Central and eastern Europe was only just beginning to recover from its 2008 crash earlier this year. Now the eurozone crisis threatens to be even more damaging to the region.
Foreign-owned banks – mostly from the eurozone – control about 80% of banking assets in central and southeastern Europe (excluding Turkey). The average loan-to-deposit ratio, although slightly lower than in 2008, is still dangerously high in these countries, as well as in parts of the former Soviet Union.
Emerging Europe’s public debt ratios in most cases are well above 2008 levels, leaving finance ministries even less room for manoeuvre. Poland and Serbia, for example, almost reached self-imposed public debt caps this autumn. Such states are more dependent than ever on the decisions of bankers such as Gianni Papa, head of central and eastern Europe at UniCredit.
"Central and eastern Europe will remain UniCredit’s biggest growth engine," Papa tells Euromoney. He forecasts medium-term average GDP growth two percentage points higher than Western Europe.
Andreas Treichl, chief executive of Erste Bank, has stated Erste’s continued focus on retail and corporate banking in what he calls "the eastern part of the European Union". Announcing a €1.5 billion third-quarter loss, Treichl said: "The most recent events have just strengthened this conviction [in emerging Europe]."
Yet none would deny that the short-term outlook for the region has been adversely affected by the eurozone crisis. Indeed, deteriorating regional financial forecasts – and a refocus away from units expected to be less profitable – spurred UniCredit, the region’s biggest international lender, to a goodwill write-down in the third quarter of €8.7 billion, causing a €10.6 billion loss.
UniCredit’s write-offs in October included the entire goodwill from acquisitions in Kazakhstan and Ukraine. UniCredit spent almost $4 billion on acquisitions in these countries in 2007, just before both were derailed by local banks’ reliance on international wholesale funding. Sector bad-debt levels in Kazakhstan and Ukraine are at 30% and 40%, respectively, while loan-to-deposit ratios are 130% and 167%.
"In all CEE countries we’re above the capital ratios required by the central banks," says Papa. "We don’t need to recapitalize them. UniCredit’s subsidiaries are among the best-capitalized banks in CEE." But Papa is now switching to a more selective growth model, driven more by local funding and expected profitability of country units.
Others are doing the same. Erste Bank had to write off €1.6 billion in the third quarter – mainly goodwill from acquisitions in Hungary and Romania. In 2005 Erste bought a majority stake in BCR, Romania’s biggest bank, for €3.75 billion.
Fellow Austrian regional lender Raiffeisen Bank International (RBI) was quick to announce that it expected to remain profitable this year. It has no outstanding goodwill in Romania and only €3.5 million in Hungary. But Raiffeisen too needs to raise about €2.5 billion to reach new capital requirements from the European Banking Association.
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With all the cross-border financing a regional bank like ours has, it would be almost impossible to pull out of a country
Herbert Stepic, RBI |
"We saw good profit growth in the first half of 2011. According to the old rules we were well capitalized – 8.5% in tier 1 capital. At the moment we would be unlikely to seek extra share capital as the stock prices are down," Herbert Stepic, RBI’s chief executive, tells Euromoney. "Until we see loan growth, we are unlikely to need an increase in share capital."
Stepic also reiterates that there will be no early repayment of the participation capital given by the Austrian government after the financial turmoil of 2008.
After the 2008 financial turmoil, Austria’s government injected participation capital of €1.2 billion in Erste and €1.75 billion in the Raiffeisen group.
RBI has indicated that it would look to cut assets in some markets to improve the group’s capital ratio.
According to Stepic, CEE economies will continue to drive growth in Europe. "What makes me confident for our next generation is that the [post-communist] transformation process continues in good and in bad times," he says.
Stepic nevertheless stresses the need to differentiate prospects within the region: Ukraine is more dependent on Chinese commodity imports, for example; whereas he seehes Romania as more of a domestic-demand growth story. He also gives Albania and Kosovo as examples of countries whose isolation has shielded them from the turmoil in the region.
In general, lenders from the eurozone – which seemed healthier in 2008 than US and UK institutions – will now have much weaker capacity to support their central and eastern European operations. This will be especially true if rescues by national governments in western Europe come with demands for greater support to their own struggling economies.
Already this November, as Austria’s own government sought to maintain its triple-A rating, the central bank in Vienna issued instructions for banks to limit new loans in some subsidiaries to 110% of local refinancing.
Regional authorities, together with the World Bank and the European Bank for Reconstruction and Development, have started work on a new plan to prevent a mass exit from individual CEE countries by regional lenders. Dubbed Vienna II, this could partly replicate a post-Lehman initiative in which regional operations were included in the Austrian government’s bank bailouts, in return for host countries’ commitments to state deposit insurance schemes.
Yet banks can no longer sustain blanket expansion. In the absence of great mineral wealth, government policies favourable to foreign banks will influence where those banks focus. This is especially so given that some regional governments and opposition leaders seem less than scrupulous about exploiting xenophobic fears after the crisis. Foreign capitalists are an easy target.
As part of efforts to meet the EBA’s new capital requirements, Frankfurt-based Commerzbank said in November that it was temporarily stopping lending unconnected to Germany or Poland, where it owns the third-biggest bank by assets. The defeat of Poland’s populist opposition figure, Jaroslaw Kaczynski, in October was good news for foreign banks in the country.
