Parex loss to be substantial for state

  • 2011-03-30
  • From wire reports

RIGA - Parex Bank will never recover the 800 million lats (1.1 billion euros) that the state invested in it under a bail-out plan, Chairman of the Supervisory Council of Parex Bank, Michael Bourke, said on March 25 during a meeting with members of the American Chamber of Commerce in Latvia, reports Bourke believes that, even though the team is working “tirelessly” to recover all debts, the bank’s losses will still be significant and it will not be able to recover state investment in full.
Currently the bank is focused on the repayment of a 163 million lats syndicated loan, due this May. Bourke says he is convinced that the bank will be able to accumulate the necessary funds to pay this off and will not require additional government assistance, though the bank still lacks sufficient funds for the repayment. It has one month before it’s due, said Bourke.

Since Aug. 1, 2010, when Parex discontinued rendering such typical banking services as account and deposit services and loan issuing, its main objective has been to recover the state’s investments. For this the bank focuses its activities on effective loan restructuring, debt recovery, as well as management of real estate taken over.
More than 100 institutional investors have already inquired about buying certain of the bank’s assets in the past six months, reported bank spokeswoman Marita Ozolina-Tumanovska. Taking into account the current market situation, the prices the investors offer are “significantly lower than the potential value of the assets they are interested in, and therefore these offers are not in the bank’s interest,” said Tumanovska.

Parex Bank CEO Christopher Gwilliam said that the investors were interested in the so-called ‘bad’ loans; however, the investors were primarily interested in easy-to-sell assets whose value was “expected to increase significantly in the future.”
“Parex Bank in its current form has been working for just eight months, which is a comparatively short period for it to start a massive offer of assets to investors,” stressed Gwilliam.

Bourke, a former chief executive of Rietumu Bank in Latvia and a former consultant to the Irish Central Bank, in comparing Latvia’s banking crisis to that of Ireland’s, in the March 6 issue of The Post.IE says that Ireland and Latvia are both signed up to EU/IMF financial and economic recovery plans, with very tough performance parameters assigned for both countries and their citizens. Problems associated with the banking systems are at the core of the difficulties in both countries and, accordingly, very strong measures are required to restructure banks so as to make them function as proper commercial banks to meet the needs of the economy.

In many ways, Latvia is further along the road to reforming its banking system and this has been achieved, so far, by choosing the best options available.
The cause of both countries’ banking problems was prolonged and unsustainable lending by banks in both countries. Both countries had strong economic growth for many years, but with banks lending aggressively and too cheaply for property speculation and consumer spending, asset price bubbles were created which eventually burst with devastating results.
In Latvia, says Bourke, this aggressive and unsustainable lending was driven mainly by the Scandinavian banks through their Latvian subsidiaries. The Scandinavian banks had, it seemed, unlimited access to lending resources from their parent banks in Scandinavia, and with the motivation of rapid (nominal) profit growth while seizing market share, drove ahead with unlimited very cheap credit.

Other Latvian banks, but in particular Parex Bank, tried to keep up with this competition and to hold onto market share by borrowing on international credit markets (syndicated loans, euro bonds, etc.) and lending in a similar frenzy. When international credit markets collapsed in 2007 -2008, Parex lost access to its credit sources, and so collapsed into the arms of the Latvian state. The Scandinavian banks fell into the arms of their parents back home.

In the old days of prudent banking, bankers were trained professionally to lend less than 100 percent of their deposit base, so as not to overexpose their depositors to an unmanageable level of risk via lending. However, over the past 15 years or so, as money became very cheaply priced worldwide, international lending between banks grew exponentially and the prudential maxim of the loans-to-deposits ratio went out the door, together with a lot of other prudential banking norms, notes Bourke. The lending splurge blew up in many economies and was a huge factor underlying the banking collapses in Ireland and Latvia.
Latvia faced a credit crisis when Parex was taken over. The problems of the bank were ring-fenced in 2009 through a number of control measures and after serious control and analysis, the government, with the approval of the EU, split the bank in August 2010 into a core bank with performing loans - Citadele Bank - and Parex Bank, which was left with the non-core, non-performing loans.

This was done to allow for time for new, independent management to get to grips with the situation in both post-split banks. This has been a delicate and skilled process which maintained calm in banking circles throughout the process, asserts Bourke.

This course of action has resulted in Parex now being re-organized into a work-out bank with an agreed business plan to work out assets, mainly loans and other non-core assets in a managed way that aims to maximize the recovery of funds for the state over the life of the approved business plan (until 2017).

It is better to allow the banks, with strong oversight from the state regulators, to work through loan problems with borrowers over a reasonable period of time, until markets recover. In Bourke’s opinion, Latvia has chosen the correct approach in trying to resolve and manage the banking problems in Parex in an orderly manner and over a reasonable timeframe. Working through the bad loans will allow time for property markets to recover to better levels than the extremely distressed levels which exist at present.

The IMF/EU program is already helping Latvia to get its fiscal affairs into order, and already the economy is experiencing a rebound in growth. This, in turn, improves the prospects for recovery on bad loans in Parex, so as to repay the state treasury. Ireland, under a similar IMF/EU program, is still grappling with resolving its banking problems, and while large losses have already been taken, uncertainty remains, together with a huge loss of confidence in Irish banking.

The Latvian Privatization Agency owns an 81.83 percent stake in Parex, the European Bank for Reconstruction and Development owns 14.61 percent and minority shareholders control 3.56 percent.