Slovenia's cure for xenophobia

A fear of foreign influence and a desire to escape the social costs of consolidation have slowed bank reform in Slovenia, but with likely EU membership looming change cannot be put off much longer. Christina White reports

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Market day in Ljubljana, where change is gradual though EU entry may unleash competition

Slovenia is like a snail inside its shell: slow and fearful of the outside world. As the small alpine country prepares for EU membership, the need to conform to EU banking standards is forcing it out of isolation. It is modernizing its banking system, amid political upheaval, while staving off tedious bureaucracy.
"Everything in Slovenia happens a little more slowly than in other countries," says Franjo S'tiblar, chief economist at Nova Ljubljanska Banka. That slowness is delaying reform in three major areas of Slovenian banking: policy towards foreign banks, privatization of the two largest banks, and consolidation of the over-banked system.
Slovenia hasn't openly welcomed foreigners, a sentiment reflected in the banking industry. Only three foreign banks operate in Slovenia, with Bank Austria Creditanstalt having the largest market share.

"The general thought in Slovenia is that it has come out independent from Yugoslavia and it cherishes that independence," says John Gibling, director at Standard&Poor's. "Therefore it has been reluctant to let foreigners in to take over institutions and it has put barriers up. Those barriers are being removed now because they want to join the EU. But they try and leave it to the last minute to get rid of them."
Legislation passed at the end of 1998 in compliance with EU standards eased restrictions on foreign entrants and a handful of Austrian and Italian banks have moved in.
Bank Austria Creditanstalt is a veteran in the Slovenian banking industry. Before the 1998 merger between Bank Austria and Creditanstalt, both banks already operated in Slovenia. Bank Austria was licensed under Yugoslav rule and it became more influential in Slovenia after the break-up of the Yugoslav regime. When Creditanstalt entered the market in 1993, buying into an existing Slovenian bank was the only means of access offered to foreign banks.

Alfred Taul, member of the board at Bank Austria Creditanstalt in Ljubljana, says that as one of the few foreign banks operating in Slovenia, it oVers products and services not available from the domestic banks. "We have a major share in corporate banking and have treasury services such as refinancing and foreign-currency lending. We are a universal bank and have the ability to use our international network to oVer more access.
"We face the same obstacles as the local banks, though, including ongoing restrictions from the Bank of Slovenia. We obey restrictions such as those on foreign-currency lending. But most foreign banks just Fly in and Fly out for the big deals."
The state still owns the two largest banks in the country, Nova Ljubljanska Banka and Nova Kreditna Banka Maribor, and the First step in reforming domestic banks is to sell them off.
Plans to privatize the banks were unveiled four years ago. S'tiblar of NLB says: "The leadership of our bank is eager to become privatized. But all institutional changes are gradual in Slovenia."
Rehabilitation without crisis
The privatization plan was adopted by the old government, which was voted out of office in April. An interim government is in place until the election, scheduled for October. And when the new government is in place, it may adopt a different privatization plan than the one proposed by the previous administration.







S'tiblar: "eager to become privatized"

Both banks were formed after Slovenia's independence in 1991 and both emerged from rehabilitation in 1997. The government's support for them during the rehabilitation process is seen as an indication of the strength of the Slovenian economy. "Compared to other central European countries, we were the only ones without a banking crisis in the 1990s. We had enough funds to rehabilitate the sector by ourselves," says S'tiblar.
The government intended to privatize both banks after the end of the rehabilitation process, but it has been reluctant to relinquish any control. Some analysts explain this procrastination as another instance of the Slovenian fear of foreign influence.
"The second stage of the privatization process was to Find a strategic partner for each of the banks," explains S'tiblar. "The prevailing political sentiment at this moment is a resistance to direct foreign ownership."
Gibling contends that even though the privatization hasn't taken place, it hasn't prevented NLB from operating as a normal bank. "NLB hasn't been affected managerially," Gibling says. "They still have good management and good systems. There is not a lot of interference from the state."
NLB may have found a way to circumvent the government's privatization process. With a population of two million and 24 banks to serve them, Slovenia is over-banked. NLB is one of the banks most eager to start consolidating. According to S'tiblar, a hidden benefit of merging will be that after its First three acquisitions, NLB will be indirectly privatized.
S'tiblar says consolidation also is progressing more slowly than in other countries. NLB is forming a group of daughter banks and partner banks, a process it will Finish by the end of 2001. Three of the banks will be incorporated by the end of this year, resulting in the indirect privatization of NLB.
The state-owned NKBM and SKB, the third-largest bank, are also talking of merging.
Though Gibling admits it would be a big move, "nothing is happening quickly and it has slowed down even more because of the election". There have been positive comments, says Taul, but no progress. S'tiblar claims that there has been a stall in signing the letter of intent, the next act in the merger process.
Provided the NLB group forms according to plan and the merger between NKBM and SKB goes through, Slovenia will be left with two very large banks and still too many small regional banks. NLB could control up to 42% of the market and S'tiblar admits "as a bank we understand that we can't go much over 40%".
Aware that bank consolidation and increasing profitability usually involve reducing the number of employees, the government would rather protect jobs. "The banks have different objectives," says Taul. "The emphasis is not always on creating shareholder value. They also want to secure everyone's jobs." But if Slovenia becomes part of the EU, the competition from foreign banks will force domestic banks to improve their profitability and lower their costs. Slovenia will then confront its xenophobia.

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Slovenia's cure for xenophobia

A fear of foreign influence and a desire to escape the social costs of consolidation have slowed bank reform in Slovenia, but with likely EU membership looming change cannot be put off much longer. Christina White reports

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