(H/T to Edward Hugh /A fistful of euros)
It seems the following little press release from Latvia’s Parex Banka went mostly unnoticed by the Western press last Friday. Parex, with assets of 3.1bn lats ($5.6bn), was the Baltic region’s largest independent bank until it was taken over by the Latvian government to prevent a bank-run.
From the release (our emphasis):
Parex banka wraps up the results of 1H2009
According to Parex banka’s unaudited financial results as at 30 June 2009, the loan portfolio of the Bank was 1.63 billion lats, deposits – 1.64billion lats, total assets – 2.70 billion lats, but the amount of capital and reserves in the end of June 2009 reached 183.6 million lats..
During this period of time the Bank has successfully completed the restructurization of syndicated loans, stabilized its customer base, as well as concluded the agreement on the entering of the European Bank for Reconstruction and Development into the shareholder structure of the Bank.
Furthermore, the bank has also substantially decreased the administrative costs, cutting the expenses by the total of 12 million lats. The cost reduction is expected to reach 30 million lats by the end of the year. Moreover, moving the Bank’s Headquarter in Riga from current 11 buildings to one office building on Republika square will save Parex Group additional 2.7 million lats.. In 1H2009 Parex banka increased its capital base to reach the liquidity and capital adequacy levels set by the regulator.
Similarly, over the period of last six months Parex banka has attracted more than seven thousand new customers, especially in the sectors of retail and small and medium size enterprises. Having made a detailed evaluation of assets and establishing substantial provisions for the asset value decrease, Parex banka concluded the first half-year 2009 with the total net losses of 44.5 million lats, including the established provisions in the amount of 46.6 million lats. Besides, Parex banka’s interest payment to the State Treasury for this period of time comprises 20.5 million lats. Parex banka continues to closely monitor changes in the quality of assets to further minimize potential losses from the asset value decrease.
Besides, in order to find the most effective solution for the issue of non-performing loans, the Bank has established a new structural unit that is working with clients and looking for mutually most advantageous solutions in the current economic situation.
About Parex banka Founded in 1992, Parex banka offers universal banking services throughout the Baltic region, the CIS and other European nations such as Germany, Switzerland and Sweden. Parex Group companies operate across the banking, finance, leasing, asset management and life insurance sectors. Parex banka is the only partner of American Express in Latvia and Lithuania, allowed to issue American Express credit cards. Currently, the Latvian Privatisation Agency is the majority shareholder of Parex banka, holding 95,3% of the Bank’s shares.
Parex is scheduled to release a final version of the results on August 31st, but the above already begins to tell an interesting tale.
Total assets now stand at 2.7bn lats, of which 1.63bn lats represent the bank’s (deteriorating) loan portfolio against which provisions of 46.6m lats have been taken — that at least is how we understand the release. The bank’s net loss in the first half was consequently 44.5m lats (which is about €63.3m). Okay, so that’s not that great a sum and probably not what’s leading to a Latvia-IMF stalemate.
The bank’s capital and reserves meanwhile amounted to 183.6m, giving as far as we can make out an overall capital ratio of some 6.8 per cent.
But it’s best to compare to the previous quarter (when the bank was accounted for separately and as a wider group, so now the direct comparable would be the larger group figure):
As at 31 march 2009, the loan portfolio of the Bank and the Group were respectively 1.74 and 1.99 billion lats, deposits — 1.92 and 2.03 billion lats, total assets — 2.87 and 2.97 billion lats. At the end of March 2009, the capital and reserves reached respectively 70.4 and 68.0 million lats, respectively
And that’s the story.
The bank appears to hold 1.64bn lats in customer deposits, compared to 2.03bn lats in the previous quarter – that’s a very significant drop.
Meanwhile, the bank, which in March was 85.15 per cent owned by the Latvian Privatization Agency (LPA) and 14.86 per cent by other shareholders, has further changed its ownership structure.
And here’s the peculiar thing. On April 3rd a press release – still accessible via the Reuters system – said LPA shareholders had decided during their EGM to raise 227m lats (€323m) of capital from a state investment via a 165m share issue — valued at 1 lat per share — and a 62m lat subordinated debt issue. The release states that this was to ensure a capital adequacy ratio of 12 per cent.
There is no sign of this release on Parex’s web site website however.
On May 11th, the European Commission eventually agreed a capital restructuring. A Parex release confirms the terms agreed were the same as those stated above, with one difference: the restructuring would now be achieving a capital adequacy of 11 per cent. As the terms remained the same, one must assume the drop in capital adequacy was the consequence of a deteriorating picture at the bank.
Fast forward to Parex’s AGM on May 29th however, and shareholders actually end up agreeing a completely different capital raising altogether:
As previously announced the Privatisation Agency has made an investment of 140 750 000 lats into SC Parex banka capital; thus, fully covering the previously announced issue of shares, and issued a subordinated loan amounting to 71 527 766 euros (50 270 000 lats) on 22 May 2009.
Obviously, this significantly differs from the EC-approved restructuring above totalling 227m (€323m), since the latter clocks in at 191m lats (€271m) instead. The change also presumably impacts the EBRD’s proposed 25 per cent stake, if the company’s share holdings as stated on March 31st are anything to go by. Interestingly, recent Baltic news reports suggest the EBRD will now be buying 59.5m lats shares instead of the 57.5m previously agreed. We don’t understand how either of those numbers would now amount to 25 per cent.
Meanwhile, a clear update to Parex’s first quarter report on March 31st further contradicts its previous releases above:
On 24 March 2009, the Government of Latvia made a decision to increase the share capital and to provide subordinated loan to the Bank totaling LVL 227 mln. On 11 May 2009, the European Commission approved share capital increase of LVL 141 mln and additional subordinated loan amounting to LVL 50 mln. On 22 May 2009, the Privatisation Agency made the respective investment into the Bank’s capital, as well as issued the subordinated loan in the amount set by the European Commission. On 16 April 2009, a share purchase agreement was concluded between the Privatisation Agency and the European Bank for Reconstruction and Development (EBRD). According to the terms of the Agreement the EBRD will purchase 57.5 million voting shares of the bank obtaining 25% plus one share of the Bank’s capital.
No date is given for the update, but it clearly must have come as recently as May 22nd from the dates specified. The practice of back-updating your quarterly reports, meanwhile, seems a curious phenomenon in its own right.
All of which perhaps goes some way into explaining the following Reuters report from last Friday:RIGA, July 17 (Reuters) - Latvia’s Finance Ministry said on Friday it had asked the state prosecutor’s office to probe the state takeover last year of a major bank that helped trigger the need for the country’s IMF-led bailout.
The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country’s second largest bank, Parex, and the way it was done.
Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor’s office to investigate the takeover to clear up such controversies. “Given that Parex Bank is now state property it is necessary to get clarity … so that society can be sure that the takeover of the bank took place honestly and that no conscious wrongdoing or neglect took place,” Repse said in a statement.
He said he wanted the prosecutor’s office to look at instances of former bank employees getting unduly large salaries and lay off compensations. He also wanted the probe to look at why the former owners of the bank got large amounts of interest income each month. Parex costs and the economy’s steep slide into recession were the main reasons Latvia had to appeal for international aid last year, getting a 7.5 billion euro rescue led by the IMF and European Union.
All we can tell is: everything’s not what it seems in Latvia.
Related links:
Don’t bite the hand that feeds, Latvia - FT Alphaville
EU-IMF breakdown over Latvia? – FT Alphaville
D-day in Latvia- FT Alphaville