In recent years, the major development in Hungary’s banking system is the establishment of the country’s superbank through the merger of Budapest Bank, MKB Bank, and the Takarek Group. DLA Piper Partner Andras Nemescsoi, Forgo Damjanovic & Partners Managing Partner Gabor Damjanovic, and Jalsovszky Law Firm Managing Partner Pal Jalsovszky share insights into the driving forces behind this development, its current status, and its anticipated impact on Hungary’s banking sector.
Politics or Economy? A Bit of Both
“The establishment of the ‘superbank’ is being implemented in two stages,” Nemescsoi begins. “The merger of Budapest Bank and MKB Bank took place on March 31, 2022, and Takarekbank will subsequently merge into MKB on May 1, 2023.”
“The new entity, called MBH Bank Nyrt., will be the second largest financial institution in Hungary, with a market share of around 25%,” Jalsovszky adds. “The ‘superbank’ would be listed on the stock exchange in 2025, with a target return on equity of 15% over the next four years.”
As for what drove its creation, Nemescsoi and Jalsovszky highlight the economic factors. “The creation of the ‘superbank’ in Hungary was driven by the government’s effort to strengthen the country’s banking sector and to promote economic growth,” Jalsovszky says. The merger, according to him, “is part of a larger plan to consolidate the Hungarian banking sector, which was considered to be fragmented and inefficient.”
The main idea behind the creation of the superbank, according to Nemescsoi, was to exploit the synergies between the three banks: “Through the process, the strengths, values, and best practices of each party, including the high-quality customer service, should be combined, thus maximizing shareholder value,” he notes.
Damjanovic, on the other hand, thinks that the rationale behind the merger is rather political: “upon assuming power in 2010, Orban expressed his desire to see more Hungarian investors and owners in certain key sectors compared to the previous years,” he notes. “This would involve reversing some privatizations in essential sectors of the economy, such as the banking sector, telecoms, and energy.” According to him, “the objective of this is twofold: first, to exert control over Hungary without interference from external investors – or political checks and balances, as there currently are none in Hungary – and second, to continue squeezing out foreign investors and banks.”
“It is evident that Orban has amassed significant power, with unofficial estimates suggesting that between 30 to 50% of the economy is under his control, either through state-owned enterprises or ownership by his family and friends,” Damjanovic continues. “To continue expanding this influence, having the backing of a large bank is crucial.”
Challenges and a Strong Will to Overcome Them
The creation of the superbank presented several difficulties and challenges from the very beginning. According to Nemescsoi, “the combination of the three banking groups is a uniquely complex process, which is very rarely seen in practice globally.”
One of the major difficulties, according to both Nemescsoi and Jalsovszky, was related to the complex regulatory framework: “the banking sector in Hungary, just like in the other member states of the EU, is heavily regulated, and the multi-step merger had to comply with various legal and regulatory requirements,” Jalsovszky notes. “The merging banks had to obtain regulatory approvals from several regulatory authorities, including the Hungarian Competition Authority, the Hungarian National Bank, and the European Central Bank.”
Additionally, Nemescsoi adds, “the Hungarian state’s involvement – being the ultimate shareholder of Budapest Bank – also raised the usual public sector-related issues, such as scrutiny of EU state aid issues, and the high formality requirements of public-sector decision making.”
Jalsovszky and Damjanovic also highlight the issue of differences in organizational culture: “the three member banks involved in the merger have different organizational cultures, which makes it challenging to integrate them into a single entity with shared organizational values,” Jalsovszky says. “This may lead to some resistance from employees and management, which further complicates the merger process.”
“Two of these three banks were highly regarded professional banks, and all three with distinct profiles, resulting in varying approaches, KYC procedures, and IT systems,” Damjanovic adds. “As a result, integration took a significant amount of time. The integration process is still underway, as evidenced by customers – depending on the bank with which they originally worked – there are still different procedures available. Even for online banking systems, both legacy and new IT systems are still in use, further emphasizing the ongoing nature of the integration process.”
Finally, Nemescsoi mentions the challenges throughout the COVID-19 period: “An interesting factor was that COVID-19 set in at a very early stage of the transaction. The project had been built on a series of personal daily meetings – these were all promptly canceled.” However, according to him, “this forced change not only had not hindered but had actually contributed to the efficiency of the transaction process.”
Between Optimism and Caution
As for the effectiveness of the Hungarian banking sector after the merger, the lawyers tend to be ambivalent. For Nemescsoi and Jalsovszky, the change is rather positive: “the merger is supposed to boost the competitiveness of the Hungarian banking sector and lead to increased efficiency and cost savings, as the new ‘superbank’ would be able to take advantage of economies of scale,” Nemescsoi notes.
“The new bank ‘aims to be Hungary’s most modern bank,’ which will ‘introduce flexible, internationally leading digital solutions,’ serve the entire market spectrum and all customer segments in the future, with a strong focus on a new, modern range of products and services for retail, micro, small, and medium-sized enterprises and agricultural customers,” Jalsovszky references. Overall, he says that “it is hoped that the creation of a stronger, more efficient bank would improve access to credit for businesses and individuals, boost investment, and drive economic growth.”
According to Jalsovszky, “in addition to promoting economic growth, the merger is also seen as a way to reduce the government’s exposure to the banking sector. The Hungarian government had acquired a significant stake in several banks, including Budapest Bank and MKB Bank, i.e., two of the three predecessors of the ‘superbank’, and the merger is also seen as a way to reduce its financial risk and exposure.”
For Damjanovic, “as with any other banking sector, creating a second-largest bank leads to sector consolidation, with both advantages and disadvantages.” According to him, “having a major bank, which can provide a wealth of information and data on the economy, is useful for various purposes, such as the FDI regime.” Moreover, he says that “having a major bank is related to the state having access to an enormous set of information, that can be used later to facilitate potential transactions.”
Additionally, Damjanovic highlights the potential threats stemming from dealing with the taxpayers’ money: “having the support of a major bank is hugely beneficial for the government’s acquisitions. However, in the long term, it is also a significant risk since it may involve taxpayers’ money. The recent collapse of Credit Suisse in just three days and its aftermath serve as a reminder of how dangerous it is to play with taxpayers’ money. In that sense, any problem that may arise could become a major issue.”