Quitting CEE region would be "nuts"-UniCredit

VIENNA Thu Dec 15, 2011 12:20pm EST

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VIENNA Dec 15 (Reuters) - UniCredit SpA's business in central and eastern Europe (CEE) is holding up well despite the economic slowdown, a top executive said, adding it was "nuts" to think Italy's biggest bank by assets would quit the region.

Gianni Papa, deputy group chief executive and head of Unicredit's CEE division, told reporters the case for staying put remained intact because the region would on average grow faster than western Europe and had greater demand for financial services.

The division's net operating profit in the first nine months rose 31 percent thanks to higher revenue, lower costs and reduced loan-loss provisions.

"This (trend) is going to be reconfirmed for the end of the year," Papa said late on Wednesday, in remarks for release on Thursday.

Papa said the economic slowdown in western Europe was having a knock-on effect in CEE, which made the bank put on hold its expansion in some countries to focus on high-growth markets such as Turkey, Russia, the Czech Republic and Poland.

UniCredit had a strong footpint in those markets, which crucially also required no central funding from the parent.

But its selective growth strategy by no means implied its commitment to the region -- where its Bank Austria unit competes with Austrian peers Erste Group Bank and Raiffeisen Bank International -- was wavering, he said.

"If the message received is UniCredit is pulling out from central and eastern Europe, I believe that the one that is receiving the message is nuts," he said of a media report it could retrench in the region.

The CEO of Raiffeisen Bank International said last month it could quit one or two CEE markets.

Papa acknowledged the bank was sub-scale in some markets there but denied it might leave any country entirely. "For the time being I don't see any of these possibilities," he said.

WATCHING CREDIT QUALITY

Its shunning of M&A activity also applied to buying assets.

"I am receiving offers -- I don't want to say on a weekly basis -- and we say no to all of them," he said, noting markets do not now allow buyers to pay goodwill on acquisitions while sellers are not prepared to divest assets below book value.

Papa said the cost of risk in the region had to go down.

"For sure we have seen the peak of the bad loans towards the end of last year, the beginning of this year," he said, noting the bank still had to keep a close eye on the slowdown's impact.

"This could bring some deterioration in the quality of assets. Nevertheless, also in this field we have been very careful in the last two, three years ... and also there we feel quite confident that we are on the right track to reach the target that we have given ourselves," he said.

He said its bank was one of only two profitable lenders in Hungary, thanks to a conservative approach that has led it to scale back foreign-currency lending to individuals across the region.

This included reining in lending in euros to borrowers in countries like Croatia, Bulgaria and Romania that intend to adopt the single currency eventually.

After restructuring, its bank in Kazakhstan had stopped bleeding money but "is still not in positive territory", while Romania had not developed as well as expected.

Papa saw no signs of a CEE credit crunch developing despite banks' efforts to shore up balance sheets.

"I think every bank has become much more conservative in its approach to lending and this has clearly created, if you will, a credit crunch, but ... it is a credit crunch to the unhealthy part of the business so it is not (really) a credit crunch," he said.

He noted CEE division loans rose 10 percent in the first three quarters of 2011, while deposits grew 17 percent.

But he sounded a note of caution.

"When we talk to customers they are telling us in many countries they had a good 2011. They think they are going to have a good 2012," based on orders on hand, he said.

"I'm afraid that because there is constantly all this news -- we have problems here, problems there -- it is becoming a sort of self-fulfilling prophecy. We are really talking the economy to death and I am afraid of that." (Editing by David Holmes)

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