A second wave of bank sector transformation is preparing to sweep through the Czech Republic, possibly disrupting what for the past few years has been a fast growing but fairly comfortable market for those banks with the foresight to get into Prague early.
The onslaught is being planned by foreign banks that sat out the previous rush into the Czech Republic at the turn of the century, when state-owned banks, lumbered with bad debts, were sold off.
One of the early entrants was Austria’s Erstebank. When it decided to enter the bidding for Ceska Sporitelna, it had no competitors. Ceska Sporitelna is now the country’s largest bank, earning more than Kcs10bn (€350m) last year.
Foreign domination
But now about 95% of the Czech market is in foreign hands – one of the highest ratios in the world – and there is very little room for new entrants wanting to offer conventional banking services. The largest four banks – Ceska Sporitelna, Komercni Banka (owned by France’s Société Générale), CSOB (owned by Belgium’s KBC) and HVB – control about three-quarters of the banking market.
The sector is consolidating further with the merger of HVB and Zivnostenska Banka, owned by Italy’s UniCredit, as well as the recent purchase of eBanka by Austria’s Raiffeisen. That deal cost ?130m and Raiffeisen had to beat five other bidders who wanted to take the internet bank from PPF, the Czech Republic’s largest financial group.
“The market here is done,” says Jan Mraz of the Czech Banking Association. “The pie has been cut into pieces and handed out.”
But hungry outsiders are looking at the profits being generated by the banking sector – Kcs39bn last year – and at a mortgage market that is growing at about 40% a year, and are deciding to take the plunge.
“We’ve had central and eastern Europe on our radar for some time but other commitments kept us focused elsewhere,” says Guy Hamilton, who has spent the last year in Prague for HSBC, preparing the international banking group to enter central Europe in the coming months.
“We want to get a limited network of branches up and running in the short term,” he says.
Organic expansion
HSBC is planning to grow organically, focusing initially on clients who have international business and personal interests, particularly in Asia, which would make HSBC’s international network attractive.
“We want to build up slowly and learn the market before we make a bigger play,” he says, adding that the bank will reply on its well-known brand to attract higher-end clients.
While HSBC aims for the well travelled and the wealthy, another bank is looking to make money further downmarket.
MBank, a subsidiary of Poland’s BRE (which is owned by Germany’s Commerzbank), is planning to launch an internet bank in the Czech Republic later this year.
“Our model is Wal-Mart,” says Piotr Gawron, mBank’s president. “We like to compete on price.”
The bank hopes to break even within four years and become the country’s fifth largest banking group. Mr Gawron is counting on replicating mBank’s experience in Poland, where it has soared to more than 1.3 million clients since being founded in 2000. Last year it earned €19m.
“Looking at the Czech Republic, it appears to be very similar to Poland in 2000, where the market also looked very stable and was dominated by two very large banks,” says Mr Gawron. “The Czech market has strong banks and modern products, but their prices are very high. What hasn’t happened yet in the Czech Republic is price competition.”
MBank intends to be an almost pure internet player, setting up only a few customer service centres where customers will go to sign the final paperwork on products such as mortgages. Most of the IT system will be run from Poland, and the back office and call centres will be outsourced.
Mr Gawron is very aware of the fate of eBanka, which also started as an internet bank in 1998, but quickly became a hybrid, opening more than 60 branches to serve its 100,000 clients. Straddling the digital divide was not a particularly profitable position, and eBanka only made money in two of the years of its independent existence.
“EBanka started as an internet bank but it wasn’t based purely on price competition. It’s not exactly the same model as us,” says Mr Gawron.That lesson is prompting mBank to rely much more strongly on the internet.
“The internet is a tool that allows us to offer the lowest price,” he says, pointing out that mBank brought innovations such as no-charge savings accounts and charging no fees for mutual funds to the Polish market.
“I think we will provide some serious competition in the Czech Republic,” says Mr Gawron. “A lot of banks will have to cut prices and change their products to try and match us, and even so I think it will be very difficult for large, older banks to change their higher cost structure.”
Existing Czech banks are unworried about the aggressive newcomers preparing to storm the ramparts.
“The concept of a purely electronic bank existed with eBanka, but eventually the owners of the bank had to reconsider their plans because a purely electronic bank is unable to offer truly comprehensive services to its clients,” says Laurent Goutard, Komercni Banka’s CEO.
Komercni plans to open 19 branches this year, the same number it opened last year. Other banks are also calculating that it makes sense to build their branch networks.
Ceska Sporitelna plans to open about 100 new branches over the next two years, says Dusan Baran, the bank’s deputy CEO.
“There still may be space in the market for banks like this Polish bank and other direct banks, but I think clients prefer to combine online and branch services,” he says. “A branch network seems to be a competitive advantage for Ceska Sporitelna.”
That marks a change in strategy from the early years of this decade, when the foreign banks that had bought into the Czech market were furiously pruning the inefficient banks they had acquired. The number of branches was cut by about half, as was the number of employees. The restructuring also winnowed out a lot of the weaker players. By the late 1990s, about a third of the banking licences granted by state regulators had expired.
“After our privatisation, we transformed an inefficient state bank into a normal commercial bank,” says Mr Baran.
Sophisticated offerings
Ceska Sporitelna is now working on supplying its customers with products such as life insurance and mutual funds, which still have a much lower penetration than more mature markets in wealthier parts of Europe.
“The cross-selling ratio is still very low,” says Mr Baran. “Most clients still have just a single account. As disposable incomes increase, we think the structure of sales will become more similar to what we see in western Europe.”
With economic growth expected to come in at about 5.5% this year, a continuing property boom spurring mortgage growth and rising consumer loans, the prospects for Czech banks look very good, which is what makes the new niche entrants confident they will do well too.
“There is a new and more innovative wave based on brands and innovation coming into this market,” says Mr Hamilton of HSBC.
