Lithuania scrambles to prevent Ukio Bankas collapse

By bne IntelliNews February 15, 2013

Tim Gosling in Prague -

Just two days after "temporarily" suspending operations at Ukio Bankas, Lithuanian regulators have ordered the state-appointed administrator to start negotiations over disposing of its assets to prevent a collapse from impacting the state budget - a move that's seen as signifying a spike in worries over the state of the bank and the wider Baltic banking network.

The Bank of Lithuania said in a statement that the administrator would now being talks over selling Ukio's assets and liabilities, primarily with Siauliu Bankas, whose biggest shareholder is the European Bank for Reconstruction and Development. The international institution said in a statement that it is ready to step in to "provide private and commercial customers with comfort and address concerns about the stability and safety of the sector."

:The temporary administrator has been given permission to begin preliminary negotiations with Siauliu Bankas, which has already expressed interest in taking over the assets, rights, contracts and liabilities of Ukio Bankas, as well as with other banks that have expressed similar interest," the central bank said in a statement.

The move signals a sharp acceleration in urgency. Administrator Adomas Audickas was originally handed only temporary control of Ukio on February 12, with a demand that he report on its health within six days. The original suspension of operations was made merely citing "irregularities" at Lithuania's sixth biggest bank, with the central bank claiming that it no longer meets capital-adequacy and liquidity requirements.

"Although the administrator can present his conclusions and proposals within six days, he has been encouraged to do so as soon as possible," the central bank said in its February 14 statement.

The Bank of Lithuania was also careful to insist in its original statement that the problems at Ukio were not in the same league as those at Bank Snoras, which was seized and put into bankruptcy 14 months ago. Having been stung by the huge losses incurred at Snoras, the regulator and government have clearly moved swiftly to try to ensure that it is not hit again, and has now revealed that Ukio is in fact in danger of bankruptcy.

"A lot will depend on the actual financial standing of the bank, which will be registered by the administrator and the auditors who inspect the bank, but our priority is clear-continuity of the operation of the bank in fulfilling obligations to its clients and ensuring that the restructuring would be the most effective, rational and cheapest means for the state in solving the problem," Bank of Lithuania's chairman, Vitas Vasiliauskas, said on February 12.

Lithuanian Prime Minister Algirdas Butkevicius said the same day that he supported the central bank's action and insisted it would not have a major impact on the economy. However, he also vowed the government would fulfill its obligation to guarantee customers' deposits up to €100,000.

The preliminary data from the administrator now suggests that could pose a big problem. Ukio's liabilities are LTL500m (€145m) more than its assets, the Bank of Lithuania said, mainly due to LTL1.6bn in risky loans granted to companies related to majority owner Vladimir Romanov.

Deja vue

Bankruptcy would require payments of as much as LTL2.6bn from the state Deposit Insurance Fund, reports Bloomberg. However, Vasiliauskas told in November: "After Snoras collapsed, the [Deposit Insurance Fund] was left with LTL1.7bn (€492m), but the state did its duty. I do not see why the mechanism should not work in case something happens again."

That would mean the fund would have to borrow from the government, in a similar scenario to that which evolved after the November 2011 collapse of Snoras. That payout forced Lithuania to issue additional debt in order to cover the bill.

Snoras was nationalised, then declared bankrupt, and is now being liquidated. Former Russian owner Vladimir Antonov is currently fighting extradition to Lithuania on criminal charges that he misappropriated millions of the bank's assets. With Snoras' Latvian subsidiary Krajbanka collapsing shortly afterwards, the actions of Baltic banking regulators have been severely questioned in the aftermath.

Two days into the investigation, it appears the regulators have uncovered issues that have brought those memories back to the surface. Vasiliauskas appeared relaxed on February 12, insisting that the situation with Ukio is very different to that at Snoras. "We have clearly seen intentional actions [at Snoras], and here it's more misconduct," he said.

Yet in just two days, the task of "re-establishing Ukio's stability and reliability" looks to have turned into a fire sale. The first hint of that was a statement late on February 13 from the EBRD saying it supports Siauliu Bankas' application to begin talks on buying Ukio's "good" assets.

"We welcome this swift move as a decisive step towards the consolidation of the local banking sector and the strengthening of its stability. This will help overcome uncertainty and bolster trust and confidence in the whole sector," said Jean-Marc Peterschmitt, EBRD managing director for CE/SEE. The Bank of Lithuania welcomed the statement, saying this could be "one of the options" for a swift resolution of the problems.

"As a first step in support of Siauliu Bankas's efforts, the EBRD has agreed to provide subordinated debt which will strengthen the bank's capital base for the potential transfer of assets," the statement added. "In the current situation the EBRD considers the preservation of stability in Lithuania's banking sector to be critical. The expansion of Siauliu Bankas by taking over Ukio's Lithuanian banking business would provide private and commercial customers with comfort and address concerns about the stability and safety of the sector, the EBRD believes."

Troubled times

The times and trials of Ukio paint a picture of the mounting problems in the Baltic banking industry over the past five years or so. Ukio has been haunted by a seemingly endless run of bad news, and reported a net loss of LTL44m for the first nine months of 2012 in October. The bank has been questioned by investors over the quality of its loans, valuations of real estate assets, and has starred in reports following warnings from the EU and International Monetary Fund (IMF) over the use of banks like Ukios in the Baltic states by dubious depositors from Russia and other former-Soviet states.

Lithuanian prosecutors said in January that they had frozen offshore accounts while investigating claims that $13m from the alleged Russian tax fraud connected to the so-called "Magnitsky case" was laundered through Ukio. The probe was initiated in response to a request by investment fund Hermitage Capital Management, for whom lawyer Sergei Magnitsky was working when he uncovered the alleged embezzlement. The lawyer later died in pre-trial detention in Russia amid accusations he was beaten and denied medical treatment.

Russian born-businessman Vladimir Romanov owns 64.9% of Snoras and is chairman of the board. Also the owner of Edinburgh football team Heart of Midlothian, Romanov spooked the market on February 8 when he said he is set to relinquish ownership of the Kaunas Zalgiris basketball club. Investors baulked at the thought that the main shareholder of the bank is unable to support stability at a mere sports club, and Ukio lost 25% of its capitalization through the week.

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