Building financial bridge between East, West

As it winds down to a close, the year 2002 may well be remembered not only as the year the Baltic countries "got the invitations," but also as the Year of the Banks.

With the Baltic economies continuing to accelerate, the financial services sector is poised not only to consolidate recent gains but also to attempt to position itself as the "financial crossroads" between West and East, according to bankers.

By using a combination of strong shareholder base, sharply increasing assets and geography, the three countries' banks will look to develop operations in Russia and other CIS countries, where the local financial institutions are still struggling and Western capital is generally reluctant to go.

Baltic banks have intensified the search for inroads to the vast Eastern market. Latvia's Parex Bank has participated in syndicated loans to Russian and Kazakh banks, and recently helped underwrite a sovereign Eurobond for Ukraine.

The Hansabank Group announced last month that, together with the European Bank for Reconstruction and Development, it will launch leasing and factoring operations in Russia.

Lateko, Latvia's eighth largest bank, recently announced it has been working the past six months on a plan to begin operations on the consumer lending market.

Using their knowledge of Eastern markets, and recently acquired experience of western-style finance, Baltic banks are intensifying efforts to become the financial bridge between East and West.

"We are in good position of becoming a bridge," said Teodors Tverijons, president of Latvia's Commercial Banks Association. "Baltic banks speak three languages fluently, and this is very important in relations with customers," he said, referring to the local language, English and Russian.

"We have a tradition of close relations with [the East]. We know the mentality and customer needs of Russian clients," he said, adding that presently 50 percent of Latvian banks' clients are non-residents.

"There is a good deal of two-way flow," said Michael Bourke, president of Latvia's Reitumu Bank.

As Bourke explained, after the crisis in 1998 Western capital is nervous about going directly [into Russia], and CIS-based banks are not able to provide local industry with quality services.

Baltic banks are "more transparent, efficient, and safer," according to Bourke. Close relations with Western financial institutions and practical working knowledge of CIS countries, said Bourke, is turning the Baltics into a "gateway for Western capital."

The potential for growth is there. Nine-month profits for Latvia's 22 banks amounted to 73 million euros, up 34 percent compared with the same period last year.

Profits at Estonia's Uhispank group jumped 18 percent in the year up to Oct. 1, 2002, while nine-month profits soared 74 percent to 19 million euros.

Hansapank, the largest bank in the Baltics, reported a net profit of 36.6 million euros, up 33 percent from the same period last year. By return on assets, Hansapank is ranked third in Central and Eastern Europe by Standard & Poor's, a rating agency.

Vilniaus Bank, Lithuania's largest financial institution, posted nine-month profits of 28 million euros, up 45 percent from a year ago.

With more assets to distribute, Baltic banks will jostle for market share, particularly on the retail side.

Estonia's banks, of which there are only seven, lead in terms of lending to individuals, accounting for some 47 percent of the 1.4 billion euros that had been loaned to private individuals in the Baltics as of midyear.

In fact, it is private lending that is perhaps the most remarkable part of the Baltic banks' success story. Baltic residents, eager to build homes, remodel apartments and purchase consumer goods have been quick to use the low interest-rate environment.

According to Emor, a polling agency, 31 percent of Latvian, 28 percent of Estonian and 13 percent of Lithuanian families have procured loans, up dramatically from last year.

The competitive market, particularly among consumers, has led many, including the Bank of Estonia, to issue a warning of potentially poor risk management and loan portfolios. Analysts, however, don't feel that the market is overheated.

"Baltic individuals were not in habit of borrowing, and this trend has just picked up speed in recent years," said Danielle Hruby, a financial analyst with Fitch Ratings in Frankfurt.

"I am certain that if you compared average borrowings per person to average salary in Estonia to the European average, it would still be very low (and Europeans borrow far less than Americans). That means that there is little to worry about at this point in time.

It is important to remember, said Hruby, that Baltic banking has been evolving from a low level, particularly in retail, so that the high rate of lending and borrowing is a normal part of development in the region.

"GDP growth has been very rapid, and incomes of companies and individuals have been growing quickly in line with it," said Hruby.

Analysts and regulators agreed that the presence of big foreign banks in the region has acted as the best guarantor against any possible crisis.

While admitting there is an asset mismatch in Latvian banks (banks borrowing short-term money and lending long-term), Uldis Cerps, chairman of Latvia's Finance and Capital Markets Commission, said this was monitored closely by the commission.

Cerps said that Latvia's banks, which together hold the largest share of assets in the Baltics, were "well capitalized" thanks to strong foreign shareholders.

No doubt foreign capital dominates the Baltic banking system. Eighty-eight percent of the total registered capital of Lithuania's banks comes from non-residents, while the numbers for Estonia and Latvia are 86 percent and 64 percent, respectively.

Still, each of the three banking sectors retains its unique characteristics. Estonia's financial sector, for example, is dominated by Hansapank, which accounts for over 50 percent of all banking assets and nearly 57 percent of all loans.

On the other hand, Estonia is marked by a high degree of technological savvy, with some 635,000 customers using the Internet to do their banking and another 200,000 using the telephone.

Latvia's banks have proven to be the most aggressive lenders, loaning out more than 3 billion euros, or 38.8 percent of all loans in the Baltics (as of June 30), even though studies have shown that Latvians earn and save less than their neighbors.

Lithuanians, by contrast, tend to be credit-skeptic, and statistics show that they both borrow less and use financial products such as debit cards less than do Estonians and Latvians. Individual deposits in Lithuanian banks rose by only 4.3 percent over the first nine months of the year, by far the slowest rate of growth in the Baltics.