Rebuilding an empire

A decade ago, Erste Bank der österreichischen Sparkassen was a plodding Austrian savings bank, unconcerned about profits and expansion and almost unknown outside of its cozy home market where it had about 600,000 customers.

As of this year it has 16 million customers and is one of the leading banks in central Europe.

The bank’s results have taken a similar upward trajectory. A decade ago Erste had assets of €50bn, it now has assets of €197bn. Its profits in 1997 were €17m. Last year it reported a net profit of €932m, of which more than half was generated outside Austria.

The startling expansion is a result of a decision to launch a €508m initial public offering (IPO) in 1997 on the Viennese Stock Exchange. That changed the bank, forcing it to look outside of its comfortable home savings and loan market for profits – something that became of key importance now that the bank was owned by shareholders and not by a not-for-profit trust.

Andreas Treichl, the bank’s CEO, says that the IPO was needed to provide the funds to begin to grow.

“Austria was one of the worst banking markets in Europe,” says Michael Mauritz, a spokesman for Erste Bank. “It was simply boring. The net interest margin was below 2%, and the profits went to employees and customers, not to shareholders.”

Unlike some other Austrian banks, which chose to boost profits by investing in financial instruments, Erste followed in the footsteps of local rival Raiffeisen, which had begun opening banks in the region immediately after the fall of the Soviet Union.

Erste’s first regional acquisition was the purchase of Hungary’s Mezobank in 1998, the country’s 10th largest bank, followed by the purchase of three small Croatian banks a year later.

Those banks did not dominate their local markets. They did, however, give Erste a taste of what post-Communist economies looked like, what some of the pitfalls were, as well as the enormous potential of catch-up economies. That new knowledge was coupled with decades of experience in Austria, which may not have been very flashy, but it was a modern, and wealthy economy with a very demanding clientèle.

“Austria is a very sophisticated and high quality retail banking market, but due to the ownership structure it is not very profitable,” says Mr Treichl. “But it did give us a very good base, which delivered the know-how needed for expansion.”

Czech purchase

Having whetted its appetite in a few smaller transactions, Erste took a much bigger bite of central Europe in 2000, buying a 52% stake in Ceska Sporitelna of the Czech Republic, the country’s largest bank. That stake was later increased to 98%.

There was little competition during the initial bidding; Erste was the only bank to bother showing up.

“No Austrian banks had the money to buy a western bank,” says Mr Mauritz. “We could only buy banks in central and eastern Europe that no one wanted to buy.”

What may have seen a long-shot gamble in 2000 now has the look of obvious common sense about it. Four years later, the Czech Republic became a member of the EU, with all the legal protections for investors that status entails. In addition, it had moved from being a peripheral economy to being a member of one of the world’s premier economic groupings – and as one of the poorer members of the club, its growth will be much higher than the developed western half of the continent for years to come.

“We have prospects of fast growth for the next two or three decades with no danger of nationalisation,” says Mr Mauritz.

The Czech Republic’s economy grew at an annual rate of 6% in the first half of this year, more than twice as fast as the rate for the EU as a whole.

“Our timing was really pretty lucky,” says Mr Treichl. “It was a once-in-a-lifetime opportunity.”

Immediately after the Ceska Sporitelna purchase, Erste went next door, buying an 87% stake in Slovenska Sporitelna, the largest bank in Slovakia.

In 2003, Erste bought Hungary’s Postabank, which after merging it with its earlier purchase created the country’s second largest bank. Last year, Erste finalised the purchase of a majority share of Romania’s largest bank, Banca Comerciala Romana, and earlier this year it bought Prestige, a small bank in Ukraine.

The bank’s footprint now closely follows that of the long-defunct Austro-Hungarian Empire, which ruled over much of central and eastern Europe from 1867-1918.

“This is a region that for hundreds of years had a cultural and economic connection which is now being rebuilt,” says Mr Treichl. “It was a single region which was artificially kept apart for 50 years.”

As Erste has grown, its strategy for the region has become clear. With only a couple of exceptions, it enters markets where it can be a dominant player.

“We go into markets where we have power,” says Mr Treichl. “You need size to have economies of scale.”

That explains why Erste has not moved into Poland, the region’s largest economy. By the time it had begun scooping up banks in southern central Europe and the Balkans, the Polish market had already been fully penetrated by foreign banks, which had bought up whatever was on offer.

For nationalist reasons, various Polish governments have refused to contemplate the privatisation of Poland’s largest bank, PKO-BP. Finally, Polish pension reforms created funds that have to keep 95% of their assets invested in Poland, pushing the valuation of blue chips on the Warsaw exchange to much higher levels than similar shares in other regional markets.

“Poland lacks one of the prerequisites that is necessary for us,” says Mr Treichl. “There are no state-owned banks with a large retail share. The largest bank is PKO and it doesn’t look as though it will be up for sale.”

Ukraine is an exception, both because the bank bought by Erste is so small, and because unlike most of Erste’s other markets, Ukraine’s prospects for entering the EU are distant at best. But the idea there is to learn how to build a greenfield bank and grow it organically to about a 5% market share.

For now, Erste has no plans to move into Russia. “We are not interested in going further east,” says Mr Mauritz. “Our countries are in the EU or will soon adopt EU legal norms.”

Now that it has bought pretty much whatever was available throughout the region, Erste is transforming itself into a holding company; a process that should be completed by next year.

“We don’t want to be an Austrian bank with central European affiliates,” says Mr Treichl. “We want to be a central European bank.”

As it consolidates, Erste is developing a strategy for dealing with customers at wildly different stages of development, from affluent Austrians, to poor Romanians, to rapidly developing Czechs.

That means in Austria, where banking asset penetration is above 150%, Erste is focusing on products such as life insurance, wealth management and private banking. There the bank can only expect to grow as fast as the overall economy.

As a country’s nominal gross domestic product (GDP) per capita passes ?10,000 a year, which is happening in the Czech Republic, the market for more sophisticated services begins to grow rapidly.

In the €5000 to €10,000 range, which is where Slovakia, Croatia and Hungary are located, there is more interest in expanding credit card services and mortgage loans. Poorer markets such as Romania, Serbia and Ukraine, where per capita GDP is below €5000, are focused on providing basic banking services such as savings accounts and payment transfers.

The growth drivers can be seen in consumer loans, where the average for an Austrian is €30,000, for Czechs, Croats and Hungarians about €4000 and for Romanians €800. Similar numbers for wealth management show that per capita, Austrians have almost €19,000 under management, Czechs and Hungarians about €750 and Romanians €4.

“We are transferring our know-how from one country to another,” says Mr Treichl.

Property boom

Despite operating in poorer markets, Erste has been very careful about its credit granting processes, only recently beginning to approve 100% mortgages. While about 4.5% of its Austrian loans are classified as non-performing, the same applies to only 1.8% of central European loans. Those numbers have been helped by making loans mainly to the upper levels of the new middle classes and by the property boom, which has seen real estate prices soar across the region.

“Erste Bank’s risk appetite is not aggressive,” notes a recent analysis by Fitch, the ratings agency.

Having risen so fast in such a short time, Erste is aware that it may become a tempting target for a larger bank wanting to make a quick entry into one of the world’s fastest growing markets.

“I know we would be attractive for a large multi-national bank,” admits Mr Treichl. “But I don’t think someone else could add a lot of value to what we already do.”

Andreas Treichl: Erste Bank’s general director describes the Austrian bank’s eastern expansion as a once-in-a-lifetime opportunity