Eastern Europe is at risk of its economies running out of credit as western lenders may have to focus on recapitalizing themselves, making it difficult to fund their units in the region.
With about three-quarters of the region’s banking industry owned by western lenders such as UniCredit SpA and Erste Group Bank AG, local units are likely to receive less support, “bearing on credit growth,” the European Bank for Reconstruction and Development said last week.
Lenders that bankrolled eastern Europe’s boom before the 2008 credit crunch are already squeezed by deteriorating loan quality and slowing economic growth. The region was the world’s worst-hit in the aftermath of the collapse of Lehman Brothers Holdings Inc. three years ago and faces the threat of the same fate as the euro area’s troubles spread.
“This will definitely have an impact,” Christian Keller, an emerging-markets economist at Barclays Capital in London, said in a telephone interview. “If you have a banking system that is intrinsically linked to western European banks and western European banks deleverage, you realize that growth in that region will no longer be as it was before.”
By June 30 next year, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided yesterday. That may require an additional 106 billion euros ($149 billion) of capital, according to the European Banking Authority.
Increased capital adequacy requirements may prompt lenders to “shrink balance sheets,” Keller said.
The summit in Brussels also persuaded bondholders to take 50 percent losses on Greek debt and expanded the euro region’s rescue fund to 1 trillion euros ($1.4 trillion). Lenders have until Dec. 25 to submit money-raising plans to national supervisors.
Italy’s UniCredit, the largest lender in eastern Europe, needs 7.38 billion euros of fresh capital, while Erste, which owns the region’s second-biggest banking group, requires 59 million euros, according to the European Banking Authority. Raiffeisen Bank International AG, the region’s third largest, will need to fill a 1.9 billion-euro capital shortfall, the regulator said today.
Lending is weakening in eastern Europe compared with the first half, when it grew 3 percent in the EBRD’s 29 countries, including a contraction in half of them, said Erik Berglof, the EBRD’s chief economist, citing inflation-adjusted figures.
Funding from western lenders added 1.5 percentage points of annual growth between 2003 and 2008 as banks feasted on new markets opening up with the European Union’s expansion waves in 2004 and 2007, according to the International Monetary Fund.
“Banks pumped all this wholesale in there, which otherwise wouldn’t have been there,” said Ronny Rehn, a banking analyst at Keefe, Bruyette & Woods in London. “This whole excess penetration is correcting.”
Loan growth is less than 10 percent everywhere in the former communist bloc, less than a third of the 2007-08 rate, the IMF said. OTP Bank Nyrt., Hungary’s largest bank, predicts that corporate lending in the country will stagnate or shrink next year because of a capital shortage at some rivals, Deputy Chief Executive Officer Laszlo Wolf said.
‘It’s an Illusion’
“It’s an illusion today that if a bank is foreign-owned it definitely has capital strength and its owner is well capitalized,” Wolf said in an Oct. 20 interview.
The amount of capital flowing into Hungary will be sufficient for “performing the necessary minimum amount of tasks” as the country is at a competitive disadvantage because of its special tax on banks, Ferenc Szabo, the deputy chief executive of Raiffeisen’s local unit, said in an interview yesterday.
Western banks will examine “every part of their balance sheet” and may be more willing to sell subsidiaries than before and more reluctant to roll over financing when it matures, Keller said.
Euro-region recapitalization plans must include the eastern units, the EBRD has said. The London-based lender in 2009 orchestrated the Vienna Initiative, a pledge from the region’s biggest banks to continue financing their units.
“Support must be extended to the subsidiaries,” Berglof said in a telephone interview on Oct. 14. “The deleveraging process is threatening what’s been achieved.”
The Vienna Initiative must be revived as there is a danger that western banks will reduce exposure in the east, Romanian central bank Deputy Governor Cristian Popa said at a conference yesterday in Dubrovnik, Croatia.
Economic growth is slowing, tracking euro countries that buy the bulk of the region’s exports. The IMF cut its 2011 growth estimate the most for the region, along with the U.S., in its World Economic Outlook last month.
Central and eastern Europe’s economies contracted by 3.6 percent in 2009 before rebounding 4.5 percent in 2010, according to the Washington-based lender, which predicts 2.7 percent growth next year.
Western banks need to reconsider their business model in eastern Europe and cover lending increasingly from local deposits, which will slow lending growth, according to KBW’s Rehn. Erste and UniCredit have already announced they will seek to cut reliance on funding from abroad at their units.
Vienna-based Erste, the second-biggest lender in eastern Europe after UniCredit, said on Oct. 10 it expects to swing to an 800 million-euro loss this year after writedowns and provisions of 1.6 billion euros. It pledged to inject capital to its Hungarian and Romanian units.
With financial markets less developed in the east and growth outpacing the west, banks that have made the most investment will be reluctant to withdraw, said Jerome Booth, who helps manage about $47 billion of emerging-market assets as co-founder and head of research at Ashmore Investment Management in London, said.
“If you’re in these markets, you’re in there because you want to build your market share,” Booth said by telephone. “All of these banks know that the attractive future markets are the emerging markets. They are not going to be wanting to give up space.”
UniCredit’s Bank Austria AG unit, which oversees the lender’s eastern European businesses outside Poland, is “trying to focus more on local funding,” Chief Executive Officer Willibald Cernko said on Oct. 21, adding that “this is only going to be even more the case in the future.”
Foreign lenders “will remain risk averse,” said Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London. The consequences may be “less credit, which means even weaker growth and recovery.”