Banking sectors in the Visegrad Four countries (Poland, Slovakia, Hungary and the Czech Republic) have been facing the same challenges, although not at the same time, ever since the fall of communism in 1989.
After 1989 the number of new banks, branches and employees started to grow rapidly. The transformation of the entire economy, including the creation of an institutional framework, had a major impact on these banking sectors. But privatisation of the corporate sector, which was financed mainly by domestic banks, caught these very same banks off guard; since they lacked the requisite banking skills, bad loans grew significantly.
The state banks were also unable to resist political pressures, leading to some dubious practices and the ultimate deterioration of these financial houses, to the extent that governments were forced to sell them.
Hungary has been most efficient in tackling banking privatisation issues. First, it recognised the necessity to recapitalise and sell state banks early. Secondly, it took an early orientation toward foreign investors. By 1996, state participation in the banking sector had declined to under 33%. Poland, the Czech Republic and Slovakia potponed the privatisation of state banks for various reasons, which was a mistake. While these banks were relatively healthy at the outset, that was certainly not the case a few years later. With every year of delay the situation got worse.
Slovakia was the last country from the V4 region to start the privatisation of state financial institutions. In 1999, the capital adequacy ratio of the three major state banks was well below the required 8%. By the end of last year, the government approved the first phase of a restructuring plan for the state-owned banks Slovenská Sporiteľňa (SLSP), Všeobecná úverová banka (VÚB) and Investičná a rozvojová banka (IRB).
The Finance Ministry increased the registered capital of VÚB by 10.2 billion crowns, and that of SLSP by 4.9 billion crowns. Part of the classified claims of the three banks (45 billion crowns from VÚB and 22.8 billion crowns from SLSP) were moved to state debt agencies which will try to recover them. An additional 31 billion crowns of bad loans were taken out from state banks. This move represented a further reduction of non-performing loans to levels acceptable for stakes in the banks to be sold to foreign investors.
A further 9.6 billion crowns in bad loans from Slovenská sporiteľňa were transferred to bring the share of its classified loans to 18%, while 21.3 billion crowns from VÚB was cut out to reduce its classified loans to 19% of its total loan portfolio. The cost of the whole bank restructuring process is approximately 100 billion crowns - over 10% of GDP.
In 1993, IRB, VÚB and SLSP controlled 88% of the deposits market and 66% of the total assets of the banking sector. In 1999, the deposit market share of these banks dropped to 52% and that of total assets to 46%. Obviously, the price for these banks will be lower than it would have been in 1993.
Had past governments recognised the importance of selling state banks to a serious foreign strategic investor, the sector would now be healthier and more competitive and the corporate sector would likely have seen more dynamic changes. On the other hand, given the political situation and culture of rent-oriented practices, it could probably be considered a success that the privatisation process has started at all.
The main conclusion to be drawn from the bank privatisation process is that the state is not an effective shareholder and does not follow the same profit maximizing business practices as private banks. Banks with foreign capital operating in central and eastern Europe are generally more prosperous and healthier compared to those with only domestic capital. Foreign investors bring know-how and increase competition in the sector. However, the cautious selection of a foreign partner is crucial, as proven by the Czech Republic's recently collapsed IPB.
Tomáš Kmeť is a sector analyst with state bank Slovenská Sporiteľňa. His Banking and Finance column appears monthly.