Integration into Scandinavian banking market

Changing sentiments towards the emerging markets triggered an outflow of portfolio investments and made it increasingly harder for banks to refinance their outstanding foreign liabilities. At the same time the BoE, in an attempt to cool down the overheating economy, increased minimum capital adequacy to 10 % and tightened reserve requirements. The above-mentioned factors triggered a sudden surge in interest rates, which combined with the falling inflation, brought about positive real interest rates. The firms found it increasingly difficult to generate competitive projects which would sustain the high real interest rates.

The year 1998 seriously shook the economy of the Baltic states. The Asian economic crisis diminished investor confidence and added a huge risk premium to new financing. At the same time the subsequent collapse of Russian economy decreased the export markets and damaged the real sector. These developments left the Baltic banks with 1) rapidly deteriorating asset quality; 2) maturity mismatch between short-term foreign liabilities and longer-term domestic assets; 3) equity and fixed income instrument related losses from the Baltic states and Russia.

The deteriorating profitability and rapidly falling capital adequacy ratios forced the banks to seek mergers and/or form strategic partnerships with foreign financial institutions in order to improve their economic situation. During the first wave of mergers the number of banks dropped from twelve in late 1997 to six by the first half of 1999. Consolidation in Latvian and Lithuanian banking sectors was a bit slower, but the trend is clearly evident. An example of this is the recent bankruptcy of Latvia’s fifth largest bank, Rigas Komercbanks, and the merger of the two largest private banks in Lithuania (Vilniaus Bankas and Bankas Hermis).

A much needed capital injection exceeding USD 250 m came from two major Swedish banks, Skandinaviska Enskilda Banken (SEB) and Swedbank. The strategic acquisitions by the aforementioned banks have led to the emergence of two large competing banking groups in the Baltic countries. Swedbank was the first to reach the Baltic market, by acquiring a strategic stake in Estonian Hansabank which holds a dominant position in the Estonian market. Pretty soon SEB bought stakes in the so-called ‘troika’, consisting of the Eesti Ühispank, Latvian Unibanka and Vilniaus Bankas who had co-operated before as well. Latvian Unibanka and Vilniaus Bankas are the leading banking institutions in the respective markets, while the Eesti Ühispank holds the second position after Hansabank. SEB has declared that it has no plans to merge the three banks and intends to keep them separate, at least for the time being.

Through the owners of stakes, the Estonian banking sector has been fully integrated into the Scandinavian banking circles from the year 2001. Scandinavian banking groups own stakes in four major commercial banks that together cover 97 % of certain parts of the market. Investments done by Swedbank and SEB have considerably improved the banks’ credibility and stabilised their balance sheets, which have caused a rapid return to profitability.

Major foreign shareholders in Estonian banks
Estonian local bank
Major shareholder
Country of origin
Hansapank
SwedbankSweden
Eesti Ühispank
Skandinaviska Enskilda Banken
Sweden
Sampo Pank
Sampo-Leonia
Finland
Merita Pank Merita Nordbanken
Finland/Sweden


Estonian banks have also been active in employing new technology: by the end of 2000, the four major banks boasted 265 000 Internet and 139 000 Telebank customers. Such indicators place Estonia on the same level with most industrial countries regarding the number of electronic bank users.

Details about this article