Fragmented SEE banking sector leaves room for further consolidation

By Radomir Ralev

Hungary’s OTP Bank has been the most active player on the region’s M&A scene in the past years after buying Croatia’s Spitska Banka from Societe Generale in 2017 and then six more of the French group’s units in the region – in Albania, Bulgaria, Montenegro, Moldova, Slovakia and Serbia – in 2018.

Gabor Kolics, managing director of M&A Coordination Department, OTP Bank

Why did OTP Group choose to expand via acquisitions in Southeast Europe (SEE) at a time when competitors prefer to focus investment in digitalisation of services?  

Although OTP Group indeed has been very active in terms of acquisitions in recent years, this was definitely not at the cost of cutting back investment in digitalisation.

OTP has always been a frontrunner in innovation in Hungary. OTP is the market leader in Hungary in terms of digital developments and utilisation of alternative channels and digital services by the clients. Just to mention a few examples: online-available products now include cash loans, overdrafts and building society accounts. In 2018 21% of cash loan applications were initiated online. OTP was a pioneer on the Hungarian market in setting up a mobile application called Simple, integrating non-banking services (like movie ticket purchase or parking) and catering for about 750,000 customers, and it was also OTP that made available Apple Pay on the Hungarian market. The introduction of Apple pay was a huge success, the number of registered users was 10,000 in one hour, and 30,000 in two days after the launch of the service. Our efforts in innovation are also recognised by the market, OTP Group was named the “Best Digital Bank” for the third time in 2019 by Global Finance, and OTP Lab – the innovation hub of OTP – was chosen among the TOP 25 financial innovation labs in the world also by Global Finance.

There was a time when we thought that online banking would completely take the market away from traditional banks, but now we see the most successful banking model in the world is when a financial institution has traditional banking channels, branches, and it also has advanced digital channels. For the time being, a significant number of customers still require non-digital care. According to surveys, a significant proportion of customers have greater confidence in banks that have traditional accounts and know that if they have a problem they can go to a banking associate. Of course, I can’t predict for sure what will happen in the future, digitisation will obviously continue to grow, but over the next ten years, truly successful banks I think will be strong, advanced and active on both channels.

Our customers are satisfied with our digital services and are very happy to use them and OTP is committed to leverage its know-how in digital innovation in the countries where we operate.

Referring back to our recent acquisition track, besides the strong organic growth of our loan book since 2016, we had almost a 60% growth through acquisitions, which is outstanding in the European banking universe.

Do you have plans for new acquisitions? According to media reports, OTP is interested in the privatisation of Serbia’s Komercijalna Banka. 

In general, our acquisition strategy is determined by seeking acquisition opportunities that will allow us to achieve the optimal size. We do not name specific targets in any markets, the most we usually say is that the primary focus is the Central and Eastern European region.

In Serbia, at present, following the merger process of Vojvodjanska banka with OTP banka Srbija, which we closed in April this year, OTP Bank is primarily focused on the smooth and successful operation of Vojvodjanska banka. Looking further ahead, with the upcoming completion of the SG Srbija deal, which is expected in a short time, OTP Bank’s market share will be even higher in the country, most probably meeting our targets for optimal size and market share in Serbia.

In May, Sandor Csanyi, CEO of OTP Bank Group, said that OTP is interested in entering North Macedonia and Kosovo. Which banks attract your attention? Are you avoiding the Bosnian market for the time being?

Growth through acquisitions is not a completed process: acquisition options in the CEE region are continuously being evaluated. Our excellent capital and liquidity positions make this possible.

With such a rapid expansion, what is the chance of OTP becoming a takeover target itself? 

The shareholder structure of OTP Group has always been diverse, with only a few investors exceeding 5% shareholding, and the majority of investors being institutional investors owning less than 5% share. We do not expect any change in that. Moreover, recent expansion resulted in an all-time high share price and market capitalisation (10.7 billion euro on August 14, 2019), making a takeover much more difficult.

Will the expansion of OTP serve as a conduit for increased Hungarian investment in SEE?

OTP Bank has been one of the most active financial institutions in the European acquisition market. Following the crisis, new transactions started in 2014 and since then OTP Bank, has announced the purchase of 11 financial institutions and banking portfolios in nine countries – out of which only two transactions have not been closed financially – and entered new countries such as Albania, Moldova and Slovenia. With this unique acquisition performance, OTP Group has become the most active banking market consolidator in the CEE region, substantially improving its market position and strengthening the profit contribution of foreign group members.

Our current and future clients also benefit from our investments, as they receive more and more discounted services, such as cheaper cash withdrawals or discounted transfers between banks in different countries.

The strategic goal of OTP Group is to become the most successful universal banking group in Central and Eastern Europe. We believe in the future of the region and will actively contribute to its development. As part of our strategy, we strive to increase our share through organic growth and acquisitions in all our markets where we are already present. In all cases, our goal is to achieve optimum operational size and to leverage OTP expertise in regional markets with the interests of our shareholders in mind. Moreover, we are constantly examining new opportunities, in addition to the member countries in new markets, further strengthening our position in the region.

What are the advantages and shortcomings of the SEE banking sector? Do you expect the consolidation process in the region’s banking sector to continue?

OTP Group has always believed in the region as economic growth in the SEE often exceeds growth of Western European economies as we saw both before
the crisis and in recent years. OTP has gained comprehensive market knowledge during the almost two decades since our first acquisition in the region. We believe that we have learned how to operate a sustainable business model to deliver profit and growth while maintaining stability in terms of portfolio quality, capital and liquidity position.

We expect the consolidation process to continue further. The main driver of consolidation will continue to be the strive for economies of scale as the SEE banking sector is still fragmented with many small-size universal players in the market.

What will be the effect of a potentially continuing lax monetary policies of the Fed and the ECB on the banking sector in SEE? Do you expect ECB to tighten once Christine Lagarde takes over at ECB president? 

The already lax and very likely soon further loosened monetary policy of the FED and the ECB helps not only the US and the Eurozone, but also Southeast Europe’s economies through several channels. First, the ECB’s support of economic activity in the Eurozone results in stronger demand for SEE exports and tourism services. Lower interest rates in the Eurozone help to keep the euro weak, which also benefits SEE economies. Looser monetary conditions in major economies also mean lower debt service on FX debt, which is also a positive factor, taking into consideration that the SEE countries are usually strongly euroised.

Finally, local currency interest rates could be kept at low levels, which also supports these economies. As domestic inflation pressure would not call for rate hikes in most of these economies, negative effects are negligible.

We definitely do not expect the ECB to tighten soon. On the contrary, due to persistently weak economic activity and low inflation pressure in the Eurozone, we expect further monetary loosening in line with the consensus and the communication of the ECB. Rate cut(s) could be round the corner and a new asset purchasing programme is likely to be launched before the end of October.