UniCredit gives Ukraine thumbs up, but warns of last straw in Hungary

By bne IntelliNews December 4, 2013

bne -

Central and Eastern Europe's (CEE) biggest bank is not worried by potential revolution, economic meltdown, or both in Ukraine, nor by the potential for the banking system to slowly pull Slovenia to its knees, but it is joining the growing list of lenders mulling an exit from Hungary, the head of its CEE business said late on December 2.

While the persistently sluggish economy has had Ukraine on the edge of currency and balance of payments crises throughout the past couple of years - not to mention an increasingly unstable banking sector - UniCredit's head for the CEE region, Gianni Franco Papa, told reporters in Vienna that CEE's leading lender won't just up sticks and leave a market for which it retains high hopes. Such pledges of commitment have been heard in Hungary from both UniCredit and other Eurozone-based peers since 2010, but they now appear to be flagging following relentless pressure on the industry from the Fidesz government.

CEO Federico Ghizzoni said in October that UniCredit could sell Ukrsotsbank, but has now merged it with smaller subsidiary UniCredit Bank instead. With Ukraine now facing the very real risk of a second revolution in the space of a decade over President Viktor Yanukovych's refusal to sign off on a deal for closer ties with the EU, Papa looked to affirm the bank's long-term vision for what he called "an important part of Europe," according to Reuters. Meanwhile, analysts have started to warn of the risks of a sovereign default should the standoff between he government and crowds on the streets of Kyiv persist.

"I think we have been weathering the situation in the country much better than many other competitors in the country... An investment like this cannot be just left out because of (one) situation or another. What is important for us as a bank is to have stable countries... because turmoil is never good for business," he said late on December 2. "I don't really think that what we are seeing in Ukraine is very much different from what we have seen in the last six or seven years."

That commitment to the market may well be driven by necessity. "We are still there, which means that either nothing pops up or what pops up was not interesting," Papa added, referring to the earlier admission that it could sell up.

But he refused to confirm UniCredit has ended its deliberations. "For the time being we are there," he said. "I don't have a crystal ball."

Hungarian camel

However, that caginess is in contrast to his comments on Hungary, where the executive insists that although the bank is still making money, the financial burden the government is imposing on banks and other segments of the economy is getting close to unbearable. Prime Minister Viktor Orban's administration has been bashing the country's lenders - overwhelmingly owned by Eurozone groups - for three years with high taxes and schemes to reduce foreign currency debt.

UniCredit's regional head claimed that while tax alone is no reason to exit a country, the imposition of more costs "would really break the camel's back". That is a clear reference to the ongoing push by the government for a final solution to the issue of forex mortgage loans. A three-month scheme in 2011 forced the banks into losses of €1bn or so. "We cannot keep on going like this. If they start again with a new round, we will reconsider," Papa said.

That makes the Italian bank just the latest to suggest that it is tiring of efforts to remain in Hungary. The banks lined up in 2010-11 to pledge their commitment to the market. However, they're starting to go down like nine pins. Raiffeisen Bank International - which owns CEE's second biggest banking network - said on November 19 that it is examining offers for its Hungarian unit. UniCredit compatriot Intesa Sanpaolo and Bayerische Landesbank are both actively looking to sell their subsidiaries, although the level of bad loans and the uncertainty over the huge volume of forex debt means any exodus will haves to be painfully slow.

Back at UniCredit, while other CEE countries, particularly to the south, have bank analysts worried over the level of bad loans and government policymaking, Papa suggested the Italian bank sees those issues as survivable. Papa reiterated that he is not worried about the potential impact of bank stress tests on its unit in Slovenia. "So far I don't have any indication that we are going to have a problem" from the results which are due on December 12, he said, calling its unit there "overcapitalised".

He added that a recent ruling in Croatia on forex mortgage loans is also not alarming, as it will not apply retroactively. "There will be no losses but less revenues," he said.

The difference between Ukraine and Hungary - both of which have banking and financial systems reported to be amongst the most precarious in CEE - may well be that the former could soon lose an authoritarian government widely speculated to rule according to the interests of closely-linked business groups. In the latter, Fidesz is lined up to win another term in elections due by spring next year.

The prospect of another four years at least of pressure - Orban has called for a reduction in foreign ownership of the country's banks - coupled with continued losses appears to have many thinking again on previous pledges to remain in the market and ride out the Fidesz storm. Right now, according to analysts at Citigroup, the foreign banks are at a tipping point. "Considering the losses accumulated since 2010, large foreign banks are at breakeven currently," they note. "Given the prospect of a low profitability outlook their market share may decline."

Claiming to be seeking to clarify Papa's comments, the Italian bank issued a press statement. "UniCredit clearly intends to stay in Hungary. Its local bank is still one of a very few profitable banks there," it read. It then added: "Nevertheless we are closely monitoring the local business environment in order to adapt our business model in time and to secure positive results. We are not interested in bidding for the local subsidiary of Raiffeisen."

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