The three big Vienna-based banks’ expansion into central and eastern Europe (CEE) was one of Austria’s real successes of the past 25 years but has left a sour taste in the aftermath of the global financial crisis.
While Raiffeisen Bank International (RBI), Erste and Bank Austria (now part of Italy’s UniCredit) came out of the crisis better than most, they have all been rocked by regional aftershocks. On top of this, the conflict between Ukraine and Russia has forced RBI to close down its eastern Ukrainian branches, pushing up its non-performing loans (NPLs) in Ukraine up to 52 per cent.
Write-offs in the region highlighted the generous multiples paid for some acquisitions (notably by Erste in Romania) while the rise in NPLs around the region demonstrated the risks of extending foreign exchange loans to non-Austrian customers.
More fundamentally, the woes of Erste, and particularly RBI, have raised questions about whether they had the management capacity to handle such a diverse portfolio of operations at such a pace of expansion and why this was unaccompanied by capital increases.
Andreas Ittner, vice-governor of the Austrian national bank, says not enough thought before the crisis went into putting more profits into providing a capital cushion against bad times.
Both Erste and RBI, with some prodding from the Austrian Financial Market Authority (FMA) and the central bank, have taken steps to address their problems, through cutting lending, particularly foreign exchange loans, and by making local operations self-funding with deposits and raised provisions for bad debts.
Loan-to-deposit ratios have been cut from 130 per cent to below 100 per cent, says Klaus Kumpfmüller, executive director of the FMA, who adds: “Most of the [foreign exchange] problems have already been booked.”
Banks and regulators say the main risk now is out of their hands.
“A much bigger risk is the geopolitical risk,” says Mr Ittner. This is a worry mainly for RBI, which has a presence in both Ukraine and in Russia. RBI’s diverse spread of operations has not helped it in a stressed environment when several countries have been underperforming at the same time. Both RBI and Erste are dependent on particular countries for profits — the Czech Republic in Erste’s case, Russia in RBI’s — to cover their losses.
The banks have had to fight these fires while profitability in their home markets has been sluggish because of low interest rates and weak lending growth.
According to RBI’s CEE Banking Report in June, the overall banking return on equity (ROE) for the region is at its lowest level since 2000 at 6.9 per cent. Both banks, which made a loss last year, are bullish that economic growth in the region will boost profitability. Erste expects a ROE of between 8-10 per cent this year, while RBI aims for a consolidated ROE of 11 per cent in the medium term. “Central Europe will grow 1-1.5 per cent more than the euro area. That is a lot, but of course [bank expansion] has to be much more contained and risk-aware than in the past,” says Mr Ittner.
Regulators are insisting that the two big banks strengthen their equity to be able to weather future shocks. Both have belatedly raised capital over the past couple of years but analysts and regulators say their fully loaded tier one ratios (core equity divided by risk-weighted assets) are still on the low side: RBI has a ratio of 9.9 per cent, Erste’s is 10.6 per cent.
“The [tier one] gap between them and their big international peers will widen in the next few years,” says Patrick Rioual, director of financial institutions at Fitch Ratings, which downgraded both banks in May.
This month Austria’s Financial Market Stability Board recommended the country’s big banks should phase in over two years a tier one ratio that is three percentage points greater than the eight per cent buffer demanded by the European Central Bank. “We are slightly behind the average of the competition with our large banking groups,” admits Mr Kumpfmüller.
Both banks are ruling out another capital increase but strengthening equity through retained profits at a time of sluggish profitability, debt provisioning and special bank taxes in several countries — including Austria — will be hard. RBI would have most difficulty launching another capital increase because of its co-operative structure and its decision to reduce its size.
“A bank of our size should be more focused,” says Karl Sevelda, chief executive. It has put its Polish, Slovenian subsidiaries and its Zuno internet bank up for sale and will slim down in Hungary, Ukraine and Russia. It expects to have to make €550m of restructuring charges, most of them this year. Erste has ruled out acquisitions this year and next.
Both banks fear that tougher capital requirements will crimp future profitability and are angry that regulatory norms are still unclear and do not take account of their low overall leverage ratios — core equity divided by overall assets (unweighted).
Andreas Treichl, Erste’s chief executive, says: “We should have a very serious taking stock of what has been accomplished in the last six to seven years and form a judgment of what is the rate, definition and level of capital, and how do you differentiate depending on the different business models banks have.”