Hungary’s private banking sector is not about to rival that of Austria, let alone trouble the gnomes of Zurich. But after suffering a crisis of confidence in 2012, it has been expanding without pause ever since, says industry specialist Blochamps Capital.
Hungary’s Private banking sector, designed to attract the savings of the wealthy, saw its total assets under management rise to a record HUF 4.135 trillion (EUR 13.2 billion) last year, a 7% increase on the 2016 figure, according to the latest study by Blochamps Capital, a Budapest-based private banking advisory firm.
Moreover, given the economic outlook and supportive taxation environment, this trend is set to continue.
“I expect the sector to see a compound annual growth rate of some 10-12% from now to 2020,” István Karagich, chief executive, Blochamps, told invited financial journalists on March 1, adding: “That segment of the population with more than HUF 3 bln in assets will grow by more than 50% in the next five years.”
Hungary has some 15-17 private banking institutions (the exact number depends on how the term is defined), serving 18,000-20,000 “High Net Worth Individuals” - the industry term for the rich, who typically hold two or three accounts each.
According to Karagich, the market is led by OTP, which boasts some 21,800 accounts - half the sector total, with assets under management of HUF 1.515 tln, more than three times that of second placed Friedrich Wilhelm Raiffeisen PB.
However, the story is not all about expansion. Market consolidation, primarily caused by the decision of Citibank to sell its Citigold high-end operation (see box) meant some 8,000 accounts were transferred last year to Erste’s “Erste World” banking segment, a classification one level below genuine “private banking” status.
This, together with pressure to reduce costs, has meant a reduction in account numbers, from 48,000 in 2016 to 42,335 last year, a shrinkage of 12%. Blochamps estimates the sector employs about 380 staff today, a contraction of nearly 1% on 2016.
Nor has the going always been serene: Karagich declines to reveal names but says recent changes of ownership and management have resulted in convulsions in some operations, with key relationship managers, the professionals who work face-to-face with clients, unhappy with the changes and jumping ship.
“I have excellent contacts [in this industry]. People talk to me, and I would say two or three banks have had management issues. Private banking is very personal: it’s not like fund management,” Karagich told the Budapest Business Journal.
Furthermore, in this period of record-low interest rates and quantitative easing, private banking has struggled to offer its clients satisfactory returns on capital - a problem exacerbated in Hungary by client aversion to investing in stocks.
“We’ve largely missed out on the recent stock market boom,” says Karagich. “Hungarians typically want to hold about 15% in stocks. In the West, it’s more like 35-45%.”
The industry is also facing “huge costs” in complying with MIFID II - the acronym for the latest set of European financial regulations which came into force at the beginning of 2018. These outlays are likely to force more consolidation within the next 24-36 months, Blochamps argues.
Nonetheless, the sector has come a long way since 2012, when assets under management declined by around HUF 87 bln. “For years it was a challenge to convince people to keep their money here,” says Karagich. “The taxation system now is excellent; we will see more growth.”
The swish world of private banking is available in Hungary at a significant discount compared to the United States. “You really need USD 1 million in New York to start an account,” says István Karagich, of Blochamps Capital. “If you are handsome, or well connected, you might be accepted for half that. But, with quantitative easing and cheap loans, the banks have got more choosy,” he says.
Unsurprisingly, Hungary is in a different league: according to Blochamps, the entry threshold varies from as low as HUF 10 mln (USD 39,000), though most banks require something in the range of HUF 30 mln-100 mln (USD 120,000-390,000).
A quick check on a handful of websites found some banks taking banking secrecy so seriously that they fail to reveal their minimum balance requirements. Raiffeisen - specifically Friedrich Wilhelm Raiffeisen PB - was one exception. It’s most informative website (in Hungarian and English) stipulates HUF 70 mln (USD 275,000) as the threshold balance for “preferred private customer status”. But it allows no slackers: any dip below HUF 50 mln and the client risks the ignominy of reclassification to mere “retail customer” ranking.
All banks promise service with a smile, at least when they want your custom: but it’s when they pull out of the market that you really know if they mean it. At such times, the service can suddenly turn short and sour.
So, when Citibank decided in 2014 to off-load Citigold Hungary, it’s premium retail operation, clients were understandably concerned. They needn’t have worried. According to Blochamps’ Karagich, Citi took pains to ensure customer satisfaction to the end. “There were three or four potential buyers, all trying to negotiate terms, but Citibank U.S.A. insisted it would sell only if service standards were maintained,” he told the BBJ.
It meant that when Erste Bank Hungary completed the sale in early 2017, Citi’s 8,000 clients completed a smooth transition to their new bank.
Those meeting the HUF 70 million entry threshold moved into Erste’s full private banking services, while the majority, slotted into the Austrian provider’s “Erste World” customer segment.
“This was a very good commercial for Citibank,” says Karagich. “The big winners were the Hungarian clients. They should be very grateful to Citibank U.S.A. for this.”