VIENNA, Jan 15 (Reuters) - Bad loans in central and eastern Europe (CEE) will remain a potential problem for banks until next year if not longer, although margins will outshine those in the western part of the continent, UniCredit unit Bank Austria said.
"Asset quality is a source of risk, at least until 2014," according to a summary of the annual sector report by emerging Europe's biggest lender.
The report, covering 17 countries, found scant signs of lenders withdrawing from the region, whose long-term economic growth potential remained intact, especially in Turkey and the CIS countries, it said.
Margins were narrowing in the region but were still double those seen in western Europe, it added, stressing cost efficiency and risk management would determine how banks perform.
"With an average return on equity expected at 10.9 percent in the years 2012-2015, the region will reveal an attractive and more sustainable double-digit profitability ratio than Western Europe," it said in the survey released on Tuesday.
UniCredit Bank Austria noted that lending and asset growth in the CEE banking sector had grown even since the global financial crisis peaked in 2008.
Banks' total assets in the region have grown by 700 billion euros between September 2008 and September 2012, it said, while acknowledging the pace of growth had decelerated in comparison to years before the crisis erupted.
"Despite weak demand the most recent evidence shows that lending growth has been positive in many CEE countries in 2012, although uneven across the region," it said.
Russia and Turkey lead the pack, not only by showing the strongest gains in loans to customers, but also via a favourable loans-to-deposits ratio, it said.
As of mid-2012, international banking groups held 43 percent of total assets in the region including Russia and Kazakhstan, down from a 46 percent share at the end of 2010.
Excluding Russia and Kazakhstan - where domestic banks have more than 70 percent market shares - nearly two-thirds of total assets in the region are held by foreign groups, it said.
Foreign players' CEE assets rose over the past four years to 13.5 percent of their groups' total assets from 12.8 percent, while international lenders improved their average CEE loans-to-deposits ratio from 107.2 to 98.2 percent, it said. (Reporting by Michael Shields; Editing by Mark Potter)