Q&A with Commerzbank President Andras Kozma

A slightly edited version of this Q&A appears in the 2009 edition of the Budapest Business Journal Book of Lists
Conducted by Jacob Doyle

Andras Kozma is the president and managing director of Commerzbank Zrt. He started his career at commercial credit insurance firm Euler Hermes Hungarian Credit Insurance Zrt. Previously, he had spent three years at HypoVereinsbank Hungária Rt, where he stayed for three years. He rejoined Euler Hermes in September 2001, as general manager and member of the board until joining Commerzbank in July 2007. He spoke with BBJ about the Hungarian banking sector and what adjustments it faces in the wake of the global finance sector crisis of 2008.

BBJ: The recent financial crisis has casued a severe blow to the global banking sector. What effect has it had on banks in Hungary?

Andras Kozma: Like the Hungarian business sector as a whole, Hungarian banking is fully integrated into the global banking sector with 80% to 90% of total banking assets owned by Hungarian subsidiaries of foreign banks. This means that every global change brings a change here, although not necessarily a parallel change of the same magnitude. Unlike many foreign banks that have been plagued by their ownership of “toxic” assets, Hungarian banks have largely avoided this. We have nothing like subprime assets. Asset backed securities are not characteristically found in Hungary. Our banks have worked more simply: deposits and credits. The local dynamic didn’t require such fancy instruments.

Andras Kozma: In so far that we have been affected by the recent financial crisis because of integration with the global sector, then yes. Initially, the big banks which failed - such as Lehman Brothers and Fortis – didn’t have much effect on the Hungarian market. Neither has a significant presence here.

There is a modest number of delinquent loans, which you could call bad assets. But our conservative business practice has prevented these from accumulating. The sector here has experienced sufficient dynamic growth to avoid the need for such “innovative” products as ABS.

BBJ: You say that Hungarian Banks are mostly subsidiaries of foreign banks, which you admit have suffered. Have relations suffered between local banks and their foreign parents also suffered?

Andras Kozma: While our assets are largely sound, we are influenced by the global sector. All banks have a need for liquidity. Deposits from households and companies are not sufficient to cover liquidity needs, so cash has to come from abroad from the parent banks. In a sense, we suffer even more than the parent banks because our liquidity needs are of lower priority than their own. As a result of the crisis, then, we have lost our foreign credit line. The Interbank market has dried up and we can no longer make loans in such foreign currencies as Euros or Swiss Francs. The parent banks simply did not have the liquidity to lend to us.

BBJ: What must Hungarian Banks do in the months ahead to cope with the aftermath of the crisis?

Andras Kozma: Deteriorating access to credit has been the impact of the crisis. Existing loans are still being prolonged if the borrowing entities prove creditworthy, but new credit lines have been difficult to establish. The challenge of the months to come is to find a way to adjust to this new reality. Banks are reasoning as to whether an offensive or a defensive approach is best. Which part of our business do we wish to scale back, they ask. Retail? Commercial? Which clients? How do we maintain liquidity? How brave do we want to be?

One approach we see now is to raise funds domestically by raising interest rates on deposits. But this doesn’t help those credits that are denominated in a foreign currency.

If the challenge can be summarized, it is to improve the liquidity management of the banks, to harmonise assets and liabilities on the maturity side and also to balance the currency side. If you have credits in a foreign currency, you need liabilities in the same currency.

Meanwhile, if interest goes to the sky on deposits, more expensive financing for banking customers cannot be avoided. Tight credit is most directly demonstrated in the lines of credit, investment credits, on loans with long-term maturity character such as real estate development projects, new investment in construction, retail expansion, mergers and acquisitions; in general, those business entities that do well in boom times will not be receiving much welcome.

The banking sector in this region has done well; we’ve gotten used to viewing ourselves as the favored sons of the European finance sector. But psychology plays an important role. It may be averting capital and financing from the region. We won’t likely be the favored sons of 2008.

BBJ: Will some areas of the banking business suffer more than others?

In my opinion, retail banking will be more stable than the corporate side and less affected by global setbacks. The brakes will be put on the corporate side, especially in the real estate sector. Instead of granting active credits, government paper will see more activity. In general, banks will be lending less and buying bonds in increasing number.

Money is like blood in the body. When there’s too much blood, you get high blood pressure, clots and loss of limbs. In much the same way, an overflow of liquidity causes bubbles in the economy. When more money is flowing, the assumption is that prices should be higher, which generates the impression that value is on the rise. But this is a psychological impact of high liquidity. The same home in the US could be valued at USD 200,000 or USD 2,000,000. But the value is derived from the expected sale price, not from an evaluation of the material value or the utility it provides. At the end of the current crisis, the assets in the US and Europe will see their values lowered. Asia’s, on the other hand, could see theirs rise.

BBJ: How do you view the relationship between the Hungarian banking sector and the government?

Andras Kozma: The banking sector is important to the broader economy, hence the government is concerned with it and has channels of communication such as the Commercial Banking Association, the National Bank, etc. I believe that the relationship is quiet good, as affirmed by recent statements from both sides.

We have seen recent instances of nationalization in the banking sector such as in the cases of the Royal Bank of Scotland or Hypo Realty in Germany. The CEE region has not yet seen the need for such government takeovers. As I said, we were not forced to be creative and had no need for AAA-rated subprime bonds.

BBJ: The energy sector was booming up until the recent crisis, particularly in the area of renewable energy. What do the months ahead hold for financing of projects, particularly in this sector?

Andras Kozma: It cannot be said that banks will refuse all new investment projects such as in energy or real estate. There will be new filters and the rules could change. If the government introduces new legislation that make energy projects more attractive, such as introducing new and higher subsidies and buy-in tariffs, then the business models of certain renewable energy projects could become much more attractive to banks. There are many things the government could do. But gas and oil should both be cheaper in times of recession, hence working against renewables. And just because gas may be expensive and coming almost exclusively from Russia isn’t enough to make renewable energy projects attractive borrowers to banks. These projects have returns that are years away, yet banks’ liquidity needs are months away. At the current moment and under current government policy, we wouldn’t be able to afford them, and wouldn’t likely be very enthusiastic to consider them as credit customers.

Q&A with Eric de Clercq

A slightly edited version of this Q&A appeared in the Budapest Business Journal
Conducted by Jacob Doyle

Eric De Clercq is the economic and commercial counselor of the Wallonia region of Belgium (Wallonia Export and Investment – AWEX), working through the Belgian Embassy to Hungary in Budapest. He recently came to Budapest from the same posting in Warsaw. Establishing and fostering ties between SMEs in Wallonia (Belgium) and Hungary, along with greater utilization of Belgian expats within Hungary’s business community top off his personal goals for his posting here.

Q: How would you describe Belgium’s role in international business?

A: Foreign trade has always been extremely important for Belgium since its very creation in 1830. Nowadays more than 70% of our economy relies on it. With this we are very open to the presence of foreign firms within our borders. Numerous large international companies have been long established in our country. American companies are for example extremely well represented. In fact, we just celebrated the 175th anniversary of Belgo-American relations. The most recent examples have been Google and Microsoft, which just decided to set up a major European hub in Mons, next to the French border. In my own region of Charleroi we have a large Caterpillar plant that assembles earth-moving equipment, providing employment for more than 3000 people. So the American presence in Belgium is substantial. Moreover, the presence of EU and NATO institutions gives the country a strong international aspect, particularly in its image abroad. And there is the fact that we have three official communities speaking three different languages (Dutch, French and German), as well as large numbers of ethnic minorities. Belgium’s cultural diversity is definitely considered as a plus by companies wishing to invest in our country. On the other hand, our national and regional presence abroad is rather far-reaching. Speaking just for Wallonia, we have the support of 105 economic representative offices in some 80 foreign markets, in place to serve the interests of our companies. And it is important to mention that we work closely with our colleagues from the other regions of Belgium and the federal authorities. As far as Hungary is concerned, Belgium is one of the top 10 investors in this country. Our companies have invested over €2 billion here.

Q: You recently came to Hungary from Poland as the Economic and Commercial Counselor representing the Wallonia region of Belgium. What have been your activities thus far and what plans do you have?

A: My main role is to help out companies - mainly SME’s - to develop their exports to the Hungarian market. I also promote foreign investment in my region. I’m new, so my first few months have been devoted to meeting Belgian firms already operating here. There are just a few large Belgian firms left in Hungary. Considering the process of globalization many Belgian investments have been bought over the years by multinationals. There are however many Belgians working in this country for non-Belgian firms. I would like to tap into this group and utilize its human resources. This is the first of two early goals I’ve set for myself, the second being to facilitate the involvement of Walloon SMEs in the Hungarian market.

Q: Could you be more specific about how do you hope to utilize these Belgian expatriates living and working in Hungary?

A: I think that the experience and expertise of all those Belgians working for non Belgian companies could be successfully used to help out our companies. One area where I hope to attract interest is to Pécs 2010, that is when Pécs becomes the European cultural capital. This was the rationale behind the business event my office helped to organize on April 23rd, along with the French-Hungarian Chamber of Commerce. Not only do events such as this build awareness on business opportunities, they also offer the possibility for the management and employees of Belgian and French firms to get acquainted, discuss and analyze opportunities and possible cooperation with the decision makers. With some 50 companies participating, our goal for this event was largely met. I don’t however wish to multiply the number of events on the Hungarian business calendar. There is more than double the number here than in Warsaw, my previous posting.

Q: What ways are you able to help these Walloon firms “get down to business?”

A: My office is able to foster business relations between Belgian and Hungarian businesses by organizing and even host meetings between them. What’s more, we have the capacity to play a limited matchmaking role at the request of a company – typically a Walloon firm interested in doing business here – by assessing their needs and then by researching the local market to help find partners, suppliers or even prospective clients on the companies behalf. We also work with ITD Hungary for FDI projects. I am not really a believer in big trade delegations. Instead I prefer to give as much individual attention to particular firms as possible. Unlike some other countries’ commercial services, we provide this service free of charge.

Q: What leads you to think you could have success in bringing Belgian SMEs to Hungary?

A: In addition to the services provided by this office, one factor attracting foreign companies to Central and Eastern Europe remains lower costs. But there is still sometimes a “mental Berlin wall” in the minds of many companies. Some people still view the region as being distant. Yet since the advent of low-cost air carriers, you can reach a market of 10m consumers and producers such as Hungary for less than the cost of a train ticket to Paris. Wizzair, a partly Hungarian owned airline, is the second largest client of the Brussels South Charleroi Airport. The effect could be similar to what happened in ’97 when Ryanair opened direct flights between Charleroi and Dublin and new markets were in effect created. Return fares of less than €100, coupled with agreements with hotels, enables low-cost visits with personalized meetings with local companies. So when it comes to bringing Belgian SMEs to Hungary, discount travel fills the missing link.

Q: What steps could be taken to secure investment on the part of Belgian SMEs?

A: All the big fish FDI have come already. The future belongs to SMEs. Their success depends a great deal on how they are received, both by local businesses and by local government. This will also help to determine the size and specificity of the SMEs that come. Previously, the lure had been made to big companies. Concerted efforts to attract foreign investors can and does pay off. As an example, the municipal government in Wroclaw, Poland launched just such an initiative and now lures numerous SMEs of foreign origin. Hungary could do the same. Municipalities could offer opportunities to Belgian SMEs. In Pécs we discussed redevelopment of the Zsolnay porcelain works. As you may know, in Belgium we also have a strong tradition of crystal and porcelain. When they described how part of the works would become a museum, I was reminded that this very thing has been done to a crystal works in Belgium, thereby illustrating an opportunity for just such cooperation.