CEE banking: Looking on the bright side


Lucy Fitzgeorge-Parker
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After a lot of provisioning and restructuring, CEE banks have returns on equity that others can only dream about.



In recent years, the mood at Euromoney’s annual Central and Eastern Europe Forum – held in Vienna in mid-January – has often been on the sombre side. 

Since the financial crisis, the region has been seen as increasingly irrelevant in a global context. International investors of all stripes have dismissed it as a collection of small and complex markets, tainted by their association first with the eurozone and, subsequently, with Russia and Ukraine. 

So it was a pleasant surprise to find delegates at this year’s event in a remarkably cheerful mood. Sustained and stable economic growth across central and eastern Europe, coupled with buoyant capital markets and out-performing local currencies, seemed to put a spring in the step of everyone from central bankers to fund managers. 

Regional bankers were in particularly high spirits – and with good reason. After nearly a decade of painful provisioning and radical restructuring, CEE-focused groups are in excellent shape to take advantage of returning credit demand across the region. 

Despite persistently low interest rates across central and southeastern Europe, the big three – Raiffeisen, Erste and UniCredit – are all seeing returns on equity of 13% to 15% from their regional networks. 

“This is something most western European banks can only dream about,” says one Austrian banker. 

Non-performing loans, for so long the curse of banking sectors from Hungary to the Balkans, have been largely tamed. Changes in legislation, combined with improving fundamentals, have sparked a brisk trade in bad-debt portfolios as well as facilitating internal work-outs. 

In Romania, NPLs fell from 22% of total lending in early 2014 to just 8.3% by the middle of last year. Bulgaria, Serbia and Croatia have all got their ratios down from similar levels to within a whisker of 10%. 

Speaking at the forum, Raiffeisen’s new chief executive, Johann Strobl, predicted that legacy NPLs would soon be a thing of the past. “There will be nothing left in three years,” he said.

The exception is Ukraine, where bad debts will likely continue to bedevil a banking sector waiting for legislative change and improvements to the judicial system. After three years of extensive provisioning, however, even CEE’s most-challenging market is once again delivering healthy profits to those western groups – notably Raiffeisen and BNP Paribas – that have kept faith with it. 

Reducing heat

Combined with strong returns from a resurgent Russia, this has helped take some of the heat off the big regional lenders. 

“The improvement in fundamentals across CEE is helping us in our discussions with regulators,” says a regional banker. “We are no longer constantly being grilled on the sustainability of our business models by the ECB.”

Banks with extensive CEE networks have also been less fazed by recent regulatory changes than some of their western European counterparts. The EU’s Markets in Financial Instruments Directive II was much less prominent in discussions in Vienna than it would have been at a similar event in London; analysts were notably relaxed about the need to make clients pay for research.

“Asset managers don’t have much choice in our region,” says one cheerfully. “Compared with the US and the eurozone, competition here is very moderate. It’s one of the advantages of covering unfashionable markets: we have a niche.”

CEE’s current lack of cachet is also a boon to regional banks in other respects. 

“We’re certainly not complaining about the fact that not everyone is running into the region,” says an Austrian banker. “It’s great for those of us that are already there.”

As well as the Austrians, that includes Greece’s Eurobank, which in January announced plans to hang on to its Bulgarian and Serbian subsidiaries after selling its Romanian operation, Bancpost, at the behest of the European authorities. The decision is understandable. In the first nine months of 2017, the two markets provided more than two-thirds of net profit for the group.

The rising regional star, however, comes from within CEE. Well-capitalized and enviably profitable, Hungary’s OTP has added three lenders – in Romania, Serbia and Croatia – to its already extensive network in the last 18 months and has earmarked $1 billion for as many as six more acquisitions over the next two years. 

The group also has ambitions well beyond CEE. In November, it made a first move into Asia with the opening of a rep office in Beijing. 

The exact scope of OTP’s plans for China have yet to be finalized – as usual, there will be a two-year hiatus before it can begin operations – but sources say everything from a consumer finance operation to a full-service bank is under consideration. 

ICBC plans Austria opening

When delegates meet at the CEE Forum next January, there will be a new player in town. Chinese state giant ICBC has announced plans to open a subsidiary in Austria to serve as a headquarters for the group’s rapidly growing franchise in emerging Europe. 

ICBC already has branches in Poland and Czech Republic, as well as subsidiaries in Russia and Turkey, so the Austrian operation will focus on other key markets in the region including Hungary, Bulgaria, Slovenia and Croatia. 

The official launch has not been set, but bankers in Vienna report that ICBC has already started recruiting locally.