When looking at banks in region, analysts favorite pick is OTP
"OTP both from a short- and long-term perspective is our top pick," said Denise Vergot Holle, European banking analyst for Merrill Lynch. "OTP is such an easy story."
Analysts point to the bank's strong position in Hungary, aggressive management and low-risk balance sheet in defending their selection of OTP as the leading banking sector investment in Poland, the Czech Republic and Hungary.
OTP is the largest bank in Hungary with 40% of total deposits and has the widest chain of retail outlets in the country, with 385 branches. The bank's subsidiaries include a securities brokerage, fund manager and insurance company. It has assets of slightly more than $7 billion.
The company has 40% of the retail banking market in Hungary, Holle said. "There's no bank in Poland that has that sort of dominance."
That is true among publicly traded banks. State-owned Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP) holds 42.3% of the retail market in Poland. However, the bank's customer base is not as desirable in terms of income-generating customers and it is saddled with high costs related to over-employment, large branches and an old-school staff.
OTP's "got a fantastic franchise," agreed Sarah Pohlinger, senior fund manager for Societe Generale's Emerging European Asset Management, adding that the bank has more than 60% market share. When you've got such a strong, existing position "it's difficult for anybody to attack," she said.
In addition, OTP's management has a strong track record, cutting staff from 15,000 to about 9,000 in three years, Holle said. These cuts brought the bank's cost-profit ratio down from 80 to 67. The bank's net income increased to $25.4 million in 1998, a 9.2% increase over 1997.
In addition to reforming management, OTP has also taken steps to overhaul its IT system, spending about $140 million for this upgrade.
This "gave them the capability to add new fees to services provided," Holle said. The bank is now in a position where it should be able to exploit market possibilities, including pension management and a new insurance subsidiary it has established. "They've put the blocks into place. Now they need to look to the future," she said.
Despite these positive characteristics, though, OTP's share price has dropped 9.1% from its early 1999 peak, closing at Ft 11,000 last Wednesday. Most analysts view this fall as temporary and see the bank's share price returning to its early 1999 level once the Kosovo crisis is resolved.
The Ft 11,000 share price results in a 1999 estimated price-to-earnings (p/e) ratio of 9.7, according to a Feb. 23 Merrill Lynch report.
Another downside to the bank is the possibility of competition within Hungary catching up with OTP, according to Jean-Pierre Lambert, director of Dresdner Kleinwort Benson in London. But he did not see that threat occurring soon.
In comparison to OTP's current dominant position, Polish banks tend to be more regional and only one or two has a national franchise, Pohlinger said.
But analysts do see Polish banks as a strong, long-term investment option.
In the longer term, Poland "is a very compelling story," said Stephen Pettyfer, an equity analyst for Merrill Lynch. "Strategic investors are paying desperately to get into the market."
"If I was investing in Poland I would do it with the long term in mind," agreed Martin van Tol, a senior analyst for Raiffeisen in London. Over the longer term it's a more interesting sector because of potential economic growth, he said.
While the market is more fragmented, consolidation is likely to speed up in coming years and many banks now have strong strategic partners to help streamline operations and aid in expansion. In addition, there is a wider choice for investors among Polish publicly traded banks. (See also The List, page S10)
For example, the government plans later this year to sell a 55% stake in Bank Pekao to a strategic investor. A consortium of UniCredito Italiano and German insurer Allianz have come out on top in a tender and later this month will begin due diligence. Pekao has about $15 billion in assets and is the second largest bank in Poland after PKO BP. It is currently trading at a multiple of 14.6 times 1999 earnings estimated by Deutsche Bank Research.
Bank Handlowy, with assets of $4.5 billion, is the third largest bank in Poland and has three stable investors: J.P. Morgan, Swedbank and Zurich Insurance. In March it was trading at a p/e ratio of 9.1 times 1999 earnings.
In addition, Bank Slaski has ING as a strategic investor, BRE Bank has Commerzbank and Wielkopolski Bank Kredytowy (WBK) has Allied Irish Bank. In March, all three banks were trading at a p/e that was under the Polish sector average of 8.5 times estimated 1999 earnings, according to Deutsche's March research report.
Banks in the Czech Republic came up last for most analysts.
"The Czech Republic is a little bit different," van Tol explained. "Hungary is an easier comparison to Poland."
The Czech Republic is not comparable with Poland because its privatization mechanisms are very different, van Tol said. The Czech banks still have ownership links between banks, industry and investment firms. For example, banks usually own investment firms and investment firms own companies. So banks have an equity stake in companies, creating a conflict of interest.
Analysts point to the bank's strong position in Hungary, aggressive management and low-risk balance sheet in defending their selection of OTP as the leading banking sector investment in Poland, the Czech Republic and Hungary.
OTP is the largest bank in Hungary with 40% of total deposits and has the widest chain of retail outlets in the country, with 385 branches. The bank's subsidiaries include a securities brokerage, fund manager and insurance company. It has assets of slightly more than $7 billion.
The company has 40% of the retail banking market in Hungary, Holle said. "There's no bank in Poland that has that sort of dominance."
That is true among publicly traded banks. State-owned Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP) holds 42.3% of the retail market in Poland. However, the bank's customer base is not as desirable in terms of income-generating customers and it is saddled with high costs related to over-employment, large branches and an old-school staff.
OTP's "got a fantastic franchise," agreed Sarah Pohlinger, senior fund manager for Societe Generale's Emerging European Asset Management, adding that the bank has more than 60% market share. When you've got such a strong, existing position "it's difficult for anybody to attack," she said.
In addition, OTP's management has a strong track record, cutting staff from 15,000 to about 9,000 in three years, Holle said. These cuts brought the bank's cost-profit ratio down from 80 to 67. The bank's net income increased to $25.4 million in 1998, a 9.2% increase over 1997.
In addition to reforming management, OTP has also taken steps to overhaul its IT system, spending about $140 million for this upgrade.
This "gave them the capability to add new fees to services provided," Holle said. The bank is now in a position where it should be able to exploit market possibilities, including pension management and a new insurance subsidiary it has established. "They've put the blocks into place. Now they need to look to the future," she said.
Despite these positive characteristics, though, OTP's share price has dropped 9.1% from its early 1999 peak, closing at Ft 11,000 last Wednesday. Most analysts view this fall as temporary and see the bank's share price returning to its early 1999 level once the Kosovo crisis is resolved.
The Ft 11,000 share price results in a 1999 estimated price-to-earnings (p/e) ratio of 9.7, according to a Feb. 23 Merrill Lynch report.
Another downside to the bank is the possibility of competition within Hungary catching up with OTP, according to Jean-Pierre Lambert, director of Dresdner Kleinwort Benson in London. But he did not see that threat occurring soon.
In comparison to OTP's current dominant position, Polish banks tend to be more regional and only one or two has a national franchise, Pohlinger said.
But analysts do see Polish banks as a strong, long-term investment option.
In the longer term, Poland "is a very compelling story," said Stephen Pettyfer, an equity analyst for Merrill Lynch. "Strategic investors are paying desperately to get into the market."
"If I was investing in Poland I would do it with the long term in mind," agreed Martin van Tol, a senior analyst for Raiffeisen in London. Over the longer term it's a more interesting sector because of potential economic growth, he said.
While the market is more fragmented, consolidation is likely to speed up in coming years and many banks now have strong strategic partners to help streamline operations and aid in expansion. In addition, there is a wider choice for investors among Polish publicly traded banks. (See also The List, page S10)
For example, the government plans later this year to sell a 55% stake in Bank Pekao to a strategic investor. A consortium of UniCredito Italiano and German insurer Allianz have come out on top in a tender and later this month will begin due diligence. Pekao has about $15 billion in assets and is the second largest bank in Poland after PKO BP. It is currently trading at a multiple of 14.6 times 1999 earnings estimated by Deutsche Bank Research.
Bank Handlowy, with assets of $4.5 billion, is the third largest bank in Poland and has three stable investors: J.P. Morgan, Swedbank and Zurich Insurance. In March it was trading at a p/e ratio of 9.1 times 1999 earnings.
In addition, Bank Slaski has ING as a strategic investor, BRE Bank has Commerzbank and Wielkopolski Bank Kredytowy (WBK) has Allied Irish Bank. In March, all three banks were trading at a p/e that was under the Polish sector average of 8.5 times estimated 1999 earnings, according to Deutsche's March research report.
Banks in the Czech Republic came up last for most analysts.
"The Czech Republic is a little bit different," van Tol explained. "Hungary is an easier comparison to Poland."
The Czech Republic is not comparable with Poland because its privatization mechanisms are very different, van Tol said. The Czech banks still have ownership links between banks, industry and investment firms. For example, banks usually own investment firms and investment firms own companies. So banks have an equity stake in companies, creating a conflict of interest.
