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"Big is Beautiful" does not apply to Slovak banks

When the two largest Canadian banks, The Bank of Montreal and the Royal Bank of Canada, merged unexpectedly in December 1997, Canadian Prime Minister Jean Chrétien decided to put his foot down and have the Finance Ministry investigate the merger.
He declared himself unhappy with the 'bigger is better' pronouncements of the financial and corporate sector. "After all," said the wiry Chrétien, "if I was 350 pounds, that would not make me a better prime minister."
Chrétien would find his beliefs confirmed by recent developments in the Slovak banking sector, where small, tightly-run banks are surging and big state-run behemoths losing ground.

When the two largest Canadian banks, The Bank of Montreal and the Royal Bank of Canada, merged unexpectedly in December 1997, Canadian Prime Minister Jean Chrétien decided to put his foot down and have the Finance Ministry investigate the merger.

He declared himself unhappy with the 'bigger is better' pronouncements of the financial and corporate sector. "After all," said the wiry Chrétien, "if I was 350 pounds, that would not make me a better prime minister."

Chrétien would find his beliefs confirmed by recent developments in the Slovak banking sector, where small, tightly-run banks are surging and big state-run behemoths losing ground.

Reports published in mid February indicate that Slovenská Sporiteľňa (SLSP), the second largest bank in Slovakia, posted a net profit of 79.5 million Sk in 1997, significantly less than its 1996 profit of 401.6 million or its 1995 profit of 670.4 million.

In contrast, 1997 was a very successful year for several medium and small banks. Austrian-owned Creditanstalt recorded a net profit of 276 million Sk, three times its profit in 1996. Slovak Istrobanka posted a 155 million crown net profit, up from 100.7 million crowns in 1996, while Tatra Banka had an even more remarkable year, recording a net profit of 900 million Sk, a 90 percent improvement over 1996.

"All the largest state banks, IRB, VÚB and SLSP, are bothered by loans from the early 1990's, as well as by politically-driven loans they have been forced to make since then," said Martin Barto, an analyst with ING Barings. "The smaller banks, especially Tatra Banka and Ľudová Banka, have been much more careful in their lending policy."

Bad loan burden

The proportion of bad and doubtful loans in the SLSP portfolio last summer was 39.7 percent, according to the NBS License Department. Because of these loans, SLSP had to create provisions and reserves in the amount of 2.4 billion Sk in 1997, causing the aggregate volume of its provisions to balloon to 15 billion Sk.

VÚB, the largest Slovak bank, reported a net profit of 260 million Sk at the end of last September, but according to preliminary estimates, the bank's annual 1997 profit will be below 200 million. Like SLSP, VÚB had to create 1.2 billion Sk in reserves last year, but unlike SLSP, VÚB has a paltry ratio of primary deposits.

Despite falling profits, SLSP has so far managed to cement its position on the Slovak market due to an extensive network of branch offices and affiliations, as well as a solid reputation among the population. In mid-1997, SLSP had 145 billion Sk in deposits from non-bank clients, and its deposits in other commercial banks amounted to 85 billion Sk.

Time to change?

But there are signs that the era of massive state banks is drawing to a close in Slovakia. Peter Staněk, State Secretary of the Finance Ministry, decried the growing concentration of money in the hands of a few Slovak financial institutions.

"Now we have only one [institution] which has money, and it is Slovenská Poisťovňa, [the biggest Slovak insurer], which lends money to SLSP and IRB," Staněk said. "We must change the position of the SP on the market because when only one [source] has money, it is very bad."

Staněk's criticism was echoed by Martin Kabát, head of market research at Slávia Capital brokerage company. "When you have this kind of centralization of reserves, it creates something like a monopoly," he said.

"It means that other banks have insufficient reserves, and every time they have to meet their minimum reserve requirements, [which is] twice monthly, they have to borrow [from SP]. If the money was more spread around, there would be more competition and the interest rates would come down."

Recent market figures show that this kind of 'spreading around' is already happening, especially with primary reserves. Five years ago, the three biggest banks controlled 93 percent of private deposits, but by the middle of 1997, this figure had fallen to only 64 percent.

"Primary reserves are flowing to other banks, which are more user-friendly and able to offer products more tailor-made to the needs of their customers," explained Barto.

"We also have to take into account the psychological effect of the IRB," he added, referring to the third largest Slovak bank which went belly-up last December and was placed under a forced administration by the National Bank of Slovakia.

"People are now more inclined to have faith in banks that are supported by foreign capital," Barto concluded.

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