More than a year has passed since representatives of the Hungarian financial group OTP Group announced plans to wind up their business in russia. The group owns OTP Bank there. The reason for the plans to abandon the russian market was the war in Ukraine. In our country, OTP Group has been present for quite some time. It owns four financial institutions – the eponymous OTP Bank, the leasing company OTP Leasing, the factoring company OTP Factoring Ukraine and the asset management company OTP Capital.
The matter didn't get any farther than promises, however: OTP Bank continues to operate in russia and is increasing its presence in the local market. At the beginning of May, the National Agency for Corruption Prevention (NACP) added the Hungarian OTP Bank (a part of the Group and the largest commercial bank in Hungary) to the list of international sponsors of war. It suffered the same fate as the Austrian group Raiffeisen, which also stays in the russian market.
Mind analysed: how the things happening affect the activities of OTP and why the Group is not in a hurry to leave russia.
What place does OTP occupy in the russian market? OTP Bank has been operating in russia since 2006, it is among the 50 largest russian banks by asset volume, holding leading positions in the field of consumer lending. According to the bank itself, it was in 2nd place in terms of the amount of loans issued at points of sale (POS loans) with a market share of 15.3% and occupied the 8th place in terms of the volume of the credit card portfolio with a market share of 1% as of early 2023.
OTP Bank serves about 2.2 million customers through a network that consists of more than 21,000 points of consumer lending, through its own branches and subsidiaries, the number of which exceeds 110.
According to the OTP Group's reports, its russian subsidiary received almost 4 billion rubles in net profit for the 1st quarter of 2023 against 6.6 billion rubles in net loss in the 1st quarter of 2022. OTP Bank's assets for January – March 2023 grew by 5% – up to 241.3 billion rubles, provisioning expenses decreased sevenfold – to 1 billion rubles, and the share of overdue debt was 15.7% (remained at the level of December 2022).
OTP Group notes that the russian market accounts for 3.1% of its assets, as well as 2.7% of the loan portfolio without considering reserves.
What steps is OTP Group taking to quit russia? The OTP Group first announced that it was exploring options to exit the russian market in March 2022. Representatives of OTP Group cited a threat of a liquidity shortage for the subsidiary in russia and the possibility that the subsidiary bank would require additional funding. The parent company, however, is not too keen on providing this. At the same time, group representatives clarified that they were complying with all international sanctions applied to russia.
Somewhat later, a more precise formulation appeared in OTP Group's report for the first half of 2022. According to it, the bank's shareholders and its management were considering various scenarios, including the possible sale of the russian asset "...at an acceptable price."
This was followed by a statement from Laszlo Bencsik, deputy CEO of the Hungarian bank, published by Reuters. He reported that potential buyers are highly interested in the russian bank. However, he warned that a deal may be complicated by the fact that russian President vladimir putin signed a decree on August 5, 2022, prohibiting non-residents from hostile countries from making deals with their russian assets, including selling them. The Hungarian OTP Group was included in the list of such non-resident companies. And, although a change of ownership of the russian OTP Bank is entirely possible, its shareholder must obtain special permission for this.
However, OTP Group again stated in its annual report in March 2023 that it was exploring all strategic options regarding its russian bank. The group also clarified that it adheres to the principle of continuity of operations regarding its subsidiaries in russia and Ukraine.
What are the Ukrainian NACP's claims against OTP? While the OTP Group was pondering over the fate of its russian asset, the NACP included the Hungarian OTP Bank in the list of international sponsors of war in early May 2023.
The agency justified its decision by stating that the bank's management continues to operate in russia and effectively recognises the occupied territories in Eastern Ukraine (Donetsk and Lugansk “people’s republics”).
The NACP refers to media investigations that prove that the bank provides preferential lending conditions to russian military personnel. "It is emphasised that russians, called up for military service by mobilisation or contract, as well as their families, can apply for a deferment of payments for loans and credits. In this regard, the banks refer to the russian law of October 7, 2022 No. 377-FZ, effectively recognizing the so-called Donetsk and Luhansk 'people's republics'", the agency says in its statement.
Furthermore, the NACP published a list of officials whom the committee holds responsible for the fact that the bank is a sponsor of war and continues to operate in russia:
What did the Hungarian side say in response to the NACP's decision? The reaction from representatives of the Hungarian side to the NAPC's decision was swift. As reported by Daily News Hungary, Hungary's Foreign Minister Péter Szijjártó stated that OTP had not violated any international laws, and its operations fully comply with legal norms. Szijjártó called the inclusion of the bank in the list of international war sponsors "unacceptable and outrageous". He warned that as long as OTP remains on the list of international war sponsors, Hungary will not be able to participate in the implementation of the 11th package of sanctions against russia, initiated by the European Union.
By the way, this package of sanctions is not yet approved. According to Politico, its adoption is being blocked by Hungary and Greece. Both states insist that Ukraine exclude a number of Greek and Hungarian companies from the same list of war sponsors. Only under such a condition are the Hungarian and Greek authorities ready to support the new EU initiative, which envisages measures to prevent circumvention of previously imposed sanctions.
What is the position of the Ukrainian bank regarding the NACP's decision? The reaction of the Ukrainian division of the OTP Group turned out to be more emotional than that of the parent company. Immediately after the NACP's decision, the Ukrainian OTP Bank published a statement, clearly indicating that being blacklisted will not affect the bank's operation.
Additionally, the bank emphasised that it "operates according to Ukrainian and international law, conducts responsible business aimed at long-term relationships with clients and the development of the Ukrainian economy". Interestingly, OTP Bank refuted some of the information about the activities of the OTP Group in russia, to which the NACP referred.
"The Group significantly reduced its presence in the market in 2022: the market share dropped to 0.17%, corporate lending was stopped, and the corporate credit portfolio was cut by 75%. The OTP Group has repeatedly stated its search for opportunities to exit the market, including involving consultants from Rothschild Martin Maurel, but the sale procedure is legally blocked. The information about the recognition of the illegal formations ‘L/DPR’, and also about granting privileged loans to russian military personnel, does not correspond to reality," reads the bank's message.
In addition to this, OPT Bank reminded that the group spent about UAH 100 million to support the army, hospitals, and children's homes in Ukraine. The bank also purchased military bonds for more than UAH 5.5 billion, thereby supporting the state budget in this way.
According to the NBU, as of May 1, 2023, OPT Bank held the 11th place in the Ukrainian market in terms of assets. It is one of the systemically important banks (there are 15 in total). The share of private deposits in the OTP Bank's portfolio total of funds held for customers is about 33%. The loan portfolio is primarily represented by corporate clients' loans, accounting for 86%. For the first four months of 2023, OTP Bank earned a net profit of UAH 2 billion.
Why is OTP Group in no hurry to leave russia? Despite the fact that the russian market does not occupy a significant share in OTP's business, the russian OTP Bank brings the group about 8% of the profit. This is the fourth largest profit-generating bank in the group, after the main bank in Hungary and regional branches in Bulgaria and Croatia. Judging from the results of the first quarter of 2023, the russian 'subsidiary' is doing well.
The bank is indeed reducing the volume of corporate lending (business loans), but is making good money by issuing unsecured loans to the people. In addition, OTP virtually does not subsidise business in russia. As of 2022, OTP Bank only had subordinated debt of RUB 1.9 billion, which it had attracted from the parent structure.
In addition to this, the OTP Group is squeezed by restrictions on conducting deals with shares and stakes, as well as with investments in the authorised capital of OTP Bank due to the latter being on the list of 'unfriendly' non-resident companies. Therefore, purely legally, changing ownership is a complex and slow process. However, the group does not seem to be giving up its plans to exit russia.
Political factors should not be ruled out either: Hungary is sceptical about anti-russian sanctions introduced by the EU. For instance, the Hungarian Ministry of Foreign Affairs has repeatedly stated that all sanction measures are ineffective and only harm the European economy.
The National Bank of Ukraine tried to influence the position of the OTP Group. At the beginning of 2023, it held talks with international banking and financial groups, which continue to operate in russia. However, following these negotiations, the NBU established that there were "no progress about making final decisions on exiting the russian market."
P.S. Mind reached out to the NBU with a request and asked for clarification whether new negotiations with foreign banks, including OTP Group, had recently been held. At the time of publication, the National Bank did not provide a response. If our editors receive any comments, they will be made public for sure