BANKING & FINANCECentral & Eastern EuropeFINANCIAL TIMES SPECIAL REPORT | Friday May 18 2012

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More than two decadesafter the fall of commu-nism, central and easternEurope has become such adiverse region that it isincreasingly difficult totreat it as a single unit.This is especially evident inthe banking sector.

While Hungary, Romania,Bulgaria and the Balticstates struggle with sub-stantial foreign currencydenominated debt and slug-gish lending growth, thethree countries at the coreof the region – Poland, theCzech Republic and Slova-kia – have well-capitalisedand profitable banks.

The biggest risk the threeface is from the outside,that the foreign groups thatown 65 per cent of Polishbanks and more than 90 percent of those in Slovakiaand the Czech Republic willcause a credit crunch ifthey reduce lending bytheir subsidiaries to bringtheir core tier one capitalratio – a key measure ofbalance sheet strength – tothe 9 per cent minimumstipulated by the EuropeanBanking Authority.

“If there are problems forwest European banks, therecould also be a problem forPolish banks,” said MarekBelka, the governor of theNational Bank of Poland, ata recent conference. “Ifthere is a change in senti-ment, we could see a with-drawal of capital.”

Credit growth in emerg-ing Europe appears to havemarkedly weakened,though countries that arestronger domestically andhave a growing deposit base– such as Poland, Slovakiaand the Czech Republic –appear more insulated.

The Bank for Interna-tional Settlements, whichmonitors funding flows, hasfound that assets of interna-

tional banks in emergingEurope dropped $33bn inthe third quarter of lastyear and the outflowsappear to be continuing,according to a study by theEuropean Bank for Recon-struction and Development.

In Poland, credit is stillexpanding – by an annual16 per cent for corporationsand about 10 per cent forhouseholds – but new lend-ing is expected to slowsharply this year.

However, fears that for-eign banks would be forcedto get rid of emerging mar-kets assets in order to beefup their capital ratios havenot yet been realised.

Some have changedhands because of their par-ents’ troubles at home,notably Poland's BankZachodni WBK, sold by Ire-land's AIB in late 2010 for€3.1bn to Santander. TheSpanish group this yearspent a further €1bn buyingPoland's Kredyt Bank fromKBC, its Belgian owner.

Polbank, the Polish sub-sidiary of Greece'sEurobank EFG, was soldthis month for €460m toAustria's Raiffeisen BankInternational.

But few analysts expectmany more big changes inthe near future. One reasonis that some subsidiaries inthe Czech Republic, Polandand Slovakia are makingsolid profits, which makesthem valuable assets.

In recognition of this,

Germany’s Commerzbanklate last year said it wouldrefuse loans that do nothelp Germany and Poland –indicating the importanceof its Polish affiliate BREBank, which last yearreported a record €275m netprofit, a 77 per cent increaseon 2010.

Overall, the Polish bank-ing sector made a recordprofit of 15.7bn zlotys(€3.7bn) last year. KrzysztofPietraszkiewicz, head of thePolish Banking Association,estimates the figure for thisyear will not be much less.

Czech banks also turned adecent profit of Kc53.4bn(€2.1bn), down slightly from2010, because several bankshad to write down theirholdings of Greek bonds.Slovak banks saw theirprofits leap by 34 per centto €674m last year.

All three countries alsoeasily meet the new capitalrequirements for the sector.Poland's banks have a tierone capital ratio of 12 percent, while Slovakia's have11.9 and the Czech Republic13.9 per cent.

The Czech and Slovaksectors are relatively wellinsulated from shocks, with

loan to deposit ratios of 80and 90 per cent respec-tively. Poland still dependson external financing witha ratio of 110 per cent.

“The Czech banking sys-tem is self-sustaining.Banks are unable to reachtheir lending targetsbecause of a lack ofdemand,” says MiroslavSinger, head of the CzechNational Bank.

Regulators are also mov-ing to limit outflows. In Slo-vakia, the central bank hasissued a recommendationrestricting dividend pay-ments if a bank’s core tierone ratio is below 11.5 percent. In Poland, the regula-tor does not want banks topay more than 50 per centof earnings in dividends.

“We are living in times ofquite large uncertainty,”says Andrzej Jakubiak, thehead of Poland’s financialregulator. “Capital is thebest buffer.”

Mr Jakubiak says hisagency will be careful aboutletting any foreign bankleave the market rapidly.

Unlike the Czechs andSlovaks, who made negligi-ble loans in foreign curren-cies during the real estaterush that preceded the cri-sis of 2008, Polish banksenthusiastically lent tohouseholds in Swiss francsand euros, a practice thathas all now all but ended.

Although about a third ofoutstanding loans aredenominated in foreign cur-rencies, Poland’s non-per-forming loans are 8.4 percent, significantly lowerthan most of the rest of theregion except for Slovakiaand the Czech Republic.This is, in large part,because economic growth inPoland has been faster.

A recent report by CapitalEconomics, a consultancy,looked at potential bankingsector problems across cen-tral Europe and found allthree countries had below-average non-performingloans, forex debt, and short-term external debt.

“I see very few risks tothe banking system,” saysMr Singer, who adds thatrecent stress tests on Czechbanks show the system sur-viving even very largeshocks.

Poles, Czechs and Slovaksform regional super-sectorBankingThe three corecountries haveprofitable andwell capitalisedinstitutions,writes Jan Cienski

‘We are living intimes of largeuncertainty. Capitalis the best buffer’

Spanish savvy: Santander bought Poland's Bank ZachodniWBK in 2010 for €3.1bn Bloomberg

T hese are deeply uncer-tain days for centraland eastern Europe.Despite the region’s

extraordinary post-communisttransformation in the past twodecades, it depends heavily onwestern Europe to buy itsexports and provide capital. Fornow, that is its Achilles heelrather than a source of strength.

Much of 2010 and early 2011saw recovery in the region,apart from in the Balkans. Butafter the eurozone debt crisisintensified last summer, the out-look worsened again.

Confidence in westernEurope’s ability to contain theeurozone crisis has been furthereroded this month after Frenchand – in particular – Greek vot-ers rejected “austerity” policies.Greece’s political troubles haveincreased investor concerns thatthe country might exit the euro-zone, and made some reviseupwards their estimates of

how bad the impact might be.EU officials say preparations

already made mean that aGreek exit need not produce ashock on the scale of the col-lapse of Lehman Brothers in2008. Then, central and easternEurope, which had sucked incheap credit in the good years of2003 to 2008 and become heavilyreliant on short-term capitalflows, saw the money dry up,landing it in a deep recession.

But, notes Thomas Mirow,president of the European Bankfor Reconstruction and Develop-ment, much will depend on howinvestors react.

“As we have seen with Leh-man, these kinds of events arevery difficult to forecast,because they have a materialaspect, a hard, physical element,but they also have a psychologi-cal element,” he says.

“For many major investors inAsia, or the Pacific, or theAmericas, this is all about‘Europe’ and they probablywould not exactly differentiatebetween . . . smaller countries.So nobody knows whether inter-national investors would stilltrust that Greece is as singular[an event] as the Europeans, upto now, have described it to be.”

Differentiation by investors is

important because CEE coun-tries are arguably in bettershape now to cope severeshocks, says Herbert Stepic,chief executive of RaiffeisenInternational Bank, one of thebiggest lenders to the region.

“Current account deficits arelower than before, labour costgrowth has slowed, competitive-ness has increased, taxes havecome down, and [sovereign]debt levels are half what theyare in the rest of the EU, withthe exception of Hungary.”

So far in this crisis, east-west

contagion has been mainlythrough trade and bankingchannels. Vital export marketshave slowed sharply, whiledomestic demand often remainsfeeble. Governments strugglingto curb budget deficits also havelittle scope for fiscal stimulus.

Moreover, strains on thewestern European banks thatdominate the region, coupledwith regulatory pressure to bol-ster their balance sheets, aresqueezing credit growth, whileforeign direct investment is alsobeing constrained.

These factors already madethe EBRD bring down its 2012growth forecasts for centralEurope and the Baltic statesfrom 3.4 per cent last July to 1.4per cent by January this year.For the Balkan states forecastgrowth shrank from 3.7 per centto 1 per cent.

Further east in the formerSoviet republics, particularly incentral Asia, which are moreaffected by commodity pricesthan what is happening in theEU, the outlook is more robust.

But first-quarter growth

figures for CEE countries thisweek were, notes Mr Mirow,“not good at all”. The CzechRepublic notched up a thirdquarter of contraction, Romaniafell back into recession, andHungary had its first year-on-year contraction since 2009.

Slovakia, however, lookedbrighter, and Poland, the onlyEU member state to avoid reces-sion in 2009, again looks resil-ient, insulated by its largedomestic market.

Prospectsdepend onwesternsupportThe region relies onolder members of theEU to buy its exportsand provide capital,says Neil Buckley

Inside this issueHubsVienna andWarsawvie for pre-eminence.Othercapitalshave triedto competebut are too small andpoorly regulated Page 2

Business education MBAsevolve from exotic flowerstatus – a homegrownsector emerges Page 3

Russia State-run banks aredeveloping agility, becomingmuch more client- friendly.

Theiraccess tofundingis alsovastlysuperior toprivatecompetitorsPage 3

Real estate Economic fearscurtail market resurgencebut euro-denominated rentshave increased thepopularity of investing inretail property Page 4

Financial support There isa tough battle to keep cashflowing – the ViennaInitiative prevented a ‘rushto the exit’ Page 4

Hungary Institutionscomplain of ‘brutal’treatment. The economiccrisis and governmentpolicies have had a severeimpact Page 4

RegionalinvestorsPrivateequity nowfocuses onsafety ofPolishhavensPage 4

EU officials say preparations mean a Greek exit from the euro need not produce a regional shock on the scale of Lehman Brothers Reuters

Continued on Page 2

2 ★ † FINANCIAL TIMES FRIDAY MAY 18 2012

Central & Eastern Europe: Banking & Finance

ContributorsNeil BuckleyEast Europe Editor

Jan CienskiWarsaw Bureau Chief

Courtney WeaverMoscow Reporter

Kester EddyBudapest Reporter

Ursula MiltonCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising, contact:Jim Swarbrick on:+44 (0)20 7873 3708;jim.swarbrick@ft.comor your usualrepresentative

More uncertainty surroundscontagion through thebanking channel. As thesovereign debt crisis inten-sified last autumn, fearsresurfaced that westernEuropean banks might startpulling out of the region, inorder to meet regulators’capital adequacy targets.

The EBRD and otherinternational financial insti-tutions, banks and regula-tors in January launchedthe “Vienna 2.0” plan – asuccessor to the 2009Vienna Initiative thatensured banks maintainedtheir investment in theregion during the last cri-sis.

Concerns about wide-spread deleveraging recededa little after the EuropeanCentral Bank eased the sec-tor’s funding troubles bylaunching its longer-termrefinancing operation inDecember.

But bank operations inthe region are being re-ordered – partly because ofaltered strategies, andpartly by necessity.

Several banks thatreceived government bail-outs are trimming easternEuropean operations tomeet their terms or EUstate aid rules. Theyinclude Belgium’s KBC,Germany’s Commerzbank,Ireland’s Allied Irish Banks,Portugal’s Millennium BCPand Austria’s Volksbankand Hypo Alpe Adria.

The process has promptedseveral big entrants – withRussia’s biggest bank, state-controlled Sberbank, lastyear acquiring most ofVolksbank’s CEE opera-tions apart from a Roma-nian subsidiary.

Analysts suggest Sber-bank’s entry could presagea wider move by cash-richemerging market banksinto a system until nowdominated by western Euro-pean institutions.

The shake-up is also pro-viding an opportunity forwestern European banksthat still have resources toexpand. In Poland,

Santander of Spain thisyear took control of KBC’s80 per cent stake in KredytBank. Santander is mergingKredyt Bank with its BankZachodni WBK business –acquired from Allied IrishBanks in 2010 – to createwhat will be Poland’snumber three bank bydeposits.

The biggest lenders,including Italy’s UniCredit,Austria’s Raiffeisen andErste Group, as well asItaly’s Intesa Sanpaolo andFrance’s Société Générale,say they are committed tothe region. But UniCredit isshifting its strategy to focuson its most profitable mar-kets, including Poland, Tur-key, Russia and Croatia.

Pressure on bank balancesheets is producing a credit“crunch” in certain coun-tries, particularly Hungary.

Hungary’s problems havebeen exacerbated by whatthe sector sees as un-friendly government poli-cies, and another hangoverfrom better times: a heavyburden of loans in eurosand Swiss francs thatconsumers are strugglingto pay in weakened forints.

Foreign banks clashedwith the government lastyear over its aggressivemeasures to reduce the bur-den of outstanding mort-gages, which forced them totake the currency losses.

Banks complained theplan contravened EU law,but Budapest insisted it wasjustified by their previouslyreckless lending behaviour.

Much tighter restrictionson foreign-currency loanssince the crisis in Hungaryand elsewhere are part ofbroader changes in thebusiness models of westernfinancial institutions.

Where many previouslyrelied heavily on wholesaleand parent bank funding ofregional subsidiaries, nowthe focus is on fundingthrough local deposits, andreducing excessively highloan-to-deposit ratios incountries such as Hungaryand the Balkan states.

Another hangover frombefore the crisis is a large

legacy of non-performingloans in various countries.A report for the Vienna Ini-tiative found these aver-aged 11 per cent across cen-tral, eastern and south-eastEurope – but were muchworse in some countriesthat had particularly pro-nounced boom-bust cycles.

It warned that a “fester-ing” bad loan problemcould be a drag on growth,by creating uncertainty andlimiting lending. The reportcalled for more co-ordinatedaction by banks and super-visory authorities.

Yet for all the difficulties,the region’s supporters arestill confident. Assumingthe eurozone crisis can beresolved, they say, centraland eastern Europe willbounce back to growth.While slower than in thebest years, it will still out-pace that further west.

“If you look at the Bal-tics, going through Poland,the Czech Republic, downthrough Croatia,” saysAndreas Treichl, chief exec-utive of Erste Bank, “I amabsolutely convinced thatin the next few years, thisis the region that will fuelgrowth for Europe.”

Prospects depend on westContinued from Page 1

For centuries, Viennawas the political,cultural and eco-nomic hub of cen-

tral Europe.When its neighbours

sloughed off communismmore than two decadesago, the Austrian capitalquickly tried to recapturethis role.

However, it has beenstrongly challenged, in par-ticular by the financialindustry that has grown upin Warsaw.

Vienna seemed to havemany advantages over thePolish capital.

After the Soviets pulledout of their occupation zonein 1955, Austria was freeto resume its developmentinto an advanced westerneconomy, while the restof central Europe lan-guished under state social-ism.

That allowed the countryto build up the modernbanks, stock exchange, lawsand regulations that gave itan enormous head startover its neighbours.

Austrian banks wereamong the first to seize theopportunities of doing busi-ness in central Europeancountries that had beenstarved of capital. They

have become dominantalmost everywhere exceptfor Poland, where German,Italian and Spanish bankspredominate.

Some of the otherregional capitals tried tobuild up their financialindustries, but proved toosmall and too badly regu-

lated to put up much com-petition.

Prague, one of the mostattractive cities in Europe,was initially a magnet forthe regional headquartersof international companies.

However, the PragueStock Exchange playeda leading role in an ill-

fated voucher privatisationscheme, which was sup-posed to move state assetsinto the hands of Czech citi-zens.

At the scheme’s peak, inthe mid-1990s, about 1,700listings clogged theexchange. It withdrew 1,301in 1997 to try to reassert

control over the market,but never won credibility.

At the end of last year, ithad a capitalisation of€29bn, an average monthlyturnover of €1.2bn and hadseen one new listing in2011. It is owned by theVienna exchange.

In the mid to late 1990s,

Hungary’s financial sectorwas developing strongly.The Bux, the Budapeststock market index, spurredby a series of privatisationofferings, had soared from1,500 at the end of 1995 tomore than 9,000 in thespring of 1998, making itone of the best performersin the world.

The banking sector,largely privatised and freefrom the shackles of stateownership, was profitableand busy investing in sys-tems and branches.

Such was the optimismthat the Hungarian capitaltalked of being the regionalbanking hub for central andeastern Europe.

Richard Lock, a partnerat Lakatos Köves, a Buda-pest law firm, says: “At thattime, the idea that Viennaor Warsaw would be leadersin the region 15 years laterwould not have seemedcredible.”

But political and eco-nomic turmoil over the pastdecade have turned Hun-gary into a regional laggardand the Budapest StockExchange, now also owned

by Vienna, has a marketcapitalisation of €14.6bnand average monthly turno-ver of €1.1bn.

The Vienna exchange –with a market capitalisa-tion of €64bn and monthlyturnover of €2.5bn – haseither bought or allied itselfwith most of centralEurope’s stock markets.

But with only two IPOsitself last year, the

exchange has not proved agreat magnet.

“We had a Serbian com-pany that was consideringbetween listing in Warsawand London’s Aim – Viennawas not mentioned,” saysRodrigo Carvalho, directorof the Warsaw operations ofPortugal’s Espirito Santoinvestment bank.

Warsaw started muchlater than Vienna. ButPoland’s larger population,37m compared with 8minhabitants in Austria, anda much faster growingeconomy – it expanded by15.7 per cent from 2008-2011,far faster than any otherEU country – turned thestock exchange into one ofthe country's capitalist suc-cesses.

Business was also helpedby a stream of large privati-sations, and by local pen-sion funds limited by law toinvesting most of theirassets in Poland.

Market capitalisation lastyear was €153bn, and aver-age monthly volume isabout €3bn. One of War-saw’s biggest achievementshas been in attracting list-ings. Last year, the mainand alternative marketstogether saw 203 IPOsworth a total of €2.2bn.

It has also worked toattract non-Polish listings.Ludwik Sobolewski, thebourse’s chief executive, isoften on the road, lookingfor IPOs in Prague, Kiev,the Baltic states and evenIsrael.

However, the IPO figuressuggest Warsaw is gainingin numbers but less indepth. In the first quarter ofthis year, it had 47 per centof Europe’s IPOs, but only4 per cent of their offeringvalue. London had 61 percent.

Mr Sobolewski pledges topush for fewer and higherquality listings, and is nowsetting his sights on over-taking exchanges at thelevel of Istanbul and Mos-cow.

“Let’s stop celebratingour conquest of Prague,Budapest and Vienna,” hesays. “The new combinedMoscow exchange is seventimes larger than Warsaw;they could soon be a realcompetitive threat.”

Although the WSE is nowvery much larger than itsVienna equivalent, the Aus-trian capital comes muchhigher in the annual rank-ings of financial centresprepared by the Z/YenGroup, a think-tank.

Vienna still has a densernetwork of banks, headoffices and other financialsector trappings than thePolish capital, althoughWarsaw is catching up.

Additional reporting: KesterEddy in Budapest and HaigSimonian in Vienna

Vienna and Warsaw vie for pre-eminenceFinancial centresOther capitals havetried to competebut have provedtoo small andpoorly regulated,writes Jan Cienski

Prague, considered one of the most attractive cities in Europe, was initially a magnet for the regional headquarters of international companies Dreamstime

‘We had a Serbiancompany thatconsidered listing inWarsaw or London.Vienna was notmentioned’

FINANCIAL TIMES FRIDAY MAY 18 2012 ★ † 3

Central & Eastern Europe: Banking & Finance

L ocal and foreign investors areeagerly awaiting the esti-mated $6bn share sale ofSberbank, Russia’s biggest

state-controlled banking group, adeal that will highlight the institu-tion’s transformation in the past fiveyears.

Under the leadership of GermanGref, a former economy minister, whotook the helm in 2007, Sberbank hascemented its position at the top of theRussian banking sector, moving intoareas previously dominated by nicheor foreign organisations, and modern-ising its operations so as to combinesize with efficiency.

While Mr Gref appears to have suc-ceeded at teaching “an elephant todance” – one of his initial promises aschairman – the successes of Sberbankand its state-controlled peer VTB havemade conditions harder for privatemarket participants.

These banks lack the access to fund-ing that the government banks haveand are also losing their edge in cer-tain services, such as consumer lend-ing and investment banking, wheretheir state competitors have onlyrecently made inroads.

Analysts and industry executivesexpect that stronger private compa-nies able to withstand the increasedstate competition will pull away from

peers that cannot, paving the way forconsolidation.

“The largest state owned banks aretaking share and the smaller banksare growing more slowly,” says SimonNellis, a sectoral analyst at Citibank.

“[Smaller, private banks] are morenimble in certain areas, but still youhave to fund the growth and that’swhere the challenge is. It was a loteasier five years ago, when marketswere open and people were happy tofund Russia’s small banks.”

“Times have changed. Both VTBand Sberbank have better manage-ment. They are much more responsiveto clients’ needs than they used to be,and they are being much more aggres-sive in their access to funding so theycan compete.”

Funding can certainly be an issuefor VTB and Sberbank’s private peers.Yet some have managed to squeeze

money from capital markets despitetough conditions.

Nomos Bank, Russia’s second larg-est private lender by assets, raisedmore than $700m in a London initialpublic offering last year, and anadditional $500m this year through aseven-year eurobond issue in April.

Jean-Pascal Duvieusart, the bank’shead of strategy, is frank about thecompetition from Sberbank and VTB,but adds that Nomos’s recent fund-raising success shows that certaininstitutions should be more than

able to keep their heads above water.“Sberbank and VTB both have huge

market shares. That’s a fact. Anyonewho tells you differently is out oftouch with reality,” he says.

“The trend in the market is consoli-dation around people who have mean-ingful leadership positions. The size ofthe bank doesn’t matter. What mat-ters is profitability. What matters isyour ability to generate capital andgrow further.”

Nomos’s loan book, he notes, grewat 30 per cent last year – faster thanthe rate at which the sector grew –while retail and small business loansgrew more than 50 per cent.

Retail lending is one area wheresmaller private banks have been ableto remain competitive, because of themore “personalised” service they canoffer, compared with the sometimeslumbering Sberbank and VTB.

The market is relatively under-de-veloped: retail lending made up just10 per cent of Russia’s gross domesticproduct in 2011, versus 29 per cent inthe Czech Republic and 36 per cent inPoland.

Growth in this are of the markethas paid off for smaller businesses,such as Home Credit Finance Bank,which remained in point-of-sale lend-ing, cash loans and credit cards dur-ing the international financial crisisand has kept a stable place in thesector despite advances by Sberbankand VTB.

Nonetheless, Citibank’s Mr Nellissays the agility and more personalservice that smaller banks providemay soon no longer be enough.

“Sberbank is more aggressive inretail lending. VTB has [its retailbanking subsidiary] VTB24. They aregiving the smaller banks a run fortheir money. I think there are stillopportunities to provide faster, more

nimble service but over time thatadvantage will probably be eroded.”

As Sberbank maintains a stronggrip on its number-one market posi-tion – with control over nearly a thirdof the country’s banking assets – it isbeginning to look more widely.

Last year, it acquired VolksbankInternational, the eastern Europeanarm of Austria’s Österreichische

Volksbanken, giving it a platform toexpand outside its home market.

The bank has expressed interest inbuilding a presence in Poland andTurkey and has the balance sheet todo so.

Last year, it recorded a 74 per centincrease in net profit, while its loanbook grew by 35 per cent.

Despite the strong results, it will

not rush into acquisitions, accordingto Anton Karamzin, Sberbank’s chieffinancial officer.

“It doesn’t mean that because wehave the money that we are going tocome and buy,” he says. “We want tobe part of those banking sectors thatoffer growth and profitability opportu-nities on the longer term horizon offive, 10, 15 years.”

State-run ‘elephants’are developing agilityRussiaVTB and Sberbank havebecome much more client-friendly and their access tofunding is vastly superiorto private competitors,writes Courtney Weaver

‘It was a lot easier fiveyears ago, when marketswere open and peoplewere happy to fundsmall banks in Russia’

Circling the competition: Sberbank controls a third of Russia’s banking assets and is starting to look abroad Bloomberg

Stefan Petkov well remem-bers his decision to take upan MBA in 2004, when theCentral and eastern Euro-pean (CEE) countries werenot only joining the EU, buteager to take on Europeanbest business practice.

“Back then, MBAs werestill ‘exotic flowers’ in thisregion. I was very moti-vated to develop my profes-sional career here.

“The best way to do it?Get an academic degree inCEE,” says Mr Petkov,whose first degree was infinance and banking in hisnative Bulgaria.

He opted for a one-yearMBA at the Central Euro-pean University (CEU) Busi-ness School in Budapest,largely because of its goodstanding in the region.

“The school was recom-mended to me by a fewfriends, and I had little hesi-tation about enrolling,” hesays.

Like Mr Petkov, each yearhundreds of young profes-sionals from CEE countriessign up for MBA pro-grammes at a score or moreof management schoolsacross the region; manyothers opt to do an MSc inBusiness at university.

Hardly any of theseschools, and certainly noneof the current programmeson offer, existed before 1989– when in some countriesthe word “management”itself was politically taboo.

Management education’sshort history in the regionraises question about theseinstitutions’ quality – espe-cially given the abruptreturn of capitalism toeconomies dominated fordecades by central plan-ning.

But Mr Petkov, 31 andbased in Sofia as a projectmanager for UniCreditGroup, has no doubts.

“That MBA programmehas helped me so much inmy career. My technicalskills – I specialise in corpo-rate finance – were verymuch enhanced and, deal-ing with cross-country,cross-functional, change-management projectsacross UniCredit Group, Ihave to say every day feelslike my Action Learningcourses at CEU,” he says.

Surprisingly – given thatan outsider may associateMBA graduates with grasp-ing young men in stripedsuits stamping on rivals ina frenzied bid to make theirfirst of many millions – Mr

Petkov stresses that his 11-month programme, ratherthan “overheating” hisambitions to rise quickly tosenior executive level, madehim more thoughtful aboutbusiness life.

“The programme shapedme to be both an insightfulsubordinate and a perform-ing manager, to understandthe whole cycle of businessmanagement,” he says.

Almost inevitably, giventhe number of institutionsthat sprung up across theregion after 1989 to offerbusiness education, somewere of dubious quality.

But so, too, was some ofthe supposed help fromwestern institutions aimedat improving the newly-founded business sector.

Danica Purg, president ofthe IEDC Bled School ofManagement in Slovenia,says: “Sometimes, we weresent second-rate, even third-rate professors; some werereally not very good.”

As a result of those expe-riences, Prof Purg has beenpivotal in raising standardsacross the region, foundingCeeman – the central andeastern European Manage-ment development associa-tion – in 1993 to helpschools address quality.

Ceeman has created arange of courses and work-shops, with experiencedlocal and visiting professors,that attract participants notonly from the furthestdomains of its target region,including Russia and theCIS, but increasingly fromsouth Asia, western Europeand even the Americas.

The annual three-day Pro-gramme Management Semi-nar (PMS) is designed todevelop the often neglectedrole of school administra-tor. It regularly attracts stu-dents from western Europe,where the skills taught aretypically – and often errone-ously – assumed to be capa-ble of being picked up“along the way”.

Marina Gordeichuk,senior administrative man-ager at Skolkovo MoscowSchool of Managementattended PMS in 2009. “It isa unique opportunity forprogramme managers tomeet colleagues from a vari-ety of business schools andto share ideas and experi-ence.

She says: “It gives you agreat chance to step backand view your day-to-daywork from a different per-spective, and gives you anopportunity to benchmark[yourself].”

For all such striving, thehighly ranked (and highlyexpensive) western schoolslook set to attract the bestprofessors for the foresee-able future, and will luremany from central and east-ern Europe who seek a glo-bal career.

Yet, Mr Petkov argues,for those seeking a profes-sional life in the region, alocal MBA programmemakes sense: “In my class,there were 60 MBA candi-dates from 22 nationalities.The majority originate fromCEE, and are still doingbusiness here, which isvery positive; [it provides] ageographically close, profes-sional network.”

An MBA programme inthe US would be too differ-ent culturally, and, whileone in western Europe –especially with a scholar-ship – would be “a bit moretempting”, he insists he“wouldn’t trade my CEUMBA experience for anywestern degree”.

MBAs evolve fromexotic f lower statusBusiness educationA homegrownsector has emerged,says Kester Eddy

New generation: Stefan Petkov is a graduate of the one-yearMBA at CEU Business School in Budapest

Hardly any of theschools – and noneof the programmeson offer now –existed before 1989

4 ★ FINANCIAL TIMES FRIDAY MAY 18 2012

Central & Eastern Europe: Banking & Finance

Private equity now focuses on safety of Polish havens

Central and eastern Europemay stretch from the Balticto the Balkans, but for theprivate equity industry it ismuch smaller – consistingreally only of Poland.

Jacek Siwicki, presidentof Enterprise Investors, aWarsaw-based privateequity fund, has beeninvolved in the region formany years.

During a recent industrybreakfast, he said thatbefore the international eco-nomic crisis, his investorsused to push him to diver-

sify away from Poland,keen not to lose out onother opportunities in a fastgrowing region.

“Now they are saying,‘Don’t tell us about CEE –we just want to know aboutPoland.’ Poland has by farthe best reputation amongprivate equity investors,”he said.

For those who want toinvest in the region, thechoice is usually betweenPoland or Turkey – othercountries are barely on theradar, he said

Mr Siwicki’s view wasseconded by Jiri Zrust, amanaging director at Mac-quarie, the financial serv-ices group whose maininvestment in the region isDCT, a container port inGdansk.

“In the region, it is only

really Poland that is dis-cussed,” he said.

The main reason is itssize – with 37m people itaccounts for about half theregion’s population – andeconomic resilience as oneof the EU’s fastest growingeconomies.

Analysis by CMS, the lawfirm, and DealWatch, exam-ining mergers and acquisi-tions in “emerging Europe”– CEE, Ukraine and Russia– found that there were3,792 deals last year with atotal value of €150bn, aboutthe same level as in 2010.

Russia accounted for 65per cent of deal value in2011, while Poland made up12 per cent.

However, the bulk of thebig deals were in Russianmining. The largest non-Russian transaction was

the €4.8bn acquisition ofPolkomtel, a mobile tele-phone operator, by Zyg-munt Solorz-Zak, a broad-casting tycoon aiming tobuild Poland's first multi-media company.

The CMS report said: “Weexpect investors to stayaway from small deals incountries such as the CzechRepublic, Romania andHungary. But at the sametime, the largest countries[Russia and Poland] arelikely to witness growth indeal activity.”

One result of this lack ofinterest from outsiders isthat in countries such asBulgaria local investorshave become more active.

Across the rest of theregion, where there hasbeen interest from biggerinvestors this has often

focused on commercialproperty.

Meanwhile, in Poland,local private equity fundson the hunt for dealshave increasingly had tocompete with industry buy-ers and big funds swooping

in from western Europe totry for some of the biggestdeals.

All in all, the country hashad a very strong year.

Last year, private equitydeal value was €1.2bn,about 18 per cent of allemerging Europe activity,

according to a report ondeal flow prepared by Exen,Bastion Group and GideLoyrette Nouel.

Although the industrywas not involved in the big-gest deal, the sale ofPolkomtel, other sizeabletransactions includedPoland’s largest privateequity buyout, the €425mpurchase of TP EmiTel, atelecommunications com-pany, by Montagu PrivateEquity.

Other significant dealsincluded the €400m pur-chase of Zabka, a conven-ience store chain, by MidEuropa Partners, a UK-based firm, from Penta, aCzech and Slovak invest-ment fund – an example ofa “second-generation” pri-vate equity investment.

While 2011 was a good

year, the outlook for 2012 ismore uncertain.

One factor is slowinggrowth across the region.

Hungary is experiencingpolitical and economic tur-moil, Romania and Bulgariahave yet to emerge frompost-crisis doldrums, andthe Czech Republic recentlyslipped back into recession.Poland is likely to growonly about 2.5 per cent thisyear.

Because local banks tendto be owned by west Euro-pean parent groups, whoare battling economic diffi-culties at home, deals aredifficult to finance.

“At the moment, you canget at most 3 to 3.5 timesebitda, or about€200m-€300m,” says ThierryBandon of Mid Europa.“This creates a flight to

quality, as only the bestdeals can be funded.”

Recent research byDeloitte, the consultancy,captures the sourer mood.

A private equity confi-dence index covering 17countries in central Europesaw its biggest drop inexpected market activitysince the survey began in2003.

Almost two-thirds ofthose questioned in theOctober 2011 report worriedabout the availability offinancing. However, Polandlooked relatively positivecompared with the rest ofCEE.

“The region has becomeless homogeneous since thecrisis, and Poland reallyshines,” says Robert Manz,managing partner at Enter-prise Investors.

Tough battleto keep cashf lowing in

Three years ago, in thedarkest days of the financialcrisis following the collapseof Lehman Brothers, theinvestment bank, regulatorsand international financialinstitutions (IFIs) met inVienna and launched animportant project.

The Vienna Initiativeaimed to prevent westernEuropean banks from pull-ing out of central and east-ern Europe (CEE) markets.

The meeting included theIMF, World Bank, the Euro-pean Bank for Reconstruc-tion and Development, andthe European InvestmentBank and lenders pledged€24.5bn – and ultimatelydisbursed €33bn – to CEEcountries, provided com-mercial banks maintainedexposure. There was alsofinancial support for indi-vidual banks.

In return for recipientcountries’ commitment tomeet conditions attached tothis support, many bankssigned letters pledging tostay invested and continueproviding credit.

The initiative did its job:banks did not withdraw,and the crisis in CEE, theemerging market regionworst hit by the 2008-2009downturn, was contained.

A recent report by theEBRD found that: “Comple-menting public funds witha co-ordinated bail-in of pri-vate-sector lenders may notonly have helped countriesto close external fundinggaps, but also to soften theinevitable deleveragingprocess in eastern Europeand prevent an uncoordi-nated ‘rush to the exit’.”

But as the eurozone crisisworsened last year, fears re-emerged about a new rushto the exit by westernbanks. If anything the con-cerns were greater.

Western European gov-ernments, battling toreduce deficits and debt,were this time less able tosupport their home banks.

The banks, meanwhile,faced heavy pressure fromthe European BankingAuthority’s capital require-ments and, later, Basel IIIstandards to strengthentheir balance sheets athome. The risks of unilat-eral actions to protectbanks without regard totheir foreign subsidiariesseemed even higher thanthree years earlier.

Worries intensified lastNovember when the Aus-trian National Bank intro-duced rules limiting itsbanks’ lending in easternEurope to what they couldfund from deposits.

It also accelerated thetimeframe for them to com-ply with Basel III, thoughthe measures were laterpartly watered down.

The EBRD, one of themain participants in theoriginal initiative, led callsfor a renewed effort to keepbanks invested in CEE –which was launched in Jan-uary, again in the Austriancapital, called “Vienna 2.0”.

Its goals and resourcesare more modest – promot-ing some critics, perhapsunfairly, to call the new ini-

tiative “toothless”. IFIs didnot this time pledge specificsums, saying only they“stand ready” to supportbank subsidiaries in easternEurope if necessary.

“Vienna 2.0 is probablynot going to be the headlinemaker Vienna 1 was,” saysErik Berglof, the EBRD’schief economist. “It is moreabout the long term, andmaking sure deleveraging isorderly.”

The aim is to foster morepermanent and organisedco-ordination between regu-lators in “home” countries,where parent banks arebased, and the “host” coun-tries of subsidiaries – andbetween these and cross-border regulatory bodies.

This is something bankshave been pressing for.

Herbert Stepic, chief exec-utive of Raiffeisen BankInternational, says one les-son of the 2008-09 crisis forregulators was to pursueoversight more stringently.

“However, an overlyhasty approach to this chal-lenge raises the prospectof excessive regulatorydemands that could under-mine banks’ productive rolein financing the real econ-omy – and thus threaten todamp recovery andgrowth,” he says.

This year’s Vienna meet-ings agreed on eight “basicprinciples”, includingensuring free allocation ofliquidity and capital acrossborders, while preserving

financial stability; match-ing the supervisory frame-work to the cross-borderintegration of financial mar-kets; and taking account of“spillovers” from nationalactions by regulators.

Meanwhile, the risks ofdeleveraging have eased, inpart thanks to the Euro-pean Central Bank’s longer-term refinancing operationbegun in December.

But the EBRD says delev-eraging has been observedsince the third quarter oflast year, when the Bankfor International Settle-ments saw assets of interna-tional banks in “emerging”Europe fall by $33bn, after anet increase of $47bn in thefirst half of 2011.

Credit growth turned neg-ative in almost all the new,eastern members of the EUby late 2011 and early 2012,the bank adds.

Mr Berglof says: “Thereare some hotspots atpresent, but not the mas-sive deleveraging we wereworried about late last year.Certainly, in the countriesinvolved, it is affecting theavailability of credit.”

Some banks have cur-tailed eastern Europeanoperations. But the biggestinsist they are committed.

Andreas Treichl, chiefexecutive of Austria’s ErsteGroup Bank, says: “Thosebanks that don’t have astrong local presence willwithdraw.

“Those banks that dohave strong local operationswill definitely not retreat.”

‘Excessiveregulatorydemands couldunderminebanks’ role’

Herbert Stepic,Chief executive, Raiffeisen

Bank International

Economic fears curtail market resurgence

As risk-aversion eased lastyear, there was a big impacton emerging European realestate markets, as investorsbegan to snap up propertiesacross the region.

Now, the return of wor-ries about the eurozone andlacklustre economic growthlook likely to reverse senti-ment.

According to a survey ofthe region by Colliers, theproperty services group,2011 was the best year forreal estate investment inthe region since 2007, beforethe crisis began, with€13.2bn in transactions.

Colin Dyer, chief execu-tive of Jones Lang LaSalle,another property servicesgroup, says: “Initially,money flows into deepliquid markets such as

London, New York andParis. Then, as prices go up,it starts to flow into citiessuch as Manchester, Stutt-gart and Warsaw.” He notesthat with yields in Paris ofabout 4 per cent, Warsaw’syield of 6 per cent makesfor attractive investments.

Russia accounted for 40per cent of last year’sinvestment total, whilePoland was the overallleader in central Europewith €2.6bn in transactions– a 37 per cent increase on ayear earlier. It was followedclosely by the Czech Repub-lic with €2.2bn, about fourtimes higher than in 2010.

The depth and liquidity ofthe Polish and CzechRepublic markets madethem much more attractiveto investors, who tended tosteer clear of less developedones such as Romania –with only €150m in transac-tions last year – or politi-cally and economicallytroubled Hungary, whichhas fallen out of theregion's top leagueand registered only €650min commercial propertysales in 2011.

“There is a differentiationamong the various partsof central and easternEurope,” says RachelLavine, head of AtriumEuropean Real Estate, afund with €2.1bn in CEEretail assets, mostly in theCzech Republic and Poland.“We see a big differencebetween Poland, the CzechRepublic and Slovakia onthe one hand and Hungary,Romania and Bulgaria onthe other

Atrium, which last yearbought three large shoppingcentres, one in Prague, onein the western Polish city ofSzczecin, and one in War-saw is an example of thetrend for investors to buyfully leased low-risk proper-ties in functioning cities.

John Duckworth, regionalmanaging director for JonesLang LaSalle says: “Thereare classic financial productbuyers who are focused onPoland and the CzechRepublic and want a steadycash flow [investment] inWarsaw or Prague.”

Other big buyers includedGerman and Austrian prop-erty funds, which had

largely withdrawn from theregion in the depths of thecrisis.

There were also newerentrants such as Black-stone, the private equitygroup whose property armis building up retail assetsaround Poland, includingthe €110m purchase of ashopping centre in the west-ern city of Wroclaw.

Retail rents across theregion tend to be in euros,

which lowers the risk asso-ciated with the currencyfluctuations experienced byCEE countries since 2008.

In effect, the currencyrisk is transferred to thelessees, as they earn zlotys,koruna or forints, but haveto pay rent in euros.

That has made retailinvesting more popularthan office or industrialproperties, which lan-

guished last year – espe-cially those located outsideWarsaw’s business district –and are unlikely to be muchmore active this year.

“Buying Warsaw retail isdifficult,” says Ben Habib ofFirst Property Group, a UKinvestor that specialises inproperties outside the cen-tre of Warsaw and in sec-ondary Polish cities. “Thisis because there is a lot ofmoney chasing it. We havebeen unable to justify theprices for some of the shop-ping centres.”

This year is unlikely to beas vibrant as 2011. Eco-nomic growth is slowingacross Europe, makinginvestors pause before buy-ing retail properties, andbanks are restricting lend-ing as they and their west-ern European parents haveto meet tougher capitalrequirements.

Buyers with a goodrecord can still findfinancing to buy incomeproducing properties, butdevelopers are facingmuch more difficult times,which means that fewspeculative retail and

office projects will be built.Before the crisis, banks

would be happy to lend 75per cent of the cost of aproject. Now they are reluc-tant to go much above 50,and are demanding highlevels of pre-leasing.

While that may slow theflow of completions, inves-tors are hoping there couldbe more secondary proper-ties on the market if banksforeclose on strugglingprojects that have beenkept on the books for thepast few years.

“We’re hoping there willbe some distressed assetsales,” says Piotr Krawczyn-ski of Kulczyk SilversteinProperties.

“Until now, banks havebeen reluctant to take overprojects, but that maychange, as five-year loansissued in 2007, during thepeak of the boom, are nowcoming due.”

But even if distresseddeal flow improves, widerworries that the fragility ofthe eurozone will slowregional growth mean that2012 is unlikely to be muchbetter than 2011.

Real estateRents in euros havemade investmentin retail propertymore popular,says Jan Cienski

Institutionscomplainof ‘brutal’treatment

W hen István Karagichadvertised for afinancial assistant inMarch, he was over-

whelmed with applications.“We got 400. We used to get

about a 100 for a job like this. Itjust shows how many have beenlaid off in [the] financial sector,”says Mr Karagich, chief executiveof Blochamps Capital, a financeconsultancy in Budapest.

The global economic crisis, cou-pled with the policies of Hun-gary’s centre-right Fidesz govern-ment, led by Viktor Orbán, havehad a severe impact on the coun-try’s banking sector.

Precise figures for job losses arehard to come by, but, as an exam-ple, the Hungarian unit of Raif-feisen, the Austrian bank group,has shed 800 – more than one infive – of the 3,800 employees ithad in 2008, when the crisisbegan. MKB, the Hungarian sub-sidiary of Bayerische Landesbank,announced another 165 redundan-cies this month.

The financial data are alsodepressing.

“We estimate the entire loss inthe banking sector [for 2011] atabout Ft300bn (€1bn),” says Lás-zló Bencsik, deputy chief execu-tive of OTP Bank.

The financial crisis has affectedall central and eastern Europe’sbanking sectors, but, having sur-vived the immediate crisis and itsaftermath in 2009, Hungary’s

banks have been increasinglyunder the cosh since MrOrbán’s government took powerin 2010.

That summer, desperate for rev-enues and seeking to avoid thepolitical backlash from putting uppersonal taxes, the regimeimposed an “extraordinary” bank-ing levy – making it retroactivefor the whole of 2010 to boot.

Tamás Bernáth, head of finan-cial services advisory at PwC, theconsultancy, says: “I blame thebanks for making some of theirproblems through reckless lend-ing. But this was brutal. Sure,there are other banking taxes inthe world, but at 0.5 per cent oftotal assets, it’s about six timeslarger than in Austria.”

Hungary had another problem.In order to access credit but avoidthe high interest rates on forint-denominated loans, from about2000, households began taking outmortgages in foreign currencies –mostly Swiss francs.

While this seemed like a goodidea at the time – when the francwas worth Ft150 – from late 2010it began a sharp appreciation,peaking within a whisker of Ft270in summer 2011.

With tens of thousands of home-owners struggling to makemonthly repayments, the govern-ment pushed through legislation,forcing banks to accept lump-sumloan repayments at the artificiallydepressed rate of Ft180 to theSwiss franc – with the banks tak-ing the exchange rate loss.

As a result, 170,000 loans, worthsome Ft1,300bn (€4.5bn) – or 25per cent of the total portfolio ofFt5,200bn in foreign denominatedmortgages – were repaid in late2011 and this year.

“This was huge,” János Müller,chief adviser of the HungarianBanking Association, told a Buda-pest conference last month. “Thetotal loss for the banking sector

was Ft370bn; it means the sectorshowed a negative result in 2011for the first time since 1992.”

OTP was one of the few banksthat reported a profit in 2011, butit was a struggle.

“Including the one-off measures,the return on equity for OTP inHungary was 4.5 per cent: now, by

buying 10-year government bonds,you can get between 8 and 9 percent,” says Mr Bencsik.

While the government thoughtit had done a good job, critics saidthe move had mainly benefitedthe well-off, rather than thoseunable to cope with their bloatedmonthly payments.

The banks, meanwhile, quietlyseethed. Heinz Wiedner, chiefexecutive of Raiffeisen Bank inHungary, says “I’m still upsetevery time I think about the[mortgage] repayment act,because it solved neither the gov-ernment’s nor the country’s prob-lems. It helped those people whoprimarily either had the moneysomewhere, or who were able toget very good refinancing.

“These were the best clients,who would have been able torepay their loans anyway.”

The move also contributed tothe weakening of the forint, MrWiedner says, adding to the bur-den for those stuck with theiroriginal foreign currency loans.

In addition, Mr Müller pointsout, banks have cut lending – inparticular, credit to small busi-nesses – also hampering growth.

Meanwhile, government meas-ures continue to evolve.

In an effort to ease the mortgageburden further, the governmenthas negotiated a new scheme ofdeferred repayments, whereby

losses are shared between thestate and banks. And, while it haspromised to halve the bank taxnext year, and phase it out alto-gether in 2014, last week itannounced a levy of 0.1 per centon financial transactions.

This move was criticised by thebanking association, which said itbroke an agreement that pre-cluded new taxes on the sectorthat it had signed with the gov-ernment in December 2011.

Others said it would be costly toimplement and encourage yetmore businesses to migrate to thegrey economy.

For all its problems, Mr Müllerinsists the sector is solid, with anaverage capital adequacy ratio of13.4 per cent, although non-performing corporate loans hadclimbed to a worrying 15.4 percent at the end of 2011.

Mr Müller thinks the risk of acredit crunch is the greaterthreat. “The banking sector is theengine of the economy. With noloans, there’ll be no economicgrowth and no new jobs.”

HungaryThe economic crisiscoupled with policiesof the centre-rightgovernment havehad a severe impact,says Kester Eddy

Notable exception: OTP was one of the few banks that reported a profit in 2011 Bloomberg

‘The banking sectoris the engine of theeconomy. With noloans, there’ll be noeconomic growthand no new jobs’

Financial supportVienna Initiativeprevented a ‘rushto the exit’, writesNeil Buckley

Regional investorsBroader interestis in commercialproperty, saysJan Cienski

Euro winner:localcurrency riskis transferredfrom ownersto lessees

‘The region hasbecome lesshomogeneoussince the crisis’