In Austro-Hungarian times, Bratislava was essentially a suburb of greater Vienna, a status it lost after communism divided central Europe, but one it is fast regaining, especially in banking services.
Slovakia has possibly the highest concentration of foreign bank ownership in Europe, with about 98% of bank assets in non-Slovak hands. The reason that the foreign banks have piled in over the past few years has been Slovakia’s tiger-like economic growth – coming in at 8.3% last year and 8.9% in the first quarter of this year.
So far, the level of foreign ownership has not become a political issue, although the new populist government of Robert Fico, the prime minister, has mooted the idea of imposing a dividend tax.
Attracting investment
Slovakia has also become a magnet for foreign investment, with the biggest deals coming in car manufacturing, giving the country the highest per-capita car production in the world.
Those kinds of numbers are a far cry from the situation in the late 1990s, when Slovakia was shaking off the torpor of the Vladimír Meciar years. The authoritarian leader had left the economy in disarray and Slovakia looked to be out of the running for both Nato and EU membership, left far behind its faster-moving regional rivals, such as Poland, the Czech Republic and Hungary.
That was the time that the new government of Mikulas Dzurinda began to undertake economic reforms – including privatising the banking system – causing the small country’s neighbours to take a second look.
Erste makes a move
Erste Bank, the third largest bank in Austria, had already woken up from the lethargy that characterised Austrian banking. It took the plunge first into Hungary in 1998, then into Croatia, and then into the Czech Republic, buying Ceska Sporitelna, that country’s leading retail bank. The contrast with Austria, where net interest margins were about 1.4%, and the new markets, where they were three or four times higher, set Viennese pulses racing. Now there was a chance to do the same in Slovakia.
“Austria is the worst banking market in the world,” sniffs one local banker. “It’s impossible to make money there.”
When the Slovak government put Slovenksa Sporitelna, its largest bank with about a third of the market, on the block in 2001, Erste jumped in, buying 87% of the shares for €411m. In 2005, Erste exercised an option to buy the remaining shares from the government, giving it complete ownership.
“We couldn’t go west because it was too expensive so we had to go east,” says Michael Mortiz, a spokesman for Erste.
“When we entered that market, there was no Treaty of Nice and no clear prospect of EU entry,” he says. “But it was our bet that all these countries were going to reach the standards of western Europe. However, when we bought, it was a very primitive banking business.”
Erste began a radical restructuring, integrating Slovenska Sporitelna into the larger group and significantly boosting earnings and efficiency. Last year, the bank reported Sk3.9bn ($155m) in profits, up 8% on the previous year.
Others had seen Slovakia’s potential even earlier. Tatra Banka, Slovakia’s first private bank, was founded in 1990. Owned by Austria’s Raiffeisen, it is now the country’s third largest bank, with Sk3bn in profits.
Italy’s Intesa Sanpaolo bought Slovakia’s second largest bank, VUB, in 2001. The Italians had just bought a bank in Croatia and believed that Slovakia, with its similar population of five million and a similar former communist background, made for a good fit.
“When VUB was put on the bloc, we had no hesitations,” says Adriano Arietti, Intesa’s head of corporate development.
Restructuring
As with Erste’s acquisition, Intesa was also forced to restructure its new purchase rapidly.
“We had to overcome more substantial issues than in Croatia. Competition with two Austrian-owned banks was very strong from the first day and VUB’s characteristic of working mainly with state-owned enterprises had cut the bank off from other profitable and dynamic corporate borrowers,” says Mr Arietti, noting that the turnaround took 18 months.
Those early gambles have paid off handsomely: last year, VUB reported a profit of Sk3.9bn.
Worries that Slovakia would not catch up with its central European brethren proved to be ill founded. It has turned out to be the fastest-growing economy in the region. Last year it entered ERM-2, the exchange rate mechanism that is a precursor to euro entry, expected in 2009.
As the economy has grown, wages have also risen, while unemployment has fallen. A wealthier population is beginning to seek more sophisticated financial products, following in the footsteps of richer economies like the Czech Republic.
“The Czechs tend to be slightly ahead of us,” says Regina Ovesny-Straka, Slovenska Sporitelna’s CEO. “If we look at the Czech Republic now, we can see where we will be in two or three years’ time.”
Mr Mauritz says that as the market has developed: “You see a tremendous increase in non-risky products, moving away from loans to asset management and pension funds. We saw the same thing in Greece, Spain and Portugal as they became richer and began to invest in more sophisticated products.”
One of the biggest banking profit drivers is the mortgage market, spurred by Slovakia’s real estate boom, particularly in Bratislava, where residential prices increased by about 15% last year.
Mortgage lending by the big three banks increased dramatically by about 50% last year, and continued growth prospects are good. Slovakia has only about a 40% mortgage to gross domestic product ratio, much lower than in western Europe. Banks are also cranking up consumer loans and credit cards.
“Loans are providing the growth in this market,” says Mrs Ovesny-Straka.
For now, investment funds have been fairly flat, as customers have been lured by high interest rates into keeping their money in banks. There is also little call for brokerage accounts because Bratislava is too small to support a viable stock exchange.
However, Mrs Ovesny-Straka says that when Slovakia adopts the euro, she expects the investment business to grow rapidly because customers will be able to easily invest anywhere in Europe.“We expect to see a big increase in asset management,” she says.
Outside interest
As in the Czech Republic next door, the profits made by the banks dominating the Slovak market are starting to attract outsiders. HSBC is planning to begin operations in Slovakia in the next few months, in conjunction with an expansion into the Czech Republic, Poland and Hungary.
HSBC plans to ‘lift and shift’ models that the bank has already developed in other emerging markets like Brazil and Indonesia and import them into the region, says Guy Hamilton, the HSBC executive in charge of central Europe. “Existing banks are robust and reliable, but our customer focus groups show a disappointment with customer service, particularly at the upper end of the market,” he says.
But the view of the banks that now dominate the market is that newcomers like HSBC will be focused mostly on large foreign corporate clients, not on retail clients or domestic small and medium-sized enterprises.
“We don’t see it as much of a danger,” says Mrs Ovesny-Straka.
Rainer Franz, the CEO of Tatra Banka, says local banks owned by Austrian and other central European players are having a more difficult time servicing global companies, who are turning to more international banks able to deal with all of a company’s far-flung operations.
“It was very profitable initially because there were not that many banks serving those clients. But now the larger companies don’t need Slovak banks at all and the value of lending to international clients is drying up,” he says, adding that local banks are now focusing more on Slovak SMEs.
“Banks like HSBC are a threat when it comes to serving global clients,” he says.
Poland’s mBank, owned by BRE, a subsidiary of Germany’s Commerzbank, is planning to launch an internet bank later this year.
“We’ll offer a limited range of products at the lowest possible cost,” says Piotr Gawron, the bank’s president, adding: “We’ll go into Slovakia at the same time as we go into the Czech Republic.”
The trick for Slovakia’s big players is now to hang on to their market share.
Mrs Ovesny-Straka is sanguine about the entry of internet banks, which she thinks will have a hard time competing against established banks with extensive branch networks.
“I’m not sure it will have much of an impact,” she says.
