On Friday, June 16, 2000, the Czech National Bank imposed forced administration upon IPB, the third largest Czech bank. The CNB move was a culmination of mounting uncertainty over the future of heavily underprovisioned IPB. The CNB guaranteed 100% of all deposits, as well as IPB’s bonds. On Monday morning, IPB’s new administrator announced that he agreed to CSOB taking over IPB assets, liabilities and operation while IPB remains under administration (CSOB, a Czech bank sold to KBC of Belgium last year, is not listed). In the meantime, the CNB started the process of rescinding IPB’s banking licence. In our special comment (see below), we highlight what we believe are the most important implications of the new IPB situation:
IPB Administration: Implications
Implications for IPB stock:
Given previous statements from the PM and other officials that they seek to protect depositors and not the shareholders, IPB stock owners should not expect good news at all. Trading in the stock was suspended by the Securities Commission as of June 16.
Implications for blue-chip banks:
i) Ceska Sporitelna, Komercni banka
The CNB’s move on Friday was a first step towards removing a potential source of instability in the Czech banking sector. Moreover, the increased rate of deposit withdrawal was good news for other large banks, which reported significantly above-average inflows of new savings. Of the listed banks, primarily Ceska Sporitelna should benefit, and to a lesser extent also Komercni banka. In case of KB, however, the situation may be more complicated by the possibility of an additional delay in privatization. With the IPB crisis on the agenda, it will be difficult for the state officials and decision-makers to pay as much attention to KB privatization as if no IPB crisis had erupted.
ii) Other blue chips
Last week, the local market suffered from increased selling pressure from some local brokers, which we partly attribute to their previous practice of borrowing through buy-sell transactions from IPB. After IPB ceased to lend in the middle of the week, some small Czech brokers had to cash their securities, putting pressure on the blue chip prices. We believe that most of this effect has already occurred.
iii) Investor sentiment
We do not expect any negative impact on investors‘ general sentiment on Czech stocks. Not that the sentiment is great at the moment, but the negative effect of the IPB crisis should not spread much beyond the stock itself. In fact, the CNB’s move on Friday alleviated some of the anxiety that had been building up over the last week and Czech blue chips gained on the news of forced administration.
Implications for the economy
We believe that the forced administration will not have a major destabilizing impact on the economy. The government’s effort to keep IPB in operation and the subsequent takover of IPB’s assets and operation by CSOB should minimize negative spillover effects on the banking, household and corporate sectors. Obviously, there will be a negative effect on public budgets, but the additional government borrowing will not represent a major threat to public finances and the overall macroeconomic picture.
Implications for the currency
Although some of the currency’s volatility towards the end of the last week may have been attributable to the nervousness related to the IPB crisis, we do not expect any further koruna sensitivity to the issue. Standard & Poor’s rating agency announced as early as Friday that IPB forced administration will not have any impact on its Czech Republic’s credit rating (long-term debt is rated “A-“ by S&P).
(Ondrej Datka)