12 December 2022
In recent months, rising inflation and the energy crisis have caused the cost of living across CEE to increase more quickly than wages, with economists predicting weak growth in 2023.
Even before Russia’s invasion of Ukraine, the region was facing serious inflationary pressures in the wake of Covid-19. Yet CEE GDP growth rates for 2022 compare favourably with the rest of Europe, even if the outlook for investment and household spending is challenging.
Willi Cernko, CEO of Erste Group, believes the region’s resilience justifies optimism: “These are challenging times, but the labour market is in good shape. Liquidity buffers are available, and the region has taken action to mitigate dependence on Russian gas.”
European recovery and resilience funds, as well as support packages to help households deal with rising energy bills, have made the situation more manageable.
Putting roofs over the region’s heads
Real-estate prices in the region are following a similar trajectory to inflation. This is of particular concern, says Willi Cernko, but banks can help.
“One of the key issues we face in the region is social cohesion, with many people, especially young families, unable to manage their daily financial lives,” he states. “Affordable housing is, therefore, a critical priority.”
Over the past six decades, through co-operative systems, subsidised housing and bank co-financing, Austria has led the way in supplying affordable housing. Now Erste is committing to financing a total of 15,000 rental apartments across the region by 2030.
“We have a proven track record in Austria; why shouldn’t it work in other countries?” he asks. “We have set up companies in Czechia [Czech Republic] and Slovakia and we are looking at similar concepts elsewhere. We see this as part of our role as corporate citizens and we hope that other governments and community groups can join the initiative.”
A culture of mistrust
Guillaume Prache, managing director of BETTER FINANCE, an organisation that represents financial-services customers across Europe, suggests that, to contribute effectively to protecting customers from falling living standards, banks will need to overcome several challenges.
“There is a problem with a lack of investment culture, because, until very recently, many CEE countries did not have capital markets,” explains Prache. “And [lack of] financial literacy and [low] levels of trust are both issues.”
Especially because of the cognitive bias called ‘monetary illusion’ people do not realise the negative impact that inflation has over time on the purchasing power of the money they try to put aside.
Guillaume Prache, BETTER FINANCE
As a result, savers in the region tend to hold a disproportionate amount of their wealth in cash deposits, which yield very low returns, rather than investing in asset classes with the potential for higher growth. “This is a real difficulty in this time of negative real interest rates,” Prache adds. “And especially because of the cognitive bias called ‘monetary illusion’: people do not realise the negative impact that inflation has over time on the purchasing power of the money they try to put aside.”
Erste Group recognises this analysis. And, for Cernko, the bank has a crucial role in overcoming these challenges. “We need to be very close to our customers to cover their liquidity needs,” he says. “We need to help private households prepare for any economic upswing, which means asset allocation is critical in these difficult times.”
Cernko believes customers can only take such positive steps if they have a foundational understanding of financial services and products.
This is why, in 2016, Erste Bank opened the Financial Life Park at its Vienna campus, where it provides financial education to thousands of young people each year. Elsewhere in the region, the bank has pursued initiatives such as campaigning for changes to school curriculums. In Slovakia, for instance, through the FinQ programme, it has helped with learning materials for Maths, History, Geography and languages, all supporting financial literacy. A further 100 elementary and secondary schools have joined the 25 that participated in the pilot, with more than 11,000 students having participated to date. FinQ is a whole-school programme, open to all teachers who are interested in incorporating its approach and content into their subject teaching.
Connect with customers by speaking their language
Trust and transparency are vital if banks are to help customers to help themselves. According to Cernko, there are three fundamental pillars to improving financial health: prevention, products and services, and availability.
“How can we help customers prevent financial issues through better literacy? How can we provide liquidity where it is needed? And how can we provide access through our branch network and digital interfaces, like George?” he asks. “This is about bringing our founding principles as a bank – of taking care of customers – into today’s world.”
Banking should not only be just about products. Everyone should have access to interactive digital banking that offers information and the opportunity for an exchange of views.
Willi Cernko, Erste Group
Providing access to clear advice and tangible support will help. “It’s not just about products,” says Cernko. “Everyone should have access to interactive digital banking that offers information and the opportunity for an exchange of views.”
Despite the macroeconomic uncertainty and threats to the financial health of consumers and communities, Cernko is upbeat. “I've been in the business for more than four decades,” he says. “Yes, it is complex and challenging, but it has also never been more interesting than it is today. I take an optimistic view of what is ahead of us.”
Digital first
When Cernko became CEO of Erste Group in July 2022, one of the first questions he was asked was whether the CEE growth story was still alive.
“When we entered the market 30 years ago, there were two key arguments: convergence with Western Europe and the comparatively low level of banking penetration in the region. These are relevant today. CEE is still very attractive; nothing has changed.”
But, to achieve the potential that the market offers, Cernko believes Erste must improve in two key areas: digital and data. “Simply, we need better data to understand the needs of our customers and their spending behaviour,” he says. “And we need to provide a digital platform that can integrate with third-party providers. That is the banking of the future.”