Guy Norton in Zagreb -

Herbert Stepic, chief executive of Raiffeisen International, the second-biggest lender in Central and Eastern Europe, remains confident that despite the short-term effects of the global credit crunch and the associated economic slowdown, the region will continue to offer profitable opportunities for those institutions that display a long-term commitment to the region.

"I personally believe that Central and Eastern Europe will stay the most attractive growth market in the whole of Europe and that in a couple of years' time, we will look back at this crisis as a spot in history," he tells bne in an interview.

While acknowledging that economic growth levels in the region will be lower than in the pre-credit crunch era - no bad thing, he argues, given the dangers of economic overheating - he still believes that "New Europe" will continue to outperform the soi-disant "Old Europe" by some margin. "Central and Eastern Europe still offers a number of key advantages versus the EU15 economies," says Stepic, highlighting such features as low labour costs, high educational standards and rising productivity gains. "Labour costs on average are at least 50% lower in New Europe compared to Old Europe."

On the educational front, Stepic says that on a global level CEE features in the top third of countries, with standards in some countries in the region higher than those in some EU member states. On the productivity front, he says that while productivity gains in the EU15 countries were running at just 1.5% in the 2002-2007 period, in CEE the gains were four to nine times that level. "If you invest in New Europe, the productivity gain which you have as an investor is extremely attractive."

What's more, the investment case for the region has been further bolstered by attractive, low-tax regimes for both corporations and private individuals. He adds that there are further economic gains to be reaped by further expansion of the EU. The drive for membership has been a key trigger for economic development, says Stepic, citing Slovakia as a prime example of a country that has seen strong economic development pre- and post-EU membership, which culminated this year in it becoming the second emerging European country to adopt the euro. "The inherent growth from the ongoing economic catch-up process in Central and Eastern Europe remains in place," says Stepic, adding that Raiffeisen analysts forecast that GDP growth in the region will be at least 2.5 percentage points higher than in the EU15 on a long-term basis after this crisis.

Bad stats

Stepic recognizes that this upbeat prognosis is struggling to find an audience against the Cassandra-like predictions of some analysts and commentators who have predicted that CEE is heading for economic meltdown. "The hammering that Central and Eastern Europe and, consequently, Austrian banks and the Austrian economy has received from un-objective reporting in recent months has been a source of great concern to us," says Stepic.

In particular, he cites the recent incorrect interpretation of financial data that gave an utterly false picture of Austrian banks' risk exposure in CEE. "Of the total €200bn exposure of Austrian banks to Central and Eastern Europe, some 85% is financed locally through deposits." Furthermore, some 72% of the total is invested in countries that are now members of the EU, Stepic argues. "There is the common understanding within the EU and outside the EU that no EU country will fail."

Of the 28% balance, half is exposed to Southeast Europe where many countries are already on the path to EU membership, while the remaining exposure of just 14% is to Russia and the Commonwealth of Independent States, where Stepic acknowledges the economic and financial risks are probably the highest in the region. "Media coverage has created a great deal of uncertainty in the banking industry and a totally wrong risk perception of Central and Eastern Europe," argues Stepic. "Our lending in Central and Eastern Europe is almost only on a secured basis and so it will not lead to an explosion of the Austrian economy, let alone the Austrian banks, as has been suggested in some quarters."

While confident in the long-term economic potential of CEE, Stepic is not blind to the short-term financial pitfalls either. "Of course, we see the risks and we will see a rise in non-performing loans, as the region has been hit by the liquidity and financial crisis of the past year." But he is dismissive of any notion that CEE poses a comparable risk with the sub-prime mortgage problems in the US. "Investors can still invest in productive assets in CEE and not in toxic assets."

Weathering the storm

As far as Raiffeisen's position as a leading banking player in CEE is concerned, Stepic says there is no lack of commitment to the region, short-term problems notwithstanding. "The name of the game as a bank is to carry our customers through the crisis and not to panic."

Stepic believes that with more than 20 years of experience of operating in the region, Raiffeisen has created a well-balanced universal banking model that is robust enough to weather the current economic storm. "Our banking model is good for generating profits in the good times as well as managing risk in the bad times," he says. "I'm extremely happy that we have a totally diversified geographic and business segment model."

With a presence in 17 CEE countries and almost 15m customers, Raiffeisen is well positioned to mitigate different risks across the region. "With our across-the-board activities, we have built-in insurance in our business model."

He adds that in contrast to some of its rivals that paid top-of-the-market valuations for its acquisitions in the region, "we have always paid reasonable multiples for our acquisitions and, consequently, we did not suffer from any impairment tests. The total goodwill that we have in our balance sheets is around €600m for all of our acquisitions - which is a very low amount in comparison to many of our competitors."

Rather than sit and wring his hands in Vienna, Stepic spent a large part of 2008 visiting all parts of the Raiffeisen network to ensure that the management and staff are fully prepared to face the market downturn. "For the last year, I've been travelling constantly throughout the region to help change the mindset of the bank. The focus has gone from growth and profits to capital and liquidity preservation, and foremost risk management."

Stepic claims that the bank's extensive on-the-ground presence in the region is a key competitive advantage when it comes to achieving the correct risk-reward balance. "The 'Know Your Customer' principle is a key part of our business model and so we are totally aligned to fight the crisis."

Even amid the current doom and gloom, Stepic says that Raiffeisen will continue to monitor markets across the region for potential acquisition targets. "For the foreseeable future, the focus will be primarily to manage our already very large existing network, but that doesn't mean that there will not be several banks on offer, especially in the CIS."

Last, but by no means least, Stepic believes that in general emerging Europe remains well positioned to cope with the current crisis. "The population in Central and Eastern Europe had to cope with a constant state of crisis under communism and I'm quite sure that this inherent flexibility will help them to overcome the current crisis quite swiftly and with less difficulties than in Western Europe."

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RZB results for 2008

Herbert Stepic's faith in the CEE region has been borne out by the bank's 2008 results released in April. Despite the crisis, parent bank RZB Group managed to put in another record operating high in 2008 and turn in a modest profit. The collapse of the international capital markets in September cost the bank some €1.6bn and what would have been high net profits fell by almost two-thirds in the last quarter of the year to €432m.

Operating profits remained high, up by 14%, and the balance sheet growth would have been strong too but for the devaluations of national currencies across the region, which lopped some €2.2bn off the balance sheet between the first and second half of the year, to leave the bank with a balance sheet total of €156.9bn by the reporting date. At the same time, the return on equity before tax fell from 22.2% to 7.3% because of the lower profit for the period. The return on assets before tax also fell from 1.17% in 2007 to 0.40% for 2008. The risk/earnings ratio increased from 10.5 to 28.7%.

Despite the setbacks, the bank's CEE specialist arm Raiffeisen International remained upbeat about its future. "In spite of the considerable turbulence and the other effects of the global financial crisis, RZB Group's listed subsidiary Raiffeisen International enjoyed healthy growth and posted a record result for the financial year 2008. Its consolidated profit (after minorities) increased by 16.7% to €982m. Raiffeisen International's profit before tax came in at €1.429bn, while its earnings per share advanced from €5.80 in 2007 to €6.39," the bank said in a statement.

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