Balkan banks expected to improve creditworthiness

London (Reuters) – In a report on the banks in the emerging Southeastern Europe region, «Improving creditworthiness at Balkan banks sparks growth potential for international funding,» published today, Standard & Poor’s Ratings Services notes that during the past decade, banking system reforms in countries in the region – Bulgaria, Romania, Croatia, Serbia and Montenegro, Albania, the Former Yugoslav Republic of Macedonia (FYROM) and Bosnia-Herzegovina – lagged behind those of their Central European cousins. Reforms made impressive headway, however, during the latter part of the 1990s, and in the past couple of years in particular. Standard & Poor’s expects that banks in the Balkan region will become much more active in the international debt markets and hence their creditworthiness will become more important. «Candidate countries that are preparing for EU accession in particular must accelerate the rate of reform within their banking systems, while avoiding the risks inherent in rapid change,» said Standard & Poor’s credit analyst Magar Kouyoumdjian. «All banks in the region face numerous and weighty challenges – in particular, the need to increase lending volumes; expand product ranges to diversify revenues and improve efficiency; the need to adopt non-traditional banking operations as capital markets develop; and the need to improve the sophistication of operations and risk management,» he added. Larger banks have started to tap the international debt markets to raise funding, although these funding sources remain limited – mainly due to the comfortable liquidity available domestically. Key reasons for diversifying funding sources have been to improve asset-liability maturity profiles, as deposits tend to have short maturity, at least technically. Business growth, however, will add pressure for additional funding going forward. «With the erosion of Latin American and Far Eastern markets, investor sentiment toward emerging Europe has improved significantly, and these countries are expected to become a lot more active in the international arena in the medium term,» explained Standard & Poor’s credit analyst John Gibling. «Furthermore, given the rapidly shrinking risks in relation to bond yields, many market participants believe this region’s debt presents a good profit potential for investors, as was the case with former EU candidates in southern Europe back in the 1990s and more recently in Central Europe.»