During the IMF/World Bank annual meetings in Istanbul, UniCredit CEO Alessandro Profumo is talking to journalists on the 22nd floor of the headquarters of Yapi Kredi Bank, in which it owns a 41% stake. And he appears totally confident that both he and his Italian bank are in the right place.
"As we always said it would, diversification is starting to pay off. In March this year, everyone was saying for UniCredit: central and eastern Europe is an issue. We have always said it would be important, and today it is clearly a key element. We will continue to work to gain market share in the region," he says.
Even in Poland, where UniCredit already has its largest central and eastern European (CEE) business unit, the bank expects to take market share in 2010. Polish subsidiary Bank Pekao has a very healthy liquidity position - loans at only 90% of deposits - from which to stage fresh lending at a time when competitors are still tackling problem loans on the balance sheet.
For the first three quarters of 2009, UniCredit made a pre-tax profit in all its CEE markets except Kazakhstan, where the group had little time to adjust the management and portfolio of a recent acquisition (ATF Bank in 2007), before a major slump in the local real estate market and financial crisis hit the country in mid-2007.
The pre-tax losses there are contained at €183m, and ATF has not sought the capital injection offered to all major Kazakh banks by the government. Nor did UniCredit as a group make use of the so-called 'Tremonti bonds' devised by the eponymous Italian finance minister to allow the government to provide hybrid capital to Italian banks. Instead, the group raised new share capital from existing and additional shareholders, including the Libyan sovereign wealth fund.
"Many banks are now increasing capital to repay government bonds. Paid-in capital is, by definition, the best capital you can have, and it is the best solution we can have in terms of financing the economy, and keeping our cost of funding lower," says Mr Profumo.
Herbert Stepic - CEO of Raiffeisen International
Unexpected challenges
It was perhaps a blessing in a fairly thin disguise for Austria's Raiffeisen that it did not make an acquisition in Kazakhstan before the crisis. "For three years, we were carrying out due diligence on various banks, but the prices were always much too high for that environment," says Raiffeisen International CEO Herbert Stepic.
Which is not to say that the year has been trouble-free. The group was forced to make heavy provisioning for non-performing loans (NPLs) on its units in Hungary and Ukraine in particular, where retail lending has turned sour, especially on mortgages denominated in foreign currencies after substantial exchange rate depreciations. Raiffeisen Bank Aval in Ukraine lost €392m in the first three quarters of 2009, as NPLs jumped to more than 18%.
"We were negatively surprised at what happened in Hungary and Ukraine. In Ukraine, we knew there could be a problem in principle, but we did not expect the gravity of it, or the importance of political uncertainty. We have not had to be accustomed to [that] since the early 1990s, when we were used to living with such uncertainty, but with lower overall exposures," says Mr Stepic.
Both Raiffeisen and Erste Bank, the other large Austrian player in the CEE region, accepted injections of government participation capital - effectively non-voting preference shares - to stabilise their share prices and credit spreads against speculative attacks in early 2009. And as with those against UniCredit, these attacks have proved well overdone: despite the difficulties in Ukraine and Hungary, Raiffeisen International recorded a consolidated net profit of €156m in the first nine months of 2009. The range of performances across the region is marked - just next door to Ukraine, at Raiffeisen Priorbank in Belarus, NPLs were only 2.5% as of the third quarter of 2009.
"International investors were very negative on Austria due to its eastern European engagements, but that is now history. Pension funds, sovereign wealth funds, and hedge funds are sitting on cash that is idle, they have to start investing it to get it to perform again. In CEE, we have easing NPL dynamics - they are still rising, but at a slower pace. There is light at the end of the tunnel, and we believe that we will return to normal growth and earnings after 2010," says Mr Stepic.
Caution pays off
For Erste Bank, its naturally conservative stance, due to its part-ownership by the Austrian savings banks, has ensured that earnings have not deviated significantly from the norm. Excluding the one-off earnings from the sale of its insurance business to Vienna Insurance Group in 2008, the net profit for Erste in the first three quarters of 2009 was down less than 17%, at €720m.
"About 16 million of our 17 million customers are EU residents, we are in fewer markets than our competitors, and in the EU countries we are usually the number one or two bank," says Andreas Klingen, head of CEE strategic group development for Erste. Operating larger banks appears to have allowed Erste to avoid chasing more marginal customers simply to win market share.
"The cost of risk is up, but actually less than what we expected at the start of the year. Including collateral, NPL coverage is still well above 100%," says Mr Klingen.
The bank became present in Ukraine after the purchase of Bank Prestige at the start of 2007, but was effectively buying little more than a licence in the country, as it only had seven branches. The network has since been built up to 135 branches, then frozen as the crisis unfolded.
"We have less capital or credit exposure, but of course we have a cost issue - we are building an engine without sufficient fuel to run it as we would wish. But we are basically calculating the cost of a call option on Ukraine, an additional option to play outside our EU CEE belt," says Mr Klingen.
As the third-quarter results were announced, the group prepared an undiscounted rights issue of €1.65bn. This is clear evidence that investor attitudes have indeed changed since the first quarter of the year and that the bank will not need further help from the Austrian government in the foreseeable future. However, the bank emphasised that the proceeds will not be used to make early repayment of the government participation capital, which has a five-year maturity.
"Currently, the Austrian scheme only provides for payback in one go at year five. The Austrian government may change its mind in the future, but we do not know at this time," says Mr Klingen.
In any case, he is confident that the future will allow Erste to "generate capital by generating earnings... with lower household debt levels, a more conservative attitude to debt, and lower banking market saturation, there is still good catch-up potential in the CEE region," he says.
This medium-term optimism is shared by Mr Stepic, although he notes that there will be variations in regional recovery rates. "Those countries that have behaved well before the crisis will be the first ones to exit the crisis, with fewer wounds. I say that irrespective of their export reliance - Czech Republic, Slovak Republic and Poland, which is the only country that will show positive growth in 2009 and 2010," he says.
"After that, it depends whether we see a general improvement in the world economy, which would be positive for the export-led countries. If not, then those countries that depend to a greater extent on domestic consumption will be best placed, such as Romania where exports only account for 35% of gross domestic product," he adds.
Growth prediction
However, Federico Ghizzoni, the head of CEE banking for UniCredit, sounds a warning that growth rates in the region are unlikely to return to pre-crisis levels any time soon, leaving the leading players with a tougher competitive landscape. "What has been done in the past 12 to 18 months in terms of increasing efficiency and productivity has to become part of the DNA of the future banking business. For me, 2009 was not about cost-cutting, it was about finding a new dimension to run the same organisation with much less cost, so we had to enter into structural changes. If you just cut costs, you have to start spending more again as soon as the economy recovers," says Mr Ghizzoni.
