Robert Anderson in Tbilisi -
The European Bank for Reconstruction and Development is looking to expand its role in Emerging Europe’s banking markets to help provide much needed finance for business.
The key task "is to re-establish credit flows on a sustainable basis, relying on savings and local capital markets,” Jean-Marc Peterschmitt, managing director for Central and South Eastern Europe, told bne IntelliNews in an interview at the EBRD’s Annual Meeting in Tbilisi in May. “In Hungary and elsewhere we remain open to investment opportunities in the banking sector where we really add value.”
The EBRD is in negotiations to take a 15% stake in Erste’s loss-making Hungarian unit alongside the Hungarian government, and to acquire a 20% stake in nationalised Austrian bank Hypo Alpe Adria’s operations in the Balkans alongside private equity firm Advent International.
Peterschmitt confirmed that the development bank was also currently examining the long-delayed privatisation of the Slovenian banking sector, whose loan problems almost forced the country to seek an international bailout in 2013. “In Slovenia we are looking at some of the privatisations that are happening there. That is definitely a market that is seeing some transformation.”
Further east, Raiffeisen Bank International is also trying to persuade the EBRD to take a stake in its loss-making Ukrainian unit. Karl Sevelda, RBI's chief executive, told bne IntelliNews in May that the Austrian bank was in “ongoing discussions” with the EBRD about converting its subordinated debt in Aval into “a real partnership”.
The EBRD’s renewed interest in taking banking equity stakes in the region partly reflects the scaling back by existing players such as RBI and Erste Group, as well as the lack of new entrants coming into the region – both a product of the continuing crisis in European banking following the 2008 crisis.
But the EBRD’s activism also reflects concerns over the shortage of finance for investment in the region, with capital flows still below pre-crisis levels. While portfolio flows have been positive for a few years (though mainly going into sovereign debt) and foreign direct investment is marginally positive, bank liquidity flows are still negative, according to Alexander Lehmann, the EBRD’s chief economist for Central Europe and the Baltic States.
Outflow of bank liquidity continues
Foreign banks are forcing their Emerging Europe subsidiaries to survive on domestic deposits, while taking out dividends when they can. The units themselves often choose the safer option of buying local state debt or keeping money at the central bank, rather than making loans.
Many banks, particularly in the Balkans and Ukraine, are still focused on cleaning up their portfolios of non-performing loans from the crisis. “It is clearly the main impediment to credit growth and arguably to growth overall,” said Lehmann.
“The outflow of bank liquidity is still going on,” he pointed out. “It’s moderated and will likely moderate further as Eurozone-based banks have more liquidity available in the context of quantitative easing. The demand picture is more positive so I expect this will reverse. It will be a very significant moment when flows overall are positive in the region.”
The EBRD is also looking to work with regional stock exchanges and corporates to enable bourses to play a greater role in providing equity finance and corporate bonds. The bank is negotiating to take a 10% stake in the privatisation of the Turkish bourse, and has financed the SEE Link, which connects trading between the Bulgarian, Macedonian and Croatian stock exchanges.
For the EBRD, helping companies finance investment is essential to accelerate convergence with Western Europe, which has lagged since the global financial crisis hit in 2008. Lehmann is confident that real convergence with Western Europe will regain momentum, though it will not match the same pace as before. “The capacity of our countries to benefit from capital inflows and to close the productivity gap is still there,” he said. “But of course it is a more complicated picture now.”
Part of the problem is the slowing – if not reversing – momentum for reform in the region, though Lehmann picked out Poland and the Baltic countries as examples where the productivity gap with Western Europe is being closed.
Peterschmitt said Poland “stands out for having a fairly strong private investment response last year.” By contrast Hungarian investment has been primarily state-led and there remain doubts whether it will be carried forward by the private sector, particularly when banks have been targeted for special taxes and penalties over forex lending.
The EBRD’s planned acquisition of a 15% stake in Erste’s unit there is tied to a Hungarian government promise to cut bank taxes, which in turn should re-start bank lending. “Hungary has produced results – which is what matters,” said Peterschmitt. “[But] what is important is to produce results that can be sustained on a long-term sustainable basis. What you need for that is private investment, what you need for that is credit flows, and what you need for that is a supportive environment. That will give confidence for firms to invest and for banks to start growing again.”
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