A SUPPLEMENT TO EUROMONEY/APRIL 1999: EASTERN EUROPE
“It is the chance of the century,” says Herbert Stepic, vice-chairman of Austria’s Raiffeisen Zentralbank (RZB). “We have emerging markets at our front garden. Bratislava is only 60 kilometres from Vienna. The growth rate is 40% to 60% in eastern Europe, double the growth rate in western Europe.” When the Russian economy collapsed, many investors thought all its neighbours would fall with it. But several countries in central and eastern Europe held on and turned the crisis to their advantage. Their ability to get deals done so soon after the rouble depreciation confirmed that much of the region west of the former Soviet Union is now a solid market.
As with any burgeoning economic region where stakes are still being claimed, denigration of the competition is a strong temptation, particularly for pioneering banks. Austrian banks recognized the potential several years ago and have readily entered eastern Europe. By virtue of their proximity and their historical role as a gateway to the east, they like to think they have top priority.
Bank Austria Creditanstalt (BA/CA International) sees itself as the region’s universal bank. It has subsidiaries in Croatia, the Czech Republic, Hungary, Poland, Romania, Russia, the Slovak Republic, Slovenia and Ukraine. RZB is present in all these except Slovenia (where it is establishing a representative office) and in Bulgaria. RZB hopes for a Raiffeisen bank in every village in eastern Europe and aims to get into all but the largest, most contested deals.
Although RZB has a smaller market capitalization, it has more branches than BA/CA International. “Most international banks have one office in the capital city,” says Marc Faller, head of international project finance at RZB in Vienna. It aims to have the best commercial and investment bank presence in the region: RZB has close to 5,000 people on the ground, BA/CA International 2,429. It has grown through building and buying and has majority stakes in Slovakia’s Tatra Bank and Hungary’s Unicbank.
Alarich Fenyves, deputy chairman of the managing board of BA/CA International in Vienna, says: “We don’t compare ourselves primarily with Austrian banks. It is more the international and the local banks [that we compete with].” He adds: “We have the more even distribution and more balanced coverage.” BA/CA International has made acquisitions only in Poland. It has a 45% stake in Powszechny Bank Kredytowy (PBK), Poland’s sixth-largest bank, which has given it access to 233 branches. In the other countries it has built up its own branch network, because, says Fenyves, the local banks are “not that quantum leap better than our own operations”.
It is BA/CA International’s name you invariably see most on the big deals. It is at the top of the project finance league tables for arranger and provider. Last year was a difficult one for the firm because of the merger between Creditanstalt and Bank Austria, and the bank’s exposure to Russia. “We did suffer,” says Fenyves. “We put some fires out. There was damage limitation but we coped well. Now we are ready to move forward.”
Herbert Stepic, vice-chairman of RZB, thinks the other Austrian banks’ strategies are more muddled than his. “We believe that we are the only ones with a clear-cut eastern European strategy. It is our new core market, not just Austria.”
Erste Bank is more modest in its goals and expectations for eastern Europe. It is traditionally a retail bank but is increasingly doing commercial banking for small and medium-size businesses. In its three core countries (Czech Republic, Hungary and Poland) Erste has 1,600 people on the ground, substantially fewer than the other Austrian banks. It operates in six countries: the core plus Croatia, Romania and the Slovak Republic. It has been building by acquisition: in 1987 it acquired a 96% stake in Mezobank in Budapest which has 60 branches in Hungary. With the regional purchase and capital injections it cost $65 million. It was renamed Erste Bank Hungary last October. In 1994, Erste acquired 10% of Estro Banka in Bratislava in the Slovak Republic and in 1997 a 25% of Bjelovarska Banka in Croatia.
Erste Bank claims that it has maintained its acquisitions’ integrity, unlike larger players. “If you choose a global bank as a strategic investor you are very likely to lose your identity,” says Harald Huebl, manager of international finance at Erste. He considers it important for small and medium-size businesses and national governments that local banking industries’ identities are preserved. Erste knows its market well. It wants to expand its retail operations and further cater to the mid-market (companies with an annual turnover of $2.5 million to $12 million). “We don’t aim for the top,” says Manfred Wimmer, deputy general manager, head of international marketing at Erste. It wants to meet the largest banks in the middle market. “We know we are latecomers,” says Otto Ilchmann, general manager and head of the central and eastern European division at Erste. He stresses that as a retail bank Erste is strongest because retail has always been its core and its acquisitions give it its commercial banking strength.
Erste bank does appear in the syndicates of important deals. It was one of the lead managers (with HypoVereinsbank, KBC, NordLB and Landesbank Hessen-Thüringen; Bayerische Landesbank and DKB co-arranged) in the $260 million project deal with the 389MW Csepel II combined-cycle gas-fired power plant. This was the first greenfield independent power project in Hungary after the privatization of the electricity industry. The project was 100% sponsored by the UK’s PowerGen. The financing was structured as a Dm204 million ($114 million) term loan and a $78.5 million term loan, both with a 19.5-year tenor.
The Austrian bank trio are not the only ones eyeing eastern Europe. Indeed, some other foreign banks claim to have such a strong position that they barely notice the Austrian banks. “There is not any significant movement in the sector,” says Peter Newgent, head of credit risk management and corporate banking at Poland’s Wielkopolski Bank Kredytowy (WBK) in which Allied Irish Banks (AIB) has acquired a 60% stake. “We are personally not coming across them.” He suggests that the Austrian banks are not as pervasive as they like to suggest. William Rocca, corporate finance head at Czech Republic Citibank, agrees. They “look seriously at the Czech market and see it as a priority but on a day-to day-basis we see them less in a competitive situation”.
Other banks are even more dismissive. “Austrian institutions want to get everywhere but no-one likes them,” says a London banker. “They want an Anglo-Saxon partner to do the sexy investment banking stuff. No-one is entirely thrilled with a partnership from RZB.” Another leading emerging-markets head says that most clients in eastern Europe think “they need a bigger window than Vienna. Those banks have a boutique feel”.
The big Dutch banks, ING Bank and ABN Amro, are two other key players in eastern Europe. For five years running Euromoney has voted ING the best bank in central and eastern Europe for establishing a significant presence in investment and commercial banking and being more dynamic and innovative than its competitors. It was the first bank to open in many east European countries and the first to move beyond the capital cities. It is the only foreign bank in Vladivostock. Apart from Citibank, foreign banks are not operating in the region in great numbers. Some have stakes in local banks, many come in to lead-manage important deals, but when it comes to pervasive on-the-ground presence in the region it is the Austrians, the Dutch and Citibank that have made their mark.
Virtually everyone who enters the eastern and central European market starts in the golden triangle. The Czech, Hungarian and Polish markets have the most advanced economies, the greatest liquidity and one of the most sought-after telecom sectors. They have been considered post-emerging markets for quite some time. Foreign banks have bought up stakes in almost all the local banks. In Poland, Allied Irish Banks has 60% of Wielkopolski Bank Kredytowy, Commerzbank has a stake in Bank Rozwoju Eksportu and HypoVereinsbank acquired a stake in Bank Przemyslowo-Handlowy last September. Pekao will be sold to either Citibank or Unicredito soon.
In Hungary, the quickest of the former eastern-bloc states to privatize its banks, foreign owners include GE Capital which has a majority share in Budapest Bank, Banca Comerciale Italiana which 100% owns Central-European Investment Bank, and Bayerische which has a majority stake in MBH.
The Czech Republic is hoping to privatize its largest state banks this year. Ceska Sporitelna, the former specialized savings bank of the communist era, is the second-largest Czech bank with $11 billion in assets and has about 35% market share. The government, which plans to increase the bank’s capital by about Kr6 billion ($172 million), hopes to sell the bank within the year. This is looking more likely with the apparent progress in privatizing Ceskoslovenska obchodni banka (CSOB). Bidding has started among Banque Nationale de Paris, Deutsche Bank, HypoVereinsbank and KBC Bank. A buyer is likely to be chosen by June and will acquire between 51% and 66% for about Kr20 billion.
The award-winning deals tend to come from the golden triangle. Polish telecoms company Telekomunikacja Polska Spolka Akcyna (TPSA) launched a $1 billion issue only three and a half months after the Russia crisis. It was a clear sign that this market had grown up and become part of a wider Europe. In Hungary there is also an active capital market with several large blue chip companies. Hungarian telecoms company Matav launched an IPO that raised $1.3 billion in the midst of the Asian crisis. Czech power utility Cez is one of the country’s most active borrowers as well as one of its best-regarded companies. In January ING Barings arranged two koruna-denominated debt issues for Kr7 billion, the largest domestic bond from Cez to date. The two tranches were a Kr4.5 billion 10-year issue and a Kr2.5 billion 15-year that lengthened the Czech yield curve. The European Investment Bank has established a koruna public debt issuance programme that will make its entry into the Czech market easier.
Entry barriers for foreign banks in the three countries are high and virtually all the local banks have been bought up. Hungary in particular is overbanked, with 10 million people and more than 40 banks. But there is still the scope in most of eastern and central Europe for foreign banks to work without “smashing our heads together” as Stepic puts it. “We love competition but it’s not the deadly cut-throat competition you get in other markets.” But beyond the top tier, there is significant activity in the middle market and retail sector. Smaller banks are looking at project finance, particularly in lower-profile sectors and countries further east.
The pioneering foreign banks in the region and those intent on establishing a presence are increasingly branching out to the more far-flung countries, where they can still find value if they are willing to take on more risk. “As the markets become more mature we move on and look at countries that are more risky,” says RZB’s Faller. Ukraine, Russia and Romania are at the top of his list at the moment. Faller is so sure of his understanding of the region and how to extract the most value from it that he saw the Russia crisis as a mixed blessing. “It had an effect [on our bank] but it was also beneficial. You need to know the markets and the conditions very well. We did not reduce our activities” but others did. BA/CA International’s “newest children” as Fenyves describes them, are Ukraine and Romania.
The deal that RZB is most proud of is a project financing for the first western hotel in Kiev, the SAS Radisson, signed in December. Construction is expected to start in June. RZB, because of its finance vehicle, Raiffeisen Property Invest, is focusing on the retail sector of project finance and boasts at least one deal in every country. The other key project RZB is working on is a syndicated senior debt facility for a 58,000 square metre warehouse project in Prague close to the airport. The $35 million syndicated loan was lead arranged by RZB. Last November, BA/CA International executed a DM66 million two-year FRN with WestLB for the city of Krakow, hoping to set a trend among Polish municipalities.
Citibank has applied its “cookie-cutter” approach to eastern Europe. It follows its multinational and bluest-chip corporates in, and as the economy develops it enters the market more deeply. Citibank was the first foreign bank in Hungary and in Poland, and in Poland its operations have spread to the third-tier retail market. It has the largest greenfield operation in the region. When the syndicated-loan market dried up last year it went to the local market to deliver Czech koruna deals to its clients. Most recently it launched a Kr5.5 billion deal for Transgas, jointly arranged with CSOB, Ceska Sporitelna and Société Générale and a Kr6 billion Konsolidacna Banka deal with ABN Amro, Deutsche and Ceska Sporitelna which are both top-tier players in the Czech market.
In Hungary, Citibank signed a $150 million syndicated loan in December with Sumitomo, Deutsche and Bayerische Landesbank. This gave a benchmark funding rate for Hungary when the market was at its most volatile. The merger of the two largest breweries in the Czech Republic, Pilsner Urquell and Radegast Breweries, has created the 11th largest brewery in Europe. Nomura has a major financial interest in both breweries which merged to enter the profitable export market with a stronger global beer brand portfolio.
SG Securities has decided to use the sector approach in eastern Europe (as it does in all other emerging markets). According to Mark Street, its head of global emerging markets, this keeps cost and management volumes low and resources can be centrally located. The key equity sectors it focuses on are banks, telecoms, technology and healthcare. In burgeoning countries such as Bulgaria or the Slovak Republic there would be one or two companies SG would look at, in other countries three or four could take well over 50% of the market capitalization.
The most significant deal to be done in Bulgaria and the largest private-sector financing package ever done there was lead-managed by ING which in 1993 was the first foreign bank to enter the country. “Entering Bulgaria was quite scary,” says Jacques Kemp, member of the executive committee and responsible for the network at ING. “We had a philosophy to follow customers from the first day, but we were the only one. The political situation was not optimal then.” This year the bank executed a $61.5 million medium-term debt and equity deal for the country’s largest wine marketer, Domaine Boyar along with the EBRD.
“Nineteen ninety nine is the crucial year,” says Lobonir Minchev, analyst at Global Securities in Bulgaria. A new government has come in and cleaned things up substantially, healthy investment has been made, Balkan relations are improving (especially with Turkey) and the currency board is under strict supervision. Privatization has been slow but this year the banking sector is hoping for a boost. After 15 banks went bankrupt during the 1997 crisis, there is much work to be done. To attract investors the country will need a successful and quick privatization of Bulbank, Bulgaria’s largest bank. Five or six banks are in preliminary indicative bids and HSBC is advising from London. If these three are privatized, only two, Biochim Bank and the State Savings Bank, will remain state-owned.
Risks are still high and the economy small but ING, RZB Bank, Banque Nationale de Paris and Dresdner are already operating in Bulgaria and Global Securities opened offices last August. Besides the Bulgarian vineyard deal, EBRD is doing a capital increase share of a new private pulp and paper holding company called Tselhard, in which Turkish holding company Isiklar has a majority stake.
The Slovak Republic has suffered from poor local banking practice and slow privatization. The banking sector is dominated by three state-owned banks: Vseobecna Uverova Banka (VUB), Slovenska Sporitelna and BIB. They account for about half the sector’s assets and are dogged by bad loans. In the second tier, foreign ownership is widespread – Tatra is majority owned by RZB, Czech bank CSOB operates there and so do the other major foreign banks. The government is keen on privatizing but the banks have asset-quality problems. These need cleaning up before they can move ahead. Last March, Moody’s downgraded the Slovak Republic from Baa3 to Ba1 partly because it believed the government’s style of privatization was inefficient, slow and lacked transparency. However, the new Slovak government is keen to speed things up and has recently proposed legislation to shorten the list of companies of strategic importance. This will open up more firms for sale, including savings banks Slovenska Sporitelna and Vseobecna Uverova Banka.
The spirited players are getting deals done. The most successful was Nomura’s multi-currency bond issue for the Slovak Republic. It was the first of its kind in the region and was the sovereign’s first entry into public international bond markets. Last May Slovakia launched a $750 million three-tranche deal: a ¥15 billion ($128 million) three-year tranche, a Dm600 million five-year and a $300 million five-year. By launching a Eurobond in three currencies the issue satisfied investor demand without flooding the market with Slovakia risk. On the back of the deal’s success Commerzbank and Nomura launched a Dm175 million 8% three-year offering for water utility Vodohospodarska Vystavba only three months later. Slovakia raised $1 billion in the Euromarkets last year.
Other notable deals include ING’s bond issue for Slovenske Elektrarne in the Czech koruna domestic market. There was also a $70.5 million bridge financing for Slovak telecom company Eurotel. Erste Bank boasts a waste-disposal system project in Bratislava, a Dm100 million deal done with Austrian and German banks. In January Creditanstalt arranged a e27.7 million ($30.25 million) club deal for the renovation and extension of the Radisson SAS Carlton hotel in Bratislava. Belgian export credit agency Ducroire/Delcredere co-arranged the deal with Creditanstalt, which lessened its risk factor.
RZB has a stake in local commercial and investment bank Tatra Bank in the Slovak Republic, one of its most developed and successful subsidiaries. The Slovak Republic was an early entry country for RZB because of its location. RZB was operating there before Slovakia split from the Czech Republic. The Slovak Republic is also a priority for Bank Austria. After the golden triangle it has the most staff (230). Its total assets and its operating results, Sch9.3 billion ($739 million) and Sch162.3 million, are greater than for its Polish operations. Erste has a 10% stake in Istrobanka, which has 26 branches and assets of $670 million.
Eastern and central Europe still has substantial risk attached to it. The countries further east are small and vulnerable. But not only is progress being made towards cleaning up their economies and privatizing to reliable investors, but perhaps more important there is the sort of optimism that can swing a market. Peter Newgent, who moved to Poland after AIB acquired a majority stake in WBK thinks Poles and Irish have a lot in common. They have similar histories and both have Roman Catholic roots. And like the Irish “Poles are friendly, entrepreneurial, and are not afraid of hard work”. The serious foreign players have made a home for themselves here.
