CEE bank management: Top bankers try to stay bullish on emerging Europe

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Bank chiefs in the region have much to cheer but can’t help feeling a little uneasy. They have no direct exposure to the sub-prime fallout, but have had to rethink their funding strategies. And while they see clear opportunities to grow, an economic slowdown could be looming.

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What do you think the GDP will be in your country at the end of 2008 and what will be the key drivers for that?


 Participants in this discussion

Andreas Treichl, Erste Group
Rushan Khvesyuk, Alfa Bank
Roman Solodchenko, Bank TurenAlem
Seyhan Pencapligil, Banka Kombetare Tregtare
Johann Jonach, ZAO Raiffeisenbank, Russia
Zafer Kurtul, Akbank
Tayfun Bayazit, Yapi Kredi
Erik Sultankulov, Alliance bank
Bozo Prka, Privredna banka Zagreb
Igor Vida, Tatra banka, Slovakia
Michael Müller, Raiffeisen Bank Bosna I Hercegovina
Dominic Bruynseels, BCR

What have been the main effects of the credit crunch on your business and the markets in which it operates?

AT, Erste Group Many western bankers have learnt quite a surprising lesson. The view has always been that banking in the west is safe and eastern markets are risky. How wrong they have been. Erste Bank, as one of the largest banks in central and eastern Europe, has always had a very responsible attitude to doing business in this part of world, highlighted by the fact that we have aimed for slightly lower, but more sustainable and safer returns. The main impact of the credit crunch, in whichever region one operates, has been the mistrust now evident between banks. On the upside, taking risk has become a costly exercise. From my point of view, that is a good development. Until the beginning of the crisis, a lot of banks were acting as if there was no risk in the market – a strategy doomed to failure. Another positive effect will hopefully be that banks will be only operating in those areas that they really understand.RK, Alfa BankWhereas in previous years the focus was on how to maintain business profitability and diversify the source of revenues, now it is on how to fund lending growth. The local inter-bank market is unstable and the maturity of liabilities is becoming shorter. In the meantime, as corporate borrowers are unable to borrow internationally, thereby increasing their demand for local loans, the market is maintaining very strong lending growth. In a nutshell, there is less competition for clients on the lending side, while competition on the liabilities side has increased dramatically. Each bank now has a choice between decreasing the growth rate and lessening risks or gaining market share but increasing risks.RS, Bank TurenAlem We have experienced significant slowdown in lending activities, an increase in cost of funds and credits to customers, and deterioration of asset quality.
Andreas Treichl, Erste Bank
"The main impact of the credit crunch, in whichever region one operates, has been the mistrust now evident between banks"
Andreas Treichl, Erste Bank
SP, Banka Kombetare Tregtare
As Albania is a relatively closed economy, there has not been a significant impact on the economy in general and banking business in particular. However, due to the fact that the majority of banks and banking assets are owned by foreigners, the transfer pricing of funds between the parent banks and Albanian subsidiaries has changed considerably. As a result, most European parent banks are now charging more for the funds they provide to their subsidiaries, which in turn prefer to increase deposit rates as an alternative funding source. Deposit interest rates have risen significantly across the board, while credit rates remain stable; the result is that many banks announced losses for the first six months. Having said that, Albania continues to be liquid and largely unleveraged, with only about half of total deposits placed as loans.JJ, ZAO Raiffeisenbank Russian banks have not been directly affected by high-risk financial instruments connected to sub-prime mortgage lending in the US but the credit crunch has affected the Russian banking system.

The Russian bond market closed almost completely for new issues for quite some time and even now only top names can place paper.

Internationally, loans have also become more expensive, and the number of borrowers with access to these markets has severely contracted. The best option for Russian borrowers in international markets is still syndicated loans.

ZK, Akbank Given the absence of exposure to sub-prime instruments, the Turkish banking sector has been relatively less affected and its growth in the first half of 2008 has been robust. The strong structure of the sector after reforms following the 2001 crisis was also essential in keep banking resilient in face of external turbulence. Despite the credit crunch, international borrowing in the sector, for example in the form of syndicated loans, is still ample.TB, Yapi Kredi Global financial turmoil and its effect on the financial system of developed countries caused the risk appetite of investors in those countries to shrink, triggering an increase in the risk premia of emerging economies. With additional specific risks that mainly originated from political uncertainty, Turkey also had to face an increase in its risk premium, reflected in CDS spreads and market interest rates.

Under these circumstances funding from syndication and securitization of Turkish banks fell, restraining long-term credit supply. With the negative effect of a rise in interest rates on demand, loan growth partly slowed down in the second quarter of the year, especially on mortgages. But we have had solid loan growth, with a 20% increase in total loans in the first seven months of the year (12% in real terms). Meanwhile, the NPL ratio remained at around 3.1%.

ES, Alliance Bank There are two main effects of the credit crunch on the banking business in Kazakhstan: short-term liquidity challenges and consequent lending slowdown; and long-term increase in borrowing costs. As Kazakhstan and its banking system have become integrated into the international capital markets, it is sensitive to every scare taking place outside. However, due to the prompt strategic reaction of the banks and government support, the system has weathered the initial fallout. BP, Privredna banka Zagreb It is difficult, if not impossible to precisely quantify the impact of the credit crunch. The Croatian central bank has imposed high reserve requirements, marginal reserve requirements on foreign inflows and credit ceilings to ensure macroeconomic stability. Thus the credit crunch did not have any direct or significant impact on our banking market. Of course foreign funds became even more expensive as Euribor and CDS spreads went up, domestic interest rates increased mostly due to domestic inflation and regulation and the Croatian economy is slowing down.

How has your funding been affected by the downturn? What measures have you taken against any difficulties you’ve experienced?

AT, Erste Group Our funding hasn’t been affected at all. As a retail bank we have a comfortable loan-to-deposit ratio of 112%, which means that almost all our credits are funded from our deposit base.
Rushan Khvesyuk, Alfa Bank"Each bank now has a choice between decreasing the growth rate and lessening risks or gaining market share but increasing risks"
Rushan Khvesyuk, Alfa Bank
RK, Alfa Bank
We are facing less stable inflows from corporate clients and from retail deposits, and higher sensitivity to interest rates. The maturity of local liabilities was never very long, but clients typically extended their deposits. Now, however, we have to maintain larger liquidity provisions. The only available source of international borrowing is through syndicated loans facilities now because the securitization and even the Eurobond markets are practically closed. In this situation, retail deposits look likely to be the most attractive source of funding for the coming years. Better marketing of our retail deposits products and offering competitive deposit rates is the best way to address recent market changes.BP, Privredna banka ZagrebEuribor spreads widened, as did CDS. Domestic deposit interest rates went up, mostly due to inflation. Further, the cost of funding increased because of changes in central bank regulation. At PBZ we have introduced additional risk-management techniques, tightened rules for credit eligibility for customers and applied additional caution in our business activities.ES, Alliance Bank We are no exception to other major Kazakh banks facing international repayments and having an adequate liquidity level has become one of the main priorities for the bank since the autumn of 2007. So far, no Kazakh bank has shown an inability to meet its external obligations and liquidity is not an issue. Thanks to our business model of retail banking, which is of a high-yield, short-term nature, we are comfortably repaying our foreign debt on time and in full. Significant international public borrowing is not feasible at the moment because of poor investor sentiment and the extremely high cost of funding. The banks have to broaden their funding base, particularly by focusing on domestic resources. TB, Yapi KrediThe reversal of the interest rate trend has meant that the cost of funding has been increasing in the sector. YKB has been taking preventative measures to mitigate this by implementing projects to focus on better segmentation of the retail/upper mass and affluent customer base to price deposits more effectively and increasing demand deposit collection efforts. Indeed, demand deposits are 16.6% of total deposits as of the first half of 2008.

YKB entered into this challenging period by being very liquid and will tap the market for a new syndication at the beginning of 2009. Costs are expected to increase slightly, in line with market conditions; however, YKB envisages no problems in renewing these lines. Despite global financial turmoil, international funding flow to Turkey remains intact in banking.

RS, Bank TurenAlemSince the cost of funds has gone up significantly, BTA is focused on internal funding through bank deposits from retail and corporate customers. In the first quarter of 2008 we have seen a 16% increase in our deposit base.ZK, AkbankAkbank succeeded in borrowing about $2 billion internationally in August, indicating that the recent credit crunch had no serious effect on our funding. The cost has been above previous transactions, but not significantly higher. IV, Tatra banka Despite a surplus of domestic currency liquidity, there is intensification of competition in the past few months, reflecting a rising loans-to-deposits ratio and liquidity costs. We have reacted to this with measures including a more aggressive pricing of primary deposits to maximize our market share.

What measures would you like to see regulators take to support the banking sector?

RK, Alfa Bank In the past 12 months substantial efforts were made by the regulator to stabilize the inter-bank market and to improve access to liquidity. An additional increase in deposits coverage, provided by the Deposit Insurance Agency, would be welcome to stabilize deposits growth. Small banks need to be tightly monitored right now to maintain inter-bank confidence. BP, Privredna banka Zagreb In this environment, central banks all around the world have a very difficult balancing act to do. On the one hand, the financial crisis would require relaxation of some regulation and monetary policy. Instead, strong international inflationary pressures require a tightening. Any commercial bank, in the short run, would like to see some of the regulations relaxed, however we are aware that it is in our best interests to operate in a long-term, sound financial system.
Zafer Kurtul, Akbank"Despite the credit crunch, international borrowing in the sector, for example in the form of syndicated loans, is still ample"
Zafer Kurtul, Akbank
ZK, Akbank
The banking sector now has a much stronger structure and is more resilient to external shocks after the restructuring following the 2001 crisis. The capital adequacy ratio has increased to around 17% from 9% in the pre-crisis period and the banking system has become much healthier. The leverage ratio is also lower, at 8% compared with 20% in the major developed economies. Implementation of Basle II in 2009 will be an essential measure for the sector to converge with international standards. TB, Yapi KrediRegulatory bodies in Turkey should make sure that banks are adequately capitalized and liquid enough to overcome potential threats. Furthermore, they should ensure that both private and public banks act rationally and not focus on reckless growth. Efforts by the government to pull the unregistered part of the economy into the formal financial system will affect public finance and the financial sector positively.

Meanwhile, out-of-market interventions on the pricing of banking products that would distort competition and the price mechanism should be avoided.

RS, Bank TurenAlem Regulatory bodies have been quite supportive, despite tightening their grip on the banking industry.ES, Alliance BankThe regulatory support framework has proved effective at taking any necessary measures during the turbulence. The government and commercial banks are currently discussing establishing a distressed assets fund that should improve the quality of Kazakh banks’ loan books.

In view of the importance of maintaining the confidence of domestic depositors, the considerable foreign currency exposure of the corporate sector and the need to keep inflation on a downward path, exchange rate stability would provide considerable benefits. It should be a central policy objective until conditions in financial markets improve.

MM, Raiffeisen Bank Bosna I Hercegovina We have a specific situation in Bosnia and Herzegovina that is aggravated by the absence of a state-level legal framework for the banking sector. There are banking laws only at entity-level, each entity has its own banking agency and banking law. Business would be much easier and more efficient with a single and independent banking supervisor. Since we are operating in a unique market, we need to have unique laws at state level and a single banking supervisor. DB, BCRRomania’s growth potential is undoubtedly there; the most important aspect from a regulatory point of view is securing macro stability because the pace of growth can be too fast at times. That’s why the central bank should keep a close eye on non-government loan development, particularly for those in exotic currencies – economies such as Romania’s will see the euro as the natural exit currency in the medium term.SP, Banka Kombetare Tregtare Parent banks represent more of a risk for the Albanian banking system, although they are generally global medium to big banking groups. Regulators must make sure that Albanian banks diversify their investments and that subsidiaries should not concentrate placements with their parents, regardless of the latter’s credit rating.

What will be the hot product or topic in 2009?

BP, Privredna banka Zagreb Next year will see slower growth including in bank assets. There will be more focus on the quality of services and customers, on innovation and on strategic positioning of the bank in areas of excellence. It will be the year of continued volatility on world markets, thus caution and consolidation will be important. Macroeconomically there is no doubt that inflation will be the main topic of interest – as will attempts to control it. And, EU accession negotiations continue to be the main goal for Croatian policymakers in 2009. We expect structural reforms to speed up, in preparation for EU accession.TB, Yapi Kredi With a gradual fall in interest rates, we can expect strong growth in mortgages to resume. Efforts to increase penetration and to access creditworthy SMEs will still be areas of high competition. Pension funds should also be affected positively from improving conditions and expectations.RK, Alfa Bank Slower economic activity in a number of sectors coupled with an increase in interest rates might reduce the quality of the loan portfolio in 2009. Risk management will likely be more important in the coming years. The strong growth of the banking sector also appears to contradict the weaker increase in its funding base. For this reason, a number of banks will have to revise their growth plans, and a redistribution of market share is likely. If there is slower economic growth, attention should be paid to the retail lending market, which is particularly vulnerable to an increase in bad loans.

Online extra

What do you think the GDP will be in your country at the end of 2008 and what will be the key drivers for that?

RK, Alfa Bank In the first half of 2008, Russia’s economic growth remained strong. However, signs of a slowdown occurred in June. In July, investment growth slowed significantly, and the manufacturing growth rate was weaker compared with June. The increase in interest rates is already hitting the construction sector and construction-related manufacturing industries. The expected increase in lending rates in the coming months is likely to limit second-half economic growth to only 7%. Only significant state investments in infrastructure are expected to prevent additional slowdown in economic growth.

ES, Alliance Bank Real GDP growth in Kazakhstan has slowed over the past two quarters, residential property prices are declining, and non-performing loans are rising primarily because assets and loan books are contracting. It is expected that real GDP growth will be the same as banking sector growth, about 5% this year. Of course the nominal growth figure should be much higher.

SP, Banka Kombetare Tregtare We expect GDP in Albania to increase by about 6% this year. Government spending has been increasing, and there have been fewer power shortages thanks to favourable weather conditions.

ZK, Akbank We expect GDP growth in Turkey to be around 4.5% in 2008. Weaker domestic demand will be a major driver of the slowdown. Continued growth in exports and increasing public expenditures in the fourth quarter will be the main factors to support GDP growth.

BP, Privredna banka Zagreb When compared with above-average growth in 2007 (5.6%), we expect a slowdown in 2008 to the range between 3.5% and 4.5%. However, GDP growth of 4% is around Croatia’s growth potential. Key drivers of this growth will be personal consumption and gross investments.

TB, Yapi Kredi Global and local uncertainties in 2008 are expected to slow down economic growth in Turkey, although first-quarter GDP figures did not reflect the feared deceleration. We forecast growth to reach 4.2% this year, and 5% and 5.5% in 2009 and 2010. In the second quarter, the slowdown in industrial output, decline in capacity utilization and deteriorating consumer confidence all pointed at slower growth. Global uncertainties coupled with the political disputes around the AKP closure case are to be blamed for the deceleration. Since political risks cleared at the end of the second quarter in a market-friendly fashion, we may end up with an annual growth rate even higher than our projected 4.2%, especially if global conditions improve considerably.

RS, Bank TurenAlem GDP growth in Kazakhstan for 2008 will be between 5.5% and 6%, as long as oil prices remain above $110 per barrel.