OTP Bank's acquisition of Ipoteka Bank is serving as a model for the future privatisation of state-owned banks in Uzbekistan and represents a pivotal moment in the country's economic transformation.

OTP is the first foreign lender to participate in the privatisation of Uzbekistan's banking sector, which is dominated by state-owned banks. Hungary’s leading lender entry to the fast-growing market is bringing expertise and knowledge crucial to Uzbekistan's evolving financial market.

As the country of 37mn continues its transition to a market economy, demand for retail banking services, consumer loans and business financing is set to rise.

OTP, which already holds a strong position in mortgage and consumer lending, is bracing for robust growth in a market with huge potential, creating more shareholder value for investors. The acquisition marked OTP's 24th transaction but its first purchase of a bank outside the EU.

bne IntelliNews, together with a group of other financial journalists from Hungary, spent a couple of days in Tashkent earlier this month on a study tour organised by the bank to showcase OTP’s plans at its first subsidiary outside Europe and learn more about Uzbekistan's ambitions to transform its market, which is seen as a model for its Central Asian peers. 

The first reports in the Hungarian media about OTP’s plans to expand in the region surfaced in March 2021, following the official visit by Prime Minister Viktor Orban to the country. OTP chairman-CEO Sandor Csanyi had also been part of the business delegation. OTP signed a MoU with the Uzbek government in September 2021 and reached an agreement on buying a majority stake in Ipoteka Bank, the fifth-largest lender in assets, in December 2022.

The Hungarian lender acquired a 73.71% stake in June 2023 and will buy the remaining shares by the end of 2025.  According to Uzbek press reports, OTP paid $324mn for the stakes. 

The government's commitment to improving business conditions is evident in the array of incentives provided to entrepreneurs, including tax exemptions, subsidies for exports and VAT refunds, and these measures have been instrumental in helping companies grow and expand, creating new markets for goods and strengthening ties with neighbouring countries and the European Union, according to Norkulov Ilkhom, First Deputy Minister of Economy and Finance.

The Uzbek government embarked on a series of reforms starting in 2017 to liberalise the economy and to reduce state control in main sectors, including the bank sector. The government also took steps to end price distortions by reducing subsidies in the energy sector, and steps were also taken to reform the farm sector, a key contributor to the country's economy. By 2030 the government's strategy envisages boosting GDP to $160bn.

State ownership in the banking sector currently stands close to 70%, but the government plans to reduce it to 40% or even below, Ilkhom said. 

The goal of the privatisation was not just to generate budget proceeds, but to attract strategic investors capable of driving further development. The goal was to partner with a bank from a stable, developed country, bringing in expertise and stability, he said. 

Ipoteka Bank chairman Elyor Inomjonov confirmed that long and tedious talks had preceded the acquisition that began at the end of 2020.

The results of banking sector reforms are already visible and the sector has been developing at a dynamic pace. Over the last five to six years, Ipoteka has seen its loan portfolio surge to over $3.5bn from $400mn before the privatisation.

By introducing new innovative products, Ipoteka has successfully attracted new clients, offering international guarantees and facilitating trade finance operations. This has enabled many Uzbek companies to purchase innovative technologies and raw materials from Europe, backed by OTP's guarantees, Ipoteka’s chairman said.

Ipoteka launched microloans accessible via a mobile app, and in December 2023 alone it provided 65,000 microloans worth $50mn.

Deputy chairman Viktor Vorobej, who heads risk management at the Uzbek subsidiary, said the demographic boom of recent years, and the fact that 60% of the population is under the age of 30, represents a burgeoning consumer base for the bank. 

“The first thing we did after acquiring Ipoteka was to review our portfolio, every single transaction. 

“OTP had to reclassify and reschedule many loans after taking ownership, but that does not mean these portfolios will have to be written off,” he stressed.

As a result of state-directed lending, the government assigned banks to lend to certain sectors of the economy. Ipoteka’s loan book was heavy with loans to agricultural producers.

If the government aims to privatise additional state-owned banks, it must first organise their portfolios effectively. Ipoteka serves as a positive example of successful management in these processes, he said.

The bank is bringing considerable know-how to the market, helping companies execute investment project financing and develop a business plan, or in other words, operating on a market-based logic. 

The transition will take time, as old habits die hard. Ipoteka still gets phone calls from ministries to lend to a certain company, but that is not the way OTP does business, Vorobej adds. 

Borrowers need to understand that if Ipoteka downgrades their credit score, they will face similar actions at other banks. 

When asked about the potential downsizing at the bank, Vorobej said that it would entail only a slight reduction of workforce from 4,670 at present to around 4,500.

Ipoteka was the only loss-making member of the OTP Group in Q4, due to high provisions for future losses. The Hungarian lender is well known for following a more conservative provisioning policy compared to its Western peers. Over time, as credit risks ease, this will help the Uzbek subsidiary turn profitable sustainably.

Ipoteka booked a HUF11bn profit in Q1, accounting for 4.5% of OTP’s HUF240bn net income in the first three months. 

Dmitry Sapronov, deputy chairman and head of retail and SME business, gave an insight into the bank's plans for its leading retail business. 

The lender, the fifth-largest by assets, holds a formidable presence in Uzbekistan's retail banking sector, driven largely by its dominance in the mortgage market. Before the privatisation, it held the number one spot in mortgage lending and at present it has a market share of 23-24% in this segment and a 15% stake in cash loans.

Ipoteka aims to diversify its loan portfolio further, which currently composed of 65-70% of mortgages and 22% cash loans.

The bank has more than 1.5mn active retail customers. The retail market is thriving, driven by a growing population and rapid digitalization. With over half of the population under 30, there is a strong preference for digital banking solutions.

Ipoteka Bank has already built a robust digital banking platform, disbursing over 50,000 loans per month through its mobile app, including cash loans and microloans up to $2,500.

The bank plans to further enhance its digital channels, anticipating a "super hot" digital market in the coming years. Since OTP's acquisition, the portfolio mix has shifted towards more sustainable and profitable products.

Historically focused on state-subsidised mortgage programmes, Ipoteka is leveraging OTP's expertise to diversify and innovate. This includes introducing new deposit products, savings accounts and universal accounts to cater to the digital-savvy population,  Sapronov said.

Sapronov highlighted operational risks, particularly the need for technology upgrades. Additionally, the lack of established risk management practices poses challenges. Competitors like TBC are using sophisticated credit scoring models to tap into the non-official income segment, a market that OTP has yet to fully address.

Despite these challenges, Ipoteka remains committed to enhancing customer centredness and leveraging OTP's global experience to strengthen its position.

Ipoteka Bank also faces some challenges, according to the accounts of the bank executives. Its outdated technology in server capacity, collection systems, and contact centres needs upgrading to handle the increasing scale of operations.

Pal Gombos, head of IT, said that the goal is to transform Ipoteka into a modern, digital bank, leveraging OTP's technological capabilities and operational efficiencies. This involves overhauling the core banking system and automating processes, ensuring that the bank can scale operations without significant increases in staffing levels, he said.

Additionally, the loan-to-deposit ratio remains high at over 200%, necessitating a focus on boosting deposits. The bank has taken steps to address that issue and has increased deposit rates and expanded channels to attract more deposits, including the convenience of opening accounts via mobile app or in-person consultations, he added.

Ipoteka's strategic plan includes becoming the number one in consumer lending, excluding mortgages, within the next three years.

The bank is also expanding its branch network and focusing on centralizing operations to improve efficiency and service delivery.

The goal is to upgrade the digital platform to support a broader range of services, including lending and banking as a service, and eventually build an ecosystem that extends beyond traditional banking.

By leveraging OTP's expertise and implementing advanced technologies, Ipoteka Bank aims to set new standards in the Uzbek banking sector, ensuring sustainable growth and enhanced customer experiences in the digital age, Sapronov concluded.