A blanket statement about custody in central and Eastern Europe is no mean feat, considering the intensely heterogenic nature of the region.
A blanket statement about custody in central and Eastern Europe is no mean feat, considering the intensely heterogenic nature of the region. Custody provision in Serbia and Montenegro is almost non-existent, while just across the border, Hungary is recording average daily trading turnover of €42.8 million: a veritable feast for custodian banks. Technology in Ukraine still, as Matthew Grabois from BNP Paribas admits, “has got some roadwork to go”, while IT solutions in Austria are remarkably mature. So how to characterise a region that consistently resists definition?
The CEE region’s back story over the last 10 years has been notably torrid. Significantly impacted during the 2008 crisis, international banks and their subsidiaries lent a helping hand to all countries in the region as they prepared to stand on their own two feet. The Vienna Initiative was launched in January 2009 to align the activities of leading private sector financial institutions and support offered by the International Monetary Fund and the European Union arguably played an important role in protecting the liquidity of CEE and CIS banking markets and in helping national governments to devise policy decisions that stabilised the economies of the region.
However, the recovery that was expected has not materialised. At the beginning of 2011, the European Bank for Reconstruction and Development (EBDR) predicted a growth rate of 4.3 per cent for the 29 countries in Central and Eastern Europe over the year. However, it now expects the combined gross domestic product of central and eastern Europe to grow by just 1.4 per cent, down from 1.7 per cent in October 2011.
The World Bank’s October 2009 report on the CEE countries, ‘From Stabilisation to Recovery’, seems accurate in its prediction of growth to be: “feeble and uneven,” and a report by RSM International was similarly gloomy, stating: “At the regional level, CEE growth appears unlikely to reach pre-crisis levels in the foreseeable future, and will fall well below growth rates of other emerging markets. At the country level, the CEE states display wide variations in GDP growth trajectories that demonstrate the region’s increasing diversity.”
Katalin Bóta, deputy regional head of Securities Services for Austria & CEE Region at Deutsche Bank, comments: “There was a slight window when the Arab Spring started; because of risk considerations, they thought the focus may come back to Europe. But that was only a very slight chance. However, things are cyclical: Asia may have the upper hand now, but everything is circular.”
Within the region, there seems to be a mixed outlook. The EBRD raised growth forecasts for Latvia, Poland and the Slovak Republic, and left those for Estonia and Lithuania unchanged. Yet Hungary and Slovenia were forecast to contract by 1.5 and 1.1 per cent respectively, with the ERBD stating that governmental domestic policy mistakes in Hungary had unnerved investors.
The Russian and Ukraine economies are still expected to grow by 4.2 per cent and 2.5 per cent respectively in 2012, with the EBRD stating that countries further to the east of the euro zone, which are less reliant on it as an export market and a source of credit, will suffer to a lesser extent.
Against this dynamic background, custodians are continually looking at the growth of countries; deciding when to exit markets, when to enter - and when to expand.
Jockeying for front runner
In terms of major players, Bóta asserts: “The market is changing: there are players disappearing and players coming. Along general lines the main competitors for Austria, Poland, Czech Hungary and Turkey are definitely UniCredit, Citibank, and I would say ING but to a lesser and lesser extent. I think its focus is different, because if I go down to Russia, Romania, Bulgaria, historically ING is very strong. If you look at Poland, Czech Republic or Hungary, I would say it is prominently Citibank, Unicredit and Deutsche, and if you go to Russia, it’s ING. But we must not forget about the local banks. DTP is very strong. It is very well-capitalised, and it has the liquidity.”
The need for splitting the region into component parts is vital when defining competitors, as global head of sub-custody at SEB Ulf Norén notes. “SEB is a sub custodian in five CEE markets: Estonia, Latvia and Lithuania, which are all EU Markets, plus Ukraine and Russia. From our perspective, we need to separate the two. Talking on the CEE as a whole, you have certain areas where you find SEB is really big, like in the Baltics. Looking at the greater CEE, ING, Unicredit, Citi, Deutsche and Raiffeisen have strong positions. The two flagship markets of CEE region are Russia and Poland, and also Hungary and the Czech Republic.”
Global head of custody at ING Commercial Banking Securities Services Lilla Juranyi defines her company as a traditional custodian, but agrees with Katalin that the market is changing:
“Currently the main traditional custodians in the CEE are ING, Citibank, UniCredit, Deutsche Bank, and there are a few smaller custodian banks offering their services to special type of clients, mainly local ones. What is interesting is that in the last two to three years we have also seen a few providers who have stepped into the CEE region on selective basis to establish their operations in a few “strategic countries”. With the local custody business, J.P. Morgan decided to build a strategic full-scale
