Austrian banks benefit from eastern European recovery

An improving performance in central and eastern Europe is benefitting Austrian banks at a time when their home market is sluggish.

Erste Group Bank AG flagged up loan growth in Slovakia and the Czech Republic as it reported a surge in second-quarter return on average equity to 17.1%, double the first quarter’s level. UniCredit Bank Austria AG’s 28% rise in first-half net attributable profit was almost entirely driven by a doubling of gains in central and eastern Europe. Raiffeisen Bank International AG’s quarter-on-quarter 16% decline in consolidated profit would have been worse but for jumps of 80% in central Europe and 40% in eastern Europe, where a harsh recession is easing.

Central Europe’s economies should expand by 2.5% this year, compared to a 1.7% average for the EU, according to the Economist Intelligence Unit. Eastern Europe’s GDP, which plummeted 5.8% in 2015 under the impact of Ukraine’s conflict and sanctions on Russia, should contract only 0.8% in 2016, before growing again next year.

Yet investing in CEE can be risky. The 400+ basis-points fall in common equity Tier 1 equity reported for both Erste and Raiffeisen in the adverse scenario of the European Banking Authority’s 2016 stress test was partly due to the assumption of a very steep contraction in eastern European economies.

Political risk can also be greater than in developed economies. Raiffeisen said in its first-half report that it took a provisioning charge of €43 million against the effects of a Romanian law allowing mortgage holders to walk away from their contracts. Banks in Poland escaped a forced conversion of about $36 billion of Swiss franc-denominated mortgages earlier this month after concern it could weaken the financial system.

All three leading banks have strengthened their capital since 2015. Retained profits and further deleveraging could continue this trend. Loan to deposit ratios range between 90% and 110%.

Both UniCredit and RBI are also restructuring to cut risks and strengthen capital. Shareholders are expected to decide by end September about a possible merger between RBI and Raiffeisen Zentralbank Österreich AG. Asset sales including the disposal of Raiffeisen Bank Polska SA should strengthen the capital of the combined company, SocGen analysts said.