The Hungarian financial market finished 2019 in a strong position. Intrigued by what many have described as a “special” year, CEE Legal Matters sat down with several of the nation’s leading Banking/Finance lawyers at Lakatos, Koves & Partners’ offices in Budapest to learn more.
Round Table Participants:
- Peter Lakatos, Managing Partner, Lakatos, Koves and Partners (host)
- Mestyan Szabolcs, Partner, Head of Banking & Finance and Capital Markets, Lakatos, Koves and Parters (host)
- Gabor Borbely, Partner, Head of Finance, DLA Piper Budapest
- Balazs Jozsef Ferenczy, Senior Attorney at Law, Head of Banking & Finance, Kapoly Law Firm
- Gergely Szaloki, Local Partner, Schoenherr Budapest
- Gyorgy Szilagyi-Schreindorfer, Head of Corporate Finance Legal Department, OTP Bank
CEELM: Let’s start by reviewing the current situation. How do you see the Banking sector as a whole, and where do you think it’s going?
Gyorgy: Last year was great, and most market participants are optimistic for 2020. However, there are also various expectations that it might start getting slightly worse in the upcoming period. I think that last year was “special” mostly due to housing loans and the retail market, but the corporate market also hit the 15% extension of the credit volume. We still need a careful approach at the beginning of 2020, and we need to take our time to see how the situation develops.
Gabor: Everyone agrees that last year was successful. Currently, we have about five key players on the market that are most active in various projects, but we have also witnessed international players coming in and out. My experience tells me that banks are under pressure, considering the number of deals on their tables.
Mestyan: Agreed. I am pessimistic about repeating the same success, however. It seems like some of the players are so satisfied that they haven’t woken up yet.
CEELM: What exactly led to last year’s success?
Balazs: It looks as though this is a continuous course. The National Bank made efforts to restore the market in the past year. In 2013, they put a program in place to prevent a credit crunch, and it seemed to work. This led to market players being able to get loans and funds that weren’t as costly. The interest rate was 2.5 percent, which led to a very favorable increase in the market. In the last two quarters of 2019 alone, HUF 435 billion was introduced.
Gergely: I think that success came from the fact that banks started to gain momentum, and in the last three years have unloaded their NPLs, which made them free to act. Of course, a significant demand on the market helped with the situation.
CEELM: Many commentators, especially from outside of Hungary, have pointed at the fact that the level of nationalization rose from 30% to over 50%. Did this trend facilitate growth?
Gergely: I don’t think that last year’s success was in any way connected to that fact, or that nationalization had any significant effect.
Balazs: It is very uncertain how that will play out in the future as well. Right now, we can only rely on opinions we hear. The top five or six banks are strongly embedded in the market, therefore I don’t think that their position has changed in any way.
CEELM: The Deputy Governor of the National Bank of Hungary and the Deputy CEO of Erste Bank both called for consolidation in the banking sector. Do you think that is needed, and to what extent do you see it happening?
Gergely: Even though it might not be necessary, consolidation is already happening, and we had examples of it last year. Whether the outcome will be positive remains to be seen. What we may predict is that Hungary will face a slow but certain consolidation.
Mestyan: I agree. I also don’t think that this has affected the big banks, and the overall picture is carved in stone.
Gyorgy: Yes. It might not be as rapid as some commentators expect, but it already exists on the market. The emerging IT costs on the side of banks, which appear mostly due to digitalization, are something smaller banks can’t afford. Considering they all have to deal with international competition, they are struggling to keep up on their own, therefore consolidation is a positive, even a necessary thing.
CEELM: What are these costs, exactly?
Gyorgy: Developing IT systems in banks is costly, as are different financial services, etc. From a larger perspective, it could be advantageous to digitalize. If we look at the agenda of the Hungarian Banking Association, they are trying to make the regulatory environment better and more competitive, and one of their proposals involves more digitalization.
Gergely: I think that banks now feel dual pressure, first from the regulators who are pushing them to move on and digitalize, and second from the market – the consumers – who like to do their banking from their phones and don’t like to queue.
Peter: I recently went to a branch of a bank I have used since the 90’s, and I noticed that there is no cash desk, which is a direct product of digitalization. I think it’s nonsense not to have it. Now you have to withdraw everything from the ATM, and the branch employs only two people.
Balazs: Digitalization is a positive thing. Mobile payments are booming, and in those terms, this could be a great marketing strategy for the firms. Adding one more thought to the consolidation question: Consolidation in generally a good thing, and we have seen examples of great consolidation in the past couple of years. The larger the bank, the cheaper the services.
Mestyan: Spending money on digitalization is not a new thing. When the Internet came in the 90’s, banks were spending a lot to develop online banking services. What is new to me as a lawyer are two things: First, it has become extraordinarily difficult to open a bank account for larger companies. If the parent company – or even the parent’s parent – is foreign, you need to go through a ton of paperwork before you can open an account. I understand this is not the bank’s fault, but the regulations that push this agenda. Second, in terms of digitalization, the banks are trying to simplify things by digitalizing all aspects of banking. Banks themselves sometimes tend to push for things that are not needed. We have tried to convince the banks that they don’t need all of it. We can blame it on EU regulations, but this is the wrong direction.
Gyorgy: There can be different opinions about what products and services are welcome on the market and the banks pay continuous attention to this. One thing is sure: the difficulties in opening a bank account result from the AML regulations.
Gabor: When it comes to digitalization, the biggest issue for the Hungarian banks, and the biggest change in the last five or six years, is that competition has mostly become cross-border. Technology is expensive, and we still have cash-dominated payment systems in Hungary. In conclusion, we are a small market and we can’t change everything, therefore we should try to be more and more efficient on all levels.
CEELM: Lets switch the discussion to the borrowers’ side. Who do you think are the biggest borrowers on the market?
Gyorgy: Generally, those are real estate developers, which in the last couple of years have mainly been funds, as well as the energy sector.
Gergely: We advised a lot of borrowers from the real estate sector last year as well, so from our experience that sector is a sponge that certainly attracts a lot of money, although real estate developers are probably not among the largest borrowers.
Mestyan: From 15 years of experience, I have noticed that Hungarian banks somehow always look past the enormous amount of manufacturing subsidiaries, which are still going to their parents’ bank or at least a bank in their parents’ jurisdiction, instead of developing a relationship with a local bank. I think there is a gap here. It’s hard to understand why Hungarian banks don’t shoot for manufacturing subsidiaries, and that is a shame, considering the fact that there exist some great manufacturers on the market. This is especially obvious now that it has become easier for them to reach out to the Hungarian banks.
Gabor: The problem is that these companies are getting financing through their balance sheets, so they don’t need financing at a subsidiary level per se, because they receive financing through their shareholders. What I think local banks are able to do is become a second layer of financing. This is a situation which is unlikely to change, because of the strong relationships that exist between those groups and their traditional financing partners in the headquarters.
Balazs: We have seen an increasing number of state-owned companies in the financial sector coming from the borrower’s side. They turn out to be unexpectedly large players – or are aiming to become so. They are professional and know the sector very well. We will see how this situation develops in the future.
CEELM: Aside from the traditional means of financing, we’ve seen a lot of bond issuances recently. Why is that?
Gergely: What we have seen in terms of bond issuance last year was mostly part of the scheme of the National Bank.
CEELM: Is this an attempt to trigger long-term investment?
Balazs: The National Bank’s Funding for Growth Scheme programs were previously so successful that they felt like it was time to boost fund raising through the capital markets too. The bank’s credit portfolio is positive and there is a minimal default percentage. The National Bank’s launch of the Bond Funding for Growth Scheme was thinking ahead that, in an event of an unexpected crisis, borrowers would have to rely on some other, more classical source of the economy, which would be capital markets. This way, they were segmented form the banking sector, so the effects of the crisis would not spill over. Companies now feel more and more comfortable in seeking bond issuance as a financing option.
Gergely: I agree, even though I am not as optimistic that in the event of a crisis the two would be as segmented, because from the borrower’s side, most of the investors are banks. This is now an extremely popular method of financing. For most of the actors, this is their first time issuing bonds.
CEELM: What is in the pipeline in terms of legislation, or at least being discussed, that’s either exciting or potentially scary for you?
Gyorgy: The Hungarian Stock Exchange has established a program for securitization, and the expectation of the market is that there will be SME loan portfolios that will be securitized. Legislation has been proposed in this area in order to make it possible to establish SPV’s. We are quite curious about further development in this topic.
Gergely: We are also quite interested in how securitization will play out.
Gabor: Securitization is already happening in places like Poland. In Hungary, I think, there are multiple issues, mostly from the legal aspect, which adds to the caution of the potential participants. At the same time, the number of companies who would be able to go through securitization is very limited.
Balazs: Agreed. There were a lot of examples in the past where the originator companies were of Hungarian origin, and pooled into a larger European group. The question is whether there would be any Hungarian company large enough to be securitized at this point. At the same time, the banks are also larger, allowing them to neutralize some of the riskier assets.
Mestyan: I agree. There always have been securitizations in this country, but they are not necessarily seen by Hungarians, because they relate to global groups, even when the largest subsidiary is Hungarian. What amazes me is that some of these are done by the parent institution of the largest Hungarian banks, actually, so the Austrians are very active in our securitizations, while the local banks have no clue about it. I too think that the size and regulation have always been a question. I am very pessimistic about the future of legislation in this field. There were drafts back in 2007, but nothing serious happened since then.
CEELM: What needs to happen to stop you from being pessimistic?
Mestyan: To see it happen.
Gergely: It is true that the regulatory environment is a bit problematic. Having done the comparative analysis among the CEE and SEE jurisdictions, I can confirm that our regulatory environment is not as favorable to a securitization transaction right now as it is in other jurisdictions.
CEELM: Any last comments before we wrap up?
Gabor: As a last thought, I’d like to add one point in terms of the challenges for future financing in Hungary. Apart from trying to catch up and digitalize, I also think that we need to go back to the fundamentals and make those processes more efficient.
Balazs: It looks like a number of companies are looking for payment service provider licenses under the PSD2 before the National Bank now, and the environment for regulation in that particular field doesn’t seem to be as problematic as it is, for example, for securitization. That’s something we’ll be expecting in the future. The other important issue is crowdfunding. It looks like it’s coming as a sort of competition for the banks. Equity-based crowd-sourcing from the users allows consumers to avoid the capital markets. European legislation is on its way, and it looks like in 2020 it will reach Hungary as well. This is very interesting.
Gyorgy: I agree. There is a big question for the market how the Hungarian regulator will handle the issue of big tech firms, because if it’s not done the right way it could potentially be harmful for the market. As the Bank for International Settlement and the Hungarian Banking Association have already underlined, it is essential to develop regulation under the “same activity, same regulation” principle.
Gergely: Coming back to crowdfunding, two years ago we also explored the possibility of its appearance in Hungary. As long as there is no legislation in this field – which is something we are really looking forward to – I don’t think that a good crowdfunding market can be established.
Mestyan: Thinking of Uber as an example of crowdfunding, if the taxis were successful in doing it, then the banks will certainly be too. I am very much in favor of it as well. I agree with Balazs, but I’d like to add that overregulation will slowly kill traditional banking, because providing EU-level legislation, which allows consumers to open an account with a picture of themselves is good, yet if you go to a local branch you have to bring three copies of recent bills, and that makes no sense. As a consumer, I don’t get it. To me that marks a slow killing of traditional banking as such, maybe not on the short-term, but surely in the next 20 or 30 years.
CEE Legal Matters would like to thank Lakatos, Koves & Partners for hosting the event, and all the attendees for their participation.