Balkan honeypot turns to black hole for foreign banks


By Ivana Sekularac and Benet Koleka

BELGRADE/TIRANA, Nov 15 (Reuters) - Bad loans have turnedthe Balkans from high-yielding paradise to profit-sappingpurgatory for international banks, crimping their ability tolend and weighing on the region's economic potential.

In Albania, banks' return on equity was 34 percent in early2000 and stayed in double digits for most of the decade untilthe financial crisis tightened its grip. It was minus 2 percentin the third quarter of 2013, after what Seyhan Pencabligil,president of a lobby group for Albania's 16 banks, called an"alarming increase in bad loans".

"This is affecting our profitability so negatively that weare either unable or unwilling to lend more," he said.

Before the crisis, foreign-owned banks typically borrowedfrom their parents at low interest rates to lend to corporatecustomers in the Balkans. Capital markets were just beginning tooperate, and there was very little equity financing there.

But the 2008 crisis hit the region's corporate sector hard,and foreign banks could no longer borrow from their parents.Everything they earned, mostly by investing in governmentsecurities, went to repay debt to the group.

Individually, problems in the Balkan countries are too smallto have a material impact on international banks, but taken as awhole, the region's difficulties can make their presence felt.

Raiffeisen Bank International, emerging Europe'ssecond-biggest lender, in September raised its forecast for 2013bad loan provisions by as much as a fifth, citing strugglingborrowers in Albania, Bulgaria and Slovenia.

"Bad loans are my biggest headache," Draginja Djuric, headof Italian lender Intesa Sanpaolo's market-leadingbusiness in Serbia, where banks made a return on capital in 2012of just 1.9 percent before taxes, down from 8.6 percent sixyears earlier, told an investment forum last month.

"I don't have time to think how we can improve our lendingconditions to boost the economy; bad loans take most of mytime," she said.

In October bad loans in Serbia increased to 24.5 percent oftotal lending from 19 percent in January, according to bankingassociation figures.

That gives Serbia one of the worst non-performing-loan (NPL)ratios in Europe, only marginally better than the 28 percentrecorded at midyear by the four biggest banks in Greece, theeuro zone's most stricken economy.

"It is hard to say, but we don't expect any improvement inthe future; our economy is not solvent. The only solution is toattract more foreign direct investment," said Veroljub Dugalic,head of the Serbian banking association.


It's a similar story throughout the region. Bad loans makeup more than 24 percent of lending in Albania, nearly 15 percentin Bosnia, 17 percent in Montenegro and 14 percent in Croatia,the newest EU member, central bank figures show.

ECB data show NPL rates in Bulgaria at 12.5 percent atend-2012. In Romania, it was 18 percent. Figures from the WorldBank show NPLs in the Balkans have been consistently above theEU average over the last decade. On the plus side, Balkan bankstend to have higher capital than the EU average, so they havegreater capacity to absorb future loan losses.

"In general, in central and eastern Europe NPLs are becomingthe number 1 policy priority," the European Bank forReconstruction and Development's (EBRD) country and strategydirector, Piroska Nagy, told Reuters. The EBRD holds stakesworth around 4.1 billion euros in Balkan banks.

Nagy said low growth rates, the lack of a legal framework tomove more aggressively on bad loans and the fact that loans,mostly indexed in euros, were susceptible to exchange ratefluctuations contributed to the high number of bad loans.

"It is not OK to sit on lots of NPLs. It is important toclear balance sheets," Nagy said. "This has to be tackled."

A banker with insight into NPL management in the Balkanssaid the picture could be much worse, as some loans classifiedas performing had a chequered past.

"In many instances banks have given out additional creditlines to clients that could not keep up with instalments, justto keep paying for interest on the first credit line," he said.

"This way the first credit line seems to be under control.However, it is not paid out of the cash flow but out of thesecond credit line."

Among the foreign-owned banks that dominate Balkan banking,NPL treatment and recognition isn't necessarily as rigorous asat their international parents, said a banker with aninternational consultancy firm who is familiar with Balkanbanks.

"It depends on the discipline the parent has, and the levelof control they exert," he said. "Some have much moredecentralised local operations than others."

"There's always a question mark on the extent to which banksrecognise NPLs," the consultant added. "The standard variesquite significantly across different countries."


If the bad loan problem has been years in the making -regional central bank governors in Belgrade last week partlyblamed foreign banks' poor credit risk management in the late1990s and early 2000s - it could also be years in the mending.

"We think the macroeconomic environment will be extremelyunfavourable for the next three or four years, and weunfortunately fear that the zenith of non-performing loans hasnot been reached yet," said Franz Hahn, a senior economist atthe Austrian Institute of Economic Research (WIFO).

Now they are having to find savings to offset the charges.

"Parent banks are not happy. There will be cost-cutting inthe banking sector ... in the whole region," said one executiveat a big lender who has exposure to the region, adding that theBalkans had become a "black hole" for foreign banks.

Not all foreign parents are equally concerned. "We're notseeing any particular burden there at the moment," said a seniorexecutive whose bank has billions of euros of assets in theBalkans. "The rate of non-performing loan creation has gonedown. We're past the worst."

Italian bank UniCredit's Bank Austria unit, theleading lender in central and eastern Europe, has said it is notconcerned what an ECB-led review of big banks' balance sheetsmight turn up.

Ellen Goldstein, the World Bank's director for southeastEurope, is also cautiously optimistic.

"While there may be not a quick win on this (NPLs), we arestarting to see some progress. Reduction in public sectorarrears and payment of bills owed to the private sector willalso help to resolve that situation," she said of Albania.

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