The banking sector has been at the leading edge of economic reforms throughout the economies of central Europe. For most of the more developed markets, striving to join the European Union has given them a focus to get their banking sectors in order, and fast. The majority of countries in the region have created sound legislative frameworks based on international banking principles and double-tier banking systems around the core of a broadly independent central bank. However, the hard work is by no means over. The difficult task has been to make sure that the banks that have been created are able to survive and operate according to commercial principles and, ultimately, to stand on their own feet.
Consolidation has been the main theme over the past year for the more developed central European markets as banks try and get their balance sheets in order. For instance, while laws dictate BIS capital adequacy ratios of 8% be enforced in most central European countries, these norms are still a long way off for many banks.
Having opted for a programme of extensive state support for restructuring banks balance sheets, Hungary is furthest down the track in many ways. The experience of handling several problems in the banking sector in the first four years of reform, in part brought about by 1992's bankruptcy laws and changes in accounting procedures, has left the supervisory mechanism more robust. A two-phase consolidation programme is now nearing completion. Mergers among the smaller banks continue apace, meanwhile, several of the larger banks have reduced their capital base and have been restructured, allowing them to announce sizeable profits last year. The restructuring programme brought with it an actual increase in the state's ownership of the banking sector and Hungary's banking privatization programme for the larger banks has only developed serious momentum over the past year, with three of the big five now at least partially owned by the private sector. In August, 49% of Hungary's largest commercial bank Orszagos Takarekpenztar (OTP Bank), was sold to private investors. GECC took a 60% stake in the second largest bank, Budapest Bank, in December and in January the state offered to sell its 24.7% stake in Hungary's foreign trade bank, Magyar Kulkereskedelmi (MKB), to its existing foreign shareholders. And the state is also reducing its holdings in smaller banks. In late March, Hungary's state privatisation agency APV announced a one-round public tender to sell its 50% stake in Altalanos Ertekforgalmi Bank, which is capitalized at Ft1 billion.
Like Hungary, banking in the Czech Republic is dominated by a few large banks. The big four control over three-quarters of the market for loans and deposits. The state is beginning to divest itself of some of its holdings in these banks. In the second quarter of 1996 an offering of global shares of up to 10% of the state's holding in Ceska Sporitelna, the largest Czech savings bank is planned. Sales of global depositary receipts (GDRs) could be the forerunner of other sales of bank stock to foreign investors. The state's stake, which comprises a shareholding of over 45% in the bank, is held by the National Property Fund (NFP).
The need for central bank approval for any foreign acquisition of shares in a Czech bank, up to a maximum 10%, is widely expected to be waived in the second half of this year, attracting foreign investors and clearing the way for GDRs to be converted back into publicly traded shares.
The Czech Republic's fourth largest bank Investicni a Postovni Banka (IPB), is the next candidate for privatization, and may be sold off entirely. Already, the share of the state has been watered down through rights issues to one-third. IPB has said it would like to issue GDRs to dilute the state's stake even further. Selling the state's shares in the other two large banks, Komercni Banka, the country's largest commercial bank, and Ceskoslovenska Obchodni Banka, would be more difficult because Slovakia still has minority holdings or claims in both. Komercni Banka, for one, has been one of the best performing stocks in the Czech Republic, buoyed by a favourable earnings outlook for 1995 and a good pre-tax profit record in 1994.
The Czech Republic's privatization programme was initiated in 1992, and alongside that programme came a policy of rapid liberalization. Unlike in Hungary, foreign banks were allowed to open branch offices in the country as early as 1992. With so many smaller commercial banks, however, the Czech Republic is widely considered to be overbanked, and as a result, the central bank has clamped down on issuing new banking licences. Three banks have collapsed since 1993, but they were set up at a time when licencing requirements were considerably more lax than is the case now. Czech financial institutions are in a better situation than they were as little as two years ago. Nonetheless, analysts estimate that a further $1 billion in support for the system as a whole may be necessary to help banks improve their balance sheets.
In Poland, the state has been relatively more hands off in terms of propping up the banking system and state support for consolidation has been limited in comparison with the Czech Republic and Hungary. That decentralized approach to the banking sector may now be changing, however. One aspect of the consolidation plan currently being implemented by the Polish government on the fragmented banking sector is driven by the desire to concentrate state-owned banking assets into four main banking groups from the "Big Nine" in operation last year. At the heart of this will be the two giants Bank Handlowy w Warszawie, the trade-related bank that is also Polands largest bank, and Bank Pekoe SA, both of which may be partially privatized over the next two years. Meanwhile, the largest state savings bank, PKO BP and BGZ (Bank Gospodarki Zywnosciowej), the food economy bank which groups together 1600 cooperative banks, will be likely to remain in the state's hands for some time to come. Consolidation within smaller banks is likely to continue, and foreign banks in particular will be instrumental in this, especially as foreign competition is restricted by the fact that the central bank will not give new banking licences unless the foreign bank buys smaller troubled banks. A recent trend has been for overseas investors, such as GECC and General Motors, to take the opportunity of acquiring banks as a way of supporting their sales in Poland. Ford and Daewoo are also seen likely to support their car sales in the country in the same way. By 1999 local banks will have to face the additional competition from abroad as the sector becomes fully liberalized.
For those banks that have survived 1993 and 1994, the outlook is generally more positive. Most banks that were in trouble have already received additional capital to deal with their problems, and special laws were created to encourage banks to restructure their debts. Polish banks have tapped into the retail credit market very effectively, and in the first two months of 1996 alone, retail lending grew by around 8%. While the corporate credit market is not considered to be as safe, Polish banks have been at an advantage in infrastructure-related loans for large projects.
Banking reforms in Estonia have also been radical and have been undertaken with an eye to conforming to EU standards by the turn of the century. Minimum reserve and capital requirements imposed by the central bank have had dramatic effects on Estonia's banking system and the resultant mergers and bankruptcies have brought down the number of banks to 15 at the beginning of this year from the 42 commercial banks in existence three years earlier. The entire banking sector has assets approaching $1.3 billion. The five largest banks, Hansabank, Estonian Savings Bank, Union Bank of Estonia, North Estonian Bank and the Bank of Tallinn now control three-quarters of the local banking market. Several of the larger banks have already attracted international capital through GDR issues last year.
Reforms to the banking structure of other central European economies are generally less advanced. In Bulgaria, for instance, banking reforms have been at the leading edge of reforms to the economy but progress is still limited. Control of the central bank was transferred to Parliament at a very early stage after the fall of communism, and it was given the responsibility of managing financial stability and conducting exchange rate policy. The Bank Consolidation Company was set up in 1992 and took control of all state banking assets. Consolidation within the segmented state bank sector resulted in over 20 small state banks being brought under the same roof as the United Bulgarian Bank in 1993. Banks created after the fall of communism still have many problems, most notably the legacy of bad debts from the communist era, estimated to be around $3 billion. Private commercial banks do not yet play a significant role (there were 28 such private banks in the local market last year), many are still unsophisticated and direct investment and participation from abroad is still limited. Most commercial banks have had little contact with banks from abroad, and many are members of the Commercial Banking Association, which does not permit foreign membership. Even so, a privatization programme is planned, and several incentives for investors such as tax allowances are under discussion.
In the guide which follows, structural changes to the banking sectors of the countries of central Europe are analyzed in depth. In addition, the bond markets of the Slovak Republic and Russia are scrutinized with an eye to foreign investor participation.
Katharine Morton