Scandinavian banks, which suffered record impairments in the Baltics four years ago, are now being criticized by the government in Latvia for dominating a financial industry it says should do more to finance growth.
Prime Minister Valdis Dombrovskis said Nordic banks, including Stockholm-based Swedbank AB and SEB AB, are over-represented in Latvia’s financial industry as he urges the banks to ease their lending practices and channel more credit into the former Soviet economy.
“After the crisis, the sector has become even more dominated by Scandinavian banks and there are even fewer players from outside,” Dombrovskis said in a Feb. 27 interview in Riga. “Competition is even more suppressed.”
Dombrovskis wants to break the lenders’ dominance and bring more banks into the market to promote competition, he said. Scandinavian banks including Swedbank say they’re exercising restraint after being dragged through Latvia’s 2009 economic collapse, which left the nation relying on a bailout from the International Monetary Fund, the European Union and Nordic governments.
According to Swedbank’s Latvian management, the lender is already expanding in the Baltics and is committed to the region. Swedbank’s position as the European Union’s second-best capitalized lender after Svenska Handelsbanken AB means it has the cash needed to invest in Latvia, said Maris Mancinskis, chief executive officer of the bank’s unit in Riga.
Boom to Bust
“It’s good news for the Baltics that the Scandinavian banks are in such good shape,” Mancinskis said in an interview. “We have the capital and the capacity” to invest, he said.
Latvia’s economic slump four years ago, which followed a boom cycle triggered by its 2004 EU accession, deepened to a record 18 percent in 2009. Yet the successful deployment of austerity measures helped restore growth to more than 5 percent last year, trouncing the average in the rest of Europe. The economy will grow 4 percent this year, Dombrovskis said.
Swedish banks have “become a bit more restrictive, and there may be a point with that,” Swedish Prime Minister Fredrik Reinfeldt said in an interview in Riga yesterday. “High risk-taking comes at a price, and then you have to lower your risk-taking and ensure you have a better resistance.”
Surplus cash at Swedbank, the largest bank in the Baltics, helped it pay for the loan portfolio of Latvian lender Hipoteku un Zemes Banka AS and the Latvian mortgage portfolio of Allied Irish Bank last year. SEB, the second-biggest Baltic lender, acquired Hipoteku’s pension-management business.
The takeovers have tightened the banks’ grip on the market. Nordic lenders, including Swedbank, SEB, Nordea Bank AB, Norway’s DNB ASA and Denmark’s Danske Bank A/S, controlled 66.5 percent of Latvia’s lending market at the end of March last year, compared with 64.8 percent at the end of 2008 and 63.6 percent at the end of 2007.
“We have a mixed history with the Swedish banks,” said Dombrovskis. “Before the crisis, Swedish banks were more part of the problem than part of the solution because it was a very easy lending spree that they created, helping to overheat our economy and helping a real estate bubble develop. With the global financial crisis they suddenly cut our countries off and we had a hard landing.”
Swedish banks began expanding in the Baltic states in the late 1990s following the fall of communism. Swedbank bought a stake in Estonia’s Hansabank in 1998 and took full control in 2005. SEB gained control of Estonia’s Eesti Uhispank, Latvia’s Latvijas Unibanka and Lithuania’s Vilniaus Bankas in 2000.
After Latvia’s property bubble burst, Swedbank suffered a record net loss of 10.5 billion kronor ($1.63 billion) in 2009. The bank turned to shareholders for fresh capital and relied on Swedish government guarantees to enable it to raise funds in capital markets. Finance Minister Anders Borg in 2009 said the banks’ shareholders bore responsibility for “taking on huge risks.”
In June 2009, Borg said his government was ready to “deal quite forcefully” to safeguard taxpayers’ interests against risks from the Baltic crisis and that Sweden would be ready to recapitalize Swedbank and SEB in exchange for common stock, or nationalize them, if needed. Sweden took a leading role in pushing for an international bailout of Latvia and agreed to lend the country 10 billion kronor as part of that package.
Citadele Bank Sale
Latvia’s government may yet get a chance to diversify its bank market through the sale of Citadele Banka AS, the state-owned retail lender formed from Parex Banka. It holds 75 percent of Citadele and the European Bank for Reconstruction and Development owns the rest. Citadele has 41 branches and service centers in Latvia and units in Estonia, Lithuania, Azerbaijan, Germany, Ukraine, Russia, Belarus and Kazakhstan.
Latvia’s government may yet get a chance to diversify its bank market through the sale of Citadele Banka AS, the state-owned retail lender formed from Parex Banka. Still, the government isn’t counting on a sale “in the near future” as “interest is not as high as we would have wished,” Dombrovskis said.
While the government wants a strategic investor willing to develop Citadele’s business, Latvia isn’t in a position to be too selective, he said.
“We don’t have so much of a privilege to give preference to an investor because there are not so many investors willing to buy the bank,” Dombrovskis said. A Swedish bank bidding for the lender would be unlikely “to be rejected,” he said.