At five in the evening on September 16, Czech prime minister Vaclav Klaus gave a radio interview in which he poured scorn on the idea that a major Czech bank was on the brink of collapse.
A few hours later he sped to an urgently convened meeting with senior officials of the Czech National Bank (CNB) at the Strakova Akadamie government building in Prague. The meeting trailed on through the night, one of the longest in the short history of the republic. Under discussion was the perilous condition of Agrobanka, the fifth-largest Czech bank, and the largest wholly private one.
Agrobanka faced serious liquidity problems brought on by a run on deposits and a refusal by the four largest Czech banks to grant it interbank loans since mid-summer. As dawn broke, it was becoming clear that Agrobanka needed a massive bail-out or enforced administration by the CNB. Most of those present eventually agreed with central bank governor Josef Tosovsky that administration would be the most sensible course. Agrobanka thus became the subject of the twelfth and easily most significant government intervention in Czech banking since 1992.
Agrobanka’s difficulties are still being investigated. What they amount to should become clearer once the details of accountants Price Waterhouse’s end-December audit are made public. But there appears to have been an element of retaliation by the big-four Czech banks, infuriated by Agrobanka’s role in the funding of an aggressive assault on bank investment funds by Motoinvest in 1995. These activities, known as greenmailing, involved financing acquisitions by building up sizeable stakes in the investment funds owned by large banks, and then auctioning them back to the banks at handsome premiums. A dynamic investment company, Motoinvest had built up effective control over Agrobanka and developed a bold acquisition strategy that recalls the heyday of corporate raiders in the UK and US. When it became clear at the beginning of 1996 that Motoinvest was also building a significant stake in Ceska Sporitelna, the Czech republic’s largest savings bank with 65% of deposits, the big four finally decided it was time to fight back.
A lack of transparency
The enforced administration has been very costly for the CNB. For a start it has had to channel Kr2 billion ($75.2 million) into Agrobanka to cover deposits. But the CNB’s resolve was stiffened by its concerns about Motoinvest, which it has repeatedly accused of lack of transparency in its dealings and of working through remote subsidiaries to avoid detection.
Motoinvest’s activities initially passed off almost without notice, mainly because they involved only small funds and tiny regional banks. But the group had been growing increasingly audacious and more and more visible. By September 1995, Motoinvest and associated investors controlled 41% of Agrobanka’s shares (according to Motoinvest chief executive Pavel Tykac, the group owns 5% directly, “controls” 14%, and during sale negotiations it “represents” 41% of shareholders) and 12% of Ceska Sporitelna. Motoinvest then publicized its stakes, encouraging speculation that a strategic investor might come in. The group’s share price rose on this possibility.
Jiri Klumpar, the administrator appointed by the CNB, says that not only was all this contrary to Czech banking law, which prohibits individual or groups of shareholders from owning more than 15% of any one bank without prior permission, but that the central bank was also concerned about transactions carried out by Motoinvest once in control of Agrobanka.
Agrobanka was participating in a special “consolidation” programme designed by the CNB to help cover losses made in 1993. However, according to Klumpar, once Motoinvest had taken control and installed some of its own executives in key positions on the board, Agrobanka began to fall short of its commitments. A special on-site investigation by the central bank early in 1996 found that Agrobanka was not going to meet the programme’s targets, which included a capital adequacy ratio of 8% and cover for all losses from 1993.
“Instead,” says Klumpar, “Agrobanka sold its liquid and highly rated assets including its entire portfolio of government securities in order to buy speculative equities, all of which reduced confidence in the bank and contributed to the liquidity crisis. The central bank could not afford to wait any longer. A total collapse would not only have harmed the whole banking sector but also dented the creditworthiness of the monetary authority.”
Central bank officials, and in particular Klumpar, obviously have a vested interest in justifying the enforced administration. Motoinvest’s Tykac, on the other hand, claims that the CNB used the liquidity problems as a pretext to force Motoinvest out of the banking sector. “They [the central bank] want to rule Czech banking but we see them simply as having a control function,” he says. “It’s a generational problem. We are typical representatives of the generation that is not affected by the past.” He adds that Motoinvest requested that the central bank act as lender of last resort, and that as a guarantee Motoinvest offered its shares in Agrobanka, but the answer was still no.
Before putting these points to Euromoney, Tykac had suggested in an interview with the Prague Business Journal that the liquidity problem could have been solved “in 10 other ways”. He continued: “It would have been enough if the state had just issued a guarantee on Kr4 billion in deposits from Komercni Banka or Ceska Sporitelna. The market would have immediately found out about it and confidence would have been restored.”
Tykac describes Motoinvest simply as “a broker”. The company’s blurb in English speaks of “undoubtedly one of the most famous companies in the Czech capital markets”. Whatever its precise present status, its origins go back to the early 1990s, when 33-year-old Tykac, a shrewd, fresh-faced engineering graduate from Prague’s Technical University, made a tidy sum importing computers into what was then post-communist Czechoslovakia via a company called Vikompt. In 1993 he controlled 32% of the Czech market.
Tykac used the proceeds from his import business to finance a series of lucrative arbitrage trades between the Czech and Slovak korunas in the aftermath of the so-called “velvet divorce” which divided the two countries and led to slight discrepencies between their exchange rates. (Tykac recently told a journalist at the Prague Business Journal that he though CNB’s antipathy towards Motoinvest’s activities stemmed from this era, since the central bank was often at the losing end of the arbitrage trades.)
Next Motoinvest decided to get involved in banking and bought a stake in Plzen’s troubled Kreditni Banka in 1993, soon building up a majority shareholding. It used Kreditni’s ability to borrow on the interbank market to finance other acquisitions, notably investment funds, shares in Agrobanka and, towards the end of 1995, shares in Ceska Sporitelna.
Motoinvest also financed acquisitions by greenmailing. In the case of Komercni Banka’s fund, Motoinvest is thought to have made a profit of around Kr100 million when it sold back its 12% stake in the bank’s fund in the autumn of 1995.
When Motoinvest tried the same tactics with Creditanstalt at the end of 1995, the Austrian bank chose not to yield and consequently lost control of its fund management flagship, Creditanstalt investicni spolecnosti, and the two investment funds it managed: the Creditanstalt Cesky investicni fond and the Creditanstalt Cesky infrastrukturni fond.
The first clear sign that things were starting to go wrong was when Kreditni Banka collapsed at the beginning of August 1996 with losses of Kr12 billion. The failure of Kreditni, a private bank with a history of imprudent lending policies, raised few eyebrows at the time. Tykac has stated that Kreditni “was already emptied out by its former shareholders”. Yet according to a CNB official, the bank’s demise had a lot to do with Motoinvest’s activities.
“They [Motoinvest] say it was bound to go bankrupt anyway because of a history of bad lending practices,” says the CNB official. “But if they knew that was the case, why did they buy the bank in the first place.” The official claims that Motoinvest used Kreditni Banka funds to buy shares and other securities and then requested further credits from Kreditni backed by those securities they had bought as collateral, all of which he describes as “very risky”. The Kreditni collapse is now the subject of of a parliamentary committee of inquiry, set up after relentlesss pressure from Klaus’s bête noire, Milos Zeman, the leader of the opposition Social Democratic (CSSD) party.
After Agrobanka went into administration, three Motoinvest board members were arrested for suspected fraud. They were later released and the charges against them dropped. The company and its funding sources are still being investigated by the interior ministry’s economic crime department, but CNB officials doubt they have the expertise or resources to look into the alleged foreign connections of some of Motoinvest’s funding sources. Tykac denies any foreign involvement in the group’s funding.
Criminality or pure anarchy?
Nothing criminal has yet been proven about Motoinvest, and it may well be that nothing ever will be. Its story could well turn out to be one of canny opportunism in a business environment that remains remarkably free of regulation. The blame, if one should call it that, probably lies with the capital market regulators rather than with the CNB’s banking supervision department. Some people also suggest that the finance ministry should have checked earlier whether Motoinvest’s capital came from legitimate sources.
But whatever the various inquiries now under way reveal, lesson one from the Motoinvest affair is that the investment group could not have done what it did if the Czech Republic had instituted a decent body of capital markets law, requiring far more transparency in securities transactions. Prime minister Klaus has long been perceived to be an opponent of more regulation, and accounts emanating from the September 16 crisis meeting indicating that he was in favour of negotiating with Motoinvest rather than forcing Agrobanka into administration suggest he is still very much a free marketeer.
The second lesson is that the government should now act with more urgency on bank privatization. According to local banking analysts, Motoinvest or no, there remains a real danger that if the government doesn’t now privatize the big-four banks, another group of investors could come along and accumulate controlling stakes through the open market. Tykac, for example, reckons that there are another 10 funds like Motoinvest in and around the Czech capital market.
“Because minority shareholder protection doesn’t exist here, such action could eventually render the government’s shares worthless,” says Miroslav Nosal, a bank analyst at Patria Finance in Prague, “especially since the majority shareholder would not allow the government to implement its original goals.”
The original rationale for the Czech government to hold bank shares has now largely disappeared and the banks need owners that will implement restructuring. Privatization has always been stated to be a top priority of the current coalition and the government needs to reassure its electorate that it will keep its original promise. It could also use the proceeds from privatization to carry out its proposed development and consolidation reforms of the banking sector.
The first sale seems likely to be the 31.5% stake in Investicni a Postovni Banka (IPB), an aggressively managed bank already out of state control in which Nomura has expressed a strong interest. IPB is arguably the Czech Republic’s most dynamic bank but, under the de facto leadership of Libor Procacka, a good friend of investment group Harvard Industrial Holding’s Viktor Kozeny, it has acquired a market reputation for sharp practices, lack of transparency and pursuing stakes in Czech industry with somewhat dubious motives. Such factors, as well as Czech bank’s current crisis of confidence, may well explain why Klaus, not previously a strong advocate of foreign involvement in Czech banks, has greeted the Nomura interest as “unbelievably good news”. From Nomura’s point of view, the deal makes sense since it involves a bank that has built up its asset side without the historical burden of bad loans. And, as a banker close to the deal put it: “As investment bankers we generally like to work with banks that need our help.”
Beyond Nomura’s interest in IPB, it is uncertain how far the involvement of foreign banks will go. It may be unacceptable for the larger Czech banks to be controlled by foreign capital, and there is little doubt that a controlling stake held by the state improves their credit rating. There are no immediate signs that the government is about to sell its stakes in Komercni Banka, Ceska Sporitelna and Ceskoslovenska Obchodni Banka. In the case of the last two, CNB officials says the finance ministry’s rejection of a merger plan before privatization is an indication that it is dragging its feet.
Whoever ends up owning the big Czech banks, the key issue for the future will be whether they will continue to follow the German model by investing heavily in industry, either as a principal or indirectly through the funds they control (banks own around 70% of investment funds). If they do, only a tiny stock market will develop. Czech banks are already a long way down that road, IPB being but the most aggressive example. The current estimate from the central bank is that banks own around 60% of privatized companies. Eight of the 10 largest investment funds are owned by banks.
The central bank is keen to reverse this trend and will soon introduce tighter capital adequacy requirements to make it more expensive for banks to own equity directly. The government is also discussing legislation one part of which envisages restricting banks’ exposure to non-financial sectors (60% of own capital in total and 15% in each individual company) and investment funds in line with EU guidelines.
