The Baltic Investment Market

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28 Οκτ 2013 (πριν από 4 χρόνια και 17 μέρες)

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The Baltic Investment Market

Investment & Development Finance for
the Baltic Recovery

James Oates

CEO Cicero Capital

Executive Summary


The Banking Systems of Estonia, Latvia and Lithuania are growing more
inefficient as the result of a lack of competition



The Financial system is now insufficiently diverse to support a sophisticated
modern economy



The Baltic economies will need to address this growing problem in order to
improve their overall competitiveness.



Liquidity needs to improve in the Corporate and personal debt market as well
as the banking system overall



Mandates for both corporate and retail finance will be needed in order to
achieve an sustainable general recovery.





Concentrated Banking System



Swedbank has
the
biggest pan
-
Baltic market share
.

A
t the end of
2008

it had
45%
share in Estonia, 26% in Latvia and 24% in Lithuania.


SEB group is the second biggest bank in the Baltics.


Rest of the market is relatively fragmented

Swedbank
SEB Pank
Danske Bank
Nordea Pank
Non members of EBA
Eesti Krediidipank
DnB Nord
Tallinna Äripank
UniCredit
Single banking group controls more than 30% of the Baltic market



Increasingly Limited Competition for both Corporate and Personal Banking Market



No Significant Mutual Banks or Credit Unions and No Mortgage Banks



Although money transmission remains relatively advanced
-

the core problem is
inefficient capital allocation



This is exacerbating the negative impact of de
-
facto


(ERM II) on regional macro
-
economic competitiveness



SEB & Swedbank comprise 70% of Banking Market in Estonia, Lithuania, 60% in Latvia

General Issues in Baltic Banking Sector



No Secondary Credit market
-

lack of market mechanism and no wholesale credit
provider to buy impaired assets



Financial Disintermediation
-

Commercial Paper and Bond market
-

is not accessible
to 99% of Corporate sector owing to size issues



Limited Development Bank Activity


EBRD reduced commitment to region & has size issues: Funds preferred route


EIB has invested via funds, limited mandate


NIB only partial mandate for the region, size issues



Equity opportunities limited by scale and lack of large private equity participation



No Capitalised Local Investment Bank
-

Corporate Finance Agents

SEB & Swedbank comprise 70% of Banking Market in Estonia, Lithuania, 60% in Latvia

Key Issues in Baltic Corporate Banking



As a result of
massive reduction in

new loan issuance,
the
aggregate loan balance
decline
d
.


The
focus on loan amortization

by the Banks
has caused liquidity problems for
corporates
. It
was
very difficult to

maintain normal capitalisation or finance any
new projects.

Banks focus mostly on loan amortization

Aggregate loan balance

Loans granted by groups of customers (loan stock): absolute figures
(EEKs, mln) and y
-
o
-
y change

Source
: Bank of Estonia

0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0
20000
40000
60000
80000
100000
120000
140000
Q1 2004
Q2 2004
Q3 2004
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Change in loan
stock:
Commercial
undertakings
Change in loan
stock:
Individuals
Loan stock:
Commercial
undertakings
6

Drastic fall in Loan issuance

-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Commercial undertakings
Individuals

Due to the global problems in
global
financial sector
,

specific issues in Sweden and
most importantly in the Baltic, all Scandinavian banks that control Baltic financing
market have taken credit rating downgrades and loan write
-
downs.



The
banks hit
the
brakes hard


and
issuance of new loans halted almost
completely

for a prolonged period
.


Banking System is the dominant source of Finance and Credit



Evidence is necessarily anecdotal: policies of the banks are commercially
confidential



Public Statements by leading Swedish Banking Figures suggest long term policy of
writing down, not asset disposal in the expectation of recovery.



However
-

a profound conflict of interest exists between the bank as a lender and
the bank as effective owner of the assets.



This conflict can only be imperfectly managed
-

and regional interests are not
helped by repatriation of major investment management functions away from
Baltic

Write
-
off rather than write
-
down is conservative, but the Process has been “managed”

Banks are “managing” a work
-
out



Evidence is necessarily anecdotal: policies of the banks are commercially
confidential



Public Statements by leading Swedish Banking Figures suggest long term policy of
writing down, not asset disposal in the expectation of recovery.



However
-

a profound conflict of interest exists between the bank as a lender and
the bank as effective owner of the assets.



This conflict can only be imperfectly managed
-

and regional interests are not
helped by repatriation of major investment management functions away from
Baltic

Funds are small, Exchanges are weak

Baltic has very limited other sources of Capital

Public Capital a low % of GDP

Access to
P
ublic
C
apital is very much constrained

by Small Stock
M
arket

Conclusions


Policy makers need to recognise that


membership requires even greater
flexibility in order to maintain competitiveness.



The Financial system requires significant changes in order to improve capital
allocation and efficiency



More capital and greater liquidity are needed in order to boost long term
growth capacity



There is substantial scope for new actors and for government initiatives
-

the
British example of 3i (Investors In Industry) may be helpful



Decisions should be taken quite soon in order to ease the transition into the


zone.









James Oates

Cicero Capital

Lai12
-
3

Tallinn 10133

Estonia

+372 508 1769

+44 7767 402 446

James.oates@ciceroinvest.com





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