German bank takes Pirma Banka shares

RIGA - He took the challenge and the outcome was good, Pirma Bank President Haken Hallaker is saying 15 months after the central bank closed down the former Riga Komercbanka for lack of capital.

Today the ostensibly Riga-based bank is recapitalized and restructured and set to recapture its slot among the big five banks of Latvia after German bank Norddeutsche Landesbank Girozentrale bought up 90 percent of shares on May 18. Moody rates the German bank's long-term debentures Aa1 and Fitch IBCA gives them AAA.

Ostensibly Riga-based? Depends on how one looks at it. Nord/LB has its roots in northern Germany and is banked by resources in Hanover. Nord/LB's umbrella, Pirma Banka will be able to introduce project and export financing, as well as comprehensive consultancy services for different client groups. Pirma Banka is now Nord/LB's subsidiary, but scratch it and Pirma Banka is Latvian all the way, said Hallaker.

"Pirma Bank is a very Latvian bank with a German flavor," he said. "It will have the reputation of a German bank and have an attraction for German companies doing business in Latvia, but won't deal only with German businesses. Local employees [about 400] will continue to staff the bank and work with local clients in all of Latvia."

Restructuring and recapitalization required the European Bank of Reconstruction and Development and the Bank of Latvia to capitalize loans. Private depositors also had a choice to participate for which they received incentives or to pull their money out at a penalty. Syndicates of lenders led by Fuji Bank and Landesbank Schleswig-Holstein assisted in the early stages.

The effort has saved Latvia a black eye in investment circles and been worth the effort, Hallaker said.

"It has not been easy. In the long perspective it is the best solution. It has been better to restructure than to liquidate, in which case we would have lost 90 percent," he said. "That alternative wouldn't have been good for anybody."

Getting the bank open again saved Latvia from suffering comparison in this case to that of the failure of Banka Baltija and the subsequent banking crisis of 1995, although Hallaker says such a comparison doesn't stand up.

"One [Banka Baltija] resulted from mismanagement. The situation with Riga Komercbanka resulted from too much exposure to Russian markets.

He conceded that the decision to take on more risk than the bank could handle when Russia effectively devaluated the ruble bears scrutiny.

Would have been heroes, etc.

Pirma Banka has bid goodby to any return from high-risk loans in Russia. Getting Pirma Banka on its feet cost the EBRD $9.5 million, an initial equity investment in 1996 and another $4.5 million in 1999 as fresh equity. EBRD got very little back even with the sale to Nord/LB for a yet undisclosed amount.

"The successful rehabilitation of Rigas Komercbanka represents the first voluntary bank restructuring in Latvia and possibly the first in central and eastern Europe. While this sale amounts to only a small recovery of the EBRD's total investment, it greatly supports the transition toward a stronger bank and a stronger banking sector," said David Hexter, EBRD's acting head of banking.

The Bank of Latvia, which pumped in $15 million to stabilize the bank a year ago was happy with the sale to Nord/LB.

"We are delighted to welcome Nord/LB as a strategic investor in Pirma Banka, Einars Repse, governor of Bank of Latvia, said. Nord/LB is a first-class banking institution, and its presence in Latvia will contribute to the strengthening of the banking sector in our country."