Exclusive: New Erste chief calls for Covid-19 harmonization in emerging Europe
Bernhard Spalt talks to Euromoney about banks’ responsibility to lend, the risk of a ‘blame game’ and the prospects for a return to business as usual in emerging Europe.
The new chief executive of emerging Europe’s largest banking group has called for the harmonization of responses to the Covid-19 crisis across the continent.
Bernhard Spalt, who has headed Austria’s Erste Group since January, says the wide range of responses from policymakers in Europe “is a concern for the future”.
“This crisis is by nature global, and it doesn’t help to have a patchwork response country by country,” he says. “Obviously everyone is trying to act quickly, but an uncoordinated reaction is the wrong response. This is not a short-term crisis with a rapid exit but rather a medium- to longer-term one.
“We need crisis management frameworks which are consistent and coherent. This is where the big European institutions need to step in.”
Spalt took over the top job at Erste from Andreas Treichl, the architect of the group’s central and eastern Europe empire, who left in December after 22 years at the helm.
An Erste lifer, Spalt joined the bank’s legal team in April 1991 after training as a lawyer. He subsequently moved to restructuring and then risk management, in which capacity he put in stints in four of the group’s six CEE markets: the Czech Republic, Hungary, Slovakia and, most recently, Romania.
I hope there will be a lot of lessons learned when it comes to critical infrastructure and the independence of the CEE region on a European level - Bernhard Spalt, Erste Group
He returned to Vienna to take up the role of group chief risk officer at the end of 2017, and was announced as Treichl’s successor in September 2018.
As chief executive, Spalt had barely got his feet under the desk before the Covid-19 crisis broke. Nevertheless, he was prompt in responding to it. A large part of Erste’s staff had been sent home before lockdowns were implemented in order to test the group’s remote-working capabilities.
The group was also quick to offer credit and liquidity support to clients affected by the crisis. Spalt says Erste sees this as “our clear responsibility” – even if it comes at a price.
“This will mean that we incur credit losses – but we can’t just say that because visibility is low, we will stop issuing credit,” he says.
Small and medium-sized enterprises are particularly vulnerable, he adds.
“Even though the last couple of years have been economically positive, not much cash has been put aside by small companies,” he says. “For micro firms, liquidity buffers are more in weeks than months, while for SMEs it’s generally a couple of months.”
While keen to help, however, Spalt notes that Erste remains constrained by the need to do due diligence – something he says is not always appreciated in the context of the coronavirus financial support packages being announced by governments across Europe.
“Politicians want to tell the public and their voters that they are responding quickly and in size,” he says. “The question is how do we translate these large numbers into money which is available to customers and helps them survive.
“If the money is not being provided very quickly, it’s not because banks don’t want to lend but because there are rules to follow and it takes time to set up the necessary frameworks. There are technical and practical issues in dealing with the administration of these schemes, which have not yet been really well thought through.”
Spalt worries that this could lead to a longer-term backlash against banks.
“It’s very clear that once this crisis is over many people will be unemployed, many companies will have filed for insolvency and a huge economic cost will have been incurred,” he says. “On the way there, people will look for who is responsible and if we’re not very careful there will be a blame game. That is the big danger.”
Erste Group's headquarters in Vienna. Source: Erste Bank/Christian Wind
By contrast, in terms of banking regulation, Spalt is positive about the response of policymakers in Austria and CEE to the Covid-19 crisis.
“Regulators and politicians have understood that in this phase of the crisis nobody should act pro-cyclically,” he says. “Through their policies on forbearance, impairment treatment and usage of capital and liquidity buffers, they have signalled clearly and early that they don’t want to aggravate the crisis and make a temporary problem into a more lasting one.
“Most of these technical elements have been addressed in a very responsible and pragmatic way. While every single detail is not clear, the most important ones are, and directionally everybody wants to help in this situation.”
Spalt is also surprisingly sanguine about other crisis measures introduced by CEE governments, such as Hungary’s bank tax and limitations on fees for banking services.
In early April, the Hungarian government announced plans to raise Ft55 billion ($168 million) for a Covid-19 fund through a one-off levy of 0.19% on bank assets. The tax, which the banking sector acquiesced to, can be deducted from the existing bank levy over the next five years.
“The banking tax in Hungary is a temporary measure for one year, which is probably why the debate has not been as long and as public,” says Spalt. “Generally, however, I believe firmly that banking taxes are the wrong response to this kind of situation.”
He takes a similar line on limiting fees for transactions such as ATM withdrawals, something that has been trialled by regulators in Croatia and elsewhere.
“If it is a response to temporary liquidity and prosperity problems on the customer side, then it can be viewed as an acceptable part of crisis management,” he says. “I would hope though that it does not have a permanent dimension.
“It is not in anyone’s interest to damage the financial services sector, which has gone into the crisis well-prepared and as a problem-solver.”
Repatriation of dividends
Spalt’s biggest concern, however, is growing pressure by policymakers in non-eurozone countries – including the Czech Republic, Romania and Croatia – for a ban on the repatriation of dividends. Like other regional bank chiefs, he is vehemently opposed to such measures.
“All attempts to remove the freedom of liquidity and capital within a group are potentially dangerous,” he says. “The subsidiaries in our markets are all well-capitalized and none of us is needing nor accepting state aid, so there is no economic reason for restricting the payment of dividends upstream.”
In other respects, however, Spalt says Erste’s seven-country network, balance-sheet heft and long track record in emerging Europe give the group a substantial advantage over smaller and newer players in the Covid-19 crisis.
“Understanding your customers really well is critical in times of limited visibility,” he says. “As a large bank with a long history we have a strategic advantage in this respect because we have both experience and ample information about our customers’ creditworthiness.
“We are also seen as a safe and reputable institution and as a strategic investor in CEE rather than a short-term P&L-driven investor. We made that commitment to the region during the financial crisis and we’re reaffirming it now.
“I think for new players this crisis is probably a lot harder. It takes a lot of traditional banking experience to deal with a fully fledged crisis.”
There is a lot of structural know-how, history, experience and intelligence in the IFIs that will be very helpful in shaping a way out of this crisis - Bernhard Spalt
Looking ahead, Spalt remains upbeat about the prospects for Erste’s business and the region more broadly.
“When the health crisis ends, I believe there will be a strong rebound in CEE, and we will see a reasonably rapid return to regular banking business,” he says.
He is also confident that banks will quickly be able to find buyers for portfolios of bad debts built up over the coming months.
“One lesson I learned from the last crisis is that as soon as the economy is recovering, we will see interest from international and regional investors in buying up secondary NPLs [non-performing loans],” he says. “There will be liquidity in the market very quickly.”
Here again, however, Spalt argues that more harmonization of legislation is needed across emerging Europe.
“Bankruptcy laws vary hugely from country to country and progress on NPL workout procedures has been patchy,” he says. “For example, in Romania we have seen an improvement in insolvency laws but also more tax barriers to the sale of NPLs. There is still a lot of work to be done in this area.”
Over the last decade, NPLs have been one of the main areas of focus for the Vienna Initiative, the confederation of banks, regulators and international financial institutions created in 2009 at the height of the financial crisis.
Both Erste and Raiffeisen, the other leading Austrian CEE banking group, have been supportive of ongoing efforts to repurpose the platform for the Covid-19 crisis.
The focus so far has been on facilitating the supply of funding to emerging Europe, but Spalt says the initiative, and particularly the IFIs, could also play a valuable role in helping with the wider response to the crisis in the region, including in areas such as NPL workouts.
“There is a lot of structural know-how, history, experience and intelligence in the IFIs that will be very helpful in shaping a way out of this crisis,” he says. “Funding will be one tool, but the first step is to understand the problem, and there I’m very hopeful that the IFIs will contribute significantly.”
More broadly, he calls for an inclusive dialogue about how an exit from the Covid-19 crisis can be achieved in a European and CEE context. He also suggests that there may need to be fundamental changes to the structure of economies in the region.
“I hope there will be a lot of lessons learned when it comes to critical infrastructure and the independence of the CEE region on a European level,” he says. “We may want to think about supply chains differently and about what kind of industries we want to retain a competitive advantage in, so as to be more resilient to similar shocks in future.”