While economies in central and eastern Europe (CEE) are staging a decent recovery, sovereign debt fears are creating uncertain funding environments for banks based in the eurozone. For the three banks with the biggest market share across CEE, Austria’s Raiffeisen and Erste, and Italy’s UniCredit, that means there are good opportunities, but possible constraints on how much balance sheet can be used to exploit them.
Editor's choice
Unsurprisingly, fee-generating activities that are less demanding on the balance sheet are the focus of all three banks. Both UniCredit and Raiffeisen are going through a general review of their investment banking services with the aim of enhancing revenues.
“We have created an investment banking and markets strategy that looks at making sure we access the largest possible share of wallet of our customers. We will do that by changing our delivery model,” says Patrick Butler, the board member responsible for investment banking at Raiffeisen Bank International (RBI).
Raiffeisen overhaul
His overhaul of investment banking goes hand in hand with the merger between Raiffeisen Zentralbank’s (RZB) general banking operations and its CEE operation Raiffeisen International, which was approved by shareholders in July 2010. Aside from RZB’s services specifically to its member Raiffeisen co-operative banks, all the plain vanilla banking operations in Austria and the CEE region are now carried out under RBI, which is listed on the Vienna Stock Exchange.
“The merger broke down many of the walls between the various businesses, and we took the decision that we wanted investment banking and markets to operate as one business regardless of the product or country in which that was happening, to make use of the unique franchise in Austria and CEE, whether the business emanating is international or local in character,” says Mr Butler.
The aim is that account managers for corporate relationships across the region should increase their awareness of products beyond the plain vanilla bank lending. RBI has identified four hubs in its origination network for investment banking: Russia, Poland and Romania, and also Croatia for debt markets.
Distinct business units
At present, there are still three distinct business units handling investment banking and markets. The first is the debt capital markets and syndicated loans division that has stayed within RBI to maintain the combination of relationship lending and obtaining financing from the wider markets. The second, Raiffeisen Centrobank, is the equity capital markets, private equity and equity derivatives competency centre. The third, Raiffeisen Investment AG, is a 100% subsidiary of Centrobank, responsible for merger and acquisition (M&A) advisory.
The bank is currently reviewing whether to merge Raiffeisen Investment AG into Centrobank to form one business unit for equity and advisory. In any case, Mr Butler says the two activities coordinate closely with RBI’s own debt capital markets unit, since M&A or equity clients are likely to need acquisition or pre-listing bridge finance. But he is not yet considering bringing all three units under one roof.
“At this stage in our development, putting everything into RBI would bring less benefit than putting the equity and capital advisory side into Centrobank. Obviously we are going through [some] major changes, and we do not want to over-stress the system at this point. We think this is a rational solution right now, it cuts out a lot of replication while ensuring that the strengths we have do not get diluted by an over-radical change,” he says.
Erste’s integrated model
At Erste Group, equity capital markets and M&A advisory are already one unit, and have been so ever since a separate corporate and investment banking (CIB) division was created under Ingo Bleier in 2007. Mr Bleier moved from Creditanstalt, which had acted as the CEE-focused investment banking arm of Bank Austria, prior to its merger with Germany’s HypoVereinsBank and subsequent purchase by Italy’s UniCredit.
“At Erste, we are an integral part, we do not try to be a separate investment bank outside the bank like Creditanstalt in the old days. You need to be able to draw on the corporate relationships, and in Erste this is institutionalised,” says Mr Bleier.
CIB staff at Erste report to Mr Bleier, but are employed by the local banks in the Erste network where they are present, and revenues from most deals are shared between Vienna and the local subsidiary. In addition, there are standalone investment banking operations in Poland and Turkey where Erste does not yet have subsidiaries.
The bank successfully won a mandate for the initial public offering of Kulczyk Oil, a Polish company with exploration rights in Ukraine (where Erste has a subsidiary), and hopes to win other mandates for Ukrainian companies planning to list in Warsaw.
Local involvement
Mr Bleier believes the involvement of local Erste subsidiaries is vital, as their board members have access to the senior management of client companies who will take any decisions on major financial market activity. However, he says his CIB division has also been given plenty of room to manoeuvre in its own right.
“Erste is a traditional savings bank group, so the corporate and investment banking business has not been the traditional core. We have been allowed to be entrepreneurial and there is sufficient capital allocation to the business,” he says.
That entrepreneurial culture can only be enhanced by the transfer of the bank’s private equity principal investing activities into the CIB in 2010. Mr Bleier says this is particularly significant in the CEE region, where private equity is not only a source of financing, but also a catalyst for improved corporate governance.
Loans business
As at Raiffeisen, the debt capital markets team at Erste sits in the main part of the bank, partly because much of its business revolves around Erste’s own covered bond and senior unsecured issuance. But the loans business is split between the two, with syndication carried out in the group capital markets division, while leveraged loans, origination and arranging takes place within the CIB.
“We share the syndicated loans business with group markets because you need access to public market information and pricing trends. We have the leveraged loans business in CIB, which is a little unusual, so if we advise people to buy certain companies, we can put our money where our mouth is and finance acquisitions,” says Mr Bleier.
Erste would not shy away from participating in big-ticket deals, teaming up as the local specialist with a global investment bank for anything more than about €500m. It has a mandate alongside JPMorgan for the privatisation of Prague Airport. But Mr Bleier says it is in the mid-cap sphere that Erste’s strengths lie.
“Below benchmark-sized deals, the real global players are not that interested, so there is room for us to compete. As an entrenched lender in those countries, we have long-term corporate relationships with some of the larger players and in particular with local entrepreneurs who have been growing businesses to a size that has become interesting for capital market or M&A activity,” he says.
UniCredit's cross-border focus
By contrast, as a top 20 bank worldwide, UniCredit is aiming to draw more investment banking business from companies operating cross-border in the CEE region. The bank already has about 400,000 corporate customers, of which at least 10% to 15% operate in more than one country where UniCredit has a presence. Gianni Papa, appointed head of UniCredit’s CEE operations at the end of 2010, says there is room to enhance the bank’s exploitation of that scale.
“It is the strategic decision of UniCredit to become at least among the top three cross-border banks in order to help companies moving from [western Europe] to [eastern Europe] and vice-versa, and between countries in [eastern Europe]. What we are offering our customers is seamless service from Italy to Russia to Kazakhstan, the product model is the same in all but the smallest banks,” says Mr Papa.
However, the investment banking set-up still partly reflects the history of UniCredit’s acquisitions. There is equity capital markets coverage in London, debt capital markets is mainly a legacy HypoVereinsBank operation in Munich, and there is a range of Creditanstalt legacy services in Vienna, including the corporate advisory team for the CEE region. At the same time, UniCredit's Bank Pekao in Poland is the most active arranger on the Warsaw Stock Exchange.
Gianfranco Bisagni, head of UniCredit CIB for the CEE region, is aiming to increase coordination. “In addition to pushing the various countries, we have set up a dedicated unit in Vienna in the CIB team, which is monitoring and following all the leads coming from the core market countries to the CEE and vice-versa, to boost the cross-border synergy that is one of our main pillars for our medium-term strategy,” he says.
Showing potential
Mr Papa sees the mandate for the initial public offering of Turkish Airlines, won jointly by UniCredit and its Turkish subsidiary Yapi Kredi, as evidence of the model’s potential. At the same time, the bank is reviewing the shape of its presence that stretches across 18 countries in the region, to make it more coherent and decide what services to offer in each market.
“In certain countries the overall presence as a universal bank is giving us perhaps 4% or 5% of the market, but then we are particularly strong in particular segments with 10% or 15% of the market. So the idea might be to stay in the country, but to invest more in the sectors where we are stronger, among the top two or three, and to invest less in other segments of the market,” he says.
