03.5.2007

Austrian trio with an eye for eastern opportunity

Stroll down Calea Victoria, a prestigious artery in the Romanian capital of Bucharest, and the neon signs and glittering nameplates of Austrian-owned banks blaze out against their grey surroundings.
From Sofia to Sarajevo, it is a similar story. In central and eastern Europe - and now increasingly Russia and the former Soviet Union - Austria's three leading banks have gained outstanding prominence. In one of the success stories of western Europe's push eastwards since the collapse of communism, Erste Bank, Raiffeisen and Bank Austria Creditanstalt (BA-CA) have transformed themselves from domestic companies into regional powerhouses.
The tale of how they exploited their geographic and cultural proximity to the region offers lessons for other companies in the art of managing growth abroad.

Longstanding historical links helped. "Just look at my name," says Herbert Stepic, chief executive of Raiffeisen International, the quoted subsidiary that spearheaded Austria's co-operative Raiffeisen banking group in its eastward push. "It betrays Slavic origins. Much of Austria is a mix of former east Europeans. We have a common history and a common destiny."
Between them, Austrians control the biggest banks in Albania, Bulgaria, Croatia, the Czech Republic, Romania and Slovakia. Elsewhere, apart from Poland, they rank among the top three. Recently their geographic focus has broadened. Raiffeisen has bought the biggest bank in Ukraine, while BA-CA - now part of Italy's UniCredit - has joined the top 10 in Russia.

The Austrians' talent for spotting opportunities has been re-warded by surging profits and spiralling share prices. But, with greater historical perspective, it is their ability to integrate acquired banks and exploit the abilities of new employees that is probably their biggest achievement.

The three banks started with different priorities. Raiffeisen and BA-CA were pioneers, setting up greenfield operations to assist Austrian exporters in central and eastern Europe when the region was still communist.
By contrast, Erste, which is primarily a retail bank, was a relative latecomer. It started to expand only in the late 1990s, buying former state-owned savings banks in a process culminating in the €3.75bn purchase in 2005 of Banca Comerciala Romana - still by far the biggest bank deal in the region.
Only in the past two years have their strategies converged as Raiffeisen and BA-CA have developed into retail banking and Erste has started serving small and medium-sized businesses.
However, all three have, to differing degrees, contended with similar challenges of scanty legis-lation, limited supervision and archaic information technology. Buying and integrating big, overstaffed and vastly inefficient banks in countries making the transition to market economies has been a gargantuan task. "In many markets, we actively helped in drawing up banking regulations," Mr Stepic says.

Erste faced some of the biggest challenges because, unlike its two counterparts, it had virtually no experience in eastern Europe. Moreover, as a primarily retail bank, its acquisitions were particularly big - usually decentralised and often struggling former state-owned mammoths, such as the postal savings bank in Hungary.
"All the banks we bought had substantial problems. In the Czech Republic, for example, Ceska Sporitelna (the former Czech national savings bank) was challenged by impaired assets following the country's transformation to a market economy," says Manfred Wimmer, the executive director behind most of Erste's deals. Opportunities for mortgage-lending, for instance, were often hampered by inadequate rules on property rights.
Surprisingly, however, restructuring was generally less problematic than expected. While there were intractable pockets, eastern Europe's rapid economic growth proved extremely helpful in turning acquired banks round.
Pro-business, market-orientated governments that had introduced flexible labour laws were beneficial, along with generally compliant labour unions and employees.

"Many of the key politicians were quite young, highly educated and often with experience of the west after having been forced abroad as dissidents during communism. That made an enormous difference," says Andrea Moneta, a board member of BA-CA.
Such compliance stemmed partly from the wish to modernise and "catch up" with western Europe. The fact that economic growth was sometimes nearing double digits also meant displaced workers could usually find jobs elsewhere. And many restructuring programmes were agreed with governments and unions - both keen to find willing buyers of often-tarnished assets.

Romania's Banca Agricola, for example, was "totally bankrupt" when bought by Raiffeisen in 2001, Mr Stepic says. But in spite of needing dramatic reform, only 500 of the 3,700 staff were unwilling to change working practices to boost productivity. "Those 500, more or less left voluntarily, with a golden handshake to help them restart," he says.
But no matter how propitious the economic and political circumstances, the Austrians' experience was also built on their own - perhaps unique - qualities.
All three stress meticulous planning and acute sensitivity to local concerns. "We defined projects and tasks. We set out milestones," Mr Stepic says. But flexibility within that framework was as important.
Mr Moneta says: "You must have a clear strategy and plan before you enter. But you only really get the full picture once you're in, so you also need to know how to adapt."

Maintaining a light touch and keen awareness of local sensitivities were crucial attributes. Tact in management appointments was particularly critical. "We've always wanted to have local management. If we have expatriates, it's only to complement the locals," Mr Moneta says.
Erste, for example, recognised tensions in Czech-Austrian relations that go back to the days of the Austro-Hungarian Empire by not selecting an Austrian to run Ceska Sporitelna.
"We chose Jack Stack, an American, who had worked at Chase and Chemical Bank," Mr Wimmer says. "He wasn't an eastern European specialist. But he had tremendous experience in retail banking, particularly restructuring and post-merger integration. That helped reduce any frictions that might have arisen with an Austrian boss."
Mr Stack will retire at theend of next month after seven years in the job. In that period, Ceska Sporitelna has moved from losing €200m in 1999 to net profits of €310m (£211m) last year. Similar transformations have been seen at many of the other Austrian-owned banks - a testament to the acquirers' initial savvy and subsequent skill.
Nicolae Danila, chief executive of Romania's Banca Comerciala, says: "We knew we would have to adjust to the requirements of our prospective new owner. Now all I can say is, lucky us."

Eastern experience

The Austrians' eastern European networks have created a breeding ground for cross-cultural management development, as expertise from one turnround has been transferred to the next.
Raiffeisen International now has almost 30 locally hired eastern Europeans working in senior positions at its Vienna headquarters. Less senior specialists, such as accountants and controllers who were hired in earlier deals, are deployed in the field to help implement more recent transactions, such as in Ukraine and Russia.
"They have the technical knowledge of any westerner. But they also speak Russian and have first hand experience of working in such a bank themselves," says Mr Stepic.

By Haig Simonian
Published: May 3 2007 03:00 | Last updated: May 3 2007 03:00

Copyright The Financial Times Limited 2007