State bail-outs for indebted, inefficient and over-politicized banks were supposed to be a thing of the past in Hungary. Not so. As its rivals rake in profits - transforming Budapest into the financial hub of eastern Europe - the country's second-largest financial institution, Postabank, has limped back to the warm milk of public funds for yet another capital increase as the government makes yet another push to find a buyer for the troubled bank.
But even with a Ft24 billion ($114 million) injection last month, following a Ft7 billion capital increase in June, will any buyer step forward if the current management remains? "That's the question," says Larry Pelleccio, a senior vice-president for Moody's Investors Service based in Cyprus. "How much control can a strategic investor get and how much will management resist?"
Robert Muranyi, deputy chief executive of Postabank, likes to stress that his "is not a classical commercial bank with a classical approach [to business] or a classical management".
Indeed - the rest of Hungary's top banks have spent the past three to four years charging furiously forward, strengthening balance sheets, modernizing operations, expanding branch networks and broadening corporate and retail services. By contrast, Postabank, owned by a fragmented group of mostly state-owned minority shareholders, has invested heavily in real estate and media holdings, much of the latter loss-making. It owns seven prominent newspapers and magazines, a radio station and a printing house. Postabank's top-eight rivals have increased registered capital substantially and, in 1997, averaged Ft5.7 billion in profits. Postabank's capital has dropped by 50% in real terms since 1995. And last year, it lost Ft12 billion.
The bank's problems started well before 1997, but as recently as February last year its managers were claiming all was well, and that the bank had made a slight profit in 1996. Then on February 28 1997, that story began to unravel. Sparked by sudden rumours of Postabank's instability, depositors crushed into its branches across Hungary, withdrawing $380 million before calm returned a week later.
Postabank's management immediately blamed a conspiracy led by "political forces" for the run on the bank. Even after accountancy firm Arthur Andersen was called in to conduct the bank's first big-six audit and revealed Postabank had actually lost Ft109 million in 1996 and was carrying Ft12 billion in bad debts, the bank continued to push this line. A woman is currently being tried in the city of Eger on charges of disseminating false information. The outcome will have an impact on such claims.
The bank also reacted to the panic by buying space in national dailies to wax philosophical in an attempt to soothe customers. The lengthy messages included statements such as: "It is not our task to decide what the single truth is, if only because in many cases it doesn't exist at all." And: "Are we able to assess the events of the recent past without falling into the mistake of subjectivity? Who knows?"
Asked why Postabank chose this approach rather than publishing accurate balance-sheet figures, Muranyi replies that most of its clients are from rural areas. "They are not intellectuals. They wouldn't understand the figures."
No political enemies have been unearthed. In fact, there has been widespread discussion in the press about Postabank's political connections and its willingness to extend credit to top political parties, right, left and centre. "There isn't a party that has no ties to the bank," one Socialist parliamentarian was quoted as telling a local paper.
Muranyi admits the bank has lent widely to political organizations but insists every credit applicant is judged only on its ability to repay. He calls talk of inside political connections "rumours" and "a joke".
Even with the capital increases, finding a buyer will be difficult. SBC Warburg was asked last year to sell the bank but was unsuccessful. "They had a horrendous bad-debt problem, no consolidated audit figures and no management team ready for sale," says SBC's executive director, John Cryan. "In the end we just threw in the towel."
Singer & Friedlander has replaced SBC. The latest Ft24 billion in public funds will solve the debt problem and consolidated audit figures have appeared. But many still doubt Postabank can attract more than a bail-out. Christopher Condon