Taking flight

By Huw Thomas, Editor

In the middle of the worst downturn in years, Erste Group is posting some of its best ever results. FST editor Huw Thomas spoke with COO Herbert Juranek to find out what went right.

Keeping a staff of eight different nationalities together is a challenge

“We believe that we are in a very good position in our market. What we have to do now is concentrate more and more on where we focus our investments”
-Herbert Juranek, COO, Erste Group

In the age of layoffs, shrinking budgets and scaled down objectives, talking about expansion seems slightly strange. But for Erste Group, growth has become something of a habit, and it’s going to take more than a global financial crisis to slow them down. This at least is the impression given by Herbert Juranek when we speak to him at the group’s Vienna HQ. “This year will be the year where we have the biggest or the best results,” he says. “On the P&L side, we will most probably end the year with the highest Tier 1 and core capital.” It’s a sentiment so sunny it seems positively alien in the grey days the financial industry is currently weathering.

So how is Erste Group managing to swim against the tide? To understand that, we need to look at a little history. Founded in Austria 1819 as a savings bank, it carved out a respectable if unspectacular niche in its home country for nearly two centuries. Erste’s defining moment came in 1997 when the group implemented a strategy to expand its retail business in Eastern and Central Europe. Cannily recognising that it was a region ripe for development, the group has grown its customer base from 600,000 to 16.6 million in little over a decade. “The whole group has developed over the last ten years,” explains Juranek.  “We started as a small savings bank in Austria, and on average we bought a bank per year, so now we are active in eight different countries and are consisting of eight banks with the holding company.”

It’s an impressive period of sustained growth. Furthermore, the fact that this work has continued right through a period when the global economy has been so uncertain is further testament to Erste’s strategy. The final shift to eight regional banks and a holding company was completed within the past year and was perhaps the biggest project Juranek has recently dealt with. “We had a big de-merger of the Erste Bank Austria, split the bank into the holding company and created a bank for Austria,” he says. “So now we have a new structure, consisting of the holding bank, and below that all the local banks.” Considering that in all eight territories in which they operate Erste occupies a position in the top three banks by market share, the growth strategy implemented just over a decade ago has been soundly vindicated.

So what challenges has Juranek encountered during this period of extensive expansion and acquisition? “Most of the banks, at the time we bought them were making a loss,” he says. “With most of the acquisitions, the main target was to make them profitable and increase the amount of services. So the challenge from the IT perspective was to transform each acquisition into a modern bank and to change the overall environment.”

To achieve this objective, the group pursued what Juranek describes as a local strategy. For each acquisition a specific and locally designed roadmap was put together, focused on transforming the organisation in line with the group’s business plan. It’s a strategy that has paid off. “We were very successful in turning these banks into profit making entities,” Juranek continues. “We are now looking at the synergy potential on a group level, so the first step was the conversion on the local level, and now we are aggregating things on a group level and looking for additional synergy potential.”

Inevitably a key part of this process concerns the technology inherited in each acquisition. With so many different systems, the risk is that the group could end up struggling with the equivalent of a modern day Tower of Babel, a cacophony of disparate technologies each speaking its own language. “Each country has its own bank, and we are talking about large institutions,” says Juranek, acknowledging the scale of the challenge. “In countries like Romania, Slovakia or Czech Republic, we already had a big heritage of systems. In various countries we have up to eight different core banking systems. One of the first activities was to harmonise on a local level. We now we have an environment by country, and we’re trying to harmonise on the next level.” Juranek explains that wherever it makes sense to have a unified group-wide system, such as in treasury for example, then that is what is done, but that in many other respects the individual banks retain much of their autonomy. “In retail, for instance the responsibility is locally orientated because we believe in the local entrepreneurship in the various countries,” he continues. “Therefore, we have different models within the countries in order to be able to react quickly to client needs.”

The foundations of Erste’s recent success rest squarely on the fact that the group spotted emerging opportunity in Central and Eastern Europe and did all they could to seize it. Juranek explains that this is only the beginning and, despite the current situation, these markets still offer new opportunity. “The main advantage of Central and Eastern Europe was up to now, and we hope in the future, the growth potential was better than in the Western European markets during the past years,” he says. “We still believe that long-term potential is still there.” He gives the example of economies such as Spain, Portugal and Greece, all of which have gone through major political and social change in the latter part of the twentieth century and all of which have seen strong growth in the ensuing years. Compare these states to many of the places where Erste operates and there are plenty of parallels. Many have emerged as free market economies since the fall of Communism and are passionate about reinventing themselves as new and modern states. Many have also joined the European Union with all the fresh opportunities that can bring. If history can be trusted, then Erste’s investment in this territory should pay off in ways that will dwarf the successes they’ve already experienced.

It is perhaps a symptom of the times that so much optimism and confidence can become a little wearing. Surely the news can’t all be good? There surely have to be a few dark clouds somewhere on the horizon? We are currently embroiled in a global financial crisis. Given the fact that Erste does its business here on Earth, it has to be having some impact on operations? “I have to admit the current environment for banks is not the best, and the overall situation in banking changed dramatically the past three quarters of the year, and especially the past weeks and months,” Juranek confirms. “But anyhow, we believe that we are in a very good position in our market. What we have to do now is concentrate more and more on where we focus our investments.”

Juranek at least concedes that riding out this period will require a clear shift in priorities from what went before. “In recent years, leverage was important, and each and every investor was very interested how much leverage you have and how much return on equity you produce,” he says. “Nowadays, it's liquidity and your core capital which has become more and more important, along with how you allocate your capital to the various businesses. For us, that means that we will concentrate on the areas where we have really good returns and good margins and allocate the equity, but also the investment, into those areas.”

In essence, Juranek describes a wait and see policy, particularly with reference to technology investment, which gives the group room for maneuver in a quickly changing marketplace. The main issue with such an approach is that it leaves little room for long-term multi-year projects. Perhaps unsurprisingly, Juranek doesn’t seem fazed by this prospect. “If the economic circumstances in a country change dramatically, we will have to adjust the business model, and adjust the investments adequately,” he continues. “But at the same time I do believe we can pursue those long-term strategies, such as the consolidation of our data centre capabilities. For those types of projects you need to invest on a one- or two-year horizon in order to get a long-term return and to reduce the operating cost. These things will certainly continue, and we will also continue to work on efficiency gains and make the whole organisation more effective.”

Another part of the picture lies in the careful use of outsourcing, an approach that has found much favour in these cash-strapped times. Juranek confirms that outsourcing plays a part in Erste’s strategy, particularly in areas such as cash processing and handling and in certain parts of the group’s software portfolio. However, he is clear that third-party providers can only do so much and if something can be done better in house, then that is the way to do it. The example of card production is one such area where Juranek believes Erste can outperform any outsourcing company.

As should be clear by now, Erste Group is not an institution lacking in confidence. Though it might be possible to dismiss a little this attitude as mere bravado, the results pretty much speak for themselves. At a juncture when many banks are staring down the barrel of record losses and are scaling back plans until the situation improves, Erste are forging ahead with an impressively robust transformation. There’s even the possibility that they could turn the situation to their advantage. Asked if the credit crunch might provide the opportunity for the group to snap up ailing institutions and increase their empire, Juranek refuses to rule anything out. “If good opportunities appear, we will take that into consideration,” he says. “If timing, size and price is right, we will certainly think about it.

As we wrap up with a question about Erste Group’s priorities in the immediate future, it comes as no surprise that there is not a hint of retreat in the response. “Coming back to the operation for the next two to three years the aim is to strengthen ourselves in a way to even increase our share of the business and to even increase our position in our markets,” Juranek says. “This is the clear target for us.”

Cultural exchanges

Keeping a staff comprised of eight different nationalities together is a challenge in the best of situations. In a crisis it can become a major headache.
Juranek. We are in difficult times because, if you work in banking and you open up the newspaper, every day there are negative stories about what is going on. Inevitably, people are reacting to that. I think our key message to the employees, and to our management is that the bank is in a really good position. We have a stable position in our markets, we are in markets with strong potential for the long-term growth, and we believe that if we do things right — and we will do things right — we will get out of the crisis even stronger than we were before.

But culture is a big issue. If you acquire banks on a yearly basis with different languages and different backgrounds then it's very important to create a kind of group spirit, where people know and people feel that they belong to the same group, to the same team. We are doing a lot with our management; we are doing a lot with the people onsite so they can feel connected to other people from the group.  This starts from big management conferences which we are combining together, and it ends on the day-to-day business where the approach is content orientated, client orientated and customer focused. The main thing is you know the result that you are working towards. You have to be very focused on the outcome.