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Erste Bank/BCR: an expensive but valuable foothold in CEE

23rd December 2005

The largest remaining state-owned bank in central and eastern Europe has become part of the Erste Bank empire after the Austrian firm paid E3.7 billion for a controlling stake in Romania's BCR Bank. Indeed, with the majority of the large central European banking markets already dominated by western players, future expansionists may have to look further east to achieve their goals.

Erste Bank outbid Portugal�s Millennium BCP in an auction which raised eyebrows among many industry commentators because of the high price paid for the Romanian banking leader. With the record E3.7 billion acquisition of the 62% stake in the bank, Erste has not only completed the most expensive foreign transaction ever by an Austrian company, but also paid the highest price offered by a western bank for a state-owned CEE banking institution.

Erste Bank offered such a high sum because it stands to control around a quarter of the Romanian retail banking market, gaining access to the relatively untapped credit card and mortgage sectors, a rare growth opportunity in the modern CCE banking sector. BCR operates 367 branches in the country and has around 4.5 million customers. Established in 1990 by the Romanian state, it became the first bank to offer mortgages in Romania in 2003 and, by the end of 2004, it accounted for an estimated 50% of that market.

The integration of BCR will cost Erste an estimated E90 million, including a three-year restructuring program. Book value adjustments for additional risk provisions are likely to cost around E100 million, while a further E100 million would be needed to settle tax issues. To minimize these costs, industry analysts expect Erste to develop a strategy centered upon rapid and massive cuts of BCR�s costs in order to render the bank efficient. Erste has already demonstrated that it can administer large inefficient banks in the CEE states by successfully applying strict reorganization programs.

This announcement completes a year in which western European banks, constrained by slow growth in their domestic markets, turned their attention towards eastern Europe � a region growing at twice the rate of many western countries. With the majority of the large central European banking markets already dominated by foreign competitors, western banks are increasingly looking towards less developed states further east and seem to be willing to take on greater risk in return for higher growth and profit margins.

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