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Financial giants to be merged

The June 16 proposal by Premier Vladimír Mečiar to merge Slovakia's four biggest financial houses into two has aroused heated debate in financial and political circles. While Mečiar and his economic advisors say that their sole intention is to heal the malnourished banks by feeding them to each other, opposition party leaders maintain that the operation is simply a clever maneuver to allow the government to privatize the entire banking system before September's parliamentary elections.
Mečiar's prescription to achieve a sound banking system is to merge Všeobecná Úverová Banka (VÚB), the largest commercial bank, with Slovenská Sporiteľňa (SLSP), the largest savings bank, and to create a second twin with Slovenská Poisťovňa (SP), the dominant insurer, and Investičná a rozvojová banka (IRB). The National Bank of Slovakia (NBS), while not overly supportive, has given the plan a cautious nod.

The June 16 proposal by Premier Vladimír Mečiar to merge Slovakia's four biggest financial houses into two has aroused heated debate in financial and political circles. While Mečiar and his economic advisors say that their sole intention is to heal the malnourished banks by feeding them to each other, opposition party leaders maintain that the operation is simply a clever maneuver to allow the government to privatize the entire banking system before September's parliamentary elections.

Mečiar's prescription to achieve a sound banking system is to merge Všeobecná Úverová Banka (VÚB), the largest commercial bank, with Slovenská Sporiteľňa (SLSP), the largest savings bank, and to create a second twin with Slovenská Poisťovňa (SP), the dominant insurer, and Investičná a rozvojová banka (IRB). The National Bank of Slovakia (NBS), while not overly supportive, has given the plan a cautious nod.

Resurrected plan

Unveiling the plan, Mečiar argued that the banks are saddled with bad loans (see sidebar, this page), and could not effectively compete with foreign banks on the Slovak market unless they join forces. Three days later, the premier added in his regular weekly interview for Slovak Radio that the idea was not new. "Negotiations with managers of the [four] banks and NBS Governor [Vladimír Masár] have already been taking place for several years," Mečiar said. His claim was confirmed by Norbert Lazar, VÚB's spokesman, who said in a statement that the idea of merging SLSP and VÚB has been around since 1991.

But while not new, opposition members and some financial experts say it is not necessarily good, though. "Merging helps when one of the institutions is troubled, and the other is strong and healthy. Then mergers bring new capital and confidence," said Brigita Schmögnerová, economic expert for the opposition Party of the Democratic Left, noting that this was not the case for either VÚB or SLSP.

According to Daniela Zemanovičová, an analyst with the Center for Economic Development (CPHR), an independent think tank, the two giants do not need one another, "but rather a partner that is going to bring capital, image, know-how, etc."

Law bypass

Viliam Vaškovič, an economic expert with the opposition Democratic Union, objected to the scheme's hastiness and lack of transparency. "Such a [merger] is usually planned over a long period of time and transparently," he said. "Moreover, it is done by specialists." Schmögnerová added that since the proposal was being prepared at the end of the election cycle, she could not help but suspect that the plan's sole purpose is to bypass a law banning the privatization of SLSP and SP until well into the next century.

That law was passed in June 1996 by votes of the opposition and some government deputies from Mečiar's partner parties, the ZRS and SNS, following Mečiar's claim in February of that year that all four banks would be sold within a month. The law froze privatization of the SLSP and the SP until the end of 2003, while allowing privatization of the VÚB and the IRB.

The SLSP is the institution where most Slovaks still keep their savings and the SP is the dominant insurer, holding a monopoly in areas such as mandatory car insurance. Consequently, both have large amounts of cash on-hand and are very attractive for potential privatizers.

While the SLSP is owned completely by the state via the National Property Fund (FNM) and the Restitution Investment Fund (RIF), nearly half of the SP was sold in the first wave of voucher privatization. Both Schmögnerová and Vaškovič believe that their merger with financial houses whose privatization had been authorized, would effectively render the ban powerless.

Cautious support

The NBS has tried to remain above the fray while cautiously supporting Mečiar. In an interview for TV Markíza, Masár stressed that "the banks that seem big to us... are not going to look big once we're in the EU." Ján Onda, the NBS spokesman, said that Masár's enthusiasm concerned Slovak banks in general. "The NBS has for a long time seen as its aim, that many of the existing Slovak banks merge," Onda said. "Our banks should be able to compete with small and medium-sized banks in the EU."

However, Masár stressed that "non-performing loans are not going to perform just because of a merger," referring to large shares of non-performing loans that burden all four financial houses.

There is an important distinction to be made between the IRB & SP merger and the VÚB & SLSP marriage. The former is considered a done deal, due to the June 10 takeover of IRB by SP (see story on page 6), and opinions about it are divided strictly along party lines; the latter, though, is more complex.

Creating a true giant

Schmögnerová conceded that merging the VÚB and SLSP made some sense, while Onda added that "there is logic to merging banks who hold dominant positions in providing loans and obtaining deposits, respectively."

Given the VÚB's capital adequacy ratio of 6.2% instead of the required 8% and its high share of bad loans, then getting the 152 billion Sk ($4.34 billion) the SLSP has in deposits from the Slovak population would certainly come as a big help.

Michal Baránik, an economic expert for Mečiar's HZDS, went as far as claiming that "the merger could decrease [the two banks'] operating costs by 30%."

But according to Vaškovič, the SLSP should not be privatized anytime soon because of its market dominance and political sensitivity surrounding its privatization.

On the other hand, he said, "the VÚB should be privatized as quickly as possible by a strong strategic investor as it sorely needs capital." Since such an investor cannot be found in Slovakia, Vaškovič suggested a foreign partner.

Government officials, for their part, seem not to entertain the idea of foreign banks owning any of the four financial houses. Baránik did not even desire foreign advice, saying: "It is more rational to use our resources - management and in-house experts - than to use expensive [foreign] firms."

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