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Balkans offer hope but not salvation for CEE-focused lenders

Centraland Eastern Europe-focused lenders can look southward for growth, but the benefitson offer in Croatia, Serbia and elsewhere in Southeastern Europe are unlikely tooffset struggles in Poland, Russia and other ex-Soviet markets.

Corporateand investment banking in particular are ripe with possibilities for lenders includingVienna-based Erste Group Bank AG,which Keefe Bruyette & Woods analyst Hadrien De Belle called the leading BalkanCIB. He described Erste as "very well-managed and resilient" and saidits status as a CIB leader is unlikely to change given the restructuring and cutstaking place at Austrian rival RaiffeisenBank International AG.

As Erste Group divestsits Hungarian unit, it will be even more dependent on SEE, and observers will bewatching its evolution closely to gauge the market's potential. Erste's total assetscontracted slightly in 2015 in Croatia, to €8.90 billion at year-end from €9.11billion a year earlier, but they expanded in Serbia, to €1.00 billion from €829million.

The bank booked a 2015 net lossof €65.4 million in Croatia on the back of a €129.5 million provision forSwiss franc loan conversion legislation approved during the year, but it earneda net profit of €47.3 million a year earlier. The Serbian business returned to profitin 2015, booking a net result of €6.5 million, compared to a loss of €7.3 millionin 2014.

Croatia and Serbia represent just a fraction of the group's €79.27billion in total CEE assets and €199.74 billion in overall assets, but De Bellesaid credit quality in SEE is on the mend and trade activity is set to increaseas EU collaboration increases. Croatia became the EU's 28th member in 2013 and is absorbing billions of euros in structural funds,while Serbia moved a step closer to EU membership in late 2015 when it began negotiationsover the first two of 35 policy areas, or "chapters," in the accessionprocess.

AntunBuric, head of the financial institutions department at Erste'sCroatian unit and deputyhead of institutional sales for SEE at Erste Group, predicted that debt capitalmarkets will benefit from increased trading with the EU.

"Theywill have opportunities to diversify and expand and interest rates on debt willshrink," he said on the sidelines of a conference in Budapest, citing near-terminvestment banking opportunities including the London bond issuance and listingplans of Zagreb-based consumer product giant Atlantic Group, as well as sovereignbond underwriting and the privatizations of the state electricity company and publichighway system.

"Ersteis the top [bond] underwriter in Central and Eastern Europe," he added. "Wehave done a lot of advisory activity in Serbia and Croatia lately."

De Bellealso highlighted sovereign bond underwriting as a strong suit of the region, alongwith direct lending to business and advisory on M&A and privatization. Corporatebond issuance is underdeveloped, he noted, with debt markets fairly illiquid.

Localequity trading is also likely to pick up, Buric said, describing asthe most important development the formation of the SEE Link regional exchange infrastructureproject. The digital initiative brings together the Bulgarian, Macedonian and Zagrebexchanges — the latter having also acquired Slovenia's Ljubljana bourse — and Buric said the Belgrade exchangeis poised to join the group soon.

"Theintention was to gather together the Southeast Europe markets on one platform whereyou could trade blue chip companies from every market," he added. "Themain goal of the move was to enable foreign investors to have an overview of allregional activities."

However,SEE markets have a long way to go before reaching pre-crisis levels of activity,and even then they would represent only a tiny portion of overall bank revenues."Daily turnover on the Zagreb Stock Exchange was roughly €12 [million] to €13million. Nowadays you have a maximum trading volume of roughly €1 million a day,"Buric said.

"Itis very hard to think that those markets [can] compensate for Poland and Russia,"where political and economic headwinds are battering lenders, said Gunter Deuber,head of Central and Eastern European research at RBI in Vienna. He noted that hisbank is now losing money in Belarus and is seeing a steep downward path in Moldova,Russia, Kazakhstan and Ukraine because of falling commodity prices and politicalinstability.

In Poland,meanwhile, banks face a double whammyin the form of a new bank levyand a proposed forcedconversion of Swiss franc loans, which remains under negotiation.

Nevertheless,"dedicated CEE lenders like Erste, RBI and UniCredit will still be very presentin fixed income, including the smaller markets," because it is profitable tooffer a diversified service to existing customers, Deuber said. "It makes senseto capitalize on our footprint."

is likewise confidentabout the Balkans, which it believes are "still an engine of growth,"said a source with knowledge of the bank's internal direction who requested to remainanonymous due to company policy. The lender is happy with its results in corporateand investment banking in the region and aims to continue pursuing business "witheven more focus," the source added.