The traditional remit for multilateral development banks is to complement commercial banks by providing funding for projects or markets that might otherwise be deprived of it. In emerging Europe these days, that definition is rather broader than it used to be.
"The crisis is bad, but for us it is an opportunity. We are becoming more competitive in the region because of the decline in private funds to the region. As external financing is not available there is more demand for our products," says Hayrettin Kaplan, a Turkish national and president of the Thessaloniki-based Black Sea Trade and Development Bank (BSTDB).
The bank was created in 1998 by the 11 original members of the Organisation of the Black Sea Economic Co-operation (BSEC, founded in 1992, see chart facing) to foster closer economic ties among the countries around its shores. The bank grew slowly until 2006, and since then its loan portfolio has doubled as benign conditions for private sector financing came to an abrupt end.
"New loans are mostly in the region where we could not finance before because the private sector was so active - Romania, Bulgaria and, to some extent, Turkey. These countries had complained we did not have enough presence there, so we are working to have a more balanced portfolio in terms of member countries," says Mr Kaplan.
Capital increase
BSTDB's initial capital of 2 billion IMF special drawing rights (SDRs) was increased to SDR3bn ($4.6bn) in 2007, and in October last year the members voted for a further SDR1.5bn increase, to be paid in from 2010. "Shareholders have seen that there is potential, so we convinced them to increase the capital. The other reason is to show the financial community that we have strong shareholder support," says Mr Kaplan.
The loan portfolio grew by about 30% in 2008, to hit its end-2010 target of SDR600m two years early. This was despite the bank putting decisions on hold in the fourth quarter due to the volatility of funding costs - although BSTDB was still able to close a $325m syndicated loan just one week after Lehman Brothers' collapse. In May 2009, the bank also managed to launch its debut Eurobond for $125m.
This should allow for loan growth of about 5% to 10% in 2009, according to Mr Kaplan, before the capital increase begins to come online in 2010. In the meantime, the bank must be selective in reviewing applications, and is concentrating on infrastructure and energy projects that would struggle to find suitably long-term financing from a global commercial banking sector that is grappling with a liquidity squeeze.
Further east, the Almaty-based Eurasian Development Bank (EDB) has also been successful in raising funds to step up its operations. The member governments have not, so far, voted the bank a capital increase, but it will be helping to manage part of the $10bn anti-crisis fund announced by the Eurasian Economic Community (Eurasec) in early 2009. "We are a young institution, and every day brings something new," says Igor Finogenov, EDB's executive chairman. The bank's total assets are now more than $2bn.
The bank has trade finance agreements with BNP Paribas and Deutsche Bank, closed a fresh €25m bilateral loan from Intesa SanPaolo in April 2009, and filed a US markets Rule 144A shelf for a medium-term note (MTN) programme in November 2008. Mr Finogenov says the plan is to issue MTNs for up to $3.5bn over three years.
Perhaps equally significant was the bank's inaugural five-year bond issue in Kazakh tenge in April 2009, for Tg15bn ($100m). In January 2009, the Russian government also authorised the bank to issue bonds in roubles. "This is important for us as we work with clients who will have more risks if they borrow in dollars, because they work in local markets and their revenues are in local currencies," says Mr Finogenov.
In addition to direct project participation, in 2008 EDB began to distribute funds to commercial banks for onlending to help modernise small and medium-sized enterprises (SMEs), starting with a $70m credit line to Bank CenterCredit in Kazakhstan.
EDB's original founders, Russia and Kazakhstan, created the bank with initial capital of $1.5bn in 2006. They were joined by Armenia in April 2009, which brought in an extra $100,000 of paid-in capital, in addition to $40m in net profit for 2008.
Discussions with other Eurasec members are at an advanced stage. "Belarus and Tajikistan are very close to being formal members, and they recently completed all formalities in their countries. Kyrgyzstan is in the process of obtaining inter-ministerial clearance to join, and some other countries have expressed an interest in participating, for example Mongolia," says Mr Finogenov.
There is no set regulation on the proportions of the portfolio allocated to each EDB member country, and Mr Finogenov says each new project will be considered on a case-by-case basis, with particular emphasis on energy, mining and large industrial plant.
Multilateral co-operation
In the case of BSTDB, there are few countries eligible to join that have not already done so. In 2004, Serbia joined the 11 founder members of BSEC, and has stated its intention to accede to BSTDB within the next two years.
In the current climate, this expansion of multilateral capacity seems unlikely to cause overlap with existing large European international financial institutions such as the European Bank for Reconstruction and Development (EBRD) or European Investment Bank (EIB). The EBRD has indicated it will increase its investment from €5.1bn in 2008 to €7bn in 2009 to manage the financial crisis, and the EIB is to contribute €11bn, mostly to be channelled through commercial banks to SMEs.
"Our distinction is that we work with projects that generate more economic integration among our members. We do some of the same tasks as other development banks, but the needs in these territories are so big that even the efforts of all of these development banks are not enough to do all the work," says Mr Finogenov.
Both BSTDB and EDB are increasingly co-operating with other national and international development banks to fill the gap left by the retreat of private sector lending. EDB is co-ordinating its response to the financial crisis with the Development Bank of Kazakhstan and Russian state development bank Vnesheconombank; and a memorandum of understanding signed with Japan Bank for International Co-operation in April 2009 complements an earlier arrangement with the Islamic Development Bank. These highly rated institutions provide trade finance facilities to EDB.
Black Sea Trade and Development Bank ownership (%)
Ratings ambition
Austria's development bank, OeEB, established a fund for €500,000 with BSTDB in October 2008, to help finance project feasibility studies and client business planning. Dutch development bank FMO, German development bank DEG and the EIB all have observer status at the BSTDB, and Mr Kaplan is keen for at least one of them to become a shareholding member. In addition to the extra capital, reputation and technical expertise that they could bring, their top AAA ratings could help to lift those of BSTDB itself - currently at Baa1 - and so bring down funding costs.
"We are working for an upgrade every two years. We had one in 2006, and we expected one last year after the capital increase was announced, but some of our member countries were downgraded," says Mr Kaplan. These downgrades included Ukraine, Russia, Romania, Bulgaria, Georgia and Greece, a majority of the shareholders.
Nonetheless, the rating from Moody's is on positive outlook, and Mr Kaplan hopes for an upgrade once the financial storm has passed. To achieve it, he will also have to watch the asset quality on the bank's fast-growing portfolio of loans. "Their continued good performance cannot be guaranteed, particularly given the high percentage of loans to manufacturing and financial services sectors - more than 60% combined of the total - which have been especially troubled during this crisis," says Moody's analyst Anthony Thomas.
In practice, Mr Kaplan says that the bank has only one non-performing loan, from a default in 2005, and this is fully provisioned. The overall asset quality is helped by the prevalence of project-based lending secured by revenue streams. "We have a high provisioning rate of 5.1%, and if there will be defaults there is enough cash to cover some losses," says Mr Kaplan.
In Ukraine, the most at-risk country in the bank's region of operation, its portfolio is well diversified among public sector, industrial and energy sector assets. "We may see some rescheduling, but I don't expect any outright non-performing loans at the moment. If you have project finance with long maturities, and the project starts to do well in seven or eight years, they will overcome any difficulties from the crisis. It is not like commercial banks making two or three year loans," says Mr Kaplan.
