Everybody wants to be in retail

For many banks in central and eastern Europe the corporate client is no longer king. Increasing competition and decreasing margins mean that corporate banking has lost its lustre. The traditional corporate client is being usurped by a new breed of customer, one that has been quietly growing for a number of years, nurtured by the expanding range of shops and boutiques in downtown Warsaw and Prague. Banks are calling this new client "the consumer"; and consumer retail banking is suddenly a business that everyone wants to be in.

Banks that traditionally have focused solely on corporate or investment banking activities are re-defining themselves as mass market, consumer retail banks. In Poland, Bank Slaski is already some way towards achieving the transformation, helped by the investment and know-how of ING.

When the Dutch bank became majority shareholder in 1996 it realized that the corporate market, where Slaski had traditionally focused, was too crowded. "We decided it would be too risky to focus solely on corporate banking," says Bank Slaski first executive vice-president, Ludo Wyngaarden. Since then, the bank has invested more than $100 million on its retail banking project, boosting its market share from 5% to 6.7% of current accounts in just 18 months.

Even Bank Handlowy, which in the past liked to promote itself as the blue-blooded JP Morgan of Polish banking, is preparing to muddy its hands in the retail market. A mass-market product is due to be launched before the end of the year, probably under the name Handlobank, as the bank's full name - Bank Handlowy w Warszawie - is "a bit too long for retail customers" says managing director Maciej Lebkowski. He suggests Handlobank is "definitely shorter, definitely a nicer name for retail banking".

Now is the time

For these and other banks, the window of opportunity for entering the retail market is small. Poland's two dominant retail banks, PKO and Pekao, which together account for over 60% of retail deposits, await privatization. While still under state ownership, they lack the means and the mentality to overhaul their cumbersome structure. According to Wyngaarden, Bank Slaski's new customers are almost all defectors from the state banks, dissatisfied with the quality of service they receive.

But that situation won't last forever. The privatization of Pekao is already up and running with the list of interested parties including names such as Deutsche Bank, Citibank and ABN Amro. Whoever buys the bank is unlikely to let it keep on leaking customers to smaller rivals. "The name of the game is to grab market share while the large retail banks are not being run efficiently," says Jean-Pierre Lambert, analyst at Dresdner Kleinwort Benson.

The two largest retail banks, Komercni Banka and Ceska Sporitelna, are still in the starting blocks awaiting privatization. "It is a big opportunity for a healthy bank with strong management to come in and aggressively take market share and enter new market sectors," says Denise Hollay, central European banking analyst at Merrill Lynch. "Certainly market participants are talking of GE Capital as a significant entrant."

US financial services company GEC officially took over the operation of Agrobanka on July 1. It already owned the Czech company Multiservis, the country's largest retail sales finance company, and a majority stake in Budapest Bank in Hungary. In July it also announced the purchase of Polish American Mortgage (PAM) Bank. Jenne Britell, president of GE Capital central and eastern Europe, points out that in this region financial services business is often dependent upon owning a banking licence. "Acquiring banks is the best way of reaching the consumer," she says.

GE Capital is not alone in seeing the potential in the Czech market. Nomura owns 53% of Investicni a Postovni Banka (IPB), and at the end of 1997 Bankgesellschaft Berlin (BGB) bought a 40% stake in Zivnostenska Banka previously owned by BHF-Bank. Both Czech banks are increasing their focus on the retail market.

Domestic banks in both Poland and the Czech Republic have realized that if they want to expand aggressively in the retail market, then attracting foreign banks as strategic investors is essential for both capital and know-how. But not any old investor will do. If the ambitions of local management are to be fulfilled, a bank needs to be sure that it is getting the right bank as an investor. If it chooses unwisely it can find its ambitions frustrated or its management no longer in place.

Zivnostenska Banka was the first bank in central and eastern Europe to be privatized through an injection of foreign capital. In 1992, BHF-Bank of Germany purchased a 40% stake in the bank, with the IFC taking a 10% share. "It was a big opportunity and we tried to use it," says Jiri Kunert, chairman of Zivnostenska.

But for Kunert and his board it gradually became apparent that BHF was not the right investor for the bank. "Our idea was to play our part as a wholesale bank with a big role in privatization and BHF fitted that strategy," he says. The problem was that privatization did not progress as Kunert and many others had envisioned it would. The Czech voucher privatization programme resulted in a stagnant corporate culture that had no demand for the services Zivnostenska had hoped to provide.