Vilniaus Bankas calls off marriage to Hermis

VILNIUS - In the West, bank mergers make regular headlines. In Lithuania, it's the merger that did not happen that seems to be weighing heaviest on most bankers' minds.

Last Thursday, March 18, the Bank of Lithuania was preparing to issue a decision whether or not to allow Vilniaus Bankas to purchase 43 percent of the shares in Hermis Bank. Hermis considers this a hostile maneuver that would have given Vilniaus Bankas 50 percent of the voting rights on the Hermis board. Trading on the Lithuanian bourse slowed as the country's financial entities held their breath.

Then, a surprising development happened: Vilniaus Bankas withdrew its application. It's explanation: Hermis was not supplying enough information about itself to its shareholders.

"Our withdrawal of the application is related to the fact that Vilniaus Bankas management has not received any reliable financial information about Hermis' financial activities," said Alexander Federas, Vilniaus Bankas' spokesperson.

"Their audit report for 1998 has not been prepared, which we at Vilniaus Bankas have already done a few weeks ago. That also means that nobody can even say what these shares [of Hermis Bank] are worth. Without having this reliable financial information, Vilniuas Bankas cannot make a proper calculation."

But the final straw, Vilniaus Bankas contends, was Hermis' recent announcement to acquire the tiny Industrijos Bankas. Some media outlets speculated that Hermis had recently announced a merger with Industrijos Bankas, Lithuania's smallest bank, to head off Vilniaus Bankas' acquisition.

"Industrijos Banks was the final point of the decision to withdraw," Federas said. "The idea to withdraw had been contemplated some weeks before."

Hermis, which had been fretting a go-ahead from the central bank, immediately fired off a response.

"Any explanations Vilniaus Bankas may offer as to why it withdrew the petition is only an attempt to justify Vilniaus Bankas' mistakes and thoughtless actions," Hermis' board was quoted as saying.

Hermis claims the decision to buy Industrijos was based on criteria independent from Vilniaus Bankas' attempt to buy in.

"We want their market share," said Gintautas Galvanauskas, deputy chairman of Hermis. Industrijos has approximately 60 million litas ($15 million) in assets and several key industrial clients for Hermis, he added.

However that merger is still far from complete and there is some speculation that Hermis will call off the Industrijos acquisition now that the takeover threat is gone. Galvanauskas played that speculation down.

"The general decision was made," he said. "We still have to make due diligence. The merger is not a very fast process."

Galvanauskas is not certain that Vilniaus Bankas will not try to acquire Hermis again later. "They defined their position very clearly. They kept the objective the same, they just changed the tactics. I assume that they will try to come again into our bank but not from the main entrance," he said.

The day after Vilniaus Bankas' withdrawal, the central bank's board of directors convened and decided not to disclose its decision. However, other "clarifications" it made at that meeting could affect the relationship between Hermis and Vilniaus Bankas.

First, Vilniaus Bankas is now considered as a part of a group of buyers. That's because of its alignment with Latvia's Unibanka and Estonia's Uhispank — the three are partly owned by the Swedish bank Skandinavska Eskilda Banken. Combined, Unibanka and Vilniaus Bankas owned 17 percent of Hermis, a condition which Galvanauskas says precludes it from having voting rights. "They have lost already the voting rights for the time being," he said.

The daily Verslo Zinios reported March 22 that Unibanka has sold its shares in Hermis. This changes the voting rights situation.

According to a statement issued by the central bank board, groups buying blocks of shares in a bank must ask for permission from the central bank first.

The central bank's statement said that while it was stopping discussion of the case, it would be drafting a new legal act "regulating the allowable level of systemic risk concentration arising through bank acquisitions and mergers" within a month.

Reinoldijus Sarkinas, the central bank's board chairman, has been notably tight-lipped about the Bank of Lithuania's non-decision.

"Normally I believe that mergers will happen and we will support any merger if it will offer benefits to the country, its clients, and monitoring policy," he told TBT. "There can't be a very clear answer in this field."

Sarkinas is particularly concerned about the scenario of Lithuania's largest banks trying to merge with other large banks. Vilniaus and Hermis banks comprise two of Lithuania's four largest banks, he said.

"Of course, we would take a look at mergers between the four large banks," he said. "Any bank merger is possible, but any bank merger has to be viewed in terms of risk, systemic risk, and the implications on the security of the state."

Federas claims that Vilniaus Bankas still maintains a "strategic interest" in Hermis, but there is no plan on the table as yet to acquire a controlling interest in the bank.

"The proposal is withdrawn and will never be presented again in the same shape or form," he said. "When Vilniaus Bankas sees the reliable, audited results then it will consider whether to make a new proposal or not. The strategic goal of investments which we have made in Hermis Bank stays at roughly 9 percent of the shares. This is a long-term investment."

Another factor delaying Vilniaus Bankas' next move is the privatization of the state-owned Agricultural and Savings banks. Such a privatization, says Federas, would remove the specter of monopolization hovering above the industry.

"If the privatization is successful, we would have big, strong competitors working in the market," he said.