Latvia's fledgling economy has been struck by a few banking crises that have seriously damaged people's confidence in the banking system.
Nearly 10 banks disappeared in the first banking crisis in 1995 and money that had come out from under the mattress was put back. The 1998 Russian financial crisis delivered a fatal blow to the oldest commercial bank in Latvia - Rigas Komercbanka - which had heavy investments in Russian government bonds.
Seemingly defying common sense and in the face of more than a few raised eyebrows, Komercbanka attracted a strategic investor. Norddeutsche Landesbank (Nord/LB), the 10th largest bank in Germany, purchased over 90 percent of the crippled bank in the summer of 2000 and renamed it Pirma Banka.
After suffering nearly 5 million lats ($7.8 million) in losses in 2000, the year 2001 ended with a profit of 301,000 lats. In 2001, Pirma Banka's assets increased 150 percent and deposit volumes grew 170 percent.
The bank, which a few years ago was a synonym for post-Soviet reform failure, is now one of Latvia's success stories.
Have you succeeded in winning customers' confidence back?
The difficulty at Pirma Banka was that the bank was actually closed and people in Latvia lost money, depositors as well as shareholders. When Nord/LB came as a strategic investor we had to cope with this kind of situation. The trust and confidence of your customers is one of the most vital things in banking. And to regain it was the main focus of the year 2001. We have done it step by step.
We had 5 million lats in losses in 2000, and I have said several times that it was in accordance with our initial investment plan. In due diligence we saw a lot of areas which needed improvement, and we have taken as cautious approach as possible.
We have introduced some new products like mortgage loans, for example, which other banks have started to copy. And that shows that we are on the right track. And when you are early on doing things like that, it (creates) the potential to get confidence back. Our customers see that we are an innovative and modern bank.
Besides that we had several equity increases last year, the last and biggest one was in September last year where we received an 11 million lat equity increase from our main shareholder, Nord/LB, which now holds 99 percent of our share capital. Pirma Banka has 22 million lats in equity, putting the bank fourth on Latvia's banking market in terms of capital and reserves.
Along with the liquidity ratio, the assets-to-capital ratio is an indication of safety to the customers. This shows that there is confidence and a long-term (commitment) from Nord/LB to be in Latvia and not to show up for a few years and then go home.
Also the recent purchase of 76 percent of the Lithuanian land bank, Lietuvos Zemes Ukio Bankas, is helping us to regain more and more confidence. Because again it shows that Nord/LB is very much interested in this area.
What was the main attraction of Rigas Komercbanka for Nord/LB as a strategic investor?
In 1998, Nord/LB adopted its northeast European strategy mainly to follow the routes of existing, longtime customers in the Scandinavian region. In terms of Nord/LB's total assets in this region, the biggest volume still is with Sweden, Finland, Norway and Denmark because it is there where our big, corporate clients are. Our potential - we are a triple-A rated bank - gives us good lending resources, therefore we can lend to good quality corporate clients in the Scandinavian region.
Later we opened a representative office in Vilnius because at that time there was no potential to invest in a bank. Then the branch in Stockholm was opened.
In Latvia, Rigas Komercbanka was the first opportunity to buy a bank that fit into our strategy. After the re-opening of Pirma Banka in 2000, the then management team's main task was to find a strategic investor because for the medium term and long run, a bank without a strategic investor would not have a chance to survive.
When the Bank of Latvia stepped in as a shareholder and decided to re-open Rigas Komercbanka, it was a clear signal that this bank had a future and potential.
From my point of view, the problem of Rigas Komercbanka was not the quality of its people. It did not have a bad loan book or a bad track record. This bank was third in Latvia in terms of assets and when I speak today to old customers who, thank God, are coming back to us, they say that Rigas Komercbanka was a very good bank.
But the decision to buy too many Russian bonds - this kind of investment in a risky area - and then the Russian crisis combined to bring the bank down. And therefore it was not the structural problems of Pirma Banka, or the former Rigas Komercbanka, and not a quality problem with its staff or customer basis. And therefore Nord/LB said "OK, it's worth a try."
And after such a history the price for the bank was not so high.
How much did you pay for the bank?
The purchase price is confidential as far as it is possible to keep anything confidential in Latvia. We made the deal with the European Bank for Reconstruction and Development and the Bank of Latvia, and we can't disclose the details of the deal.
Is the German strategic investor the main reason for confidence?
Part of the reason. I hope this is not the only reason because the quality of our service is most important. I think banking means to serve the customer and do a good job serving the financial needs of customers.
Keeping in mind this lack of confidence, we very much played the Nord/LB card. Definitely, it's a very important aspect of our image we would like to give to our customer.
But more and more we feel that people are realizing that we are willing to provide good services and deliver a good product for reasonable prices. Nobody will come to Pirma Banka because they have a nice shareholder only.
What are Pirma Banka's plans for the future?
We are interested in corporate finance but with a very strong focus on retail. So far we have been very much focusing on medium-sized and larger corporate finance activities plus all kinds of international investment.
We are happy to serve shareholders coming from Europe, America, wherever, who have an interest in doing something in corporate finance. We have not built up all kinds of highly specific departments here in Pirma Banka because we have an agreement with Nord/LB to use its resources. So in cases of privatization, mergers, acquisitions, project finance, we are able to service our customers with the assistance of Nord/LB.
On the retail side, we are trying to increase our market share. There we have put the focus on product development, like mortgage loans, express loans and other new products. We are also improving our card business. We feel that our product range now is complete, but it doesn't mean that it will not be improved. Dealing and trading in bonds and securities, for example, still is on a starting level.
I just came from a meeting with a representative of the European Investment Bank where we were talking about a 10 million euro refinance loan for Pirma Banka for small- and medium-sized enterprise lending. With the refinance capacity of the European Investment Bank we will be able to get a very attractive fixed interest rate financing for medium-sized and smaller companies in Latvia. The timing of this refinance line is April of this year.
In 2002, we plan to modernize our branches everywhere, but the main focus will be on Riga. Although we are doing business all over Latvia and have branches in all the largest cities, the main business volume still is in the Riga region, and therefore we feel a little bit underrepresented in Riga.
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