Finally, A Clean Banking Slate For The Czechs?

Selling the last state-owned banks should open up the loan tap

It has taken ten years and $1.7 billion in bailouts, but the Czech government is finally selling off the last two banks it still owns. The hope is that the new owners of Ceska Sporitelna, the country's leading savings institution, and Komercni Banka, its largest commercial bank, will get down to business quickly and start lending. "The process of providing loans should improve significantly," said Jiri Stanik, an analyst at Raiffeisen Capital and Investment in Prague. And that, in turn, should accelerate the country's faltering economic recovery. But that may be wishful thinking.

Prague spent $1.14 billion to clear bad loans off Ceska Sporitelna's books over the past 13 months. Now, Finance Minister Pavel Mertlik is about to sell the government's 52% stake to Austria's Erste Bank for $475 million in cash. Then the Finance Ministry will have to contend with the huge problems at Komercni Banka, which is supposed to be sold by midyear. Prague already bought $644 million worth of Komercni's bad debt in September, but $1.8 billion more in failed loans--30% of its portfolio--remains on its books. Most analysts believe the government has no choice but to buy that debt too. Potential bidders for Prague's 60% stake in Komercni certainly wouldn't be interested otherwise. For now, the talk is that Germany's Deutsche Bank could end up running Komercni. But rival Hypovereinsbank may also make an offer for it.

Restoring the two banks to working order is especially vital as the Czech market for stock issues is nascent and venture capital still a novelty. Bank loans are a critical source of finance. But for the past three years, they've been scarce. That's because, in the days after the Velvet Revolution, banks doled out loans without much scrutiny. Komercni, especially, was pushed by the government to finance the market economy and support newly privatized companies, though it had neither the inclination nor expertise to evaluate their creditworthiness.

As economic reforms slowed in the mid-1990s, though, many of Komercni's corporate clients defaulted. "When Komercni's management discovered just how bad the bank's loan portfolio was, the bank practically ceased loan activity," explains Pavel Sobisek, an economist at Bank Austria Creditanstalt in Prague. Some analysts believe this lack of credit precipitated the current recession in the Czech Republic.

But selling Komercni won't by itself solve the country's economic woes--that is, if it's even possible to find a buyer. David Svojitka, a board member at Hypovereinsbank CZ in Prague, says that the financially stricken giants that dominate Czech industry and Komercni's portfolio--such as rolling stock maker CKD Dopravni Systemy and engineering empire Skoda Plzen--must first be broken up and sold to foreign partners. Then, maybe, corporate lending will start up again. "Nobody would buy Komercni now because of its corporate customer portfolio," says Svojitka.

LEGAL HELP. Its management will have to go, too. Certainly after the bank is sold, if not before. In early January, Komercni execs announced the bank might have lost some $200 million by opening unsecured letters of credit to an Austrian company called BCL Trading that had used fictitious collateral. An audit is under way. Many expect high-level resignations to follow.

Meanwhile, Prague is trying to encourage banks to resume lending by putting stronger bankruptcy laws into force. As of April, for example, banks won't need a court order to collect collateral when businesses default.

Once lending resumes, say analysts, medium-size and small companies ought to get money first. In a nation that favored big business during its communist days, and for much of the past decade too, that would be really revolutionary.

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