Parex awaits EC green light

  • 2010-07-07
  • Staff and wire reports

Restructuring activities include setting up Citadele bank.

RIGA - The Latvian government has still not received the European Commission’s (EC) official opinion on Parex bank’s restructuring plan, however, the EC has already ‘de facto’ given its approval to the program chosen, said the bank’s Council Chairman Juris Jakobsons, reports Jakobsons, who has been appointed CEO of the newly-created Citadele bank, expressed his certainty that the ‘de facto’ recognition from the EC meant that the division of Parex could now be carried out on Aug. 1, with the transfer of ‘good’ Parex assets into the new bank.

The Citadele bank head explained that the EC process was long and painstaking, and resulted in the submission of a detailed report containing the results of the Commission’s analysis. While ‘de facto’ approval had already been given, the preparation of the ‘de jure’ document would require at least another two months, noted Jakobsons, adding that the most important thing had been to receive the ‘de facto’ approval by June 30.

Finance Ministry Communications Department Chief Baiba Melnace also indicated that agreement with the EC was almost complete, but that the formal decision would only be taken sometime in the next few months. At the same time, Melnace stressed that there was no reason to believe that the EC would not give its approval for the restructuring; quite the opposite, as the plan had been developed in accordance with the best European practices.
On March 23, the Cabinet of Ministers took the decision to break up Parex and create a new bank. On June 29, Citadele bank received a credit institution license from the Financial and Capital Market Commission; on June 30, the bank was entered into the Commercial Register.

Part of the more than 800 million lats (1.1 billion euros) invested by the state in Parex will remain in the old, so-called ‘bad’ bank, while 230 million lats of this sum will be transferred to the new, or ‘good’ bank. Of this, 100 million lats will become share capital, while the other 130 million lats will remain as a deposit. Jakobsons previously stressed that “the current plan does not foresee any further investment in this bank by the state.”

Jakobsons said that the bank’s value has increased since it was nationalized in November 2008. He mentions that the bank’s former owners, Valerijs Kargins and Viktors Krasovickis, had sold their controlling stakes for 1 lat each, therefore, he adds, at that time this was what the bank was actually worth.
He says that the Latvian government and the European Bank for Reconstruction and Development have invested huge sums of money to sustain and ensure Parex bank operations, so the value today for these two shares could not cost just one lat “if the new Citadele bank functions as planned.”

“Now the bank must be divided to guarantee that the new bank can function, and no additional investment is necessary, with one single objective to be met - effectively recouping the government’s investment,” Jakobsons said.
The director is optimistic that if the bank succeeds in showing that it really is a “good” bank and can operate in a stable manner, then there is hope that the bank will not only be able to return the state’s investment, but can also raise additional capital.

Jakobsons pointed out that it was necessary to found the new bank a month before it started commercial operations for the reason that this time was necessary in order to prepare the bank and reach agreement with all partners, including SWIFT, American Express, and Mastercard, as well as to ensure a smooth takeover of all Parex branches, operations and activities.

Citadele will acquire all of Parex bank’s non-problematic assets, or ‘core’ assets on the transition date, notes Girts Rungainis, partner in investment broker Prudentia. “It cannot be said that a company where reorganization and reform is constantly taking place could quickly and effectively recommence lending and suddenly, in one night, acquire a second wind. This is highly unlikely,” he said. In his opinion, Citadele bank’s influence on the financial market in Latvia will be minimal, and the bank will not succeed in regaining the former position once held by Parex.

However, he sees the creation of the new bank as a positive step, which will increase the bank’s value and, correspondingly, the state’s chances of recovering the resources it has sunk into Parex.
He believes though that it is still impossible to talk about the state managing to recover the full investment. “The full value of Parex was destroyed during the bank’s period of ‘de facto’ bankruptcy and the takeover process. Now a battle is taking place so that the state can recover at least part of its investment. At present it would be more appropriate to speak of how much the state will lose. This will be hundreds of millions, but it is still impossible to say when and exactly how much,” indicated the banker. He also says that the state could also exit the situation without losses if devaluation of the lats took place.

In Rungainis’ view, with the creation of Citadele, the banking sector in Latvia has acquired a new middle-sized bank, which in terms of rankings will join the top ten. “It is clear that the new bank will be much smaller than Parex was as a whole. Both due to the fact that the bad part has been detached, and also to the fact that clients have left, do not use the bank and in the near future will not use it as their main bank,” said Rungainis, adding that non-residents will not find the bank attractive, either.

Rungainis is skeptical about Citadele’s management team, indicating that he sees no leaders among the group who are capable of moving the bank forward. “The bank is basically without leadership. All respect to [Citadele bank CEO Juris] Jakobsons, but the bank needs aggressive, innovative and visionary leaders and management, but there are no such people there now, and I do not see that in the near future such people could appear there, as, first of all, the state is not ready to pay the amounts which must be paid to this kind of leader; moreover, no good manager would come to work just for a couple of months, as in this time it is not possible to make a career or fully express how you work, as the bank will be sold anyway,” he cautions.