Consumer finance in CEE: Calm before the storm

Roland Berger Strategy Consultants and EFMA (European financial management & marketing association) recently carried out a detailed market research on the consumer credit business in Central and Eastern Europe (CEE). The study "Consumer Finance in the CEE region – How to emerge stronger from the crisis" found a market in turmoil. Specialist lenders such as auto banks are rethinking their market presence in the region.

Between 2005 and 2008 there was 50% growth in the annual volume of consumer credit (excluding mortgages) in Romania and Russia and 15-30% growth in Central European countries such as the Czech Republic and Hungary. But now – for the time being, at least – the gold rush is over. Growth in the level of consumer credit is down to single digits, while default rates have hit double digits in many areas.

Consumer loans: more bad debt in sight
Roland Berger Strategy Consultants interviewed more than 50 board members and heads of consumer finance divisions at companies in Poland, the Czech Republic, Slovakia, Hungary, Croatia, Serbia, Bulgaria, Romania, Ukraine and Russia. They included not only universal banks, but also specialist lenders such as Cetelem, GE Money Bank and auto banks like Porsche Bank. Some 38% of those interviewed said that they expected the default rate on loans to be somewhere between 5% and 10% in 2009, and over half expected a rate of up to 5%.

Trouble ahead
"I believe that this is the calm before the storm," says Hendrik Bremer, Partner at Roland Berger's Vienna office. "The banks are allowing customers to defer repayment. Some customers are taking out new loans to pay back the old ones. They are also making greater use of their credit card limits. This simply puts off the problem to a later date." According to Fabrice Kahn, Partner in Roland Berger's Paris office, personal debt is on the rise. Next year we are likely to see more companies going bankrupt and higher unemployment rates. This means that more and more people will have difficulty paying back their debts.

Debt default rates differ widely from country to country, but Bremer believes that the average in 2010 for the countries investigated will be 15%. "The lenders managed to survive 2009, but 2010 will be the real challenge." He does not expect to see growth for consumer loans in Central and Eastern Europe above the rate of GDP until 2011 at the earliest.

According to Kahn, a process of consolidation can be observed for lenders, as specialist lenders face refinancing problems. For example, he believes that it is possible that some auto banks are seriously working on withdrawing from the market. The consumer finance specialists have to develop themselves as "retail banks light", with more own sales outlets and deposit products.