Central and eastern European banks have almost no direct exposure to US subprime loans, but the tightening debt markets could weigh on credit growth and earnings this year and next.
Lenders throughout the former Communist bloc are expected to enjoy consumer and corporate annual credit growth of 25 to 30 percent for years to come as economies between the Baltic and the Black Sea catch up with their richer western neighbours.
As earnings from traditional business lines have expanded healthily, the region's banks have not felt the need to turn to more esoteric products such as collateralised debt obligations or sub-prime mortgage-backed securities to boost profits, unlike their western peers.
"Our banks have very limited CDO exposure," says Cristina Marzea, an analyst who covers emerging European banks for Merrill Lynch, but added: "Where we are more concerned, and where the market needs to understand the implications, are the funding lines."
As lending grows faster than wealth in the region, the banks suffer a widening gap between assets and deposits, and more than western banks rely on wholesale financing - bonds or interbank loans - to shore up the money they hand out.
"The subprime debacle has pushed the credit markets, and you are seeing this through a widening of credit spreads. That will have implications for our banks," said Marzea.
At worst, the evaporating credit lines could lead to a liquidity crunch if a bank had to roll over short-term debt and found the doors of possible lenders closed.
Matthias Siller, who helps manage emerging European equities at Baring Asset Management, says banks in Kazakhstan and smaller Russian entities in particular could face this fate and may have to seek refuge with bigger banks ready to swallow them.
"There could be problems for some Kazakh and smaller Russian banks, which could result in them being taken over," he said. More widespread consequences of scarce funds will be that banks will no longer be able to deliver the credit volume growth investors have become used to in the region, or that funding will become more expensive and put pressure on margins.
Merrill's Marzea singled out Kazakhstan's Kazkommertsbank among the banks she covers as most likely to take a profit hit from the credit crunch, possibly pulling next year's earnings 20 percent lower than previously thought. Banks further to the west, such as Austria's Erste Bank and Raiffeisen International or Hungary's OTP, also have more loans than deposits on their balance sheets and will be affected by the higher cost of wholesale funding, but to a much lower degree, she said.
These concerns, along with a general moveut of emerging market stocks, has hit bank shares in the region at least as badly in recent weeks as their western peers, which have greater exposure to the subprime crisis.
The drop has come even though second-quarter results showed healthy credit growth and quality and only raised some concerns on costs as the region's growing wealth fed wage inflation.
"We had pretty good results more or less across the board," said Michael Sieghart, deputy head of European equities at Deutsche Bank's fund DWS Investment. "There was a continuation of the previous quarters and of the big convergence movement (between east and west)," he said. "Fundamentally, the region is on track. But the subprime crisis triggers a de-risking, and the mid-cap stocks are being sold."
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