Business has never been better for the international banks that dominate in much of central and eastern Europe. But the upheavals in international financial markets could presage more difficult times, even if the region is spared the worst of the turmoil.
Bankers say growth in central and eastern Europe is sufficiently strong for the region to weather the storm, but individual countries and companies have run into difficulties – and they may be joined by others before stability returns to world markets. As Andreas Treichl, chief executive of Austria’s Erste Bank, says: “People say things will improve in the second half of 2008 but I am not so sure because I don’t know all the bad news is out.”
Most banks have been celebrating record results for 2007. Italy’s Unicredit, the biggest bank in central and eastern Europe, reported a 9 per cent increase in net profits to nearly €6bn ($9.4bn); Erste, with extensive central and south east European investments, reported a rise of 26 per cent to €1.2bn net; and US-owned GE Money, a division of General Electric, reported $944m net for its east European business, with profits growing at an annual average of more than 60 per cent in the past three years.
Of the leading international financial groups which are big in the region, only France’s Société Générale and Citibank of the US have been seriously affected by the global credit squeeze. Whether by luck or judgment, the rest have mostly been too busy investing in central and eastern Europe to put much money into exotic instruments.
With most big banks in central and south-east Europe already in the hands of international owners, the focus of acquisitions in the past year has been on the less familiar markets further east. If the biggest banking acquisition of 2006 was Erste’s €3.75bn acquisition of BCR – Romania’s largest bank – the most significant deals of 2007 have been in Ukraine, where Sweden’s Swedbank bought TAS-Kommerzbank for $735m, plus future performance-linked payments of up to $250m, while Unicredit paid $2.1bn for Ukrsotsbank. Banks are also looking hard at Russia and Kazakhstan, where they think the liquidity problems experienced by some local banks creates buying opportunities. Unicredit has, for example, dived into the choppy Kazakh market and agreed to buy control of ATF Bank for $2.2bn.
On top of acquisitions, banks are investing heavily in the expansion of networks and product lines, notably in Ukraine, Romania and Russia. Herbert Stepich, chief executive of Raiffeisen International – in asset terms the third-largest bank in the region behind Unicredit and Erste – says: “Conditions for expanding our business remain very good.”
Bankers argue that because the global credit squeeze coincided with a period of very strong growth in central and east Europe, the moderate economic slowdown now taking place is not unwelcome in reducing the dangers of over-heating. Some central banks were in any case acting to slow credit growth even before last summer.
Raiffeisen forecasts moderate declines in credit growth from high levels: in Russia from more than 50 per cent last year to 26 per cent in 2008, in Ukraine from 76 per cent to 24 per cent and in Romania from 53 per cent to 24 per cent. Mr Stepich says: “We see some air coming out of over-heated economies of the past few years.”
Of course, even if the general outlook is benign, there is scope for significant nasty surprises. The region’s banking sector is by no means uniform. In central and south-east Europe, the industry is dominated by international groups, which mostly have bigger operations elsewhere. Unicredit, for example, has about 20 per cent of its total assets in the region. These groups generally finance their east European operations from their own resources.
But in Russia and Kazakhstan, markets are dominated by locally-owned banks raising large amounts of money from the international market.
Some of these institutions are now vulnerable, as is reported elsewhere in this report. The oil-rich Russian and Kazakh authorities are supporting banks that have run into trouble. But, especially in Kazakhstan, that is not enough to put confidence back into the banking market.
Jean Lemierre, president of the European Bank for Reconstruction and Development, says his government-owned institution stands ready to play a role in easing fund-raising problems. “The challenge we have for 2008 is to help some companies and some banks to go back to the market.”
Manfred Schepers, the EBRD’s vice-president for finance, says local currency markets the EBRD assisted in establishing in Russia and Ukraine can contribute support. “Our role as a stabiliser in these economies in 2008 will be a very important role.”
For the region’s policymakers, one comfort from the financial turmoil is that local financial markets are small in relation to total economic output. According to Raiffeisen, bank assets are the equivalent of 235 per cent of Gross Domestic Product in the eurozone, but just 75 per cent in central Europe, 74 per cent in south east Europe and 53 per cent in the former Soviet Union.
For mortgages, which have caused so much trouble in the US, the figures are even lower – just 11 per cent of GDP in Poland, 2 per cent in Romania and 1.2 per cent in Russia.
At these low levels, the danger of a financial shock having a big macro-economic effect is smaller than in more financially-developed economies. But it is far from negligible. The impact of a financial crisis on economic confidence could still be considerable, as it was in Russia in 1998.
