Parex Bank, Latvia’s second largest with Lt3.4bn (€4.8bn) in assets, is the bank that broke the Latvian government and forced it to seek help from the IMF.
In a Baltic market that is dominated by Scandinavian banks, Parex always stood out as the last remaining big independent commercial bank. Its founders – Valery Kargin and Viktor Krasovitsky, once Latvia’s richest men – had considered selling out on numerous occasions but had always felt Parex was worth more than other banks were prepared to pay.
The founders’ prudent management had enabled Parex to survive several banking crises during the 1990s. However, when the global financial crisis rocked the already weakened Baltic economies last October, Parex was left cruelly exposed as the only big bank without a foreign parent backed up by state guarantees.
Parex was also undone by its success in attracting non-resident deposits, which made up almost half of all its deposits in Latvia. Since its foundation in 1992 – a year after Latvia broke away from the Soviet Union – Parex had built a lucrative business servicing Russian flight capital, once boasting “We are closer than Switzerland” in its advertising. This proved a fatal weakness when Russian businesses scrambled to withdraw their deposits during the global liquidity squeeze.
Domestic depositors also rushed to withdraw their savings amid worries over how the bank would repay €775m of syndicated loans during the credit crunch.
In November, the founders were forced to throw themselves on the state’s mercy, eventually agreeing to give away their 85% stake for a nominal Lt2.
The government, facing a huge bill for rescuing Parex, was then forced to seek a €7.5bn loan from an international consortium led by the IMF and agree savage spending cuts. The government was brought down in February 2009 by internal divisions and popular unrest over the austerity package.
Today, Parex has been stabilised through an injection by the government of Lt165m in equity and Lt6.2m in subordinated debt, plus Lt57.5m in equity and €22m in subordinated debt from the European Bank for Reconstruction and Development (EBRD). This has boosted the bank’s capital adequacy to 12%.
At the same time, banking syndicates have agreed to reschedule their €775m in loans and investors holding €200m of Eurobonds have been placated.
Chief executive Nils Melngailis, former head of Latvian telecom Lattelcom, says the EBRD injection will enable Parex to resume lending. He also hopes that the EBRD will help Parex secure new external funding that will allow the state to withdraw funds it has put on deposit in order to improve the bank’s liquidity.
Depositors are already returning, and Mr Melngailis expects a “positive reaction” to the EBRD taking a 25% stake.
Parex still faces a painful test over the next two years while Latvia endures the most severe recession in the EU. The bank made a Lt124m loss in 2008 after a Lt146m impairment charge, reducing the bank’s equity to Lt77.5m before the injections.
Further deterioration in the bank’s loan portfolio is inevitable, particularly in its real-estate exposure, and Mr Melngailis says it is likely that the bank will make another loss this year, though “significantly less” than last year.
“Our current projections indicate that we are now secure and we do not need any more funding from the government this year,” he says.
The government has appointed Nomura to advise it on selling the bank, but nobody expects any sale in the near future. Instead, Mr Melngailis says Parex is considering what individual businesses to divest, though it can afford to wait for markets to recover as none of these are currently losing cash.
Parex is strong in corporate banking and asset management across the Baltic states, and runs lucrative car-leasing operations in the former Soviet Union.
“We need to define with the EBRD what our core region will be,” he says. “This will drive what divestments will be made.”