Eastern Europe banks match Western rivals

High local profit margins and rapid expansion in the nascent retail market are boosting the valuations of Eastern European banks as they travel down the path to convergence with their richer European Union colleagues. Analysts say that some of the region's top banks, aided by restructuring brought about through foreign buy-ins, have already caught up with the West, while others do not lag far behind. "Investors got more trust (from 2001 results) that the restructuring is really successful and are already starting to price in convergence and accession to the European Union," said Peter Breyer, CA IB banking analyst. Commerzbank, Merrill Lynch and Raiffeisenbank data show top Eastern banks trade at 2-2.9 multiples of price to estimated 2002 book value (P/BV) ratios, up from 1.6-2.4 in January and an average of 2 for Western banks.

Price to earnings (P/E), another valuation indicator, stand around 13 in the East up from 10.2 in January, matching the levels in the West. Improving bottom lines and falling yields on benchmark bonds, used when calculating the valuation models, have begun to attract a lot of fund managers. The sector is also benefiting from sustainable economic growth and tame inflation regionwide. The valuation shift looks even more dramatic when compared to a price at which Austria's biggest Erste Bank bought Česka Sporitelna in 2000: a 1.6 multiple of the Czech bank's book value. Eastern European banks are contributing more and more to their Western owners' performance. That's something everyone expected. But the trend is likely to accelerate as Western banks are hit harder by a global slowdown, analysts said. "For Eastern European banks in 2002 we are talking about ROE (return on equities) of 17-20% and for good Western European banks a 14% ROE is perfectly OK," CA IB's Breyer said.

Bullish on Pekao Three years ago, Italy's Unicredito bought Poland's No.2 bank Bank Pekao, hoping to rebuild an inefficient dinosaur into a respectable bull - reflected in the one Pekao has put in its logo. In 2001, Pekao delivered an almost 20% return on equity, while its Italian owner saw the figure slipping to 18% - still an attractive rate - from 19.2% a year before. Hungary's OTP, the most profitable bank in the region, announced an 18% jump in 2001 net profit, representing a 27% profitability rating. Erste Bank is targeting a 14% ROE in 2003 while Česka Sporitelna is expected to post an 18% ROE this year, rising to around 20% in future. Analysts say those investors still looking to cash in on the sector will be hard-pressed to find similar returns since the shift in market valuations along with a limited number of buying opportunities makes potential takeovers pretty expensive. "The banks represent a good bet on macroeconomic growth in the region but the recent money inflow sent the stocks to quite irrational levels," said Conseq Finance trader Petr Zajic. Unicredito, its Italian rival IntesaBCI and BNP Paribas are among those looking at further expansion in Eastern Europe. - Reuters