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Progress slow on modernisation

Until there is clarity over home country rule, Slovenian privatisation will be held up. Brian Caplen reports.
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Slovenia’s banking sector retains large state ownership, lags behind its European competitors and the prospects for modernising it through privatisation are poor.

Slovenia’s finance minister Andrej Bajuk admits that the major Slovenian banks such as Nova Ljubljanska banka (NLB) are performing way below their potential but he says that EU directives on supervision of banks is holding up further privatisation. The government is negotiating with KBC of Belgium over whether it can increase its stake in NLB above the current 34%. The state holds 35.4% plus a golden share in NLB, which has a dominant 40% share of the market.

“The major issue now, and one on which I have to swallow most of my libertarian views, is that the EU directives in terms of supervision establish a home country rule wherever somebody has more than 50%,” says Mr Bajuk. This implies that if KBC had a majority, NLB would be regulated in Belgium, he says, but that Slovenian taxpayers would be asked to bail out the bank if it failed because of the country’s deposit guarantee system.

Debate goes on

“We have to slow down [privatisation] until the whole subject of host country rule gets debated,” Mr Bajuk says. The government also has a controlling stake in the country’s second largest bank, Nova Kreditna Banka Maribor (NKBM), with a 13% share.

Analysts are scathing about the sector. A Standard & Poor’s report in January said: “State ownership has limited the banking sector’s restructuring and modernisation momentum and, given the dominance of NLB and NKBM, potentially distorts the competitive environment. It also contributes to the slow adaptation to change, moderate returns and unfavourable cost structure. Conversely, this attitude has shielded the two largest players from the greater competitive pressures felt elsewhere in Europe and provides a level of government support that has been replaced by foreign shareholders in other systems.”

One example of where Slovenia is falling behind, say, Estonia, is the low take-up in online banking. In Estonia, banks jumped the technology gap but in Slovenia branches are still the main distribution channel and the network is being expanded.

Lack of scale

Fitch says: “Despite a still healthy net interest margin across the sector, profitability is still quite low as Slovenian banks typically suffer from a lack of scale, which leads to high costs relative to income, with this ratio being 60% to 70%.”

The dominance of the state-owned Slovenian banks makes it difficult for foreign banks to break into the system, although roughly 30% of total equity is held by foreigners. Société Générale owns 99.6% of SKB Banka and San Paolo IMI has 66% of Banka Koper.

France Arhar, chairman of the management board of Bank Austria Creditanstalt, and former central bank governor, says: “A key problem of this market is the dominance of NLB and the gap between its share and that of the other banks. It’s not good for competition and it makes it very difficult to compete for deposits.”

Another challenge is that the Slovenian savings rate, traditionally one of the highest in Europe, is under pressure as personal consumption rises. Despite this, Bank Austria Creditanstalt has a 16% share of the mortgage market and 4% of the retail deposit market. Last year it started selling funds, especially guaranteed funds, and opened three branches bringing the total to 13.

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Read more about:  Central & Eastern Europe , Slovenia