Central and eastern Europe’s economic crash brought the boom years – that saw banks ramp up balance sheets and profitability, especially through short-term and foreign currency borrowing – to an inauspicious end.
Weak growth in Erste’s core markets of western Europe, loan defaults, high banking taxes in Hungary and (potentially) Austria, and new financial regulations are conspiring to create another perfect storm. But the untold story is how, from 2006, Erste Bank gradually charged higher interest rates across its business streams and maintained a tight grip on costs.
The bank was able to increase its revenues as a percentage of risk-weighted assets from 6% in 2006 to 7.1% in 2009, purely through asset repricing. The improvement in margins and efficiency gains – with Erste forecast to have a competitive cost-to-income ratio of 50% this year – has helped it to absorb credit losses. What’s more, its prudent decision to demand higher rates, rather than slashing them to increase market share, has allowed the bank to deploy capital to shore up its businesses in the weaker economies, principally Romania and Hungary.
Erste’s deposit-rich and high retail market share in the structurally sounder economies and E1.7 billion rights issue last October has provided the firepower to open 70 more branches in Romania this year. With tight margins in the Czech Republic and Austria, Erste Bank has little choice but to increase its penetration in the Balkan region.
However, with the Hungarian banking market already saturated, Erste at some point will have to increase its presence in the likes of Ukraine and Serbia – and Société Générale and UniCredit are fast encroaching into these territories.