Post-Crisis Business Models of Austrian Banks in Central and Eastern Europe

Alissa M. Winkler / Peter R. Haiss

ABSTRACT

We analyze the impact of the global financial crisis on foreign bank strategies in Central and
Eastern Europe. Foreign banks basically “own” the markets in CEE, with Austrian banks
playing a major role. While initially celebrated for their success during the growth phase of
these countries, the global financial crisis put them under severe stress. What is their strategic
reaction? How did they adapt their business model? We conduct case studies on three major
players and examine their post-crisis business models with regard to price, promotion, place
and product. In this respect we discuss increasing equity ratios of foreign banks in CEE and
government measures as well as cost cutting strategies. We further focus on banks’ risk
management resulting in a cessation of lending of foreign currency loans and an increase in
provisions for risks in addition to an accurate and anticipatory observance of liquidity. We
find that foreign banks did not “cut and run” but rather “sit it out” as regionally focused
players, though with major strategic shifts in operational policies.

KEYOWRDS
Global financial crisis, foreign banks, strategic adaptation, transition countries, stakeholders

JEL CLASSIFICATIONS
F23, G21, G38, L10, M21

Alissa M. Winkler Peter R. Haiss

EuropaInstitut
WU Vienna, University of Economics and
Business, Vienna, Austria
Althanstraße 39-45/2/3
A-1090 Vienna, Austria
Phone +43 (0) 650 755 722 7
Fax +43 (0) 1 31336 – 758
Email: alissawinkler@hotmail.com
Lecturer, EuropaInstitut
WU Vienna, University of Economics and
Business, Vienna, Austria
Althanstraße 39-45/2/3
A-1090 Vienna, Austria
Phone +43(0)664 812 29 90
Fax +43 (0) 1 31336 – 758
Email: peter.haiss@wu.ac.at
 Post-Crisis Business Models of Austrian Banks
in Central and Eastern Europe

1. Introduction
This paper examines the impact of the financial crisis on Central and Eastern Europe (CEE)1
regarding the activities of three major Austrian banks. After a general overview of the CEE
region, the focus is directed towards Ukraine, Romania and Hungary. Serving as an example
of heavily affected victims of the crisis, these three countries are analyzed concerning
changing banking activities of Austrian banks operating in CEE. As major players in the CEE
region Erste Group, Raiffeisen International (RI)2 and UniCredit Group are in the spotlight.
Examination of primary and secondary data shows a slow adaptation to the new situation
faced by these banks. In order to meet the high standards and expectations of the IMF and the
European Union (EU), on the one hand, and confronted with obligations of national leaders
and conditions made by host country institutions, on the other hand, banks adjust in different
ways.
The paper focuses on similarities and differences of banking strategies before and after the
crisis but also tries to highlight potential business opportunities. In this regard increasing
equity ratios of foreign banks in CEE by means of new share issuing and government
measures are discussed as well as cost cutting strategies such as staff reductions, closing
branch offices and cutting administration costs. Furthermore, focus is put on banks’ risk
management resulting in a cessation of lending of foreign currency loans and an increase in
provisions for risks in addition to an accurate and anticipatory observance of liquidity.
We base our analysis on interviews with bank managers and bank supervisors as well as on
company statements and reports and both scholarly and journalistic sources. To compare the
similarities and differences of before- and post-crisis business models of the three Austrian
banks, McCarthy’s 4Ps (product, price, place, promotion) are drawn on in order to focus on
special aspects of banking strategies and to combine facts and major research findings which
form the basis on which recommendations and conclusions are built upon. Given the multi-
faceted pressure that banks face, we also discuss reactions of various other stakeholders to the
financial crisis in CEE with repercussions to bank strategies.

1
For the sake of completeness is has to be mentioned that the term CEE in this paper often includes Ukraine, a
country-participant of the CIS (Commonwealth of Independent States) countries, and is used to simplify matters
in order not to disrupt the flow of reading unnecessarily with long abbreviations.
2
Member of the Raiffeisen Zentralbank (RZB) Group; as the CEE-units of UniCreditGroup (besides PL) are
managed by UniCredit Bank Austria, it is treated among Austrian banks.

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 2. Austrian Bank Groups’ CEE Entry and Engagement
Before going into a detailed analysis of the banks and countries under review, this part of the
paper offers an overview of the Austrian banks’ entry and exposure in the whole CEE and
CIS region, followed by a description of the impact of the global financial crisis on these
countries.
The fall of the Iron Curtain in 1989 marked the end of communism in Europe and led to the
transition of Central and Eastern European economies accompanied by a tremendous increase
in demand for banking services. After decades of centrally planned economic activities,
domestic banks lacked the experience or the corporate governance to support the
establishment of dynamic markets and were therefore unable to fund the economic growth
sustainably. The former more domestically oriented Austrian banks adapted rapidly to the
new situation and took advantage of the geographical proximity together with cultural
similarities and a shared history when formulating their new business strategy with a focus on
“going east” (Nowotny 2009, 3). Austrian banks followed their corporate clients in order to
provide services to their customers starting business in this region. Moreover, foreign
investors were lured by the low ratio of private credit to GDP in these countries, offering an
attractive business opportunity for Austrian banks. Taking part in the first wave of
privatization of state owned banks, the Austrian banks quickly changed their initial business
models of greenfield investment and organic growth to growth through acquisition (OeNB
2009b, 105). The turn of the millennium was characterized by the stabilization of economic
environments in most CEE countries and sustained expansion of banking activities (Barisitz
2007). Surging direct cross-border loans3 to nonbanks by Austrian banks further contributed
to an increasing CEE and CIS exposure. Direct cross-border lending by Austrian banks
expanded rapidly over the last few years and seems to follow nonfinancial FDI by Austrian
corporates to CEE and the CIS. Direct lending to the CEE countries that joined the EU in
2004 (NMS-2004) increased at a steady pace of about 20% a year and reached EUR 36.2
billion in 2008, whereas cross-border credit to customers resident in the CEE countries that
joined the EU in 2007 (NMS-2007) grew at a significantly faster rate of more than 50% on
average to 10.7 billion in 2008. At the same time direct lending to CIS almost quadrupled to
EUR 5.2 billion (OeNB 2009b, 106-107). Counting for about one-fifth of total cross-border
lending, the following chart shows the regional differences of direct cross-border lending.

3
“Direct (cross-border) lending denotes loans of Austrian banks to customers resident in CEE and the CIS,
whereas domestic loans extended by CEE and CIS subsidiaries of Austrian banks are referred to as indirect
(cross-border) lending” ( OeNB 2009b, 102).

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 *** insert chart 1 about here ***

Today, Austrian banks hold a market share of almost 20% in the CEE and CIS countries,
which has attracted international attention given the increased risk awareness triggered by the
financial crisis (Cf. OeNB 2009b, 105). To compare Austria’s CEE exposure to other
countries’ engagement in this region, the next chart presents an overview of foreign banks’
claims on Eastern European countries.

*** insert chart 2 about here ***

Austrian bank groups, whose CEE exposure amounted to EUR 199 billion at end-2008, do not
only take the highest risk in absolute numbers, but also when comparing the banks’ lending to
Eastern Europe to the GDP of the countries (OeNB 2009b, 55). Chart 3 indicates Austrian
banks’ lending, accounting for about 64% of the country’s GDP to the CEE region in 2008.
The biggest Austrian claims are on Czech Republic, Romania and Hungary (Föhrenbergkreis
Finanzwirtschaft 2009). Given the impact of the global financial crisis on CEE countries, the
next paragraph describes the beginning of the crisis in a nutshell, followed by an overview of
the effects on emerging markets as well as on Austrian banks and their banking activities in
the CESEE region.

*** insert chart 3 about here ***

3. The Global Financial Crisis and its Impact on the CEE Region
The current global financial crisis is traceable to the U.S. subprime market for structured
credit securities. Rising risk aversion to these structured credit products and increasing
concerns about losses from bad assets caused more and more market participants to lose
confidence and to raise questions about the solvency and funding of core financial institutions.
As a result, refinancing in the interbank market and later also in capital markets became more
restrictive (OeNB 2009b, 54). Activity slowed in the face of tightening credit conditions, with
advanced economies falling into mild recessions while emerging and developing markets
continued to grow at a steady path. The situation deteriorated rapidly after the collapse of
Lehman Brothers (a large U.S. investment bank) in September 2008. Following the default,
perceived counterparty risk surged as banks faced large write-downs and demand for liquidity
increased tremendously. As a result of deleveraging pressure, liquid assets were sold at fire-
sale prices and banks began to tighten their lending standards. New securities issues were

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curtailed, bond spreads soared, equity prices fell steeply, and exchange markets came under
heavy pressure (IMF 2009, 3). This sharp escalation of financial stress quickly transmitted the
consequences of the excesses and failures to all sectors and countries of the global economy.

Due to their limited exposure to the U.S. subprime market, emerging markets had been
relatively sheltered from financial strains in the beginning of the crisis. The global financial
crisis, however, revealed imbalances, related to high dependency on foreign funding and the
effects of a widespread credit boom of the past years (Cf. UniCredit Group 2009, 3). Chart 4
presents an overview of the sharply increasing rate of private credit growth in emerging
countries, Central and Eastern European countries included, between 2002 and 2007,
followed by a decline in 2008.

*** insert charts 4 and 5 about here ***

The slowdown in real economic activity eventually reached Eastern Europe via the advanced
economies. The crisis has caused default rates to rise, credit conditions to become more
restrictive for companies and households, and retail demand for stocks to increase (OeNB
2009b, 54). Non-financial corporation saw their access to needed funds dwindle as the
liquidity of the markets dried up. Sharp falls in equity markets, presented in the chart above,
as well as continuing deflation of housing bubbles have led to a decline in savings and a
massive loss of household wealth. Together these factors caused the effective demand in most
economies simultaneously to stay behind their productive potential, resulting in a major
global recession (Nowotny 2009, 7).
Impact on Austria and its Banking Activities in CEE
In the early stage of the crisis Austrian banks profited from the regional focus of their
activities in CEE and from their strong strategic focus on retail banking. Due to their
relatively modest total exposure to structured credit products – the share of the six largest
banks4 accounted for EUR 14.6 billion – Austrian banks’ direct exposure was largely limited
to refinancing problems in interbank markets. To stabilize the situation, central banks
conducted additional tenders, the ECB and the Fed implemented a USD/EUR swap line and
the Oesterreichische Clearingbank AG was established in Austria in particular for banks
lacking sufficient eligible assets to obtain liquidity from the ECB. All these institutions
further contributed to smoothing interbank market operations (OeNB 2009e, 55). As a result

4
Erste Group Bank AG, UniCredit Bank Austria AG, Raiffeisen Zentralbank AG, BAWAG P.S.K.,
Oesterreichische Volksbanken AG (incl. Kommunalkredit), Hypo Group Alpe Adria (HGAA).

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of the high CEE exposure of Austrian banks, the crisis hit the Austrian financial sector in the
second stage when the unfavorable conditions finally spread to the emerging markets. As a
consequence CDS 5 spreads (risk premiums) widened drastically and Austrian bank stocks
plummeted in the final quarter of 2008 (OeNB 2009b, 47). The willingness of the IMF and
the European Commission to provide new funds for CEE resulted eventually in a certain
recovery of the stressed financial situation in the first and the second quarter of 2009 (OeNB
2009b, 56). This provided the basis for foreign banks strategies in the region, as discussed for
Austrian banks in the following.

4. Activities of Major Austrian Banks in Selected CEE Countries

As major players in the CEE region, Erste Group, Raiffeisen International (RI) and UniCredit
Group (UCG) 6 are amongst the companies most influenced by the financial crisis in the
region. After presenting an overview of their financial performance and CEE exposure, the
focus is on their banking strategies’ adjustment to the new situation. As strategic investors in
the region, all three banks are highly committed to the market, with a widespread presence
reflected in the share of CEE assets in total assets and in the number of branches. With a
considerable high share, RI and Erste Group appear to be much more dependent on the region,
with almost all their profits stemming from these countries, compared to UCG exposure in
CEE (UniCredit Group 2009a, 12).

*** insert table 1 about here ***

Uncertainty surrounding the length and impact of the financial crisis, followed by risk
aversion towards the financial sector has caused stock prices to plump and cost of funding to
increase, as expressed by the CDS. Geographical presence has become the main driver in
terms of cost of funding as risk aversion eventually was directed towards CEE. Cost of risk
have started to decline since March 2009, following strong international intervention to
support the region and improving international conditions (UniCredit Group 2009a, 12). In
order to stay competitive, the Austrian government launches a banking package valued at
EUR 100 billion, comprising EUR 15 billion of capital infusions, EUR 75 billion in state
guarantees in order to ensure continued access to liquidity, and EUR 10 billion in additional
deposit insurance coverage. Erste Group took up the measures offered by the government and
5
CDS: capital default swap, Definition: CDS spread = Premium paid by protection buyer to the seller, Quotation:
In basis points per annum of the contract’s notional amount, Payment:Quarterly (Deutsche Bank Research, 11)
6
As the CEE-units of UniCreditGroup (besides PL) are managed by UniCredit Bank Austria, it is treated among
Austrian banks.

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entered into agreements to issue up to EUR 6 billion in state guaranteed bonds in order to
further maintain a solid liquidity position, and the issuance of up to EUR 2.7 billion in core
tier 1 eligible participation capital, in order to further strengthen the Group’s capital base
(Erste Group 2008b, 27, Erste Group 2009d).

*** insert table 2 about here ***

Before going into more detail in the next part of the paper, the banks’ exposure in Ukraine,
Hungary and Romania is briefly described. With 4.6 Million clients and a market share of
20.5% on retail loans, Erste Group is market leader in Romania, where the Group holds
69.17% of Banca Comercială Română S.A. (Erste Group 2009b). In the Ukraine, however, RI
and UCG are the top players, measured on total assets, whereas Erste Group’s share is limited
to 1.7% and represents the Group’s smallest exposure in CEE (UniCredit Group 2009a, 15).
Raiffeisen Bank Aval is the second largest bank in the Ukraine, with 1,048 branches, where
16.400 people are employed to serve 4.8 Million customers (Raiffeisen International 2009b,
18).

5. Banks’ Strategies and Post-Crisis Business Models

Due to a lack of academic literature on post-crisis business models for this unprecedented
global financial crisis, the findings on post-crisis business models in this chapter are based on
research conducted on primary data drawn from personal interviews with bank managers of
Erste Group and Raiffeisen International in December 2009 and experts from national banks
and international organizations (IMF, EBRD) in November 2009. Furthermore, a review of
banking strategies and current banking activities in CEE was conducted, following an analysis
of information in quarterly reports and groups’ financial performance presentations.
To compare the similarities and differences of before- and post-crisis business models of the
three Austrian banks, this part of the paper draws on McCarthy’s 4Ps - product, price, place
and promotion (McCarthy 1987, Kotler 2008). With the purpose of making business strategies
and post-crisis models more comprehensible, charts of macroeconomic data of the countries
under review as well as information on the impact of the crisis on these countries are included
in the following presentation of research.
5.1 Price
Restrictions on refinancing in the interbank as well as on the capital market, as explained in
more detail above, entailed higher cost of liquidity for banks, which tried to transfer these via
higher interest rates for loans and rising cost for credit. Country-specific risk premiums forced

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Austrian banks, e.g. in Serbia, to raise interest rates (Depolo 2009). Learning from the crisis,
the banks focus currently more on securities and credit collateralization (Dollinger; Palzer
2009). Tightening of credit conditions and lending approval standards put a damper on
sharply surging private credit growth rates. With rising unemployment and limited private
investment due to rising cost of credit weighing on consumption, coordinated policy action is
essential, even as public support will need to be gradually withdrawn (IMF 2009, 76; OeNB
2009e, 56). Therefore banks have to change their internal organizational procedures to cope
with the high risk exposure and to balance the increasing costs of capital and liquidity (in
particular long-term; Stepic 2009).
5.2 Promotion
Regarding advertising strategies, the groups follow the thinking global, acting local approach
in designing global messages later adapted to local standards and requirements. Local
language and colors are used as well as local celebrity endorsement, as in the case of Erste
Group’s advertisement campaign in Serbia endorsed by a famous Serbian tennis player. All
kinds of media, such as TV, radio, journals, newspapers, radio and billboards are used to
strengthen the banks’ brands in CEE countries and to allure new customers and their deposits
in local currencies.
Importance is attached to brand management and corporate identity building. For a new
definition of its advertising strategy, Erste Group has recently awarded a contract. Until now
the Group’s main message concentrated on the 190 years of successful banking history. The
two-colored TV-spots without pictures focus the concentration of the listeners on the Erste
Group’s main message - “retail banking since 1819” (Erste Group 2009f). The message is
clear, in times of crises banks invest in the trust and confidence of their clients.
Cost reduction measurements also affect the advertising budget. Therefore the banks are
asked to find creative ways to advertise their products and commitment to the CEE region
(Dollinger, Palzer 2009).
5.3 Place
In response to the economic slowdown and the deteriorating banking market environment
banks have accordingly adjusted their business models. As the existing market offers ample
opportunities for business growth, even without adding further markets to the portfolio,
regional expansion through large-scale acquisitions will no longer be the preferred way to
grow the business in CEE, at least not in the short or medium term. In markets where Austrian
banks already have a strong presence the objective is to maintain market position; in other
markets “the business environment will be carefully assessed in light of the evolving

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economic situation (…) to distinguish between short-term tactical positioning and long term
growth” (Erste Group 2008b, 29). RI ranks second in Ukraine and is determined to hold its
position although no further investment is planned in view of the unstable economic and
political situation in the country. In other CEE countries, however, RI conducts selective
branch openings to make use of business opportunities (Palzer 2009).
Experts view the current difficult economic environment as an opportunity to consolidate the
banking sector and to reduce the number of banks (Orlova 2009). Austrian banks although
scaling back operations in fringe markets, such as Ukraine, are firmly committed to all their
markets in the long term (Depolo 2009, Erste Group 2008b, 29, Dollinger 2009). To yield
great benefits Erste Group has created a favorable risk reward profile by “committing large
investments to lower risk EU member countries, such as the Czech Republic or Slovakia,
while limiting exposure to high potential but high risk, non EU member countries, such as the
Ukraine or Serbia” (Erste Group 2008b, 26).

Nevertheless, the banks focus on restructuring their banking network in order to improve cost
efficiency (Dollinger, Palzer 2009. In this regard the crisis fastened and intensified the
employee downsizing which already had been planned for the Raiffeisen Bank Aval in
Ukraine where the bank operates 1,140 branches with 18,000 employees (Höller 2009; Palzer
2009). RI announced in spring 2009 to reduce every tenth job. The decline in branches
amounted in 8,2% between September 2008 to June 2009 (Raiffeisen International 2009b, 18).
Furthermore, Romania, Bulgaria and Russia are heavily affected by the RI’s downsizing
strategies (Raiffeisen International 2009e). Erste Group also reacted to the difficult economic
and political situation in Ukraine when it halted expansion plans and started to cut 15% of the
2,100 jobs in the region (Erste Group 2009e, Höller 2009). UCG disclosed a staff resizing of
10,200 employees since December 2007 and a scheduled cut of further 3,800 jobs. 4,038 of
the redundancies affected the UCG’s exposure in the CEE region, mainly Ukraine,
Kazakhstan, Poland and Turkey (UniCredit Group 2009c, 20, 12).
5.4 Product
The current global economic decline will likely lead to a new assessment as to the sustainable
level of debt and to a decrease in lending activity in CEE at least in the short-term.
Nevertheless, long-term economic growth in this region will be accompanied by credit
extension as a secular growth trend (Dollinger; Palzer 2009). A comparison of loan to GDP
in % and loan per capita in CEE with that of mature economies like Austria reveals an

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enormous gap. These countries are many years away from reaching Western levels
(ErsteGroup 2008b, 29).

*** insert charts 6 and 7 about here ***

Austrian banks benefit from their focus on the retail sector. In the coming years Erste Group
wants to concentrate on retail lending in form of residential mortgages as mortgages
penetration is especially low in emerging markets but also in the developed countries. Even in
Austria this measure only stands at about 25%, leaving room for growth (Erste Group 2008b,
29). As customers become wealthier, another source of long-term growth will be wealth
management. Growth dynamics in fund management from those experienced in standard
banking products, as meaningful growth reaches critical mass when nominal GDP/capita
surpasses the EUR 10,000 mark. Some developing transformation economies, such as
Hungary have reached that level whereas other countries, such as Romania and Ukraine still
lag far behind. The current economic environment is not conducive to substantial growth in
wealth management activities in the short term, but the long-term trend still points towards
faster growth in CEE. (Erste Group 2008b, 29).

Besides concentrating on new products on the CEE markets, banks have to restructure their
business models and are forced to adapt products to the new challenging situation. In this
regard the following section discusses the problems caused by deteriorating exchange rate
developments, high foreign exchange (FX) lending exposure and nonperforming loans and
illustrates the adjustments conducted by Erste Group, Raiffeisen International (RI) and Bank
Austria (UCG).

*** insert chart 8 about here ***

Cause for concern constitutes the high exposure of RI in Ukraine. Ukraine has been hit hard
by the global financial crisis. Its economy has been affected by global de-leveraging, the
collapse of external demand, and the steep decline in international prices for steel and
chemicals (EBRD 2009c). Ukraine’s currency the hryvnia has depreciated 60% since the
onset of the crisis in September 2008 (Morningstar 2009). Having their consolidated financial
statements denominated in euros, the banks face translation exposure, on the one hand, and
the high exposure to non performing loans, on the other hand.

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As large part of the loans from Western to Eastern Europe are denominated in euros and
Swiss francs, difficulties in payment are caused when the local currency depreciate against the
euro and/or the franc, mainly because of financial stress and slumping prices for energy
exports (Haiss, Paulhart and Rainer, 2009). Chart 9 indicates the exchange rate development
from June 2008 to June 2009 of the Ukrainian hryvnia, which has the worst performance
among the 175 currencies worldwide tracked by Bloomberg since June 2009. The currency
has been pushed lower by uncertainty about sovereign debt payments and the freezing of IMF
assistance in November due to a lack of reforms and political infighting (Cochrane 2009,
Olearchyk 2009). Hungary and Romania also have been hit by falling currencies, although not
as badly (Föhrenbergkreis Finanzwirtschaft 2009).

*** insert chart 9 about here ***

In the second quarter of 2009, the share of foreign currency (FX) loans of households as a
percentage of total loans was particularly high in Hungary, Romania and Ukraine. The share
of total loans as well as the FX loans denomination is presented in the chart below. Borrowing
in foreign currency has been a typical feature of the financing landscape in CEE (Szigetvari
2009). “At the end of March 2009, the amount of retail loans issued by Austrian subsidiaries
in CESEE totaled some EUR 173 billion. About EUR 85 billion or slightly below 49%
(exchange rate adjusted: 47%) of this amount were denominated in foreign currency” (OeNB
2009e, 45-46).

*** insert chart 10 about here ***

The high share of FX credit made CEE countries more vulnerable to currency depreciation.
Credit portfolios deteriorated as the economic downturn impaired borrowers’ ability to repay
their loans. As a consequence, nonperforming loans rose steeply and banks were forced to
raise their loan loss provisions (OeNB 2009c, 21). According to the OeNB’s scenario over a
two-year horizon, the nonperforming loans (NPL) ratio for Austrian banks is expected to rise
to 8% in their home market and to 16% for their exposure in CEE and the CIS. Austrian
banks’ subsidiaries in the region would have to expect close to one-fifth of their outstanding
loans to default (OeNB 2009c, 22). The development was particularly strong in Romania,
where the NPL ratio rose to almost 20% in the second quarter of 2009. The NPL ratio of
Raiffeisen Bank Aval in Ukraine escalated to 18.2% in June 2009 compared to 4.7% in
September 2008. As a consequence, the bank augmented the reserve ratio 1 from 4.0%

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(Sept08) to 11.1% (June 09) (Raiffeisen International 2009b, 18). Moreover, RI increased
loan loss provisions to EUR 969 million, a tremendous surge of 381% compared to 2008
(Raiffeisen International 2009b, 4; 2009a). Facing a NPL ratio of 6.3% (Sept09), the Erste
Group responded to the situation by augmenting its loan loss provisions to EUR 1.5 billion
(3Q09), resulting in a NLP coverage ratio of 56% (Erste Group 2009a, 14).

*** insert chart 11 about here ***

Furthermore, procedures for crisis prevention have been introduced by Austrian banks.
Besides the strengthening of the equity capital base, a restructuring of business is currently
realized and necessary adjustments are made (Palzer 2009). Against the background of
deteriorating debt servicing capacities of bank clients and uncertain economic prospects,
banks started to tighten credit standards and especially non-price conditions (Palzer 2009).
At the end of the second quarter of 2009, the outstanding volume of credit exceeded that of
deposits to a particularly large extent in Hungary, Romania and Ukraine. For banks operating
in these countries mobilizing domestic deposits is a task of utmost priority (OeNB 2009c, 22).
Therefore the UCG improved its loan-to-deposit ratio from 104% in Dec. 2008 to 96 % in
Sept 2009 by moderating lending (UniCredit Group 2009c, 18¸ UniCredit Group 2009b, 6).
RI’s loan-to-deposit ratio ameliorated likewise from 136% in September 2008 to 127% in
September 2009 due to solid domestic funding and a steadily increasing number of customers
(Raiffeisen International 2009b, 20). With a focus on a balanced loan-to-deposit ratio, Erste
Group’s ratio decreased to 112% (3Q 09) in accordance with the Group’s long-term objective
to collateralize the credit volume with own deposits. Strong deposit inflows in Austria as well
as funding in local currencies in the CEE region and a large and well-diversified retail
customer base of more than 17.5 million further support this goal and contribute to Erste
Group’s financial health (Erste Group 2009a, 4).

*** insert chart 12 about here ***

Due to the high risk of FX credits, Erste Group abolished Swiss Franc loans from Hungary
and suspended CHF and USD loans for all private individuals in CEE (Cf. Erste Bank 2009c,
EBRD 2009e). RI decided to stop granting FX loans in Ukraine, whereas the issuing of loans
in foreign currencies in selected CEE countries was sustained. Nevertheless, fluctuating
exchange rates in other countries make long term prospects for FX lending problematic.
Therefore all three banks concentrate their business on issuing credits in local currencies

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preferable with short-term maturity and on allocating domestic funding in order to lower the
loan-to-deposit ratio and to expel the risk of NPLs (Dollinger, Palzer 2009). Nevertheless, in
the future banks have to make medium- and long-term local currency-based financing
available at reasonable prices in order to prevent a prolonged economic stagnation of the
region due to the limitation in FX lending (Surányi 2009).
Besides a cessation of lending in foreign currencies in selected countries and an increase in
provisions for risks, banks opt for an accurate and anticipatory observance of liquidity,
provide supplementary securities and concentrate on restructuring of credits to enable clients
to service the credit to avoid considerably high write-downs and to minimize the default risk
(Palzer 2009).
Therefore a major focus of the banks’ post-crisis strategy is on the improvement of risk
management. Restructuring of the retail portfolio and the corporate exposure is based upon
sector specific methods such as analysis of customers’ income and payment history, maturity
extension, additional securities, temporary ease of repayment to the point of decrease in
interest rate in rare cases in the retail portfolio, and a segmentation in pre-workout, early and
late workout combined with strengthening of performance and adjustment of early warning
systems for the corporate exposure (Raiffeisen International 2009b, 18, 37-39).
RI uses the services of different channels of distribution and introduces a new one when
announcing the launch of a direct bank in CEE in 2010. The advanced online product and
services are designed to match the customer segment in this region and to supplement the
conventional banking business in EU countries (Cf. Raiffeisen International 2009c, Raiffeisen
international 2009d, Palzer 2009).
5.5 Business Strategy and Outlook
In general RI’s outlook for 2010 is fairly optimistic. According to forecasts of analysts and
researchers, they bank expects growth rates of 0.7% for CEE in 2010 and 3-4% for 2011
especially in CIS countries (Palzer 2009). Identifying internal measures for efficiency
improvement and optimizing business operations as potential business opportunities, Mag.
Palzer mentioned the value of a strong brand when highlighting the number of 300,000 new
clients (1-3Q 09) as proof of customer loyalty. This loyalty has been strengthened although or
because facing the global financial crisis (Palzer 2009). Central and Eastern Europe’s
economic potential in terms of economic and banking growth is still intact, and growth rates
in that region will continue to exceed those in Western Europe and the U.S. for the years to
come. Furthermore, deep changes and further adaptations of business models are expected in
case of an international agreement on conditions regarding adoption of standards for equity

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requirements, stricter control systems and liquidity risk management, leading to a
restructuring of the whole banking sector. “With new strategies currently being designed and
new windows of opportunities gradually opening, those players who can afford enough risk
appetite for the region now are those likely to enjoy the upside and confirm as tomorrow's
leaders” (UCG 2009a, 3). According to Mr. Stepic (2009), CEO of Raiffeisen International,
“the transition process has been completed only to one-third; the CESEE region still promises
“juicy” banking business in the future”.
Erste Group’s exposure in CEE in concentrated on the retail and SME banking. The second
wave of the crisis, entailing solvency problems and bankruptcies of SME, strongly affected
Erste Group. Therefore the Group’s outlook for 2010 is curbed although showing optimism
for 2011 with high expectation for economic growth in the CEE region. Improved efficiency,
simplifying operations and a focus on the retail and SME sector in CEE, a small investment
banking business and a small number of corporate clients, represent the Erste Group’s
new/old post-crisis business strategy, according to Dollinger (2009).
UCG’s prospects are fairly optimistic, due to the faster than anticipated rebound of global
economy, driven by a robust recovery in global trade (UniCredit Group 2009b, 4). Regarding
the Group’s exposure in Romania, prospects are slightly negative although the new budget
deficit target is settled at 7.3% of GDP. Risk of fiscal slippage is expected due to increased
political risks following the collapse of the coalition government and the therefore hard to
anticipate reaction of global institutions such as the IMF and the EU (UniCredit Group 2009b,
24).
All three banks agreed on keeping hold of their old business models slightly adapted to the
new situation with new parameters to avoid “overheating”. Their focus is on a sustainable
business model in terms of customers, funding, capital base, product mix and investment
discipline and an extensive presence in Central and Eastern Europe with the overall goal to
create value for shareholders, clients and employees (Dollinger, Palzer 2009).

6. Stakeholder Reactions
The adoption of a host of measures by central banks, governments, the IMF, the European
Commission, the EBRD and the World Bank (WB) contributed to mitigate the negative
impact of the crisis in banks’ liquidity situation and performance (OeNB 2009e, 56) and thus
had a major impact on commercial banks strategies in the region. Several of these adopted
measures are presented in this section to highlight the direct and/or indirect influence of
stakeholders on banks operating in the countries under review.

- 13 -
European Bank for Reconstruction and Development (EBRD)
The EBRD cooperates closely with all stakeholders to respond to the crisis. The Bank is
engaged with clients, national authorities and other international financial institutions (IFIs) to
identify issues and take action where appropriate. To counter the problem of reduced risk-
taking capacity in CEE markets and in order to provide finance to the real economy, the
EBRD is providing capital support in the form of equity, quasi-equity and subordinated debt
How foreign banks in CEE are affected by EBRD’s capital support shows the example of
Ukraine. EBRD is the largest investor in this country and provides diverse financing with a
focus on financial institutions. In this regard a US$ 75 million subordinated loan was provided
to Raiffeisen Bank Aval (RBA). The 10-year loan will increase the bank’s capitalization and
strengthen its balance sheet by providing long-term funding, boosting the bank’s overall
financial strength. The project is part of the EBRD’s efforts to contribute to the
recapitalization of Ukraine’s banking system. Support of RBA is especially important as it
will boost market confidence and facilitate financial intermediation and lending to the real
economy in Ukraine (EBRD 2009b, Raiffeisen International 2009f).
As supporting the real economies in the central and eastern European region is a key priority
for the EBRD, the bank is providing a senior loan of €100 million to Erste Bank Hungary, the
second largest retail bank in Hungary, to increase the availability of finance to small and
medium-sized companies. The EBRD financing offered to Erste Bank Hungary is a part of the
Bank’s joint initiative with the World Bank and the European Investment Bank to provide
€24.5 billion in support of the banking sectors in the region and the real economies hit by the
financial crisis. The EBRD has committed more than €1.77 billion in new funds for the
financial institutions sector in countries of its operations so far in 2009 (EBRD 2009f).

International Monetary Fund

As discussed above, Ukraine has been hit hard by the global financial crisis. To help assure
macrofinancial stability, in November 2008 the IMF approved balance-of-payments support
via a US$ 16.5 billion loan under a 24-month stand-by arrangement (OeNB 2009d, EBRD
2009a). The fund had already disbursed almost $11 billion to the country by July. Ukraine
was due to receive the fourth tranche, $3.8 billion, in November, but the IMF decided to
withhold the latest installment until after the presidential election on 17 January 2010 because
the government failed to meet budget demands, including spending cuts (Kirkham 2009,
Dempsey 2009). Although the IMF has shown a lot of flexibility in dealing with Ukraine, it
could be the case that the next tranche is not disbursed and the program will need to be re-

- 14 -
negotiated after the electoral cycle is over (UniCredit Group 2009b, 43). According to the
Financial Times on 23 December 2009, the IMF also turned down Ukraine’s request for a
$2bn emergency loan before the New Year (Olearchyk 2009).
As part of international stabilization efforts the IMF and the EU also sealed credit
arrangements with Hungary and Romania (OeNB 2009c). To mitigate the risks of the crisis,
an IMF-led financing program was introduced for Hungary in October 2008 with the
European Union providing about one-third of the €20 billion package (EBRD 2009e, 173).
And “in March 2009 the Romanian government agreed a two-year macroeconomic
stabilization stand-by agreement with the IMF, backed by a €12.95 billion loan as part of a
broader external aid package” (EBRD 2009c, 209). Support packages are often accompanied
by coordinated commitments by European banking groups to maintain their existing overall
level of exposure to the countries concerned. Such commitments help dispel concerns about a
possible meltdown of financial systems in the region and therefore contribute to financial
stabilization (OeNB 2009d, EBRD 2009b and EBRD 2009c).
European Union
At the EU level, the European Commission is working out new provisions for credit
institutions’ liquidity risk management. These provisions will include, in particular,
qualitative liquidity risk management requirements and, if necessary, uniform minimum
quantitative requirements (OeNB 2009f, 63). Achieving a fast and sustainable pace of
economic growth over the longer term will require deep structural and institutional reforms
(OeNB 2009d).
All of these above mentioned measures of the EBRD; the IMF and the EU contribute to the
financial stability in the respective countries and are adopted to mitigate the impacts and risks
of the crisis, to stimulate confidence of foreign investors in CEE markets and to boost real
economy in order to improve the economic situation of these countries.
Austrian and CEE governments
Austria responded to the financial crisis in October with a EUR 100 billion banking stability
package similar to those of other European countries. “About 15 billion euros of that package
are earmarked for capital injections” (Groendahl 2009). Since Austrian banks would have
otherwise been at a disadvantage and uncertainty about their CEE exposure was rising, the
Austrian government adopted this banking package to prevent a liquidity squeeze and to raise
banks’ capital via participation and hybrid capital (OeNB 2009e. 54-62).

*** insert table 3 about here ***

- 15 -
The Romanian government announced in February 2009 the launch of a €13 billion stimulus
package to help the country through the global economic crisis. Some €10.2 billion,
equivalent to 7 per cent of GDP, will be spent on investments, mainly in infrastructure (Cf.
EBRD 2009, 209).
In Hungary some 70 per cent of banking sector loans to the private sector are denominated in
foreign currencies. Risky lending practices were only belatedly reined in by the supervisor,
whose powers are now being expanded. In September 2009 the government and most
commercial banks agreed a code of conduct on retail lending. “The government also put in
place a mortgage debt service guarantee scheme that would safeguard debt service of
households without eroding credit discipline of households” (EBRD 2009e, 172). As part of
the global effort to support the banking system through the crisis, most of the European
governments have been offering aid packages for their local banks, as a support schema to
help increase capital ratios and to restore confidence in the interbank market (Cf. UniCredit
2009a, 13). In Croatia, the prime minister interfered with banking activities, foiling UCG’s
plans to raise interest rates. Moreover, UCG was asked not to distribute dividends but to leave
them in the country. UCG holds via Bank Austria the leading bank in Croati, Zagrebačka
banka dd (UniCredit Group 2009d).
CEE national banks
In response to recurring pressures in the currency market, the National Bank of Ukraine (NBU)
introduced various foreign exchange controls, reversing the progress made in recent years
towards full financial account liberalization (EBRD 2009d, 240). Moreover, the Ukrainian
hryvnia has been supported by interventions from the NBU during most of 2009 because it
has lost almost half of its value against the US dollar since July 2008. (EBRD 2009a). During
the financial crisis also the impact of the forint devaluation on domestic demand and on the
quality of banking loans to households played a major role. In response to the pressures on the
currency, the National Bank of Hungary (NBH) has steadily raised interest rates since early
2008 (EBRD 2009e, 173). Furthermore, in November 2009 the NBH planned restrictions on
FX lending due to the increasing financial pressure on households (FAZ 2009).
Serbian Prime Minister Cvetković criticized the high profit margins which Austrian banks
charged on credits in Serbia. Besides being criticized by the premier, Austrian banks were
accused by the Serbian national bank of dealing unlawfully when raising interest rates in the
retail sector. Therefore the national bank plans to enact new legally binding regulations and
standards for credit agreements (Depolo 2009).

- 16 -
Bank clients
By putting customer needs at the forefront of all banking activities, the main goal for banks is
to further increase customer loyalty and hence long-term profitability, while at the same time
adhering to strict lending standards (Erste Group 2008b, 50). Operating in 8 countries, Erste
Bank serves 17.5 million private and corporate banking clients. 15 million customers rely on
services of RI’s employees in 17 countries and 40 million people in 22 countries entrust their
banking activities to UCG (Erste Group 2009b, Raiffeisen International 2010, UniCredit
2010c). Creating a healthy, mutually beneficial and sustainable relationship with these
customers and serving them well and responsibly is at the heart of everything banks do.
Therefore banks constantly strive to serve their customers with innovative solutions, by
offering them a complete range of high-quality, reliable products and services at competitive
prices (UniCredit Group 2010b).
Bank employees
Banks strategies are focused on creating value for shareholders, clients and employees (Erste
Group 2008b, 25). Nevertheless, 59,000 employees working for RI, 51,000 people employed
by Erste Group and 168,000 employees of UCG are facing redundancies due to strict cost
management and a restructuring of the banks’ business activities (Erste Group 2009b, 2010;
UniCredit Group 2009e, 2010a, Raiffeisen International 2010). Although banks face high
pressure to improve efficiency and therefore to reduce costs wherever possible, they avoid
cutting costs on employee training and development (Dollinger 2009).

7. Conclusion
This paper analyzed the impact of the global financial crisis on transition economies in
Central Eastern Europe (CEE) and particularly Austrian banks’ adaptation to this difficult
situation. We find that the first wave of the crisis caused refinancing in the interbank market
and later also in capital markets to become more restrictive. As a consequence, advanced
economies fell into a mild recession while emerging and developing markets in the CEE
region continued to grow at a steady path. The situation deteriorated rapidly after the collapse
of Lehman Brothers in September 2008. Following the default, banks faced large write-downs
and demand for liquidity increased tremendously. This sharp escalation of financial stress
quickly spread the unfavorable conditions to all sectors and countries of the global economy.
The second wave of the crisis eventually hit the CEE markets when revealing imbalances,
related to high dependency on foreign funding and a widespread credit boom of the past years.
The liquidity of the markets dried up. Sharp falls in equity markets as well as continuing

- 17 -
deflation of housing bubbles have led to a decline in savings and a massive loss of household
wealth resulting in a decline of demand. Austrian banks hold a market share of almost 20% in
the CEE and CIS countries and their CEE exposure of EUR 187 billion as at June 30, 2009 is
significant. As a result of the high CEE exposure of Austrian banks, the crisis hit the Austrian
financial sector with drastically increasing CDS spreads and plummeting Austrian bank stocks
in the final quarter of 2008. The willingness of the IMF, the EBRD and the European
Commission to provide new funds for CEE resulted eventually in a certain recovery of the
stressed financial situation in the first and the second quarter of 2009. In this regard the crisis
has shown the importance of international cooperation and financial institutions, as they have
been able to help quickly and provide countries in need with appropriate credit lines.
As strategic investors in the region, Erste Group, Raiffeisen International and UniCredit
Group are highly committed to the market. Erste Group is market leader in Romania, whereas
RI and UCG are among the top players in Ukraine, where Erste Group’s share is limited to
1.7%. Concerning their business strategies’ adjustment to the current situation, measures are
differentiated regarding price, promotion, place and product. Referring to the price section,
banks tried to transfer higher cost of liquidity via higher interest rates for loans and rising cost
for credit to the customers. Currently banks focus more on securities and credit
collateralization. To cope with the high risk exposure and to balance the increasing costs of
capital and liquidity banks have to change their internal organizational procedures in the long-
term. Regarding advertising strategies, the groups follow the thinking global, acting local
approach in designing global messages later adapted to local standards and requirements.
The message focuses on brand management and customer loyalty. All kinds of media are used
to strengthen the banks’ brands in CEE countries and to allure new customers. Cost reduction
measures also affect the advertising budget and ask for creative solutions. Referring to
strategies concerning place, experts view the current difficult economic environment as an
opportunity to consolidate the banking sector and to reduce the number of banks. Austrian
banks, however, follow the objective to maintain market position in countries where they
already have a strong presence although no further investment is planned in view of the
unstable economic and political situation in CEE countries. Nevertheless, the banks focus on
restructuring their banking network in order to improve cost efficiency. In this regard the
crisis fastened and intensified the employee downsizing which already had been planned for
some countries. Concerning products, in the coming years Erste Group wants to concentrate
on retail lending in form of residential mortgages as mortgages penetration is especially low
in emerging markets. As long-term trend still points towards faster growth in CEE and

- 18 -
customers become wealthier, another source of long-term growth will be wealth management.
Besides concentrating on new products on the CEE markets, banks are forced to adapt their
old products to the new challenging situation. Facing deteriorating exchange rate
developments, high foreign exchange (FX) lending exposure and a steep increase in
nonperforming loans, banks adapted by restructuring their credit portfolios, improving risk
management, rising their loan loss provisions, strengthening the equity capital base and
introducing procedures for crisis prevention. Furthermore, banks started to tighten credit
standards and especially non-price conditions against the background of deteriorating debt
servicing capacities of bank clients and uncertain economic prospects. Moreover, due to the
high risk of FX credits, some banks suspended FX loans for private individuals. With focus
on a balanced loan-to-deposit ratio and in order to expel the risk of non-performing loans
(NPLs), banks concentrate their business on issuing credits in local currencies preferable with
short-term maturity and on allocating domestic funding.
To sum up, Austrian banks’ business strategies concentrate on a sustainable business model in
terms of customers, funding, capital base, product mix and investment discipline and an
extensive presence in Central and Eastern Europe with the overall goal to create value for
shareholders, clients and employees.

- 19 -
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Chart 1 Direct Cross-Border Lending by Region from 2002 to 2008, EUR billion

Source: OeNB 2009a, 1067

Chart 2 Claims of Foreign Banks on CEE Countries, in Million of USD

Source: Föhrenbergkreis Finanzwirtschaft 2009 (figures are taken from BIS).

7
NMS stands for “new member states” of the EU in 2004 and 2007

- 24 -
Chart 3 Claims of Banks on CEE Countries, as % of GDP

Source: Föhrenbergkreis Finanzwirtschaft 2009 (with data from BIS and CIA Factbook).

Chart 5 Development of Equity

Chart 4 Private Credit Growth in
Prices
Emerging Markets

Sources: IMF 2009, 3

8
Sources: IMF 2009, 3

8
Source: Bloomberg Financial Markets; Capital Data; IMF, International Financial Statistics; and IMF staff
calculations

- 25 -
Chart 6 Customer Loans per Capita in CEE

Source: Erste Group 2008a, 27; local central banks

Chart 7 Loans (% GDP)

Source: UniCredit Group 2009a

- 26 -
Chart 8 GDP/Capita (in EUR Thousand)

Source: Erste Group, Annual Report 2008; UniCredit Group 2009b

Chart 9 Exchange Rate Development

Source: Raiffeisen International 2009b, 8

- 27 -
Chart 10 Retail Loans9 Denominated/Indexed in FX (2Q 2009), in % of Total10

Source: UniCredit Group CEE Strategic Analysis¸ UniCredit Group 2009a, 16

Chart 11 Non-Performing Loans (% of GDP)

Source: UniCredit Group 2009a

9
Loans to households and nonfinancial corporations
10
Other FX includes mainly loans denominated/indexed in CHF and USD; growth rates are not adjusted for FX
movements

- 28 -
Chart 12 Loans-to-Deposits Ratio, in %

Source: UniCredit Group 2009a

- 29 -
Table 1 Ranking of International Players in CEE

Data as of Total Assets Net Profit Number of Countries CEE, Market

2008 Branches of % Share in Capitalization
(EUR bn)11 (EUR Presence13 Group Assets (EUR mn)14
mn)12
UniCredit 121.6 2,577 4,005 19 12 44,977
Erste 79.3 1,569 2,099 7 39 9,729
Raiffeisen 85.4 1,078 3,231 16 54 7,141
Source: UniCredit Group 2009a, 12, UniCredit Group 2009e

Table 2 CEE International Players - Key Strategic Drivers15

Group Tier I Government Assets in CEE CEE GAP17 Group CEE

16
Ratio Aid CDS Cost of
in % of Group in % of (current) Risk
in % (EUR bn) assets Group assets bps
bps

UniCredit 9.24 none 12 1.5 81 ≈200

Erste 8.6 1.22 39 3.8 128 ≈200
Raiffeisen 10.4 1.75 54 10.1 248 >300
Source: Raiffeisen International 2009b, UniCredit Group 2009a, 14, UniCredit Group 2009c, 17, Erste Group
2009a, 84

Table 3 CEE Banking Groups applying for Austrian government aid

11
100 % of total assets, and profit after tax (before minority interests) for controlled companies (stake > 50 %)
and pro rata for non-controlled companies (stake < 50 %);
12
After tax, before minority interest
13
Including direct and indirect presence in 25 CEE countries, excluding representative offices;
14
Data as of October 21st 2009;
15
T1 ratio is of Jun. and pro forma Sept. 2009 ; CDS as of Oct. 2009, Cost of Risk as of Jun. 2009, other data as
of Dec. 2008; data are reclassified to be comparable among banks and do not match with official reported data
16
The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total asset
17
Gap = sum of various (loans-deposits) only if loans > deposits. Loans are net loans

- 30 -
Source: UniCredit Group 2009a, 13

- 31 -