Interview with Jiří Hrouda: The key to success is to do things differently
This is what it takes according to Jiří Hrouda, CEO of the investment group CREDITAS, whose portfolio includes two banks. In his opinion, excelling in a specific area that the mass market does not cater to is the right way for a medium-sized or potentially even smaller bank to succeed.
What specific area might this be? What other options do smaller players in the banking market have? And how can the banking portfolio complement the energy business? Jiří Hrouda answers these questions and many more.
You are in charge of the entire CREDITAS Group and its strategic investments, so how important are the large investments in non-banking sectors for the Group?
I have been with the Group since 2016, and historically, it has developed mainly along the lines of a bank. Its investment arm, called Unicapital, started in 2013 in the agricultural sector. In 2014, the energy sector was added, and gradually, a third segment was added: real estate. The banking and investment segments developed relatively independently until 2021, when we decided to unify the Group under one large entity, the CREDITAS brand. Today, it has both the banking division and the entire investment division, which mainly includes energy and real estate, under its umbrella.
In terms of relevance, if you look at it from an asset perspective, the bank is on top. It has a huge volume of deposits, which is simply not possible in other segments. But when you look at it in terms of invested capital, the banking and non-banking part is about half and half, with the non-banking part being 40 per cent in energy, 40 per cent in real estate, and 20 per cent in other segments.
And in terms of net profitability?
One thing is the view of profitability, that is, relative performance per capital invested, and the other thing is absolute profit. In terms of absolute profit for 2021, the investment part was a little bit bigger than the banking part. It will be the same in 2022, mainly because of the investments in the energy sector, which performed very well. If I were to provide some long-term average, we are performing similarly on the banking and investment side in absolute terms. For 2022, we expect a profit for the whole Group in the order of billions of crowns.
As for the energy investments, where are they going?
Historically, we have built the energy part on the so-called local distribution systems. This is the energy infrastructure in a defined area where you, as a licensed distributor, are responsible for the distribution of electricity. This could be, for example, a logistics centre, an industrial park or a factory that you supply with electricity. Since 2014, we have become the fourth largest player in this market.
But today, we do much more in the energy sector. First and foremost, we are involved in what we call power balance services. This is the activation of a source or consumer of electricity under pre-agreed technical and commercial conditions – we cooperate with ČEPS.
We also invest heavily in CHP units and are creating a so-called virtual unit, which is basically a virtual power plant made up of several smaller sources. Such a unit can then also be used to aggregate flexibility, i.e. to supply energy or consume surplus energy. This is the future of the coming years. We would, therefore, like to strengthen this area significantly over time. We plan to have up to 1,000 megawatts in a virtual unit by 2030, which requires an investment of over CZK 20 billion.
So your investments in the future will be directed towards building infrastructure and expanding your portfolio of power plants, electric boilers and incinerators?
That is right. That is what we want to focus on in the future. Use what we have built, the know-how, and the assets we have there and build on that. Flexibility aggregation is still new in the energy sector, which creates an opportunity for us to enter a developing segment. There is currently no dominant player there. Whoever wants to succeed in this area must have a significant portfolio of spinning energy resources connected to the distribution or transmission grid. We are trying to take advantage of the fact that we have electricity resources, a huge knowledge related to distribution and, last but not least, sufficient strength to develop further.
Last year, you added another bank to your portfolio. In October, you bought Expobank. At the press conference, you said this move would allow the bank to expand its balance sheet to 115 billion. Are you already seeing any fruits from this acquisition?
Max Bank is indeed already meeting our expectations. Since joining in October, we have managed to increase the number of clients by 100 per cent. Together with Banka CREDITAS, we now have over 200,000 clients. I believe that this transaction will have a very positive impact on us, not only on the financial side but also on the whole Group. We are now trying to ensure that retail services, in particular, will be the domain of Max Bank, and servicing corporate clients will be the domain of Banka CREDITAS. However, it is too early to make further assessments.
Will Max Bank also offer investments?
It is not licensed for that; we do not count on it yet. The focus will be primarily on things related to savings accounts. At the same time, we are preparing a digital mortgage. We want to develop these activities further, and in some cases, we have already made steps toward them.
We want to focus on investments in Banka CREDITAS. It has been playing an important role in retail on the liability side for several years, whether it is a savings account or a time deposit. We strive to be among the best in retail fund appreciation. I think we are doing that. Our savings accounts have long been among the best-rated with the best rates. It is in the spirit of our motto “You should want more from your savings”. In line with this, we are constantly expanding the range of investments we offer to our clients, so we have set up our own investment company and are opening new investment funds. This year, we will offer several more to our clients.
You finance some projects in the Group through bonds. How important is this source of finance for you?
We use bonds because it is very difficult in the investment world to finance initial acquisitions through banks, whether in the first stages of development projects or the acquisition of a company, etc. So for us, bonds complement equity and bank financing. Thanks to them, we can carry out some projects that standard resources would not allow us to do. Typically, it is really the early stage of a development project where you need to buy the land, prepare the project, and get the permits. Once you have the permits and you can start building, the financial institutions jump in. So bonds allow us to be more profitable.
Are they retail investors?
Primarily yes, and many of them invest with us for the long term. We first started with bonds in 2015 under the banner of Unicapital Energy, which invested in the energy sector. Clients see that earlier projects have matured, they could be sold, bonds paid off, etc. This has given us their confidence and allowed us to keep the portfolio of bonds issued stable and possibly increase in some way. We value the trust of our investors and the fact that they invest on a long-term basis, and we know that financial leverage must be appropriate. It is also important that our projects are not imaginary and that we treat our investors fairly and share the profits with them.
But bonds are not suitable for every investor. How would you personally allocate your investments?
The most important thing is diversification. If you have a million crowns to invest, it is probably not ideal to put it in one bond. And it does not matter if it is a bond of the CREDITAS Group or someone else’s. But if you say that you are going to put 30 per cent in a savings account, some in a fixed deposit, 500,000 in investments, and 250,000 of that in securities, I do not see a problem.
You completely forgot about crypto.
I am not a big fan of crypto. I am not denying anyone that as an option, of course.
Can a smaller bank survive on the domestic market or even on the European market? Or is it unrealistic due to constantly increasing regulations and technical requirements?
Banka CREDITAS is already one of the medium-sized banks. We have over 175,000 clients, and last year alone, the number increased by 50,000. I have prepared a few statistics for you. You can see from it that there are practically three basic ways you can succeed in the market. The first one is to be awfully big. If you are big, you have substantial economies of scale, and you can generate a decent return on capital even though you are subject to tight regulation.
Then you have a segment of so-called specialised stars. These banks are in a niche (specialised) segment, such as Fio or Air Bank. And then there are banks that are somewhere in the middle. These are medium-sized banks that are dedicated to a particular segment. That is where we are, and I believe we can succeed.
Copying others is not the way to go? After all, the services in banking are very similar.
If we copy someone else, we will, at best, be as good as them, but the cost, especially compared to the bigger banks, will be higher per employee. That is why I am talking, for example, about those investments that we develop over the long term because that is generally a business that offers a higher margin.
We also finance purely Czech companies that have no appeal for the big banks for some reason. And last but not least, we focus on retail asset appreciation. Max Bank fits into this mix, and we thought that this is actually something that will not make much sense for the big players, but in our segment, it will be another growth driver.
Speaking of growth, banks are starting to partner with various fintechs. Are you planning to go down that route as well?
It is definitely on the agenda. It may even be one of the competitive advantages for us. I mean, our ownership structure makes us very flexible. When I need to approve something, I just open the door at the end of the hall and get the ultimate decision there. It makes us make decisions faster. And that may be one of our advantages in the future, where we are always trying to come up with something new, and I believe that third parties will help us along the way.
So are you looking at any start-ups yet?
In general, we are actively looking at opportunities across segments, including the one you mentioned. However, we will not comment on ongoing negotiations.
You mentioned the digital mortgage. But the mortgage comes with insurance. Are you already dealing with an entity?
Yes, we are preparing cooperation in the field of insurance for this year, and it will not only be insurance related to the mortgage but also home insurance, car insurance, etc.
The windfall tax will pass you by, but how do you view this taxation of individual sectors?
I am not a fan of sectoral taxation. The concept of a sectoral tax does not put a smile on my face. When COVID-19 broke out, companies like Dáme jídlo or Alza were doing well, and we did not tax them either. I do not think it is well thought-out from the point of view of the tax system. But at the same time, I confess that I am not such a big advocate of massive fiscal support.
Sometimes it seems to me they are mainly built for one election cycle. For example, I was also relatively pragmatic during the COVID-19 era because I found the stimulus from the government at that time quite substantial, and I thought it must cause inflation. A couple of years have passed, and I have been proved right. I would probably urge some more fairness and more counterbalancing for those steps because both of those sites are quite aggressive. Both on the stimulus side and on the taxation side. And it is not quite right.
ESG has been an extremely resonant topic in the energy sector, but also in finance, for the last year or two. To what extent does it permeate your activities?
ESG is kind of my “hobby”. Unfortunately, the EU is a big pioneer in this direction, and not all steps are always correct and fully thought out. Although climate change is a major issue, it is not something that can only be solved at the European level. It is a global problem, and I personally would like to see these matters dealt with more at a global level. That is the absolute basis for long-term success.
At the same time, it is interesting that things that look green
at first glance are not so green. For example, one search on Google generates 0.2 g of CO2 , and there are billions of such searches every day. This is precisely because Google operates huge data centres, which consume enormous amounts of energy. This, too, needs to be borne in mind, and not just saying that combustion-engine cars will not enter cities. Because then the impact of ESG activities will be small.
But what can society do to ensure that Brussels is not completely fanatical about this?
I would perhaps paraphrase John F. Kennedy. Do not ask what the EU can do for you; ask what you can do for the EU. In general, it actually starts with each of us. It is one thing not to be carried away by populism because some actions are popular and short-term. Coming back to energy, nobody is saying that energy is generated 100% from renewable sources. It is not. Nor can it be. That is a physical fact. But the problem is precisely that populism, which has an element of short-sightedness.
The rules around green energy are constantly changing, and that is wrong. When we talk about energy, we are talking about investments for decades. And it is difficult to plan when you do not know what will happen in five years’ time. But if the rules are definite, clear and long-term, the industry will adapt.
So will banking and energy, but it is quite problematic for any industry to adapt to rapid changes. If you invest billions and do not know if the presumption you made it with is going to be valid in a year’s time, you are probably not going to go for it. But if we do not make the investments, we will not achieve the climate goals.
But banks are quite active in this area.
I do not want to make it sound like I am not an ESG advocate, but again, common sense is the key. In investments, for example, I would even partially agree with that. The new regulation requires us to find out the client’s preferences for sustainable investments. I think that is good because we are giving them another option.
On the other hand, we need to have investments that meet these conditions. Because if a client tells you they want green investments, but you do not have them, that is going to be a problem. And there are still very few funds that are oriented in this way. As far as funding is concerned, the question is to what extent it is PR and to what extent it is a head office decision. However, I can easily imagine there will be a “speciality stars” type of bank that will say it is an ESG bank. It will have wicker chairs in its offices, will not use paper, and will only finance sustainable projects – and they will be sexy to a lot of clients. It can be a standalone business model.
I personally know plenty of people who will tell you they would rather invest in a PV fund with a lower return than a coal fund with a higher return. For some people, it is a matter of principle. But I think the basis of the banking business will always be pragmatism. Banks are not going to undertake ESG activities that are going to be unprofitable over the long term.
But similarly, there can be a bank that will focus on non-green projects.
Definitely, as I said, being super good in a particular area that the mass market does not do is how a medium or potentially small bank can succeed. And we see it elsewhere. If you go to the UK, for example, which I know a little bit and I worked and lived there for years, it is similar. You have the established banks, usually with an insurance company, as well as the “challenger banks”. There is a bank, for example, that is licensed in London and specialises in Middle Eastern clients. Another bank, on the other hand, focuses on payments in Renminbi etc. So you can succeed in the mid-size and small sizes, but you have to do things differently. And that is the CREDITAS way.
This text was published in the monthly Bankovnictví.