Hungarian OTP Group enters the banking market in Uzbekistan

OTP Group, the leading financial organization in Hungary, has finally signed a purchase agreement with Uzbekistan’s Ipoteka-Bank.

A long-awaited deal

Even though the deal between Ipoteka-Bank and OTP Group was expected to be closed within two months, it took almost a year because of the Russian invasion of Ukraine. OTP’s Chief Financial and Strategic Officer László Bencsik even suggested to Uzbekistan’s authorities not to wait for a final decision and to look for another buyer.

In early December, the S&P rating agency warned that geopolitical tensions and an uncertain outlook for the global economy can negatively affect the process of privatization in Uzbekistan.

However, on December 12, 2022, the two sides signed the Ipoteka-Bank acquisition agreement. This means that the state-owned bank in Uzbekistan is going to go private for the first time in the modern history of the country. Moreover, Ipoteka-Bank is the first bank that has sold its major stake to a foreign investor.

The Hungarian bank is going to acquire 96.9% of the shares from the Ministry of Finance of Uzbekistan (2.6% of the bank’s shares belong to several entities and 0.5% of shares are controlled by individuals). The deal is set to be completed in two stages. At the first stage, OTP is expected to buy 75% of the Ipoteka-Bank shares. The remaining part of the shares will be bought three years from the total completion of stage one.

The Ministry of Finance promised the Kursiv edition to explain why the deal is split into two stages, but no official comment was provided at the moment of publication.

Neither of the sides has disclosed the transaction charge, although as of December 19, the market capitalization of Ipoteka-Bank was $205 million. However, the bank’s shares are highly volatile because of the dividend politics the bank follows. As of December 19, the closing price of its shares was 20% lower than the nominal price, while the preferred stock was 75% more expensive. In 2022 the bank made a dividend payout for privileged shares, while holders of the common stock haven’t received any payouts this year. 

The deal between the government and OTP Group also includes two subsidiaries of the bank: Ipoteka Leasing and ImkonSugurta (insurance company).

Money for future

As of early December, Ipoteka-Bank was ranked among the five largest commercial banks in Uzbekistan. The bank reported $3.7 billion in assets, $2.9 billion in its loan portfolio, $516 million in equity capital and $1.2 billion in its deposit portfolio.

According to Erik Livny, lead regional economist for Central Asia from the European Bank for Reconstruction and Development (EBRD), the deal is a milestone event for the banking sector in Uzbekistan. «This is the first time a large state-owned bank (8% out of the banking assets) is going to go private. Currently, state-owned banks account for 80% of the entire banking sector in the country. Once Ipoteka-Bank is private, this figure will decrease to 70%. I hope this trend will continue to expand. We are going to keep an eye on the process and assist banks in their preparation for privatization,» said the expert.

Once the deal with the Hungarian investor is completed, Ipoteka-Bank will be the largest private bank in Uzbekistan. Moreover, the bank is going to expand its operations in the local market. The deal has a clause that requires OTB Bank to increase the equity capital of Ipoteka-Bank to allow the latter to beef up the lending facility for youth and small and medium-sized businesses. However, it is unknown how much money OTP is going to put into the equity capital.

Livny believes that the new owner of Ipoteka-Bank can attract relatively cheap money from abroad and bring more competition to the banking sector of Uzbekistan.

New products

In terms of the loan portfolio, Ipoteka-Bank is left behind by four other big state-owned banks, but this difference isn’t that significant. For example, Asakabank’s loan portfolio is about $3.2 billion (ranked 4th). OTP can help its new subsidiary catch up to its competitors, even though it is unlikely that Ipoteka-Bank is going to be the leading bank in the country anytime soon, although the investor is probably keeping this idea in mind.

«Our long-term goal is to make OTP Group the key actor in the banking market in Uzbekistan,» said Sándor Csányi, chairman and chief executive officer (CEO) of OTP Bank Group after the ceremony of signing the agreement in Tashkent.

Sergey Kaduk, executive director of Portfolio Investments, says it is unlikely that Uznatsbank, the largest bank in Uzbekistan (three times bigger than Ipoteka-Bank), would voluntarily bow out of its leading position. On the other hand, Hungarians have something to offer the market. «First of all, they can bring best practices and new technologies. They can make the process of lending meet international standards. Even though smaller and more active banks may attract more clients at the expense of fast and easy procedures, almost limitless financial resources of OTP will allow the bank to reach steady growth in the loan portfolio,» he said.

Odil Musayev, executive director of Alkes Research, points out that OTP Group has a huge amount of experience working in emerging markets of Eastern Europe and CIS. This expertise is crucial when it comes to Uzbekistan, a country where the banking sector is going through a deep transformation. The investor can make the bank’s operations more effective; it can increase the quality of management and corporate governance and improve risk management. Also, Musaev believes that OTP can offer new products for the local market such as Private Banking and even provide investment and banking services and asset management services.

Another crucial part of the deal, which is still unknown, is the question of staff. «I am wondering whether OTP is free from obligations to staff or not. This is important because Uzbekistan’s authorities can use such deals to create new jobs in the economy. The social component of the privatization process is very important,» Livny highlighted.

Right after the signing of the agreement with the government, OTP said that is going to develop its new subsidiary, and introduce new banking products and standards for corporate governance.

OTP expansion

In the summer, when the two sides just negotiated the deal, the Fitch agency confirmed the rating for Ipoteka-Bank with a stable outlook. The assessment was based on the assumption that «OTP is more capable to support the bank than the government.» However, the rating of Ipoteka-Bank (BB-) won’t change anytime soon because it is already at the same level as the sovereign rating.

OTP has been very active in terms of acquiring banks in Hungary, Bulgaria, Serbia and Montenegro. Ipoteka-Bank is the 24th foreign asset the group has acquired since 2000. For example, the group entered the Russian market in 2006 after acquiring Investsberbank. As of April 1, 2007, the bank was ranked 63rd in terms of capital equity and 41st in terms of assets. As of February 1, 2022, the bank was 42nd in terms of assets and 32nd in terms of capital.

Plans for future

Uzbek authorities are not ruling out the possibility of more deals with investors in the banking sector. In May 2020, Uzbekistan’s government adopted the banking system reform strategy that is aimed at decreasing the state’s role in the sector. The government wants commercial banks to account for at least 60% of all assets in the market by 2025. This is going to be a significant change compared to 15% in 2020.

According to the Central Bank of Uzbekistan, the successful transformation and privatization of state-owned banks in the country will decrease the necessity of pouring money into banks’ equity capital from the state budget. The goal is to push out the banking system into a market territory. It is expected that foreign investments and owners’ money would be enough for increasing the equity capital and distributing cash flows within the economy more properly. At the end of the day, these factors must let the banking sector gain the power needed to provide a growing number of promising projects with the funds they desperately need.

The closure of the deal between Uzbekistan’s government and OTP Bank is expected to be completed within the first half of 2023.