Support for CEE bank subsidiaries to become more selective

Western European parent banks will adopt a more selective approach to investments in Central and Eastern Europe (CEE) banking systems in response to the declining profitability trends of their CEE subsidiaries, Moody's Investors Service said in a new Special Comment. This report analyses Moody's-rated subsidiaries in the Czech Republic, Hungary, Poland, Romania and Slovakia.
The rating agency said that a more selective approach to parental funding could lead to further scaling-down in the amount of resources and funding provided to subsidiaries and has had implications for the parental support assumptions that Moody's factors into the individual ratings of these subsidiaries.
However, Moody's maintains that parents are unlikely to withdraw their investments, as the CEE market still offers Western banking groups returns (albeit limited) at a time when profitability in their domestic markets remains constrained, in the aftermath of the financial crisis.
Pre-crisis profitability in the CEE region grew rapidly in relative terms and peaked in 2008 in the Czech Republic, Hungary, Poland, Romania and Slovakia; however, Moody's says that this trend was sharply curtailed in 2009 when subsidiary profitability plummeted close to the levels of their parents. In 2010, on average, there was virtually no difference in the profitability of parent groups and subsidiary banks on a net-profit basis.
For 2011-12, several CEE countries have managed to recover from the earlier downturn and profitability differentials have widened again, with Czech, Polish and to some extent Slovak subsidiaries leading the peer group.
Moody's said that despite profitability differentials, CEE subsidiaries continue to represent a relatively small portion of their parents' core revenues, on average at around 7%, and are unlikely to offset wider trends for parent groups or influence their capital needs. The above considerations are expected to shape and influence the long-term strategic commitment of parents to these markets and, thus, inform our parental support assumptions that we factor into our ratings for CEE subsidiaries.