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Erste Hungary CEO on govʼt deal, non-performing loans

While he cautions that recent moves by the government could be a deal breaker, Radovan Jelašić talks about his bank’s plans to sell an ownership stake to the state and to increase its lending activities here.

Radovan Jelašić: ‘A new era in the relationship of the banking sector and the Hungarian government.’ (Photos: Mátyás Pődör)

Erste Bank plays a key role in the government’s plans for the banking sector. In a memorandum of understanding signed with the European Bank for Reconstruction and Development (EBRD) in February, the government promised to lower the banking tax, to refrain from placing undue burdens on the banks in the country, and to take other steps to improve conditions for banks here. In conjunction with that agreement, Erste Hungary agreed to sell 15% ownership stakes to both the EBRD and to the Hungarian state. In line with the government’s strategy, Erste has been increasing its activities here and in September the bank said it had agreed to take over the retail business of Citi in Hungary.

But in April, the government passed a law requiring banks in Hungary to add to a fund to compensate people who lost money when the Quaestor brokerage went broke, apparently due to fraud. Local banks rejected the idea that they should be forced to contribute to the compensation fund.

On November 6, Andreas Treichl, CEO of the Austria-based Erste Group said the Quaestor fund could be a deal-breaker, and that Erste was reconsidering selling its stake to the government. On November 17, the Constitutional Court ruled against the law to force banks to pay into the so-called “top-up” fund.

The Budapest Business Journal spoke to Erste Hungary CEO Radovan Jelašić about the deal with the state, as well as the role that Erste is planning to play in the government strategy – and in the Hungarian economy.

Jelašić (Jelasity Radován in Hungarian) was governor of the National Bank in Serbia between 2004-2010. He was born in Baja, Hungary, in 1968.

Where does the deal with EBRD and the Hungarian state stand right now?

We are working with full speed on this transaction: We are hoping that by the end of the year we can have an agreement in principle. For signing contracts, to have the entire legal documentation and the financial part of the transaction, we will definitely need the first quarter of next year. Of course, we have to be aware that this transaction is conditional on the Memorandum of Understanding (MoU), which includes no additional burdens on the banking sector – read no additional burden regarding the Quaestor fund as well. We also hope that the rate of the bank tax cut will remain as it was originally set and will not be modified by Parliament.

In light of State Secretary Ágnes Hornung and Minister János Lázár’s recent statements, do you think the government is committed to pushing through the deal with the original conditions?

The MoU started a new era in the relationship of the banking sector and the Hungarian government, with some involvement of the EBRD, as well. We are pleased not only to hear the continuous support from the government representatives but also to see concrete deliveries based on that document: The law on private individual’s bankruptcy, the conversion of foreign currency loans to forint ones, regular meetings between the Banking Association, the banks, the central bank and the ministry, the development of new tools to be used now by the central bank for the new growth program. Additional statements from ministers and state secretaries stating their commitment provide us with a high level of confidence that the government is going to do whatever is needed in order to deliver on that.

Certain elements of the central bank’s new “Growth Supporting Program”, such as the interest rate swap or lower capital requirements for credit institutions willing to step up their lending to SMEs, seem really favorable for banks.

This program is definitely music to our ears. We committed ourselves in the MoU to increase our lending anyway in three areas: Agriculture; public sector employees; and energy efficiency. This program will help us deliver on that. I am confident that banks thinking long-term in Hungary and interested in increasing their stake in lending are fully going to utilize it; Erste definitely wants to be a top user of this credit line.

What impact will the program have on debtors’ confidence and borrowing?

Not only Europe but Hungary as well is swimming in an excess of liquidity. Although we are trying to increase the amount of credit to our SMEs, the utilization is substantially lower than previously. Early repayment from our clients is significant; they prefer to use their own money and not get indebted. But it is crucial that there is a growing level of confidence: GDP is growing, the budget is stable, public debt is decreasing, interest rates are at record low, etc. We do hope this is going to contribute to improved lending.

Part of the new scheme will allow banks to acquire from each other clients who have been tied to their bank with long-term NHP loans. Do you think the “Growth Supporting Program” will stir up the market?

People generally underestimate how difficult it is for clients to pick a new bank. It is surprising (for us and the central bank) how few clients want to change banks. Once banks notice their client wants to change, they first improve conditions, than create administrative burdens. Those clients who take the effort and go fishing for better offers usually stay at the original bank, which will refinance them at the best possible offer the client received from a different bank.

Will the new scheme change that? Will banks be willing to acquire more clients from each other?

Ours is definitely an aggressive bank; ready to grow both organically and via acquisition, which is rather atypical today. We love competition and would like to see that clients are much more proactive. On the other hand, defensive and monopolistic banks know exactly where to find the point while still keeping a relatively high margin and avoid a steeper change, saying that all banks will eventually charge the same. The pricing of banks is not the most transparent either. All these factors contribute to the fact that the vast majority of clients are not changing [banks]. And this is why we decided that if we want to grow in such an environment, the best thing to do is acquisition – so we acquired Citi’s retail business.

The other reason for the acquisition was that we want to be an active contributor to the consolidation of the banking sector and move forward. If I look around, there is no other player in Hungary right now who is following a similar strategy. Not even more profitable banks or those that have lighter baggage to carry from the past are as active as Erste. I hope that this is going to be appreciated not only by the government but the Hungarian central bank as well. They say that there should be no more than six large banks; we will be one of them.

Many of Citi’s services are of a very different nature than those of Erste Bank Hungary – what do you plan to take over from them?

They are the best in class with regards to credit card service, wealth management and they have very good call centers and agent networks – so there is a lot we can and have to maintain. At the same time, our product range is much bigger than Citi’s so, for example, those clients can have a mortgage loan or a building society contract, too. We hope we would be able to commit those who have had only a part of their banking services with Citi to bank exclusively with Erste in the future.

Our target toward clients is that we want to make sure that the customers transferred from Citi to Erste will notice basically nothing. We work on a huge IT project in the background to ensure that the service level is the same as when it was maintained by Citi. We can – and will – retain the best people, and out of these two good banks we can make an even better bank. We will be the largest credit card provider in the country, the number two in the retail loan portfolio; regarding the number of clients, we will be approximately the third.

Modernization/digitalization has a cost side, not to mention the challenges fully digital banks pose.

This challenge has been around for nearly a decade, everybody has been writing off branches for years. Although I definitely don’t think we need 130 branches in Hungary, our almost one million clients do need the personal contact. Slowly, but surely we are moving many responsibilities from the branches to call centers, internet and mobile applications. In a couple of years, other channels, which have already improved efficiency in our branches, will become more important.

Are you planning to close branches in the short run?

We are not planning to shut down any: if we look at the number of clients, transactions, interfaces we have, our branches are among of the most efficient – not only in Hungary but within Erste Bank Group as well. Compared to some competitors, our strategy is not to go backwards and solve the problem of profitability exclusively by cutting costs, but rather through acquisitions and increasing efficiency.

Economies of scale will substantially improve with the Citibank transaction; our cost of completion should also come back to below 50% in 2016-17. If loans are performing even with lower margins in an improving macroeconomic environment, we can be profitable.

Like many banks, Erste Bank Hungary has built workout groups to deal with its non-performing loans (NPLs). What is going to happen to them?

The corporate workout department will be dissolved by the end of the year. We have sold and solved the vast majority of the portfolio, so we don’t need such an organizational unit anymore. The majority of our claims were sold and realized in such a way that we did not have to suffer losses on them. During the last 12 months we have also seen a massive improvement in real estate NPLs as well. GDP increases, the MoU, growing confidence, the country having a positive outlook – let’s be frank: if you look at the fundamentals, this already is an investment grade country. All of these contribute to the fact that the demand for real estate NPLs has increased. We are benefitting from that by selling substantially above the book value. The appearance of MARK Zrt. has affected the process positively, too. Buyers also realize this is the time to bring forward their purchases before they are taken by MARK Zrt. We are still waiting for the first concrete prices from it, as it is going to set a new benchmark for these transactions.  We are also actively working with it on the sale of some of our real estate NPLs.

How big is Erste Bank Hungary’s NPL portfolio?

We are still talking about 21% NPL share in our portfolio – but this is continuously decreasing. Some of the largest transactions will be finalized in a few weeks.

How long until the NPL portfolio is cleared?

If you had asked me a year ago, I would have told you the sooner, the better. Now that I see the upside we can make, we are rethinking the compromise between selling fast and selling at the best possible price. I am ready to take the risk of keeping some of these assets a little longer in order to realize a substantial profit.

One aim of the “Growth Supporting Program” is to bridge the gap in corporate financing until the next round of EU funds starts to come in. This program still being an artificial tool to boost lending, what do you think of the central bank’s room for maneuver/involvement in the lending process?

The time when central banks could lean back and say, “we are only in charge of price stability, the market will take care of the rest” is over. The central bank in Hungary took a proactive role in trying to solve the problems of banks inherited from the past – offering some “carrots” and to support increased lending. We welcome every tool to increase lending in Hungary, as it is a win-win for all participants.

Wouldn’t investors rather see an environment that is safe to invest in?

Here the future is far more important than the past. The reason why Hungary does not have an investment grade today has nothing to do with economics or macroeconomic data. It only has to do with a bit more time the country needs to make sure there is much more confidence among all the actors and rating companies get more “hard-core evidence” that we are starting a new era with the MoU. I think it is a matter of weeks before this country will receive something it has deserved anyway because of the macroeconomic data – and that’s an investment grade.