The retreat of western banks from emerging markets is hardly a new theme. In the wake of the financial crisis, the sight of big players rushing to dump ‘non-core’ holdings in Asia, Africa and Latin America became commonplace.
Until recently, though, emerging Europe was mostly immune from the exodus. State bailout rules prompted a few forced sales by groups such as Allied Irish Bank and KBC. Some holdings in the region’s wilder reaches – Kazakhstan, Armenia – were jettisoned. And a handful of US houses – notably Citi and GE – sold off smaller operations as part of a global strategic shift.
By and large, however, western European banks kept faith with the region. Again and again, in the years following 2008, groups such as UniCredit, Raiffeisen, Erste and Société Générale reiterated their commitment to what they insisted were core markets in central and eastern Europe. The region’s relative economic resilience and supposedly low risk were loudly trumpeted, as was the value of the pan-regional banking model.
At this point, existential questions start to arise. If CEE’s two biggest lenders are prepared to exit two of its biggest markets, is the pan-regional banking model dead?
It is easy to find reasons to be negative about banking in CEE. Margins across the region are being squeezed as never before by historically-low interest rates, just as political risk is rising in key markets. Russia, Turkey, Poland, Hungary – all the reliable profit generators of previous years are proving false friends as nationalism trumps economics.
Much of the rest of the region is just as risky but far more fragmented. Most of the Balkan markets are tiny. Romania looks to be beating graft but is still freighted with bad debts. Even in the more buoyant and stable markets of central Europe, economic growth has yet to translate into credit demand.
Yet it would be a mistake to write CEE off just yet. Most markets in the region are wildly overbanked for their size and long overdue for consolidation. A wide range of assets are already known to be up for sale, from Greek bank subsidiaries in the Balkans to the south-eastern European network of Sberbank.
If the big regional groups are indeed starting to retrench as well, there could be space for bold and well-capitalized newcomers to create national and even regional champions. These consolidators need not be banks. Already, in Slovenia, private equity firm Apollo Global Management is emerging as a consolidator. JC Flowers has explored the options for consolidation in Romania.
What they will need is vision, cash and a stringent approach to risk management. The previous round of regional groups had the first two but all too often fell down on the third. Maybe the next generation can do better.