A buyer's market for Latvian banks

By bne IntelliNews November 14, 2011

Mike Collier in Riga -

Anyone on the lookout for Latvian banking assets will soon be spoilt for choice after the confirmation on November 11 that the Latvian government has submitted a plan to the European Commission to sell off the commercial wing of state-owned Hipoteku un Zemes Banka (Mortgage and Land Bank).

"We can confirm that the Ministry of Finance has submitted the sales strategy of Hipoteku un Zemes Banka to the European Commission. We have started to form the advisory committee and... it is planned that the advisory council will be composed of the members from ministries of Finance, Economy, Agriculture, Environmental Protection and Regional Development, the State Treasury, as well as the Association of the Commercial Banks of Latvia, Venture Capital Association of Latvia, Confederation of Employers of Latvia and Latvian Chamber of Commerce and Industry," a finance ministry spokesman tells bne.

The finance ministry - which is the actual owner of the bank - was given until November 15 to put together an advisory board "to coordinate state aid mechanisms." "Since the development bank/institution plays mainly a complementary role and it does not have to compete with other players in the market, the part of the Mortgage Bank which is not directly linked with the performance of development functions, namely the commercial part, will be provided a possibility to develop in the private sector," the ministry said earlier.

With Bank Citadele (the "good" bit of the former Parex bank) already up for sale and the rump Parex bank looking to realise as many bad assets as possible as it continues its duties as a resolution bank, it's definitely a buyer's market in Latvia at the moment.

Neither one nor the other

At present Hipoteku, founded in 1993, is in a curious half-in, half-out position in which it performs commercial operations while also receiving government money and cash from the EU's European Investment Bank to give development loans. The situation has unsurprisingly attracted the attention of the European Commission and the new impetus given to the process may be in part to try to head off an Commission probe into the bank's inner workings that might uncover some nasty secrets.

According to Prime Minister Dombrovskis, two alternative scenarios exist as far as Hipoteku's sale is concerned: the best-case scenario sees the state losing about LVL28m (€32m), whereas the worst-case scenario sees more than LVL110m (€156m) going down the plughole.

Despite local media reports to the contrary, the Commission's local office told bne that no investigation had yet been launched, though annoyance is clearly mounting over delays with divesting the state of its commercial interests. "The elaboration and implementation of [Hipoteku] restructuring and the sales process of the bank's commercial part is included in the specific conditions of [Latvia's €7.5bn bailout] programme," said a spokesman.

"In the most recent (4th) addendum to Memorandum of Understanding between Latvia and the EU, it is mentioned that transformation plan was finally approved by Cabinet of Ministers on April 12, 2011. It was envisaged that the government will submit to the EC a sales strategy for the commercial part of [Hipoteku] by end-June, 2011, so that the actual sales process could start in July and be completed by mid-December 2011," said the Commission spokesman.

The International Monetary Fund - the other major contributor to Latvia's bailout - has also bemoaned the "long delays" and "lack of political consensus" in dealing with Hipoteku.

But according to the finance ministry, negotiations will be launched with potential buyers in order to "start evaluation of their offers by end-2011". The transformation itself "should be finalized by end-2013."

The sales plan - devised by SEB Enskilda, part of the same Swedish banking group that tried to buy Hipoteku in 2006 - envisages selling off the bank's commercial assets in six "packages" containing pre-wrapped delights: the "universal" banking operations, loans to small businesses, loans to big businesses, real estate loans, leasing, and funds. At end-2010, 59% of the bank's loans were classed as commercial in nature.

The precise reasons for the delays in offloading the bank are unclear, but might be attributed to any or all of a number of curiosities. If ever there was a case of "caveat emptor," it is Hipoteku.

For a start, the state parked its shares in Parex at Hipoteku in 2009 while it decided what to do with them, as part of its dramatic and expensive nationalisation of what was then the second-biggest bank in the land. Ownership was later transferred to the Financial and Capital Markets Commission before Parex was split in two. There have been rumours (but it must be stressed no real evidence) ever since about precisely what happened during Parex's holiday at Hipoteku, mainly concerning whether assets or liabilities of one bank were transferred to the other. The phrase "second Parex" is occasionally whispered in dark corridors when discussing Hipoteku.

Described as "profitable" in official blurb (on the basis of earnings of LVL3m during the first 6 months of 2011) the bank actually lost LVL63m in 2010 (even more than in the crisis year of 2009 when it dropped LVL53m). Gross assets declined by LVL158m or 16% last year to stand at LVL808m. During the first six months of 2011, assets shrank by another LVL59m, though the bank did also manage to pay off the last of its syndicated loans to the tune of LVL39m. Moody's Investors Service puts the bank's long-term foreign deposit currency rating at 'Baa3'.

Such figures may not seem huge by international standards, but in a Latvian context they are significant when the government and its lenders are deadlocked over how to save LVL122m from the 2012 budget. As Bloomberg has perceptively pointed out, the bank's 2010 loss was equivalent to 0.5% of Latvia's total GDP - and that from a bank with market share of less than 4%.

What is known is that Hipoteku has some very influential clients. If Parex became a boutique bank for Russian oligarchs, Hipoteku during the boom years cultivated a different line as the bank of the Latvian political elite. The wife of current Prime Minister Valdis Dombrovskis, the central bank governor Ilmars Rimsevics (who says the sale should not go ahead until market conditions improve) and some of the most notorious mixers of business and politics such as former prime ministers Andris Skele and Valdis Birkavs are either clients or involved via linked companies, with rumours abounding of better-than-market rates charged on loans to the great and the good.

Investors looking for Baltic banking assets should always consider employing the services of a decent due diligence investigator. But perhaps the best evidence that things went a bit wrong in this case lies in the simple fact that despite its name, it is currently impossible for an ordinary Latvian citizen to obtain a mortgage or buy land with money from the Mortgage and Land Bank bank.

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