Central European financial institutions, squeezed by tight margins and a lack of corporate lending, are banking on a continued jump in mortgage loans to buoy their bottom lines.

Lenders in the region have seen double-digit growth in housing finance this year and bankers and analysts are optimistic about future prospects for the region's $18 billion mortgage market. Further fuelling the pace are benign inflation pressures and wage growth, which have allowed central banks to trim interest rates to record lows and attract mortgage seekers despite moves by cash-strapped governments to cut housing subsidies. With EU entry for 10 mainly former Communist countries set for May 2004, housing prices are expected to rise as well, creating a rush of willing customers for bank products. Such consumer optimism is backed up by hard numbers. The Regional Development Ministry said Czech mortgage loans had jumped 41 percent by the end of September to 148 billion crowns ($5.6 billion) but remained a fraction of the country's GDP. Czech mortgage leader Ceskomoravska Hypotecni, a subsidiary of KBC group unit CSOB(KBKBt.BR), has seen its outstanding loans jumping 38 percent this year to 22.7 billion crowns. Komercni Banka (BKOMsp.PR), the country's third largest lender, said its mortgage loan portfolio was 23.7 billion crowns in September, up 41 percent year-on-year, after it accelerated lending this year. The situation in neighbouring Hungary is similar. Analysts said bank OTP (OTPB.BU) has built its stellar performance on soaring housing loans which have helped offset the impact of falling interest rate income. OTP has 68 percent of the domestic housing loan market. Looking to capitalise on the buoyant sentiment, the Hungarian government recently raised $54 million from the placement of half of mortgage bank FHB (FHBK.BU) in a tender that was four times oversubscribed. FHB doubled its retail loan portfolio to 63 billion forints ($265 million) last year, beating its target by 40 percent. "We see a consensus view in the market that there is still no sign showing that households would rein in spending or the dynamics of the rise in its borrowing," Hungary's finance web portal www.portfolio.hu said. Poland, by far the biggest market among future EU member states, has lagged slightly, but analysts said the best lies ahead for emerging Europe's largest country as long as its interest rates continue to fall and wage growth accelerates. Though interest rates are higher than in the Czech Republic or Hungary because the central bank is battling to keep a lid on demand-led inflation, Polish mortgages soared 45 percent by the end of September to 27.4 billion zlotys ($7.2 billion), helping it overtake its smaller but more developed neighbours. State-owned bank PKO, the leader in the domestic retail market which is slated for a partial privatisation next year, raised mortgage lending by 29 percent to 10.6 billion zlotys in the first nine months of 2003. BPH-PBK (BPHW.WA), a unit of Bank Austria (BACA.VI), saw its mortgage loan portfolio jump by a whopping 67 percent to capture a 15.7 percent market share. By issuance, the Czech Republic led with 935 million euros ($1.15 billion), followed by Hungary with 382 million euros. Poland and Slovakia had 68 million euros each in mortgage bonds, according to 2002 data by Germany's industry association.