THE INSIDERS: Building a regional powerhouse step by Stepic

By bne IntelliNews April 20, 2012

Nicholas Watson in Prague -

Herbert Stepic is in fine fettle. Buoyed by receiving the Grand Decoration of Honour in Gold for Services to the Republic of Austria, one of his country's highest honours for business people, the 65-year-old banker has secured a new five-year contract to run Raiffeisen Bank International and is eager to start work on adapting the bank he has built into one of the region's powerhouses to the post-crisis reality.

"All the work in setting up the bank has been done and our job for the future is to optimise our structures and adapt them to the new market requirements," Stepic tells bne. "Banking will be different in the future, no question. And if capital is becoming scarce and more expensive, you will have to change strategy and adapt it."

"In a nutshell," he concludes, "we have a perfect set-up and strategy to be very successful over the next five to ten years."

The genesis of that set-up began 25 years ago with a joint venture in Hungary in 1987 with a bank then called Unibank. This was the starting point for a career that culminated in that award, presented to Stepic by Austrian Federal President Heinz Fischer in a ceremony on March 31. RBI was undoubtedly one of the pioneers of western business in the newly opened markets of Central and Eastern Europe, and Stepic the visionary behind that strategic move. "For me, the unification of Europe is something I have been working for all my professional life and finally when in 1989 Eastern Europe opened up, I saw it as a unique chance for Europe and Austria specifically," says Stepic. "Highlighted by President Fischer was my role in safeguarding the financial sector of CEE and by doing so strengthening the role of Austria as a business location."

In hindsight, it's perhaps obvious that Austria would reclaim its role as a major player in its historic hinterland. Yet in those heady days when the Berlin Wall was crashing down and people were throwing off the shackles of communism, no one knew how quickly or deeply the region would grasp the opportunity to remould their economies in Western Europe's image.

Stepic says he did not meet any great resistance from his shareholders when he acquainted them with his plan to push out into Austria's former imperial lands. For one thing, he explains, Austria was over-banked so the room to grow at home was limited. Second, the new markets were basically virgin territory, giving RBI the chance to offer products and services that were in demand, rather than those it would be necessary to create the demand for. Finally, the shareholders were inclined to back Stepic due to the huge success of the first venture in Hungary.

That strategy outlined by Stepic comprised three steps: to first move into Central/Southeast Europe, then to Eastern Europe, and finally to the countries of the Commonwealth of Independent States (CIS). And this is basically what happened, so that today RBI has an extensive network of subsidiary banks in 17 markets serving almost 14m customers through around 2,900 outlets, the vast majority of which are located in CEE.

That process has, inevitably, had its ups and downs. Stepic picks Russia's financial crisis in 1998 as a low point. "We were just about to open in Russia and in the time leading up to that we had lost already $150m due to the fact we'd been hedging our shillings and dollars against the local currency."

Set against that are the highlights, such as the bank's IPO in 2005, which saw it raise €1.11bn, the biggest IPO in Austrian stock market history at that time. "It took us two years in the making, but it was a quantum leap in our business. With all the reporting requirements, you are really creating a different quality of institution," he says.

The road ahead

The biggest headache today is the raft of new regulations being pushed through by governments in the wake of the 2008 financial crisis, which Stepic believes are not being phased in because it would be too difficult a sell to the public.

Chief among them is the regulation from the European Banking Authority (EBA) that obliges banks to increase their core Tier 1 capital to over 9% in a very short period of time. Raiffeisen Zentralbank Oesterreich, the parent bank of RBI, is required by the EBA to raise its Tier 1 capital above 9% by the end of June, and a capital increase looked to be on the cards. And on April 20, RZB announced plans for a capital increase worth €840m. "With this transaction and in economic terms, RZB's participation capital will be transformed into share capital, in order to meet the new regulatory requirements effective as of mid-2012," the bank said.

The issue Stepic has with the legislation is not the rise in the level of capital per se, but the short duration with which banks had to perform the task in a difficult environment. "This is very negatively affecting the lending activities of major banks, as we are now concentrating on how to create capital in a very difficult time when the capital markets aren't working well, rather than how we can give loans to the economy."

He adds that this rush to introduce new legislation has led to a situation where the regulators are out of step with each other, so a ruling from one sometimes contradicts the ruling of another. "If you are confronted with this situation, it is very difficult to do business," he sighs.

Staying put

Stepic says RBI is currently present in all the markets that it feels are interesting, and there are no plans to enter new ones. "Frankly speaking, with our present geographical set-up, we believe we have covered all the interesting markets of the region," he says. "We are present in all the CIS countries including Belarus, and the only geographical areas we have not entered are the Baltic states, which are too small and dominated by the Scandinavian banks, and we have no intention for the time being to enter the Central Asian countries, because we believe the political environment there is not guaranteeing the safe development of banking."

At the same time, neither is RBI planning to leave any existing markets. Russia, for example, is proving to be the graveyard of many western banks' ambitions; the past year has seen Barclays Bank and HSBC among others quit the country, citing the fierce retail competition from the giant state-controlled banks with ties to regulators - Sberbank and VTB Group.

RBI was one of the first western banks to start operations there, and so is much more established than many of its foreign peers, with over 200 branches in 44 provinces. "We're not just restricted to Moscow and St Petersburg, but in all the large provincial centres... and our standing in the market on this regional basis will allow us to grow with the market."

The same could be said for RBI in Ukraine, another market with its own particular set of problems. RBI led the charge into Ukraine when it bought the country's second-largest commercial bank, Bank Aval, in 2005. That set off a rush by other banks over the following 18 months, which ended with some paying extraordinary amounts of up to 6x book value for local banks.

Unfortunately, the five years following the "Orange Revolution" were, says Stepic, "lost years", as the two main players in the movement, former president Viktor Yushchenko and former prime minister Yulia Tymoshenko, spent most of their time feuding. The jury is still out on the current president, Viktor Yanukovych, who has presided over more political and economic stability, a prerequisite for growth, but needs to address the serious failings in the system such as the judiciary.

The banking sector in Ukraine is still dealing with the fallout from the 2008 crisis and the huge devaluation in the local currency, which left many borrowers of loans in foreign currencies (half of mortgages are forex ones) struggling to keep up their payments. Non-performing loans are estimated at between 25% and 30% of all loans, in some segments even higher.

Even so, Stepic describes Ukraine as "a really important" country for RBI to be in. "We have one of the strongest brands, and one of the largest banks with 900 branches. Even in difficult times, we were one of the most profitable banks," says Stepic. "If the government is able to offer stability and continue even at the current small pace the restructuring of the economy, then I believe that within the next two to three years the banking industry will see a strong revival."

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