When Hungary's revamped Socialist-dominated coalition government recently decided to impose a special tax on banks to help narrow its budget deficit, prime ministerdesignate Ferenc Gyurcsány sought an audience with the country's top banker, Sándor Csányi. Instead of summoning Csányi to his office, Gyurcsány went to see the banker at the headquarters of OTP Bank. Csányi then persuaded the prime minister to amend the proposed tax to make it less onerous for OTP than for its foreign-owned competitors.
Such is the power wielded in Hungary by Csányi and OTP Bank, or National Savings and Commercial Bank. The bank has been more successful than most in Eastern Europe in defending its domestic franchise in the face of intense foreign competition -- and without the backing of a strategic Western partner. Csányi's considerable political influence hasn't hurt, but it is really his commercial prowess that has helped the bank thrive. By attracting some of the country's best bankers, marketing aggressively and investing heavily in information technology, OTP has retained control of about 21 percent of all bank lending in Hungary, 43 percent of retail deposits and 55 percent of outstanding mortgages.
"OTP is still the colossus and surprising everyone," says Aris Bogdaneris, who recently stepped down as chief executive of Budapest Bank, a subsidiary of GE Capital, to become head of retail banking at Austria's Raiffeisen International Bank-Holding, a major OTP rival. "Everyone thought the foreign banks would come in and eat their lunch. It hasn't happened."
Csányi, 50, is now looking to extend his bank's reach throughout Central and Eastern Europe. OTP is building out small banks in Slovakia and Romania that it acquired in the past two years and is applying its retail expertise at DSK, the Bulgarian retail banking leader that it bought last year. Csányi is also bidding for banks in Croatia and Serbia and looking for possible acquisitions from Turkey to Ukraine. That expansion makes OTP the only homegrown player with the ambition and scale to rival the regional networks of Western banks like HVB Group's Bank Austria Creditanstalt and UniCredito Italiano. Csányi's ultimate aim is bolder still: to double OTP's E6 billion ($7.8 billion) market capitalization within five years and enable the bank to look for acquisitions in Western Europe.
"I would like to be a European bank and among the biggest ones," Csányi tells Institutional Investor. "For us the first step is to be a regional bank. We have good experience in how to restructure the bank, which products can be interesting, how to sell. I think this knowledge can be used very well in Central and Eastern Europe."
Fulfilling Csányi's vision is a daunting challenge. Foreign banks, mostly Western European, have taken advantage of privatization and market openings over the past decade to seize control of nearly 75 percent of the sector in Central and Eastern Europe. OTP faces rivals with deeper pockets in nearly every market it seeks to enter. What's more, those rivals are working actively to erode its dominance in Hungary, one of the most competitive markets in the area. Almost every foreign bank with regional ambitions -- Austrian, Dutch, German, Italian and even American, like Citigroup and GE Capital -- has a subsidiary in the country, and most are looking to expand, including Austria's Erste Bank, which last year acquired Hungary's No. 2 retail player, Postabank, for E394 million.
Economic conditions aren't getting any easier, either. Hungary hiked interest rates to the highest levels in the region as a result of a brief currency crisis late last year. That has cooled the pace of loan growth. Bankers also face the Gyurcsány administration's new tax in 2005, which could trim profits by as much as 10 percent.
Despite those hurdles, few bankers are prepared to sell OTP short. Csányi has succeeded in revamping the bank's technology, product offerings and marketing over the past decade, enabling OTP to grow profits tenfold since 1995 and increase its market cap almost 30 times over. With some E15.5 billion in assets, the bank is the sixth largest in the region, behind the networks of Belgium's KBC Group, Erste, Bank Austria Creditanstalt, UniCredito and Raiffeisen.
Earnings surged by 56 percent in the first nine months of 2004, to E442 million, fueled by high interest margins in Hungary and the contribution of DSK. Csányi confidently predicts that annual earnings will rise to E1 billion in three years' time. Return on equity was a stellar 33.5 percent in the first three quarters, compared with the European average of about 16 percent.
"OTP has done a good job positioning itself as a major player," says Kurt Geiger, head of the financial institutions group at the European Bank for Reconstruction and Development, which holds a roughly 2 percent stake in OTP. "Their strength is really knowing the reform process and transition. That experience could be applied in countries that have made less progress."
Foreign investors, who own 83 percent of the bank's shares, are eager to buy into OTP's expansion strategy. Bank lending grew by 18 percent in Central and Eastern Europe last year, compared with a rate of less than 5 percent in the 12-nation euro zone, and countries like Bulgaria and Romania grew by nearly 50 percent, according to Bank Austria Creditanstalt. Most Western European banks active in the region still derive the bulk of their profits in their domestic markets, but OTP offers a pure play on the region's robust growth.
"We see OTP Bank as not just a Hungarian play but a play on Central and Eastern Europe," says Alexander Karpov, who helps manage E450 million in equities in the region for Union Investment in Frankfurt. "We are looking for exposure to countries like Bulgaria and Romania." Union owns some E40 million of OTP shares. "It's one of the top picks in the long term," says Karpov.
"They are at the sweet spot of growth in consumer credit and mortgages," says Douglas Helfer, who helps manage $4 billion in emerging-markets equities at F&C Asset Management in London. "They've proven themselves to be very dynamic, anticipating competition and introducing new products."
THE ROOTS OF OTP'S SUCCESS LIE IN HUNGARY'S early efforts at financial liberalization. Until the 1970s banking in Hungary, as in most of the Communist bloc, was a three-ring circus, with a national bank for lending to industry, national savings banks for retail deposits and a foreign trade bank. Gradually, Hungary opened itself up to trade with, and investment from, the West more than any other Soviet satellite in the Warsaw Pact. To facilitate that activity, the National Bank of Hungary in 1979 established a joint venture commercial bank, Central-European International Bank, with a group of European and Japanese banks. Today it is the country's fifth-biggest bank in terms of assets and is wholly owned by Italy's Banca Intesa. In 1986 the National Bank established two more joint venture banks, now wholly owned subsidiaries of Citigroup and Raiffeisen, respectively. The following year, the National Bank spun off all of its remaining commercial activities and restricted itself to a purely central banking role.
The early liberalization created Eastern Europe's most dynamic banking market and fostered the development of a cadre of managerial talent unmatched in the region. After the collapse of Communism, foreign banks rushed in to acquire the National Bank spin-offs in privatizations. KBC picked up the Commercial and Credit Bank, or K&H, the No. 3 bank by assets today; GE Capital acquired Budapest Bank; and ABN Amro grabbed the Hungarian Credit Bank, or MHB. Others, such as Bank Austria Creditanstalt and ING Group, built local subsidiaries from scratch. The foreign banks focused on corporate lending, seeking to capitalize on fat lending margins and the influx of foreign investment into Hungary.
OTP, meanwhile, had served as a safe but stodgy repository of savings since it was established in 1949 as the country's sole savings bank. In 1990, just after the fall of Communism, the bank still held 93 percent of all retail banking deposits and made 98 percent of all household loans. But despite its dominance, OTP was a relic of decades of shoddy management. "We were a bank with bad services, long queues and no profits," says László Wolf, the deputy CEO in charge of commercial banking.
The government brought in Csányi as chairman and chief executive in 1992 to get OTP in shape for privatization. An economist and chartered accountant by training, Csányi obtained a Ph.D. at the University of Economics in Budapest in 1983. His thesis, prophetically, was titled, "The Present Aspects and the Prospects of Development of Retail Crediting and Collecting Retail Deposits." He then became a high-flying official in the Finance and Agriculture ministries before joining National Bank spin-off MHB. He later worked as deputy CEO at K&H, another spin-off, from 1989 to 1992. His government contacts and banking experience made him a natural for the job at OTP and have played a big role in the bank's growth ever since.
Those factors have made Csányi a wealthy and well-connected man. His personal holdings include a E40 million stake in OTP, a 25 percent position in U.S.-based Atlas Telecom's new Hungarian telecommunications network, prime Budapest real estate, vineyards, a munitions factory and a dairy company. A local newspaper, Magyar Hirlap, ranked him as Hungary's ninth-richest person last year, with a net worth of about E70 million; many bankers believe his actual worth is several times higher. He has seats on the boards of MOL Group, the Hungarian oil company that, like OTP, is expanding throughout Central and Eastern Europe, and of the Hungarian Bank Association, which makes him the industry's point man for lobbying the government, as his negotiations with Prime Minister Gyurcsány demonstrated. "He's almost like the godfather of banking," says a rival banker.
Csányi makes no attempt to deny his clout. "Of course anyone who has a big role in the economy has influence," he says. His first-floor office at the bank's central Budapest headquarters looks more like that of a cabinet minister than a CEO, with dark oak paneling, boxy leather chairs and oil paintings of hunting scenes on the walls, a nod to his favorite pastime.
Csányi grew up in the small town of Jászárokszállás, in a rural area some 100 kilometers east of Budapest, the son of a field ranger of an agricultural cooperative, and developed a lifelong love of the woods and hunting. He relaxes by going to his lodge in southern Hungary, near the Croatian border, and hunting boar and deer. Colleagues say he tells them that the quiet and concentration of the hunt help him to focus his mind. Interestingly, it's a relatively common passion among chief executives in Hungary.
"What golf is for U.S. executives, hunting is for these guys," says one executive who knows Csányi well. "It's an opportunity to relax, reflect and meet to discuss business."
Csányi wasted little time in instilling a commercial culture at OTP. He slashed the top management ranks by nearly three quarters, from 215 to 65, in his first 18 months. He also launched a relentless cost-cutting program that reduced the bank's staff by more than 50 percent, from 16,500 in 1992 to just over 8,100 today. He plans to cut an additional 1,000 jobs over the next year by centralizing back-office functions and making OTP branches pure sales outlets. The bank's cost-income ratio stood at 54.1 percent at the end of 2003, below the European average of roughly 60 percent.
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Besides cutting costs, Csányi poured his then-limited resources into developing the bank's own technology platform to offer checking accounts, then virtually unknown in Hungary. He also used the bank's biggest asset, its nationwide network of nearly 400 branches (440 today), to sign up new clients. With those assets he went after government and corporate customers across the country, offering them the ability to pay salaries electronically and allowing workers to pay their utility and tax bills by direct debit. Today virtually all employees of the national government and more than three quarters of municipal workers -- a total of some 500,000 people -- have accounts at OTP.
The bank has maintained its emphasis on technology, introducing successively debit cards, Internet banking and transactions by mobile telephone. It dominates all of those segments today with more than 50 percent of the Hungarian market. OTP also boasts more than 1,100 automated teller machines, nearly half of all ATMs in the country. "Now we can offer a very wide selection of products and a very good service," says Csányi.
The banker also played a key role in persuading the government to privatize OTP in a way that would keep it in Hungarian hands, over the objections of thenFinance minister Lajos Bokros, who wanted to sell it to a foreign bank. It wasn't an obvious decision at the time, given the advantages and richer price that a sale to a foreign institution could have brought, but OTP's improved performance and the desire for a national champion won the day. The government sold a one-third stake for $89 million to Hungarian and foreign investors in an IPO in 1995; it sold an additional 39 percent in two further offerings in 1997 and 1999. The remainder of the shares were given to Hungarians whose property had been expropriated under Communism.
Far from being a disadvantage, the lack of a strategic partner allowed OTP to tailor its technology platform, products and pricing to the Hungarian market rather than importing systems and managers from abroad. Csányi "did the right thing," says Péter Kisbenedek, chief executive of Erste Bank Hungary. "He selected good people around him. They modernized the bank and managed to keep more of their clients than anyone would have expected. It's his achievement."
Today foreign institutional investors own 83 percent of OTP, the EBRD and other international investors about 2 percent and Hungarian investors 4.4 percent. Management and employees have 3.1 percent and the bank itself the remainder. The government retains a single preference share, which gives it a say over any change of management.
Many bankers believe Csányi owns much more of OTP than the 1.87 million shares, or 0.7 percent stake, that he discloses in the bank's financial statements. Some speculate that he owns as much as 25 percent through offshore accounts. "Nobody knows how much he has indirectly," says Éva Várhegyi, a financial consultant and board member of the Hungarian Central Bank. Even the EBRD admits to being in the dark. "We of course would support transparency about ownership," says the bank's Geiger. Csányi insists he owns only the shares that the bank discloses.
Bokros, the former Finance minister who had advocated a strategic investor for OTP to improve transparency at the bank, worries that management's ownership stake poses a potential conflict of interest and gives Csányi undue political influence. He regards OTP as symptomatic of a deeper problem in Hungary. "There is a fight going on between an open, democratic society and an oligarchic one. It's a fight for survival for everybody," he says.
IN HIS EARLY YEARS CSANYI SET ABOUT PICKING A team of top-notch bankers. He considers talent spotting his greatest strength. "If I go anywhere, I always look at the people," he explains. "I try to set up a database -- who can be good."
He met Wolf, a former National Bank official who moved to Dresdner Bank, in the early 1990s when the German bank was considering a bid for K&H, where Csányi then worked. He brought Wolf to OTP in 1993 and made him deputy CEO in charge of commercial banking a year later. Today Wolf hunts for foreign acquisitions for the bank. Deputy CEO Csaba Lantos, who joined OTP as head of retail banking in 2000, was CEO of Creditanstalt in the 1990s and met Csányi when the Austrian bank advised the Hungarian government on OTP's privatization. He was surprised to get a call from Csányi a few years later. "He got the idea that I could do retail," he recalls. "It wasn't obvious."
Csányi retains and motivates his team with generous helpings of stock options. Fully 80 percent of the compensation of the bank's top 70 executives is based on OTP's performance (for Csányi, the figure is 90 percent). Roughly three quarters of that performance-related pay is in the form of stock options, which are granted if the bank fulfills 80 percent of some 100-odd benchmarks, including a real return on equity of more than 19 percent, a return on assets of more than 1.75 percent and profit growth exceeding the inflation rate by at least 3 percentage points. The executives also receive performance-related bonuses.
"It's very efficient because they can lose 80 percent of their income," Csányi says with a smile. So far his team has done anything but lose. The 3.1 percent stake owned by managers and employees is worth E183 million. Wolf has a stake worth E16 million, and Zoltán Spéder, the deputy chairman and head of strategy, owns E30 million. "They're tremendously loyal to him," one competing banker says admiringly of Csányi's team. "OTP is more than just a bank."
After defending and modernizing his base, Csányi broadened OTP's offerings with the aim of being a top-three player in every major market. His domestic empire includes the Merkantil Group, an auto loan subsidiary that controls 20 percent of the Hungarian market; OTP Building Society, a savings and home loan business; OTP Mortgage Bank, an issuer of mortgage-backed securities; OTP-Garancia Insurance, the country's fifth-largest insurer; and OTP Fund Management, which, with some E2.6 billion under management, controls nearly half of the Hungarian mutual fund market.
"We're the largest and broadest group in Hungary," Csányi notes. "My policy is to be first in every new product."
OTP's market share has eroded steadily despite all the innovation, a hard fact of life for a bank that started as a monopoly. But its success in Hungary's red-hot mortgage market shows just how powerful its franchise can be.
The bank had seen its share of new mortgage lending fall from more than 90 percent historically to 43 percent in 2001. Then the government introduced a program that provided subsidies of as much as 6 percentage points on mortgages of up to 30 million Hungarian forint (about E120,000). Lantos, the head of retail banking, saw a clear opportunity.
"I felt, okay, this is my time," he explains. "If I can react faster than everybody else, we have the opportunity to turn it around." He changed reporting lines and staff in the mortgage division to cut in half the time needed for a mortgage approval, to a little less than two months. He also eased salary requirements for borrowers. Although that sounds risky, Lantos notes that to minimize social security taxes, many small and midsize Hungarian companies give workers the bulk of their compensation in cash. And with a home ownership rate of 93 percent, the highest in Europe, most borrowers have some property in the family to pledge as collateral.
The results flowed quickly as mortgage lending surged by 80 percent in 2002 and again in 2003.
The bank was caught out by a sudden shift in the mortgage market this year, however. Lending cooled dramatically after the central bank drove up interest rates to a peak of 12.5 percent in November 2003 to defend the forint and the government scaled back mortgage subsidies to curtail its big deficit. Several banks responded by offering mortgages denominated in Swiss francs or euros, which carry interest rates of as low as 5 to 6 percent, compared with 14 to 15 percent for unsubsidized forint mortgages. OTP didn't roll out foreign currency mortgages until June, several months after its rivals had. By autumn, half of its new mortgages were denominated in Swiss francs or euros. New mortgage volume was down 9.9 percent in the first nine months of the year, and OTP saw its share of new lending drop to 10.2 percent from 16.1 percent a year earlier.
Despite this year's blip, Lantos believes the mortgage market will continue to grow at a 25 percent annual clip in the medium term as rising living standards encourage Hungarians to seek better housing. The central bank has gradually eased rates to 10 percent over the past nine months, which should help, and bankers expect it to cut rates by another 2 points or so in 2005.
Lantos is also looking for growth in credit cards, which are still relatively rare in Hungary. Thanks to its dominance of point-of-sale terminals in stores, OTP has access to a rich stream of data on consumer spending. This fall the bank began sending out preapproved credit cards to thousands of female customers based on their shopping patterns at hypermarkets. The customers can activate the cards at one of the bank's ATMs. For Lantos, the method is simple. "We try to excavate the current client base and cross-sell, cross-sell, cross-sell. If we can manage it properly, I believe we'll be able to keep the best clients," he says.
On the commercial side, where OTP has a 12 percent share of Hungarian corporate lending, the bank is trying similar tactics in the hotly competitive market for lending to small and medium-size enterprises. Many small businesses are too put off by the time and hassle to even apply for a loan, says Wolf. OTP's response? It copied its retail strategy and sent out preapproved credit lines to 3,000 small business clients this autumn. The bank is also exploiting its internal credit rating system and its army of branch managers, which enable it to approve loans of up to E200,000 in a day or two.
"We have the strength," Wolf says. "We know the market. We know the people. We can decide faster than other banks."
Wolf's other big target is the municipal market, where OTP dominates with a market share of 66 percent of deposits and 57 percent of loans. As a new EU member, Hungary stands to receive E2.5 billion in aid for infrastructure and other projects over the next three years. OTP aims to expand lending by E100 million a year by prefinancing a chunk of that EU aid.
The big challenge for OTP is that foreign banks are raising their game in a bid to grab market share. Erste Bank has just completed integrating Postabank, which it acquired last year. That deal made Erste the second-largest bank in Hungary, with E7.6 billion in assets and more than 250 branches. It expects to grow retail lending by as much as 35 percent this year and by 20 to 25 percent a year thereafter. "As long as OTP has that big market share, that's our main target," says CEO Kisbenedek.
Raiffeisen aims to increase its retail market share to 8 to 10 percent by doubling its branch network to 120 by 2006. "We would like to grow and increase market share," says Krisztina Horvath, deputy CEO for Raiffeisen in Hungary. "If we want to expand in SME lending and retail, we need more branches."
OTP and other banks also face a bigger tax burden in coming years. Hungary's banks have taken advantage of the sharp rise in interest rates over the past year and the mortgage subsidy program to raise interest margins and profits, making them a tempting target for a government desperate to close a deficit of more than 5 percent of GDP. When Gyurcsány was chosen in September to replace departing prime minister Peter Medgyessy, he surprised bankers by proposing an 8 percent surcharge on bank profits.
That's when Csányi showed his clout -- and his canniness. He publicly blasted the proposal and threatened to move jobs offshore to lower-cost countries in the region. Then he invited Gyurcsány to his office and persuaded him to amend his tax to give banks the option of paying a surcharge of 6 percent on net interest income. That change stands to save OTP nearly E10 million in taxes next year because of the diversity of the bank's business -- it generates more than 40 percent of its revenues from fees, commissions and other noninterest activities. By contrast, almost every other major bank in Hungary derives a higher proportion of its profits from lending margins and will pay the 8 percent surcharge on overall profits.
Csányi is unapologetic about his lobbying. "Subsidies were given to the people, not the banks," he says. "The prime minister made a very correct step. He wanted to show he is not an enemy of the banks. I didn't force him to come here."
The big growth opportunities for OTP lie outside Hungary. The bank has acquired subsidiaries in three countries since adopting a regional growth strategy two years ago. In 2002 it paid E12 million for IRB, a midsize Slovakian bank that had to be bailed out by the government in the late 1990s, and renamed it OTP Banka Slovensko. By applying OTP's aggressive retail marketing techniques, the bank managed to increase its customers by 41 percent, to 147,000, in 2003; nearly double deposits, to E429 million; and expand lending by 35 percent, to E427 million. The subsidiary eked out a modest profit of E2.3 million in the first nine months of this year, compared with a break-even result a year earlier, as loan volume surged by 36 percent.
Csányi and Wolf's next target was DSK, the leading retail bank in Bulgaria. Some analysts believed OTP overpaid when it outbid Erste last year and won a government auction for DSK at E311 million. But the bank's big presence in the rapidly growing Bulgarian market -- it boasts 3.7 million customers in a country of 7.8 million people and controls one quarter of retail deposits and 41 percent of retail lending -- has proved a winner. Lending surged by 67 percent in the first nine months of this year, and profits jumped 44 percent, to E26.6 million.
"If you look at the improvement of the bank and the country, I don't think you can say we overpaid," says Wolf.
In April, OTP paid $47.5 million for Romania's Banca Comerciala RoBank, a small player with a 1 percent market share. That's a far cry from Csányi's real ambition. He tried to buy the country's dominant bank, Banca Comerciala Romana, three years ago, but with political tensions running high over the rights of ethnic Hungarians in Romania, Bucharest pulled BCR off the market. Still, OTP has a small foothold in a market that, like Bulgaria's, is growing at a rate of more than 40 percent a year.
OTP aims to generate growth in its new markets by exporting its technology platform and marketing expertise. The bank also hopes to take advantage of growing commercial links in the region. It is offering same-day payment across borders to small and medium-size enterprises. "If we add up all these factors, there's an important synergistic effect," says Wolf.
Wolf hopes to continue growing the bank's regional network. OTP currently is bidding against Société Générale and Russia's Alfa Bank for Jubanka, the fifth-largest bank in Serbia. The government is expected to announce the winner of the auction for its 88 percent stake as early as December.
OTP also is squaring off against SocGen and two local rivals in a bid for Croatia's seventh-largest bank, Nova Banka.
Further afield, Csányi is considering expanding in Ukraine and Turkey, where the incipient economic and political transformations hold out the potential for strong growth for banks, such as OTP, that know how to profit from the transition process. PKO Bank Polski, the newly privatized Polish retail bank that is the only other indigenous player with regional ambitions, bought a 67 percent stake in Ukraine's Kredyt Bank for E24.5 million in August.
Csányi's ambitions aren't limited to Eastern Europe, though. He boldly believes OTP can turn its sights on the West within five years. He has an eye on Germany in particular, a market not short on underperforming banks.
"If we show we're able to run a very efficient bank and maintain a high ROE and price-to-book value, we would have enough credibility with investors" to make acquisitions in Western Europe, Csányi insists.
Some investors worry that the banker's appetite could be his undoing. "We would be a little nervous if they bought anything significant now," says F&C's Helfer. "It's a question of how thin they can spread themselves."
Raiffeisen's Bogdaneris contends that OTP will have to set up a separate management team to run its non-Hungarian operations, just as Raiffeisen and other Western banks have done with their Eastern European networks, if it wants to continue expanding successfully. He also questions whether OTP can grow from a small base in other countries, considering that its heritage is protecting a dominant franchise at home. "OTP really hasn't had to build," he notes.
Csányi confidently dismisses the naysayers, though, with a nod to his track record. "We are fighting against these competitors for 12 years. A lot of people predicted that OTP would collapse because we wouldn't be able to meet the competition from big Western banks."
Having proved his skeptics wrong once, Csányi is eager to do it again.
