Mike Collier in Tallinn -
There may have been worse times to launch a bank - say, in the wake of bubonic plague - but only just. Yet the fact that the banking sector is currently about as popular with the general public as an outbreak of swine flu isn't putting a dampener on the spirits of Erki Kert, a board member of Estonia's newly-formed LHV Bank.
"Actually I would say quite the opposite," he tells bne. "Lending has slowed everywhere across the market and as a result, even some of the strongest companies are left with empty hands. These are the companies we can help and that is the gap we can fill today. Basically, we can start from a clean slate and do not have to worry that much about an earlier loan portfolio," he says.
The banking market in all three Baltic states is dominated by Scandinavian giants such as SEB, Swedbank and Nordea. The largest local player, Latvia's Russia-friendly Parex, spectacularly over-reached itself and was only saved from collapse by a costly nationalisation that brought the Latvian state itself to the edge of insolvency.
With the Baltic economies seemingly in freefall and governments responding with painful austerity policies, banks have become popular targets in the blame game. They were too free and easy with their credit, say some critics - and now they aren't being free and easy enough, say others.
The current brouhaha over whether Latvia will be forced to give up its currency peg against the euro has put these Swedish banks under an intense spotlight. They are rather caught between a rock and hard place over the issue: after having made most of the euro-denominated loans to free-spending Balts, a devaluation of the lat would hit them hard; on the other hand, keeping the peg means squeezing those same borrowers through huge cuts to government spending. At time of writing, the Latvian government had just managed to cut more from the budget to qualify for another tranche of aid money form the International Monetary Fund, thereby staving off default and a sovereign bankruptcy. Even so, the Swedish finance minister, Anders Borg, was still moved to announce on June 16 that the government was ready to step in and help its banks if the situation in the Baltics deteriorated. "We have made clear that we have the resources and the ability to deal with any problem that might occur," he told reporters. "We could deal quite forcefully if necessary."
Suspicion of the motives and ultimate loyalty of these "foreign" banks (or their local subsidiaries) has, therefore left a gap in the market for home-grown institutions, believes LHV Bank's Kert. "One of our missions is to help develop Estonia's economy and social sustainability. In that sense, there is a patriotic motive to the move as well. We believe that better decisions for Estonia in the long term are rather born here than overseas," he says. "Our impression is that the Estonian public has been happy to see a local bank again after so many years."
Lest anyone think LHV Bank is simply an optimistic reaction against the excesses of recent capitalism, it does boast a considerable track record. It has been operating as a well-regarded investment bank for a decade and most members of its supervisory board were among the founding partners of Hansapank (today's Swedbank Estonia) and can boast the longest banking experience in the Baltics. "The idea of becoming a bank was a natural step for us in order to widen the range of products we can offer," says Kert, though the idea of a retail bank growing out of an investment bank rather than vice versa perfectly shows the topsy-turvy nature of global finance at the moment.
In addition to its investment related services (brokerage, private wealth management, corporate finance), four new business lines will be added: high interest deposits, business loans, internet banking and credit/debit cards.
LHV Bank is 100% owned by LHV Group. The major shareholder in LHV Group is Rain Lohmus, who was one of the founders of Hansapank. 19% of the group belongs to Andres Viisemann and the rest to various other well-known Estonian business leaders and the bank's employees.
Although he insists the main focus will be on Estonia for the next few years, Kert doesn't rule out expansion into the larger neighbouring states. "Already today it is possible to open deposits in Latvia and Lithuania," he says. "In the next two to three years, we aim to have at least 20,000 satisfied and happy banking clients. As for longer plans, everything is possible... we will see."
But in the short term, lending levels are likely to remain subject to broader influences. Estonian Prime Minister Andrus Ansip's coalition shrank from a majority to a minority administration in May after one party accused him of going too far with spending cuts, and with economic forecasts getting worse with every passing month (the Estonian Finance Ministry now predicts an 18% contraction of the economy in 2009) and unemployment into double digits, it will be a brave bank that calls the bottom of the slump and starts opening the credit taps again.
But if the dominant Swedish banks do end up taking a big Baltic buffeting, it may be enough to scare some of them off for good - in which case the likes of LHV Bank could suddenly find themselves extremely popular.
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