RISING EXECTATIONS: SEB chief Kvedaras said Lithuanian businesses were optimistic.
KLAIPEDA - The Snoras Bank collapse at the end of last year has shaken up the entire national banking sector, revealed massive financial transgressions in the doomed bank, including embezzlement and money laundering. Amid the fallout, waves of distrust in the banking system rolled over Lithuanian banks.
For example, Swedbank, fending off swirling social media-triggered gossip about hard times, was forced to ask the Lithuanian Department of Security to trace down the gossipmongers. The instigators of the rumors were never found. The bank estimated that losses due to the panicked withdrawal of bank deposits reached a half billion litas (143 million euros).
“It is nothing to the bank. The amount could be compared to what a ten-cent coin means to most of us,” chairman of Lithuanian Bank Vitas Vasiliauskas said in an attempt to scilence the depositors’ fears.
Following nationalization of Snoras, people’s trust in banks has deteriorated, a Sprinter Tyrimai survey reveals. Asked how the bank collapse changed their opinion about the banking system, a whopping 43.5 percent of respondents answered they trust it “less” than before the bank demise, while 32.7 percent maintained they “completely distrust” it. And only 14 percent of respondents replied that their trust in the banks has not been ill-affected. Surprisingly, 1.1 percent pointed out they started trusting banks more after the Snoras collapse.
In the wake of the Snoras events, hinting at a lack of control, the Bank of Lithuania – the central Lithuanian financial institution in charge, among other things, of supervising local banks – established the Supervision Service as a part of the introduction of a new financial market supervision model in the Lithuanian banking system.
The new unit of the Bank of Lithuania started operations on Jan. 2. It will supervise commercial banks and other credit and payment institutions, securities and insurance markets, and will investigate the disputes of consumers and financial institutions.
Up until now, these supervisory functions were carried out by the Securities Commission and the Insurance Supervision Commission, as well as the Credit Institutions Supervision Department of the Bank of Lithuania.
“The decision of legislators to concentrate financial institutions supervision under one institution – the Bank of Lithuania – was taken to make this function, which is especially important for the state, more efficient and less costly to the budget. The experts of the Supervision Service, organized into specialized divisions, will analyze the risks of financial institutions more widely, which will increase the effectiveness of supervision and the stability of the financial system,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
According to him, while launching into a new area for the Bank of Lithuania – the supervision of financial services provided to consumers – special attention will be paid to the unbiased and urgent investigation of disputes and to banks providing the proper amount of information to consumers.
The Supervision Service will employ 115 people from the Credit Institutions Supervision Department of the Bank of Lithuania, the Securities Commission and the Insurance Supervision Commission, which is about one-third fewer than the number of employees in the three liquidated supervision institutions.
According to preliminary estimates from the Bank, after the introduction of the new financial market supervision model the state budget will save around 5 million litas a year.
Nevertheless, the Bank of Lithuania and its incumbent and former heads have drawn an avalanche of excoriation in the wake of Snoras collapse.
What part of the blame falls on the central bank and its heads? Could the collapse of Snoras have been averted? Just ass importantly, will the Bank of Lithuania be able to learn the lesson from the fallout?
“Now everyone is trying vehemently to find one [person] to blame for the bank crisis. And, no doubt, the scapegoat will be found. However, like the police are not tasked to catch every criminal, in the same way the Supervision Service of the Bank of Lithuania is not responsible for stationing a Supervision Service officer at an every plausible financial swindler,” says Vladimiras Truksinas, an independent financial analyst.
“Swindlers are very smart and sly people. They are always a few steps ahead of those who are in charge of revealing faulty games. Nevertheless, supervision has to be. As the Lithuanian adage says, the pike in the pond is necessary to not let the crucian carp fall asleep,” he said.
Prominent economist Eugenijus Maldeikis, while acknowledging the prompt and swift reaction of the Bank of Lithuania to the Snoras troubles, admits that in the modern history of bankruptcies of Lithuanian financial institutions the Central Bank has failed to draw appropriate conclusions from the fallout of the events.
“I still see the principles of bank activities and control are lacking regulation and supervision, the regulation mechanisms are not fully attuned, and necessary prevention measures have not been adopted, though the Bank has had plenty of time to do that,” Maldeikis told the Lithuianian-language daily Lietuvos Zinios.
Stasys Jakeliunas, a financial analyst, notes that the practice of the same person heading the Bank of Lithuania for many years is detrimental in terms of supervision.
“The same director for dozen years is like blood that does not flow anymore. Sooner or later, this kind of veteran head starts being plagued with illnesses characteristic to all our society: [building] abundant acquaintances in the financial field that are a part of the supervising process, caring more for interests of their own family and relatives than performing their direct duties. No one has ever dared to evaluate the work results of the former head of the Bank of Lithuania,” Jakeliunas stresses, referring to Reinoldijus Sarkinas, who has led the Bank for 15 years and recently stepped down.
Pointing arrows to the Bank of Lithuania, Maldeikis notes that the Bank has long been reluctant to take on control of large credit enterprises.
“It has set a bad example for the banks,” the economist says.
Despite the shake-up of the banking system, Lithuanian banks earned a profit 1.1 billion litas last year.
This result is close to the record-high that was set in 2007, the final year of the economic boom.
The Bank of Lithuania notes that in contrast with the peak period, in 2011 profit growth was driven largely by factors other than expanding banking operations.
“This optimal result was determined by a declining need for loan loss provisioning, as a number of clients who had been looked on as hopeless earlier have proven their ability to continue with their obligations. This showed that banks were too conservative [regarding] client solvency during the crisis at its height,” Vasiliauskas was quoted by the Bank of Lithuania as saying.
Some financial experts note that the operational result of banks also grew, driven by higher net interest rates. The latter jumped last year by 14 percent to 1.3 billion litas, as a result of more active borrowing and an ongoing decrease in the price paid by banks for deposits and other monetary resources.
In spite of nine-digit earnings last year, indicators reveal that the banking system has suffered a lot from the events surrounding the collapse of Snoras. After revoking the bank’s operational license, and with the panic gripping the sector, the assets of the banking system contracted by 2.7 billion litas last year to 78.9 billion litas.
The deposit curve spiraled downward in the first half last year, but moderate deposit growth was observed in the second half – until the news about Snoras broke out.
Bank deposits had reached record heights before the Snoras fall, but the deposit trends were badly affected by the cease of operations at Snoras in mid-November. Fortunately, the tremor suffered by depositors was short-termed and deposits started flowing back to banks in December, which was the month that deposit insurance compensations for Snoras deposit holders were offered.
“The banking sector has withstood stress tests to prove it was prepared for real challenges and attacks of its information systems, a couple of which have been seen recently. It has become more transparent and therefore healthier and more reliable”, Vasiliauskas says.
Amid the obscure economic outlook, banks last year remained conservative in their lending stance, but a slight recovery could be seen. Thus, in the second half of the year, the flow of new loans surpassed the flow of repaid loans for a couple of months. However, this was not enough for gross annual result to be on the positive end: the loan portfolio of operating banks, excluding Snoras, shrank by about 0.3 percent in 2011, to 53.9 billion litas. This fall, however, was far milder compared with the decrease of 9.9 billion and 3.2 billion litas in 2009 and 2010 respectively .
“Regarding lending activities in 2012, I am a moderate optimist. In case the loan portfolio is set on growth this year, the growth will be only minimal. The gloomy economic outlook will slow down lending,” the bank chairman forecasted.
Vasiliauskas maintains that the banking system is sufficiently capitalized and has complied with the current capital adequacy requirements, and the new ones are to be applied in the nearest future.
The largest Lithuanian bank of Swedish stock, SEB, according to preliminary data, earned an un-audited net profit of 379.8 million (110.0 million euros) last year.
The year before, the bank suffered a loss of 12.1 million litas (3.5 million euros) and the Bank Group’s loss amounted to 18 million litas.
Raimondas Kvedaras, President of SEB Bank, says Lithuania’s economic recovery and stronger customer financial standing in 2011 enabled improving the result of the Bank Group.
“Despite the fact that in the second half of 2011 uncertainty in the eurozone and in global markets was rising, expectations among Lithuanian businesses were better [than] compared to 2010, offering an opportunity to increase the bank’s business volumes in the sector of large corporate customers. Also, there was some improvement in the sector of small and medium enterprises,” Kvedaras told The Baltic Times.
He stresses that 2011 saw a significant increase in SEB Bank’s deposit portfolio and growth in the bank’s customer base. The changes were primarily determined by the Snoras events in the last quarter of 2011.
Asked to forecast developments in the sector in 2012, the president said: “In 2012, stabilization of the activities of Lithuanian banks is more likely than rapid development. Lower-pace economic growth will hamper growth in the demand for traditional banking services. Similarly, uncertainty related to the eurozone crisis will not encourage companies to increase their business volumes or the population to increase its consumption appetite: therefore, this year the probability of more pronounced changes remains low.”
The second largest Lithuanian bank of Swedish stock, Swedbank Lithuania, earned a net profit of 592 million litas in 2011, a net increase year-on-year. In 2011, Swedbank’s Internet banking system was recognized as the best in Lithuania by the financial magazine Global Finance for its user-friendly functionality, design and the wide scope of e-services offered.
Bank experts attribute the growth to the 5.8 percent GDP growth in Lithuania last year, compared to the previous year. Overall economic growth was broader, and was mainly driven by exports as well as domestic demand, which grew considerably during the second half of 2011. GDP growth is expected to slow down in 2012 due to eurozone issues and a deteriorating global outlook.
“The increase in Swedbank’s net profit goes hand in hand with Lithuania’s successful return to growth in 2011. A positive economic outlook as well as the improved financial situation of our customers are both reflected in net recoveries, which continued to improve,” Antanas Danys, Head of Swedbank Lithuania, told The Baltic Times.
Howevers he noted that growth is expected to slow down in 2012 due to challenges in the global macro environment that were already visible in the last quarter of 2011.
Other banks also reported growth last year.
Swedish finance groups SEB and Swedbank praised Lithuania’s economic recovery on the visit of Lithuanian PM Andrius Kubilius to Stockholm last week.
“The banks are really glad to see Lithuania’s economic recovery and view Lithuania’s results as very positive. And this proves that the tough austerity policies we implemented several years ago were correct. Banks are returning to profit too. This is no longer related to Snoras in any way. Last year’s data show that banking profits are returning to pre-crisis levels. This is one more sign that Lithuania has overcome the crisis and that the economy and business financing are returning to their normal conditions. I wish the eurozone problems were not giving us a headache,” Kubilius told Ziniu radijas.