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InterviewsFebruary 16 2011

Why eastern Europe could outperform Asia

Erste Bank’s shares were hammered in 2009 as high-profile economists predicted that its central and eastern European markets would implode. Today, Erste CEO Andreas Treichl expects his bank’s core region to outperform the troubled eurozone - but he never doubted the prospects in the first place.
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Why eastern Europe could outperform AsiaAndreas Treichl, CEO, Erste Bank

The European Bank for Reconstruction and Development forecasts the average gross domestic product growth rates for the eight central European transition economies at 3.2% in 2011, comfortably outperforming any other eurozone countries.

This confounds the fears of an economic meltdown in central and eastern Europe (CEE) that caused the shares of leading Austrian banks to take a pounding in 2009. But do not call it a turnaround – at least, not in the presence of Andreas Treichl, CEO of Austria’s Erste Bank, which operates subsidiaries in seven CEE countries.

“We strongly disagree with the idea of a turnaround. There were some big names, such as [Paul] Krugman and [Nouriel] Roubini, who were saying CEE was going down the drain and, because of the exposure of the Austrian banks in that region, Austria itself would go bust. That was based on a market perception of international banking that simply did not fit the reality and nobody took the time or effort to really look into what banking was like in CEE,” says Mr Treichl.

Austrian banks had extended around $200bn in loans to the CEE region. But Mr Treichl’s contention has long been that it is not possible to generalise about emerging Europe, nor is it appropriate to analyse Erste as a bank alongside monoliths such as Citigroup, which had very different business models and attitudes to risk in general.

Erste has focused almost exclusively on countries in the EU, which provides a more stable legal and institutional framework. But even among those countries, Mr Treichl emphasises that there are substantial differences between markets such as Poland, Hungary or Romania. Still, his overall view is that prospects in CEE are better than those in western Europe.

“Erste is a 'call option' on eastern Europe, and we are comfortable with that. Except for Hungary, the sovereign and private debt levels to gross domestic product are substantially lower than in western Europe, and the reliance of these countries’ pension and social welfare systems on future generations’ incomes is substantially lower than in western Europe. And despite those advantages, governments in CEE acted faster than those in western Europe to counter the fiscal impacts of the crisis,” he says.

Market opportunities

In fact, Mr Treichl believes the CEE region can compete with Asia in terms of retail banking prospects, both for lending and savings products. Bank lending per capita is well below western European levels, and the retreat of governments from the pension system is stimulating demand for suitable investment products.

“Economic growth will be lower than in Asia but from a higher base, and we tend to look at personal wealth creation, not just economic growth. A 10% growth rate in Vietnam generates €200 per capita in additional wealth each year, but a 4% growth rate in the Czech Republic generates €400 per capita. People only really start borrowing when they reach a certain wealth level, and they only start investing some time after that. That is the moment we are waiting for, to create real margin by derisking our profit and loss, moving away from dependence on lending,” he says.

In addition to the wider economic picture for the CEE region, the prevalent banking model was often ignored by the doomsayers in 2009. Mr Treichl characterises Erste as an “agglomeration of strong local banks with local funding that happen to have an Austrian owner”, and the figures support this contention. Outside Austria, the group’s overall loan-to-deposit ratio was less than 100%, so the CEE operations were fully self-funding.

Regulatory challenge

One area of concern for Mr Treichl is the tendency for new regulatory initiatives to overlook Erste’s inherently conservative business model. In particular, he says Basel III continues to favour either loan concentration to large sovereign and corporate borrowers, or the securitisation of smaller loans to reduce capital requirements – both strategies that have contributed to the financial problems of the past few years.

“If you have a small business that has 50% equity and 10% bank debt, that has a good management team and has been profitable for many years, is in an excellent market that is small, but growing, this will require 10 times more capital under Basel III than to lend to a sovereign or blue-chip company. That just does not make sense,” says Mr Treichl. 

Despite the uncertainty, he does not rule out further expansion of Erste Bank’s presence. Given Erste’s self-definition as the bank of the eastern EU, he says Poland is the obvious country where it has not yet built a significant market share. And the bank’s corporate clients are becoming more interested in Ukraine, where Erste purchased a small subsidiary before the crisis. Ukraine lost the bank a cumulative €126m in 2008, 2009 and the first half of 2010, before returning to profit in the third quarter last year. Mr Treichl describes this as “a research and development project that was more expensive than we had anticipated”, but one that could still generate significant income in the future.

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