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Rankings & dataMay 22 2015

Austrian banks’ profits in CEE hit all-time low

For years, Austrian lenders Erste Bank and Raiffeisen Bank have enjoyed strong profits at their central and eastern European operations, but with growth in these economies slowing, more recent results suggest that they may need to rethink their strategies in the region.  
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In the past two decades, expansions into central and eastern Europe (CEE) have proved lucrative for Austrian banks, allowing them to capitalise on the region's growth and even protecting them from the financial downturn that swept through the much of western Europe. But, as charts one and two show, while the CEE operations of the two largest Austrian lenders – Erste Bank and Raiffeisen Bank – recorded peak profits in 2008, they have been on a downward spiral since, with results hitting an all-time low in 2014.

For Erste, this meant a loss of €117.3m in the region, adding to the total losses of the group, which amounted to €803.2m. In Raiffeisen’s case, CEE contributed just €29m to its parent, which recorded a €23m pre-tax gain for 2014. After tax, the bank actually posted a net consolidated loss of €493m. 

In some countries, problems have been a long time in the making. Hungary’s recession pushed Raiffeisen’s local revenue into negative territory as far back as 2009. Moreover, a bout of legislation – including the bank levy, which was introduced in 2010, and the forced conversions of foreign exchange loans in 2014 – further contributed to the €320.6bn loss suffered in the country by Erste and the €389bn loss by Raiffeisen in 2014.

Erste’s loss in Romania was likewise the product of ongoing problems for the bank. With 29.2% of loans in arrears at the beginning of 2014, the local subsidiary, Banca Comerciala Romana, was forced to write-off or sell nearly 30% of its non-performing debt. Interestingly, losses for one lender do not always mean losses for the other, and Raiffeisen has maintained a high-quality asset base in Romania, with non-performing loans amounting to just 8.74% in 2013, and as provisioning for impairment losses decreased, profits in the country grew by €15m in 2014.      

A mixed bag

Chart three breaks down profitability at each of the two banks' CEE operations since 2007, highlighting that the performance of individual CEE markets has become more divergent in recent years.

Some subsidiaries continue to be a staid source of profits for Austrian lenders; business in Slovakia flourished, with profitability of Slovenska sporitelna, Erste’s Slovenian subsidiary, doubling in the eight years since 2007, and Raiffeisen’s local operation remaining in the black. Neighbouring Czech Republic has proved equally lucrative, with gains from Ceska sporitelna, Erste’s Czech operation, growing 38% since 2007. Raiffeisen has also recorded consistently strong profits in the country. 

Raiffeisen's profitability in Poland wavered in 2012 and 2013 – as the country's GDP growth dropped to a 10-year low – but rebounded in 2014, when the local economy emerged from the slump.

For Raiffeisen, the Belarus market has shown the most promise. The country registered a €51m increase in profits between 2008 and 2013. However, with its economy closely tied to Russia’s – which is currently suffering a downturn – the short-term outlook for Belarus is uncertain.

Performance of Balkan subsidiaries was often lacklustre for the two banks. A flagging Croatian economy has been a drag on Erste’s representative there, although the bank managed to recover from 2013, when it suffered a €8.6m loss, returning to profit in 2014. For Raiffeisen, gains in Albania, Bulgaria and Serbia have also been trending downwards over the past eight years.

But it was Ukraine that delivered one of the most severe blows to Raiffeisen’s profits. As the value of hryvnia plummeted 100% between January and December 2014, the local unit recorded a €345m loss, the biggest loss in CEE outside of Hungary. Erste avoided the fallout from the crisis in Ukraine, having shed its business in the country in 2013, after having made losses every year since 2007, when it first acquired the business.

Chart 1 FW
Chart two Raiffeisen ungrouped FW4
Chart 3 FW 3

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