There is no such thing as a good time for a pandemic. Nevertheless, it is fair to say that much of emerging Europe is better prepared to deal with a crisis today than at any time since the fall of the Berlin Wall.
A decade of increasingly strong economic growth, falling debt-to-GDP ratios and rapid local capital markets development has left most governments in central and eastern Europe with both the fiscal space and the borrowing capacity to mount a robust response to a local and global downturn.
Moreover, not only did many CEE countries go into the crisis in much better shape financially than their counterparts in Western Europe, they were also quicker to respond to the threat from Covid-19.
The Czech Republic, Poland, Hungary and even Ukraine implemented early and effective lockdowns, in many cases before the first local deaths from the virus. As a result, several have already been able to ease restrictions.
There are weak spots, however. Romania is vulnerable in both economic and healthcare terms, thanks to years of underinvestment in infrastructure and overspending on social giveaways.
Russia’s response to the health crisis has been opaque, slow and patchy. Belarus’s ageing dictator, Aleksander Lukashenko, is sticking to his contention that tractors and vodka are more effective against coronavirus than social distancing.
Overall, however, the region was in good shape at the start of this year – and its banks are equally robust. Years of painful cleansing of balance sheets after the financial crisis, combined with surging consumption and returning demand for credit, have left CEE’s lenders profitable, well-capitalized and highly liquid.
|John Hollows, CSOB|
This has allowed them to take a proactive approach to the Covid-19 crisis. Banks across the region were quick to offer payment holidays to clients, in many cases well ahead of moratoriums imposed by local governments.
Some have even offered non-financial help. Czech market leader CSOB has retrained staff in one of its outbound call centres to take emergency calls and opened the nursery at its headquarters building to the children of essential healthcare workers.
“This is a big opportunity for us to show that we can use our money, physical size and reach to help the country in a difficult moment,” says chief executive John Hollows.
The idea that the crisis offers a chance for banks to demonstrate their commitment to and role in society is echoed by senior bankers across CEE. For Raiffeisen chief executive Johann Strobl, however, this can best be done by giving customers access to the money they need.
This is a big opportunity for us to show that we can use our money, physical size and reach to help the country in a difficult moment- John Hollows, CSOB
“Our banks are donating [to Covid-19 charities] – but our most important role is in supporting the economy through the flow of cash and the provision of credit,” he says.
As the knock-on effects of global lockdowns kick in, that will be a challenge in itself. While CEE may have started the crisis in good shape, it is clear that many countries and industries will struggle over the coming months.
Disruption to global supply chains will hurt the big manufacturing hubs of central Europe, with Slovakia expected to be the worst affected, while countries such as Croatia, Montenegro and Georgia will be hard hit by the collapse of tourism.
An expected sharp decline in remittances will put additional pressure on a clutch of vulnerable economies across the former Soviet Union, from Ukraine to Tajikistan; while the plunging oil price will present a different set of challenges for commodity exporters such as Russia and Azerbaijan.
Many governments in the region have already offered generous financial support to mitigate the effects of the downturn on their economies. However, for banks, which will be on the front line in distributing this largesse, this is as much a curse as a blessing.
“Once governments announce support packages, customers want to see the money on their account the next day,” notes Strobl.
Given that banks are still expected to do due diligence on potential borrowers, this will inevitably mean delays and disappointments. Bankers worry that if these persist, politicians will be unable to resist the temptation to use them as a convenient scapegoat.
Erste Group’s new chief executive, Bernhard Spalt, warns of the dangers of a “blame game”.
Bernhard Spalt, Erste Group
“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, people will look for who is responsible.”
Clearly, this problem is not specific to CEE. Nevertheless it is particularly relevant for the region, given the continued domination of many banking sectors by big Western groups, including Raiffeisen, Erste, Societe Generale, UniCredit, Intesa Sanpaolo and KBC.
Blaming foreign banks has been a popular activity in the past for politicians in countries such as Hungary, Poland and Romania – not always without justification – and senior bankers are well aware that it could once again prove attractive if deteriorating economic conditions prompt public unrest.
Nevertheless, calls by local regulators for restrictions on the repatriation of dividends – a favourite theme of foreign bank-bashers in CEE – have met with strong resistance from regional banking groups.
Strobl puts the case succinctly: “Banks in the EU have built their operations on the promise that as long as capital stays within a banking group, it should be free to move. The ring-fencing we are now seeing by local governments puts a lot of pressure on parent groups and will be damaging in the long run.”
Otherwise, banks in CEE mostly seem to have made their peace with regulators as early calls for forbearance on impairments and leniency on countercyclical capital buffers have been heeded.
Developments in digitalization that would have taken a couple of years under normal circumstances have accelerated dramatically- Bernhard Spalt, Erste Group
Many are also taking comfort amid the chaos from a rapid increase in the use of digital banking services, even in cash-dependent regions such as the Balkans.
“Developments in digitalization that would have taken a couple of years under normal circumstances have accelerated dramatically,” says Spalt.
Not only does this offer banks an opportunity to demonstrate the capabilities of new digital banking platforms, there are also hopes that it could also help to see off challenges from new players.
“If customers realize our digital offering is very good, they won’t feel the need to move to non-banks,” says Strobl.
Some bankers even see the current crisis as an opportunity to build market share. Laszlo Wolf, deputy chief executive of Hungary’s OTP, believes it can work to the advantage of CEE’s largest home-grown banking group.
“OTP managed to get through the 2008 crisis without any major downsizing, which turned out to be a competitive advantage when the economy started to catch up after the crisis,” he says. “We believe OTP Bank is well positioned to emerge as a winner from the recent turmoil.”
Meanwhile in Russia, Alfa-Bank chief executive Vladimir Verkhoshinskiy says the crisis will accelerate recent consolidation in the Russian banking sector.
“Clients will migrate to more reliable, bigger banks,” he says.
He is also upbeat about the resilience of Alfa-Bank and its clients.
“The average Russian customer will be able to live with complete lockdown much better than those in European and other countries,” he says. “With Alfa-Bank, I think we are probably in one of the best situations globally.”