Investment banking is a growth business. It thrives when economies are booming, markets are rising, firms are expanding, acquiring, and borrowing. For banks in western Europe, there’s precious little of it around, but the countries of central and eastern Europe are still an opportunity.
Central and eastern Europe — roughly, the countries which joined the European Union in 2004, plus some more of the former Yugoslavia — had a rough crisis. Not because they themselves had borrowed, binged and broken their banks, but because their banking and financial systems sit within the orbit of a deeply dysfunctional western Europe.
Many of the local banks in central Europe are subsidiaries or affiliates of wider European banking groups, such as UniCredit, Sociéte Générale or Raiffeisen Bank International, while further north, German and Scandinavian firms dominate.
The problem with foreign bank ownership is that lots of these banks had trouble at home. 2011 saw a dollar funding crunch for Europe, and panic and fear of a new crash. Banks shut off lending to countries deemed less “core”, and battened down the hatches. More recently, shareholder pressure to create more “focused” investment banks has led to firms such as RBS, Barclays, and Deutsche Bank shutting offices in CEE, and taking boots off the ground. Suitcase banking is back in fashion.
“In the not too distant past, perhaps 2007-2010, there were a larger number of London-based investment banks with sizeable regional teams,” says Theodoros Giatrakos, head of Greece and Cyprus investment banking at Citi. “A number of those firms have switched down a gear, in terms of the number and seniority of the people involved in covering the region.”
Other banks have also been on efficiency drives, but still regard the region as a major source of investment banking strength.
UniCredit, for example, uses the currency services and presence of its network of CEE subsidiaries a differentiating factor to sell transaction banking services to multinationals — opening the door to bond mandates and more. It is tightly rooted in many of the region’s countries, and handles business too local for other international firms to touch.
It is also committed to investing more in the region.
“We’ve actually allocated more capital to CEE as part of our strategic plan, we’re looking to deploy that, to originate assets, and to add people where needed,” says Enrico Minniti, UniCredit’s head of CIB for CEE.
He continues:“Clients are valuing consistency in the region more and more. There have been many cycles of our competitors disappearing, then coming back when the numbers justify it, and we’ve actually seen a significant deleveraging process from some other banks, which doesn’t necessarily show up in the mandates for the big M&A and ECM deals.”
Citi, meanwhile, has extensive corporate and commercial banking operations in the region. Its coverage and lending relationships might not go as deep as those of local firms, but it’s still a solid fixture in the business lending landscape.
But it did cut back on its investment bankers in the region. Coverage and product teams now sit in London, so while the corporate bank continues to feed clients and business to the investment bank, there are fewer bankers and lower costs.
MISSED OPPORTUNITY
While a desire for banks to be smaller and more focused is understandable, the decision of some firms to pull back in CEE looks short-sighted. Unlike larger emerging markets like Russia and Turkey, the CEE region is stable and free of commodity price challenges and major geopolitical trauma. They are also growing fast.
“The background growth rates of Poland, the Czech Republic, or Hungary are seriously impressive, and there are just not that many ways to gain access to growth in developed Europe,” says Linos Lekkas, Citi’s head of CIB for CEEMEA.
Growth, combined with attractive entry levels, are attracting buyers to the region, in the form of the top tier private equity firms – the best fee-paying clients for the banks. It’s the opposite of the situation in western Europe, which is flooded by QE money pushing valuations while growth stays low.
“Relative valuations versus the rest of EMEA have helped to attract bulge bracket sponsors and encourage them to spend more time following the region,” says Giatrakos. “Western European valuations have become so stretched that it’s very hard to find attractive entry points. Even CEE is starting to command premium valuations, but the growth compensates for that.”
The region is also seeing increased interest from further afield, including Chinese investment in the region. The $829m Moneta Bank IPO, on which Citi was a global co-ordinator, was apparently marketed and distributed with an eye to international demand, despite being listed in Prague, rather than on a more traditionally international market.
Moneta illustrates another force helping keep investment banking activity in the region going – it is being sold as part of another financial institution’s quest for focus. Moneta is the Czech subsidiary of GE Money Bank, and GE is going through one of the largest deleveraging and divestiture exercises in history, with the sale of nearly all of its GE Capital finance arm.
LENIN'S LONG ARM
Despite the vibrant private sector investment into the region, the basic structure of many CEE economies still retains echoes of the communist past. The top tier corporates, in CEE countries, are almost always former state-owned businesses, some of them privatised fairly recently, giving a steady flow of chunky mandates.
“What is driving the dealflow has changed,” says Lekkas. “There were a string of Polish privatisations in the recent past, which didn’t pay great fees, but the deal sizes were extremely large. Now the privatisation flow has slowed up and the businesses are more likely to be private or sponsor-led.”
Lekkas cites, as examples, Hungarian budget airline Wizz Air’s IPO last year, and the more recent Czech IPO of Moneta Bank.
In many cases, privatisations are used not just to move assets out of state hands and raise cash, but to develop capital markets. The regional dominance of the Warsaw Stock Exchange grew out of privatisation business; more recently, Romania has been building liquidity on the Bucharest bourse with listings of pipeline company Transgaz and power utility Electrica.
The privatisation programmes also made a few of the region’s entrepreneurs extremely wealthy – and independently acquisitive through the companies they control. In the Czech Republic, for example, there is oil billionaire Karel Komárek’s group KKCG, which morphed from oil extraction firm in the early 1990s to private equity-style holding company. The richest man in the Czech Republic, Petr Kellner, has another similar group, the investment fund PPF.
BEST CLIENTS?
These clients are the sort of firms investment banks want to cover — dynamic, acquisitive, with a penchant for financial engineering and a willingness to act. But these businesses are very deeply rooted in their home markets, have access to plenty of lending capacity, so have certain expectations of their banks.
“Some of the large, home-grown firms, particularly those which have come out of a privatisation, entrepreneur-led firms — they are achieving relatively inexpensive lending as they have plentiful offers of financing,” says Giatrakos.
Below the top tier clients, though, there is a rich stratum of corporates that do not look far beyond the region — and which many international banks are not covering well, at least not yet.
“The flow from smaller clients is much more consistent than the large deals which get all the attention,” says UniCredit’s Minniti. “Not all of the smaller clients use investment banking products, but some do, and that’s the advantage of a combined corporate and investment bank. We’re also seeing a growing interest from some competitors in penetrating this segment.”
Sovereigns, meanwhile, are the building block for a country business, but are following the lead of their western counterparts in wanting to see commitments first before awarding fee business.
“I’d say the practice of linking sovereign bond mandates to the primary dealership is becoming more prevalent,” says Tibor Pandi, Citi’s chief country officer for Romania. “But it’s not just about laying out more balance sheet, it’s a demonstration of commitment and capability.”
He says, however, that no government he’s heard of has channelled its flow of privatisation business to the banks on the primary dealer panel.
That said, it’s not a given that primary dealerships will prove expensive, unlike in western Europe — UniCredit’s Minniti says that UniCredit would run the dealerships it holds anyway, as a standalone profitable business.“Primary dealerships are a normal piece of activity for the major banks in the region, and an activity we find profitable in the context of the full debt capital markets value chain,” he says
A sovereign bond mandate, though, is a valuable thing for other reasons, perhaps more prevalent in emerging markets than in western Europe (though the standalone fees are still paltry).
“Being on the sovereign bonds brings credibility and really helps in the marketing of your business to other sectors,” says Lekkas.
BANKS COME BACK?
So far, the departures of some firms, and the selective business approach of others doesn’t seem to have returned much pricing power to the banks that are still fully committed.
You are unlikely to ever hear a banker praise the health of the fee environment they are in, but just as quickly as some international investment banks have pulled back, local firms have stepped up to fee business, while the low interest rates exported from western Europe have kept loan margins low.
“Perhaps it is easier to get a place on a deal now,” says Pandi. “But fees certainly haven’t gone up. There are still many many active players, in vigorous competition, despite the banks that are retrenching.”
That has to be good news for the region’s corporates, sponsors and governments, but in the end, it is CEE’s continued growth, not the level of its fees, which keeps banks coming back for more. Long may it continue.