Hungary Shows Russia the Way

Financial News, April 27, 2003 | Go to article overview

Hungary Shows Russia the Way


Byline: Michael Hoare

When Balazs Jozsef Ferenczy, a partner at law firm Gide Loyrette Nouel in Budapest, helped put together a $60m ([euro]55m) syndicated loan in 1998, Western banks were a key part of the process. By the time that loan was refinanced in 2000, Hungary had shaken off its dependence on foreign capital and the deal was funded entirely by domestic institutions.Hungary leads the race among Central and Eastern Europe countries to develop their banking systems. It started the process earlier than any other former Soviet bloc state and has now gained such dominance that its leading bank, OTP, is bidding against Western groups looking to buy assets in the region.

Poland and the Czech Republic are also at the front of the first wave of 10 countries to accede to the EU in 2004, although they started later than Hungary. Both have further restructuring to go and Farid Ahmed Khan, an analyst at Morgan Stanley, predicts the Czech Republic's 40 banks will number a quarter of that 10 years from now.

Banking reform in countries tipped to accede to the EU in the second wave is not so advanced. Romania and Bulgaria have some changes to implement to meet EU requirements, although their financial services revolution is under way and they are far ahead of Russia and the central Asian states.

Hungary had a banking sector in better shape than many former communist countries, even before the Berlin Wall came down, after forcing through regulatory and legal reforms in the 1980s and 1990s. Now, if anything, it risks over-regulation, according to Ferenczy at Gide. "It's very easy to fall off the other side of the horse," he says.

The country was also quick to sell its leading banks to foreign institutions, such as the purchase in 1996 and 1997 of K&H Bank by ABN Amro, the Dutch group, and KBC, the Belgian bank. Attila Vago, senior analyst at Concorde Securities in Budapest, says: "This gave a huge impetus to banking sector development much earlier than in the Czech Republic or Poland."

As a result, the listed OTP, which dominates Hungarian retail banking, is able to acquire rather than be acquired in cross-border banking consolidation. The bank took a majority stake in Bank Slovenska in Slovakia, for example, and bid for DSK, the second largest bank in Bulgaria.

The group has been rumoured to be interested in Serbian Novosadska Banka, is expected to make an offer for local Postabank, and has tried to buy Banca Comerciala Romana (BCR) in Romania. It might use most of its firepower on DSK, but the fact that it could outbid Western rival Erste Bank for the asset is in itself a huge boost for emerging Europe's banks.

While OTP is the only institution in the region able to be aggressive now, more are likely to emerge from the Czech Republic and Poland, says Barbara Nestor, an economist at Commerzbank Securities in Prague.

The role of BCR, which is the biggest bank in Romania, as a target in OTP's sights demonstrates how much catching up Romania has to do. Its financial sector has developed rapidly since it closed down its export bank Bancorex in 1998 and restructured the sector. But reform has been restrained by what Paul Timmons, an economist at Moscow Narodny Bank (MNB), calls "a general lack of political resolve", and the country's government holds more banking assets than any of its neighbours.

Despite the disposal of a majority stake of the Romanian Development Bank to Societe Generale, and the sales of Banc Post and Banca Agricola, the state still owns CEC, the savings bank, Eximbank, the trade bank, and BCR. It is having trouble selling the latter, although it is expected to complete the disposal this year or next.

But Romania's regulatory reform seems to have worked. …

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