* Rise of non-performing loans has lost momentum
* "Moment of truth" for emerging European banks in 2010
* Q3 results likely to trigger further broker upgrades
By Boris Groendahl
VIENNA, Oct 28 (Reuters) - Investors expect a rise in
emerging European bad debt to have slowed in the quarter to
September and are preparing to price in growth again for the
crisis-ridden region's lenders, but a test looms in 2010.
Banks including Erste Group Bank <ERST.VI>, Raiffeisen
International <RIBH.VI> and OTP <OTPB.BU>, due to report in the
next two weeks, have said that the rise in non-performing loans
that weighed on profits in the first half has lost momentum.
Austria's Erste will be the first major bank in the region
to report on Friday, with analysts expecting net profit to
decline but bad debt provisions broadly flat quarter-on-quarter
-- as they were for Baltic-exposed peer Swedbank <SWEDa.ST>.
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The International Monetary Fund (IMF) earlier this month
raised its 2010 forecast for emerging Europe, now predicting 1.8
percent growth next year after a sharp contraction of 5 percent
forecast for 2009. []
The real test for those banks, however, will come only in
the first quarters of next year as their strategy to weather the
bad debt surge has effectively been a bet on a relatively quick
turnaround of the former Communist economies.
"The moment of truth will be in 2010 when the wheat will
separate from the chaff," said Matthias Siller, who helps manage
$1.9 billion in assets for Barings Asset Management's emerging
European equities fund.
Since the credit crunch hit the region, banks have been
trying to smooth out the rise in bad debt over as long a period
as possible, stretching accounting rules to create as little in
reserves for possible loan losses as possible.
"It shows that the legal framework gives banks a lot of
leeway in provisioning for bad debt," Siller said. "Many
analysts didn't get that right, which has led to a creeping
upwards pressure on earnings estimates."
For a universe of 22 banks in the region, analysts issued
around twice as many upgrades than downgrades of earnings
estimates for this year and next in the last three months, and
upgraded their investment ratings twice as often as they
downgraded them, according to Thomson Reuters I/B/E/S.
BETS STILL OUT
The banks' strategy to go easy on building reserves has
allowed them to safeguard profits and avoid massive dilutive
cash calls at depressed prices earlier this year.
Some of them, including Swedbank <SWEDa.ST>, Poland's PKO
<PKOB.WA>, Greece's Alpha Bank <ACBr.AT> and National Bank of
Greece <NBGr.AT>, tapped markets after prices recovered strongly
and Erste is seen following suit.
Massive intervention by the IMF and the European Union
helped stabilise currencies and protected the banks' portfolios
of loans held in foreign currencies. This also boosted trading
revenue in the first half of the year.
But having run down the ratio of reserves to non-performing
loans to as low as 50 to 60 percent -- from close to or more
than 100 percent going into the crisis -- there is little room
left to manoeuvre.
The main risks are that loans that were restructured to
avoid default become non-performing anyway, that collateral
seized proves to be worth less than thought, and that rising
unemployment and corporate insolvencies create more bad debt.
These risks are higher in countries already depending in IMF
lifelines, including Ukraine, Latvia, Hungary and Romania. In
Poland, the only EU country expected to grow this year, and the
Czech Republic, loanbooks are proving more resilient.
At any rate, investors who had priced in meltdown scenarios
for emerging Europe this spring are rushing back into the stocks
and have little patience for doomsday scenarios any more.
"With positive macro newsflow likely to continue over the
next few quarters, we expect investor fatigue to creep in on the
credit crunch and asset quality themes," said BofA Merrill Lynch
analyst Cristina Marzea in a recent note.
Most central and eastern European banks and the Austrian,
Italian, Swedish, Belgian and French groups with a big exposure
to the region have outperformed the 15 percent rise of the DJ
STOXX Banks index <.SX7P> in the same period.
With 2009 widely written off as a lost year for emerging
European banks, the focus has now switched to 2010 and beyond as
confidence rises that the former Communist economies recover to
growth rates above the European average from next year.
This economic growth is very likely to be accompanied by
even bigger loan growth in the region, the more bullish analysts
say, as the level of credit as a percentage of GDP is still way
below that of developed economies.
"We believe the reasons for the pre-Lehman super-premium
valuations of central European banks are still valid -- low
penetration of banking products and long-term convergence
towards western European wealth levels," HSBC analyst Maciej
Baranski said in a note last week.
"A return to those valuations is just a matter of time."
Analysts say that the price-to-book ratio was typically
around 4 before the financial crisis, with some banks even
valued at 6 times book in high-profile acquisitions.
SCHEDULED EARNINGS ANNOUNCEMENTS 2009 EPS CHANGE PRICE/
FORECAST* BOOK
Swedbank Oct 20 -8.94 SEK N/M 0.70
SEB Oct 21 1.10 SEK -85 pct 0.88
Erste Group Bank Oct 30 2.21 EUR -47 pct 1.01
Banca Transilvania Oct 30 0.04 RON -88 pct 1.14
Societe Generale Nov 4 1.75 EUR -46 pct 0.91
Komercni Banka Nov 4 278 CZK -20 pct 2.30
BRE Bank Nov 4 7.51 PLN -74 pct 2.06
Bank Handlowy Nov 4 3.06 PLN -42 pct 1.38
Bank Millenium Nov 6 0.09 PLN -81 pct 1.53
UniCredit Nov 10 0.11 EUR -56 pct 0.71
Bank Pekao Nov 10 8.08 PLN -40 pct 2.49
ING Bank Slaski Nov 10 40.3 PLN +18 pct 1.86
Raiffeisen International Nov 12 0.36 EUR -94 pct 1.24
BZ WBK Nov 12 8.08 PLN -31 pct 2.27
KBC Nov 13 -2.90 EUR N/M 1.18
Bank BPH Nov 13 1.40 PLN -65 pct 1.26
PKO BP Nov 13 1.98 PLN -35 pct 2.25
OTP Nov 19 516 HUF -52 pct 1.30
EFG Eurobank Nov 24 0.60 EUR -49 pct 1.50
Sberbank Dec 15 $0.01 -93 pct 2.18
National Bank of Greece tbc 2.16 EUR -25 pct 1.89
* Mean of analysts' forecasts, Thomson Reuters I/B/E/S
N/M = not meaningful
To read a wrapup on Nordic bank results click on
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(Reporting by Boris Groendahl, Editing by Sitaraman Shankar)
