Tomáš Kme?
The Slovak banking sector is heading towards consolidation. The main engine will be improved efficiency. If we look at the figures in the paragraph below, we can see that the Slovak banking sector had the worst cost/income ratio from V4 countries in 1998.
Avg. cost/income ratio of regional banking sectors in 1998: Estonia 48%, Lithuania 81%, Czech Republic 61% Hungary 86%, Poland 54%, Slovakia 96%.
The Slovak data mean that on every dollar of income there were 96 cents of expenses. This unbearable situation was caused by inefficient management and the high costs of classified loans in the portfolios of major state banks. Although restructuring eased the burden of non-performing loans, a serious increase in efficiency will only occur after privatisation, when new foreign shareholders will transfer necessary management know-how.
To retain acceptable profit in the long run, banks will have to slash costs and offer interesting products, as even the current margins will narrow. The increased competitive strength of dominant banks will put huge pressure on small banks unless they focus on specific products.
The new trend on the Slovak market is cross-selling. Banks recognise their branches as viable distribution channels for selling various packages of products. For example, with a current account a customer may buy life insurance, credit, savings or asset management products. However, this is still in its first stages, and a significant effort will have to be put into educational activities. Banks are diversifying, and asset management is a hot issue.
Recently, two banks offered these services as a response to more sophisticated client needs and because of the potential in the market. Declining deposit rates increased demand for more riskier but higher yield investments. However, it will take a while before collective investment will be a serious alternative to term deposits - the public has negative experiences with voucher privatisation. Besides, the Slovak capital market is extremely illiquid, with very few interesting stocks, so the general public has little contact with capital markets and tends to largely ignore them. Trust in any mutual fund is based on previous performance, and since the history of Slovak funds is very young, it's no surprise that even an aware public is suspicious.
In Slovakia only around 1% of total deposits are invested into funds, the least of the V4 countries. The clear winner is Hungary, a fact which may be related to its having the best privatisation programmes of the V4 (oriented towards direct sales and foreign investors).
Although the demand for asset management is low here, it may shoot up quickly. As an example, the Czech Republic experienced a 20% growth of assets in mutual funds during 1H2000. Public attitudes towards investments and risks will change with time, and asset management will thus inevitably become a serious industry. For banks, it will be a new challenge.
Tomáš Kme? is a research analyst with Slovenská Sporite3oa. His Banking and Finance column appears monthly.
Author: Tomáš Kme?
