Austria’s bank and finance sector has made it through the global financial crisis largely intact – so far.
Although some medium-sized banks are facing difficulties, the top three banks – Raiffeisen Zentralbank Österreich, Erste Group and UniCredit Bank Austria (the former Bank Austria Creditanstalt AG now part of UniCredit Group) – remained profitable in 2009.
All the major Austrian banks, except UniCredit Bank Austria, opted to tap into the Republic of Austria’s EUR100 billion bank rescue fund to strengthen capital reserves or refinance debt. However, some banks are now said to be preparing to repay the money. But while part of the crisis may be over, another part still lies ahead.
The fate of a number of financial institutions depends in large part on the economies of Central and Eastern Europe (CEE) and South-Eastern Europe (SEE), where many Austrian banks invested heavily in the boom years.
For them, Eastern Europe was a market full of fantasy. The region’s growth potential represented a tremendous opportunity for Austrian banks, fuelling their revenue growth over many years.
But those higher returns came with higher downside risk – a risk that some banks did not manage well. Now, in their case, the fantasy has been replaced by a difficult reality.
As a result, the banking landscape of Austria and CEE/SEE is about to undergo a major shift as the sector enters a period of consolidation.
For the most part, many of the small locally owned banks that sprung up across Eastern Europe are likely to disappear. With their local structure, they often lack the higher standard internal controls and compliance that outside investors are looking for in acquisitions.
Therefore, the main acquisition targets will most likely be the local subsidiaries of Austrian and other international banks.
The buyers will most likely be US, Asian and a few European banks that, up to now, have not been active in the region, as well as financial investors, such as private equity funds.
Since most of the large Western European banks received state subsidies, their ability to expand aggressively is limited under European Union rules. US and Asian banks, even if they benefited from subsidies, aren’t bound by those rules, opening the door for them to enter the market at quite favourable prices.
In addition, the stronger European banks that did not require state support, such as Italy’s UniCredit Group, Germany’s Deutsche Bank or Spain’s Banco Santander, could be among those eyeing assets in Eastern Europe.
The sellers will be the banks that are forced to divest after having received state subsidies. One may be Austria’s Hypo Group Alpe Adria, which was nationalised in December 2009. Other sellers are likely to include Germany’s Bayerische Landesbank, the former majority shareholder of Hypo, and Commerzbank AG, which began selling assets in the region in 2009.
To understand how the investment unravelled for some banks, the crisis at Hypo serves as a case study of what can happen to institutions that are overexposed in a particular market and lack shareholder support.
For some European banks, that exposure was in Iceland or Ireland; for others, it was in collateralised debt obligations. For Hypo, it was the former Yugoslavia. Hypo is like a number of regional Austrian banks that tried to grow beyond its borders. Over the years, Hypo, a medium-sized national bank, grew to become one of the largest players in the bank and leasing sector in Bosnia and Herzegovina, Croatia and Serbia – countries that were among the hardest hit by the economic downturn.
With Hypo’s shareholders in disagreement over how to raise further capital, the Republic had no choice but to step in to rescue the bank. Wolf Theiss was among the lead advisers representing Hypo in the negotiations between the government and its former shareholders. In the end, a restructuring and financing plan was agreed upon that averted bankruptcy.
Ultimately, parts of Hypo’s business may need to be sold, with the remainder to be sold by the Republic once the restructuring has been completed. Hypo may possibly disappear from the market as an independent bank.
In Austria, we expect others banks to consolidate, as well. Österreichische Volksbanken is reportedly searching for a new strategic partner, with market commentators naming Raiffeisen as one of the interested parties.
Despite the crisis, Eastern Europe still offers enormous growth potential for banks, particularly in the consumer area.
Austria’s major banks showed that expansion in the region can be done successfully. In their case, they did not expand aggressively. In addition, they have reliable core shareholders (which, in the case of Hypo, was missing), and a better refinancing structure, with access to primary funding such as from consumer bank deposits (which Hypo also lacked).
Indeed, with the economies of CEE/SEE expected to resume their upward growth trend by 2011, one can say that the ‘fantasy’ of the region remains. Going forward, those banks that invested prudently will reap the benefit of the market consolidation and future growth.