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CEE sickness

3 March 2014 By George Hay

Crisis in Ukraine is denting European banks’ recovery strategies. Barring Austria’s Raiffeisen, few Western groups have meaningful exposure to the country. But big lenders such as Societe Generale, Commerzbank, UniCredit and KBC were hoping lucrative, fast-growing markets in central and Eastern Europe would counter humdrum returns at home. With Russia squaring off against the West, the economic, currency, and political risks of this approach are all too apparent.

Markets punished all CEE-facing banks on March 3, lopping 2.4 percent, or nearly 28 billion euros, from the Stoxx 600 Banks index. Raiffeisen Bank International, SocGen, and Commerzbank shed 8.9 percent, 6.4 percent and 5.6 percent of their market capitalisation respectively. But the worst damage was in Russia itself, where Sberbank and VTB both lost 16 percent.

Up until recently, bulls had a good story to tell about Sberbank and VTB. Together they have 45 percent of Russian banking assets – a dominant position in an economy that promised higher growth than Western Europe. Sberbank has almost half of all Russian deposits and so lower funding costs. It is making a 21 percent return on equity and a massive 5.8 percent net interest margin.

Figures like these were enough to make any European bank CEO’s mouth water. Nowadays the sector’s big headache is returns far below the cost of equity – SocGen’s ROE was only 4.4 percent in 2013. For SocGen Chief Executive Frederic Oudea, growing in places like Romania and Russia was preferable to cost-cutting, or risky acquisitions. Raiffeisen makes 27 percent of group operating profit in Russia, and another 8 percent in Ukraine itself.

The prospect of hostilities between Ukraine and Russia changes things. The rouble’s swoon reduces the value of Russian earnings, and protective rate rises could hit growth. The country’s economy, which has already slowed, could worsen further under Western economic retaliation and capital flight, damaging consumer confidence. Investors are alive again to regional risks.

For the most part, these look manageable: SocGen, for example, only holds 4 percent of loans and makes 10 percent of operating profit in Russia. But the crisis will perpetuate sub-par returns. And it’s a reminder that when you stray further afield, political risk is not just about bonus caps and leverage ratios.


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