Aizkraukle - small town name, big city bank

By bne IntelliNews August 7, 2008

Mike Collier in Riga -

The town of Aizkraukle lies an hour's drive from Riga and is wholly unremarkable. Apart from a tenuous claim to be an important location in the fictional Latvian epic tale Lacplesis, it's the sort of place to drive through without stopping. But if the town isn't worth a second look, the bank that rather unexpectedly bears its name certainly is.

The contrast couldn't be more striking. Where Aizkraukle is a bit run down, boring and grey, Aizkraukles Banka (AB), founded in 1993, is efficient, energetic and bright yellow - or at least its eye-catching logo is. It also happens to be one of the most profitable banks in the region and unusual in that it is completely independent of foreign parent companies. At the end of June 2008 it had total assets of €1.5bn, around €5.7m under trust management and last year recorded a €38m profit with return on equity (ROE) of 34.9% and return on assets (ROA) of 2.85%.

"We have two main goals. First is the development of the Latvian economy. The second is the development of Riga as a regional financial sector," says deputy chairman Olegs Fils, who along with co-founder and chairman Ernests Bernis still owns over 90% of AB's shares.

Evidence of the former goal came recently when AB set up a special lending programme for small and medium sized enterprises, working in partnership with state-owned Hipoteku Banka. Evidence of the second goal will arrive in more spectacular fashion in around three years with the construction of a new corporate headquarters at the heart of a gleaming financial district in Riga called New Hanza City. The ultramodern glass edifice will be the sort of thing they can only dream about back in Aizkraukle.

According to Fils, New Hanza City will simply be a physical reflection of a straightforward fact: "This confirms that Riga is becoming the regional financial sector for this part of Europe. It's good for Latvia because we have a lot of multinational investors here - not only banks from Sweden, but investors from Germany, Denmark, Norway, Finland and of course Russia."

There is no shortage of banks claiming to act as a bridge between East and West, but AB has a better claim than most. Instead of just holding the door open to western investors wanting to take their money east, it also works in the opposite direction, providing western standards of accountability and efficiency to well-heeled individuals and institutions in Russia and the CIS with offices in St Petersburg, Minsk, Kiev, Almaty, Moscow, Baku and Odessa.

This two-way flow is in marked contrast to many of AB's competitors in its home market, says Fils. "The Latvian experience is that foreign banks use the Latvian market to step forward to the Russian market and the Ukrainian market. For instance SEB bank came here and is now stepping into Ukraine and Swedbank's next step is into Russia."

Talk of Russian money flowing west via little-known regional banks inevitably prompts raised eyebrows and whispers from cynics, but AB is candid about tackling the issue of "funny money."

"The banking industry is a part of our lives. Our business standards are exactly the same as in other spheres of human activity. We speak openly with our clients, employees, and with society; we keep our promises and do not take part in morally or legally shady deals," says Fils.

The main drivers of AB's rise from regional obscurity have been "organic" growth and efficient staff, says Uldis Eglitis, AB's head of financial institutions.

Reinvested profits

"Profits have always been reinvested into capital thanks to the shareholder structure, which is quite simple. The bank is owned more than 90% by two individuals and therefore the bank can grow all the time. It is highly profitable and if you compare us with banks of the same size or larger, there is a lot of efficiency in what we do."

Eglitis recalls a recent press report revealing that AB's staff are some of the best paid in Latvia's highly competitive financial services sector in which 25 banks currently operate (as against more than 60 when AB was founded!) "We employ around 600 people in the bank. The fact that there is a very well focused bonus structure, which has improved over the years, is maybe why we are rated so highly. But at the same time what wasn't mentioned in the article was that the profit per employee is correspondingly among the best in the industry."

Eglitis has also been part of recent moves to diversify the services AB offers its customers by establishing daughter companies AB.LV Asset Management and AB.LV Capital Markets in 2006, running five investment funds as well as individual asset management.

AB.LV Capital Markets carries out buying and selling of financial instruments at the customer's request, servicing of financial instruments' accounts, and provides informative support. The custody of financial instruments is provided by the bank but purchased financial instruments belong directly to the customer. They are not entered on the balance sheets of AB.LV Capital Markets or Aizkraukles Banka, and are held in separate customer accounts.

"The funds are defined according to the profile of our customers, which are more risk-taking than the average European investor and looking for a higher yield," says Eglitis. "We use the knowledge the bank has obtained managing its own portfolio, which has been successful over the years, and we expect that the business will grow and show nice profits."

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