Orszagos Takarekpenztar es Kereskedelmi Bank Rt. (OTP Bank)

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Orszagos Takarekpenztar es Kereskedelmi Bank Rt. (OTP Bank)

H-1051
Nádor u. 16
Budapest,
Hungary
Telephone: (36) 06 1 473 5000
Fax: (36) 06 1 312 6858
Web site: http://www.otpbank.hu

Public Company
Incorporated: 1949
Employees: 7,777
Total Assets: EUR 19.7 billion ($24 billion) (2005)
Stock Exchanges: Budapest
Ticker Symbol: OTP
NAIC: 522110 Commercial Banking

Orszagos Takarekpenztar es Kereskedelmi Bank Rt., or OTP Bank, is Hungary's leading commercial bank and one of the fastest-growing players in the Central European banking market. The former state-controlled saving bank monopoly has successfully navigated privatization and the liberalization of the Hungarian banking sector to retain its leading market shares. The company claims 29 percent of the retail deposit market, and 40 percent of the country's credit market, as well as a 36 percent share of retail foreign currency deposts, and 49.7 percent and 35.3 percent of the housing loan and consumer credit markets. The company's Hungarian network includes nearly 440 branches and 1,500 ATMs, as well as telephone, Internet, and mobile banking services. Altogether the bank serves more than 3.5 million customers in Hungary. OTP has also launched an effort to become a major bank in the Central European region. The company operates subsidiaries Romania, Slovakia, Croatia, and Bulgaria—where its subsidiary, DSK Bank, has become market leader. OTP is actively seeking expansion in other regional markets, including Serbia and Ukraine. The company submitted a bid to buy Ukraine's Ukrsotsbank in February 2006. Unlike many of its regional counterparts, OTP has built its position without the backing of a major financial partner, in part because the Hungarian government retains a "golden share" in the company, restricting foreign shareholdings and placing ownership limits on the bank. The chairman, CEO, and architect of OTP's growth since its privatization in the mid-1990s is Sandor Csanyi. OTP is listed on the Budapest Stock Exchange and had total assets in excess of EUR 19.5 billion ($24 billion) in 2005.

ORIGINS

The elections of 1947 brought Hungary's Stalinist-oriented Communist Party to control, placing the country under the dominance of the Soviet Union. The nationalization of the country's assets quickly followed, as the state took over its industries, including the banking industry. In 1949, the Hungarian government established a new bank, Orszagos Takarekpenztar Bank, or the National Saving Bank, in 1949, which then became the monopoly for all savings deposits in the country. The bank also became the sole source of housing loans in Hungary.

Over the next several decades, OTP's mandate expanded to include real estate transactions and services such as foreign currency deposits and exchange and municipal banking services. OTP also became responsible for operating the state lottery during the years of Communist Party control. Despite the expansion of its mandate, OTP remained limited by the Communist-styled separation of banking functions, which restricted the bank from industrial and commercial lending and from conducting foreign trade operations.

OTP established a branch network reaching throughout most of the country, opening nearly 400 offices nationwide. Yet services were kept to a minimum: checking accounts were unheard of, automated teller machines were non-existent, and computer technology was lacking. As was typical of most Soviet-bloc industries and government-owned businesses, OTP grew into a bloated, overly bureaucratic organization, with nearly 17,000 employees, inefficient operations, and no commitment to operating at a profit.

Yet Hungary became the first of the Soviet-bloc countries to begin the process of liberalization that ultimately resulted in the collapse of communist domination. In the late 1970s, the Hungarian government began authorizing trade with and investment from Western sources, and as such the National Bank of Hungary established a number of joint-venture banks, such as the Central-European International Bank, set up in 1979, and joint ventures with Citibank and Raiffeisen in the 1980s. The National Bank then shed its commercial banking functions, transforming itself into a Western-style central bank.

These moves allowed Hungary to become the region's most dynamic market, introducing modern banking techniques, practices and services, and, importantly, allowing the country to develop a new generation of highly educated and trained bankers. Among this generation was Sandor Csanyi, who completed a Ph.D. in Economics at the University of Budapest in 1983. Csanyi joined the civil service and quickly rose to prominence in the Finance and Agricultural ministries. In 1989, however, as Hungary emerged from Soviet dominance, Csanyi left to join the K&H Bank (the Commercial and Credit Bank), a spinoff of the National Bank, and served as deputy CEO at K&H until 1992.

In that year, Csanyi was appointed chairman and CEO of OTP bank, charged with modernizing its operations and preparing the bank for privatization or sale to a foreign investor. Csanyi's political clout and economic prowess helped him push through a sweeping restructuring of OTP. By the end of 1994, OTP had reduced its number of managers from more than 200 to just 65. At the same time, Csanyi replaced much of the bank's existing management with a new, hand-picked team, drawing from the vast talent pool that was by then available in the country. OTP also cut through its rank and file, slashing more than 8,000 jobs by the end of the decade. Continuing in its cost-cutting efforts, OTP began centralizing its back-office operations, rolling out an information technology infrastructure throughout its branches. Meanwhile, the bank developed its own computer technology, and launched the country's first true checking account system. Coupled with the bank's strong branch network presence, OTP not only retained its dominance in the savings market, but also captured a leading share of other consumer and retail banking areas. The bank's commitment to technology also allowed it to secure contracts with the national government and many of the country's municipal governments, providing electronic salary payments and direct bill-paying services. By the end of the decade, OTP had also added such innovations as debit cards, mobile telephone banking services, and Internet banking services.

COMPANY PERSPECTIVES

The Bank's strategy In order to maintain development and steady growth and hence shareholders' confidence the Bank Group has prepared for future challenges. In the heart of its business strategy for 2005–2009 lies the maximization of shareholder value by achieving an outstanding consolidated financial performance in European terms. OTP Bank Group's vision is to become a determining financial provider in the region while retaining the market leadership in Hungary. The strategic aim of the Bank is to achieve/retain market leadership or a dominant position in all segments of financial services in Hungary and to become a major player in the markets of its subsidiaries.

OTP's commitment to introducing new technology and services enabled the company to weather the flood of foreign competition that occurred as the banking sector was liberalized in the early 1990s. OTP's own privatization was slated for the mid-1990s. A number of members of the Hungarian government, including the country's finance minister, at first favored seeking foreign buyers for the bank; the move would likely have raised more immediate capital than a public offering. Yet Csanyi, backed by his political connections and economic clout, convinced the government to maintain OTP as a Hungarian-owned institution.

As such, OTP was placed on the Budapest stock exchange. As part of the privatization, the Hungarian government drafted rules limiting individual foreign shareholders in the bank to just 5 percent of its stock. Domestic shareholders were limited to a maximum 10 percent stake. By the end of the decade, the bank's privatization had been completed and nearly all of OTP's shares had been placed on the Budapest exchange; the government held onto a so-called "golden share," however, giving it veto rights over certain policy decisions and any potential merger or de-merger operations.

REGIONAL PLAYER IN THE NEW CENTURY

OTP remained focused on the retail banking sector into the early 2000s, while also building up a new commercial and corporate wing. Meanwhile, the wave of foreign-owned financial institutions entering the country competed especially for the country's corporate and industrial sector. In this way, OTP was able to maintain clear dominance over the country's retail sector into the new century. Into the early 2000s, OTP attempted to gain more control over the Hungarian banking sector, when it launched a takeover effort for the country's number two retail bank, Postabank. Under private ownership, that formerly state-owned bank had run aground in the late 1990s, requiring a bail-out from the Hungarian government. Yet OTP's bid was rejected, amid opposition that the acquisition would give the bank too much control over the country's retail banking market.

Finding its growth limited at home, OTP targeted international expansion. The bank's expertise as a former state-owned bank negotiating a liberalized market also gave it an edge over its competitors as it developed the strategy for its next growth phase. By the early 2000s, most of the countries in the Central European had successfully completed their own transition to free-market economies, including the liberalization and privatization of their state-controlled banking assets. OTP became determined to transform itself into a major player in the retail banking sector in Central Europe.

OTP at first targeted Romania, negotiating to acquire that country's leading bank, Banca Comerciala Romania. However, amid ethnic tensions between the country's Romanian and ethnic Hungarian populations, the government of Romania decided to postpone the bank's sale.

Instead, OTP moved into Slovakia, buying up that country's IRB Bank in 2002 for EUR 12 million. OTB renamed its new subsidiary as OTP Banka Slovensko, restructured and modernized its operations, and transformed it into the country's fastest-growing bank, with particular success in the mortgage lending market. Building on that success, OTP next targeted Bulgaria, buying up that country's DSK Bank for EUR 311 million. DSK, then Bulgaria's second-largest bank in total assets, was also that country's leading retail bank. Under OTP, DSK launched a range of new and improved products and services, including new credit cards, long-term deposits, and electronic services. The bank also began opening new branches, with 320 branches in operation by the end of 2004, and more than 350 branches by the beginning of 2006.

KEY DATES

1949:: The OTP Bank is set up as a saving bank monopoly by Hungary's communist government.
1979:: Hungary's banking market opens trade with financial institutions outside the Soviet bloc.
1992:: Sandor Csanyi is appointed as CEO and chairman of OTP in order to lead its restructuring in the post-Soviet era.
1995:: OTP is privatized with a listing on the Budapest stock exchange.
1999:: The privatization of OTP is completed.
2001:: OTP's bid to acquire Postabank is rejected by the Hungarian government.
2002:: OTP enters Slovakia, acquiring that country's IRB Bank.
2003:: OTP acquires Bulgaria's DSK Bank.
2004:: OTP enters Romania with the purchase of RoBank.
2005:: Croatian Nova Banka is acquired by OTP.

OTP finally succeeded in entering Romania, when it acquired RoBank, a corporate banking specialist. While the organization was a relatively minor player, with a market share of just 1 percent, the purchase gave OTP a foothold in that country, ahead of the future privatization of the country's state-owned banks. Under OTP, RoBank changed its name to OTP Banka Romania and launched its own retail banking operation, and began preparations to offer other financial services, such as insurance and leading products. The bank then began opening a new branches, targeting a future total of 100 branches or more.

OTP's next stop on its regional expansion path came in March 2005, when the bank acquired Croatian Nova Banka. That bank operated its own 90-branch network, primarily on Croatia's coast, and counted more than 500,000 customers.

By the beginning of 2006, OTP was prepared to further its expansion in the region. In February of that year, the bank targeted two new countries for expansion, launching bids for Serbia's Splitska Banka, and Ukraine's Ukrsotsbank. While the company was facing heavy competition for the latter bank, notably from Italy's Banca Intesa, both offers confirmed Csanyi's ambition to develop OTP into one of the major banking players in the Central European region.

PRINCIPAL SUBSIDIARIES

DSK Bank EAD (Bulgaria); Hungarian International Finance Ltd.; Merkantil Bank Ltd.; Merkantil Car Ltd.; OTP Bank Romania S.A. (Romania); OTP Banka Hrvatska (Croatia); OTP Banka Slovensko, a.s. (Slovakia); OTP Building Society Ltd.; OTP Factoring Ltd.; OTP Fund Management Ltd.; OTP Garancia Insurance Ltd.; OTP Mortgage Bank Ltd.; OTP Pension Fund Ltd.; OTP Real Estate Ltd.; OTP Travel Ltd.

PRINCIPAL COMPETITORS

ING Bank (Magyarorszag) Rt.; Kereskedelmi es Hitelbank Rt.; Magyar Kuelkereskedelmi Bank Rt.; CIB Koezep-Europai Nemzetkoezi Bank Rt.; Erste Bank Hungary Rt.; Raiffeisen Bank Zrt.; HVB Bank Hungary Rt.; Magyar Fejlesztesi Bank Rt.; Budapest Bank Rt.; Postbank and Savings Bank Corp; Citibank Zrt.; Deutsche Bank Rt.