CEE foreign banks: In the firing line
Politicians have long been whipping up nationalist sentiment in Russia and Turkey. But now Poland is joining in on the act, banks and investors in CEE have reason for concern.
For commercial banks that operate outside their home market, a certain amount of local hostility goes with the territory. Both banks and foreigners make easy targets for populist politicians in times of stress, so bad-mouthing foreign banks is something of a two-for-one deal.
In most cases, politicians’ bark is much worse than their bite. Even the more rabid nationalists usually realize that they need external capital and expertise, and are also well aware that discriminating against foreign banks is one of the quickest ways of deterring international investors of all stripes.
Nevertheless, there is always a residual risk that at some point politicians will either start believing in their own rhetoric or, for one reason or another, feel obliged to deliver on it.
This risk is rising in emerging Europe. The most obvious cases are the region’s two largest markets, Russia and Turkey. Both have authoritarian leaders who are increasingly looking to bolster their domestic base by whipping up nationalist sentiment. Western banks have got off lightly till now, partly for reasons of expediency but also because they are relatively small in comparison with domestic giants such as Sberbank and Ziraat Bank.
There are signs, however, that this is starting to change. In May, the head of the state-backed Russian Direct Investment Fund announced publicly that European banks are the most profitable in Russia, which they are not, and that reducing the market share of “certain Italian banks” – presumably UniCredit – is a priority.
Meanwhile, in Turkey, key presidential aide and rising political star Yigit Bulut last year began making vague but ominous noises about the threat posed by foreign banks, and there are fears that the rhetoric could be stepped up if president Recep Tayyip Erdogan’s AK Party posts a convincing win in elections on June 7.
Even in Poland, generally seen as the most open and investor-friendly market in the region, policymakers appear to be looking to clip foreign banks’ wings. In an echo of Hungary’s push to renationalize the banking sector, the Polish regulator and the purportedly pro-business Civic Platform government have expressed support for combining three smaller lenders that are up for sale into a new top five player under the aegis of state-owned insurance giant PZU.
Still more worrying for Poland’s foreign banks is Andrzej Duda’s victory in last month’s presidential election. Not only did Duda campaign on a pledge to force the conversion of Swiss franc mortgages into zloty, a measure that would disproportionately hit non-Polish lenders, his victory also raises the possibility of a similar success by his nationalist Law and Justice Party in parliamentary elections in October.
Clearly, none of these events constitutes a reason to panic. It is still highly unlikely that Poland will victimize foreign banks as Hungary has done, or that Russia or Turkey will throw out lenders that have done much to support their economic growth.
Nevertheless, they are indicators that tail risk is rising in central and eastern Europe’s largest economies. Banks and investors will need to keep a close eye on political developments.