Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Latvians seek growth at home and abroad

Competition for market share is tightening in Latvia’s banking sector. Some institutions are seeking organic growth at home, others are looking abroad for expansion opportunities. James Hydzik reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Last year, Latvia’s commercial banking sector posted significant gains in many key areas. Some indicators, such as the net profits increase of more than 37% year-on-year, are the result of a healthy economy. Other wins, such as the record increase in payment card distribution, come from long and sustained efforts by banks to bring efficiency-boosting products to general awareness in the market and make them rational to use. Commercial banking is on the rise in Latvia and is expected to continue to grow but, at the same time, competition is already fierce and recent acquisitions in the sector will only raise the bar.

Toms Silins, CFO and board member of Hansabanka in Riga, points to healthy features of the Latvian banking sector as evidence of its efficiency. Some figures, such as the 9% increase in ATM machine placement last year, the first significant rise in four years, can be assessed with the naked eye; others, like the banking system’s 97% straight-through processing rate for domestic transfers, are less easily seen but are just as important.

“One thing that I can say about our banking industry is that we didn’t have cheques before Latvia became independent, and it’s a good thing that we never started using them,” says Mr Silins. Intra-bank transfers take about two minutes and inter-bank operations within Latvia need a couple of hours to be completed, he notes.

Given that Latvia’s retail sector grew by 25% last year, the rise in ATM and plastic card numbers might not seem surprising. However, this rise is seen more as the culmination of several years of effort by Latvian banks to educate consumers and retailers than as a reflection of the retail upsurge.

“The process really began in 1992, and the distribution of PoS [point-of-sale] machines has been a priority for several years,” says Mr Silins. “We use advertising with our customers to make them aware of using cards for purchases. Hansabanka was also the first to bring chip cards into the country in the mid-1990s.”

Tighter edge

Although the top places in the league tables have remained steady over 2006, and Hansabanka sits at the top with a Q4/2006 market share of 19.9% of commercial bank deposits and a 28.6% share of loans, Mr Silins claims that the struggle for an edge is tightening and that business clients will play an ever-increasing role in the best banks’ performance.

“There’s tough competition with international names behind it,” he says. “While we see some niche banks, especially those focusing on non-resident business, coming up, quality of service will be the primary differentiator that will bring more clients and more activity.”

The purchase of Finnish Sampo Bank by Danske Bank of Denmark, which included Sampo’s subsidiaries in the Baltic states, could make Sampo Banka a bigger player in Latvia in the future, he says.

One direct acquisition in Latvia that is expected to have a direct impact on business clients is the purchase of Lateko Banka by Icelandic investors. Norvik Banka, as the firm is now called, will keep an eye, and a representative office, in Russia but sees the development of the commercial sector as a priority.

“We prioritise our lending toward commercial concerns and, while real estate investments are recognised as important and handled, we tend to finance industrial projects,” says Aldis Upenieks, a board member of Norvik Banka.

Real estate boom

Corporate lending in Latvia is heavily tied to the rising commercial property market, according to Mr Upenieks. “About half of internal demand is related to real estate, and this might be to the detriment of other business aspects. The return rates in the short term are driving this, but we expect a rationalisation in corporate lending to more normal levels of real property-related borrowing,” he says.

Both Mr Upenieks and Mr Silins are pleased with the increasing sophistication of Latvia’s corporate borrowers. Because of the lack of an active public debt market in Latvia, banks are the primary recourse for commercial entities that want to raise funds.

“Our largest companies are the size of larger small and medium-sized enterprises (SMEs) elsewhere,” says Mr Silins. “They have good business ideas. In terms of structuring and working out financing, we are doing a lot of advising. That said, our largest companies already know how they want to do it.”

Mr Upenieks elaborates: “We have a lot of good businessmen with ideas, but we see some lack of understanding of the varieties of financing available to them. Senior debt is pretty well understood, but mezzanine financing isn’t. The need for a proper understanding of risk and reward goes hand in hand with this. But the main difficulty comes in the presentation of otherwise sound business plans.”

Although Mr Upenieks emphasises the need for Latvian businessmen to work closely with professionals on the details of their plans so that they can realise their potential, the basics are already clear to those trying to access financing through banks. “Most of them understand the need for transparency in accounting and ownership. After all, this is a country that is pretty small, and references are easy to get even before a prospective borrower gets serious,” he says.

Market focus

The future of banking in Latvia looks bright as the economy is slated to continue expanding and businesses continue growing. However, the relative stability of rankings in the country shows that market share will not change quickly. If top banks such as Hansabanka continue providing superior customer service, other firms will have their work cut out for them. Messrs Silins and Upenieks regard the expansion of advisory services as one of the keys to corporate banking in the country.

Norvik Banka envisages Latvia as part of a larger picture. “We see Riga as becoming a regional financial centre,” Mr Upenieks predicts. “We’re pushing for organic growth in Armenia, for instance. We’ve bought a small Russian bank and, although we have a presence in Moscow, we’re planning to open in St Petersburg as well. We see that it should be easier than trying to consolidate internally in Latvia.”

That international vision is expected to prove beneficial when working within Latvia as well. “We have to be oriented not only locally but also on foreign investors coming to the country,” says Mr Upenieks.

Mr Silins looks for opportunity inside Latvia to keep Hansabanka on top. “Cash management solutions will become more important, especially for larger corporations. Lending expanded by more than 45% in 2005-06, and we see it growing over the next two to three years. Project and acquisition financing could develop more as well. And it would be hard for a newcomer to work their way in by an acquisition. It’s already very competitive and I don’t see much change in that,” he says.

Was this article helpful?

Thank you for your feedback!