Erste Bank der Osterreichischen Sparkassen AG

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Erste Bank der Osterreichischen Sparkassen AG

Graben 21
Telephone: +43 50 100 10100
Fax: +43 50 100 910100
Web site:

Public Company
1819 as Ersten österreichischen Spar-Casse
Employees: 37,650
Total Assets: $167.89 billion (2003)
Stock Exchanges: Vienna
Ticker Symbol: EBS
NAIC: 522110 Commercial Banking

Erste Bank der Osterreichischen Sparkassen AG has broken out of the tiny Austrian banking market to become one of Central Europe's retail banking leaders. Since 1997, Erste Bank has built an impressive regional presence, with operations extending into the Czech Republic, Hungary, Croatia, and Slovakia. In each of these countries, Erste Bank has positioned itself among the top three. In the Czech Republic, for example, Erste Bank controls Ceská Sporitelna, that market's leading retail bank with a 32 percent share. Erste Bank's acquisition of Hungary's Postabank in 2003 gave it the number two position there. In Croatia, Erste Bank owns Erste & Steiermärkische Bank, which, following the 2003 acquisition of Rijecka bank, has become that country's third largest bank. At home, meanwhile, Erste Bank remains Austria's number three bank, with a 20 percent share of the market. By the end of 2004, Erste Bank counted nearly 12 million customersup from just 600,000 in 1997banking at almost 2,200 branches in the region. Erste Bank's strategy relies on the cultural and economic proximity of the Central European region, and the bank provides transparent cross-border banking services in its operating region. Erste Bank also has been lifted by the expansion of the European Union to include most of its area of operation.

Pioneering Austrian Banking in the 19th Century

The creation of the European banking system occurred in large part at the end of the 18th and the beginning of the 19th centuries. The first European savings bank, the Ersparniskasse, was developed in Hamburg, Germany, in 1778. England followed later, with the creation of the Rothwell Savings Bank in 1810. By the end of the decade, and following the economic upheaval caused by the Napoleonic Wars, Austro-Hungarian emperor Franz I called for the creation of a banking system in Austria as well.

In 1819, Johann Baptist Weber, minister of Leopoldstadt, founded Austria's first savings bank in Vienna. The bank, called Ersten österreichischen Spar-Casse, soon became a model for the development of the savings bank system throughout the Austro-Hungarian empire and the European continent as a whole. Savings banks quickly appeared in Trieste, Laibach, Innsbruck, Bregenz, Split, Graz, Hollabrunn, Prague, Görz, Klagenfurt, and many other markets in Austria and elsewhere in the empire. Many of these banks were established by the local aristocracy and wealthy citizens, and often were operated as nonprofit organizations. Others were established or otherwise owned by local governments. By the end of World War I and the breakup of the empire, Austria alone counted more than 200 savings banks.

Many of these became grouped together within a union of savings banks, with Erste Bank emerging as a central coordinating bank. Yet Erste Bank appeared in this position as early as 1825, when it founded the Allgemeinen Versorgungsanstalt för die Unterthanen des österreichischen Kaiserstaats. This body became the first privately held bank in Central Europe to offer social security-like services. In 1873, Erste Bank became instrumental in establishing the region's first mortgage and creditlending services, a factor that led directly to the rise of a middle class in Austria.

The ownership structure of the many Sparkasse, coupled with restrictive Austrian banking rules that limited the number of branches each bank was allowed to operate, contributed to the fragmentation of the Austrian savings bank sector. As such, by the early 1970s, the country featured just 400 branches in all. This situation began to change at the end of that decade, however, with the passage of new banking regulations that liberalized the opening of new branches. By the mid-1990s, the number of branches operating in Austria had nearly quadrupled.

Yet the number of banks had fallen dramatically. The 1980s saw a first wave of consolidation in the Austrian banking sector. Much of the consolidation occurred on a regional level, as the country's local sparkasse joined together to form larger, regionally focused banking unions. Meanwhile, Erste Bank expanded its function as a central umbrella bank, overseeing a number of mergers among the new regional banks.

Central European Leader in the New Century

The passage of new legislation deregulating Austria's banking industry in 1986 paved the way for the emergence of the modern Erste Bank. The bank began preparations for its conversion into a public corporation, which it carried out in 1993. With support from the Austrian government, Erste Bank then began consolidating the country's savings bank market. Between 1993 and 1997, Erste Bank absorbed some 17 of the country's regional savings banks.

Despite being one of Austria's larger banks, Erste Bank remained tiny in comparison to its Western European competitors. With just 600,000 customers, Erste Bank required scale in order to survive the increasingly competitive European market. The appointment of Andreas Treichl as CEO of the bank marked a new beginning.

In March 1997, Treichl pushed through a complex deal that enabled Erste Bank to acquire majority control of GiroCredit Bank. That bank had been formed in a three-way merger in 1992, combining Girozentrale, Bank der Osterreichischen Sparkassen, and Osterrichisches Credit-Institut. The addition of GiroCredit, allied with Austria's political left, doubled Erste Bank's total assets, to the equivalent of EUR 54 billion. Erste Bank then became Austria's third largest bank. In December 1997, Erste Bank launched a public offering of some 30 percent of its shares.

While its larger competitors, and much of Europe's banking sector, turned their focus to the fast-growing corporate finance market, Erste Bank, because of its smaller size, had no choice but to concentrate on its core retail banking operations. The bank soon turned this limitation to its advantage.

Treichl now began a de facto consolidation of Austria's savings banks. By 1999, he had reached agreements to exchange 77 of Erste Bank's branches for equity stakes in nine of Austria's savings banks. In this way, Erste Bank established equity positions in these banks and, in many cases, acquired majority control. At the same time, the entire Austrian savings bank federation agreed to begin carrying Erste Bank products, such as insurance and investment products, and other services, and rebrand themselves as Erste Bank. In this way, Erste Bank stepped up its domestic customer base to more than two million.

Yet Treichl had spotted an opportunity for international growth. While the corporate market captured competitors' attention, the rapidly privatizing retail markets in the Central European countries were in large part overlooked. In 1997, Treichl led the company into its first foreign acquisition, with the purchase of nearly 84 percent of Hungary's Mezobank. Yet that acquisition proved a disappointment for Erste Bank. As only the tenth largest bank in Hungary, and with a market share of just 4 percent, Mezobank did not provide Erste Bank with the leverage it needed to compete in the Hungarian market. Nonetheless, Treichl learned an important lesson from the Mezobank acquisition. As he told Institutional Investor, "It taught me that you had to be big if you wanted to be a success in Central European retail banking."

The Mezobank acquisition merely whetted Erste Bank's appetite for future foreign expansion. The bank now identified a target regionwhat it called its "extended home market"consisting of the Czech Republic, Slovakia, Croatia, and Hungary. The bank now began preparing for the next acquisition opportunity as these countries planned for the sell-off of most of the region's formerly state-owned banks.

Erste Bank's moment came in 2000, when it won its bid to acquire 52 percent of Ceská Sporitelna, the Czech Republic's largest bank. Ceská Sporitelna had been founded in 1953 as the country's consumer banking monopoly under Soviet domination. In 1993, after the fall of Communism, the bank went public, listing its shares on the Prague exchange. Nonetheless, the bank remained under government control, and weighed down by a huge, underperforming portfolio of loans to state-owned companies. The Czech government decided to put the majority of Ceská Sporitelna up for sale after it was forced to underwrite a CZK 7.6 billion bailout of the bank.

Erste Bank now turned its attention to the nearby Croatian market. In June 2000, the bank reached an agreement with Graz-based Steiermärkische Bank to form the Erste & Steiermärkische Bank joint venture. That bank then acquired three other Croatian banks, Bjelovarska banka d.d., Cakovecka banka d.d., and Trgovacka banka d.d., in September 2000. The merger of these operations enabled Erste & Steiermärkische Bank to claim a position among the top banks in that market.

Company Perspectives:

Erste Bank's 4 Core Strategies

The future growth of Erste Bank Group is based on four core strategies, which already allowed Erste Bank to develop into the leading financial services provider in Central Europe: 1. Focusing on and exploiting core business potentials; 2. Building a strong retail franchise with the Austrian savings banks; 3. Targeting a home market of 40 million people in Central Europe; 4. Transferring the multi-channel distribution model throughout Central Europe.

The long-term commitment towards these four strategic thrusts will further strengthen the Group's solid earning power in Austria and enable it to exploit the vast growth potential in Central Europe.

Next, Erste Bank entered Slovakia, buying more than 87 percent of that country's leading bank, Slovenská Sporitelna, which had previously been controlled by the Slovakian government. The addition of Slovenska boosted Erste Bank's total customer base to more than eight million, and placed it among the top ten retail banks in all of Europe. By the end of the year, also, Erste Bank gained full control of Ceská Sporitelna.

Back in Austria, the bank also reached an agreement to acquire majority control of Tiroler Sparkasse. By the beginning of 2002, however, Erste Bank had organized the Haftungsverbund, or cross-guarantee arrangement, among 55 of Austria's banks, which placed these banks' assets under Erste Bank's central control. The agreement effectively boosted Erste Bank's total assets to EUR 124.8 billion, without requiring the bank to launch outright acquisitions of these banks.

Erste Bank continued building in Croatia as well. In April 2002, the bank acquired 85 percent of Croatia's fifth largest bank, Rijecka banka d.d. That purchase boosted Erste Bank's standing in Croatia to a 10 percent stake. The merger of Rijecka into Erste & Steiermärkische Bank in 2003 created Croatia's third largest bank.

Soon after, Erste Bank returned to Hungary, snapping up former state-owned bank Postabank. The purchase doubled Erste Bank's presence in Hungary and boosted its market share to 8 percent. Then in September 2004, Postabank and Erste Bank Hungary were merged, boosting Erste Bank's presence in that market to 11 percent. Following the Postabank acquisition, the company completed its takeover of Slovenská Sporitelna, boosting its share to 100 percent in January 2005.

Thus Erste Bank's initial Central European expansion strategy was completed. Yet the company continued to eye further growth in the region. The bank acknowledged its interest in expanding into Romania when that country begins its own bank privatization process. In the meantime, Erste Bank turned its focus on increasing the operating efficiencies of its international subsidiaries, while stepping up its presence as a cross-border financial services provider. Erste Bank also began building a strong presence in Internet banking, with more than 800,000 online customers at the end of 2004. Erste Bank had become a powerhouse in the Central European retail banking market.

Principal Subsidiaries

Allgemeine Sparkasse Oberösterreich; Bankaktiengesellschaft, Linz (Group); Bausparkasse der österreichischen; Česká Spořitelna a.s. (Czech Republic); Die Erste & Constantia Beteiligungsfonds Aktiengesellschaft; Erste & Steiermärkische banka d.d., Rijeka (Croatia); Erste Bank Hungary Rt.; Erste Financial Products Ltd. (U.K.); ERSTE-SPARINVEST Kapital anlagegesellschaft GmbH; Europay Austria Zahlungsverkehrs-systeme GmbH; Postabank és Takarékpénztár Rt. (Hungary); Sparkassen Aktiengesellschaft.

Principal Competitors

Deutsche Bank AG; UBS AG; ABN AMRO Holding N.V.; DZ BANK AG; Westdeutsche Landesbank Girozentrale; Bayerische Landesbank Girozentrale; Kreditanstalt fur Wiederaufbau KfW; Landesbank Baden-Wurttemberg AG; KBC; Unicredito S.p.A.; Bank Austria AG; Raiffeisen International.

Key Dates:

Johann Baptist Weber, minister of Leopoldstadt, founds Austria's first savings bank in Vienna, the Ersten österreichischen Spar-Casse (Erste Bank).
Erste Bank converts to a public corporation and begins acquiring regional savings banks.
The bank acquires GiroCredit; Mezobank of Hungary is acquired.
The bank acquires Ceská Sporitelna; the Erste & Steiermarkische joint venture forms, which then acquires Bjelovarska banka, Cakovecka bankam, and Trgovacka banka.
Slovenská Sporitelna is acquired.
Rijecka banka in Croatia is acquired.
A merger of Erste & Steiermarkische and Rijecka is formed; Postabank in Hungary is acquired.
Postabank and Erste Bank Hungary merge.
Erste Bank acquires 100 percent control of Slovenská Sporitelna.

Further Reading

Bansal, Parveen, "Going for Grassroots Growth," Banker, June 1, 2004.

Falush, Peter, "Erste's High-Growth Eastern Strategy," European Banker, November 2002, p. 11.

Frazer, Patrick, and Peter Falush, "Erste Bank Wins Postabank," European Banker, October 2003, p. 1.

Galbraith, Robert, "Coming First Where It Counts," European Banker, September 2004, p. 12.

Lanchner, David, "Banking on the East," Institutional Investor (International Edition), January 2003, p. 17.

M. L. Cohen