Gerhard Randa, Austria’s undisputed number one banker, flanked by four senior colleagues, gives a rare audience to the Viennese press corps. Two of the sharpest Stefan Janny of the weekly profil, and Margarete Freisinger of the out-of-town Salzburger Nachrichten sit dead centre, cigarettes and other weapons at the ready.
Behind Randa is a tapestry depicting jousting knights on horseback in the main square of medieval Vienna. In the Bank Austria building today, in that same square, Randa is facing his least favourite opponents.
It’s exactly a year since Randa, chairman of savings bank Bank Austria shocked the little world of Austrian finance by announcing a bid for patrician but state-controlled Creditanstalt. Within a month Randa had it in his grasp. But it took another 11 months, until December 16 1997, to present the world with a structure for the merged banking group. And even then the structure can’t be fully confirmed until the Creditanstalt and Bank Austria annual general meetings on June 4 and June 5, respectively.
Unlike the link-up between Swiss Bank Corp and UBS, this merger was born of a tortuous agreement betwen Bank Austria and Austria’s coalition government. This specified that Creditanstalt should continue as an independent bank for at least five years although non-core functions (Teilfunktionen) could be merged with the mother bank.
Over the first year, the press and other critics watched and protested as Creditanstalt was whittled down the interpretation of what is a “non-core function” becoming ever broader.
In December, Randa unveiled a three-part structure: the mother company Bank Austria, Bank Austria Creditanstalt International (BA-CA International) and Creditanstalt. BA-CA International will handle international business for two brands of domestic bank, Bank Austria and Creditanstalt. It will also contain the merged investment bank, Creditanstalt InvestmentBank, which incongruously includes domestic investment banking. Inter ational treasury and fixed-income securities will be within Bank Austria. Is that clear?
As Randa announces this, Janny of profil is spoiling for a fight: “Could you please state, Herr Generaldirektor, whether Creditanstalt is being merged into Bank Austria or not?”
“This structure is designed to secure Creditanstalt’s domestic customer-base for the long term. As for international, this is a reasonable compromise. Bank Austria is giving up some of its franchise into the joint international subsidiary too.”
“You haven’t answered the question,” says Janny. “Doesn’t the new structure mean that core functions have been taken out of Creditanstalt?”
“It’s a matter of semantics,” says Randa, “whether you call treasury or international banking a core or non-core function. Credit risk management stays within Creditanstalt and within Bank Austria, they will be fully untouched, although the sum of exposures to big customers will be monitored centrally. There is a Chinese wall between client relations in Bank Austria and those in Creditanstalt.”
Randa moves on and indicates that the group’s net profit for the year will be more than Sch7 billion ($550 million), “of which Creditanstalt has contributed the biggest amount”. In fact, says Randa, “we’ve over-fulfilled the promises we made”.
That spurs Freisinger of the Salzburger Nachrichten into action. “Mr Randa,” she asks, “what exactly is it that you have over-fulfilled?”
“We have secured Creditanstalt’s existence for the long term.”
Freisinger isn’t impressed. She writes the next day: “Without the two core areas of treasury and international, which accounted for a good half of the balance sheet and earnings, CA [Creditanstalt] is but a shadow of its former self.” She predicts that the rump domestic bank could experience such a shrinkage of business that, after another four years, it might seem a mercy to fold it into Bank Austria. Nevertheless, the political agreement signed by Randa on January 12 1997 will have been met “in letter if not in spirit”.
Others closer to the action suspect the rump of Creditanstalt won’t last even that long as a competing brand in Austria. “Banks aren’t like soap powder,” says one.
However, the future of Austria’s biggest bank is more important than nostalgia about a brand name. As Freisinger adds in her report: “In a period of spectacular global bank mergers there’s no place for such sentiment. What’s happened is a logical result of the state selling its stake in Creditanstalt to Bank Austria.”
Even severe critics of Randa admire the way he has freed the Bank Austria group from what could have been a political straitjacket. On December 16 he created a structure which ensures the market will be the referee. If the Creditanstalt team can’t sell its competing brand successfully, the brand will disappear.
“The critics of the Creditanstalt sale have spent all this time clamouring for free market forces,” says Randa. “Now they’ve got them they can’t complain.” And Randa’s most experienced international manager, Creditanstalt veteran Alarich Fenyves, believes the past should not be dwelt on. “What matters is the future,” he says.
The question remains: can Randa get the best out of the Bank Austria group? His style of management is ruthlessly autocratic. At board level he is reputed to have collected around him a group of yes-men, rejecting any who might be contrarian or too powerful.
“We’ve always tried to make a team that’s accepted,” says Randa. “Our decisions [on the structure] have been unanimous.” The joint board, six members representing Bank Austria and five Creditanstalt, meets every two weeks.
“The managing board think and act as a group,” says Bank Austria spokesman Heimo Hackel. “No one stands out.”
Bankers remembering the turbulent discussions on Creditanstalt’s former board, where opinions and ideas were freely sought and given, see unanimity as a fault rather than a strength. “Randa can’t work with open-minded professionals,” says one.
But another outsider praises Randa for getting things done: “He’s hands-on, very clever, thinks long-term and has the guts to put things in place. But he’s more a technocrat than a personality. Much like a general, he has his lieutenants in place. He likes to have power and to demonstrate it. But Napoleon he ain’t.”
Says a former Creditanstalter: “He’s achieved a consolidation of the Austrian banking sector. But I see no great vision to develop further.”
Randa has been the focus of such consolidation since 1991 when he masterminded the merger of ailing Länderbank and Zentral-sparkasse (Z-Bank) to create Bank Austria. He added GiroCredit to the group in 1994 but failed to integrate it. Then, he put an end to six years of dithering by the Austrian government over whether to sell Creditanstalt to a consortium of potential buyers led by Erste Bank (Erste Bank der Österreichischen Sparkassen). Randa broke the log jam by making a mouth-watering bid for Austria’s most famous bank. The success of that bid also forced the sale last year of GiroCredit to Erste Bank.
Rivals concede that Randa is pre-eminent in Austrian banking. “Randa’s has to be the bank that represents Austria,” says Andreas Treichl, chairman of Erste Bank and son of Heinrich Treichl who headed Creditanstalt from 1970 to 1981. Treichl’s ambitions for Erste are more focused and less political: “I want to be a middle-market player, and make money.”
Randa talks about shareholder value, and by floating over 40% of Bank Austria’s shares on the market he has put the group under more pressure to perform. But his role is undeniably political. The constant carping by angry politicians, notably Conservative party leader and deputy premier Wolfgang Schüssel and extreme right-winger Jörg Haider, and by a hostile press, adds stress and discomfort to his job. Merging two politically opposed banking cultures is stressful enough.
Lingering ghosts
Randa had to dilute some of the blue-blooded elitism in Creditanstalt, at the risk of breaking the bank’s spirit. Whether he has succeeded depends on who you listen to.
On the second floor of the Creditanstalt’s grandiose Schottengasse building is a corridor known as “ghost alley”. In it, Marko Musulin and Heinrich Pecina, who used to run the investment bank until they resigned (or, according to Randa, were fired) in May and August respectively, maintain offices and go about their private business. Around them, according to the cynics, are Creditanstalters trapped by Austria’s fossilized pension laws into serving out their time at the bank. If they’re fired they get their full pension rights, but if they resign they leave their pensions behind. The job market is not buoyant enough for many to find new employers who will fund a fresh pension. “You can’t take your pension with you as you would a rucksack,” admits Fenyves, number two at the bank. “It’s a generic Austrian problem.”
That wasn’t a constraint on Karl Sevelda, star relationship officer with Austria’s top companies, who announced in December that he was leaving to join the board of arch-rival Raiffeisen Zentralbank (RZB). This was a blow to Creditanstalt. Not only was it reduced to being a domestic brand within Bank Austria, but it was now in danger of losing its position as Austria’s top corporate bank.
The hope is that Sevelda won’t carry away clients in his rucksack. A board position was obviously a tempting promotion for Sevelda, but by December it must also have been clear that Creditanstalt risked losing much of its glamour under the new structure. High-flyers, unless they see a clear way into the Bank Austria group hierarchy, are unlikely to stay long at Creditanstalt.
Fenyves, the favourite to head BA-CA International unless Randa does so himself says he wants to stay on the board of Creditanstalt: “It’s important to have the tie-in between domestic and international. We don’t want the international operations to float away.” The continued commitment of Fenyves, the one surviving member of Creditanstalt’s former board, is vital for morale. Friends say he finds the culture clash tough going. Three former chairmen of Creditanstalt tried unsuccessfully to moderate attitudes at the bank, which has a culture of elitism extraordinary in a state-owned institution. “There are branch managers who still don’t like to see the ‘wrong sort’ of people in their bank,” says a former Creditanstalt veteran.
An ex-Creditanstalt investment banker opines loftily: “Bank Austria still hasn’t got rid of the savings-bank image, and the real people from Creditanstalt don’t mix with them. It’s a question of the way you speak, the way you dress and what you do in your free time. It’s a question of networking networking with industry.” Another recalls his “shock at the quality of people at Bank Austria. It’s an awful organization”.
For the Creditanstalt rearguard the appointment of Erich Hampel as chief executive in April epitomized the political takeover. The former Citibanker was most recently chairman of post office savings bank PSK, as a caretaker to preside over its expected takeover by Bawag or RZB. Janny wrote a long biography in profil characterizing him as a malleable man who does his masters’ bidding. Says a senior Vienna banker: “He’s a bland, colourless, mousy figure, just the right chap to see Creditanstalt into its grave.”
There’s still life there
But Fenyves and his new guard insist there’s a fresh enthusiasm running through Creditanstalt’s surviving limbs. Take the merged investment bank, which grew mainly out of the former Creditanstalt Investment Bank.
During merger discussions senior Creditanstalt Investment Bank managers wrote a letter to the Creditanstalt main board saying they had lost confidence in Musulin’s leadership of the investment bank. Next in line, Pecina was too outspoken a critic of the takeover to be considered as chairman. So the new Creditanstalt InvestmentBank has lost the patrician glamour of Musulin, Pecina and legal counsel Wolfgang Lafite, who resigned late last year. A new team led by Hungarian securities star Andras Simor “is very strong”, says Fenyves.
Simor was hired from the National Bank of Hungary to start Creditanstalt Securities in Budapest in 1989, with a share of around 10% of its equity. Within three years the firm was undisputed leader in the local securities market. “This year it will contribute $10 million to Bank Austria’s bottom line,” says a source close to Creditanstalt. Simor was called to Vienna last July to do a completely different job. His task was to integrate Creditanstalt Investment Bank with the less impressive InvestmentBank Austria, losing around 300 jobs. “It’s easier coming from outside to make difficult decisions,” says Simor.
The integration of the investment banks has been virtually a reverse takeover by Creditanstalt Investment Bank. InvestmentBank Austria’s hand was weakened by reports that it had dropped Sch250 million in naked equity derivative positions, mostly on the German Dax index. (Bank Austria says it was less, but won’t give a number.) The amount was peanuts in daily trading terms but it gave the Creditanstalters a strong enough case to shift the investment bank’s focus away completely from western Europe and competition with “the big boys” in over-the-counter derivatives to concentrate on its strengths as one of the biggest players in central and eastern Europe.
Creditanstalt had early spotted the opportunities of the region and the advantage of being based in Vienna the hub of expertise and contacts for the entire region, just as Vienna was the centre of the Austro-Hungarian empire. Now all three big Austrian banking groups are pushing the same argument, but Creditanstalt was there first. Bank Austria also had useful commercial banking footholds that have been merged with Creditanstalt’s into a holding company for central European operations. The holding company will be folded into BA-CA International.
The investment bank, driven by Simor in Vienna and Tim Medland in London, “has a strong management team”, says Fenyves. “The old management style was different.” Medland has been able to push through a 1996 Creditanstalt decision to bring international equity trading, sales, research and corporate finance to London.
“This is totally in harmony with what we’re trying to do,” says Simor, “offer international expertise at the highest possible standard.” Medland, formerly with Goldman Sachs and Swiss Bank Corp, says the quality of people is “as good as [at] SBC or Goldman”.
Competitors wonder if the move to London is more than an expensive gesture. “It makes sense,” says a board member at another big Austrian bank. “But I wouldn’t say it’s an absolute must. London is getting much too expensive. The cost/earnings ratio of our London branch is much higher than here. The salary expectations of investment bankers have nothing to do with real profitability.”
Helmuth Horvath, Simor’s deputy in Vienna and a former Bank Austria board member, says: “It doesn’t make sense [for us] to invest in being global players, we’re aware of that.” The winners of mandates for major central European privatizations are always likely to be the global players, he says. “But these days there are usually two global coordinators. We want to be the other one.”
Lament of the Nibelungen
Creditanstalt Investment Bank Austria occupies spacious open-plan offices on the seventh floor at Julius Tandler Platz. There’s a buzz and urgency about the place, with animated meetings in glass-walled conference rooms. But a former employee fears all that may change when the investment bank is kicked out to occupy more modest 19th-century cells in the Nibelungengasse, the former home of Investmentbank Austria: “We were all set to stay at Julius Tandler Platz when Randa suddenly said: ‘You’re moving to Nibelungengasse and corporate finance is going to London.'” There’s a risk that the investment bankers in Vienna will end up with “less than 10%” of the merged investment bank’s business, he adds.
The loss of fixed-income securities sales and trading to the main bank and the centralized treasury is another blow to the investment bank’s status and earnings potential. But “fixed income is increasingly a capital-intensive business,” says Simor. “When you use the balance sheet of the bank,” agrees Fenyves, “it [the trading] should be in the bank.” Providing customers with fixed-income-based structured products, such as equity-linked and index-related bonds or interest-rate hedging products, could be a problem for the investment bank. “I don’t see us doing that for the time being,” says Simor.
Creditanstalt people, such as Gerhard Novy, former head of treasury, now a Bank Austria board member, were the driving force behind merging the two banks’ treasuries. The treasury will be run jointly by Peter Fischer, former head of treasury at Bank Austria, and Patrick Butler, formerly of Creditanstalt. Although the treasury will serve both Austrian brand names, Bank Austria and Creditanstalt, it’s likely to carry one name in the market: Bank Austria. “We’ll have two separate [treasury] sales teams sitting very close to each other,” says Butler. That won’t fool the big customers, who will realize that each domestic bank has the same price source for treasury and foreign-exchange products. Says Fischer: “The big customers who call direct into treasury know exactly what’s going on.”
The implication is that it won’t take medium-size and retail customers long to realize the same thing: that Bank Austria and Creditanstalt have the same price base: only the commission, the credit margin and the quality of service will distinguish them.
Can that provide enough differentiation? Perhaps on service and commission. But credit margin is a real conundrum.
The Bank Austria group is working on a centralized credit risk management system. Den norske Bank has provided the model, which “allows us to build in the soft factors that account for 50% of the credit risk of a company”, says Franz Zwickl, the board member responsible for risk management. By soft factors he means judgements on such elements as management or competitive position. Zwickl prefers the system to JP Morgan’s RiskMetrics because “you can install it and make it better year by year”. Creditanstalt has a similar system, and the two banks’ databases will be combined this year, says Zwickl. One goal is to be able to allocate equity to risk-adjusted assets. Creditanstalt’s existing system “is a bit better at measuring equity allocation in the business field”, says Zwickl, “BA’s is better for private clients.”
When it comes to credit decisions, each bank’s credit officer will have access to the same database, but he can assess management quality and project viability. “If the two-brand strategy is to work well,” says Zwickl, “we can’t make the same credit decision.”
At the group level, credit risk management will mean that aggregate exposures to industry groups and market segments must be known and monitored. So must large exposures to single companies, for reporting reasons.
Judging by the way credit risk management is going, such centralized intelligence on credit exposures, including exposures in loans, derivatives, securities and repos, will encourage centralized credit decisions too. The more that credit exposure becomes tradable through assignment or credit derivatives the more tempting it will be to manage and adjust group-wide credit exposure by trading in and out of assets. On the single-customer level, if Bank Austria and Creditanstalt have exposures close to aggregate group exposure limits, won’t they have to coordinate their credit policy?
Says Randa: “I’ll cross that bridge when I come to it. In both banks the lending policy has been very conservative and has not by far ever reached that limit.” He insists the two-brand strategy must be sacrosanct. “I would be shooting into my own knee if I did internally something which is not according to this, and isn’t covered by the banking secrecy law, and will damage the confidence of my customers.”
Co-head of treasury Fischer agrees that his department must operate according to aggregate credit limits: “You have to have a limit for large credits, and you have to combine the credit limits into a total. But we [the treasury] are not creating the credit risk.” Widespread securitization of credits might change the landscape, he admits.
Competing with Europe’s big boys
Bank Austria Creditanstalt may have the critical mass to be the leading Austrian bank but Randa recognizes that this isn’t enough to ensure growth. It is only in central and eastern Europe that an Austrian-size bank can hope to grow a customer base big enough to compete with the big west European banks. But all three big Austrian banks are following the same strategy. Last year RZB declared that it was no longer an Austrian bank but a bank for central and eastern Europe. It claims to have a bigger presence there in commercial banking than Bank Austria Creditanstalt. “Our projected earnings from the region for 1997 are Sch1.5 billion while BA-CA’s are only Sch1 billion,” says RZB’s deputy chairman Herbert Stepic. “We’re number one in commercial banking in central and eastern Europe. The only competitor we feel at all is ING.”
Fenyves protests: “It’s simply not true that RZB is number one in central and eastern Europe. We match them branch for branch in commercial banking and we have more staff. They have nothing to write home about in investment banking and leasing. We’re clearly superior. With the possible exception of ING Barings we’re second to none.” But Fenyves admits that RZB has two “jewels in the crown”: Unicbank in Hungary and Tatra Bank in Slovakia. Creditanstalt sold its interest in Central European International Bank in Hungary and started afresh. Bank Austria Creditanstalt now has 18 branches in that country and will have 35 by the end of the year, says Fenyves. Randa admits that the group has a “weakness possibly in asset management, they have a way to go, and we have some weaknesses in private customer business”.
Erste Bank, meanwhile, intends to build up its retail presence in neighbouring countries and to develop its asset-management business there. It will be able to cross-sell these products in cooperation with its three new bank shareholders Swedbank, Bacob of Belgium and Commerzbank. Treichl doesn’t limit his horizon to central and eastern Europe: “The north of Italy could be interesting, and we can move into Bavaria.” He believes Erste is one of the lowest-cost providers of retail products in Europe: “We have the lowest net interest margin in Europe except for Switzerland, around 1.5% rather than 3%.” He’s keen on the approach to commercial banking adopted by banks such as Lloyds TSB: “We could expand our trading activities but I’m not interested. I’d rather have 15% steady return on equity than 25% in volatile trading-based income.” Because of the purchase of GiroCredit, Erste is unlikely to produce a return on equity of anywhere near 15% for 1997.
Are Austrian banks big enough to compete in Euroland when it begins next year? All believe that central and eastern Europe will become more attractive for diversification and yield as euro-denominated assets prove rather homogenous. But if the Austrian banks’ expertise in the region proves valuable enough, predatory European banks may be tempted to take them over. WestLB already has 10% of Bank Austria Creditanstalt, with an option to buy the city of Vienna’s 26% stake. Commerzbank has a stake in Erste; Bayerische Landesbank a 46% stake in Bawag. “We’re an attractive takeover target, I understand that,” says Treichl of Erste. But in terms of consolidation the Austrian banking sector is “light years ahead of Germany”, he says. Consolidation probably has to happen there first before German banks start buying those in Austria.
Randa says he doesn’t see another big move in Austrian bank consolidation soon and “I don’t see myself as a takeover target as long as we have a strong shareholder structure with AVZ [city of Vienna], Wiener Städtische [an insurance company], Cariplo [now Banco Ambrosiano Veneto] and WestLB”. According to statements last year by WestLB chairman Friedel Neuber, WestLB will not exercise its option to buy the city of Vienna’s stake.
But last month there were rumours in Vienna that another foreign investor might be building a stake in Bank Austria: Swiss financier Martin Ebner. Ebner has electrified the Swiss financial sector in recent years by forcing the mergers of Credit Suisse with Winterthur insurance and of Swiss Bank Corp with UBS. Could pressure by Ebner now force the pace in Austria?
