On October 15, Slovenia launched an IPO of local market leader NLB, just four days after inviting expressions of interest for number three player Abanka. The same day, Serbia’s finance ministry advertised for an adviser to sell its stake in Komercijalna Banka, the country’s second-largest lender.
Exciting times for investors looking to tap into the growth markets of south-eastern Europe? Well, maybe.
Whether all or any of these sales will go through is an open question. Policymakers in both Slovenia and Serbia have long track records of failing to deliver on privatization promises, particularly when it comes to the banking sector.
The listing of NLB, for example, comes just 16 months after a previous attempt was cancelled when the Slovenian government refused to approve the price range.
The bank itself is in better shape this time. Return on equity is coming in at around 13%, partly thanks to a strong performance by subsidiaries in smaller Balkan markets, and asset quality is no longer a concern.
It’s the only opportunity for equity investors to get direct exposure to the banking sectors of former Yugoslavia. At the moment, the only way to do that is by buying someone like Erste, Raiffeisen or OTP- Guy Stevens, UBS
“NLB is an interesting story,” says Guy Stevens, who is responsible for financial institutions M&A in CEEMEA at UBS. “Slovenia is a relatively mature economy with the highest GDP per capita in emerging Europe and a eurozone member, while its other markets – particularly Macedonia, Bosnia, Montenegro and Kosovo – are growing more rapidly and generating good returns.
“It’s also the only opportunity for equity investors to get direct exposure to the banking sectors of former Yugoslavia. At the moment, the only way to do that is by buying someone like Erste, Raiffeisen or OTP.”
Unfortunately, while NLB may be healthier than in summer 2017, global equity markets are not – and nor is Slovenian politics.
Inconclusive elections in June eventually produced a five-party centre-left coalition government led by Marjan Sarec. For a parliamentary majority, however, it relies on the support of the socialist Left party, which is vehemently opposed to the privatization of NLB.
Add in the propensity of politicians of all stripes to refer to the bank as “Slovenia’s crown jewel” and the chances of the current IPO process securing the necessary political approval look fairly slim.
A second cancellation would, however, put Slovenia on a collision course with European authorities. In 2013, when NLB had to be bailed out by the state, policymakers promised the European Commission (EC) to reprivatize the lender by the end of 2017.
When a sale failed to materialize, the deadline was – repeatedly and reluctantly – extended. The last extension, however, came with a condition. If the privatization is not completed by the end of this year, the EC has threatened to appoint a divestiture trustee to manage the process on its behalf.
If the EC makes good on its threat, the political fallout in Slovenia could be severe – which has prompted hopes that policymakers will this time see the wisdom of keeping their promises
““The Commission isn’t used to people not meeting their commitments in a situation like this so a draconian mechanism has been put in place in case of failure to deliver,” says a regional banker.
If the EC makes good on its threat, the political fallout in Slovenia could be severe – which has prompted hopes that policymakers will this time see the wisdom of keeping their promises. “It would obviously be the rational thing do,” says the banker. “But that’s no guarantee they’ll be able to do it.”
By contrast, the sale of Abanka should be relatively trouble-free. The deal doesn’t have to be completed until the end of next year, politicians seem unfazed by the prospect, and at least two strategic investors are reportedly lining up to bid.
The obvious buyer would be Apollo, which bought Nova KBM from the state in 2015 and subsequently added Raiffeisen’s Slovenian subsidiary. At the time, the private equity firm said it was targeting a 25% market share in Slovenia, and analysts say Abanka would be a good fit for the group.
The other likely bidder is OTP. The Hungarian group, which has been emerging as Europe’s most prolific bank buyer in recent years, was reportedly disappointed to be runner-up in the NKBM process.
OTP is also looking to bulk up in Serbia and expressed an interest in Komercijalna Banka as recently as last year. Reports suggest that the group is on the verge of buying Societe Generale’s Serbian subsidiary, however, which would make further purchases in the short term less likely.
Finding alternative bidders that are acceptable to the Serbian authorities may be a struggle. Two years ago, policymakers were said to be resigned to Komercijalna going to private equity. Recent statements from the central bank suggest that only strategic investors with regional experience will be considered.
In theory, this shouldn’t be too problematic. Serbia is seen as a promising growth market by regional banking groups, and several – including Erste and Raiffeisen – have a subscale presence there.
Komercijalna is unlikely to be on their shopping list, however. Bankers say the lender’s large physical network is more of a curse than a blessing in a digital era, while its proximity to Serbia’s unwieldy state structure would be a stumbling block for international buyers.
Recent management changes are also unlikely to reassure potential investors. Under pressure from the EBRD and IFC, who between them own 35% of Komercijalna, veteran frontier markets banker Alexander Picker was brought in as CEO in 2015 to prepare the bank for privatization.
Picker resigned in September 2017, however, reportedly due to disagreements with local policymakers over the restructuring process. The first choice for his successor apparently turned the job down and a replacement was not appointed until April.
“The government has created such a mess with Komercijalna that I can’t see any international strategics getting involved any time soon,” says a regional banker.
Whether the Serbian authorities will even be able to find a financial adviser remains to be seen. Nomura was appointed during a previous process in 2015, but since then a change in legislation has removed the requirement for the Komercijalna to be sold in a competitive tender process.
“I’d be surprised if they get a good response to their ads for advisers after that,” says the banker.
If the current privatization plans once again come to nothing, the reaction of the EBRD and IFC will be closely watched. Market sources say the two banks are deeply frustrated with the lack of progress, to the point where they could even attempt to force the state to repurchase their stakes.
“IFIs don’t go into these situations blind – they always have puts,” says one. “I don’t think they’ve ever exercised one on a sovereign but they do have a way out, and it seems increasingly likely that they will use it.”