East Europe, Land of Opportunity for U.S. Banks

While U.S. banking companies wait out the financial crisis in Asia, they are steadily building businesses in a less troublesome emerging market-Eastern Europe.

A number of leading banks, including Citicorp, J.P. Morgan & Co., Chase Manhattan Corp., and BankAmerica Corp., have stepped up their banking activities in the region.

These companies are emboldened by a regional economy that has grown rapidly since 1990.

U.S. banks have an opportunity to sell services there that they had previously offered only in other markets.

Citicorp, the second-largest U.S. banking company, is arguably the most ambitious player in the region, given its twin focuses on retail and corporate business.

The company has 13 branches in six countries, principally Hungary, Poland, and the Czech Republic.

Besides planning continued expansion in the region, U.S. bankers there are very optimistic about growth in businesses such as loan syndications, foreign currency exchange, and project finance.

"There are a number of reasons to be optimistic," said David Simmons, head of research for Eastern Europe at Citicorp.

"Foreign investment is still picking up; these economies are still relatively small; while they are displaying superior growth, there is a decline in inflation, and there is continued overall progress in the economy."

Like Citicorp, Chase Manhattan Corp., the largest U.S. banking company, is also bullish on Eastern Europe, though it is focusing on the a host of corporate businesses such as corporate lending, project finance, and capital markets activities.

J.P. Morgan has also positioned itself for continued growth in this region, despite the problems in Asia.

"The fallout from Asia on this region's capital flows has been relatively limited," according to Mark Thirlwell, emerging markets analyst at J.P. Morgan & Co. in London. "Recent investor interest suggests that there is certainly scope for continued growth."

Morgan, which is highlighting investment banking activities, is expecting domestic demand growth in Eastern Europe to reach 3% this year.

"One reason why this region has fared well is its close trade links to Western Europe," Mr. Thirlwell said. "With the EU area well on track for solid growth this year, Central Europe's current account will be cushioned against the pressures coming from Asia."

Since its 1994 creation of a Central and Eastern European group, Bank of America has seen a surge of growth in the region, and it has been active in more than 35 transactions in areas such as syndicated lending, project finance lending, advisory, cash management, cross-border leasing, and capital markets activities.

Analysts, however, cited some potential negatives in the region.

They pointed out that increases in the cost of international capital will rein in growth in these emerging economies. Moreover, increased competition from Asian exporters benefiting from a drop in their currencies' value may undercut Eastern European exporters.

Bankers pointed out that Eastern and Central Europe can learn from Asia's turmoil by examining the crucial importance of transparency and prudent regulation.

This extends from the timely release of reliable economic data to the effective enforcement of conservative banking regulations and capital market and company accounting rules that meet international standards.

For example, Eastern Europe has less short-term debt than Asia and has adopted "better" currency policies, often using exchange rate bands rather than fixed rates.

Like Asia, Eastern Europe is filled with imprudent and politically motivated bank lending. In the Czech Republic and Slovakia, where the largest banks are state-controlled, about 30% of bank loans are nonperforming.

Some countries still employ archaic accounting rules, and several of the stock markets are poorly regulated. The result of this is that the market is unable to price assets and thus could scare off investors.

A lesson that can be learned from the Asian crisis is the risk involved in rapid credit growth. Across the region there has been a surge in money supplies as credit creation has sought to match either consumer demand, government infrastructure spending, or both.

Because this has fueled imports, current-account deficits have appeared.

A western banker who asked not to be named said, "When internal or external demand disappears, currencies, banks, and stock markets can crash, and this should say it all."

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