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BANKING & FINANCE

Consumers beginning to re-examine savings strategies

Banks have been focusing their activities on state papers in recent years. Huge government expenditures pushed up interest rates on T-bonds and T-bills to abnormal levels, providing valuable and risk-free investment for banks. Banks had little problem in deciding where to put their funds. But the euphoria has now disappeared.
A restructuring of loan portfolios at domestic banks and weak enforcement of creditors' rights fuelled a credit crunch, while deep cuts in government expenditures resulted in a low supply of T-bonds and T-bills. A liquidity surplus in the banking sector caused a sharp fall in interest rates and a lack of issuing activity from the Finance Ministry allowed the central bank to take full control over interest rate developments in 1H00.
A significant drop in interest rates on deposits is forcing bank clients to re-examine the way they save their money. Rolling over short-term time deposits had been the most popular tool, and clients enjoyed high yields on this. Three month (3M) deposits increased 84% in 1999, and together with 1M deposits represented roughly half of total time deposits in June.


Juraj Kotian

Banks have been focusing their activities on state papers in recent years. Huge government expenditures pushed up interest rates on T-bonds and T-bills to abnormal levels, providing valuable and risk-free investment for banks. Banks had little problem in deciding where to put their funds. But the euphoria has now disappeared.

A restructuring of loan portfolios at domestic banks and weak enforcement of creditors' rights fuelled a credit crunch, while deep cuts in government expenditures resulted in a low supply of T-bonds and T-bills. A liquidity surplus in the banking sector caused a sharp fall in interest rates and a lack of issuing activity from the Finance Ministry allowed the central bank to take full control over interest rate developments in 1H00.

A significant drop in interest rates on deposits is forcing bank clients to re-examine the way they save their money. Rolling over short-term time deposits had been the most popular tool, and clients enjoyed high yields on this. Three month (3M) deposits increased 84% in 1999, and together with 1M deposits represented roughly half of total time deposits in June.

But the average interest rate on 3M deposits fell from 16.27% in June 1999 to 8.9% in June 2000. Currently, most banks offer interest of less than 8% on 3M deposits, which could result in a change in consumer savings strategies or an outflow of deposits.

Low interest rates on deposits create a good environment for opportunity investments [investments into insurance products, asset management products or real estate]. Asset management seems to be the right alternative to time deposits. Actually, only two significant banks provide asset management products for retail clients. The asset portfolio of Opened Investment Funds is worth only 3.2 billion crowns in Slovakia, less than 1% of total deposits, compared with 5% in the Czech Republic, 15% in the EU and 40% in the United States.

These new retail clients' trends in savings, or more precisely investment, strategies have been hindered by poor legislation.

Higher yields should bear higher risk. In Slovakia this does not work. For instance, Devín banka operates under bank licence so non-anonymous private deposits kept in the bank are covered under law by the Deposit Protection Fund. But Devín banka is far from a standard bank. It has had problems with its fulfilment of the Minimum Reserves Requirement for 3 months. Devín banka offers one of the highest interest rates on short-term deposits, currently 12% p.a. for 3M deposits - more than 4% p.a. above the market average. Such an interest rate policy is unsustainable.

Interest rates on client deposits at other banks follow the BRIBOR [Bratislava InterBank Overnight Rate], but only Devín banka borrows from clients at BRIBOR plus 4% (for 3M deposits). So its costs of money are higher than the costs of high net-worth corporate clients, resulting in a negative interest margin.

There is a question as to whether the presence of such a "bank" is not merely social welfare because the future costs of bankruptcies (including high accrued interests) will be paid by successful banks and their clients [through the Deposit Protection Fund]. The only reason why Devín banka still operates is direct government support and weak, non-independent bank supervision.

Can we expect a further fall in interest rates? The central bank decided to keep key interest rates in July and August unchanged, despite an expected cut. Deflation in June, the first since August 1998, and 0% inflation in July assured one-digit annual inflation in July.

This result only confirms that the central bank can easily reach its inflation targets - a positive argument for a further cut in interest rates.

Juraj Kotian is a research analyst at state bank Slovenská Sporiteľňa

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