It’s rare today to find a bank that plans to increase its lending. But the European Bank for Reconstruction and Development (EBRD) is no ordinary bank. Set up in 1991 to support the private sectors of countries in central and eastern Europe, it later expanded its investments into the former Soviet Union, including central Asia, areas that were not developed enough to attract high levels of private investment. In recent years, foreign direct investment has increased in these markets, leading some observers to wonder whether the EBRD still has much of a role to play in economic development. For Manfred Schepers, a Dutchman and former veteran of UBS who joined the bank as vice-president of finance in 2006, the credit crunch has ended that debate. This year, the bank — which is owned by 61 countries and two inter-governmental institutions — expects to invest about €7 billion in its target regions, up some 20% from its previous estimate.
The EBRD has said that its role will change according to financial and political situations. How has the role altered in recent years?
Some countries in which we have invested are starting to depend less on the type of support we provide, such as the Czech Republic. But as we leave some countries, we enter others — for example, we’ve started to work in Mongolia and Turkey. And although the intention has been to stop investing in the first-round European Union accession countries by the end of 2010, we realise we will need to increase investment in those countries this year.
In addition, given the current global economic situation, many of the projects we are now addressing are inextricably linked to the financial crisis.
Has the crisis re-emphasised the need for the bank after years in which private investment was more readily accessible?
Yes. A conventional private-sector investor would basically wait for the next 12 to 24 months to see how things evolve. Our mandate is to be more assertive in supporting a region and addressing the needs of a market. Over the past few years, the financial commitments we made were decreasing as a percentage of the overall projects we were involved with because of the availability of private finance. Now we’ll make greater commitments to these projects because the private sector is more cautious.
Which sectors will get the EBRD’s attention?
The area that needs most attention now is obviously banking. But the problems that local banks have in emerging regions are very different from those faced by western banks. In emerging regions, the local banks don’t have investments in structured credit and there are no leveraged loans. The main problem for them is liquidity. Their financing came from external sources and so they have a refinancing risk.
Clearly there’s an expectation that the real economy in the regions will also suffer. But as yet we haven’t seen much tangible evidence of that from companies in eastern Europe. If you look at all the defaults happening in western businesses, they’re leverage-related. On the whole, corporate development in eastern Europe has involved privatisations in which leverage is a lot lower.
What sort of conversations are you having with corporate CFOs?
The big unknown for them is how their companies’ revenue will be hit during this crisis. There are some sectors that are vulnerable, such as the steel sector in Ukraine. On the other hand, from a demand standpoint most companies are focused on domestic growth rather than exports. That at least makes the task slightly easier — if you’re trying to determine what your turnover is going to be like for the next 24 months, demand nearest home is the easiest to ascertain.
One bright spot for a number of the companies we see is their efficiency. They were just down-and-out bankrupt businesses in the 1990s. But many of them had to go through a pretty severe restructuring over the past 15 years, and those that are still standing today are more efficient than they were before.
How has the bank’s own finance function and funding outlook changed?
As a triple-A financial institution, we’re only moderately affected by the changes in the capital market and we still have access to funding. The dramatic increase in government-guaranteed bank debt has made the volume of triple-A securities a lot greater, but we’re a very modest issuer and we have a strong reputation among central banks in the securities markets in Asia.
Within our treasury, liquidity management has been challenging. We run high levels of liquidity, which is good, but if you do that you need to invest it and obviously the definition of what is liquid has changed over the past year. If you carry a senior bond from a bank — which you could normally sell within half a minute — there’s been no market for that over the past six months. We now carry a €15 billion liquidity cushion, half of which is in the money markets.
Because we deal extensively with a range of global financial institutions. We had to keep a close eye on them last year to understand the various government interventions. As all the major governments of the world are our shareholders, we were confident that they would stand by their banking systems. But at the end of the day we have to protect our liquidity. That’s an issue that has concerned every CFO in the past year.
Are there personal lessons you’ve learned from the crisis?
I’ve learned a huge number of lessons, but not because things have gone horribly wrong for us. We’ve been fortunate that the structure of our asset-liability management is so simple, not taking a lot of FX and interest-rate risks. We have the good fortune of being a very well capitalised institution. Maybe 12 months ago people thought the bank was over-capitalised. Well, if that is so now, I’m very glad of it.
Over the past five years, institutions such as ourselves and the World Bank have been criticised for being too conservative. When I started here, I thought the same. Well guess what? Now, in the middle of the crisis, we’re the only institutions that can continue to invest more this year than we did last year.
Tim Burke is senior editor at CFO Europe.