INTERVIEW: Baltic bank for sale, one careful owner

By bne IntelliNews March 15, 2011

Mike Collier in Riga -

While the financial crisis saw some familiar names from the banking world carted off in coffins, there have been fewer examples of the pitter-patter of tiny feet as new banks are born to take their place. Latvia provides an exception in the form of Citadele, a bouncing baby bank conceived during a one-night stand between Parex Banka and the Latvian state.

Citadele was formed in August 2010 by means of splitting the notorious Parex, which had to be nationalised by the Latvian state in 2008, into a "bad" resolution bank and "good" Citadele. Juris Jakobsons is the "good" bank's chairman, charged with nursing the nine-month-old through its formative years and getting it ready for a coming-of-age party when an investor acquires it. "The bank spent close to two years under the heaviest liquidity squeeze and was forced to pay a very high price for deposits," Jakobsons tells bne in Citadele's Riga riverside head office. "The lion's share of a bank's income is usually net interest income, but in our case this was negative when we started. Now, finally we have reached positive territory and this is extremely pleasant. For us, this is the breaking point - we have finally surfaced."

Presently, Citadele has assets worth LVL1.4bn (€2bn). Three-quarters of its shares are owned by the state via the national privatisation agency, with the remainder held by the European Bank for Reconstruction and Development (EBRD). However, a group of minority investors in Parex (including investment groups East Capital and Firebird Management) are challenging the legality of the Parex split, even though the strategy was approved by the European Commission.

As the day-to-day manager of Citadele, Jakobsons insists that neither legal wrangles nor public pressure to find a buyer are distracting him from his job. "We are not getting interest directly - we redirect those requests to the privatisation agency and their consultants, Nomura International. The management of the bank is not selling the bank. We have our strategies and our targets and visions. We want to be the most valuable bank in the Baltics in coming years and we are working hard on that. Valuable for future investors, valuable for our employees, valuable for our clients. This is not simply value in monetary terms, but in a broader sense."

Jakobson's efforts have been helped by the somewhat surprising acceptance of the new Citadele brand. "Parex casts a long shadow, whereas Citadele seems like something new and positive," Jakobsons says. "We feel there are many clients we can approach now who previously refused flat to talk to Parex."

"Though many people working in the bank were here when it was Parex, the management has changed, and with that the business culture and the approach to problems and service issues. I have worked in the Latvian banking sector since 1994 with Scandinavian banks and UniCredit. I can say that the culture and processes with which we are working have become much closer to this Western European style than they were before."

Final furlong

On the prospects for a sale, Jakobsons insists that spinning off assets such as the well-regarded asset management arm or Swiss subsidiary AP Anlage & Privatbank ahead of a sale of the core business would make little sense. "These foreign assets which we are holding have positive yields, so why should we scrap something giving positive returns? If one day the new investor thinks, 'Why do I need a Swiss bank?' he can sell it and get a decent return. I can imagine some investor groups would be interested in holding this asset. We are working as a banking group, so when the investor comes along and asks what we are doing, we have a clear answer and the investor can consider how much he is prepared to pay."

The ultimate deadline for a sale, set by the European Commission, is the end of 2014. According to Nomura, it typically takes eight or nine months to complete a sale process, so potential buyers still have a couple of years to monitor the bank's progress, though until a sale is completed, Citadele is forbidden from exceeding certain performance limits to prevent it distorting the market using state money.

The interesting thing will be whether potential buyers are existing players in the Baltic banking sector looking to increase their market share or new entrants, maybe even from the east. "If the buyer is someone who already has a strong brand, then probably the brand will change. It happened with UniBanka, now SEB," says Jakobsons. "But there is also the possibility that a banking group not present here at the moment comes in and if they feel the brand is strong, they'd might as well keep it. So for example there is still Yapi [Kredi Bank] in Turkey even though half of it belongs to UniCredit. Strong brands are not scrapped."

"If you're buying a new car, you don't take it straight back to the shop and re-paint it immediately," Jakobson smiles. "You choose the car you like, you drive it for a while and then you change the colour if all of a sudden you decide to do so."

Ian Hague, co-founder of Firebird Management, is an investor in bne

INTERVIEW: Baltic bank for sale, one careful owner

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