New blood wants to flow through the Lithuanian banking sector

VILNIUS - The Lithuanian banking sector, which is used to cooler
Scandinavian blood flowing through its veins, is now poised to accept
some hotter specimens, that of an Italian-Polish consortium, which
wants to expand its operations in Eastern and Central Europe.

Two banks, Italy's Uni-Credito Italiano and Poland's Pekao SA,
submitted a bid to buy a 76.01 percent stake in one of Lithuania's
largest banks, agriculture bank Zemes Ukio Bankas. Uni-Credito/Pekao
submitted its proposal to buy the controlling share in Zemes Ukio
Bankas on May 15. The State Property Fund will now analyze it and
decide whether to invite the consortium to further negotiations.

Zemes Ukio Bankas is Lithuania's second-largest bank in terms of
employees, behind savings bank Lietuvos Taupomasis Bankas, Lithuania's
other state-owned mammoth. In terms of assets Zemes Ukio Bankas, with
1.67 billion litas, ranks third, behind Lietuvos Taupomasis Bankas and
Vilniaus Bankas.

Currently, the European Bank for Reconstruction and Development owns
11.37 percent of the bank, while Vilniaus Bankas owns another 11.44
percent stake, that media reports say it may sell.

The Italian-Polish consortium is the only participant in the tender.
Media reports have it that several other companies - the Estonian
Hansapank Group, the Polish Kredyt Bank PBI, and the German Nord/LB
Bank - had initially shown interest in participating in the tender, but
didn't submit bids.

"This is not a problem with our bank, it's a problem with our country,"
says Imandra Duksiene, a spokesperson for Zemes Ukio Bankas. "Our
country maybe is not very good for foreign investors."

Some banking experts here are hailing the move as a much-needed
diversification of the country's Scandinavian-dominated foreign
ownership structure.

"I support the Italian version," says Eugenija Martinaityte, director
of the Lithuanian Banking, Finance and Insurance Institute. "It would
be helpful because Scandinavian banks are putting the main influence on
the Lithuanian banking industry. We would really appreciate some sort
of diversity. Everybody is optimistic about an possible Italian
invasion. It will really be like new blood."

Most are predicting that UniCredito/Pekao stands a good chance of
succeeding. One criterion for a successful tender is a minimum
BBB-minus Standard & Poors rating. Both banks have it; UniCredito
Italiano currently has an A-plus rating.

The main criterion, says the state Property Fund's Rimantas Butkus, is
the price.

"We do have a minimal price approved by State Privatization Commission
- and if they comply with the minimum price we could invite them for
negotiations," Butkus said. The minimum price is not-disclosed.

Latvia's Parex Bank tried unsuccessfully to buy Zemes Ukio Bankas in
1998. That was the first attempt to privatize the bank, but Parex's
offer of $500,000 (20 million litas) wasn't enough for the State
Property Fund. "It was not so serious," says Martinaityte, speaking of
Parex's intentions. "It was a testing of the waters, like advertising."
Parex Bank has since purchased a stake in Lithuania's smallest bank,
Lithu-anian Development Bank.

For Zemes Ukio Bankas, a foreign investor will help stream activities
and open the bank's activities to a greater portion of the public. "We
hope that the investor will focus attention on information technologies
and will develop our subsidiaries," says Duksiene. Zemes Ukio Bankas
has a leasing and a currency subsidiary that it hopes to expand after
privatization.

Also, Duksiene adds, a new parent company should help improve the
bank's loan portfolio.

This could create good consequences for the banking industry, which is
currently hampered with high lending rates and, some say, indifference
to small businesses.

"Up to now there's no competition," says Martinaityte. "There's
nothing for the client. If you need to pay 16 percent interest, it's
unbelievable. For mortgage lending you need to pay around 12 [percent].
It's impossible to accept. We would really appreciate for any kind of
small and medium enterprise lending, with an interest rate of around 8
percent for long-term, 5-year loans at least."

Vilniaus Bankas may have a new head-to-head foe with a privatized Zemes
Ukio Bankas, but it is welcoming the competition so far. Its head of
retail banking, Raimondas Kutra, recently told reporters the
state-owned banks to function according to the same requirements and
possibilities as private commercial banks. Vilniaus Bankas claims that
Lithuania's state-owned banks occasionally get certain privileges from
the state such as exclusive government contracts.

Another Vilniaus Bankas official conceded that it's just a matter of
time before more strong competition enters the market.

"The competition will come one way or the other and we are ready for
that. Foreign banks, strong banks, might come, we think. It seems like
everyone wants it to come from a German bank, and in this case it's a
Polish bank owned by an Italian bank." he said.

The controlling partner in the Italian-Polish coalition is UniCredito
Italiano, which owns most of Pekao SA, Poland's second-largest bank.
UniCredito, says a recent report in the business daily
Financial Times, is refocusing its attention on Central and
East European markets as it turns away from buying large Italian banks
or cross-shareholding agreements with Spanish banks. It recently
purchased shares in banks in Croatia and Slovakia, and is maneuvering
to get footholds in Bulgarian and Czech Republic markets.

"I think big cross-shareholding European banking alliances are no
longer the order of the day: The new trend is to identify international
partners in specific business sectors," Alessandro Profumo, chief
executive of UniCredito, told the Financial Times.