion outside its home country has concentrated on the former Soviet Union, helping to concrete Latvia's reputation as an EU base for capital from that region.

Idea Bank and Bank Pocztowy are both looking to raise funds to power rapid expansion. The innovative Idea issued PLN200mn worth of bonds in late September, with plans to execute another PLN300mn soon. The bond issue follows the bank’s troubled IPO in April, when it only achieved an IPO price of PLN24 per share, having hoped for PLN32.

Bank Pocztowy’s shareholders - state-owned postal operator Poczta Polska and state-controlled bank PKO BP – boosted the bank’s capital by PLN60mn in September, and plan to get an IPO off as soon as market conditions allow.

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Romania

Bank ROE

Banca Comerciala Româna 23.30

Banca Transilvania 10.38

BRD – Groupe Société Générale 9.66

Kazakhstan Group A

Bank ROE

Halyk Bank 23.86

Tsesnabank 14.27

Sberbank 2.37

Kazakhstan Group C

Bank ROE

Home Credit Bank 23.37

RBS (Kazakhstan) 22.58

Altyn Bank 18.96

Armenia

Bank ROE

ARARATBANK 23.41

INECOBANK 19.59

Armbusiness 18.30

Georgia

Bank ROE

JSC TBC bank 13.01

JSC Bank of Georgia 10.60

Azerbaijan

Bank ROE

AccessBank 33.13

Kapital Bank 28.20

Xalq Bank 6.07

Kyrgyzstan

Bank ROE

Optima Bank 25.09

Rosinbank 18.39

JSC CB Tolubay Bank 17.50

Uzbekistan

Bank ROE

Ipoteka Bank 27.50

Asaka Bank 15.09

Qishloq Qurilish Bank 13.46

Mongolia

Bank ROE

Khan Bank LLC 24.81

Trade and Development Bank of Mongolia LLC

20.22

Golomt Bank of Mongolia 10.28

Tajikistan

Bank ROE

First MicroFinance Bank (The) 20.83

CJSC Accessbank Tajikistan 12.62

Orienbank 6.61

Albania

Bank ROE

Banka Kombëtare Tregtare  19.78

Raiffeisen Bank Albania 15.73

Intesa Sanpaolo Bank Albania 14.96

Kosovo

Bank ROE

TEB Bank 35.59

ProCredit Bank, Kosovë 32.67

Raiffeisen Bank Kosovo J.S.C. 28.63

Macedonia

Bank ROE

Eurostandard Banka a.d. Skopje 60.00

Ohridska Banka a.d. Ohrid 22.08

Croatia

Bank ROE

Privredna Banka Zagreb d.d. 10.59

Zagrebacka Banka d.d. 6.57

Erste & Steiermärkische Bank D.d. 2.38

Bulgaria

Bank ROE

DSK Bank 21.71

Sibank EAD 14.36

Unicredit BulBank AD 13.56

Bosnia

Bank ROE

Raiffeisen Bank d.d. BiH 19.76

UniCredit Bank d.d. Mostar 12.52

Montenegro

Bank ROE

Societe Generale banka Montenegro AD 18.08

ERSTE Bank AD Podgorica 13.94

Hipotekarna banka AD Podgorica 10.65

Kazakhstan Group B

Bank ROE

Citi Bank Kazakhstan 39.74

Delta Bank 22.37

Kaspi Bank 19.34

Serbia

Bank ROE

Banca Intesa a.d. Beograd 195.45

Unicredit Bank Srbija a.d. Beograd 16.14

Raiffeisen banka a.d. Beograd 11.33

Moldova

Bank ROE

BC „MOBIASBANCA - Groupe Societe Generale” S.A.

27.12

BC „Moldindconbank” S.A. 25.93

BC „Moldova - Agroindbank” S.a. 21.38

Southeast Europe Eurasia

Erste group’s Romanian branch Banca Comerciala Romana (BCR) returned to profit in H1 this year after massive losses in 2014. But its non-performing loan (NPL) problem is still not fully settled and the group has just abandoned plans to sell a €2.7bn bad loan bundle, disappointed by the price offered. Banca Transilvania, in second place, recently acquired Volksbank Romania. This allowed locally owned Banca Transilvania to overtake Societe Generale’s BCR to become the second largest bank in Romania. However, while the deal boosted Banca Transilvania’s market share the bank also had to resolve NPL problems at Volksbank, including with CHF debtors.

DSK Bank, a state savings institution in the communist era, is Bulgaria’s second largest bank by assets, now owned by Hungary’s OTP Bank. A February 2015 survey by Client X found it was the most trusted bank in Bulgaria. DSK was also the developer of the mobile savings gaming application DSK Gameo in 2003.

Winner Privredna Banka Zagreb is a member of Intesa Sanpaolo Group. The EBRD, a shareholder since 2002, sold its 20.9% stake to Intesa Sanpaolo in June, citing the bank’s successful development within the Italian group. Runner-up Zagrebacka Banka, part of UniCredit Group, was Croatia’s largest bank by assets at the end of June, with Privredna in second place and Erste & Steiermarkische Bank third.

Halyk Bank, also known as Halyk Savings Bank of Kazakhstan, is the country’s second largest bank in terms of assets and first in terms of equity capital and profit. Halyk was one of the few Kazakh banks not involved in reckless lending to high-risk projects and in aggressive borrowing in the global capital markets during the credit boom preceding the 2008 financial crisis, which hit the Kazakh banking sector badly. Historically, the bank has always adhered to the highest corporate governance standards which have allowed it to make the right strategic decisions. Halyk is the only Kazakh company to make Forbes magazine’s Global 2000 list of the world’s biggest, most powerful companies in 2015.

Banka Kombetare Tregtare (BKT), now part of Turkey's Calik Holding, is the biggest and oldest commercial bank in Albania.

Armenia's underdeveloped banking sector, the assets of which stand at a meagre €6bn, has had its margins affected by a weak operating environ-ment, characterised by devaluation, economic slowdown and higher rates. Overall sector ROE in the first quarter was a modest 0.7%, which may explain why, of the banks we selected, only Armbusinessbank, ROE of 18.30%, is among the country's top five largest banks. The ranking is completed by the smaller Inecobank (9th largest bank, ROE 18.30%) and Araratbank (ROE 23.41%).

Georgia's banking sector has been no stranger to controversy, or operating environment and currency devalua-tion shocks this year, but the country continues to have the most competitive banks in the Caucasus. The two winning institutions, TBC Bank and Bank of Georgia, are also the two largest lend-ers in the country, and are both listed on the London Stock Exchange. Bank of Georgia caters largely to corporate clients, while TBC Bank focuses on the retail and SME segments.

Azerbaijani banks have withstood the shock of the decline in oil prices and a 33% devaluation of the national currency thanks to their high liquidity, although the sector's high level of dollarisation may turn into a credit risk. A noteworthy exception may be International Bank, the country's largest bank, which may be privatised after reports of poor manage-ment led to an investigation that resulted in a wave of arrests of executives from different companies this May.

After restructuring over 100,000 foreign-currency denominated loans this year, Azerbaijan’s banks have managed to post a 6.5% NPL rate, which may not reflect the true quality of their loan portfolio.

AccessBank is an SME and micro-lender owned by international financial institutions; Kapital Bank is owned by one of the largest holdings in the coun-try, which can count on close ties to Baku and generous financial backing.

Banka Intesa is the largest Serbian bank with total assets of over €4bn and a 16.2% market share. Originally Serbia’s first private bank, Delta banka, it is now part of Intesa Sanpaolo. Despite cost-cutting efforts, it still has one of the country’s largest branch networks and an emphasis on customer service in a market where staff are traditionally rude and unhelpful. Runner-up UniCredit Bank Srbija is the country’s third largest bank with a focus on small and medium-sized enterprises.

Moldova’s banking sector is in turmoil as investigations into a $1bn bank fraud drag on, most recently resulting in the arrest of former PM Vlad Filat on October 15. The central bank’s decision to liquidate the three banks involved in the scandal does, however, create opportunities for other banks to expand. Mobiasbanca in particular could benefit from its status as part of international banking group Societe Generale.