The slow pace of state sell-offs
For Slovenia's 24 local banks, 1999 is likely to be a crunch year. For the first time, foreign competitors will be allowed to open branch offices rather than subsidiaries (thereby removing the need for a local capital base). Two of the country's largest banks (Nova Ljubljanska Banka and Nova Kreditna Banka Maribor) are scheduled for privatization. And local companies will be able to raise short-term funds internationally without having to deposit 40% of the money in a non-interest-bearing account with the central bank.
Since Slovenia gained independence from Yugoslavia in 1991, its banks have been heavily protected from outside competition. Foreign banks have not been permitted to use overseas capital to finance local lending. They have not been allowed to buy strategic stakes in state-owned banks, and the cost of obtaining a banking licence has been kept extremely high at Dm60 million ($34 million). At the same time, international portfolio investors wishing to buy shares on the local stock exchange have been forced by law to hold those stocks with local custodians.
The close relationships enjoyed by local banks with government and the corporate sector have made it hard for outside firms to break into the market. Almost every important corporate or banking post is appointed by the coalition government (a large chunk of which is convinced that foreigners are about to take over the country). Three overseas banks operate in Slovenia: Bank Austria Creditanstalt, Société Générale and Austria's Volksbank. But at the end of 1997, they con- trolled less than 6% of total banking assets.
Thus shielded, local banks have had it pretty easy. The average banking margin (the spread between lending and deposit rates) is 5% nearly 3% higher than in western Europe. Retail-banking market shares are maintained by a semi-official ceiling on bank deposit rates that prevents new entrants from offering competitive rates.
| Total assets and market share of Slovenian banks 1995-1997 |
| Bank |
Total assets (Tr m) |
Market share (%) |
| |
31/12/1995 |
31/12/1996 |
31/12/1997 |
31/12/1995 |
31/12/1996 |
31/12/1997 |
| NLB |
445,097 |
490,299 |
549,225 |
29.7 |
28.4 |
27.2 |
| SKB Banka |
179,740 |
206,584 |
241,010 |
12 |
11.9 |
11.9 |
| NKBM |
168,587 |
197,201 |
237,654 |
11.3 |
11.4 |
11.8 |
| Banka Koper |
82,451 |
99,251 |
120,299 |
5.5 |
5.7 |
5.9 |
| Banka Celje |
69,401 |
89,504 |
109,246 |
4.6 |
5.2 |
5.4 |
| Abanka |
68,567 |
88,348 |
103,055 |
4.6 |
5.1 |
5.1 |
| Gorenjska Banka |
65,910 |
71,833 |
90,706 |
4.4 |
4.2 |
4.5 |
| Total ‹ top seven banks |
1,079,753 |
1,243,020 |
1,451,195 |
72.1 |
71.9 |
71.8 |
| Total ‹ all banks |
1,497,544 |
1,729,083 |
2,022,037 |
100 |
100 |
100 |
|
Source: Bank of Slovenia |
But change is coming to the cosy, little country Slovenes like to call "the green treasure of Europe". In November 1998 Slovenia begins negotiations in Brussels for its accession to the European Union. To qualify, it must open up its banking sector, and quickly if it is to gain concessions in other more sensitive areas such as agriculture and pensions (where the government is hoping for lengthy transition periods).
Capital-flow restrictions such as overseas borrowing limits that give significant advantages to local lenders must be abolished. Foreign banks must be left free to use the balance sheets of their parent banks. Cartels on deposit rates will have to be abolished. State-owned banks must be privatized.
The final date for these changes is 2002, the expected date of Slovenia's accession. But many will become law before this. A law allowing foreign banks to set up branch offices is now in parliament. Restrictions on overseas borrowing will be removed next year.
Slovenia's banking sector is in reasonably good shape compared with many other transition economies. Only four banks lost money last year (13 did in 1992) and 1997 gross profits totalled Tr(tolars)21 billion ($134 million). According to the central bank, the National Bank of Slovenia, the average return on assets in March 1998 was 1.3% and the return on equity was a respectable 12.7%. Bad debts have been reduced to 3.2% of total loans.
But a recent report by Slovenia's Institute of Macroeconomic Analysis & Development, suggests that the country's banks are not ready to compete in an EU-wide market. Most, it argues, have too many employees and low productivity. There are not enough staff with experience of credit risk analysis or corporate lending. That analysis is supported by statistics on bank assets. Government securities account for 60%; corporate loans account for only around 40%.
"Banks continue to restrict their activity to classical banking services," the report notes, "while more sophisticated products and services, such as investment banking, are in very early stages of development." Then there is the problem of size. Only a handful of Slovenian banks have more than $300 million in assets, and even the biggest private-sector bank (SKB Banka) had only $1.5 billion of assets at the end of 1997.
No rush to compete
Competitive pressures will take some time to build. Slovenia is a small country with fewer than 2 million people and foreign banks are unlikely to rush in straightaway. "I don't think [the changes will result in] a crowd of international banks applying for a licence," says Samo Nucic, deputy governor of the National Bank of Slovenia.
Nevertheless, it seems likely that many local companies will prefer to raise funds outside Slovenia once the restrictions are lifted. This will put pressure on local lenders. "Domestic interest rates are still higher than they are on the international markets," says Nucic. "So good companies will probably borrow more abroad." Analysts suggest that if big international players such as Citibank and ING decide to move in, local banks (particularly those centred on small towns) may find it hard to hold on to their corporate clients.