Banks Face Downgrades on Eastern European Losses, Moody’s Says
By Zoe Schneeweiss and Niklas Magnusson
Feb. 17 (Bloomberg) — Austrian, Swedish and other banks with subsidiaries in eastern European may face rating downgrades as economies in the region deteriorate, according to Moody’s Investors Service.
East European banks, which are mainly subsidiaries of financial institutions such asRaiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” which may also weaken their parent companies, Moody’s wrote in a report released today in London.
Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of western European bank loans in eastern Europe. The region’s economies are weakening, with the International Monetary Fund already offering aid to Latvia, Hungary, Serbia and Ukraine. Bailouts may be extended to Bulgaria, Romania, Lithuania and Estonia as the global recession derails more banks, according to Capital Economics research.
“The downturn in eastern Europe will be more severe as a consequence of many countries’ dependence” on capital flows from west Europe banks, Moody’s analysts led by Reynold Leegerstee wrote in the report.
West European banks might become selective in supporting their subsidiaries and “banks in countries that are associated with higher systemic risks might face reduced support,” the report said. Western governments may also establish rules to ensure banks receiving state support do not aid foreign subsidiaries, Moody’s said. On the other hand, limiting support for a subsidiary could hurt confidence in the parent.
Austria ‘Most Exposed’
Austria, whose banking system is “most exposed” to central and eastern Europe, has two of the biggest lenders in the region. RZB made 79 percent of its 2007 pretax profits in eastern Europe, including Russia and Ukraine through itsRaiffeisen International Bank Holding AG unit, and Erste Group Bank AGearned 65 percent of its pretax profits in countries including Romania, the Czech Republic and Slovakia.
Erste, which said last week that full-year profit probably slumped about 26 percent, is in talks with the Austrian government to get 2.7 billion euros ($3.4 billion) in state aid. RZB, which owns a 69 percent stake in Raiffeisen International, which is active in 18 eastern European countries, is also in talks with the Austrian state and has asked for 1.75 billion euros.
In December, the Austrian banks, together with Italy’s UniCredit SpA and Intesa SanPaolo SpA, Societe Generale SA of France and KBC Groep NV of Belgium, asked the European Union to organize financial aid for countries on its eastern fringes, like Romania and Ukraine.
Swedish banks began their Baltic expansion in 1998. Swedbank, the largest lender in the region, bought a stake in Estonia’s Hansabank in 1998 and took full control in 2005. SEB AB took full control of Estonia’s Eesti Uhispank, Latvia’s Latvijas Unibanka and Lithuania’s Vilniaus Bankas in 2000.
Special Units
As the Baltic states enter their worst recession since gaining independence from the Soviet Union in 1991, Swedish banks have been forced to raise cash from shareholders to boost capital and establish special units to deal with delinquent loans.
Impairments and provisions for anticipated future loan losses at Swedbank soared more than sixfold to 1.63 billion kronor ($190 million) in the fourth quarter from 238 million kronor a year earlier, mainly because of the Baltic states, it said earlier this month.
To contact the reporters on this story: Zoe Schneeweiss in Vienna atzschneeweiss@bloomberg.net; Niklas Magnusson in Stockholm atnmagnusson1@bloomberg.net.
Last Updated: February 16, 2009 20:30 EST