A Czech Bank Sale That Bodes Well


The Czech government is selling a bank, and it seems to be handling the sale of this state-controlled asset right -- for a change. Its 60% stake in Komercni Banka, the nation's second-largest bank, is expected to fetch $1 billion despite a history of mismanagement and bad loans. One reason: The government's advisers at Goldman, Sachs & Co. insisted that the selection process take place in the investment bank's London offices, far removed from the political infighting in Prague. Just one representative of the government was there late in May, 29-year old Jan Juchelka of the National Property Fund, which manages the state's property.

More than a decade after the fall of communism, such professionalism has been missing from the Czech government's often transparently political efforts to unload state assets. The government waited too long to sell its telecommunications holdings, and now most of the potential buyers in Western Europe are too burdened with debt to pay top dollar.

The sale of energy utilities was also marred, in that case by disputes over who should get lucrative contracts advising the government. The problems helped force the resignation of Finance Minister Pavel Mertlik in the beginning of April. Jiri Havel, head of the National Property Fund, soon followed. Then Jan Mladek, the country's key privatization official and a Mertlik deputy, was fired in early May.

WISHFUL THINKING? The Social Democrat government is keen to avoid any more shenanigans since it faces elections in June, 2002. But that won't be easy. Faced with a deteriorating budget, the government wants to sell six key holdings, including Komercni, in the remaining year -- a plan that many insiders, including former minister Mertlik, consider wishful thinking.

To speed up the sales, the government is selecting advisers without a competitive application process. Even Finance Minister Jiri Rusnok admits the process may not be as transparent as it should be. The government may even sell some assets without bidding, say insiders at the Finance Ministry. Depending on the buyers, that could lead to charges of favoritism.

Then there's Komercni Bank. So far, so good. The bidders: Germany's HypoVereinsbank, Italy's UniCredito, and France's Société Générale. Of the three, UniCredito and SocGen are considered the front-runners. The two banks presented bids close to $1 billion, according to Czech press reports, just under the government's expectation. A decision is expected by mid-June.

Actually, the fact that anyone at all is bidding for Komercni Bank is something of a success, given its past woes. CEO Radovan Vavra, a Citibank veteran, is credited with restoring the bank's confidence, while the state cleaned up its balance sheet after bad debts and obligations rose to 21% of the bank's assets. On several occasions, the bank has been technically bankrupt, and top management has turned over several times.

"SERIOUS FLAW." Problems persist. Regulators at the Czech National Bank have harshly criticized Komercni management for buying as much as $425 million in collateralized debt obligations (CDOs) since September based on mostly U.S. corporate debt. Trouble is, the U.S. economy is in a downturn. Regulators also complained that the bank took too long to establish trading limits for these specialized corporate bonds. One CNB board member described the failure as a "serious flaw of the management." Komercni board member Michal Vetrovsky, who was responsible for the purchases, denies the accusations and says the debt, rated single A by Moody's, will prove highly profitable.

As a result of regulators' complaints, the three foreign bidders are likely to seek further state guarantees before buying Komercni. But all in all, they seem to be convinced the bank is reasonably healthy again. "There are very good reasons why the strategic investors should buy," says William Vincent, a banking analyst with ING Barings in London. "Although the Czech Republic is not a market people have to be in, you can make money there."

After the sale, foreign investors will own as much as 95% of the balance sheets of the country's 40 banks, up from 75% now. That in itself will mark a big step for the nation's financial system -- most likely for the better, given the problems of Czech banks. By Hana Lesenarova in Prague


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