An Order to Survive

Olga Pavuk, Vaidotas Visniauskas (Lietuvos Rytas), Pavel Bocharov (Investinfo)

In 1999, the 42 Baltic banks earned around 150 million USD. Almost all profit was made by two bank groups, controlled by two Swedish banks. These are Hansapank with its «daughters» in Latvia and Lithuania (controlled by Swedbank) and the Baltic trio - Unibanka, Uhispank and Vilniaus bankas (Skandinaviska Enskilda Banken). Leaders own one fourth of total assets, half of the credit portfolio and 39% of total deposits in the Baltic banks.

In 1999, banks came close to restoring the capital lost in August 1998, taking into account that the losses were counted in hundreds of millions (in 1997, capital and reserves constituted LVL 219.5 million. In 1999 - LVL 189.5 million). The same applies also to the assets of the banking industry: in July 1998, those assets equalled LVL 1896.2 million while by the end of 1999 they had reached LVL 1962.2 million. Last year's total profit was LVL 12.49 million (whereas in 1998 - 98.65 million) compensating 12-13% of the losses. We can begin to talk then of a recovery from the effects of the Russian crisis.

Deposits have increased by almost 10% compared with the last pre-crisis month of 1998. In 1999, 48% of all deposits were made by non-residents. According to the president of the Commercial Bank Association of Latvia, Mr. Teodors Tverions, foreign clients are attracted by the chance of receiving a full service package from Latvian banks.

Among non-residents are numerous offshore companies, which is not always a very pleasant topic of conversation. And it seems that most of the offshore investments have Eastern and mostly Russian origins. This is precisely why the Russian authorities consider Latvia to be an offshore zone. And this is the reason why Latvia still has a higher number of banks (23) than its neighbours in the South and the North. There is no other reason, according to Teodor Tverions, for regarding Latvia as an offshore zone: «there are no special tax allowances in Latvia, and the banking legislation conforms to all international standards».

The Latvian Law on Money Laundering was enacted in 1998, and the banks must regularly report suspicious deals to the Office of the Prosecutor General. During a review of the activities in the fight against money laundering made in March 2000 by the European Union, Latvia did not receive any warning or reproach. «It could be true that Latvian banks are used for money laundering, but not more, I would say it is less than in other countries» says Teodors Tverions.

Undoubtedly, such developments are in favour of the banks: money comes from outside and is distributed in the form of credits, mostly in the domestic market. In sum, 26.5% of all credits were issued to non-residents. If we look at this from a macroeconomic perspective, Latvia performs the function of a mini banking centre for the whole Baltic region.

A frequently discussed subject these days is whether Russia will apply economic sanctions against Latvia. In case this notion will be implemented, there will be a sharp cut in production and in provision of services in businesses focused on the Eastern market, which in turn would result in a downward-sloping amount of clients in the commercial banks, first and foremost those having the so-called offshore deposits.

Turning back, however, to «our banks». The only area of the Latvian banking industry that the banking crisis did not impact at all is credits. As mentioned earlier, the largest part of the credits has remained at home in the domestic economy. Year by year, the number of clients that can show both their wealth and creditworthiness is growing. The growing sizes of the issued credits have not impacted the quality of the credit portfolio on the whole. There is a slight increase in the standard (i.e. absolutely risk-free credits) - in 1997 their share amounted to 87%, while in 1999 - 90%. Another positive trend is the growing share of the long-term credits compared to the shrinking share of short-term loans. In 1999, the share of long-term loans, above 5 years, was 14% (in 1997 - 7.9%), medium term - 1 to 5 year credits - 50% (39.4%), short-term - up to one year - 31% (46%). Where do banks finance the long-term loans? First of all, by the increased amount of long-term deposits - in 1999 they were 4% (in 1997 - 2%). The share of demand deposits is also shrinking: from 83% in 1997 to 68% in 1999.

After the break caused by the Russian crisis, banks again started to receive syndicated loans. This privilege has already been assigned to four Latvian banks: Unibanka, Hansabanka, Parex Bank and Hipoteku banka. These credit institutions are the ones to issue the longest credits: for 10, 20 and 30 years.

One of the recent events that was widely discussed by the press is the purchase of Saules banka in December 1999 by the Italian entrepreneur Ernersto Preatoni. According to the press secretary of the Bank of Latvia, Edzus Vejins, the Latvian Central Bank had not yet received the full document package from the new owner. At the end of April Ernesto Preatoni has finished his banker's career in Latvia. Estonian Uhispank decided to disturb the contract with Mr. Preatoni on sale of Latvian Saules banka. On the other hand, after the shareholder meeting approved the new President of Saules banka, Edgars Dubris, assets and deposits almost doubled during the month of February.

Many banks in Latvia are eagerly looking abroad for an investor. Latvian Pirma Komercbanka have not yet managed to find new owners. From month to month the signing of an agreement on sale of a shares stake to German bank Norddeutsche Landesbanken is being postponed. The situation is very similar with Latvian Saving Bank, which is willing to have the Norwegian Den Norsken Bank as its strategic partner. Last year Parex Bank picked ABN Amro Rotshild as its consultant for attracting a strategic investor to the bank. Yet no progress is seen in this direction.

Looking at the first months of this year, one can identify development trends of the banking industry: in the first quarter banks managed to earn almost LVL 10 million - almost as much as for the whole year in 1999. Among the ones to earn above one million USD were Parex Bank (LVL 2,791,000), Unibanka (LVL 2,523,000) and Hansabanka (LVL 1,202,000). According to the President of the Bank of Latvia, Einars RepYe, the political situation in the country (resignation of the Prime Minister Andris Skele) will have no adverse effect on the banking industry.

Last year Lithuania was marked by the bankruptcy of Litimpeks - this, however, is just one loss with a deep economic recession forming a backdrop. Banks survived, many even managed to make a profit. At the beginning of 2000, Lithuania had 10 commercial banks, three branches of international banks and two banks offering special services.

As of 1 January 2000, all banks had total assets of LTL 11.3 billion (annual growth at 7.3%) while the total profit amounted to LTL 122.9 million (this figure even exceeds the results of 1998 when the total profit was LTL 88.4 million). Therefore, according to ever-optimistic Chairman of the Board of Central Bank, Reinoldas Sharkinas, banks grew and gathered strength. He believes banks will do it again this year.

The structure of the banking sector changed already at the beginning of the year.

February finally brought to an end the romantic story of love and hate of the two banks - Vilniaus and Hermis. Assets of Vilniaus bankas at once grew by LTL 5 billion while provisions for bad debts in the balance sheet of Hermis grew to LTL 150 million - almost as much as for all other banks taken together.

Bankers were surprised - is it true that Vilniaus bankas bought a bank that was almost bankrupt? Vilniaus bankas did not even as much as blush. Moreover, Chairman of the Board, Julius Niedvaras, said that on the occasion of the bank's 10th anniversary Vilniaus bankas would not mind taking over another Lithuanian bank. Why not the second largest bank Lietuvos Taupomasis whose privatisation starts at the end of this year or early 2001? Or Zemes ukio, whose privatisation will perhaps finish already by September?

Of course taking over a bank (especially Taupomasis) would give Vilniaus bankas (i.e. the Swedish SEB) a distinct advantage in the market - the Central Bank does not like this at all since it has very different plans. There are other applicants: Swedbank, MeritaNordbanken, Norddeutsche Landesbank Girozentrale, maybe Vereinsbank, maybe even Handelsbanken or SampoLeonia. In any case, privatisation of the two state banks will be a highly interesting process.

The game has begun. At the end of March, the Lithuanian Finance Ministry suddenly dismissed the head of Lietuvos taupomasis bankas, Romualdas Visokavicius, a man fairly popular in the banking business and so-called high society. Reason - low effectiveness of bank management and excess spending. His post was happily accepted by the former Finance Minister and Head of the International Department of Lietuvos taupomasis bankas, Algimantas Krizinauskas (until then Head of the financial corporation, Balticum Management). Banking circles welcomed this change. But not Romualdas Visokavicius...

Other banks can sit back and hope, in the meantime, harvesting the fruits of Lithuania's economic recovery. Vilniaus bankas has started to issue 20 year credits, though the annual rates are above 10-12%, which does not make these credits very attractive. This was shortly after followed by the announcement of Zemes ukio bankas about the availability of 25 year credits with the annual interest rate under 15% while the rates for credits in foreign currency are slightly lower. Some similar efforts to generate business were made also by Hansabankas. Snoras has released new microprocessor cards. MeritaNordbanken is hiring new staff. Life goes on.

At the end of 1999, the consolidated balance sheet of all Estonian banks exceeded the results of 1998 by 14.8%. Thereby, with respect to 1998, when this indicator was at 5.7%, bank assets have almost tripled. Of course, the 15 percent growth is not particularly astonishing as it was in the period from 1994 to 1996, nevertheless, it is not exactly what could be called stagnation either.

Altogether last year has been relatively successful for Estonian banks, especially if compared with the results of 1998. Consider the profit of Hansapanga Grupp last year; it amounted to EEK 815 million while in 1998 the financial losses totalled EEK 60.5 million. Indicators of the second largest Estonian financial corporation - Uhispanga Grupp - are also quite impressive: EEK 382.3 million losses in 1998 followed by a profit of EEK 129.2 last year.

The beginning of the year was marked by sharp discussions in banking circles regarding the decision taken by the Bank of Estonia (BE) that performance results of the commercial banks should be published every quarter instead of every month, as it was earlier. BE was motivated in its decision first of all in protection of the investors' interest in the bank stocks. According to BE representatives, the monthly figures would only mislead the less informed investors. The data is fragmented and not fully processed making it difficult to gain adequate information and this could harm investors. Despite the fact that banks themselves welcomed this decision (if not even stimulated it), Hansapank and Optiva Pank have continued to inform the stock exchange about their performance using some basic figures. It seems that the «ingredients» of these indicators have become an even greater secret; investors - people of a rather nervous nature - whereas before may have been partially confused can now be almost completely confused.

Besides, taking into account the family relations that link the BE president and one of the operations in the third largest Estonian bank Optiva Pank, there are doubts about the objectiveness of this decision. If everything is fine - why make that harder to see? Banks are, after all, still obliged to report to BE with the same frequency.

In light of the above-mentioned situation, the fact that a professor at Tallinn Technical University Vello Vensel was voted BE President by the Board on March 30 deserves additional attention. The professor had several times expressed his disapproval of the decision.

Vello Vensel cited his disapproval with the actions of the Estonian Tax Department as one of the motives for his sudden refusal to accept the position of the BE President. The central bank governor's chair is temporarily filled by the vice president of the bank Peter Lehmus.

Riga-Vilnius-Tallinn