Potential for crisis aftershocks at eastern European banks
Recent events suggest greater dangers than further west
Does the danger of a new banking crisis lurk in central and eastern Europe? Investors are certainly skittish after several recent incidents.
First, Bulgaria’s central bank had to stabilise its banking system with a €1.7bn emergency credit line after runs on two of the country’s biggest lenders. Then, days later, Hungary’s government passed a law forcing banks to compensate borrowers for “unfair” conditions on foreign-currency loans issued before the 2008 financial crisis (loans in euros or Swiss francs had offered apparently lower interest rates than forint loans but, when Hungary’s currency unexpectedly plunged due to the crisis, borrowers faced hikes in repayment costs).
As a result of the Hungarian measures, plus regulatory pressure in Romania to reduce non-performing loans, Austria’s Erste Group warned it would plunge to a net loss of €1.6bn. OTP, Hungary’s biggest bank, said its second-quarter profit would be cut by Ft25bn (€81m). Austria’s Raiffeisen Bank has estimated its Hungarian costs at up to €160m.
Shares in all three banks – and in others with Hungarian and eastern European exposure, such Italy’s UniCredit and Belgium’s KBC – have suffered.
Even if these developments do not signal any new systemic risks in eastern Europe, or greater contagion dangers, they still suggest greater political and regulatory dangers than exist further west. In particular, they highlight the problem of lingering bad loans.
Capital Economics notes that Bulgaria, Hungary and Romania were among the European countries that saw the largest pre-2008 expansion of credit – much of it in foreign currencies – and so suffered the biggest hangovers. Non-performing loans in all three countries are still above 15 per cent of total loans.
In Bulgaria, regulators say the banking sector is well capitalised, with plenty of liquidity. But confidence is fragile, with the recent crisis highlighting ties between business and politicians.
The run on Bulgaria’s fourth-largest lender, Corporate Commercial Bank, was sparked by media reports of a quarrel between its main shareholder and its biggest borrower, a politician. Last weekend, CCB was put into bankruptcy after the discovery that documents relating to its loan book were missing and cash had vanished from its vaults.
Meanwhile, First Investment Bank – Bulgaria’s number three lender – became the target of an apparently co-ordinated attempt to undermine it through false text messages and emails suggesting it was about to collapse.
Bulgaria’s president said on Monday that the country would now seek to join the EU’s single supervisory mechanism for banks and submit to a peer review from the European Banking Authority.
“Getting the right macro-financial stability picture [in eastern Europe] remains exceptionally difficult,” says Peter Attard Montalto, an analyst at Nomura. “Even central banks themselves, as we saw in Bulgaria, don’t seem to have entirely full confidence in their ability – hence the need to turn to outside forces.”
In seeking to join the SSM, Bulgaria is following Romania – whose desire to become the first non-euro member of the supervisory regime led to pressure on NPL provisions and inflated Erste’s writedown.
But Hungary, whose government has feuded with banks since it was elected in 2010, prompts larger concerns. Its forex loan measures are the latest of several moves to ease the burden on borrowers, and the broader economy.
Prime minister Viktor Orbán’s Fidesz government insists that the foreign currency loans were essentially mis-sold, with risks not adequately spelt out. Banks, however, complain that they have shouldered not only the costs of the forex loan measures, but also a hefty banking levy and a financial transaction tax.
Some suspect political motives, after Mr Orbán said last year he favoured lifting Hungarian ownership of the banking sector – heavily dominated by foreign banks – to more than 50 per cent. The government’s latest measures could force some foreign banks to sell out or merge.
For now, the foreign banks insist they will stay, judging that these steps will be the last before stability and profit growth return. But Budapest is preparing in the autumn to make banks convert their remaining €12bn of forex loans back into forints. It has not said if this will be at market rates, or a discount.
“[Foreign banks] are still not fully realising quite the whack the government in Hungary is going to give them,” says Mr Attard Montalto. In central and eastern Europe, the crisis may be over, but the potential for nasty surprises remains.
Neil Buckley is the Financial Times’s eastern Europe editor