RIGA - Parex bank may need an additional 100 million lats (142.8 million euros) to stay in business, reports news agency LETA. This additional capital may be necessary due to losses suffered last year.
With Latvia’s ‘submerging’ economy still looking for stable ground, increasing joblessness is putting pressure on homeowners to continue making their mortgage payments. Mounting foreclosures, and sinking asset values on the banks’ books, mean that banks need to keep adding to their bad debt reserves, resulting in the need for additional capital to bolster balance sheets.
With a cash-strapped Latvian government, the question arises as to where the additional capital will come from. One possibility is to capitalize the money that the state has already deposited in the bank, thereby increasing the state’s share in the bank’s equity.
The exact amount needed to re-capitalize the bank hasn’t yet been decided, and this will depend on the bank’s restructuring plan. The plan is expected to argue for the splitting up the bank in two – a ‘good’ bank, and ‘bad’ bank. Into the ‘good’ bank would go current working operations, the retail network, the performing loan portfolio, while the ‘bad’ bank would get non-performing assets such as bad consumer and mortgage loans, repossessed properties.
Latvia and the European Commission have begun initial discussions on the proposed restructuring plan, confirms Prime Minister Valdis Dombrovskis (New Era). The European Commission’s point of view will be what determines whether the bank could be split up. Dombrovskis has previously said that the bank’s restructuring foresees partitioning off some of the bank’s functions, as well as partitioning off the bank’s ‘bad assets.’
Parex President Nils Melngailis expects that the restructuring will lead to a safer balance sheet for the bank.
The next shareholder meeting at which the recapitalization will be decided on is set for the end of January. The restructuring plan, supposed to have been delivered from the Privatization Agency on Dec. 30, has not yet been produced, but needs to be decided upon before the shareholder meeting.
The Latvian state after stepping in at the end of 2008 to bail out the failing bank currently owns 73.4 percent of shares, with 22.4 percent of shares controlled by the EBRD.