1. Toulouse 29 November 2007 1 Increasing Early Settlement Charges for Personal Loans by OTP-Bank Hungary Abuse of Dominant Position or a Rational Business Response to a Demand Shock? 2007 ACE Conference, Toulouse London Economics www.londecon.co.uk Norbert Maier (London Economics)

2. Toulouse 29 November 2007 2 Plan of the Talk I. Background II. Relevant Market Definition III. Market Power IV. Competition Assessment of OTP’s Action V. Conclusion

3. Toulouse 29 November 2007 3 I. Background

4. Toulouse 29 November 2007 4 The Case  In August 2005, OTP-Bank (Hungary) raised early settlement charges for personal loans from 5,000 HUF to 35,000 HUF (case Vj-12/2006) - a unilateral contract modification by OTP  Allegation: Abuse of dominant position by OTP - exploitative effects: OTP’s personal loan clients were prevented from switching to loans offered by rival banks on more favourable terms - exclusionary effects: OTP’s competitors potentially hurt by foreclosed access to customers

5. Toulouse 29 November 2007 5 Loans in Hungary  Non-corporate loans → housing (mortgages) loans → consumption and other loans → restricted use loans (e.g. for cars, household appliances, etc.) → non-restricted use loans → personal loans → non-restricted use secured loans → etc.  HUF and non-HUF (EUR, CHF) based loans

6. Toulouse 29 November 2007 6 The market for non-restricted use loans in Hungary  Personal loans and non-restricted use secured loans: 2004.03 – 2006.06  Main facts: - steady stream for personal loans - non-restricted use secured loans launched in early 2005 - sharp increase in non-restricted use secured loans

7. Toulouse 29 November 2007 7 Early settlement charges in Hungary in Summer 2005  Key claim: OTP raised early settlement charges for personal loans from 5,000 HUF to 35,000 HUF in August 2005  Early settlement charges for OTP’s main competitors (as of July-August 2005):  OTP raised its settlement charges to the level of that of some of its competitors

8. Toulouse 29 November 2007 8 II. Relevant Market Definition

9. Toulouse 29 November 2007 9 Relevant market definition  Demand substitution between personal and non-restricted use secured loans - switching from personal to non-restricted use secured loans (a new/improved product) - difference between the size of personal and non-restricted use secured loans  Relevant product (by GVH): personal + non-restricted use secured loans - relevant market increased by 130% over the relevant period (2004.03-2006.06) - fast growing market: 40%/yr in the 2004.03-2006.06 period 60% in the 2005.03-2006.03 period - customers under personal loan contract: potentially high switching costs  Relevant geographic area: Hungary

10. Toulouse 29 November 2007 10 III. Market Power

11. Toulouse 29 November 2007 11 Market Power  OTP - 30-40% in the market for the relevant product: indication of strong position in the market - fast growing market (40%/yr): actual market share not the best indicator of market power  Customers - switching costs, due to: (i) early settlement charges (and front-end costs) of new loans in the market (ii) limited transparency and information in the marketplace  Banks - each bank – regardless of its overall market share – has certain market power over its existing client base (e.g. they can increase early settlement charges) - banks are allowed to make unilateral changes to their contracts under certain conditions → such actions do not necessarily imply market power

12. Toulouse 29 November 2007 12 IV. Competition Assessment

13. Toulouse 29 November 2007 13 Allegation  Exploitative effects: Customers under a personal loan with OTP were prevented from switching to rival banks for more favourable refinancing loans  Exclusionary effects: competitors potentially hurt by foreclosed access to customers

14. Toulouse 29 November 2007 14 Analysis of Potential Exploitative Effects  Legal issues - OTP complied with actual regulation as (i) unilateral contract modification under certain circumstances were permitted by law (ii) customers were informed as prescribed by law  Underlying costs - OTP’s initial fee of 5,000 HUF was a general admin fee for loan-relates issues - low demand for early settlement at the beginning - demand for early settlement took off with the appearance of non-restricted use secured loans - increased costs for OTP: (i) admin costs (ii) interest rate costs due to falling interest rates over the period  Customer switching - calculate the profitability for customer switching to alternative loans Ex.: - a personal loan of 2,000,000 HUF taken in Aug 2004 for 5 years at an APR of 25% - Aug 2005: opt. 1: stay with OTP for another 4 years opt. 2: switch to a non-restricted use secured loan with 15% APR for 10 years - profit of choosing opt 2 (using personal discount rate of 10%): 153,115 HUF (>>35,000 HUF)

15. Toulouse 29 November 2007 15 Analysis of Potential Exclusionary Effects  Competitors are not likely to be foreclosed in a market that grew in excess of 60% a year in the relevant time period (2005.03-2006.03)

16. Toulouse 29 November 2007 16 V. Conclusions

17. Toulouse 29 November 2007 17 Concluding Remarks  The relevant market includes personal and non-restricted use secured loans  Market share is not the best indicator of market power in a fast growing market - each bank, regardless of its market share, has some market power over its existing client base  OTP followed sectoral regulation when increasing its early settlement charges  The sudden increase in demand for early settlements imposed high costs on OTP - OTP increased its early settlement fees (to market level) to match its increased costs - more detailed analysis of costs is needed (see The Northern Ireland PCA Banking Market Investig.)  Customers were unlikely to be deterred from switching - see Numerical example - one needs to investigate the distribution of OTP’s personal loan clients with respect to the size and the duration of the loan - exploitative effects of OTP’s action remains questionable  Exclusionary effects unlikely to be important in a fast growing market