A decade of work on reinforcing capital bases, managing bad debts, improving risk management processes and investment in technology paid off for the big regional banking groups in central and eastern Europe (CEE) during the first 12 months of the pandemic.
Proactive provisioning inevitably took a toll on profitability last year, but operating income remained robust, asset quality was largely stable and the switch to remote banking and home office working was achieved seamlessly.
While Raiffeisen Bank International, Erste and UniCredit all posted solid results, the standout performer and the winner of this year’s award for CEE’s best bank is OTP Group.
The Hungarian entity was the only major banking group in the region to post a double-digit return on equity last year on the back of an equally impressive 9% rise in outstanding loans. It also successfully completed two complex merger processes on schedule despite the switch to remote working.
The loan portfolio expansion – which was driven by double-digit growth in Hungary, Serbia, Romania and Ukraine, with key segments including mortgages, consumer lending and large corporates – helped boost OTP’s net interest income by 12% year on year.
“The strength of our franchise is shown by the fact that we had good loan growth in different sectors and markets last year,” says Laszlo Wolf, OTP’s deputy chief executive.
That in turn contributed to a return on equity of 10.9%, well ahead of regional peers. This outperformance is partially due to OTP’s continued focus on retail lending, which was also reflected in its relatively weak asset quality.
The group’s capital base remained solid, however, with the CET1 ratio rising to 15.4% by the year end, providing a comfortable cushion against further portfolio deterioration.
“We provisioned heavily at the start of the pandemic, but we have a strong client base, so our losses were limited and we were able to continue lending,” says Wolf.
Even more impressive was OTP’s ability to complete the integration of new acquisitions in Bulgaria and Montenegro during the pandemic, in May and December respectively.
This speaks to the expertise and experience built up by the group’s dedicated integration team since the launch, in 2014, of a new expansion strategy aimed at achieving optimal scale in all OTP’s countries of operation.
Over the past two years OTP has also bought banks in Albania, Serbia, Moldova and Slovenia, as well as exiting its small Slovakian operation last year.
“We are particularly proud of our capacity for completing successful integrations that produce cost savings without losing clients or making them dissatisfied,” says Wolf. “We have a lot of experience in integration and we have good processes in place, which was key to completing integrations last year via Zoom and home office.”
The latest integration, which will bring together the Serbian banks acquired by OTP from Société Générale and National Bank of Greece, was due to be completed by the end of June. The process will create the second-largest player in the Serbian market.
OTP has also recently demonstrated that it has not lost its appetite for acquisition, announcing in June the purchase of Slovenian number two Nova KBM. Wolf notes that the group is still keen to expand its footprint in various markets – although not at any cost.
“We are looking at acquisition targets, but only if the price is realistic,” he says. “We have to find the right bank, at the right price.”
As of today, OTP is present in 10 countries in CEE. Its biggest markets are Hungary, which accounts for 42% of total group assets, Bulgaria (18%), Croatia (10%) and Serbia (9%).
The other key plank of OTP’s long-term strategy is digitalization. The group has been investing heavily in this area since 2015, when it launched a digital transformation strategy, but the pace of progress increased again last year.
“We have been actively developing on the technology side, but the pandemic pushed us to speed up the process and become more aggressive in digitalization,” says Wolf.
Notable developments in the awards period included the launch of a new mobile banking app by DSK Bank in Bulgaria, which helped boost take up of mobile banking by more than 80%, as well as the launch of fully digital loan application processes in markets including Serbia and Romania.
Wolf stresses, however, that digitalization is not only about client services. “It also means internal digitalization – automatized processes, digitalized analytics, using AI [artificial intelligence] etc.,” he says.
