Analytics, Banks, EU – Baltic States, Financial Services, Latvia, Rating

The ABLV announcement followed the ECB on 19 February halting all withdrawals from the bank after the US Treasury’s Financial Crimes Enforcement Network on 13 February found that ABLV had been involved in transactions with North Korea in 2017 and had “institutionalized” money laundering. The findings prompted customers to withdraw funds from the bank, creating a liquidity shortage. The Central Bank of Latvia subsequently granted ABLV €297.5 million in emergency loans, short of the €480 million that ABLV had applied to borrow.

Separately, Central Bank Governor Ilmars Rimsevics was detained earlier this month in an anti-corruption investigation and is currently prohibited from conducting his duties as governor.

Before ABLV’s failure, the bank proceeded with a planned €80 million repayment of two maturing bonds on 22 February, in an attempt to avoid a default on its obligations. The repayments are to be held in accounts at other banks.

Latvia’s banking system mainly comprises two groups of banks. One group is funded through domestic deposits and their Nordic parent banks, which primarily lend to domestic borrowers. The other is primarily funded through non-resident deposits and has limited domestic lending. Approximately 30% of the banking system’s liabilities are made up of international non-resident deposits (see Exhibit 1), a significant margin over other Baltic states (Estonia and Lithuania), which makes Latvia’s banking system vulnerable to negative external perceptions.

Although the developments are credit negative for all banks, those that rely more heavily on non-resident deposits to fund their operations are the most vulnerable, including ABLV, Rietumu Banka, and Norvik Bank (see Exhibit 2). ABLV’s deposits from residents in the Commonwealth of Independent States (CIS) comprised 83.9% of deposits at 30 June of 2017. Rietemu Banka has limited disclosures on non-resident deposits, but its business model is geared toward affluent international individuals, and as of year-end 2016 62% of its total lending was to borrowers in countries that are not part of the Organisation for Economic Co-operation and Development (OECD), which we believe infers a high degree of non-resident deposits. Norvik Bank’s non-resident deposits were 57.8% from non-OECD countries at year-end 2016, including 25.3% from Russia.

Among the Latvian financial institutions we rate, SC Citadele Banka (Ba2 positive, b11 ) and JSC Development Finance Institution Altum (Baa1 stable) are well positioned to withstand pressure that could arise from these events. Citadele in recent years has grown primarily in Baltic countries, focusing on consumer and small and midsize enterprise lending, while meaningfully reducing exposures to countries that comprise the Commonwealth of Independent States (CIS) and being restrictive in accepting new non-resident deposits. At the end of December 2017, its deposits from Baltic countries were 64% of total deposits, while deposits from CIS countries were 7.6%, and liquid assets over tangible banking assets exceeded 52%. Altum is a development institution mainly funded by state and European Union programmes.