14 Jan Weathering the storm through collaboration in all fronts
Pál Simák, Chairman and CEO, CIB Bank, explains how the pandemic acted as the trigger to enable critical digitalization initiatives in the financial sector
You have been heading CIB Bank, Intesa Sanpaolo Group’s Hungarian subsidiary, for the past 6 years now, following several leadership positions at MKB Bank, McKinsey or Bank of Canada. As a quite experienced banker, how would you rate the health and the competitiveness of the country’s banking industry? How is it supporting the real economy, especially these days with the COVID-19 crisis still raging?
The banking sector in Hungary is one of the supporters of the country’s economic growth. Hungary had one of the most dynamic GDP growth in Europe in the past couple of years, partially because the banking sector was able to support the business and the economy. It is good to compare the current crisis to the 2008 crisis, because it highlights the new resilience and the ability of the financial sector to support the economy. As opposed to 2008, 2020 is a very different story. The banks are quite profitable which allows them to lend and support the economy, whereas back in 2008, the loan to deposit ratio in the banking sector was close to 150 percent, meaning that the banks were borrowing money outside of their own resources to lend; they had a lot more loans than resources. This rate is of about 75 percent now, so the banks are a lot more self-sustaining at present and can use their own funds that they create from customers to support the lending.
The other big important metrics is the capital adequacy ratio, which in the previous crisis was around 11 percent. Today it is above 20 percent, so the capitalization of the banking sector is a lot more stable and stronger, which allows it to withstand any kind of potential shock and allows it to grow the balance sheet and continue the lending that needs to be done to stimulate the economy.
The biggest change compared to 2008, was that back then, 70 to 75 percent of the loans to private individuals were in foreign denominated currencies, mostly Swiss Francs or Euros, and some at variable rates. Now, all the loans to private individuals are Hungarian Forint currency based. About 50 percent are in fixed rate, and so the potential shocks coming from currency fluctuation do not impact customers, neither in terms of improving or worsening their payment possibilities. Therefore, banks do not face any big non-performing loan (NPL) problems which also allows them to be stable and to lend. Overall, the banking sector as a whole is very strong, stable, self-funded and resilient, which is good to see, amid this new pandemic crisis.
The Government of Hungary launched several stimulus packages and other incentives to help keep businesses afloat during the COVID-19 crisis, including the loan moratorium, the Funding for Growth Scheme and others. How would you rate the effectiveness of these various programs? How are they impacting the economy and banks’ business?
The collaboration between the Hungarian Government, the Central Bank of Hungary and the banking sector is great. It was good to see that when the crisis started in March, not only has the banking sector come together, but also the Central Bank and the Government have joined forces to prepare various actions to help Hungary and the Hungarian people to get through this pandemic crisis. These actions include all kinds of lending programs, guarantee programs and the moratorium. They span through the various measures that the Central Bank took to ease the burden on the banks to serve customers, also through digitalization. It was very good to see this cooperation done in a very coordinated and a professional way. This allowed us to react very quickly and to be able to fight the negative impacts of this crisis.
In your opinion, what will be key to propel faster economic recovery in Hungary now? Are you confident we will return to the pre-crisis growth level any time soon?
There are many discussions around what kind of a recovery curve we will have, whether U, W, V, etc. It was very encouraging to see the third quarter GDP statistics of Hungary, where you could see that after a very sharp decline in the second quarter, we had a very strong rebound and resurgence of GDP growth when certain measures such as businesses’ closure and traveling limitations were lifted. The economy is very resilient and very quick in its ability to react and come back to normality. Overall, this year we can expect around minus 6 percent in GDP, so a big fall. However, we think that next year we can expect a rebound in the region of plus 4 percent against 2020. By the end of 2021, we should be back to a state close to where we were by the end of 2019, depending on a number of factors and how we manage to tame the pandemic and the vaccine process. As an open and export-oriented economy, ranked 35 worldwide in terms of export volume, Hungary relies a lot on exports. If there is a slowdown in Western Europe or the other parts of the world, we do feel it from a GDP perspective. Yet the local consumption has increased considerably and foreign direct investments are also quite substantial, creating a balancing effect. Even if the resurgence pace of our export-related growth is lower than expected, domestic consumption and FDIs, together with the government programs targeting infrastructure, will support the economy. At the end of the day, I think we will bounce back quite quickly to a pre-COVID-19 situation by the end of 2021.
2020 has marked a big turning point for digitalization, namely with the launch of the instant payment system back in March. CIB is not a stranger to innovation and digitalization since it launched a number of innovation solutions in that area, such as the CIB Bank Mobile Application or Apple Pay services. How would you rate the state and the progress of banking digitalization in Hungary?
About four years ago we did a survey and evaluated the digital readiness of the country in terms of infrastructure, in terms of legislation, and we found that Hungary was quite behind. But back then, there was also an accelerated pace for changing this, and about 2 to 3 years ago, we got to a point that we were already at par with the countries surrounding us, from a competitive point of view.
Together with the Banking Association, which I am on the Board of, we put together an agenda with the top 22 items that were priorities from a banking perspective to speed up digitalization. A large number of these items were already implemented in collaboration with the Central Bank and the Hungarian Government. Out of this digital roadmap, a couple of actions are still outstanding, but this has allowed an even faster acceleration, and has enabled us to be able to do things remotely and in a seamless way.
CIB has done many different things in that regard and is one of the leaders of digitalization in the Hungarian market. We were the first bank to enable our existing customers to get personal loan onto their account in just seven minutes, from our mobile application. We were among the first ones to introduce an acquisition portal where you could open an account with the help a video banker online and also apply for a personal loan.
One of the biggest innovations we have done up till now, which I think is extremely important in a pandemic situation, is the almost fully online mortgage application. Up until now, you had to come to the branch around 4 times when applying for a mortgage. Now we have enabled our customers to do everything digitally, except for signing the official contract of the mortgage. This the only touchpoint where they need to come in to the branch to sign the final contract, because you also need the signature of a notary in Hungary. In addition to being able to open an account in a fully online process, we have also introduced a fully digital account opening in the branches as well, where no paper is used, and we are able to open accounts in 20 minutes for our customers, as compared to over one hour for the paper-based approach.
Many things are changing and evolving. We have a very high penetration of digital sales: 25 percent of all personal loans is done through our digital channels, 30 percent of investment funds, 40 percent of deposits is also done this way. 98 percent of all our transactions are digital already, which is not surprising. New products and new contracts are moving more and more towards this channel.
As a consequence of these increasing digital skills CIB has been gaining an important role as digital innovation hub within the International Subsidiary Banks Division (ISBD) of the Intesa Sanpaolo banking group. In this respect, more and more frequently CIB is taken as pilot-bank for IT applications to be then installed in other ISBD banks.
Where do you see the next disruptions and opportunities in the financial services industry and fintech areas in the future?
We had a long debate for a while about the fintech companies, whether they pose a threat for us or not. Our answer is that we should work together: keeping this in mind our approach is to integrate fintech into our services. For example, for our digital acquisition portal, we have five different fintech solutions embedded into our own infrastructure. We have now moved to the model of disruption, and to a certain extent we are challenging the status quo. I think we, as a banking sector, have adapted to be able to accommodate and work together with most fintech companies to incorporate their innovative solutions into the infrastructure that we have already built. That disruption is helping us also to rethink what we are capable of, and it speeds up development, because we do not need to ‘reinvent the wheel’.
From a disruption point of view, I think the main changes will come primarily from remote access, what you can offer remotely to the customer. This is what we are working on mostly, trying to accommodate to the pandemic situation, but also from a convenience point of view, adapting to the tendency that most services and most product sales should move to digital channels. The challenge is making it the most convenient and comfortable for the customer while remaining the main contact point for the customer. We do not want to become just the back-end service provider and see other companies take the customer interface and customer interactions away from us. That is where most of the interaction happens, where we can provide additional value and products for the customers.
Do you think any substantial progress has been made in terms of sustainable finance?
The notion of sustainability was one of our top priorities at the beginning of 2020, then the COVID-19 crisis situation hit and everyone started to focus on many other things. However, I think everyone have become a lot more conscious of this topic in general. All of us became less polluting, less energy consuming, especially with the lockdown and travel restrictions measures. I think we will return to this topic very soon. We have certain programs being launched by the Central Bank and our parent company, Intesa Sanpaolo, is also very focused on this topic, as evidenced by the EUR 5-billion fund allocation for circular economy projects set up for the period 2018 till 2021.
CIB is one of the leading banking players in Hungary, turned 40 years old last year. What are the distinct differentiating factors that make CIB Bank stand out in Hungary? What would you say are the bank’s key strengths and weaknesses? How does CIB contribute to the country’s economic development and to financial inclusion?
In terms of size we are somewhere between 6th and 7th, depending on what you look at, in terms of loan volumes or balance sheet. In terms of market share we are in the range of 5 to 9 percent depending on the products that we are focusing on.
During the financial crisis of 2008, we were one of the banks that were negatively affected. We had to rethink our risk policies, rethink our approach, cleaning up the bank and clean up our balance sheet. As a result of this, even thanks to exploitation of Intesa Sanpaolo Group’s expertise and support, we have one of the most advanced risk management practices on the Hungarian market. We were able to streamline it and carefully pick and optimize the loan portfolio. We have out-performed the growth of the market in the past years, the rate of our customers that are over 90 days in delay of payments are 1.4 percent, whereas the Hungarian average is 2 percent. We have managed to find the right balance between a healthy growth and also maintaining a clean balance sheet.
On the innovation and digitalization side, as mentioned before, we are among the top players in the Hungarian market.
As we are closing the 2020 chapter and starting a fresh from a clean slate, how would you summarize CIB’s priorities and objectives for 2021?
The main strategic priority for us is to maintain a sustainable, efficient way of operation. We are working on keeping our costs level flat. In fact, we were the only bank on the Hungarian market who managed to reduce its costs in the past year, while improving revenues – because the cost of the whole banking sector actually increased in that period. Our cost-income ratio is one of the most important indicators for us, gauging our efficiency. We managed to improve our cost-income ratio by about 7 percent this year, and we continue to improve by 3 to 4 percent year on year. This is fuelled by the innovation and the digitalization at the bank.
This comes with about 10 to 13 percent growth on the loan book on a year on year basis, and this will fuel the profitability to a normal level of 7 to 10 percent return on equity, which is something that we are trying to ensure in the long term. This is all to be supported by the growth and the digitalization strategy that we are continuing to pursue in the coming years. We are also planning to focus on the fee business and fee income of the bank, to make sure that we are not too reliant on interest income, which can potentially be affected by the volatility and the economic situation of the country.
What would be your final and direct message to our audience?
The Hungarian banking sector is very resilient and will have a strong role in the future to support the above average growth of the Hungarian GDP. Going forward, Hungary is a great place to live, a great place to visit and has a lot of potential opportunity for everybody. Our bank, CIB as a member of the Intesa Sanpaolo Group, is committed to be a leading player on the Hungarian market, providing best-in-class digital services to all our customers. We’re open if anybody wants to come in and try out our services.