INTERVIEW: Latvia's Western Bank looks east for business

By bne IntelliNews August 16, 2010

Mike Collier in Riga -

When bne approached Rietumu Banka (Western Bank) three years ago as part of a survey of the Latvian banking sector, management politely declined the opportunity to contribute, explaining that they preferred not to describe themselves as a Latvian bank and were wary of direct comparisons with certain other Latvian banks. At the time, this attitude seemed a little precious. But the intervening period saw the disastrous collapse of publicity-hungry Parex Banka, local subsidiaries of Scandinavian banks saw their balance sheets marmalised and the loan market all but froze. Today, Rietumu's original reticence looks not just understandable, but extremely prescient.

As Rietumu's chairman, Alexander Kalinovski, tells bne, "The bank is headquartered in Latvia and therefore we consider Latvia to be our 'home' market. But our business and the business of our customers is both regional and global."

Rietumu had a better crisis than any other bank in the region, never once slipping into the red. According to Kalinovski, there are several reasons for this. "First of all, in contrast to other banks, our approach to lending has always been based on healthy conservatism. During the global mortgage-lending boom, when many other financial institutions inconsiderably granted loans against doubtful collaterals, Rietumu kept a cool head. Secondly, our continued success is due to reasonable and time-tested attention to expenditure control and, as a result, record high cost/income ratios for a European bank. Rietumu's solid financial performance and steady profit and liquidity levels are the best in the Baltic states for the second year in a row."

Rietumu concentrated on business loans to carefully vetted borrowers when the Scandinavian banks were stuffing consumer credit into the pockets of anyone wearing trousers. Rietumu expanded at a glacial pace when other players were frantically clawing for market share. As a result, Rietumu was the most profitable Latvian bank in 2009, earning nearly LVL10m (€14m) before tax, with a return on equity (ROE) of 7.4% and return on assets (ROA) of 1%. Not as good as the LVL40m profit of 2007 or the 40% ROE of 2006 perhaps, but in the climate of financial apocalypse that engulfed Latvia in 2009, still remarkable.

It has continued to perform strongly in 2010 and remains the leader in terms of profitability and efficiency. Assets were LVL1bn at the end of the first half and the credit portfolio was LVL530m, showing 8% growth in the first six months of the year. The largest part of the credit portfolio is made up of loans issued outside the Baltics - mostly in Russia, Belarus and other emerging regions. The bank's capital adequacy ratio exceeds 17% and at the end of June it paid off its only remaining syndicated loan of €120m.

Contrarian orthodoxy

In the aftermath of the global crisis, Rietumu's formerly contrarian approach looks like it could become the new orthodoxy. But the prospect of increased competition from a new breed of "conservative" banks doesn't worry Kalinovski unduly. "Everyone seeks to copy the success of others," he says. "It is not that difficult to become successful. However, what is really difficult it is to remain successful over years. In our development we seek harmony, but at the same time we have ambitious plans."

Those plans include include fresh efforts to attract business from the east, a strategy that has led to an eye-catching sight across Riga in recent weeks.

"Welcome to EU!" says a matronly woman in a blue dress and Baltic amber necklace in front of an EU flag. In her hands is a tray of bread and salt - a traditional Russian greeting for guests. She is the face of Rietumu's latest advertising campaign, but if her bread, salt and smile aren't enough to make you open a deposit account, she has one other thing to offer on her poster: the chance to get hold of an "EU residence permit."

As provocative ad campaigns go, Rietumu's has been a definite hit. At a glance it seemed the bank renowned for its conservatism had taken leave of its senses and was flogging EU residency the way people in the underpass near Riga market will sell you a driving licence. In fact, Rietumu is actually taking advantage of amendments to EU member state Latvia's immigration laws that came into force on July 1. Despite attempts by Latvian nationalist parties to block the move, five-year residence permits are theoretically being made available to non-EU citizens - for which read "Russians" - able to meet certain financial criteria. A range of conditions include paying LVL20,000 in taxes per year, buying real estate worth LVL50,000 in the regions or LVL100,000 in Riga, or depositing €300,000 in a savings account, which Rietumu unsurprisingly assures is the "fastest and easiest way to the residence permit."

Rietumu denies that its campaign is misleading - though it is certainly cheeky. "We are not afraid of any incorrect interpretations of our campaign," Rietumu spokesman Vadim Alekseyev tells bne. "We started to support amendments to the law on immigration at the very beginning. Its potential contribution to our country in the form of foreign investments is absolutely clear to us."

"Once the amendments were passed, we announced our readiness to provide full practical assistance to customers in obtaining residence permits. Now we have to transform the legal act into reality and integrate it into our everyday life," he says.

The timing of the Rietumu campaign was no coincidence, and the bank freely admits that it was targeting rich Russian attendees of the annual New Wave music event which takes place in the resort town of Jurmala. "Riga and Jurmala traditionally accommodate New Wave guests and post-festival visitors - the target audience of the new law. It would be completely unprofessional to lose such an excellent opportunity to communicate our message to them," Alekseyev says.

Targeting rich Russians is nothing new. Parex - newly rebranded as Citadele and seeking buyers following its billion-euro bailout - made attracting deposits from Russians keen to offshore their cash a speciality and used ad campaigns even more brazen than Rietumu's. "We have not any interest in buying Citadele. However, we are ready to consider the possibility to acquire separate assets of this bank - particularly in the [Commonwealth of Independent States], provided we receive attractive propositions," says Kalinovski.

"Since its inception, Rietumu has had business interests in the CIS market, including Russia, and we continue to grow our business activities there. We have many valuable customers in Russia, and our customer base is constantly swelling. Speaking about Central Asia, we have been selectively represented in this region for many years, particularly in Kazakhstan where we have a large customer base and investment interests. We are also planning to rapidly grow our banking business in the Chinese market," he says.

That Rietumu should now try what seems on the surface to be a strategy similar to Parex's previous one isn't perhaps that surprising for a bank with such a strong contrarian streak. Maybe rapid growth is now the new conservatism.

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