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LONDON (Reuters) - A falling stock of bad loans has brightened the outlook for banks operating in emerging Europe, a report from the Vienna Initiative said on Thursday, adding that the funding pullback seen after 2008 was likely at an end.
Based on data from the Bank for International Settlements, the report said banks across Central, Eastern, and Southeastern Europe (CESEE) had trimmed exposure to the region by about 0.5 percent of gross domestic product in the second half of 2016, versus a 0.3 percent fall in the first six months of the year.
But excluding Russia and Turkey, positions declined by just 0.2 percent of GDP in the second half of last year, it said.
"Post-crisis deleveraging seems to have been largely completed, while banks' strategies in the region have become more selective," the Vienna Initiative said.
Created in 2009 after the global financial crisis to prevent large-scale withdrawals by Western banks from emerging Europe, the Vienna Initiative is credited with averting banking crises in the region after 2008.
It includes major banks as well as groups such as the European Bank for Reconstruction and Development (EBRD) and the World Bank.
Substantial increases in foreign bank funding were reported for Albania, Bosnia and Herzegovina and the Czech Republic, while the largest declines were observed in Macedonia, Moldova and Ukraine.
The data showed that credit growth in Turkey and the ex-Soviet CIS region was stabilizing at low single digits, as the pace of credit contraction in CIS countries eases.
Turkey's economy had already suffered from a drop in investment and tourism after a failed coup last July. Meanwhile Russia's economy has emerged from a two-year recession.
The ratio of non-performing loans (NPL) across the region also continued to decline, standing at 7.1 per cent as of end-June 2016 compared to 7.9 per cent a year earlier. Bad loans totaled 52.6 billion euros or around 4.3 per cent of the region's annual economic output.
Three countries in the region - Hungary, FYR Macedonia and Slovenia - had managed to cut their NPL ratio below the 10 per cent threshold since December 2015, but seven of the 18 countries remained in the double digits.
"Levels of bad loans in the region declined in the year to mid-2016, but in several countries they continue to have a negative impact on the local economy and further action is needed to deal with them," the report added.
After the crises in 2008 and the euro crisis in 2012, banks both foreign and local cut lending lines and many western European banks sold assets in eastern Europe to heal balance sheets injured by the crisis and to meet new capital rules.
The biggest western-owned banks operating in emerging Europe were Italy's UniCredit, and Erste Group Bank and Raffeisen Bank International of Austria while French bank Societe General, Belgium's KBC and others were also big players.
They all took part in a broad pact between private lenders, regulators and international institutions which agreed under the first Vienna Initiative to stay invested in the region.
The EBRD this week held its annual meeting in Cyprus at which it said the growth outlook for much of its region of operation was improving.
Editing by Andrew Heavens