Rob Anderson in Vienna -

Austrian banks have a spring in their step once again, but this time around they are watching carefully for potholes on the road ahead.

Written off during the global financial crisis because of their massive exposure to the apparently stricken economies of Central and Eastern Europe, Bank Austria (part of Italy's UniCredit Group), Erste Group and Raiffeisen Bank International are increasing lending in the region again and eyeing potential acquisitions. Raiffeisen even felt confident enough in April to propose a five-fold increase in its dividend, stunning analysts.

Net interest income and fees and commissions are growing healthily again, but the big boost to profits has come from falling provisioning for bad loans, down 47% at Raiffeisen in 2010 from the previous year. The big three never slipped into a full-year loss during the crisis and they are now confident that the worst is over. Even though non-performing loans at Raiffeisen remain high at 9% of total loans and they are not expected to peak until the second half of the year, the bank believes that the return of growth in the region should more than cover this and allow it to write back provisioning. "The dynamo is working again," says Patrick Butler, head of investment banking at Raiffeisen.

Neither the crisis in the Eurozone periphery, nor the fiscal squeeze being imposed across CEE, nor the threat of interest rate hikes to contain rising inflation are currently seen as likely to switch the motor off again. Nevertheless, no-one is predicting a return to the glory days of rocketing loan growth and soft lending conditions. Banks expect steady lending growth - Erste says in the mid-single digits this year - and promise to be much more cautious on loan/value percentages and lending in foreign currencies.

Moreover, banks are also making what Butler describes as "incremental changes in behaviour" that will have a profound impact on how the region recovers.

Deepening deposits

Firstly, because of the continuing worries over access to wholesale funding, banks are concentrating on building up strong deposit bases in each of their markets, a challenge particularly for Raiffeisen and Bank Austria. "The focus on funding is going to stay," says Kristian Kuendig, director of the Financial Institutions Group at Fitch Ratings. "They will have to focus on maintaining and improving a good retail deposit franchise."

Secondly, at least this year, banks will focus on corporates, because business confidence is recovering much faster than consumer confidence, pulled by the roaring German economy. "Corporates will be much more active than retail in the next 12 months," reckons Gianni Franco Papa, the new head of UniCredit's CEE division.

This is a challenge particularly for Erste, which is much stronger in retail banking, but it too is successfully using its wide branch network, together with its international centres of expertise, to win corporate business.

Banks are also seeking other kinds of work from corporates as a condition for granting loans, in part because tighter regulation will restrict the amount that banks will be able to lend (compared to their equity) in the future. Butler points to services such as corporate advisory, mergers and acquisitions, private placements, and hedging. "In the past this was a bit of an adjunct, now it is central," he says.

Franz Hochstrasser, deputy chief executive of Erste Bank, highlights the booming corporate bond market in CEE as a new banking battleground. "We have to establish new sources of finance for our clients," he says. "[Corporates] don't want to depend on just one source of funding - they learnt their lesson."

Thirdly, banks are bringing their networks under greater central control than before, partly to seek synergies on both the cost and revenue side, partly to take more account of the heightened differences in country risk, and partly to prevent a recurrence of some of the mistakes by the individual banks that were revealed during the crisis. This will be particularly interesting to watch at Raiffeisen, which has a wide network of small banks and has always had a more devolved structure of decision-making.

Black sheep of the family

Each of the banks still has its black sheep. For Raiffeisen, the problem countries are Hungary (partly because of the banking levy) and especially Ukraine; for Bank Austria, Ukraine again and Kazakhstan (where it made a further €199m writedown last month); for Erste, which operates in less volatile countries, it is Hungary again and particularly Romania.

None of the banks talk about exiting any of these operations, but it's clear that they will be much more discriminating in the future about which country to put capital into and which segment in which country, rather than just trying to grow overall market share as they did in the past. "The assessment is in what segment we want to be strong," says Papa of Unicredit, which plans to open 300 new retail branches in Romania.

Rather than exiting, the big three are looking for cheap acquisitions as stricken banks from the Eurozone's periphery retreat from Emerging Europe and walking wounded such as KBC of Belgium and Volksbanken of Austria pull in their horns. "Multiples have come down very considerably," says Butler.

Last September, a Raiffeisen banking report predicted that 2011 "might be a year of increased M&A interest." In February, Raiffeisen itself agreed to buy 70% of Poland's Polbank from Eurobank EFG of Greece for €490m, a modest price multiple of 1.7x book value. Putting Polbank's retail network together with Raiffeisen's existing corporate banking business will create Poland's sixth largest bank by assets.

Raiffeisen hasn't ruled out further acquisitions, but any significant ones would almost certainly necessitate a capital increase, given the bank's wish to strengthen its core capital to meet new international rules and repay (like Erste) the Austrian government's injected equity by 2013.

Erste is also looking at Poland - where there is speculation that Portugal's Bank Millenium might want to exit - hinting recently that it might be prepared to go against its longstanding practice and buy a small bank.

Bank Austria, which has the strongest capital base, remains outwardly the most cautious. "Today there is nothing on the table," says Papa. "The plan we put forward is for sustainable organic growth."

Robert Anderson is currently the Financial Times' industry news editor. As an FT correspondent he reported across central and eastern Europe for 12 years