The lenders, which own three-quarters of eastern Europe’s banking industry, want local deposits to finance their units’ lending as stricter regulatory requirements force them to sell assets and bolster capital. Still, declines in funding have been limited, according to Artur Szeski, director at Fitch’s financial institutions department in Warsaw.

“We see a shift in the parents’ policy going forward but we don’t see anything drastic happening in terms of a cut in the ability to get funding from parents,” Szeski said in a March 7 phone interview. “We haven’t seen any instance when the capital wasn’t made available to the subsidiary when it was needed.”

The Vienna Initiative group of international lenders, regulators and policy makers, which helped keep eastern Europe’s banking industry afloat in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy, are meeting the region’s largest banks in Brussels today to discuss limiting funding risks.

The International Monetary Fund, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank spent $42 billion in the two years through 2010 to support eastern banks and businesses.

Markets Rebound

Eastern European financial markets have rebounded this year after the European Central Bank’s longer-term refinancing operations helped lenders in the region’s west.

Poland’s zloty is the world’s best performer this year with an 8.5 percent gain against the euro, while the Hungarian forint is fourth-best, advancing 7.2 percent. The currencies were the worst performers in the second half of last year behind the Belarusian ruble on concern the euro-region’s debt crisis would spread eastward.

The ECB allocated 529.5 billion euros ($695 billion) in three-year loans to 800 European banks on Feb. 29, after supplying 489 billion euros on Dec. 21.

“The LTRO helped a lot because it eased a lot of pressure on the banking groups in some countries and the take-up both in December and in February was large,” Szeski said. “This helped these banks contain their liquidity issues.”

Bank-related capital outflows from emerging Europe were “substantial” in the second part of last year, the EBRD said in a report on its website Feb. 28. Hungary’s outflows accelerated last year and net outflows in Poland totaled 2 percent of economic output between July and November 2011, according to data compiled by the EBRD.

‘Can’t Draw Conclusions’

While funding has declined somewhat, large-scale deleveraging hasn’t occurred so far, according to Szeski. An economic slowdown across the region, as export markets in the euro area grapple with a debt crisis, is curtailing demand for new loans and is undermining credit quality, he said.

“Funding from the parent banks is falling but one can’t draw conclusions from that on the simple fact,” Szeski said. “There isn’t enough quality demand for loans locally. It’s not that the banks aren’t extending enough loans because there isn’t enough funding or capital.”

The IMF cut its growth forecast for central and eastern Europe in January, citing “strains in the euro area.” The region will expand a combined 1.1 percent this year, the IMF said. The extent of the revision from a September estimate, 1.6 percentage points, mirrored the cut in the euro region’s forecast.

Continued Commitment

Parent banks are signaling their continued commitment to eastern Europe by providing capital to their units where needed, according to Szeski.

Erste, eastern Europe’s second-biggest lender behind UniCredit, injected capital into its Hungarian and Romanian units last year as it swung to a full-year loss after writedowns and provisions of 1.6 billion euros.

Raiffeisen, the region’s third-largest bank, said March 9 it will raise its stakes in two east European units, Slovakia’s Tatra Banka AS (TAT) and Raiffeisenbank AS in the Czech Republic, to prepare for the introduction of Basel III guidelines in 2013.

“Even in countries where parent banks have major issues with subsidiaries -- and Hungary is a good example -- the parent banks are standing behind the subsidiaries,” he said.

At the same time, a shift toward local funding has begun, according to Szeski. Austria, whose banks are collectively the biggest in eastern Europe, told its three biggest lenders to limit loans in the region to 1.1 times the funding they can raise locally. It also imposed a capital surcharge whose size depends on their eastern European business.

Parent banks would like subsidiaries to be self-funded, even as regards foreign-currency lending, Szeski said.

“This isn’t feasible overnight but this is the policy statement going forward,” he said. “It’s good from the point of view of the future stability of these markets.”

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

http://www.bloomberg.com/news/2012-03-12/eastern-europe-banks-keep-support-as-funding-shifts-fitch-says.html

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