Business 18 February 2020, 4:00pm

Nothing like this has happened at Hungary's OTP for over a decade

Portfolio

The Slovakian operation of Hungary's largest lender OTP has really stood out from the group. It was perhaps the only asset that OTP failed to shore up and the market share of which was so minuscule that it was not worth it to operate the bank in itself. Long story short, OTP has decided to sell it. The last time the bank divested a major asset was more than a decade ago, when it sold insurer Garancia Biztosító.

OTP Slovakia finally taken over

It has not been a secret for a while now that OTP plans to get rid of its Slovakian operation, and the bank made the announcement of selling 99.4% of the bank to KBC on Monday. Once the transaction is done, the unit will merge with Belgian bank's local subsidiary CSOB Bank. The deal is still pending approval by the National Bank of Slovakia (NBS), the National Bank of Belgium (NBB), the European Central Bank (ECB), and the Economic Competition Authority of the Slovak Republic. OTP expects the green-lights to be given in either the second or the third quarter of 2020.

Not a shocker

The sale of OTP's Slovakian arm has been in the air for years, given that

it has been making losses for years;
contrary to operations in other countries, OTP failed to beef up the Slovakian unit by further acquisitions;
it has been unable to grow significantly organically;
OTP's management have recently been openly talking about exiting Slovakia. Deputy CEO László Wolf told Portfolo's Budapest Economic Forum conference in mid-October 2019 that OTP was preparing the sale of one its units that failed to reach economies of scale; CEO Sándor Csányi later confirmed OTP could leave Slovakia shortlz. In mid-January this year, OTP's press department confirmed that they were preparing the sale.

Competition abound

Although OTP Slovakia did not show a stellar performance over the last few years, but it did have its suitors. According to Slovakian press, there were two serious contenders. One was CSOB, the Czech unit of Belgium's KBC, and the other one was possibly Prima Banka, an interest of Slovakian investment group. In the end, the former came out as the lucky winner.

Suboptimal operation

The Slovakian OTP operation failed to run the course management intended for it and what was the path taken by other foreign units. It failed to carve out a meaningful share either on its home turf or within the OTP group. Its domestic market share was merely 1.7% and it contributed to the group only 2.5% of assets, 3.4% of gross loans, 2.4% of deposits and 1.4% of total equity.

Since 2007, OTP Slovakia made losses in a number of years and even when it posted a profit, its contribution to group profits was tiny. The balance since 2007 shows a loss of nearly HUF 5 billion, and this sum does not include the Slovakian banking tax that was generally around HUF 0.7 bn annually over the last few years.

KBC to expand further

By the takeover KBC's Slovakian subsidiary, CSOB, will further strengthen its position on the Slovakian market and increase its market share in every segment. It is currently the fourth-largest bank in the country with a market share of 12.6%. Its share will go up to 14.8% from 12.9% on the mortgage market and to 8.2% from 4.7% in the consumer credit business.

A few tens of billions of forints

The parties have not disclosed the purchase price, but on the basis of the bank's equity and valuations in the region we can make a ballpark estimate.

The Slovakian OTP unit had an equity of HUF 32 bn, according to the latest available data, so if OTP sold it at book value (it regulary bought banks at book value over the last few years) then the sales price was probably close.

Due to the low market share of the bank we do not believe KBC would have paid a lot more than book value. It is interesting, though, that the price would be HUF 35 billion at the 1.1 P/BV of regional banks and HUF 50 bn at OTP's nearly 1.6 P/BV. Overall, we think that OTP's balance of the last over ten years is negative in Slovakia, and it will be paid less than book value by KBC for this bank.

For the sake of comparison, analysts project OTP to post an after-tax profit of HUF 417 billion in 2020.

Major expansion scheme

Over the last few years, OTP has been buying up banks in Central and Eastern Europe at an amazing rate. In most cases, the seller was Societe Generale.

Including the latest acquistion in Slovenia, OTP was present in 12 countries, but with the exit from Slovakia this number is back at 11.

Excluding last year's divestment when OTP sold its insurance arm Express Life Bulgaria, the only time it sold a larger asset than now was in 2008 when it sold insurer Garancia Biztosító to Groupama. So, this is the first time in more than a decade when OTP makes a substantial divestment.

Cover photo by Omar Marques/SOPA Images/LightRocket via Getty Images