Bankers and economists have warned that some financial institutions in Central and Eastern Europe are increasingly vulnerable to liquidity risks as stresses in the eurozone banking system continue to heighten. Western European lenders such as UniCredit, Raiffeisen Bank International, Erste Bank and Societe Generale dominate the banking landscape in emerging Europe with their overall market share in many countries greater than 70%.
Troubled banks in the eurozone like Dexia, National Bank of Greece and Millennium BCP also have subsidiaries in the region. So far, CEE banks have held up relatively well. For example, SG's subsidiaries in the Czech Republic and Romania are trading at a higher price-to-book value than the French bank. However, some bankers believe it is only a matter of time before liquidity and funding constraints become apparent.
One says: "It hasn't happened yet but I'm surprised. I think it's inevitable." A report published earlier this week by the EBRD highlighted the potential risks if the eurozone's outlook continues to deteriorate. It warned that cross-border bank flows to central and south-eastern Europe in particular "could be severely disturbed from increased parent bank stress" if several large European banks become insolvent. Banks that are owned by troubled parents are seeing their credit risk worsen for no fault of their own. For example, Turkish lender Finansbank, which is owned by the National Bank of Greece, has seen its risk premia rise far more than its peers simply because of its ownership. On Friday its Baa1/BBB- rated May 2016 five-year bond was trading 240.7bp wider than UniCredit subsidiary Yapi Kredi's November 2015 five-year note, compared with a 22.9bp differential when it was first issued.
Finansbank's 2016s are trading at 799.4bp over US Treasuries. Its new issue spread was 373.5bp over. Yapi Kredi's 2015s (Ba3/BB-/BBB-)are trading at 558.7bp over US Treasuries from 396.4bp at launch. One reason to be optimistic about the region's banks, however, is that many have strong deposit bases. UniCredit, for example, has equal deposits to loans across its 22 country-network. In addition, outside of Russia and Ukraine, most lenders' funding is in euros or local currency rather than dollars, the currency that European banks have found hardest to access.