Dummies for finance
From The Economist print edition
Andreas Treichl of Erste Bank thinks banks should be kept small and simple
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HE MAY be descended from five generations of bankers and head a large bank himself, but Andreas Treichl has a pretty low opinion of his profession. He had hoped to become a conductor, but changed his mind on the advice of Leonard Bernstein. The maestro saw him perform, Mr Treichl says, and “told me to go into banking because one would do better as a mediocre banker than one would as a mediocre conductor.”
Happily, most observers consider his tenure at Erste Bank, Austria’s second biggest, which he has run for more than a decade, better than mediocre. He has transformed the staid, insular, 200-year-old savings bank into one of the largest retail banks in central and eastern Europe. Although he led it into a region that subsequently found itself on the front-line of the financial crisis, he has managed to keep it profitable and independent. To be sure, Erste Bank has not escaped the crisis unscathed. Earlier this year it had to raise €1.8 billion ($2.3 billion), including €1.2 billion from the Austrian government, to bolster its capital, and provisions for bad loans have more than doubled in the first half of this year compared with a year earlier. Yet these setbacks look inconsequential when set against the monstrous losses reported by bigger banks farther afield.
That Erste Bank continues to stagger on in perilous emerging markets while many of those that bet on American or British housing have fallen flat is explained, at least in part, by the fact that banking was not Mr Treichl’s first choice of career. He built a business on the assumption that commercial banks do not have the pick of the best or the brightest, and should therefore keep their strategies simple and their ambitions relatively modest.
“People who want to make a lot of money fast go to work in investment banks, but people who work in commercial banks are pretty average people,” says Mr Treichlin an office so understated that it almost seems calculatedly so. On the whiteboard near his desk are the colourful doodles of one of his three sons—testimony to a recent spot of baby-sitting. Near the door is an open carton containing dozens of boxes of chewing gum. Mr Treichl’s prescriptions for banking are as unpretentious as his office. “We should not think we can invent something brilliant. If we could we would be working somewhere else,” he says of the exotic credit derivatives that spread risk, like a contagion, through the financial system. “We bought the crap but we didn’t invent it.”
Mr Treichl’s keep-it-simple philosophy has steered his firm’s strategy. Instead of trying to expand into investment banking, a business with juicy margins in good times but horrible losses in bad, Erste Bank has instead concentrated on expanding its retail banking business into central and eastern Europe, where it has subsidiaries stretching from Austria to Ukraine. In most countries where it does business, it owns one of the larger local banks. In the Czech Republic, for instance, it holds almost a third of all retail deposits, and in Romania it has a quarter. Erste Bank also has a policy of balancing loans and deposits. In the go-go years before the credit crunch, that left it growing more slowly than many rivals. But because it did not rely on flighty capital markets for funds, it has weathered the downturn better. Conservatism has other rewards, too: being a big, safe-sounding bank in small countries has allowed it to pay uncompetitive interest rates and still keep pulling in deposits.
It is also firmly a local bank. Most of its main markets are just a few hours’ drive away from the head office in Vienna. In the waiting room on the executive floor, the head of risk from a subsidiary in a neighbouring country is pouring himself a coffee, having driven for an hour from his own office to talk about a new computer system. This localism underscores one of Mr Treichl’s deeply held beliefs: that big banks fail because they become unmanageable. “If you run something like Citi how the hell do you know what’s going on in Poland if you only go there every three years?” he asks. “This is very much a people business. I need to touch and smell and feel what’s going on.” It is a view formed by his many years in various bits of the far-flung empire of Chase Manhattan, a company about which former employees joke that it “trained the best but kept the rest”. Mr Treichl joined it as a credit analyst in New York and worked in its offices in Brussels, Athens and Vienna before joining Erste Bank some 15 years ago.
It is hard to find fault with the argument that many big banks have become ungovernable. Even HSBC, a British bank with a sterling reputation, ingrained prudence and a history of astute acquisitions has stumbled in recent years when entering markets where unfamiliarity prevented it from bringing these traits to bear. But there is a corollary. Size and geographic reach allow big banks to spread risk. Erste’s profitability over the next few years, by contrast, will depend on a few fragile economies in one small part of the world—albeit ones that are not moving in unison, and for which Austria has mustered an international bail-out.
Being decidedly local also carries other, idiosyncratic risks. Austrian banks have, in recent years, been enthusiastically peddling risky foreign-currency mortgages at home and abroad. Erste Bank was far from the worst culprit in this regard, but it did opt to issue some mortgages denominated in Swiss francs and euros to Hungarians and Romanians rather than entirely surrender a booming new business to more daring rivals.
Banking also has an annoying knack of turning today’s genius into tomorrow’s fool. Devotees of back-to-basics banking such as Mr Treichl and Banco Santander’s Emilio Botín are riding high only by comparison with racier (and now disgraced) rivals who tried to combine investment banking with retail and who boosted returns buying credit derivatives they did not understand. Yet their stars may also fall if a long economic slowdown produces bigger-than-expected losses at conservative banks, too.
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