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MACRO NOTES

Retail boom is an inevitability in a changing sector

Much has been said about an on-going credit crunch, imperfect legislation, the slow restructuring of the corporate sector and the resulting high indebtedness in the Slovak corporate and banking sectors, but much less attention has been paid to what is happening in the retail sector.
Till now, retail banking clients have brought their deposits into banks, increasing bank liabilities. If a bank has needed more money to finance activities and boost its balance sheet for a short time, it has generally launched big advertising campaigns to bring in clients, but afterwards gone back to largely ignoring the ordinary private client on the street.
This was mainly the result of conditions on the Slovak banking market. Margins were high and banks could benefit from high yields on state bonds. At the same time, income from fees and interest were not good enough. For banks it was easier to supply one big loan to a corporate client than to administer thousands of small retail customers.


Tomáš Kmeť

Much has been said about an on-going credit crunch, imperfect legislation, the slow restructuring of the corporate sector and the resulting high indebtedness in the Slovak corporate and banking sectors, but much less attention has been paid to what is happening in the retail sector.

Till now, retail banking clients have brought their deposits into banks, increasing bank liabilities. If a bank has needed more money to finance activities and boost its balance sheet for a short time, it has generally launched big advertising campaigns to bring in clients, but afterwards gone back to largely ignoring the ordinary private client on the street.

This was mainly the result of conditions on the Slovak banking market. Margins were high and banks could benefit from high yields on state bonds. At the same time, income from fees and interest were not good enough. For banks it was easier to supply one big loan to a corporate client than to administer thousands of small retail customers.

Hunger for retail customers born of sector change

However, the situation is changing. Banks have learned the hard way that the Slovak corporate sector and its legislative framework is far from standard, and have found themselves trapped in a position where they have an excess of money but no one they feel confident enough to lend to.

The obvious result is an orientation towards a less risky segment which is hungry for loans. This section is that of retail customers.

And behind this situation is the restructuring and privatisation of state banks and resultant massive holdings of state securities in the two biggest banks in Slovakia.

After the removal of non-performing loans from restructured banks to state debt agencies, a process which took more than one year and cost the state the princely sum of 100 billion crowns ($ 2 billion), the Finance Ministry replaced the state-guaranteed loans of these agencies with government bonds. Thus, Slovenská sporiteľňa (SLSP) and Všeobecná úverová banka (VÚB) gained an enormous amount of government bonds.

Longer bonds holding a risk

Replacing non-performing loans with tradeable government bonds is a good move, but on the other hand, there are also some risks attached to holding a large share of these bonds with long maturities. For example, these long bond maturities involve a certain liquidity risk (if we take into account their real maturities), because liabilities are composed mainly of short-term customer deposits.

Some of these government bonds bear a fixed coupon of 8% p.a., which looks quite good, but the five year bonds bear a significant interest risk. Government bonds, as does any low-risk investment, lower the average yield on interest-bearing assets and push down the net interest margin. Therefore, banks will have to become more active in providing loans in order to increase their profitability.

The demand for longer term state bonds and papers is also likely to fall as Slovakia approaches elections in the autumn of next year. A number of dealers have already said that the shorter term securities, especially those with one year maturities, are attracting more interest as their maturities are perceived to be relatively more assured.

Any maturities after the election date are, they say, somewhat more uncertain in the minds of buyers more and more concerned with who will be making what financial policy decisions in the next government. This is expected to become a more pronounced situation right up until the election.

Some recent issues of short maturity state papers have actually been heavily oversubcribed - one in mid-January seeing 16.4 billion crowns subscribed while only 4 billion crowns was acepted - while the government even changed a planned issue of longer term papers to shorter ones in the hope of attracting more buyers.

The current liquidity surplus on the market is pushing down interest rates, and banks are having problems deciding where to allocate their resources. Figures released confirm that banks are shifting their focus towards retail clients: retail loans rose 21% in 2000 to a total of 43.7 billion crowns.

The ratio of retail loans to retail deposits rose only slightly from 13% to 14.8%. We expect that retail loans will show the highest growth of all assets (not including the replacement of loans to state debt agencies with government bonds in restructured banks) in future.

Mortgage loans also seem to have a bright future, as they are currently available at 5% p.a. (the state subsidises additional interest of 5% p.a.). Although there are some difficult legislative requirements, we believe that Slovakia can expect to see the mortgage market boom in the near future.

Tomáš Kmeť is a sector analyst with state bank Slovenská Sporiteľňa. His Banking and Finance column appears monthly.

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