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Wenceslas looks out on a country full of foreign banks |
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Although large local corporates have commanded the attentions of most western banks, Austria’s Erste Bank is aiming its regional expansion at a less coveted market, but one it believes may have greater potential. By targeting consumers of retail banking services, Erste Bank is playing to its core strengths while developing a distribution network that is among the largest in the region.
Almost immediately following its formation some four years ago when Erste Bank and GiroCredit Bank merged to form Austria’s second-biggest bank, Erste Bank has aggressively built up operational size and scale in central and eastern Europe.
And despite the fact that Erste Bank was not among the early entrants – such as domestic competitors RZB and Bank Austria/Creditanstalt – the retail focus has enabled it to do so largely in a vacuum.
“We are not latecomers, but front-runners,” says Erste’s spokesman in Vienna. “Back in 1997, there were no western banks focused on retail banking. When we acquired Slovak Sporitelna, there were no other banks involved in the bidding process. When we were bidding for Ceska Sporitelna, we were one of three. It is only now that more banks are seeing the market’s potential.”
Indeed, Erste Bank’s strategic bias, backed up by more significant spending on acquisitions, has enabled it to amass some 8 million accounts in five countries. This year, operations in the Czech and Slovak republics alone are expected to contribute more than a quarter of group net profits.
A decided disparity in the rates of return – ROE at Erste Bank’s regional operations averages 12%, compared with around 19% for western banks targeting the corporate market – reveals why Erste Bank has been largely unrivalled in the pursuit of the region’s retail client base. Still, bank officials say the fact that some 40% of adults in central and eastern Europe do not have bank accounts is just as indicative of the prospects for sustainable growth in the years ahead.
“As living standards rise, so will levels of fee income in the retail market,” says Frank-Michael Beitz, a managing director at Ceska Sporitelna, the former state-owned savings bank for which Erste Bank paid around e530 million in 2000. “Further European integration will only push levels of personal income and disposable income higher and that is one of the drivers of this strategy.”
Although bank officials acknowledge that a double-digit percentage of the 3.6 million accounts it acquired in that purchase are unused, Erste Bank’s rapid rise as a retail banking presence is a noteworthy achievement – the more so since it has been accomplished without a presence in the region’s largest market.
The fact that most Polish banks had already been partly or fully privatized, and in many cases aligned with western competitors, by the time Erste Bank was formed made a purchase difficult. And though the Polish government is pressing ahead with privatization of PKO BP, its largest savings bank, the higher premiums for market share are giving rise to further circumspection about a Polish push among decision-makers in Vienna, despite Poland’s enormous potential.
“Our strategy calls for us to continue expanding into neighbouring countries, and to do so by acquisition,” says an Erste spokesman. “We’ve been able to buy a considerable amount of market share. We’ve built critical mass and we haven’t paid the prices others are paying today to do it.”
In the Czech Republic, Erste Bank made a co-investment with the European Bank for Reconstruction and Development for its 52% stake in Ceska Sporitelna. In doing so, it acquired a big portfolio of businesses, including an asset-management company, a pension fund, a building society, and an insurance concern.
To leverage its regional retail franchise, Erste Bank plans to introduce new products and services, including credit cards, mortgage packages and a 24-hour client centre. And contrary to the top-down approach of most of its western competitors, the bank is also looking to expand its customer base by lending to small and medium-size enterprises and developing a recently acquired factoring business.
“Our insurance business – whose products we distribute through the domestic branch network – is a big driver of growth in Austria,” says Frank-Machael Bietz, Ceska Sporitelna’s head of risk management. “So we are working to repackage those products for the individual countries of central and eastern Europe. Our goal is to acquire and then to exploit the cross-selling capability; to link our production capability with the distribution we are acquiring in the region.”
Those opportunities should begin to pay off through early next year, after the bank completes a e200 million programme of IT systems upgrades and a retraining of management and staff that is based on a more customer-focused approach. In addition, a cost-cutting initiative that will reduce staff in the Czech Republic by a third, from around 15,500, in 2004 is expected to boost ROE levels there to around 18%.
With the price seemingly too rich for an entry into Poland, Erste Bank is looking to such markets as Hungary, Croatia and Slovenia, where it has been building a retail-banking presence through a series of acquisitions and partnerships with local banks.
“The privatization process is almost finished around the region, which makes getting a big market share very difficult,” says the Erste spokesman. “For the moment, we are going to continue to build on gains from the purchases we’ve made.”
