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SLOVENSKÁ POISŤOVŇA MUSCLES INTO SMALLER FINANCIAL HOUSES

New banking empire emerges under giant insurer

A process of consolidation has begun among Slovakia's small and medium-sized banks under the auspices of the country's largest insurer, the state-owned Slovenská poisťovňa (SP). With the blessing of the central bank, SP has increased its stakes in the country's three biggest private banks, but critics from the political opposition warn that the new 'SP empire' is really in the hands of Slovakia's largest company, the steel maker VSŽ.
"Slovakia is too small for 25 banks, especially when all of them are universal and most of them are small and weak," explained Vladimír Hromý, the director of the National Bank of Slovakia's (NBS) Banking Supervision Department. "Our banks cannot compare with those of our neighbors, not to mention banks in the EU."

A process of consolidation has begun among Slovakia's small and medium-sized banks under the auspices of the country's largest insurer, the state-owned Slovenská poisťovňa (SP). With the blessing of the central bank, SP has increased its stakes in the country's three biggest private banks, but critics from the political opposition warn that the new 'SP empire' is really in the hands of Slovakia's largest company, the steel maker VSŽ.

"Slovakia is too small for 25 banks, especially when all of them are universal and most of them are small and weak," explained Vladimír Hromý, the director of the National Bank of Slovakia's (NBS) Banking Supervision Department. "Our banks cannot compare with those of our neighbors, not to mention banks in the EU."

A whole new Slovak banking empire is now emerging under SP, which enjoys more than a 60% share of the Slovak insurance market. In an interview for the weekly economic paper Trend, SP president Karol Melocík said that "I think holdings such as Istroban-ka, Poľnobanka, [our] leasing company and so on create conditions for something...like a Slo-venská Poisťovňa group."

SP is the largest shareholder in all three biggest private Slovak-owned banks. It now holds 66.66% of Investičná a rozvojová banka (IRB), 31.91% of Poľnobanka and 72% of Istrobanka. The combined assets of these holdings amount to 95.5 billion Sk ($2.7 billion), giving the 'SP group' a safe third place in the Slovak banking sector after Všeobecná úverová banka and Slovenská sporiteľna.

Dreams of empire

The idea of an SP group found a relatively warm welcome at the NBS. "It is interesting that the banks we recommended to merge to create a big private Slovak bank are now all in the hands of SP," said Hromý. "I have to admit, though, that it happened without our guidance."

But Ivan Mikloš, a former Minister of Privatization and an economic expert with the largest opposition party, the Slovak Democratic Coalition (SDK), was not enthusiastic about an SP empire. "Even under normal circumstances it would be risky, as it would mean too much power for one group and a significant decrease in competition," he said.

Mikloš' misgivings were based on events that took place at SP in August (see related story, page 3). The insurer held a capital increase and stock subscription that resulted in that state's share in SP dropping from 50.5% to 40.4%. De facto control of SP passed to three private companies - VSŽ Holding (25.6% after the increase), Telemar (7.6%) and Vinlan (10.9%). "It's well known that they vote together," said one financial analyst who declined to be named. "I would not call [the new empire] the SP Group, but rather the VSŽ Group," said Brigita Schmögnerová, the economic expert of the post-communist SDĽ party.

In an interview for the Slovak daily Národna Obroda, VSŽ Supervisory Board Chairman Ján Smerek scoffed at opposition suggestions of a VSŽ takeover of SP. "VSŽ did not gain [decisive influence] and will not do so," he said. "We provided money and gained shares in return. This is business." However, he conceded that "the activities of Slovak banks will have to be re-evaluated...industrial enterprises should be represented in banks as shareholders. They need us and we need them."

The NBS, along with economic analysts and opposition politicians, all adamantly oppose a VSŽ putsch at SP. A securities analyst who requested anonymity said that "if VSŽ Holding had credibility, it would not be a bad idea, as a true financial powerhouse could emerge. However, VSŽ is totally without credibility." Schmögnerová added that increased VSŽ influence in the banking sector "means a marriage of industrial and financial capital which would not be good in any case. It is especially troublesome as VSŽ is a company that is going to experience problems in the following years."

Regardless of who controls SP, several moves have already been taken to bring Slovakia's three biggest private banks closer to the giant insurer.

Top management changed at both Istrobanka and Poľnobanka in the last three months. František Palic, formerly a vice-president of the government-controlled VÚB, became the CEO of Poľnobanka and according to Rudolf Gálik, Poľnobanka's Marketing and Strategy Director, "the new management is currently working on a new strategy which should be known by the end of October." Gálik added that "We will keep agriculture as one of our strategic areas; the changes will concern the other [strategic] area."

Edita Bukovská, president of SP before Melocík, became the CEO of Istrobanka. Melocík himself indicated that members of the 'SP group' were snuggling up to the private bank. "I think we are going to...cooperate [more] with Istrobanka. We also are preparing new products with Poľnobanka."

IRB is a special case, as it has been under a caretaker administration imposed by the NBS since it faced a shortage of liquidity in December 1997. However, as Hromý pointed out, "if the IRB had proper shareholders independent of the government, it could get into good shape rather quickly." According to information released by Dušan Krkoška, the bank's administrator, IRB's loss for the first six months of 1998 was 2.3 billion Sk ($600 million). However, 1.4 billion Sk of the loss was due to the creation of provisions for the bad loans IRB has in its portfolio.

Other banks controlled by the SP/VSŽ syndicate include Poštová banka and Banka Slovakia. Poštová banka has 15 billion Sk ($400 million) in assets and the only widespread retail banking system besides VÚB and SLSP (it has offices in more than half of Slovakia's 1,600 post offices). "We have indications that companies close to VSŽ each hold less than 10% of Poštová banka, but together have majority," said Hromý. After a recent purchase, SP owns more than 80% of the small Banka Slovakia (3 Billion Sk in assets).

The consolidation process is also evident among smaller banks independent of SP and VSŽ. AG Banka, founded in May 1997, has gradually taken over the troubled daughters of smaller Czech banks. "They actually are doing us a service by 'consuming' Banka Moravia, Agrobanka and Banka Haná," said Hromý. Dopravná banka took over the remaining small Czech subsidiary, Coop banka. Recently, Dopravná banka (assets of 5.3 billion Sk) itself was bought by the major state-owned bank, Slovenská sporiteľna.

As ING Barings Securities analyst Vladimír Zlacký pointed out, the merits of consolidation remain to be seen. "In Slovakia, it has always been the medium-sized banks that were very profitable and successful, while the giants got into trouble," he said.

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