Erste Group Bank's has increased its activity in the Central and Eastern Europe (CEE) region in recent years. Apart from issuing structured products in its domestic market Austria and Germany the bank is issuing an increasing number of products in Hungary, Czech Republic, Slovakia, Romania and Croatia. SRP spoke to Thomas Mlekusch (pictured), capital markets, fixed income and certificates sales at Erste Group Bank about the trends and challenges in the CEE region.
"Austria, Czech Republic, and Slovakia are our core markets also from a group strategy [perspective]," says Mlekush. "These countries are the most developed in our region. Romania and Hungary are very important for us too. We are the clear number one issuer there, but there is still a lot of work to do in order to educate advisors and clients."
According to Mlekusch, there is "huge potential" in Romania and also in Hungary. "In Hungary we took over the business from Citigroup Bank which should have a positive influence to this business," says Mlekusch. "In Romania we see a rising demand for equity notes. The main reason is decreasing deposit and government bond rates."
Many of Erste's products are simultaneously issued in several countries which is to do with Erste's approach of bundling product issuance and acting more from a group perspective than from a single country perspective, according to Mlekusch. "We try to develop the structured bond business also in these markets," he says. "As rates are going down we see more interest in these kind of products."
According to SRP data there has been a shift from structured funds and deposits to bonds and certificates, especially in the Czech Republic and Slovakia because of the constraints around providing capital protection and pricing although Mlekusch says the move responded to a flight towards simpler payoffs.
The issuance bonds and certificates has also increased in Hungary, where product wrappers are slowly adjusting to the offering in other German speaking markets, with an increasing number of capital at risk products. In Croatia and Romania Erste has also started issuing more bonds. "Erste started offering express notes (autocallables) and worst of option reverse convertibles in [Croatia and Romania] in 2014 and they are at the present the most popular products there," says Mlekusch.
In terms of underlying assets, the Euribor and the Eurostoxx50 indices are the most used benchmarks in Erste Group products, whereas the Stoxx Global Select Dividend 100 became a popular underlying in the past year. According to Mlekusch there is no country specific offer around underlyings, although the current focus lies "very clearly on sustainability and ethical indices".
According the SRP database across all markets the Eurostoxx50 and blue chip shares beside currency pairs are the most popular underlyings. "In Croatia and Romania the taste is similar to the rest of the region with the Eurostoxx50 and international shares being the most sought after," says Mlekusch.
Erste offers a wide range of payoffs in each jurisdiction and the bank introduced recently autocallables in Hungary. The reason for the increasing risk appetite is a result of the challenging market conditions. "More and more customers are willing to take more risks," says Mlekusch. "Decreasing deposit and interest rates are partly responsible for this trend. Furthermore the education of financial advisors is another aspect which [has facilitated] the increase in demand for products with soft protection."
Erste Bank issued most capital protected products in Austria and Germany as floaters linked to the Euribor, while in the Czech Republic they were mainly linked to baskets of shares. Looking at the chances and challenges ahead Mlekusch stressed that "education" of advisors and customers will be key to grow the market. "We try to standardise our educational material which is always in the local language," he says adding that regulation will also pose challenges although there is no way around.
"The paperwork is increasing all the time and especially the client information and education is getting more and more important," he says. " "We have to deal with the regulation as it is."
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