Banks in eastern Europe may face 8 billion euros ($10 billion) of losses on loans in foreign currencies, according to a study by Berenberg Bank analysts.
Erste Group Bank AG (EBS) may be forced to raise capital if the European Central Bank’s review of lenders’ books prompts it to recognize 900 million euros of losses on Swiss franc mortgages in Hungary and euro loans in Romania, Berenberg analysts led by Eleni Papoula wrote in a note to clients dated Sept. 12. Raiffeisen Bank International AG (RBI)’s potential losses may be of 600 million euros, they said.
“The market is underestimating the credit risk arising from the Austrian (and other European) banks’ exposure to central and eastern Europe,” the analysts say in the note. “Some of these losses may crystallize ahead of the ECB Comprehensive Assessment.”
Loans in euros, francs and dollars were attractive for borrowers in eastern Europe ahead of the 2008 credit crunch, because interest rates were lower than for credit in local currencies. When currencies in Hungary, Poland, Romania, Croatia slumped in 2008 and 2009, the loans led to rising installments and principals.
Foreign currency loans and mortgages turned sour faster than other loans and Berenberg’s analysts said they still have a way to go. They calculate 8 billion euros of losses by comparing the outstanding loan stock in Hungary, Romania, Croatia, Serbia and Ukraine with the currency depreciation since 2005, according to the note.
ECB Clean-Up
Romania’s central bank has asked lenders to write down their non-performing foreign currency loans at a faster rate because the country wants to adopt the ECB-led banking supervision. That helped trigger Erste’s warning that it will swing to a loss this year. Erste owns the biggest bank in Romania and the No.2 in Hungary.
Hungary, in the meantime, plans to convert the remaining stock of foreign currency loans at pre-crisis rates and may force additional losses on banks in the process.
Erste’s potential losses could cut its core equity Tier 1 ratio, a measure of financial strength, to below 10 percent Berenberg said.
“Its capital buffer is a meager 300 million euros,” the analysts said. “There is a risk Erste may have to raise capital again, in our view, if the hidden losses on retail FX loans crystallize.”
Erste spokesman Michael Mauritz declined to comment on the report.
For Raiffeisen, the potential loss is equivalent to 7 percent of its tangible book value, leaving its capital ratio just above 10 percent. The other most affected banks are KBC Groep NV (KBC), Intesa Sanpaolo SpA (ISP), UniCredit SpA (UCG) and Societe Generale SA. (GLE) Those banks can recognize the losses without having to raise capital, the analysts said.
Source Bloomberg
