Oliver Gatzke: Striking the right balance

Oliver Gatzke sits behind his desk, watching his computer screen. Fair hair combed back and with a touch of a tan on his face, he is dressed in a smart banker’s suit, though casually tieless.This is the first time that he has talked with GOLD since joining the country’s second largest systemic bank in March 2021. Outside his office, as the warm sun hangs in the sky over Nicosia’s western horizon, it’s a real Cyprus winter morning. We exchange a firm handshake and settle beside a small conference table.

Let’s go back in time: It seems that you’ve spent most of your career close to Hamburg where you grew up. Correct?

It’s true that I lived, studied and started my career in Hamburg (with Deutsche Bank) but I spent two years in Chicago, until 2013, working for the KPMG advisory business as a partner in the M&A corporate finance space. While at KPMG, I also worked in Frankfurt for eight years and commuted to Hamburg. I did the same with London and Munich for another 2 years.

After KPMG, you spent eight years at HSH Nordbank.

Yes. We restructured and privatised it and it was renamed as the Hamburg Commercial Bank. After the privatisation, in addition to being the CFO, I led the bank’s digital transformation as CTO. The eight years I spent with the bank gave me invaluable experience and insight into the restructuring and transformation of a large banking organisation.

How tough a decision was it to move to another country and take up one of the hottest CEO seats in Cyprus?

Honestly, when Hellenic Bank approached me at the start of 2021, I didn’t know much about it but it was an opportunity to work as a CEO and lead a systemic bank – this was very important for me. And both my wife and I saw Cyprus as a country with great people, excellent food and sun!

Are you one of those people who relish a challenge?

Oh, absolutely! I try to turn challenges into opportunities.

Was that one of the reasons why you decided to go into banking in the first place?

I actually wanted to study chemistry and biology but it was not a good time for that in the ‘80s. My parents said, “Why don’t you do a traineeship with a bank? It’s a solid profession,” and I was really influenced by the Michael Douglas movie Wall Street!

I share the sentiment, having studied Law because I mythologised the TV series Suits! OK. Let’s talk banking and specifically Hellenic Bank’s strategic plan for 2023, according to which the cost-to-income ratio will drop from 66% to less than 50% in the medium term. How will you achieve that?

On the income side, there is obviously a big change going on right now because of the interest rates environment and our top line will improve, as a result. We will also place a strong focus on miscellaneous income: life insurance, wealth management, transaction-related business and so on. By growing our loan book, it will also improve our miscellaneous income. On the cost side, our actions will include a diligent approach for managing both staff and administration costs.

Will there be another voluntary staff exit scheme?

We just finished one – involving around 450 people – and last year we reduced the number of temporary staff by more than 100. We were actually a little bit more aggressive in headcount reduction than planned, and because of that, for the next two years we intend to consolidate and focus on what really matters: customer service.

Why were you ‘more aggressive’?

Our profitability was much better than we expected as the interest rate environment changed, so we decided to change the strategy and use those profits to invest in the headcount reduction.

On the issue of staff exits, you had a public falling-out with the Cyprus Union of Bank Employees (ETYK). Have you now found common ground?

You need to understand that, a year ago, the situation in the banking industry was different because we were still experiencing a low-interest rate environment; the top line at all banks was under pressure. We were a bank with very high deposits, very high liquidity and limited opportunities for new lending because of the market size. This really put a lot of pressure on our profitability. I think that what matters ultimately is the result: we have achieved our cost targets. As for the Union, it is an important stakeholder, so we want to have a good relationship with it but, by definition, there will be challenges.

Is it par for the course for someone in your position to lock horns with these stakeholders or is this just how the system in Cyprus works?

I have to admit that I had to learn how the system works here. In Cyprus, about 90% of the workforce in the banking industry is unionised, while in Germany, it is only 20% and employee representatives sit on the Board of Directors. At the end of the day, you have to adjust when you come to a different country.

Interest rate hikes to curb inflation have improved the bank’s profitability, so can we expect deposit rates to rise in a similar way?

We have to look into the specifics of the Cypriot banking system, which is very peculiar compared to other markets. Cyprus has a banking system with about €55 billion in deposits but almost less than €25 billion in lending – I’m not counting the non-performing loans that were carved out of the system. Despite this, and given the European interest rate environment, we should start thinking about a potential increase of deposit rates. I’m sure your next question is ‘What’s happening on the lending side?’, right?

You just read my mind.

As we speak, if you look into the pricing of Cypriot government bonds, interest rates stand around 4%. When you look into lending activities – and I’m talking about the entire system – we still see rates of around 3-4%. So the country risk is not priced into the corporate risk. That doesn’t make sense to me. I believe that the whole system is under-priced because of this specific market environment. In my view, to price correctly, interest rates on lending should be higher than the country’s risk and they should reflect European market rates that are based on the Euribor interest rate curve.

I had an interesting conversation with an analyst a month or so ago, where he mentioned that companies that are able to shoulder an extra 3%-4% will be the foundation of a more robust economy. So essentially, high inflation has its benefits.

Well, if you look at banking, in the past, projects have been highly leveraged, meaning a lot of debt and minor equity from investors – this is dangerous. I believe that higher interest rates will require more equity contribution from investors, which supports what you are saying. Someone who develops a building in Limassol needs to have skin in the game and not just transfer the risk to the bank, which I think is a good development.

Going back to your 2023 strategic plan, medium-term new lending will exceed €1.2 billion. Is that too high in the current environment?

We have slightly overachieved our lending target for the past year, so we are on track for the new one. It is important to remember that banking is not only about volume but also credit quality and pricing. I always say that I’d rather not take a new loan on my book if it has a high risk or low pricing. We have to make our money and the capital we are allocating needs to provide a specific return.

In recent years, you have acquired two loan portfolios: one from the defunct COOP Bank, and the other from the exiting RCB. Let’s talk first about the impact of the RCB deal on the bank.

The acquisition of around €325 million worth of performing loans from RCB has increased our client base in corporate lending, provided cross-selling opportunities, improved our operating income through higher interest income, and will grow our non-interest income. With the RCB deal, we increased our loan book, and we transferred some very experienced bankers who support our corporate lending activities.

What about the ex-COOP acquisition? Have you unlocked its full potential?

I was not around at the time but, looking at the acquisition, I think it was a very good strategic move. I understand the issues around credit quality, the involvement of the Government and so on, but it was an excellent transaction because it transferred about 500,000 customers to Hellenic Bank. Is the full potential unlocked? I would say not yet. The client profile of the ex-COOP created additional challenges, especially as regards our digitisation journey. There are complaints from people living in villages where we are closing branches and I understand that, which is why we are spending a lot of time, effort and money to educate and support people on how to use ATMs, web and mobile banking, and so on. There’s still a lot of work to be done, since our strategy is to become the number one retail bank on the island. We are working to become a customer-centric organisation, through digitalisation, the streamlining of procedures and offering competitive products and tailor-made solutions.

Tell me more about the full spectrum of the Hellenic’s digitisation efforts.

I would separate it into three pillars. Let me start with the customer side, which is the provision of digital channels through mobile and web banking. The next step is to start selling through these channels: buying a loan, a fixed deposit, cards and so on. At a certain point, you can expand this to other non-banking-related services. Cyprus has a different client base, so we still need branches: when deciding to buy a house, which is a one-in-a-lifetime investment, you’ll want to speak with your trusted banker directly. We recently opened a new type of branch that we call ‘phygital’ (physical/digital), which is part of our efforts to streamline procedures, reduce bureaucracy and make the life of the customer as easy as possible. Now, the second pillar concerns internal processes. It still takes too long from the moment a customer enters a branch to get a loan, or for anything else, until the final payout. We are focusing on automating and digitising our processes as much as possible, and we introduced tools such as Automated Credit Decisioning, Risk Adjusted Return on Capital, and Customer 360-degree review.

Are you investing in data analytics?

Definitely. We understand consumer behaviour, and we can share that information with corporates or a retailer so that they can then attract clients – this is all subject to data protection, obviously. For our own purposes, we can look at the data and better understand our customers’ behaviour when offering products and services. We are investing a lot in data management, with a team of some 25 people doing nothing but data mining and similar activities.

And the third pillar?

It is about culture and the way we work. When you look at technology companies such as Google you see that they work differently – they are continuously assessing themselves and are very agile. This also relates to remote working. I don’t mind if someone wants to sit in a different environment, if it makes them more effective while working on a project. What counts is the output, right?

We are of the same mind. You mentioned how cultural differences have influenced your approach toward digitisation. Are there any differences between what it was like to take a systemic German bank online in the 2010s and what it’s like with one in Cyprus in the 2020s?

We have to admit that we are behind Central Europe – and for good reason: Hellenic Bank’s focus was on the acquisition and the integration of the ex-COOP, so its real digital journey started three years ago. However, that journey is very similar when it comes to convincing clients and helping them use digital channels. There’s also this discussion about fintechs, which present more of a threat and competition in Central Europe, due to the market size. Again, it’s about client behaviour, and people here are not there yet. So, the big difference between us and Central Europe is the pace.

We enjoy taking our time in Cyprus.

There’s nothing wrong with that as long as we achieve our targets.

Not at all – unless you are stuck waiting in line in a government office! So, here’s something that everybody wants to know: when can your shareholders expect a dividend distribution?

If you look into lending, the bank is profitable and sustainable. We have started paying coupons on our CSS 1 and 2 after 10 years – this is our tier-one capital – and the next step will be to offer dividends to our shareholders, ideally in 2023 subject to all relevant regulatory approvals.

In October, Demetra Holdings, then the main shareholder in the bank, launched a formal complaint that resulted in your taking a three-month Board-mandated leave. Can you comment on what happened?

I don’t want to go into details but, as I said earlier, I view challenges as opportunities: I’m here to execute the bank’s strategy, improve shareholder value and work with all stakeholders going forward. It happened, it’s over and my focus is on the future.

Eurobank has now become the largest shareholder in Hellenic with a 29.2% stake. How did you feel about this move?

First, it’s a sign of confidence that a large European bank is investing in a lending bank – it proves that we are doing something good. Secondly, we have a standalone strategy, and we are not changing that. This is something I’ve had to learn: if you wait for something but then start changing your strategy, you might move in the wrong direction.

Another challenge facing the sector has to do with the increased pressure from governments to limit the financing of carbon-intensive projects. Are there any concerns that Hellenic Bank might be left with stranded assets?

I can’t see the risk. Actually, the green agenda is a big opportunity, particularly for Cyprus where 90%-95% of energy production is from oil. When friends come to Cyprus, they always ask me, “Where are all the solar panels?” and I say, “There aren’t that many.” As a bank, we have introduced green finance products for cars and housing, and the cost of lending will differ, depending on whether you are green or not – this is why the European Commission is putting banks at the centre of this initiative. We also have a dedicated team for green financing that can help you exploit all the government schemes and subsidies. The industry needs to change too. The energy intensive industries must consider their strategy and start investing in green products. In Cyprus, for example, it is good to see more businesses providing charging stations for electric vehicles. I am actually driving an electric car here.

I’m driving a weather-beaten, battle-tested VW Golf, which is not quite the same but it gets the job done!

Although German, I’m not a car enthusiast. I never got into the idea of driving a Porsche. What I can say, though, is that Cyprus is the best country for having an EV because the distances are so short. I live in Limassol and drive back and forth to Nicosia. It’s just perfect – very inexpensive compared to a combustion engine.

Let’s finish where we started: You spent 16 years at KPMG and almost a decade with HSH Nordbank/Hamburg Commercial Bank. That’s a long time in just two organisations. Do you see yourself in for the long haul with Hellenic too?

At first, I was planning my career for the next five years and when I joined HSH Nordbank, it was for the next three. What I’m trying to say is that the older you get, the shorter the timeline is for your next career step. I’ll be turning 55 this year and I have a contract for another one and a half years or so. Let’s see what happens after that. If the opportunity is good, I may stay for another term. What I do know is that my wife and I want to stay in Cyprus, so, on the personal side, that’s the plan but, professionally, the final decision rests with the bank’s board of directors. We’ll see!

(This interview first appeared in the February 2023 issue of GOLD magazine. Click here to view it.)

(Photo by TASPHO)