The Banking sector in Hungary has been doing well in recent years. Schoenherr Budapest Local Partner Gergely Szaloki walks us through that progress.
CEELM: We spoke at length about the current state of affairs in the Banking sector in our recent CEELM Round Table. Could we start now by offering our readers a bit of context for that conversation? Where was the sector, and the economy as a whole, five years ago, and how has it evolved since?
Gergely: If we are to use a time machine and go back five years, I’d highlight two main challenges for the Banking sector at the time: the growing ratio of non-performing loans and the start of digitalization stress.
As to the first, I’d say the Banking sector has made good progress. NPLs are at a healthy level, in no small part due to the fact that the economy in general has picked up, allowing debtors to start making money and financing their debts. This was also supported by the Hungarian housing market picking up. Really, apartment prices have skyrocketed in the last five years in both Budapest – the capital – and outside of it, with prices per square meter having doubled in certain regions. This raise in flat prices helped a lot in terms of raising capital. There were also a few regulatory changes that helped banks along the way in terms of getting rid of these NPLs.
On the second subject, I’d say that the stress of digitalization was only starting to show its head back then. Back then, Fintech companies were only just starting to enter the market. The difference between then and now is massive – five years ago I couldn’t pay with my phone, or handle my finances with it. We’d read back then about developments in the field – but it still seemed to be science fiction. Today it’s mainstream.
CEELM: You mention both the economy overall and real estate prices picking up as a driving factor for banks. What role did the banks themselves play in the recovery?
Gergely: It might be a bit strong to call them zombies at the time, but before they got rid of their NPLs, banks were rather inactive. Once those portfolios were cleared, they could restart their lending business, which naturally helped the real estate market. And it was not just the residential real estate sector that saw a boom – a lot of commercial development kicked off as well, and most of it was financed by local banks. On top of it, the Hungarian Government employed various mechanisms to encourage Hungarian families to have children, which also incentivized a lot of development in residential spaces, again financed by local banks. I’d say it was a two-way street in terms of which helped the other recover.
CEELM: What about the practice of law in the Banking sector? How is it different in Hungary today from five years ago?
Gergely: I’d say that lawyers’ jobs basically remained the same over that time. There is really nothing new in my everyday work – I am pretty much doing the same things I was five years ago. How I am doing it might have changed a bit in the interim.
Firms faced the same digitalization push the banks did. Many see this as a hurdle to overcome but, of course, once that’s done, it helps our work as lawyers rather than impeding it.
Of course, as a law firm, considerable investments are required, especially if, like us, you aim to be at the cutting edge of both software and processes. Once those investments are carried out though, you reap the benefits. The Schoenherr office is operating under a home office setting at the moment, in light of current events. Everyone, from assistants to associates to partners, was initially encouraged, and then required, to work from home to stay safe. The transition to this set-up was extremely smooth – but five years ago this would have been much harder to implement. This is where we felt first-hand that our efforts in digitalization had paid off.
And I suspect every major law firm in Budapest has worked hard, and continues to do so, to gain a competitive edge on the digitalization end of things.
CEELM: How does this evolution translate in terms of fees for the clients?
Gergely: Of course, it will ultimately translate into the pricing strategies, but really, that revolution started ten years ago with the crisis kicking in. We were used to working mostly on an hourly basis but that’s not something our clients are interested in paying for anymore. Now, as a result of digitalization, it no longer makes sense for us either, as certain tasks no longer pay off under that old model. If certain kinds of client requests took up a large amount of time in the past to perform, with the deployment of the right technological solutions, they can now be done in a far more efficient manner. Applying traditional hourly fees would actually not reflect our investments as well as other aspects, such as our professional liability coverage.
CEELM: You’ve told us about the sector overall. What about your firm specifically? How has it evolved over the last few years?
Gergely: I think this was an interesting time for the firm. As you probably know, Schoenherr’s network is based in Vienna, where the first office was opened in 1950. Between the fall of the Iron Curtain and around ten years ago, the firm managed to open up offices pretty much everywhere in the CEE and SEE regions, except Greece.
Since the last five years is the main point of reference we’ve been looking at, I’d say the firm underwent a different type of expansion in that time. Granted, as seen from the outside, not much has happened in terms of our network, with fewer eye-catching headlines of the kind that accompany the opening of a new office. Seen from within, the story looks quite different, however, as our main drive over the recent years has been to grow stronger in those markets where we already planted our flag.
For example, the Budapest office grew by 30-40% in terms of headcount in the last four or five years, and revenue has almost doubled in that same time span. It is a good problem to have, but we need to move to a new and bigger office as we have outgrown our current place. Yes, it’s less spectacular news to report but I would argue it’s a more significant development than geographical expansion.
CEELM: What about the future. How do you see the next five years?
Gergely: I obviously have no crystal ball in front of me, and things are very volatile today. The Covid-19 virus is here and it sometimes feels like it came out of nowhere. I’d like to believe that things will pick up soon but there is always the chance we’ll fall into another recession, as many economists project. Then again, we’ve been listening to the same people telling us that the next big crisis is just around the corner for the last two or three years, so am I not sure if the virus will be the thing to finally trigger it or if it will turn out to be just another hiccup along the way.
If I had to place a bet, I do expect some level of economic downturn – but I am hopeful it won’t be as big as a decade ago. I expect it will require a lot of restructurings, and looking at CEE, I foresee plenty of companies having liquidity problems or other forms of shortages that will require bridge financing or some form of organizational restructuring. We, at Schoenherr, are expecting these – as I assume most of the market is – and are building up our capabilities further to meet the expected demand down the line.
CEELM: You mentioned you are preparing for restructurings. Are banks?
Gergely: I am talking to clients regularly but, at this point, the feedback is mixed. Some say they are already feeling it, while others are not yet reporting anything just yet, but they say that they are still preparing for the inevitable moment when it will.
CEELM: How are they preparing?
Gergely: That I have limited info on, as I assume they protect that strategy as a business secret. Generally speaking, Hungarian banks have a robust capital structure so, if some of their clients will face difficulties, I think they should be able to weather the storm.
Beyond that, there’s a great deal of know-how that has been built up over the last ten years, which I’d split into two chapters. The first five years after the recession were all about sweating it out and hanging on. The subsequent five were all about selling off what was perceived as helpless. Should banks be faced with a new wave of challenges, I think they are far better equipped now to distinguish between what’s salvageable and what’s not and act quickly based on it.
CEELM: What about legislation? Is there anything in the works that may help down the line, should it be needed?
Gergely: There are some talks about a new insolvency law, but nothing has been published yet, so what it will bring is still a big question mark for us. I really hope that, whatever they are cooking in their kitchen, they will allow us to at least get a sniff soon so that we can brace ourselves and wrap our heads around it.
And it’s not just a matter of preparing as under normal circumstances when it comes to new legislation. We need to face the reality that this is what we may end up going to war with. If a crisis is to hit us, it would be rather unfortunate to have a fresh insolvency regime in place that has not yet been fully vetted out.