Czechs lag behind
There is only one way to describe the banking sector in central Europe: too small. The banks in Poland, the Czech Republic and Hungary are too small and too few to meet the growing demand for capital from corporate and retail customers and they are not big enough to survive without outside help if the three states join the European Union.
According to analysts in the west, there is only one effective way to deal with this problem: sell the banks to foreigners. "The local banks don't have the power, the skill or the knowledge to help develop a fully functioning and transparent capital market," says an analyst at one of the major foreign banks involved in the region. "This is partly because of the lack of equity capital at the banks."
Compared with the situation of five years ago, however, the banking sectors in all three countries have improved enormously. Banks in each country must now observe strict lending limits and reserve requirements (although still not enough, in the case of the Czechs), and can act as brokers and asset managers, as well as developing their corporate and retail services.
But the feeling is that there is still a long way to go. "The local banks are strong competitors for the business we conduct here," says one head of treasury at a west European bank. "But there is no indigenous dealer community in eastern Europe and although they have a huge customer base they don't know how to take calculated risks. This, and their very limited experience in forex and money markets, has a direct effect on liquidity."
The Czech Republic provides an obvious example. When the currency crisis hit in April and May, it was the domestic banks that suffered most. The big-four local banks all reported a huge drop in profits for the first six months of the year, while most of the foreign banks located in Prague made handsome profits.
For acquisitive foreign banks, this presents an ideal opportunity. "Eastern Europe is fundamentally under-serviced by its banks, especially the retail sector," says Edward Marrinan, head of fixed-income credit research at JP Morgan. "For western banks there are few, if any, ways of significantly increasing their earnings streams because their core markets have matured. So they can expand into a region which needs the services they offer; and the banks they buy or start a joint venture with benefit from both the experience and the international reach of the western bank."
How much the foreigners are allowed to influence the banking sector depends on the country. The Poles have taken a selective approach. Initially, only those western banks willing to enter into twinning arrangements with local banks were allowed to set up branches in Poland. But two local banks now have majority foreign holdings, Bank Slaski and Wielkopolski Bank Kredytowy. There are other strategic investors, such as Commerzbank, which is about to increase from 32.9% to 49% its stake in Bank Rozwoju Exportu. And JP Morgan took 12% of the shares of Bank Handlowy during the recent IPO of Poland's largest bank (Swedbank and Zurich Insurance each took a further 6%).
But the government is also prepared to cap foreign institutions' involvement. When the tender for PBK-Warsaw was announced there were two bidders: one was a consortium of five Polish financial institutions, the other the Korean group Samsung. Apparently Citibank, having also expressed an interest, was told by the government that it would not win, although Citibank denies any involvement. "The rumour was that the government hinted to them that they had no intention of selling the bank into foreign hands," says one western banker in Poland. Samsung stuck with its bid until the whole tender was cancelled. But it too complained of the government's overt support for the local bid. In the event the Polish group was unable to come up with the cash to conclude the deal, so PBK-Warsaw is now to be privatized through an IPO.
Hungary has taken a different approach. The government has effectively decided that the banks are best off in foreign hands. Of the three banks spun off from the national bank, Budapest Bank is now 60%-owned by the Eurpean Bank for Reconstruction & Development (EBRD) and GE Capital; ABN Amro owns 99% of Magyar Hitel Bank; and 25% of Kereskedelmi es Hitel Bank has just been bought by Belgium's Kredietbank. This leaves OTP (the state savings bank) and Posta Bank as the only large banks still in Hungarian hands. The former is gradually being brought to the stock exchange, but it may be too sensitive to sell to foreigners outright, as it has the major share of retail savings accounts, underdeveloped though the market is at present.
Posta Bank is simply not ready to be sold. "The problem with the management of Posta Bank is that they're more interested in acquiring power than restructuring the bank," says an equity analyst. "They own a publishing firm and have their fingers in most of the major newspaper organizations, as well as other non-banking-related businesses. It's not a structure which would appeal to strategic foreign investors." What is more worrying, the bank had a severe liquidity problem at the start of the year, opening its doors to find queues of people wanting to withdraw their deposits.
Below are the stories of three foreign banks that have made successful acquisitions in central Europe.
Poland's Irish connection
Several names routinely come to mind when a bank takeover in emerging markets is mentioned. Dutch houses ABN Amro and ING are obvious candidates, as are some of the German banks; even Citibank was rumoured to be looking into buying one, PBK-Warsaw, although it denies the story.
But Allied Irish Banks is a surprise. Although outside Ireland AIB has a decent-sized franchise in the UK and US, it is hardly a global player. But since early this year it has held 60% of Wielkopolski Bank Kredytowy (WBK), one of Poland's best regional banks.
Historically and economically, there are few ties between Ireland and Poland, but AIB, which already owns a couple of fund-management firms in Asia, has identified core central Europe as its next area of growth. "We'd got to the stage where we were happy with our development in our core markets of Ireland, the UK and the US, and we want to start to expand further," says David McCrossan, managing director of AIB European Investments. "We saw core central Europe as a region whose laws and regulations are developed enough for a somewhat conservative institution such as AIB. So I was basically given a blank sheet of paper and asked to go and search for suitable projects to invest capital in."