Another bank merger locks up 10 percent of the market

TALLINN - Two Estonian banks, Forekspank and Eesti Investeerimispank (Estonian Investment Bank, EstIB) plan to merge and control over 10 percent of the market. Together they are the third biggest bank on the Estonian banking market.

Forekspank's plan is to purchase 50.25 percent of EstIB shares and then acquire its whole operations by the end of October. According to the business daily, Aripaev , the price of the shares may be greater than 100 million kroons ($7.1 million) and owners of the remaining 49.75 per cent shares of EstIB will become shareholders of Forekspank.

According to the agreement, which lays down the principles of a planned merger, the two banks will set up a working group to conduct the negotiations and set a share exchange rate based on audited net assets.

Forekspank has close to 2.5 billion kroons and EstIB 1.7 billion kroons in total assets. After a merger, the assets would total more than 4.2 billion kroons. Forekspank and EstIB are Estonia's third and fourth largest banks, respecitvely. In the entire Baltic region, a merger would make the enterprise the ninth largest bank.

As the merging banks are too small to compete with Hansapank and Uhispank, the banks will have to decide which niche to choose, whether to focus on investment banking or make a bigger impact on the retail market.

The Investment Bank has a big loan portfolio, and according to the competing banks, it is the most qualified Estonian loan portfolio with only 1.5 percent bad loans. EstIB has few deposits and it has not dealt with retail banking, while Forekspank's representation in retail banking is weak. The loan portfolio of EstIB is 1.1 billion kroons and of Forekspank is 1.35 billion kroons.

EstIB's clients are leading Estonian firms and the bank has a strong basis of know-how and professional staff to handle corporate financing but has no individuals' deposits and does not do intermediate payments and settlements. EstIB has mostly dealt with intermediating international financing.

Forekspank has mostly been active outside the local market - mostly in Russia - until the purchase of a stake in a Russian bank failed. The merger of the two banks will improve Forekspank's low capital adequacy normative, as EstIB will bring along a huge amount of capital.

The new entity also plans to bring in a strategic investor to enlarge its capital base. The biggest shareholders of the new entity are AS Immerman and Swiss Ueberseebank AG clients. AS Immerman, which belongs to the leaders of the bank, controls 64 percent of EstIB. Swiss Ueberseebank controls 53 percent of Forekspank.

According to Forekspank, the merger costs will be low as the personnel of EstIB is moving to the Forekspank's main office and only 5 to 10 people will be made redundant. The number of employees in Forekspank is 300 and in EstIB it is 30.

EstIB's half year profit was 18 million kroons and Forekspank had 8.8 million kroons in losses.

The Estonian banking market has been reduced by four banks in one year now that Forekspank and EstIB are going to merge. Eight banks out of 12 are left after the mergers of Hansapank-Hoiupank, Uhispank-Tallinna Pank, Forekspank-EstIB and the bankruptcy of Maapank.