EASTERN EUROPE HAS THE MOST TO FEAR FROM BANK´S RETREAT / THE FINANCIAL TIMES INSIDE BUSINESS ( A MUST READ )

Inside Business

 

November 14, 2011 8:47 pm

Eastern Europe has most to fear from banks’ retreat

By Patrick Jenkins

Faced with an anaemic growth outlook in developed markets and an intensifying regulatory clampdown on banks, you would think lenders would be stepping up their focus on emerging markets.

Quite the reverse, it seems. Take China for starters. Last week, Goldman Sachs, hardly the weakest of global financial institutions, announced it wanted to offload another $1.5bn worth of shares in Industrial & Commercial Bank of China.

Only a few months earlier, Bank of America Merrill Lynch had followed a similar strategy, halving its stake in China Construction Bank.

In the short term, there is a clear dual appeal of cauterising the problem of slumping Chinese bank valuations (Goldman took a $1bn hit in the third quarter of the year, having to mark down the value of its ICBC stake), while also releasing some much needed capital to buoy balance sheets.

Having such large sums tied up in shareholdings is set to be unattractive under new capital regulations. Worse still, the stakes had not brought in the business that some had expected they would. Buttering up the Chinese state, still the controlling shareholder at all local lenders, didn’t work. Following the same logic, bankers reckon the sell-down of stakes won’t damage the underpinning relationships between the US banks and their Chinese partners.

That is debatable, but what is certain is that backing away from the world’s biggest market looks odd when the prospects for business in so much of the rest of the world are bleak.

A similar trend – though less marked – is taking place in that other emerging markets powerhouse, Brazil. Here, surely, there should be no nervousness about the state’s limiting hold on the market.

All the same, HSBC is trying to sell its consumer lending business in Brazil, as part of a global pullback from much of its retail banking network, and Royal Bank of Scotland is in retreat in investment banking. Only JPMorgan is really pushing ahead with a growth strategy in Brazil, according to local rivals.

Yet, this is one of the few countries in the world where banks are still generating typical return on equity numbers of 25 per cent or more, reminiscent of pre-crisis levels on Wall Street.

Again, bankers say there is pressure from head office, and from home market regulators, for capital to be retained at the centre of a group’s operations. Nowhere is that more true than in Europe, where the continent’s banks not only have to bring themselves into line with global Basel III rules on capital adequacy over the next few years, but by June 2012 must comply with tougher targets set by the European Banking Authority, the pan-EU regulator.

If that constrains far-flung operations, it will hit hardest closer to home. As UniCredit revealed on Monday, alongside a €7.5bn rights issue, it plans to narrow its geographic focus in eastern Europe, where it is currently the number one lender. A few days earlier, Germany’s Commerzbank similarly pledged to restrict new lending to only Germany and Poland, cutting adrift the rest of its eastern European operations.

Ever since the world became excited about the Bric economies of Brazil, Russia, India and China, the promise of eastern Europe has drawn less attention. But with western banks, predominantly western European banks, controlling nearly three-quarters of eastern Europe’s banking system, this is the region that has the most to fear from a retreat of developed market banks from the emerging markets.

While Poland and the Czech Republic remain relatively attractive, virtually every other market is vulnerable to a credit crunch, as western banks freeze new lending. More disruption could be caused as they try to sell old portfolios of business or whole entities.

The squeeze is made all the tighter by the fact that the banks with the biggest presence in eastern Europe are among those with the biggest troubles back home. Aside from UniCredit and Commerzbank, the list includes Austria’s Erste and Raiffeisen, both of which are seen by analysts as undercapitalised, France’s Société Générale, which has embarked on aggressive shrinkage, not to mention the Greek banks that will have no choice but to retrench from their leading positions in parts of south-east Europe.

All of this clearly matters for the affected economies – if the traditional suppliers of credit suddenly withdraw capacity en masse, as threatens to be the case in much of eastern Europe, economic disruption looks pretty much inevitable.

But it also matters profoundly for banks and their shareholders. If western banks withdraw systematically from growth markets, either to hoard capital or to de-risk, there is yet another reason – on top of the regulatory and economic constraints – for investors to desert them.
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Patrick Jenkins is the Financial Times’ Banking Editor
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 Copyright The Financial Times Limited 2011.