banks are moving into Eastern Europe in force, attracted by its emerging-market growth rates and outsize lending spreads.
Executives at J.P. Morgan & Co., BankAmerica Corp., and Bankers Trust New York Corp. said they will establish offices and deploy more staff in the region in hopes of capitalizing on the demand for capital market issues and other banking business.
"There has been a rapid increase in the flow of capital to the region," said Tony Best, managing director and head of emerging markets in Europe for J.P. Morgan. "One of the consequences for us is that we can no longer manage this business solely from London."
By 2000, he added, Morgan "will have hundreds of people on the ground in a variety of locations."
Bankers are eyeing countries, including Russia, Poland, Hungary, and the Czech Republic, because they are growing faster and generating wider spreads than mature markets such as the United States and Western Europe.
The rush into Eastern Europe is grounded in the belief that these markets will develop even faster than Latin America. Bankers cited a legacy of pre-World War II free-market infrastructures and educated work forces as reasons why Eastern Europe's financial markets will approach western standards.
"These markets are in the initial steps of development, but the pace of change is faster in Eastern Europe than elsewhere," said Gerald R. Kowalski, senior managing director for risk management at Bankers Trust International PLC.
The extent to which U.S. banks are increasing their involvement in that part of the world is clearly reflected in cross-border lending statistics.
According to the Federal Reserve Board, cross-border lending by U.S. banks to Eastern Europe rose 126% to $6.6 billion in 1996, including a fivefold rise in lending to Russia to more than $3 billion.
In recent interviews, executives at Morgan, BankAmerica Corp., and Bankers Trust outlined ambitious plans to expand corporate banking, underwriting, trading, and financial advisory activities in the region.
Morgan, which recently opened a banking subsidiary in Poland and a representative office in Moscow, plans next year to open a securities subsidiary in Moscow with more than 50 on staff.
Simultaneously, the New York bank's London-based capital market teams will be spending more time on the road in Poland, the Czech Republic, Russia, Slovenia, and Slovakia.
In a coup for Morgan's underwriting business, the bank last Friday obtained a mandate from the Russian government to lead-manage a $2 billion, 10-year Eurobond priced at 375 basis points above equivalent U.S. Treasuries.
Banking sources said Morgan originally had planned a $1 billion issue for Russia, but it became oversubscribed.
Similarly, Bankers Trust has set up a separate merchant banking unit for Eastern Europe, the Middle East, and Africa. The unit will bring the bank's representative offices in the Czech Republic and Russia, banking subsidiaries in Hungary, Poland, and Turkey, and even offices in South Africa, Israel, Greece, and Egypt under a single umbrella.
This, said Jay L. Pomrenze, a senior managing director with Bankers Trust, will allow the bank to coordinate and transplant expertise in areas such as trading and underwriting capital market issues, including high- yield securities, local currency financing, risk management, and other transactions.
"We've had bits and pieces in place for over 25 years." said Mr. Pomrenze. "Now we want to leverage our existing franchise to develop relationships with local banks, corporations, and government situations."
BankAmerica, meanwhile, is expanding cross-border and local banking operations.
"We've picked up momentum," said Shahzad Shahbaz, senior vice president and regional manager. "We've identified those countries where, in addition to cross-border business, we want to do business locally." That, he added, includes Poland and Russia, where the bank hopes to obtain banking licenses soon.
BankAmerica is also expanding its operations in the Czech Republic, Slovakia, Slovenia, Hungary, and Romania, emphasizing capital market activities, corporate finance, trade, and project finance in areas such as oil and gas, as well as private equity investments in middle market companies.
Executives at Citicorp, the bank with the largest presence in the region, were unavailable for comment. However, sources said Citicorp recently looked at buying local banks as part of a plan to extend its branch network and get into middle-market banking.
It might seem odd that U.S. banks waited more than five years after the collapse of Communism to move in with such verve. But bankers said a number of occurrences have encouraged them to commit significant resources to the region.
Among them, they said, are the improving credit ratings of several countries and rapid increases in demand for funding and flow of capital.
Another is a rise in interest in trading in Eastern European currencies and securities. By contrast, trading in Western European currencies is tapering off ahead of plans to create a common monetary unit.
Yet another factor is a growing appetite among bankers and investors for riskier, but higher-yielding, assets.
"Banks are looking for new frontiers," said Mr. Pomrenze. "Eastern Europe is moving away from being a hinterland and becoming part of western capital markets."
"People are looking for more credit and currency risk," Mr. Best added.
U.S. bankers emphasized that most countries in the region are moving in the right direction, politically and economically. Even if the risks are still there, they are diminishing, the bankers said.
"The key is not where they are today, but what measures they have taken for tomorrow." Mr. Best said.
Even if yields decline, Mr. Kowalski said, Bankers Trust sees ample room to continue expanding by moving deeper into local markets and into other specialties, such as real estate and asset securitization.
"You have inefficiencies and growth in Eastern Europe, and that creates opportunities, especially for trading and risk management," said Raphael Soifer, a banking analyst with Brown Brothers Harriman. "And as those economies develop, there are opportunities for corporate finance and investment banking to develop."
Still, bankers have lingering reservations about the speed at which some countries are moving-for example, Bulgaria, which is still in the throes of a severe financial crisis, and others in central Asia where regulatory and business practices are far from clear.
"We think some of the players are offering underwriting deals that are premature and should be making much tougher choices," said Mr. Best.
For this reason, he said, J.P. Morgan targets governments, top-tier domestic corporations, and western companies in the region. Some countries it simply avoids.
"We're not going down to the second tier," Mr. Best said. "The fees may be higher, but the reputation risk is very great."
Others shrug off such concerns.
"We feel that we're making intelligent decisions about our counterparties," said Mr. Pomrenze of Bankers Trust. "We have a policy of getting in early."
