What is the point of owning small banks in obscure markets? It’s a question western banking groups have been asking themselves ever since the financial crisis finally called time on a decade-long dash for assets across central and eastern Europe.

Unsurprisingly, they all came to the same conclusion. Time and again over the last 10 years, the heads of western groups have told Euromoney that in a diverse and developing region, where few countries can boast a population of more than 10 million, scale is a necessity.

This is clearly correct. It can make little sense to wrestle with the regulatory and political complexity of markets such as Serbia or even Romania for the sake of a 5% market share. Yet while subscribing publicly to the new orthodoxy, bank executives have been reluctant to give up on their CEE empires.

Those from further afield have been more proactive. Citi made rapid exits from its retail banking operations across the region, while General Electric also lost little time after the financial crisis in clearing house in emerging Europe.

Western Europeans seem to find it more difficult to let go. Until recently, nearly all the disposals by larger groups were either at the behest of European authorities – as in the case of KBC and the Greek banks – or prompted by an urgent need to raise capital (step forward UniCredit and Raiffeisen).

Honourable action

Frédéric Oudéa,
Société Générale

The honourable exception is Société Générale. Initially, the French group had hoped to scale up in all its CEE markets. When it became clear that the capital to do so would not be forthcoming, however, chief executive Frédéric Oudéa ordered the dismantling of the group’s network in the region.

Subsidiaries in Croatia, Bulgaria and Albania have already been sold to Hungary’s OTP. Polish retail lender Eurobank was purchased by Portugal’s BCP in November. A handful of other operations in small markets are also up for sale.

At the end of the process, SocGen will be left with sizeable universal banking operations in Russia, the Czech Republic and Romania, as well as a regional corporate and investment banking business – in other words, a manageable, focused franchise.

Why are others not following suit? A number of answers are usually given, none of them hugely persuasive.

One is that, having sat out the lean years, it makes no sense to sell when painful restructurings have been completed and business is back on track.

Yet the point at which asset prices have recovered and demand is returning is exactly the moment to get out. Why wait for the next crisis and get stuck once again with a troubled asset that no one will buy?

Similarly, the argument that banks would be foolish to get rid of profitable operations holds little water. Citi, GE and SocGen were able to complete speedy exits from unwanted markets precisely because their subsidiaries were well-managed. No one wants a loss-making bank.

Even banks for whom CEE is their core business should think hard about whether or not it makes sense to stay in countries if they can’t afford to scale up – particularly when those markets come with high legal and reputational risks.

Those for whom it isn’t should either bulk up or, if they can’t afford to, get out. Their banks can then go to owners – such as OTP or Banca Transilvania in Romania – who have the capital to support them and are committed to those markets.