* 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 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.
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
"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)