Josip ProtegaNacional has learned from a senior Government source that Damir Polancec, Deputy Prime Minister and Minister of the Economy, is the very likely candidate to take the helm of a new strong domestic financial holding company, that is to be created this year with the merger of Hrvatska postanska banka (Croatian Postal Bank, HPB) and insurer Croatia osiguranja. Prime Minister Ivo Sanader personally put the plan into motion a few days ago, with the strong support of Finance Minister Ivan Suker, who had previously championed the move. The news that Polancec is a candidate to take the top post in a holding of this kind was indirectly confirmed by the recent discovery by Nacional that Prime Minister Sanader is seriously considering a cabinet reshuffle, concretely of getting rid of Polancec as Deputy Prime Minister. Top HDZ brass had initially considered keeping Polancec on as the Economy Minister, but Polancec has emerged of late as the first choice in the context of creating a strong domestic financial holding company, which would presume his departure from the ranks of Government.

The idea of creating a strong domestic financial holding company under state control has recently come back on the front burner for several reasons. The creation of a financial holding company of this kind would strengthen Government's hand if relations with the European Commission were to come under strain, and in the event of a possible worsening of relations with other leading banks doing business in Croatia, who have been in foreign ownership for years. Besides, the creation of a financial holding company by the merger of HPB and Croatia osiguranje would deflect speculation related to the future business development of the HPB and put an end to media speculation on the departure of Josip Protega from the post of President of the Board. HPB recently came into the spotlight when newspapers wrote that Josip Protega was moving to the Agrokor Company. The write-ups of his departure continued as if it were a fait accompli, even after Agrokor and HPB denied the story off the record.

There was speculation as to the possible successors to Protega at the post, with newspapers promoting Ante Samodol, the top man at HANFA (Croatian Financial Services Supervisory Agency), and Ivica Maloca of the Croatian National Bank as candidates. Nacional has learned from senior Government sources that some interest groups tried to lobby for Josip Protega's dismissal, and the instalment of Samodol or Maloca. There are claims that these groups deliberately released disinformation on the departure of Protega to Agrokor just to irk Prime Minister Sanader, whom Agrokor top man Ivica Todoric has allegedly irritated quite a bit for some time now. These rumours were to have helped move along a decision to dismiss Protega, but that idea was abandoned for several reasons.

Ante Samodol did not want to move to Protega's job, and there were also some formal obstacles arising from the position he currently holds. Samodol met with Protega a few days ago and told him so in person. Maloca was dropped as he has been on sick leave for months now, and there have been doubts expressed in his work habits, by all accounts because he has been using sick leave to prepare his post graduate studies with Professor Vlado Leko, a member of the Croatian National Bank Council.

There has been unofficial consideration given to Protega's possible successor most likely as a result of the fact that Protega has of late begun to contact more frequently with finance minister Suker, inquiring as to what Government intends to do with the HPB. The bank has seen rapid development over recent years, seeing through a strategic plan in which the state has decided to make a strong domestic bank out of it in order to facilitate a greater influence on the development and crediting of the domestic economy in the event that other banks in majority foreign ownerships do not do so. Over the past three years the bank has increased its assets from 5.5 to 15.5 billion kuna, taken on 600 new employees and opened some 30 branch offices. The bank has also opened nine investment funds, manages a pension fund, a real estate fund, and offers a range of financial products like other banks on the market. Most of the press coverage of the bank was positive, and Protega was even considered a favourite of the press.

Hrvoje VojkovicPeople close to the HPB say that this pace of growth was possible because of what is known as capital adequacy, i.e. the fact that the share of the bank's own capital in the bank's overall assets amounted to over 18 percent. Most other banks operating in Croatia have capital adequacy ranging from 12 to 16 percent, while the current legal minimum is 10 percent. After three years of significant growth the capital adequacy of HPB sank recently to only 10.4 percent. In this situation they began practically daily measuring the ration of bank capital to monetary placements on the market. This all hinders the bank's operations, even though a large number of personal deposits were moved to the bank over the past few months by people fearful that the massive global financial crisis might jeopardise the money they hold in banks in majority foreign ownership. Most of that money could not be placed on the market because the bank has a shortage of its own capital. In order to improve the situation, Croatian Post (Hrvatska posta), recently transferred 110 million kuna in long-term deposits to the HPB, which increased the HPB's capital adequacy to 11.4 percent.

But that only helps on the short term and will not solve the problem of the bank's long term challenges if it wants to continue to develop on the market. What is more, without a significant new injection of capital the bank may not even be able to continue to do business, because new financial legislation coming into force in July of this year says that the minimum level of capital adequacy is 12 percent. That is why the bank needs to secure at least 500 million kuna of additional capital or long-term deposits over the coming six months. If it does so its capital adequacy would jump to 14 to 16 percent. But to continue the desired long-term growth it is estimated that Croatia would have to find a total of 1.5 billion kuna of new capital for the HPB. The bank's management has been aware of the situation for some time now, and the possibility of an IPO has been foreseen in the frame of its business plan. The opportunity was missed when it could have been realised, however. The bank's management was not the one who could have made the concrete decision, and Government did not do so. Now the situation has changed and it cannot be realised because of the massive crisis on financial markets.

The fact that Protega has in the meantime, under pressure by the business environment, begun making intensive inquiries as to the future pace of the bank's development, was not to the liking of some members of the cabinet, as it indirectly showed that Government had not been as effective as it could have been in doing its job. Some tension also emerged in the relations between Protega and finance minister Suker. That is why it is not surprising that Nacional learned in December of criticism levelled at Protega from sources close to Government.

People close to Prime Minister Sanader, however, confirmed for Nacional that the idea of dismissing Protega was recently abandoned, partly because there was no successor of any calibre at the moment to take over his position. Besides, Protega did not actually seriously run afoul of anyone in the Government, and began making intensive inquiries about the bank's future early enough for the bank not to get into serious problems. The future development of the bank was discussed a few days ago at a session of the bank's supervisory board, which is made up of Zdravko Maric, state secretary at the Ministry of Finance, Vedran Duvnja, head of the Privatisation Fund, Grga Ivezic of the State Agency for Property Management, Drago Jakovcevic of the Faculty of Economics and Robert Jukic, the new head of Croatian Post. At the session Protega again posed the question of the bank's future development, which Maric passed on to Suker.

An influential financial expert told Nacional that Government could resolve the problem of the development of HPB in several ways. It could find the additional capital in the Croatian Pension Insurance Institute, Croatian Post and the Croatian Privatisation Fund, who are in fact stakeholders in the bank. The same financial expert warns that many foreign countries have gotten directly involved in assisting privately owned banks in order to increase their capital adequacy. The same expert said that Croatian Government is behaving quite clumsily in this situation, but that that can to some extent be justified by the significant problems in running the national finances.

In this context Prime Minister Sanader and finance minister Ivan Suker activated the possibility of merging the HPB and Croatia osiguranje, a plan that had already been discussed. Croatian National Bank governor Zeljko Rohatinski spoke positively about the idea in an interview given in late June of 2006 to Privredni vjesnik. He said of it that "integrated financial operations are becoming a major element in bank competitiveness and the increase of market share. This way of doing business is characteristic nowadays of almost all banks in foreign ownership operating on the Croatian market, while small domestic banks for the most part do not have access to additional financial, organisational and other resources for this kind of autonomous expansion of operations.

Damir PolancecThat is why the creation of these resources through the merger of HPB and Croatia osiguranje is a logical step that would create a financial conglomerate in domestic ownership with the possibility of more successfully facing foreign competition both on the banking services market and in the insurance market, than HPB and Croatia osiguranje could do on their own." Josip Protega also spoke publicly of the possibility of merging the HPB and Croatia osiguranja. Consultants were engaged to assess the value of both institutions and to propose three merger models, but nothing came of it. The idea also had its opponents, who said that something similar had been tried abroad, but that these projects had not always has a positive effect on operations.

Government has begun to consider another way to strengthen the HPB. Consideration has been given again to the policy of placing the deposits of state-owned companies and transferring them to the HPB. The idea was renewed after the recent falling out between Prime Minister Sanader and the head of Zagrebacka bank, Franjo Lukovic. Zagrebacka bank first announced additional hikes to interest rates on home loans, and then withdrew the decision only a day later. A similar situation developed in early March of last year when Suker had a fierce row with the head of the Privredna Bank, Bozo Prka, at the Ministry of Finance, at a meeting that was to have discussed the possibility of taking on loans and financing the state in 2008. The meeting took place on the same day that Privredna, Zagrebacka and Raiffeisen Banks announced that home loans were to be more expensive, by from 0.3 to as much as 1.22 percent. When the bankers saw that someone had called the press to the meeting, Prka became angry. He began to complain to Suker about the reporters, saying that some of them could wrongly interpret the meeting. After a while, Suker lost his cool and threatened that Government could transfer the payment of all wages to employees in the state administration to the HPB.

If that were to happen, a further 2 billion kuna would come into the HPB every month, the approximate amount spent on wages to employees of the state administration each month. Drago Jakovcevic, a member of the HPB supervisory board told Nacional at the time that Government could very easily significantly strengthen the HPB by also transferring deposits, something Government has given serious consideration to as of a few days ago. A few months later Government did in fact begin to actively consider the idea. The possible formation of a domestic financial holding with Damir Polancec at its helm is realistic because of yet another detail, which perhaps best demonstrates the nature of the current government. If a new financial holding is created with a management structure headed by Damir Polancec, all of the merit in the event of its significant strengthening on the market would go to Polancec, i.e. to Government. So far it has been young managers like Josip Protega and Hrvoje Vojkovic, the top man at insurer Croatia osiguranje, who have been the focus of public praise. Vojkovic has on several occasions been a source of quite a lot of irritation to Prime Minister Sanader, and as a member of the HSLS party is anyways no favourite of the HDZ, and is only seen at the post as a necessary concession to a coalition partner.

Protega and Vojkovic would remain at the same posts in the new balance of power, but would nevertheless be subordinate to another new formal authority coming from Government. On the other hand, in the event of an ever more likely cabinet reshuffle, Sanader could cast Polancec's dismissal as a kind of promotion to a significant function. At the post Polancec would be subordinate and dependent on Ivan Suker, with whom he has of late been ever more often at odds, but the compromise should be sweetened for Polancec by a much more rewarding manager's wage. This all goes to show that Government will try to use the big crisis this year to strengthen its influence on the domestic financial market and on the economy.