Central Europe banks need to improve transparency to woo investors

Wed Sep 3, 2014 10:44am EDT

Related Topics

* Financial sector transparency poor in many CEE markets

* Foreign banks' role leads to fewer detailed disclosures

* Lack of information can lead to unforeseen collapses

* Investors stay away, have to price in unknown risks

* Efforts underway to improve disclosures

By Laura Noonan and Marton Dunai

LONDON/BUDAPEST, Sept 3 (Reuters) - Banks in central and eastern Europe risk missing out on beneficial foreign investment if they fail to step up efforts to provide clearer information about their financial health.

The region has gained a reputation as one of the European banking industry's weak spots after the collapse in June of Bulgaria's Corpbank, which triggered the first bank run since the financial crisis.

Other banks have also raised alarm bells. Austria's Erste had a profit-warning in July because of troubles in Hungary and Romania. Slovenia had to spend 3 billion euros last year to rescue troubled banks.

People involved in the banking sector said the poor quality of information available in some parts of the region - as outlined in a Reuters analysis of nine countries - is not enough on its own to cause a crisis. But they said it was a deterrent for investors, since they must price in the risk of the unknown.

"What we've seen in a number of markets (across Europe) is that the ignorance wasn't just outside, the banks themselves didn't know the information," said Ajay Rawal of Alvarez & Marsal, a consultancy that has worked in euro zone crisis spots including Spain, Ireland, Cyprus and central and eastern Europe.

Inadequate financial reporting can also signal underlying problems in a country's financial system.

Fixing this issue is crucial for growth across the region. Countries like Romania, Poland, Hungary and Lithuania are expected to grow faster than the wider European economy in 2014. But this growth could be put at risk as bank lending is being hampered by bad loans that are also a worry for investors.

European Bank for Reconstruction and Development head Suma Chakrabarti told Reuters this week the situation was so bad in some Balkan countries that an industry-wide solution for problem loans would have to be found.

FILLING IN THE BLANKS

Reuters' analysis shows information about the state of the financial sector in the region falls short of western European norms in several countries. Detailed quarterly accounts that are the staple of financial reporting are hard to come by in places like Hungary, Romania and Slovenia.

In other cases, when quarterly reports are available, key numbers can be missing, including details of how much banks have set aside for non-performing loans, growth in non-performing loans and standardised capital ratios.

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Bank analysts said that some banks have excellent disclosures, including large banks in Poland, the Czech Repubic and Slovakia. But Rawal said that transparency was a "mixed picture" across the region.

Istvan Lengyel, head of the Banking Association for Central and Eastern Europe (BACEE), said: "In some cases, it's not a decision of a subsidiary to be transparent or not, it's decision of the parent bank." He pointed to foreign banks in these markets where accounts have varying levels of detail.

But Lengyel said locally-owned banks are often even less transparent than foreign-owned branches, because they do not depend on international markets for funding or equity.

Banks that do not publish full quarterly accounts include the Hungarian subsidiaries of MKB, UniCredit, Raiffeisen and Intesa Sanpaolo, as well as several small local banks in Romania.

"It's not ideal across the board, but disclosures are improving and they will probably continue to improve," Paul Formanko, head of CEEMA banks research for JP Morgan, said. He said crises tended to be catalysts for improved disclosure.

LOTS TO GAIN

Christian Stracke, managing director at global asset manager Pimco, said investors in emerging market banks had an all-or-nothing approach partly because of the lack of transparency.

"What you'll often see is that investment in emerging markets banks, whether it's equities or debt, it's kind of a derivative of whatever the global investor base is doing in a given country," he said. "If we like Turkey today then we're buying Turkish government bonds ... and we're buying Turkish bank securities ... There's an undifferentiated Turkey risk, that's largely because there's not a lot of information."

For many of these markets to really mature, there needs to be differentiation across institutions, said Newport Beach-based Stracke, who is also co-chair the Enhanced Disclosure Taskforce, set up to promote improved bank disclosure.

"The only way you're going to get that is with adequate, high-quality, regular information ... so that when the tide turns and investors decide they want to get out of whatever country you're talking about there may get out of the weaker name first and stay in the stronger name," he said.

BACEE - which Lengyel said had struggled to gather even annual reports in some of the 30 markets its 20 members come from - believes banks should be more transparent to reduce the "systemic risk" created by information black holes.

Lack of transparency is usually a factor in crises, although not their main cause, an official involved in financial sector restructuring said. "It's not the lack of market discipline which usually takes down the banks, but some murky deals ... something which is not easily detected by the markets."

The European Commission has been working on a package of new disclosures that EU banks will have to comply with across different markets from next year.

Some national regulators are already pushing for more, such as in Slovakia, where the central bank requires lenders to publish quarterly accounts, and Croatia, where the central bank publishes some quarterly data for more than 30 named banks.

Bulgaria, Romania and Slovenia have monthly non-performing loans dispatches that are more frequent than the quarterly reports prepared in most of the euro zone.

BACEE hopes to see results next year from an initiative to promote greater transparency in the region. "I don't want to over-estimate our influence," said Lengyel. "It should be the market or the regulator demanding first of all more transparency. We have a small part." (Reporting By Laura Noonan; Additional reporting by Marja Novak in Ljubljana, Robert Muller, Jason Hovet in Prague, Ivana Sekularac in Belgrade, Igor Ilic in Zagreb, Marcin Goclowski in Warsaw, Radu-Sorin Marinas in Bucharest, Tsvetelia Tsolova in Sofia. Editing by Jane Merriman)

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