Jadek & Pensa Senior Partner and Head of the Transaction Unit Ozbej Merc talks about the evolution of the banking sector and their role as legal advisors in Slovenia over the last 10 years.
CEELM: Over the last ten years, what types of banking/finance deals and projects have kept your team the busiest in the banking and finance sector? How has that focus evolved over the past decade?
Merc: If I look at the past ten years, there were two significantly challenging periods in Slovenia. The first stemmed from the lingering aftermath of the 2009 financial crisis, marked by ongoing refinancing concerns. Subsequently, there was a resurgence of refinancings of some of those same deals, that coincided with the wave of COVID-19, similar to the challenges faced from 2011 to 2015.
Additionally, in the banking sector, there was a wave of consolidation in the past five to ten years, with many banks streamlining their operations and selling off non-performing loan portfolios. Among the notable transactions, Nova KBM acquired Abanka, which was subsequently acquired by OTP to form a joint entity. Additionally, local bank Sberbank, a subsidiary of Sberbank Austria, underwent forced disposal and was acquired by NLB over the course of a weekend, following the developments with EU sanctions on Sberbank of Russia.
Another highlight of the last few years has been an ongoing dispute regarding the wipeout of subordinate noteholders and shareholders of Slovenia's largest banks in 2013. This led to legal challenges from affected parties, legislative interventions, and disputes between the Slovenian Government and the Bank of Slovenia on who should bear the ultimate responsibility arising from these disputes, adding complexity to the process. Although these events caused some turbulence, they did not significantly stress the banking sector.
CEELM: Can you pinpoint the most intense periods your team has faced in the banking and finance sector over the last ten years? What factors do you believe led to these particularly challenging times?
Merc: Despite the challenges described above, noteworthy developments emerged in the bond market. Notably, real estate bonds and public bonds, particularly those issued by states for retail investors, gained prominence. This shift was highlighted by the emergence of individuals investing in state-issued retail bonds (people's bonds), marking a recent but relatively modest development, totaling only EUR 250 million, as the state cautiously tested the waters.
Similarly, the COVID-19 pandemic coincided with a surge in refinancing activities, particularly for deals structured over five to seven years. Although the pandemic created significant economic disruptions, it did not escalate into another full-blown crisis, largely due to substantial government intervention, often referred to as helicopter money. Despite the challenges posed by both the previous financial crisis and COVID-19, the economy navigated through without succumbing to another crisis and recovered quite quickly following the initial shocks produced by lockdowns and the restrictions associated with them.
CEELM: How have the profiles of clients in the banking and finance sector evolved over the last decade?
Merc: Clients in the banking and finance sector have become more sophisticated, handling more tasks in-house. There's been a noticeable increase in demand for tax advice, indicating a rise in sophistication and the intertwining of banking, finance, and tax considerations – something that was not a market characteristic ten years ago.
Moreover, despite Slovenia's small market, there has always been a significant pour-in of foreign-origin clientele, with external players continuing to look into the market. This is evident from actions like the OTP's purchase of one of the two largest domestic banking institutions as well as massive foreign involvement in bond issuances – NLB had its IPO in 2018 and is now listed on the London and Ljubljana Stock Exchanges, following the largest-ever Slovenian public offering at the time.
CEELM: Regarding client expectations, what new demands do you see emerging in the banking and finance sector? Conversely, which aspects do you think have diminished in significance over time?
Merc: Client expectations in the banking sector have not seen significant changes. I believe that banking still remains quite a conservative sector in Slovenia. Banks in Slovenia act with prudence and are additionally subject to at times difficult to manage regulatory restrictions. In addition, they are not, in the broader EU/world market, among the largest players. A larger movement in banking practices is more likely to come from market leaders in a larger EU market.
Even with banks becoming more sophisticated and doing much of the work in-house, the essence of banking has stayed consistent, with a focus on traditional services despite the internal shifts towards more advanced operations. AI, despite seemingly pervasive everywhere, has (in my opinion correctly) not found its way into banking in Slovenia just yet.
CEELM: From a legislative and regulatory standpoint, what recurring challenges has your team encountered in facilitating deals and projects? How have these challenges evolved over the past decade?
Merc: The banking sector has faced a more conservative approach in regulatory measures, with banks being subject to growing restrictions on retail lending for example, and capital maintenance rules becoming stricter. Capital maintenance has been a persistent legal theme in financing arrangements, with courts restricting more and more what is considered permitted, and even some criminal penalties being on the table now for violations of capital maintenance rules.
There is a saying over here that "we change our laws a lot," meaning that there is a constant wave of updates – be it to laws or overall compliance regulations. For instance, there's been an increase in licensing requirements and restrictions in areas like consumer loans and NPLs, which form a significant portion of the market.
CEELM: Looking ahead, what do you anticipate being on the horizon for the banking and finance sector? What might be the focal points in a similar interview a decade from now, and how do you foresee the industry evolving?
Merc: If I had been looking ahead ten years in 2014, I don't think that I could have anticipated any of the changes that have transpired since then. Looking ahead, I expect that the banking and finance sector will become more regulated, with potential developments in digital currencies gaining a more significant role, though predicting this is challenging.
Interestingly, there are discussions underway about enshrining the right to cash in the constitution. While there's a clear push towards digitization, there's also a strong opposing sentiment advocating for the preservation of physical cash and the right to privacy, resisting constant surveillance and complete transparency.
Jadek & Pensa is CEE Legal Matters' Practice Leader for Banking & Finance in Slovenia for 2024 – learn more here.
