Czech Republic Business Guide 2002

Business Opportunities: Banking & Capital Market

The information below is provided by Prague Business Journal www.pbj.cz

The Czech banking sector has seen more than its fair share of ups and downs since the fall of communism in 1989 and has only recently begun to make a comeback from a collapse, the cost of which to the state budget and ultimately Czech taxpayers is still being estimated, although the overall cost has been put by some analysts at up to Kc 300 billion (roughly $8.6 billion).
The cause of the collapse dated back to the years 1990-1993, during which time licenses were issued by the Czech National Bank (CNB) to some 55 commercial banks-servicing a population of just 10 million. Through those years to 1996 the Czech economy was held up as an example of economic transformation and strength amongst the post-communist countries, with GDP hitting an amazing 4.8 percent in both 1995 and 1996. But the bubble was about to burst.
The problem was that the Czech Republic's banks and in particular the three largest-Ceská Sporitelna, Komercní Banka (KB) and Investicní a Poštovní Banka (IPB)-had acted as the main financiers of the privatization of the economy from 1992 onwards. Antiquated and inefficient companies from the communist era were sold to Czech entrepreneurs who were generously buoyed up by loans from the banks. Czech companies thereby accumulated a high ratio of bank debt to GDP, reaching 66.3 percent in 1997, nearly triple of that in Poland and Hungary.
By the time it became apparent that there were problems-roughly a dozen banks went under between 1994 and 1996, including the country's fifth largest, Agrobanka-it was already too late to prevent many of the losses. Agrobanka became the first large, majroty state-owned Czech bank to be sold off, to U.S. GE Capital.
The launch of the privatization of the four largest banks began in 1997-long after the process had been completed in Poland and Hungary-with the sale of IPB to Nomura International. Ceskoslovenská Obchodní Banka (CSOB) followed in 1999 and was bought up by Belgium's KBC Bank in June 1999. The fates of these two banks were to become indelibly linked, as forced administration was imposed on IPB in June 2000 and CSOB took over the bank three days later. Nomura International and the government are due to fight an arbitration case over IPB later in 2002.
Ceská Sporitelna came next, being sold to Austria's Erste Bank in February 2000 and last, not least, KB was sold to France's Société Générale in September 2001.
With all of the main banks now in foreign hands, there is little or no concern over the possibility of any further collapses in the Czech banking sector. Bringing in foreign managers and introducing Western practices has benefited the sector and there is a sense of relief on the market that the trauma of the mid-1990s will not be repeated.
The end game that remains now is that the debts and bad assets of these large banks-which were taken over by the state to be able to sell off the banks in the first place-are to be sold off by the state-run Czech Consolidation Agency (CKA). There are many interest groups involved, including those who stand to gain by controlling assets key to their own companies or those that could be useful in fighting lawsuits and criminal cases.