The Baltic states of Estonia, Latvia and Lithuania are an odd mix of the very old and the very new, with not much in between. In the beautifully preserved old cities, winding cobblestone streets lead visitors round medieval churches and fortresses to the constant accompaniment of bells. Outside the cities' defensive walls the bells are replaced by pile-drivers and hooting taxis, office buildings are slick and new and western chain stores line the streets. In Vilnius, Lithuania's capital, you find the Museum of Genocide Victims, the grim old KGB headquarters and prison, and a statue to 1960s rock musician Frank Zappa all within a 20-minute walk of each other.
Baltic banking is like its cities - it has gone from ancient to modern in one leap. "They are jumping over steps that it was taking over 20 years for other countries to do," says Monica Caneman, executive vice-president of Baltic states at SEB.
The abruptness of change is a result of the collapse of the Soviet Union. Only after the Baltic states gained independence in 1991 were these countries able to create independent banking systems. And they created them in the image of Western systems that had had the time to learn from their mistakes. Baltic banks, for example, are among the most electronically advanced in the region.
The combination of good infrastructure and underdeveloped markets - in Latvia and Lithuania only half the citizens have bank accounts and savings products are virtually non-existent - has made the banks prime targets for predatory Scandinavian institutions keen to service their customers in these countries and to expand outside their limited and overbanked home markets. The two most aggressive players have been SEB and Swedbank.
One of the biggest prizes was Hansabank, which became Estonia's largest bank when it merged with Investment Savings Bank (Eesti Hoiupank) last July. With a balance sheet of approximately Ekr27.7 billion ($1.9 billion) it is the leading bank in the Baltic states in both the corporate and private markets.
SEB and Swedbank both tried to gain a majority stake in the bank in August and September. Swedbank, which already had a 7% stake, won and SEB agreed to sell its shares at market price. "We won that race. It was simply impossible for them to catch up with us," says Anders Sahlen, senior adviser to the president at Swedbank.
However, the acquisition was not as smooth as either party would have liked. "It was a hostile takeover. They [the acquirers] just put on brave faces later on," says a local banker who was closely involved with the deal. "They didn't pay enough attention to the culture aspect. There was a big chunk of senior management leaving the bank. Some were told to go, others chose to walk."
Swedbank denies that the takeover was hostile. Sahlen admits that the process was painful, and was made worse because it was so abrupt. Swedbank had originally announced that it wanted a one-third stake in the bank and in less than a month it had taken 62%. "They were feeling they were victims in the first few weeks of the takeover," says Sahlen about Hansabank employees. He counters that once it was clear that Swedbank merely wanted a strong counterpart in Hansabank rather than take it over, relations improved. Swedbank sold 12% of its stake in the bank to the European Bank for Reconstruction & Development and its Polish partner Bank Handlowy. Opponents argue that this was merely for accounting reasons but Sahlen says the reason was more altruistic. "We don't want Hansabank as a daughter bank. It should be an Estonian bank. This has important psychological implications, Estonians should have a home bank," he says.
Despite the volatility, Hansabank remains one of the best banks in the Baltic states. It has become stronger and more efficient and diversified. It has made the first step to the international arena. "When the Swedes came here, Estonian banks recognized times were changing. They were viewing themselves as haute couture boutiques - Gucci or Prada - and the bigger banks came in and said no, you're Levi's," says an insider. Swedbank has a greater emphasis on retail banking, which it hopes to expand. Its stake in Hansabank gives it access to Hansabank-Latvia and it plans to set up a greenfield operation in Lithuania because there are no good local banks available for investment.
SEB also has an aggressive acquisition strategy in the region. Late last year it invested Skr1.5 billion ($177 million) to buy strategic stakes in three leading Baltic banks. It acquired a 32% stake in Estonia's Uhispank, 44% in Latvia's Unibanka and 32% in Vilnius Bank in Lithuania. By investing in the three it has capitalized on a pan-Baltic cooperative agreement that was introduced among the banks at the beginning of 1998. Coordinating transfer payments have already been established between these banks and capital-market deals, corporate financings and syndicated loans are being slated for the future. Using this agreement, SEB plans to introduce new savings products through these banks across the Baltic states such as life insurance, mutual funds, and mortgage lending.
Merita Nordbanken has taken a different approach. It has adopted a greenfield strategy first in Estonia and will do so soon in Lithuania. In Estonia, it is the only foreign bank in the country and has captured about 10% of the market (Hansabank has 45%, Eesti Uhispank has 35% and state-owned Optiva has the remaining 10%). Only in Latvia has it entered the market by buying. It now fully owns Investment Bank of Latvia, which has been renamed Merita Nordbanken Latvia. Matti Hakavuori, deputy general manager of the Tallinn branch of the Merita-Nordbanken group, says the bank's success springs from its conservative approach, its being seen as a safe bank. Ingrida Bluma, chairwoman of Hansabank Latvia, says that Merita's strategy has not been aggressive enough and it has failed to gain a real foothold in the region.
Surprise merger
Of the five banks in Estonia, four are either majority or completely foreign-owned by Scandinavian banks and the remaining state-owned bank is looking for an investor. In Latvia, the situation with the leading banks is the same, the two biggest are foreign-owned and the third is up for sale. In Lithuania, if the country's largest bank, Vilnius Bank, acquires the second-largest, Hermis, SEB will have a significant stake in the two biggest banks and only one state-owned bank will remain. Hermis Bank had resisted Vilnius Bank's attempts to buy the bank for over a year but in a surprising move last month the two banks signed an agreement to the terms and conditions of a possible merger. If the merger is approved by Lithuania's central bank, four of the five publicly owned banks in the Baltic states could very easily be owned by Scandinavian banks and with three major state-owned banks left to be privatized the stranglehold on the sector could become even stronger.