Bets on East Europe prove to be disastrous

Bloomberg

Austrian, Swedish and other banks with east European subsidiaries may face rating downgrades as the region’s economies slump, according to Moody’s Investors Service.

"Moody’s expects continuous downward rating pressure on east European bank ratings" as a result of worsening asset quality and their reliance on short-term funding, the ratings company said in a report released yesterday in London.

Raiffeisen International Bank-Holding, Erste Group Bank of Austria, Societe Generale of France, UniCredit and KBC Groep of Belgium have the biggest operations in the region, Moody’s said. The MSCI East Europe Financials Index dropped 6.2 percent to the lowest in five years.

The global economic crisis is threatening to destabilize a number of nations in central and eastern Europe, where growth based on debt funding and exports is plunging. The International Monetary Fund has already offered aid to Latvia, Hungary, Serbia and Ukraine. Bailouts may be extended to Bulgaria, Romania, Lithuania and Estonia as the global recession derails more banks, according to Capital Economics research.

Erste tumbled 7.6 percent to 7.90 euros at 10:10 a.m. in Vienna trading yesterday, the lowest since it went public in 1997. KBC slumped 10 percent to 9.98 euros in Brussels, Raiffeisen fell 6.2 percent, Societe Generale 7.5 percent and UniCredit 7.5 percent.

"The downturn in eastern Europe will be more severe as a consequence of many countries’ dependence" on capital flows from west Europe banks, analysts led by Reynold Leegerstee wrote in the report.

West European banks might become selective in supporting their subsidiaries and "banks in countries that are associated with higher systemic risks might face reduced support," Moody’s said. Western governments may also establish rules to ensure banks getting state support do not aid foreign subsidiaries, it added.

Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of bank loans in central and eastern Europe. Austria, whose banking system is "most exposed," has two of the biggest lenders in the region.

Raiffeisen Zentralbank Oesterreich made 79 percent of its 2007 pretax profits in eastern Europe, including Russia and Ukraine, through its Raiffeisen International unit, and Erste earned 65 percent of its pretax profits in countries including Romania, the Czech Republic and Slovakia. In December, the Austrian banks together with UniCredit, Intesa SanPaolo, Societe Generale and KBC, asked the European Union to organize financial aid for countries on its eastern borders.

Erste, which said last week that full-year profit probably slumped about 26 percent, is in talks with the Austrian government to get 2.7 billion euros ($3.4 billion) in state aid. RZB has asked for 1.75 billion euros. Raiffeisen International on Monday cut more than 2,100 jobs in its Ukrainian and Hungarian units.

Currencies in central and eastern Europe and the former Soviet states account for seven of the 10 worst performing currencies in the world this year. Poland’s Zloty led the declines with a 74 percent slump against the euro and a 76 percent drop against the dollar. The Hungarian Forint has declined 15 percent versus the euro, while the Czech Koruna and Romanian Leu fell 8 percent. Swedish banks with holdings in the region fell yesterday. Swedbank dropped 4.2 percent, its lowest intraday level in more than a week. SEB slumped 7.2 percent, its steepest intraday decline in two weeks.

Swedish expansion

Swedish banks began expanding in the Baltic states of Latvia, Lithuania and Estonia in 1998. Swedbank, the largest lender in the region, bought a stake in Estonia’s Hansabank in 1998 and took full control in 2005. SEB took full control of Estonia’s Eesti Uhispank, Latvia’s Latvijas Unibanka and Lithuania’s Vilniaus Bankas in 2000.

As the Baltic states enter their worst recession since gaining independence from the Soviet Union in 1991, Swedish banks have been forced to raise cash from shareholders to boost capital and establish special units to deal with delinquent loans.

Impairments and provisions for anticipated future loan losses at Swedbank soared more than sixfold to 1.63 billion kronor ($190 million) in the fourth quarter from 238 million kronor a year earlier, mainly because of the Baltic states, it said earlier this month.