* IMF intervention restored investor confidence
* Asset quality could suffer from worse macro slowdown
* Risks include real estate, currencies, cluster risks
By Boris Groendahl
VIENNA, Dec 18 (Reuters) - Western European banks could
still be hit by a further rise in bad debt in emerging Europe if
the economic downturn is worse than expected or if currencies
decline, the European Central Bank (ECB) warned on Friday.
The ECB said in its half-yearly financial stability report
that vulnerabilities eased in the region, which includes the new
EU member states as well as Ukraine and others in the former
Soviet Union and Croatia or Serbia the former Yugoslavia.
The region suffered a sudden reversal of fortunes this year
when a boom driven by western bank loans, exports, investment,
and consumer spending slammed to a halt and caused steep
contractions in almost every country.
It has been pulled back from the brink by global
policymakers' success in beating back the worst of the financial
crisis and restoring liquidity to markets, but the ECB said the
situation remained "fragile".
A general economic deterioration could let the expansion of
bad debt pick up again and could unveil some banks' overexposure
to certain countries or sectors, the ECB said.
"In the wake of the weakening of economic activity in the
CEE region, the deteriorating quality of bank assets is likely
to become an important vulnerability, particularly in economies
affected by large contractions in output," it said.
"Rising unemployment, lower incomes and corporate defaults
are likely to lead to a further increase in loan delinquencies
and a further deterioration of bank loan portfolios," it said.
The region's habit of lending in foreign currencies such as
the euro, the Swiss Franc and the U.S. dollar keeps alive the
risk that borrowers default if local currencies decline.
"In countries with a large stock of outstanding foreign
currency credit, a renewed weakening of these currencies could
trigger a significant further deterioration in banks' asset
quality," the ECB said in the report.
Above all, if markets returned to the risk aversion seen
earlier this year, this would aggravate the pressure on banks.
"Potential capital outflows triggered by, for example, a
possible renewed increase in risk aversion towards the region
could result in severe loan losses, eroding the capital and
asset quality of parent banks and their subsidiaries," it said.
EURO ZONE BANKS DOMINATE
After a buying spree in the past 15 years, euro zone banks
own most of the banking sector in eastern Europe, with UniCredit
<CRDI.MI>, Raiffeisen International <RIBH.VI>, Erste Group Bank
<ERST.VI>, Societe Generale <SOGN.PA> and KBC <KBC.BR> being the
biggest players by assets. []
Their exposures vary widely however, both in terms regional
presence and the sectors they are exposed to, and in terms of
the eastern European share of their total assets.
The ECB warned, without identifying the banks it was
alluding to, that some of them may be prone to cluster risks
which could emerge if bad debt was to rise again.
It said that risks included the "possible unearthing of
portfolio concentration risks and insufficient differentiation
across sectors, currencies and geographical entities."
Those factors all played a role in the bailout of Austrian
bank Hypo Group Alpe Adria, which was nationalised on Monday
after German owner BayernLB [] walked away.
Hypo is very exposed to the real estate and leasing business
in Croatia and other former Yugoslav countries and is one of the
major banks there. ECB President Jean-Claude Trichet personally
intervened in the process and pushed for a bailout deal.
(Reporting by Boris Groendahl; Editing by Toby Chopra)
