The financial crisis has highlighted the wide differences between the CEE markets and Western Europe, and also how heterogeneous they are as a group. This keeps asset servicers on their toes, writes Fiona Rintoul
A one-size-fits-all approach has never been appropriate for the Central & Eastern Europe (CEE) region, but the global financial crisis and the more recent eurozone debt problem have, if anything, served to underline the differences among the CEE countries. Poland has proved resilient economically, partly because of its large domestic market, while the Baltic countries have stumbled. Hungary, having had to resort to IMF funding in 2008, has generally pleased investors with its determination to repair the damage.
The region’s heterogeneity is very much in evidence in the asset servicing market. “The region is quite fragmented with a lot of countries at different stages of development,” says Philippe Kerdoncuff, head of new markets development, at BNP Paribas Securities Services (BNPPSS).
The crises have also highlighted the differences between CEE and its Western neighbours, with CEE countries generally emerging more favourably. “If you compare the fundamentals of Hungary and Poland to countries like Portugal and Greece, paradoxically they look better,” Marco Annunziata, chief economist at UniCredit, recently told the Financial Times.
Raiffeisen research analysts agree. “Following an interruption on account of the global economic crisis, the transition process in CEE will continue to move forward.” They have projected that the GDP of the CEE region will grow by 2.6% in the current year and by 4.2% in 2011, following its decline of 6% in 2009. In the longer term, they expect the growth differential between CEE and the eurozone to exceed two percentage points.
CEE is an attractive market, then, and the part of Europe with perhaps the greatest growth potential. But for asset servicing companies, the variegated landscape presents many challenges. They have to come up with a service that is both international and local – in some cases, very local. Whether service providers are achieving this is a moot point.
“There is a gap between what the local fund industry wants and what services providers deliver,” says Chris Porter, regional executive for Central and Southern Europe at BNY Mellon Asset Servicing. “About 50% of the asset servicing industry has set up what I would consider to be a viable business model. There’s another half that still needs to set up platforms to provide models that will work and facilitate the growth that the CEE fund industry is looking for.”
When it comes to the local part, big international players are up against regional behemoths such as Austria’s Raiffeisen and Erste Bank, as well as Unicredito, which inherited a large CEE network when it acquired HVB. The likes of Erste Bank has grown its retail customer base from 600,000 to 17.5m since 1997, largely through expansion in CEE.
“Twelve years ago we defined CEE as our extended home market,” the company says. “Today Erste Group is one of the largest financial services providers in Central and Eastern Europe in terms of clients and total assets.”
Erste Bank has on-the-ground custody operations in Croatia, Czech Republic, Hungary, Romania, Serbia and Slovakia. Raiffeisen has €130.1bn of assets under custody in the region and on-the-ground operations in all the core markets, including Poland where Erste is not present, as well as more recherché venues, such as Kazakhstan and Albania.
BNPPSS recently learnt the value of such coverage, particularly when trying to attract local clients.
“It’s not so tough to compete in terms of international clients because we have an international brand,” says Andrzej Szadkowski, head of BNPPSS in Poland. “It’s more challenging for local clients, but recently this is really changing. There is much more brand recognition because of the recent acquisition of Fortis, which was one of the top banks in Poland.”
This ‘boost’ from the acquisition comes at a time when some of BNPPSS’s competitors, such as Citibank, are suffering a negative impact because of having been acquired themselves. Parts of Citibank’s CEE operation have already been sold – Raiffeisenbank a.s., the Czech subsidiary of Raiffeisen International Bank-Holding AG, took over Citibank’s portfolio of personal installment loans worth €29.2m in May 2010 – and other parts of the business may follow.
Unicredito, meanwhile, which is mainly present in the region through its historical acquisition of HVB, had announced that it would pull out of the custody business, but has since made a U-turn. This, competitors suggest, is kind of a hard marketing message to sell. “Commitment to the business is important to customers,” says Theo Mitsakos, head of BNPPSS in Hungary. “Securities services is what we do and we have a commitment from the group to expand locally.”
There has also been retrenchment on the fund management side, with the likes of Credit Suisse pulling back in the region. “We expect others to consolidate or exit non-core business, similar to what happened in funds outside CEE,” says Porter.
The landscape is changing, in other words, with movement among both asset servicing providers and the asset managers themselves. This can create opportunities for the international players in the region, such as BNPPSS and BNY Mellon, that don’t have the kind of on-the-ground coverage regional competitors do. BNPPSS runs its CEE operation from a hub in Germany, with a local presence in Hungary and Poland.
“Starting as a newcomer has certain advantages,” notes Mitsakos. “You don’t have any bias.”
People come to BNPPSS for a high-quality service provider with a good overall rating that can fulfil their product needs in these countries, says Gerald Noltsch, head of BNPPSS for Germany. Geographic expansion is high on the agenda, but clients are not just looking at single countries. Often they want coverage in multiple countries.
“We want to go step by step,” adds Kerdoncuff. “Czech Republic is high on our priority list. We will look at other opportunities market by market.”
BNY Mellon operates a different model. The company facilitates global business on behalf of local asset servicers in CEE through its cross-border platform. Its local coverage is based on its relationship with local asset servicers.
“In a typical CEE we will work with several of the top players,” says Porter. “Some will plug into everything and some only to certain services.”
This is a model where commitment is not demonstrated by opening offices, but by investment and a willingness to adapt to the region’s changing needs. “The region has evolved so much and will continue to do so,” says Porter. “That will put a burden on asset servicers and the question then is whether it is a core business. A lot of companies have struggled with this topic. The question is: are you committed to facilitating the growth of asset services in the CEE?”
Part of facilitating that growth is being ready and willing to offer new services and insights. Last year, the emphasis in the region was very much on counterparty risk. Profiles of agents and agent risk is now ingrained, says Porter. More recent developments include the introduction of performance and risk analytics.
“It’s the first time we’ve seen these topics in the fund industry,” says Porter, who believes the development has been driven by funds taking performance knocks.
Another new development is securities lending. “The securities lending industry has started in CEE,” says Porter. “People are getting their arms around the technology now, looking at system enhancements and interpretation of local regulations. It will come in on a staggered basis. Poland is a market where it’s very close to going live.”
Other topics include support for derivatives usage and increased use of proxy voting, which, Porter says, demonstrates a “greater recognition of the fiduciary responsibilities of fund managers” in the CEE region.
BNPPSS’s Szadkowski sees a similar development in the microcosm of the Polish market. The firm has been targeting local clients in Poland for the past year, having previously focused more on international clients. Although local clients are perhaps less demanding in terms of technology than international clients, their needs are evolving.
“We have a different type of relationship with local clients,” says Szadkowski. Insurance companies, mutual funds and pension funds are still learning. They were looking for core services but now they are looking more to value-added services.”
The CEE region is a market that keeps assets servicers on their toes, then. Client needs are evolving fast, and new – and sometimes difficult – markets are constantly opening up. “We are permanently looking at what is happening in Russia,” says Kerdoncuff. “Russia is, of course, the largest market but it is not the easiest to enter.”
The prize, for those who can meet these changing demands, and achieve a good position within the local asset servicing market, is to sit on the most attractive growth segment. But, cautions Porter, it won’t be worth the investment for everyone.
“These markets are very concentrated,” he says. “If you look at any CEE market the list of clients is very short.”
©2010 funds europe