These pressures in the past few days generated new tensions in the relationship with the Austrian banks targeted and with the countries that will be affected by the new lending rules.
According to market sources, the partners of discussion of the Bank of Austria, the Romanian central bank included, say that once Austria has lost its triple A rating -a major stake in the restrictions announced last year by Austrian supervisors – it would be of no use for the Austrian regulatory authorities to continue to be inflexible in their plan to correct Austrian bank exposure in the region.
The echo of the central bank of Austria’s initiative has now reached Brussels and the EU authorities together with governments in the region and with international financial institutions are seeking to conclude a second Vienna Initiative modeled on the one agreed in spring 2009, in order to prevent the mass reduction of western banks’ exposure to European emerging markets.
Governments and central banks in the region, the European Commission, alongside the IMF, the World Bank, the EBRD, the European Investment Bank and other international financial institutions, agreed in 2009 with the largest financial groups in Eastern Europe, including Erste, Raiffeisen, and UniCredit, not to reduce their exposure to emerging markets amid the financial crisis. The agreement expired after one year.
On Monday in Vienna there was a new round of talks between all parties affected by the new set of measures of the Austrian central bank, but the day-long meeting only sharpened the divide between the Austrian central bank and the three major banks targeted.
Romania, represented by deputy governor of the Romanian central bank Cristian Popa, said, according to banking sources, that Austria harmed itself by unnecessarily drawing negative attention to the region and by insisting on this discussion over the new lending terms, which raises the issue of maintaining exposure to the region.
However, on Tuesday, at the Euromoney conference in Vienna dedicated to the region, Nowotny emphasized that on Monday he had met with friends and repeatedly said a massive reduction in the exposure of Austrian banks is out of the question.
He said that given the speed at which lending grew before the crisis, the quality of loans granted in the region could not be controlled, but that now it was important to reach sustainable growth that would allow a better quality control.
Nowotny insisted that the maximum 110% credit/deposit ratio he wants to impose for the regional subsidiaries of the Austrian banks concern the future. “This doesn’t mean it needs to be reached now, right away, because it would generate a very dangerous exposure reduction. This is about new loans.”
Nowotny says it is in the interest of host countries and of banks, as well as in Austria’s interest for local financing to be strengthened especially in countries with a weak position in this regard.
In turn, Austrian banks accuse the central bank that the new restrictions overlap with the obligation set by the European Banking Authority (EBA) on consolidating the Core Tier 1 capital ratio to 9% by this summer, an obligation that Herbert Stepic, CEO of Raiffeisen Bank International does not hesitate to call “stupidity”. He says what the EBA is demanding is “stupidity”, and that it is “killing progress”.
He says a reduction of exposure to the region by up to EUR20-30 billion could follow, but says it would be bearable and that Raiffeisen will not flee the countries where it operates, but continue to invest in them because it sees them as a growth driver for Europe.
After Monday’s Vienna meeting, banking sources say each party understood what it wanted to but ultimately there would be a memorandum which will establish more clearly how Austrian banks’ activity in the region will change, including in Romania, and what can be done to maintain the current exposure.
The Governor of the National Bank of Austria sought to reconcile banks, saying they built success stories in the region, but says internal saving needs to be encouraged in countries in the region, and that banks need to make efforts both to attract deposits and to draw resources by issuing bonds and shares.
He admits that external financing will continue to play a major role in the convergence process of countries in the region, but asks that past mistakes should not be repeated and foreign money should be used for investments in export capacities, not in malls. And he does not want external financing to choke the internal one anymore.
Nowotny’s conclusion: internal resources should play a more important part in regional economic growth after for years it relied on external saving.
Papa, UniCredit: New loans in 2012 need to reflect the new rules, but I expect flexibility
Gianni Papa, in charge of the operations of the Italian group UniCredit for the region, says talks with the central bank of Austria are complex, and currently target a set of technical aspects, but the fundamental idea remains that the maximum 110% loan to deposit ratio refers only to new loans, not the existing stock on December 31 2011.
He says a process of balancing has already started at group level, especially in countries where there is a major gap between loans and deposits. Papa says in the case of Romania, where UniCredit Tiriac Bank has an around 140% loan/deposit ratio, a slowdown of lending is out of the question.
“I think even in 2012 we will be able to outpace the market in terms of credit growth rate because we have a relatively good position compared with our competitors. Slowing down is out of the question because the resources considered as stable financing do not only concern deposits, but also bonds and financing from international institutions. The target that all banks will have to meet under Basel III is a balance between long-term assets and long-term liabilities.”
Papa expects the central bank of Austria to however be flexible in its supervision of how the new lending rules will be applied. He says UniCredit Tiriac Bank is one of the few banks who have retained solid profitability, which allows it to continue lending.
At the same time, he says weak demand could slow down lending this year on the entire market. As for the diversity of financing resources, the UniCredit official says it is difficult to issue bonds on a financial market like Romania’s, so the Italian group will continue to work with the authorities to find solutions to help it grow.
Papa says Unicredit Tiriac Bank does not need a capital increase right now, but if the business trend demands it, the group is ready to supply the necessary resources.
On the other hand, he says UniCredit Tiriac Bank does not intend to pay dividends in 2012, either, retaining the 2011 profit to strengthen its position on the market, and that this was not an issue with businessman Ion Tiriac, the Italian group’s partner shareholder.
“We have a very good relationship with Ion Tiriac and the decisions are made jointly.”
(English version by Daniela Stoican)