Swedbank warns of Baltic losses but won't cut and run

By bne IntelliNews June 13, 2008

Mike Collier in Riga -

Hansabank is leaving the Baltic states - and that's official. But before anyone presses the "sell" button, it's worth noting that the change won't amount to much more than a lick of paint and an order for some fresh stationery. The switch from the Hansbank longboat logo to the tree of Swedbank is designed to put a stop to persistent rumours that Swedbank is planning to quit the Baltics over post credit-crunch fears about its exposure.

"The rebranding from Hansabank to Swedbank will be completed in the next year or so. As we did in Sweden, we will make it very cost efficient, so we will not do it immediately overnight," Jan Liden, president and CEO of Swedbank told bne at the Baltic Sea Region Business Forum in Riga on June 4. "We are committed to the Baltic market and we believe in the long-term potential of the market."

This will come as good news to the bank's 5m account holders throughout the Baltic region, particularly as earlier in June the Swedish Riksbank issued a statement warning that "borrowers in the Baltic countries could experience problems paying their loans. This would lead to a greater risk of loan losses for the Swedish banks with substantial activities in these countries."

Liden, too, is making no bones that harder times lie ahead for the Baltics as growth slows to near-standstill after the boom years of earlier this decade. "I believe that more serious economic difficulties await Latvia, its residents and companies," Liden said in a June 5 interview to Latvian public radio. "We understand that our losses will increase, and we expect to continue cooperation with our customers."

The prospect of such losses have caused Swedbank's share price to plunge from a high of SEK280 in February 2007 to around half that level today. In May, Goldman Sachs cut its rating on the company to 'neutral' from 'buy', estimating that Swedbank's earnings from Estonia, Latvia and Lithuania would decline by 30% next year and in 2010 because of higher loan losses and lower commission and lending growth. Recently, however, regional investors such as East Capital have pointed to Swedbank as representing excellent value. "I need to be careful when talking about the valuation of our company, but I think that if you do the analysis, the share price is very low if you compare it with our assets and forecasted earnings," Liden told bne. "The main reason [for the depressed price] is the worry about Baltic exposure and what that could lead to. I think this is somewhat exaggerated because all economic development goes in cycles and we feel very confident that we can play an active part in the development of these economies as well. There are a lot of opportunities, long-range, but we have to be prepared for short-term problems."

Far from running away from Eastern Europe, Swedbank intends to cautiously bolster its presence. "Most definitely that includes Ukraine and also we are taking small but determined steps in Russia where we are trying to introduce ourselves," he said. "I think that clients, whether they are corporates, institutions or private will have a more sophisticated demand for financial services in the future and we'd like to stay the largest bank in Latvia and the region which means further investment in all three Baltic countries," Liden added, without giving any figures for the level of that investment. Ukrainian media reported June 3 that Swedbank is considering the purchase of the European Agency for Return of Debts, a Ukrainian collection agency with a portfolio of $18.8m. The deal would also involve the purchase of Business Standard bank, ranked 95th in size among Ukraine's 178 operating banks, with 14 branches mainly serving small business.

Commercial power

As the largest financial institution in the Baltic states, Hansabank's actions probably have more influence on the economic welfare of the three republics than the three central banks combined. As much was admitted by Latvia's central bank boss Ilmars Rimsevics when he said in June that, "After EU membership, the three central banks of the Baltic states were basically ripped of their powers of monetary policy and all the commercial banks here now are basically branches of the central bank conducting monetary policy by supplying liquidity and lending."

That has led to accusations that the irresponsible lending policies pursued by Swedbank and the other large Nordic banks in the region were primarily to blame for the lend-and-spend spiral that led to a property bubble, high inflation and an unjustifiably large lending/GDP ratio.

For his part, Liden is under no illusions that all the problems associated with the much-discussed Baltic "hard landing" are done and dusted or, indeed, that a similar scenario could not happen in the future. "One important thing for all of us to remember is that right now, those of us operating in the Baltic financial sector have the eyes of the financial sector on us. Don't underestimate that attention. How this situation is handled will set the image and determine the future credibility of this region for many years to come."

"We think we have ways to mitigate negative effects and to secure the quality in our credit portfolio to gain both us and our customers. As a robust financial institution we also represent long-term stability for corporations and private clients in times that might be more difficult than they have been," he concluded.

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Swedbank warns of Baltic losses but won't cut and run

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