vienna as a business location

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Viennas long-held ambitionto be the business hub forcentral Europe has takensomehardknocks over thepast 12 months. While it

has not ended the dream, businessesandpolicymakershavebeen forcedtoredefinewhatthegoalshouldbe.

Since the collapse of communism inthe neighbouring countries of centraland eastern Europe (CEE) in 1989,Vienna has seen itself as the naturalheadquarters for international compa-niesseeking toenter theregion, aswellasafinancialserviceshubforCEEcoun-triesas theyopenedup tothe restoftheworld.Vienna developedbanks, insur-ance companies, asset managers, pen-sion funds, lawyers and otheradviserswhowereexpertsintheregion.

But as central Europe has grown up,Viennas relationship with rival hubssuchasWarsawhasaltered.

Wehaveestablishedsound relationsbased on co-operation, says MichaelHupl, Viennas long-serving mayor.The role that Vienna plays in theprocesshaschanged.Wearenow oneofmanyequalpartners.

Michael Hllerer, managing directorof RaiffeisenCapitalManagement,saysthe big hub dream is over but adds:Vienna is still the gateway. We havesomefunctionsthatarestill essentialfordoingbusiness inCEE.

Wiener Brse (the Vienna stockexchange)andthetwobiglocallyownedbanks,Erste andRaiffeisen BankInter-national (RBI), have led Austriaschargeintothe regionbut inthe past12

months all have suffered serioussetbacks.

In September the stock exchangesplanned merger with its main rivalWarsaw to create a dominant regionalplayer was torn up by the Polish

exchanges new management. Viennanow sees its role as more of an IT anddata service supplier than as a stockmarketfortheregion(seePage3).

ErsteandRBI havehadto trim theirexpansion plans after runningintobad

loan problems with some of theirregionaloperations atthe sametimeasregulatorsaredemandinghighercapitalbuffers. Erste has ruled out furtheracquisitions for 2015-16, while RBI issellingits Polishand Slovenian subsidi-aries. Austrian banks are redesigningtheir strategy to concentrate on coremarkets, says Andreas Ittner, vice-governorof Austriasnationalbank.

Viennas self-esteem also took aknock over the collapse of Hypo Alpe-Adria in 2009. In March the govern-menthaltedpayments on 11bn of thestrickenbanksdebts andwarnedthat itplans to be the first country to use theEUs newbail-inmechanism to forcecreditors to share the pain. This hassparked lawsuits and rating down-gradesforAustrianbanks.

Eyes to eastand west astransitioncontinuesFinancial crisishas belatedly arrived but Austriascapital is reinventing itself, saysRobert Anderson Reflectivetimes: ascentralEuropehas grown up,the citys relationshipwith rival hubshas alteredDreamstime

ThewholeHypocase hasbeen verydamaging to the reputation of Austriaand harmful to the financial system ofAustria, says Andreas Treichl, chiefexecutive ofErste,thoughhe adds thatit has also led to big improvements inlocalbankingregulation.

These setbacks have come at a timewhen economic growth and businessconfidenceremain weakbecauseof thepoor performance of Austrias mainmarkets in the eurozone and the CEEregion,and which hasnot beenhelpedby events in Ukraine. After initiallyweathering the storm, the economiccrisishas caught upwith Austria, saysMrHupl.

GDPgrewat 0.4percentin 2014andthisyeartheOECDpredicts itwillgrow

continuedonpage2

FT SPECIAL REPORT

Viennaas a Business Locationwww.ft.com/reports | @ftreportsFriday June 26 2015

Inside

Financial servicesPresent woes areprompting questionsabout past plans tostimulate growthPage 2

Mayor faces fightFreedom party givesSocial Democrats atough timePage 2

The stock exchangeData sales nottakeovers are thefuture, says boursechief Michael BuhlPage 2

Financial servicesCapital worries hangover banks as tighterlending rules startto take effectPage 3

State backingThe governmentis hoping to fostera generation oftechnology start-upsPage 4

Thewhole Hypo case has

been very damaging to

the reputationof Austria


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2 FINA NCIA L TIM E S Friday 26 June 2015

0.6 per cent, with investment particularly weak. Theforward-looking purchasing manufacturing index forMay showed that Austrian manufacturing companiesconfidence was belowthe Eurozoneaverage,at 50.3 com-paredto52.2.Realwageshavebeenstagnantorfallingandunemployment has been creeping up from a low base,

withtheOECDforecastingit willaverage5.8 percentthisyear.

Thisweaknesshas ledbusinessleaderstoredoubletheircriticism of the ruling coalition of the centre-left SocialDemocratsand centre-rightPeoples Partyfor notmovingfastertoimprovethe businessenvironment.

Thegovernmenthasfinally agreedto cutthe countryshigh income taxes from January next year, which couldhelpboosteconomicgrowthto1.9 percentin2016and1.8percentin2017,accordingtothecentralbank.

However, tohelppay forthis,taxationforhighearnersandoncapitalgainsanddividendswasraised.

There isa dangerous tendencynot totake accountofthe kind of things that are important for multinationalcompanies and their managers, says Karl Sevelda, RBI

chief executive. If Vienna wants to remain a hub forcompanies inthe regionit hasto becarefulnotto loseitsadvantagescomparedtoCEEcountries,headds.

Banksarealsostillangryaboutthe taxonthesectorandcriticisethe overallcomplexityof thetaxationand regula-torysystem.TodayViennais becomingless attractiveforbankingand insurance,says MrHllerer.Wehave highadministrativeburdens,hightaxes.It isreallya problem.

NeverthelessViennais stillvery successfulatattractinginvestors andcompanyheadquarters,drawn inpart byaquality of life that is the best in Europe, according toMercer, the human resources consultant. Invest inAustria, the countrys foreign investment promotionagency, handled a record 276 investment projects lastyear,131ofwhichcametoVienna.

Russians in particular have made Vienna their Euro-peanbase,attracted byits relativeproximityto Moscowand the way they can blend in. This is transforming thecity,with companiesand theViennesethemselvesmovingout of the historical centre to purpose-built commercialandresidentialdevelopmentssuch as the new25-hectareQuartier Belvedere, leaving wealthy foreigners such asRussianoligarchstobuyapartmentsathighprices.

Thegrowthof Viennaspopulation,whichis expectedtohit2m in2030,is causingsocialstrains andzoningprob-lemsbuthas given thecitya renewedsenseof dynamismand lowered the average age of its inhabitants. Viennauniversity is the biggest German-speaking university inthe world and the city is home to a wave of technologystart-upsas itaimsto reinventits industrialbase.

Thecityseems tobe inthe midst oftransforming itselfinto a magnet for migrants and companies who arelookingto expandbeyondAustrias borders andwho arelookingbotheastandwest.

continuedfrompage1

Vienna as a Business Location

Vienna wasvery mucha closed-shopculture untilthe late1980s,bit conserv-ative,bitwithdrawn.I wouldcompareitwithsomecirclesinFrenchsocietywhoonly wanted to be among themselves,says Georg Diwok, a partner of globallawfirmBaker&McKenzieinVienna.

Thatchanged whencommunism col-lapsed in neighbouring eastern blocstates,shaking upstuffyViennese soci-etyas tensof thousandsof theregionsnewly liberated citizens descended ontheAustriancapitalin search ofgoods,jobsandlong-lostrelatives.

Viennas population grew by almost18 per cent in under 25 years to reach1.76m bythe endof 2014andforecastsexpectit toincreaseby another250,000by 2029. According to 2014 data fromthe AustrianEconomic Chambers,23.7percent ofall employees inViennaarenon-Austriancitizens.

Most of the growth has come frommigration,with manypeoplefillingjobsincompaniesthathadgrownfrombeingdomestic players serving a midsizedmarket to international players sellingto an entire region. The city estimatesthat more than 200,000 people com-mute to Vienna daily from the CzechRepublic, Slovakia and Hungary andfromthe neighbouringAustrianregionsofLowerAustriaandBurgenland.

One of the most vivid signs of trans-

formation isQuartierBelvedere,a largeredevelopment near the new railwaystation,whichwhen completedwill cre-ate a commercial, shopping and resi-dentialareaspreadout over25hectares.

The whole project was driven by[Austrian federal railways] to moveVienna from an unconnected hub to a

connectablehub, sonow youcan comefrom the west and go out through thesouth of the city without changingtrains,meaning there cannow behigh-speedrainlinks tothe restofAustriaaswell as neighbouring countries, saysRichardWilkinson,chiefof ErsteGroupImmorent, which funds infrastructureprojects incentralandeasternEurope.

Thebank isdevelopingErste Campusin the Quartier Belvedere. This, whenfinished by the end of the year, willgathe r its 4,500 employ ees in one117,000-square-metre building.

Transport iskey toViennas ambitiontolinktotherestoftheworld.Aswellasrail, a new terminal was opened at

Vienna international airport that tookits capacity up to 30m passengers peryear.In 2014, theairporthandleda totalof 22.5m passengers, up 2.2 per centfromthe previous year, manytravellingontoAsiaandtheAmericas.

Thestandardof living Viennaoffersisexceptional and not just for Russianoligarchswho enjoyitssafe atmosphere,where it is possible to eat out withoutbodyguards.Forthe thirdyearin arow,Vienna cametop inglobalconsultancyMercers quality of living ranking ofworldcities.CEE rivalslag farbehind.

Central to this is affordability. Richforeigners may have bought up theapartments in the citys heart butVienna has room to grow to the southand northeast, where the authorities

have identified 10 areas for develop-mentoverthenext20-30years.Thomas Hussl, head of property at

RaiffeisenLeasing, whichis developing12 residential projects here, says evenafterthepricerises ofthepastdecade,theaverageapartmentinmany districtsof Vienna costs 4,000-6,000

per sq m, compared with about10,000-11,000for amuch lowerstand-ardofhomeincitiessuchasStockholm.

Yet observers have concerns aboutthefuture, pointingto a numberof glo-balbusinessesmovingheadquartersoutoverthepastfewyears,withsomeopen-ingbranchesin regionalcapitalssuch asPragueandWarsaw.Thisis beingpartlyoffset by the arrival of some easternEuropeancompanies.

Friedrich Wachernig, head of Aus-trianrealestate companyS Immo,says:Many global companies have estab-lished local branches in [central Euro-peancapitals]becausethey sawitsnotnecessary to have one headquarters inVienna,especiallybecause ofthe lowerlabourcosts elsewhere.

Blame over costs is often pointed atthe Social Democrats, who have runViennafor thepast 70-oddyears.Whilemany admit there is some strategybehind municipal development plans,these are also expensive, meaning cor-porateand personaltaxesarehigh,andcostly enterprises that could be priva-tisedremaininstatehands.

We are[among] thetop fivehighestin Europe, even surpassing Sweden intermsoftaxes andsocialsecuritycontri-butions, which at 43.5 per cent isroughly 10 per cent higher than theEuropean average, says Peter Brezin-schek, head of research at RaiffeisenBank International.

Given the local elections are set forOctober, andthe left-wingSocial Demo-crats have had a drubbing in electionsrecent polls favouring the right-wingFreedom party, the tax situation couldchangeif thelatterwinssupport.How-ever,the rights immigrantbashingmayconflictwith todays multiculturalcity.

Migration and globalhub ambitions serve

to fuel growthDevelopment plans

The city is a great place in

which to live and work but

taxes and costs are still high,

saysNicholas Watson

World view:the cityhas developeda

multicultural feelsince thelate 1980s Viennas city council elections thisOctober will be a critical midterm testfor the ruling Social Democrats (SP)andcouldhelp to determinethe shapeofthenextgovernment.

TheAustrian capitalhas longbeen ared city. Since the second world warthe Social Democrats have only had tosharepowertwice.

For the past two decades it has alsobeenled by MichaelHupl,Viennas andEuropes longest-servingmayor.

The city is of crucial importance fortheleft, especially given thatthe SPsmembershipinViennais thelargestinacapital city of any party in Europe. MrHupls control since 1994 has madehima powerbroker.

Butwiththe populistrightwing Free-dom party (FP) leading nationalopinionpollsandmakingstronggainsinregional stateelections, the65-year-oldfolksy politician faces his toughestcontestyetagainstthe youthful47-year-oldFP leaderHeinz-ChristianStrache.A poor result could end Mr Huplspolitical career as well as demoralisehisparty.

That is not to say that the SP is indanger of losing Rotes Wien (RedVienna).AccordingtoaGalluppolllastmonththe partyis nine pointsclear at37 per cent (compared with 44.3 percentin 2010) andits Green Party allieshave13 percent. However, thislevelofsupport would represent the partysworst result since the war and couldhavesignificantknock-oneffects.

Thewholepoliticalsystemdependsonthe mayor,saysJohannGudenus,MrStrachesdeputy.Headdsthatthewholepower of the Social Democrats nation-allyis basedin Vienna,andhisparty isgraduallybreakingits grip.

We have the chance to go above 30percent[comparedwith25.8percentin

2010], says Mr Gudenus. Then ourmayor would have to retire. After ourmayor leaves office, there will be arethink[of policytowardsthe Freedomparty]intheSocialDemocrats.

TheideathattheSPmightreviewitspartnershipstanceis notjust aFreedomparty fantasy. TheSocialDemocrats inBurgenland, the easternmost state ofAustria, have raised the possibility offorminga coalition withthe FPtherefollowingstateelectionsinMay.

Mr Hupl, a strong opponent of co-operating withhis rightwingrivals,saysthatheis stillaimingto winanabsolutemajority. During the past two decadesthemayorhas overseenthe transforma-tion of Vienna into a vibrant, youthfulcity, with strong universities and aburgeoning IT industry. Long-delayedinfrastructure improvements, such asbuilding a new main railway station,havefinallybeencompleted.

But Vienna faces big challenges thatplay into the Freedom partys hands.The citys prosperity hides pockets ofrelative poverty, which has been wors-enedinthepastfewyearsbyfallingrealwagesand risingunemployment,whichat the end of 2014 hit 14 per cent,accordingto Eurostat.

The fast growth of Viennas popula-tionfrom1.54min 1995to nearly1.8mhasput hugestresson cityservicesand

pushed up local charges. Mr Huplacknowledgesthatthere isstilla lotofworkto dointermsof housing:thecityowns 220,000 apartments, for whichtherearelongwaitinglists.

Heavy city spending has pushed upViennas debt, estimated at 4.9bn,though criticssay therealfigure,whendebt of city-owned companies isincluded, isdoublethat.Mr Huplsaysthat he has committed himself tobalancing the city budget next year,thoughheaddsthatitmaynot bethewisestthingtodo.

WithsloganssuchasForeigninyourown country? the Freedom party hasfocusedtheseconcerns onthe questionofimmigration toprisea largesegmentof working class Vienna voters awayfromthe SP.Abouta fifthof Viennaspopulationis nowforeign-born.

The FP remains short of potentialallies but the party says it is open toentering a coalition, despite its loss ofpopularitywhenittookpartinthe1999-2002government.

We are ready to be part of thegovernment but not at any price, MrGudenus says.

ThisautumnMrHuplstandsintheirway.The mayorsays thathis colleagueswere unanimous he should stand for afifthtermand headds:I feelready tofacethatchallengeagain.

Long-serving mayor faces toughestfight yet to keep the city voting red

Politics

The Freedom party is giving

Social Democrat Michael

Hupl stiff competition,

reportsRobert Anderson

The standardof livingViennaoffersis exceptional,

notjustfor rich Russians

Survivor:MichaelHuplis Viennas,and Europes, longest-servingmayor

It was a conversation in the men'sroom of the Connaught hotel inLondon that changed the growthstrategy of the Vienna StockExchange. By chance, Michael

Buhl, the bourses longstanding chiefexecutive, found himself listening to a

financial datavendor who, while wash-ing his hands, voiced his gripes aboutemergingEuropesstock exchanges.

It wouldbe greatif wecould getthesamedatabut fromdifferentcountries,he said. Because everywhere I have adifferent contract, a different dataformat,a different interface, a differenteverything.

It was a brainwave moment for MrBuhlandwhat emergedwithhim fromthe Connaughts lavatory was a policyaimed at buying every stock exchangeincentralandeasternEurope tostampViennas supremacyon theregion.

But after a merger bid with itsregional rival in Warsaw broke downlast summer and the exchange made abelated realisation that its acquisitionspree may have been misguided, thechiefof Vienna-ledCEE StockExchangeGrouprealisedthere wasanotherway toachievethedream.

Hedidnotneedtoowneveryboursein the region to ensure Vienna pulledthe strings. He just needed to own,controlandsell thedataspewingoutofthem.Ouraimforthe future isnot totakefuture stakes . . . butratherco-op-erateasan ITand dataserviceprovider,says MrBuhl.We aretryingto reapthesynergies that we have now . . . It is allaboutdiversifying awayfrom ourtradi-tionalrevenue streams.

Last year about 50 per cent of the

groupsrevenuecamefrom tradingfees.Theplan isforthatto reduceto nearly40 per cent over the next few years,despite rising trading volumes, as datavendingand ITgrow asa proportion ofthetotalbusiness.

The[markets], saysMr Buhl,send

the data to Vienna. And then fromVienna the data all goes out, and wehaveafeesplitontheincome.

Theysend usthe data,we thenhavethe index, and we have index incomethat we share. It is a nice business forbothsides.

The Viennesebourse,historicallythelargestintheregionbybothmarketcap-italisation and trading volume, spenttheyearsbefore 2010snappingup otherexchanges in neighbouring formereastern bloc countries, as Warsaw, theonly rival witha chanceof matchingitsscale, greworganically.

That race for growth reached a headin March 2013 when the two boursesbegan negotiations on a possiblemerger, blending Warsaws size andability to tap the large Polish domesticmarket with Viennas attraction andexperiencewithinternationalinvestors.

Whenthe deal waspronounceddeadinautumn 2014, manyassumedViennahadmissedout.ButMrBuhlreckonshedodgeda bullet:We couldhavemadeabig,big lineand createa cross-member-ship between Vienna and Warsaw, hesays.Buttherewasnotrust.

While his exchange had the greenlightfromthe board,he says,forthcom-ing elections in Poland complicatedmattersandtherewasno political willtodo somethingtogether.

Since the deal broke down, Viennas

trading growth has jumped by morethan 25 per cent, while Warsaws hasbeen flat.This isnowone ofthemoretroubled markets in Europe, says MrBuhl. Thedevelopment of themarkethas come to a standstill . . . I dont seethewayforward.

He adds that the Warsaw exchangenow seems to be suffering a bit ofdespair. People used to say we arethreatened,but actuallyI think its theotherwayaround,hesays.

Mr Buhl, who accepts that there isspace in the region for two majorexchanges, dismisses any potentialrekindling of talks with the Polishbourseforatleastfiveyears.

Thedoorwasalwaysopen.Nowit isnotfirmly shut,butprettyshut.Wearenotinterestedatthisstage,heexplains.

Since the failed merger, the Viennaboursehas redoubledeffortsto focusonnon-traditional revenue growth. Thatincludes a sale of its stake in theLjubljana stockexchangein Sloveniabythe end of this year, where it owns the

primarymarketbut notthe derivativesexchanges.

We l e ar n t a l e s so n [ i nLjubljana] . . . if youdontget thewholeinfrastructureinthecountry,itdoesnotmakesense,he explains.

But even with this disposal, Viennawillcontinueto provide dataand inves-tor access to the market. Ljubljana isoneof 13differentCEE boursesthatcanbe accessed through a single platform,plugging in to data cables that rundirectly from Vienna to London orFrankfurt.

Mr Buhl, who has been chief execu-tive ofthe bourseformorethana dec-ade, also says any future acquisitionsareveryunlikely.

Nothingelse makessense.If youtakeCEE . . . and the market cap of all thelistedcompanies,then 80per centare inWarsaw andour group, hesays. Andifyoulookat tradingvolumes,it is98 percent. Just two per cent is traded inSerbia, Bulgaria, Romania. Its just notworth it.

Data nottakeovers

signal boursesway ahead

Stock market Chief Michael Buhl tellsHenry Foyhow a chance discussion altered group strategy

Nomore

acquisitions: deals

are offthetablefor

now, saysMr BuhlBloomberg

They send us

thedata, we

then have theindex,and we

haveindex

incomethat

weshare. Itis a

nicebusiness

for bothsides

IfVienna wantsto stay a hubfor

companiesin theregion it hasto be

careful notto lose itsadvantages

compared to CEE countries

Eyes east and west astransition continues


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Friday 26 June 2015 FINA NCIA L TIM E S 3


Vienna-basedassetmanagersdominatecentral Europe, exploiting the bankbranch network that Erste, RaiffeisenandBank Austria builtstraightafterthecollapseofcommunismin1989.

We have avery goodnetworkin thisregion, says Michael Hllerer, manag-ing director of Raiffeisen Capital Man-agement.Thisis ourmainasset.

HeinzBednar, chiefexecutive ofErsteAssetManagement,estimatesthat overthe past 18 months 40 per cent of hisfundsnew money camefromAustrianinvestors, some 10 per cent from Ger-many and elsewhere, and about halffromcentralEurope.

Funds are usuallydesigned centrallyinVienna, thoughoften tailored fordif-ferent markets, to be sold via bankbranches and third parties across theregion. As with their parent banks,muchofthebackofficeworkisstilldonein Vienna, though more is beingdevolvedto countriesthemselves.

Pioneer Investments, a globalfirm, also uses Warsaw as aregional hub, where its owner,ItalysUniCredit, whichowns BankAustria, controlsPekao Bank.Raif-feisen Capital Management usesTatra Asset Management, a unit ofRaiffeisensSlovakia subsidiary TatraBanka, which co-ordinates itscentral and eastern Europe(CEE) asset managers. We

aregrowingtogether, saysMr Hllerer.Bratislava[Slovakiascapital]is a verygoodplaceto dothis.

Werner Kretschmer, head of Austriaand CEE for Pioneer, says: The bigchallenge wefaceis thatinreality theseare different countries where we facequite different requirements. Balkancountries, for example, are at a muchearlier stage of development thancentralEurope,he says.

The other main complexity is thatAustrian, Germanand northernItalianinvestors seekinghigher yieldsin Vien-na-basedCEE fundsbehavequitediffer-ently from CEE investors. This dividehasbeen highlightedbyfund flowssincetheglobalfinancialcrisis.

Mr Hllerer says: Before 2007 wereally hada partyatmosphere.Then theparty was over. The next two to threeyears were really very hard for ourbusiness.

Despite attractive (though narrow-ing)bondyieldspreadscomparedwithwestern Europe, rising share prices,strong economic growth and fallinginflation, foreign institutional invest-ment into CEE remains weak, says MrBednar. Worriesover the Ukrainecrisis

have deepened this differ-ence,he says.Localinflowsintofundshaveremainedstrong, while investorsoutside the region haveheldback.

According to data pro-vider EPFRGlobal, inves-

tors into all EmergingEurope funds

have con-tinued towithdrawcash, pull-i n g o u t$823m up

to the end of April, even as fund netassetvaluesrose17.5per centyear-on-year.

Nordoes theshort-termoutlookofferany respite, as fears over monetarytighteningbytheUSFederalReserveledtoa sell-offin emergingmarketbonds inMay. This is our big challenge today,saysMr Bednar.Thisis oneof therea-sons why we try to increase the equitypartofourclientportfolios.

Meanwhile, Austrian and centralEuropean flows into funds have comeback strongly over the past two years,according to all three big asset manag-ers,thoughgrowthhas yettoreachpre-crisis levels.According tothe FinancialMarket Authority, inflows finallyturnedpositivelast year.

Longerterm,theyexpectthisgrowthto continue, propelled by low bankdeposit rates, growing wealth, ageingpopulations (together with low statepensions) and increased financialsophistication.Atthe momentregional,as well as Austrian and German inves-torsremainconservativein theirchoiceof products, though this is changingslowly, with equity and actively man-agedfundsdrawingmoreinterest.

In all these countries we see a shiftintomorebalancedproductsandawayfrom[pure]fixedincome,says MrBed-nar. But more exotic offerings, such asfunds focusing on regional property orcorporate bonds, or those puttingmoney into private equity or hedgefunds,remainoffthemenu.

Looking ahead, Mr Kretschmer seestheneedformorelong-terminvestmentproducts, to try and ensure wealth ismore evenlyspreadbetweenthegener-ationsin CEEbecauseof thestrongriseinincomes since1989.This ischalleng-ing, but in a positive way, as we areforcedtofinda way,hesays.

Prospects healthy as investorsbegin to spread their wings

Asset management

Low bank rates and ageing

populations propel growth,

writesRobert Anderson

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Raiffeisen Capitals

Michael Hllerer

The three big Vienna-basedbanks expansion into cen-tral and eastern Europe(CEE) was one of Austriasrealsuccessesof thepast25

years but has left a sour taste in theaftermathof theglobalfinancialcrisis.

While Raiffeisen Bank International(RBI),ErsteandBankAustria(nowpartof Italys UniCredit) came out of thecrisis better than most, they have allbeenrockedby regionalaftershocks.Ontopof this,theconflict betweenUkraineandRussiahasforcedRBItoclosedown

itseasternUkrainianbranches,pushingup its non-performing loans (NPLs) inUkraineupto52percent.

Write-offs in the region highlightedthe generous multiples paid for someacquisitions(notablyby Erstein Roma-nia) while the rise in NPLs around theregion demonstrated the risks ofextending foreign exchange loans tonon-Austriancustomers.

More fundamentally, the woes ofErste,and particularlyRBI, haveraisedquestions about whether they had themanagementcapacityto handlesuch adiverseportfolioof operationsat suchapace of expansion and why this wasunaccompaniedbycapitalincreases.

Andreas Ittner, vice-governor of theAustriannationalbank,saysnot enoughthought before the crisis went intoputting more profits into providing acapitalcushionagainstbadtimes.

Both Erste and RBI, with someprodding from the Austrian FinancialMarket Authority (FMA) and thecentral bank, have taken steps toaddresstheir problems,throughcutting

lending, particularly foreign exchangeloans, and by making local operationsself-funding with deposits and raisedprovisionsforbad debts.

Loan-to-depositratioshavebeen cutfrom130percentto below100percent,says Klaus Kumpfmller, executivedirectorof theFMA,whoadds:Mostofthe [foreign exchange] problems havealreadybeen booked.

Banks and regulators say the mainrisknowisoutoftheirhands.

A muchbiggerrisk isthe geopoliticalrisk, says Mr Ittner. This is a worry

mainlyforRBI,whichhas a presenceinboth Ukraine and in Russia. RBIsdiverse spread of operations has nothelped it in a stressed environmentwhen several countries have beenunderperforming at the same time.Both RBI and Erste are dependent onparticular countries for profits theCzechRepublicin Erstes case,Russia inRBIstocovertheirlosses.

Thebankshave hadto fightthesefireswhile profitability in their home mar-kets has been sluggish because of lowinterestratesandweaklendinggrowth.

According to RBIs CEE BankingReport in June, the overall bankingreturnonequity(ROE)fortheregionisatitslowest levelsince2000 at6.9percent.Bothbanks,whichmadea losslastyear, are bullish that economic growthin the region will boost profitability.ErsteexpectsaROEofbetween8-10percentthisyear,whileRBI aims fora con-solidated ROE of 11 per cent in themedium term. Central Europe willgrow 1-1.5per cent more than the euroarea. That is a lot, but of course [bank

expansion] has to be much more con-tainedand risk-awarethan in the past,saysMrIttner.

Regulators are insisting that the twobigbanksstrengthentheirequityto be

able to weather future shocks. Bothhave belatedly raised capital over thepast couple of years but analysts andregulatorssay theirfullyloadedtier oneratios (core equity divided by risk-weightedassets) arestillon thelow side:RBIhas a ratio of9.9 percent,Erstes is10.6percent.

The[tierone]gapbetweenthemandtheir biginternationalpeerswillwidenin the next few years, says PatrickRioual, director of financialinstitutionsat Fitch Ratings, which downgradedbothbanksinMay.

This month Austrias Financial Mar-ket Stability Board recommended thecountrysbigbanksshouldphasein overtwo years a tier one ratio that is threepercentage pointsgreaterthanthe eightpercent bufferdemandedby theEuro-pean Central Bank. We are slightlybehind the average of the competitionwithour largebanking groups, admitsMrKumpfmller.

Both banks are ruling out anothercapital increase but strengtheningequitythrough retainedprofitsat atime

of sluggishprofitability, debtprovision-ing and special bank taxes in severalcountries includingAustria willbehard. RBI would have most difficultylaunching another capital increase

because of its co-operative structureanditsdecisiontoreduceitssize.

A bank of our size should be morefocused,saysKarlSevelda,chiefexecu-tive.It hasputits Polish,Sloveniansub-sidiaries andits Zunointernetbank upforsaleand willslimdownin Hungary,UkraineandRussia.Itexpectstohavetomake 550m of restructuring charges,mostof themthis year. Erstehas ruledoutacquisitionsthisyear andnext.

Both banks fear that tougher capitalrequirementswill crimpfuture profita-bility and are angry that regulatorynorms arestillunclearanddo nottakeaccount of their low overall leverageratios core equity divided by overallassets(unweighted).

Andreas Treichl, Erstes chief execu-tive, says:Weshouldhavea veryseri-ous taking stock of what has beenaccomplished in the last six to sevenyearsandformajudgmentofwhatistherate, definitionand levelof capital,andhowdo youdifferentiatedepending onthe di fferent business modelsbankshave.

Capital worrieshang over banksas tighter lendingrules take effectFinancial services Present woesprompt questionsabout past growthplans, writesRobert Anderson

FT graphic Source: Thomson Reuters Datastream; Eurostat; Statistics of Austria

Vienna: the city and its banking sector in numbers

Banks performance

Datastream indices

Share price and indices rebased (in terms)

2007 08 09 10 11 12 13 14 15

0

20

40

60

80

100

Raiffeisen Bank European banksGlobal banksErste Group Bank

Size of European banks

Market cap (bn)

0 2 0 40 6 0 8 0

Banco Santander

BNP Paribas

Intesa Sanpaolo

Deutsche Bank

Bank of Ireland

Erste Group Bank

Deutsche

Postbank

Finecobank Spa

Raiffeisen Bank

GDP per capita

In purchasing power standard (2011),

EU-28 average = 100

0 200 300100 400 500 600

London

Paris

Oslo

Brussels

Hamburg

Dublin

Milano

ViennaRome

Lisbon

Madrid

Barcelona

Berlin

Athens

Liverpool

2011 (bn)

Austrian GDP by province

Vienna

UpperAustria

LowerAustriaStyria

Tyrol

Salzburg 21.9

Carinthia 16.9

Vorarlberg14.1 Burgernland 6.8

77.9

50.7

47.3

37.4

26.1

Theoldwheel

spins: thecitys

Praterwheel, built

in1897, isa

symbolof

Viennas

durability

throughout a

tumultous history:

Austriasbanks

saytherisksthey

facetodayare

geopolitical and

outoftheirhandsDreamstime


4/4

4 FINA NCIA L TIM E S Friday 26 June 2015


Thethreefoundersofstart-upPolaireknewtheirbusinessideahadthelegstobecomearealitywhentheysawoneoftheirproductscomedowntheBerlincatwalkonthefeetofamodelinDawidTomaszewski-designedclothes.

InJanuary,duringthe citysMercedes-BenzFashionWeek,thedesignofPolairesdigitallydesignedand3D-printedshoescaughtthe attentionofthewatchingtrendsetters.Photographers shottheshoes asmuchasthe clothes,fashionblogstook noteandthepeoplebehindtheViennesefashionaccessorystart-upknewtheywereontosomething.

ThoseblackshoessitonashelfinPolairesworkshopofficein centralVienna,alongsideadozenotherpairsofprototypes,designideasandpreviousversions.Stillwedgedinthetoeisapieceofthetissuethatthemodelusedtomaketheshoefitmoresnugly.

Weareaveryunusualstartupbecausewearenotinthesharedeconomy,orin theinternetof things,saysAnna-MariaPankiewicz,co-founderandcommercialdirector.Weareactuallymakingthings.

Basedinatrendydistrictpopulatedbywinebars andboutiques,thecompanysofficeisacollectionofdesks,cupboardsandshelvesinaconvertedfactory,wherePolairesharesthebright,airyfloorwithotherfashionstart-ups,designersand tailors.Describingthemselvesas twoarchitectsand a

businessmanagementstudent,theteambehindPolairedesignsandmakesexclusive3D-printedproductssuchassunglasses,braceletsandringssolddirectlyfromitswebsiteandinfashionboutiques.

Thecompanyssmall3Dprinter,inwhichtheymakeprototypesthatare

fine-tunedandultimatelyproducedusingoutsideprinters,sits prideofplaceatthecentreoftheiroperations.

Thisisnotjustajoborabusiness.Thisis myhobby,too,said DanielReist,chiefexecutiveand creativedirector.PeoplethinkthatIamcrazythatIspendeveryfreeminutehere.

MrReistandHoratioValcu,thecompanysothercreativedirectorandafriendfromtheirdesignstudentdays,collaborateondesigningtheproducts.MsPankiewiczsjobistosellthem.

Iswitchedfromarchitecturetoproductdesignfor acompanyworkingwith[fashionhouseLouisVuittonMoetHennessey]andthenIthought,whynotdothisformyself?MrReistsays.

Hedesignedandmadehisfirstpairofsunglasseswhileathighschool.Aftertraininginabigdesignstudio,heenjoysrunninghisownshop.Ofworkinginafashionhouse,MrReistsays:Theyhavesuppliers,theyhaveconcepts,theyhavesourcingconstraints . . . I liketohavecontrol overeveryth ing.

Theirproductsare soldthroughprivatechannelswhilethefirstcollectiongetsthenecessarysafetyandcomplianceapprovals neededfor

generalretail,whichareexpectedby theendofthisyear.Buttheirdesignsarealreadygeneratinga buzzin theircity.

Werebuildinga curated business,saysMsPankiewicz,aPolaireringonherfingerandbraceletonherwrist.Peopleonthestreettakephotographsof

hersunglasses,whileothersaskwheretheycanbuy herjewellery.Thedesigncomesfirst.Andthats

whythe chiefexecutiveis adesigner,notsomegradschoolMBAguyorwhatever, shesays.

Formallyfoundedabout18monthsago,Polairewas granted25,000infirst

roundfundingfromDeparture,adivisionof theViennaBusinessAgency,andreceivedasecondtrancheof45,000 fundingfromAWSKreativwirtschaft,afederalAustriangovernmentfund.

WhileMsPankiewiczgrewup inViennaandishalfAustrian,MrValcuisRomanianand MrReistis Swiss-Austrian.WhatkeepsthemandthecompanyinViennaistheblendofgenerousfinancialsupport,mixedwiththefeelingofbeingpartofadevelopingdesignandfashionsceneandastrongsenseofloyaltytothecity.

Viennawastheenvironmentthatgaveusinspirationandthe intellectualabilitiesandresourcesthathaveallowedus tobuildthis,saysMrValcu.

AllwehaveisthankstoVienna,andwewanttogiveback,agreesMrReist.Thecityhasbeenverygoodtous.

Gettingmorestart-upslikePolaireofftheground,andconvincingthemtostayandgrowinVienna,isthecityauthoritysnew focus.

TheViennaBusinessAgencyboastsofofferingmorethan160minfundingeveryyearfordevelopingbusinesses.Itisworkingwithfederalbusinessagenciestosupportstart-upswithtraining,assistanceinapplyingforpatentsandbygivingone-offgrantsforindividualprojects.

Polaireis eyeinga potentialthirdroundoffundingtoinvestinanother,moreadvanced3Dprintingmachine,andto funditsdistributionpush.

Itisreallycoolthatsomethinglike[theDeparturestateagency]exists,togetpeoplelikeus goingandit meanswedonothaveaninvestortellinguswhattodo,saysMsPankiewicz,asasewingmachinechattersin thebackground.Wedonthave investors.Wedonthavedebt.Wedonthavebankers.

City-funded newbiesteps out for successin fashion industry

Case study3D printing

Business agency develops

entrepreneurs sense of

belonging, writes Henry Foy Framed:designerglassesby Polaire Itisperhapsfittingthatacityoftentalkedaboutasbeingapivotallocationforthe centralEuropeanregionshouldhaveasoneofitsmostinnovativeandfast-expandingcompaniesanoutfitcalledTheImpactHub.

ThisVienna-basedcompanyisresponsiblefor aglobalnetworkofHubs,runbylocalentrepreneursandbackedbyinvestorsandcharities.Theseareamixtureofrentableofficespaces,communitycentresandbusi-nessincubators providingtheoftenyoungtechentrepreneurswho inhabitthemwithresourcesandservicestohelpthemstart theirbusinesses,as wellasplacestomeetandshareideas.

Its aself-generatingcommunityofmakers,and doersandentrepreneurswhowanttogettogetherandjoinasup-portecosystemthathelpsthemtoutilise theirideas, MatthiasReisinger,co-founderanddirectorof ImpactHubVienna,shoutsabovethebuzzingofsaws.HisHubispreparingtoopenanexpandedspace,whichhas tripledinsizeto1,200squaremetres.

Viennaisalsohometooneoftheglobalorganisationsmain investors,theErsteStiftung(orfoundation).Currentlythereare67 Hubsopenaroundtheworld,withanother25intheprocessofbeing developed,situatedincitiesonfive continentsand bringingtogethermore than11,000memberswhocometotheirHubstowork:athot-desks,permanentdesksand inoffices.By2016itisestimatedtherewillbe100Hubsaroundtheglobe.

ThepeoplewhoruntheHubsand

rentoutthespaceswhicharefavouredby younginformaltypes socialise,organiseeventsand,thefoundershope,usetheirworktothewiderbenefitofsociety.Thebusinessincubatorelementis crucial,providingmanagement training,marketingandITservicesas

wellasaccesstocrowdfundingforwannabeentrepreneursstartingout.

Thefirsthub wasopenedin LondonsboroughofIslingtonin2005.Setupasaone-offbyBritishentrepreneurandwriterJonathanRobinson,memberspaidfeesbasedononhowlongtheyusedaspacefor.Thenetwork,originallyknownasjustTheHub,grewasforeignmembers returnedto theirhomenationsandsetuptheirownspaces.

Atthatpointafairlytraditionalsocialfranchisemodeldeveloped,inwhichnewHubswouldpayaheftyjoiningfeeandashareoftheirannualrevenuestoaglobalcentre.In returntheywouldbegivenalicenceto usethe brandandsupporttolaunchandrunoperations.

Butasmanyinemergingmarketsbegantochafeagainstthecentresdemandsforcashandcontrol,andeitherdidnotpayortriedtorenegotiatethejoiningfeeandrevenueshare,acashcrisisensued.Thetraditionaltop-downstructuresand systemsstartedtofail,andsowedecidedtodosomethingthatsvery bottom-up,Petr Skvaril,ImpactHubsglobalpartnershipsmanager,says.

AtanemergencymeetinginAmster-damin2010aninvertedfranchisemodelwasagreed:eachlocalHubwouldownitselfaswellasanequalpartofthecoreorganisation,theHubAssociationinVienna.Theassociationownsthe

brand,theglobalITsystemsandtakesstrategicdecisionsthroughaone-Hub-one-votesystemofgovernance.Thereisstillajoiningfeeandarevenueshare,butwiththeformerinsomecasesabouthalfofwhatitwasunderthepreviousmodelandthe shareofannualrevenueatjust2percent,non-paymentisnolongeraproblem.

Theseandother organisationalchangesmeantthenumberofglobalHubsgrewfromjust15to67infiveyears,MrSkvarilsays.Tomakethemmoreprofitable,aswellasderivingrevenuefromofferingflexiblespaceforworkandevents,value-addedservicessuchas businessadvice,educationandconsultingforstart-upsarenowofferedwithhelpfromthemainorganisation.Theresultisanetworkwhoseannualrevenueisnowinthetensofmillions.

ItisperhapsnosurprisesomeinvolvedwithImpactHubusethewordmovementtodescribewhattheyaredoing.Whilethemorecynicalmayrolltheireyes,theideaisonewhosetimemayhavecome.Mr Reisingercertainlythinksso.TheveryprinciplesthatImpactHubisbasedonseemtoresonatewithpeoplefromallovertheworld,hesays.

Despitethispositiveassessment,theHubAssociationstillhasmuchtograpplewith, includingdevelopingastrategicfive-yearplan.Amongthethingsitneedstoaddressare:whatcontrolsthe centrehason localHubentrepreneurssellingouttheirstaketootherswhomightnot sharethegroupssocialbusinessagenda;aglobalpolicyonworkingconditionsforstaffintermsoflivingversusminimumwage;andtheuseof zero-hourcontracts.

Also,beingakintoamovement,suchastrategywouldnotbecompletewithoutabitofproselytising:theorganisationsrevamped structure, itsmanagementbelieves,couldinspireotherstoadoptit,anditisconsideringhowtoshareitsknowledge.

Wewoulddefinitelyliketoinspireamoreshared,bottom-upeconomy,versusthetop-downtraditionalones,saysMr Skvaril.

Impact Hub takes on all the fervour ofa movement as network increases

Case studySocial investing

The global group of flexibleworking spaces has a

revamped business model,

writesNicholas Watson

MatthiasReisinger: the

networksprinciples resonate

withpeopleall overthe world

Design comesfirst. Thats

whythechiefexecutiveis a

designer,not an MBA guy

Viennas 13th-century Hof-burg palace was once theseat of the Holy RomanEmpire. It hosted the pre-miere of Ludwig van

Beethovenseighth symphonyand pro-vided thesettingfor US President JohnKennedys and Soviet leader NikitaKhrushchevs bruising tte--tte in1961beforetheBerlinWallwasbuilt.

Buton aFridayafternooninMay,thebiggest draw in its cavernous, marble-lined halls was a virtual realityskydiving simulator opposite a robotdancingtoelectronichousemusic.

The takeover of the palace for theannualpioneersfestivalstart-upconfer-ence is part of the Austrian capitalseffort to rebrand itself as a centre forinnovation and entrepreneurs, amid afightfortalentand capitalacrosscentralandeasternEuropeandfurtherafield.

Vienna wasnever famousfor havinglotsof start-ups,says PeterBosek,chiefretailofficeratErsteGroup,a bank.Butthe numbers are definitely increasing.Of course, compared with London orBerlinwe are ona lowerlevelbutoverthenext fiveyearsthis canbe developedinthe city,saysMr Bosek, whosebankhas aggressively moved into start-upfunding.

Vienna appears to have many of theright attributes to foster a culture ofentrepreneurship. The city boasts190,000students,roughly10per centofitspopulation,from 20differentuniver-sities,manyof which areresearchlead-ersintheirfields.

Traditionally a corporate hubfor theregion,it hasthe banks, funds andpri-vate capital that are necessary to fuelnew businesses. It has a nationalgovernment and city authorities thataredoingallthey canto providean envi-ronmentforinnovativeideas.

But while the Hofburg provides per-haps the most beautiful architecturalsetting for a start-up conference any-where, it underlines the difficulty thatthe historic, old-world city faces inrebranding itself to young entrepre-neurs as a location in which to build afuturisticbusiness.

Justa quarterofthe start-upspitchingfor support and investment are Aus-trian,underliningthe taskaheadfor thecity in competing against other coun-tries and cities with more establishedstart-uphubs.

The global dominance of SiliconValleyaside, otherEuropeancities suchas London and Berlin have the scale,community and supportnetworks that

start-ups need to thrive, creating avirtuous circleand suckingin entrepre-neursfromelsewhere.

Other upstartsthat offer cheaperliv-ingcostsandoverheads,suchasWarsawand Budapest, are building their owninnovationhubs,cuttingintothecentraland eastern European talent pool thatViennatraditionallyhasdrawnfrom.

Idaresaywearealreadypushingtheright buttons, says Harald Mahrer,state secretary at Austrias ministry ofscience,researchandeconomy.

However, Mr Mahrer, a formerentre-preneurwho describeshimselfas Aus-trias chief innovation wizard adds:Austriaas a businesslocationstilllacksvarious important ingredients thatwould further foster entrepreneurshipandinnovation.

We definitely need to cut red tape,andwe needto reduce taxes andsocialsecurityexpensesfor start-ups,he says.We need to welcome innovators andentrepreneurs, even if their productsand services might disrupt establishedsectors.

Thegovernmenthas recentlypasseda law making fundraising throughcrowdfunding easierand lesscostlyforsmallcompanies.It is preparinglegisla-tionto giveincentives to investmentin

researchand development and providetaxbreaksto companiesthat spendoninnovation.

The politicians are jumping on thetrainbutthey dont fullyunderstandthepotential, said Andreas Tschas, co-founder and chief executive of thepioneers festival, and an expert onAustrianentrepreneurship.

Hesaysthatdespitethesuccessofthefestival, it wasa struggleconvincingthecitythatbackingit wasa goodidea.Weareclappingourselves onthe back,hesays. But Vienna is not really on the[start-up]map . . . Yet.

Thatsaid, a numberof Austrian start-ups attracted attention at the festival.Noki, a companythat buildselectronicdevices that allow keyless and remoteaccess to homes, raised a targeted125,000 in funding in less than ninehours.

Bri.Tech, a company that hasdesigned bone implants that dissolvenaturally, removing the need for p ost-operation surgery, has recently raised6mandexpectsto launchon themar-ketwithintwoyears.

Thecitys authoritiesare bankingonmaking up for what Vienna lacks instart-up name recognition with gener-ous funding options. In March,

Viennese venture fund Speedinvestlaunched its second fund, which at60mis thelargestraisedin Austria.

The government recently passed alawthat removesany personaldeclara-tion obligations for investments of lessthan 5,000 and any declaration forcompanies raising less than 100,000.Full prospectus obligations have beenscrapped for any fundraising less than5m.

If thatmanages to stimulate Austriancrowdfunding to EU average levels, itshould drum up an extra 60m a yearforyoungcompanies.

That private capital will join alreadygenerouspublicgrants andfunds madeavailable to entrepreneurs, suchas the68.5m government-backed AWSFounders Fund, and a double equityinitiative that means growingcompanies can get up to 2.5m in acollateral-free loan that is 80 per centguaranteedby thestate.

Themost interesting thingaboutthecity now is a combination of privatemoney and public grants, says MrBosek, who has privately invested intwostart-upshimself.

Itwouldmake sensetocreatea veryspecialenvironment forstart ups here,headds

Sights set onfostering a

generation oftech start-ups

Investment Public funds arehelping build a rivalto London, Parisand Silicon Valley, saysHenry Foy

Technoshow off:

a dancingrobot

onstage atthe

Pioneers Festival

inMay

Weare

clappingourselves

on theback,

but Vienna

isnoton the

map . . . Yet

vienna as a business location

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