Hansapank rearranges stock issue

The Baltic Times, TALLINN
By Kairi Kurm
Sep 24, 1998

The Hansapank council was supposed to go ahead with the bidding process that would allow one strategic investor to buy into the bank.

But instead, Swedbank, already a 30 percent owner in Hansapank, convinced the board at the last minute to rearrange the planned stock issue so that all Hansapank shareholders have an opportunity to increase their stake.

According to the Swedbank’s plan, the shareholders of Hansapank may buy one new share for every four shares already owned. Swedbank said it would guarantee the issue of 14 million shares at a price of 100 kroons ($7) apiece. If shareholders don’t use their right to subscribe, Swedbank automatically assumes all shares at this price.

If this were to happen, Swedbank officials announced that the company would start consultations with Hansapank’s board to reduce its large holding in the Estonian bank. Swedbank officials and others fear Hansapank shares will become less attractive to large potential investors if one company has too large a share, thus hindering trading.

But according to specialists, it is very likely that Swedbank may have to buy the whole issued stake, as investors might not be interested in buying the issued shares at a price that is 20 percent higher than their current market value.

The board and council of Hansapank have decided to support Swedbank’s proposal to rearrange the planned issue and call an extraordinary shareholders general meeting in a month. Hansapank has also announced that other possible suggestions are still welcome. Skandinaviska-Enskilda Banken (SEB), which planned to increase its 18 percent stake to 33 percent, has not commented on its competitor’s action. According to Estonian press reports, most of Hansapank’s board members saw SEB as a likely strategic investor.

The European Bank for Reconstruction and Development (EBRD), a large shareholder in Hansapank, has announced that it supports Swedbank’s course of action. The rights issue is the only possible way for EBRD to increase its stake in the Baltic’s biggest bank since EBRD does not buy shares from the market and does not take part in auctions.

EBRD may have a possibility to increase its present 4 percent stake in Hansapank next year, if the shareholders of Hansapank agree to convert Hansapank’s loan into the bank’s stock capital.

Hansapank and EBRD signed an accord Sept. 16, whereby EBRD has until June 30,1999 to propose that Hansapank’s 35 million DM loan be converted into Hansapank shares. The conversion price will be 95 percent of the average price of the shares over 30 trading days preceding the EBRD’s announcement.

Hansapank and EBRD also signed an agreement on a 10-year subordinated loan of 10 million DM. The rest of the 25 million DM loan was received earlier.

The aim of this loan is to improve the bank’s capitalization, which due to a postponed share issue, is very close to the minimum level. The bank’s capital adequacy rate was, according to the Estonian business daily Aripaev, 10.6 percent in August, while the minimum permissible level is 10 percent.

University celebrates 80 years of free education

The Baltic Times, TALLINN
By Kairi Kurm
Sep 24, 1998

“We have given students basic knowledge through theory, and have managed to make them think independently and solve problems in everyday life.”

It’s a good mantra for Tallinn Technical University, a higher education school that has spent the last 80 years educating students in everything from the basic trades to high tech engineering skills.

The words of Tallinn Technical University Principal Olav Aarna are backed up by years of results. The school, one of 36 higher education schools in Estonia, began as a technical college. In 1940, it opened an economics department and today, holds a virtual monopoly in engineer training in Estonia. Students study economics and then have the possiblity to combine what they’ve learned in the classroom with technology available on the market.

Today, the school has nine faculties that include civil and mechanical engineering, chemistry, economics, business administration, math, physics and information processing. Currently, 7,500 students attend the school, which has graduated 36,000 since its inception.

It’s most famous graduate in both Estonia and abroad, Endel Lippmaa, made his name as a politican and scientist. He was included in a TTU tradition of announcing an alumnus of the year for his or her achievements at the school. This year, Toomas Somer, now the general director of Eesti Telecom, was honored. Last year, Jaak Leimann, present minister of economics was mentioned.

“The students of TTU are given the education, for which we have a demand on the market – economics, administration, technology and production,” said Lauri Koop, a student of TTU who is also the head of the Federation of the Estonian Student Unions.

In addition to academic excellence, TTU has a prime location. Although Tartu University may be the most well-known Estonian school, many students who live in Tallinn prefer to stay in the capital for their education. There is a practical reason – jobs are easier to come by in Tallinn. TTU and Tartu University are the only public universities in Tallinn.

The catch for some is that, according to Koop, 75 percent of TTU students don’t manage to graduate on time, while only 15 percent of Tartu students are late in getting their diplomas. The University of Tartu proposed charging students a fee for not graduating in the alloted four years.

These public schools, while free for most, already charge a fee to some students. Those who did not get accepted to the school on merit can still attend for a fee. The best of them can qualify for a state-paid seat when one becomes available.

According to Aarna, 3 percent of students are charged a fee, a method that began three years ago. He does not believe that the state will stop subsidizing his students, but may decide to make students assume part of the bill for their studies. Aarna says he is in favor of a partial fee and hopes that this will occur in two or three years.

Both Aarna and Koop both contend there should be fewer universities in Estonia.

“For a small state like Estonia, the number of schools is too big. Some might think that a bigger number is the pride of a country, but it is not. We should develop in the same way the banks do, towards consolidation,” Koop said.

Koop suggests having public schools merge with some private schools, especially since some, with only 50 or 100 students are far too small as it is.

“The main priority of the TTU development plan is to raise the results, not only through sending our teachers to practice abroad but also through our own resources,” said Aarna.

Russian meltdown and its effect on Estonian funds

The Baltic Times, TALLINN
By Kairi Kurm
Sep 17, 1998

The Russian stock exchange is plummeting quicker than any stock exchange in the world. The Russian Trading System (RTS) index has fallen by 84 percent this year, from 396 to the current low of 65 on Sept. 11. The all-time high of the RTS was 571.

The net value of the Hansa Russia Growth Fund share, an Eastern-oriented fund issued by Hansapank, has suffered similarly, falling by 85 percent since the beginning of the year from 831 to 119 kroons per share.

Indeed, what’s going on in Russia has hit such Eastern-oriented funds hard. Still, Hansa Russia Fund Manager Vadim Ogneshtshikov declares that unlike some Eastern-oriented investment funds, his is not going to stop trading.

But a look at what did happen in Russia might help to understand why such funds have taken a hit.

“The mood of the investors changed after the Asian crisis on October 27, 1997, and this in its turn influenced the Russian stock market,” said Ogneshtshikov.

Russia froze its internal bonds and offered new restructuring methods to its investors. The new method foresees that securities will be converted to other securities and the maturity date will be set on a fixed date three or four years away.

This method resembles the one that Russia used when it issued Eurobonds after increasing its foreign currency reserves due to the loan from the International Monetary Fund. Only that time, securities were converted voluntarily and on much better conditions for the investors.

The present conditions have meant big losses to those who invested in Russian T-bills. According to analysts, investors may receive only 15 to 20 percent of their money, and 20 percent of the T-bills will be converted to U.S. dollars for a 5 percent discount rate.

“Foreign investors are disappointed in the scheme as the Russian government cannot carry out its financial obligations and has lost its confidence in a way,” Ogneshtshikov said. “When the United States issues T-bills, investors are confident that the government can carry out its obligations. The government should be the strongest issuer. T-bills are risk-free financial instruments.”

The problems in Russia started when the government could not redeem its bonds. The market works like a financial pyramid – the government issues new bonds to redeem the previous ones.

Russia faced a problem where investors’ interest in bonds decreased and the government did not succeed in issuing new bonds. About $33 billion of the $40 billion sunk into the market disappeared. About a third of the investors were from foreign countries. The Soros Fund, for example, has lost about $2 billion.

The crisis of the T-bill market in its turn decreased the prices of the Russian stocks as investors started selling. It also reflected on the local banks that had invested up to 50 percent of their assets in T-bills.

“The Russian banking system may go into bankruptcy one day although they are trying to avoid this through different methods like the mergers of the biggest banks,” said Ogneshtshikov.

The Russian T-bill market does not directly influence the Estonian stock market, as the share of Russian stocks in Estonian banks accounts for less than 1 percent of their assets. The exposure of Hansapank, for example, is 250 million kroons ($17.8 million).

As the Hansa Russia Growth Fund is an open fund, it is obliged to repurchase the shares on a current net asset value.

“The value of the fund has decreased by nine times. The investor who bought the share for 1,000 kroons receives 119 kroons today,” said Ogneshtshikov, commenting on the sad situation of his clients.

The future of the investment fund is still not clear, although some Russia-oriented investment funds in Estonia have already halted their activities.

“The future of our fund depends mostly on the continuity of the market economy in Russia,” said Ogneshtshikov.

Keeping banks off the stock exchange

The Baltic Times, TALLINN
By Kairi Kurm
Sep 17, 1998

Jaak Roosipuu, the CEO of Talinvest, the largest Estonian investment corporation, has a novel idea. Bank shares, he says, should not be active on the stock exchange because despositors’ money should not be exposed to the risks of the stock exchange.

Last autumn, Estonian banks had large stock portfolios, which made up a big part of each bank’s revenues. The decrease in the prices of the shares on the stock exchange caused a decrease in the revenues earned from the stock portfolios, which was followed by lower profits in the banking sector and decreasing prices of the banks’ shares.

As banking shares make up most of the stock exchange capitalization, the effect on the stock exchange was enormous. The comedown spiral had begun.

“This was followed by a situation where Maapank was in bankruptcy, Hoiupank had to merge, declaring big losses, and none of the other banks escaped from big share portfolio losses,” said Roosipuu. The ratings of the banks were lowered accordingly.

In earlier times, the banks used to refinance syndicated loans with new and larger ones. Today, they face a problem where loans have to be repaid and money has to be taken back from the market. Banks are in a state where they are unable to give loans. This means that companies whose financial indicators are good are not able to receive loans and are forced to decrease their sales. The losses of the profitable companies may in its turn bring on a crisis in the economy.

“Stock exchange is risky and every kind of fluctuation leads to a comedown spiral,” explains Roosipuu. The banks should disclaim from stock investments, one of the sources of revenue, where high risks are taken.

“A countryman would not have put his savings in a stock exchange. He received interests from the deposits, not the interests of the stock exchange. His deposits had smaller interest rates and were less risky,” said Roosipuu referring to the cheated clients of the bankrupt Maapank.

In happier economic times, stock exchange investments by a banking group indicated positive trends. Now that lending depends so much on the fluctuations of the stock exchange, Roosipuu believes it would be better if banks were separated from investment banking services.

“It was wise to take higher risks during the start-up of the banks,” he said. “But today, they should be more stable and not influenced by the falls of the stock exchange. They should not take risks coming from the investment banking activities,” said Roosipuu.

In an interview given to the Estonian daily Sonumileht, Roosipuu drew a parallel between the stock exchange crisis in the United States that set off the Great Depression in the 1930s and the Estonian stock exchange today.

After the financial crisis in America, a Glass Steagal order banned the banks from buying and selling securities, arranging issues and investing in shares. The Estonian stock exchange has fallen by 80 percent since last autumn and Talinvest has proposed the central bank use similar methods to change things here.

Estonia to hike excise tax on cars

The BAltic Times, TALLINN
By Kairi Kurm
Sep 17, 1998

The Estonian government, to the dismay of many political parties, has agreed to raise the excise tax on cars beginning in 1999.

According to the motor vehicle excise tax law, cars are taxed according to their age and size of the engine.

For example, the current excise tax on a 10-year-old American car worth 55,000 kroons ($3,900) is 3,700 kroons. When the new excise tax comes into effect, the tax on that same car will be 33,000 kroons.

Many of the parties say the tax hike is unneccesary because its purpose is not clear. Tallinn already has a tax on fuel and all cars registered in the city are additionally taxed for this purpose, critics say. That may soon expand to all of Estonia.

The government has also planned to raise fuel prices for several years. This year, the tax makes 2.5 kroons per liter of petrol and next year it will be 3 kroons. One liter of petrol costs approximately 6.80 kroons in Estonia.

If the purpose of the amendment is to cut consumption, then it is a direct threat to the car companies. The turnovers of the companies selling and leasing cars have decreased tremendously since last autumn when the leasing interests increased by 10 percent to 20 percent and it became almost impossible for a client to lease used cars.

The purpose of the law may also be to decrease the imports of secondhand cars because people would then start buying secondhand cars from the local market, where excise tax is not charged. According to statistics, 40 percent of cars imported last year were new and most of the cars registered in Estonia have an engine smaller than 2,000 cubic centimeters. This, according to the Ministry of Finance, shows that Estonia is favoring imports of new and environmentally friendly small cars.

In addition, the Ministry of Finance has also proposed raising taxes on company cars that are used for private purposes. According to the specialists, the general rise related to cars may in its turn bring along a rise in car insurance by one-third.

Hansapank to decide on strategic investor

The Baltic Times, TALLINN
By Kairi Kurm
Sep 17, 1998

The Tallinn Stock Exchange resumed all trading of Hansapank shares Sept. 14, after a short suspension, but talks with potential buyers of the bank’s imminent stock issue are still going on. The talks may last until Sept. 17, when the meeting of the Hansapank council will take place in Helsinki.

Hansapank board members had suggested increasing the capital through issuing 7 million new shares but decided to double its stock issue instead, due to a favorable market situation. The issue is directed at one strategic investor who makes the highest bid in preliminary negotiations.

The negotiations are being held by international investment bank Merryl Lynch, and Hansapank is not authorized to disclose the names of the potential negotiation partners.

During the past few weeks, two Scandinavian banks – Swedbank and Scandinaviska Enskilda Banken (S-E Banken) – have bought up Hansapank shares.

Swedbank holds a 30 percent stake in Hansapank; S-E Banken’s current stake is about 10 percent. S-E Banken has announced that it intends to achieve a stake of 33 percent in Hansapank and it has already sent an application to the Bank of Estonia for permission to increase its stake.

Swedbank has signed a contract with Hansa Investments, under which Hansa Investments becomes Swedbank’s corporate consultant, in order to get better information about the local situation.

“While Swedbank is Sweden’s largest retail bank, S-E Banken is the strongest in lending to businesses and investments,” said Rain Lohmus, a member of Hansapank’s board.

According to the Estonian business daily Aripaev, Swedbank’s assets total 1,216 billion kroons ($87 billion), and the bank earned 6,765 million kroons in profit during the first half of the year.

S-E Banken assets total 1,281 billion kroons and the bank earned 9,774 million kroons through June 1998. The precise figures for Hansapank, the biggest bank in the Baltic states, are 20 billion kroons and 188.6 million kroons in 1998 thus far.

Specialists have calculated that if Swedbank purchases the stock issue, its holding in Hansapank would increase to 43 percent. If S-E Banken acquires the whole stock issue, it will own 27 percent of Hansapank.

Another bank merger locks up 10 percent of the market

The Baltic Times, TALLINN
By Kairi Kurm
Sep 10, 1998

Two Estonian banks, Forekspank and Eesti Investeerimispank (Estonian Investment Bank, EstIB) plan to merge and control over 10 percent of the market. Together they are the third biggest bank on the Estonian banking market.

Forekspank’s plan is to purchase 50.25 percent of EstIB shares and then acquire its whole operations by the end of October. According to the business daily, Aripaev , the price of the shares may be greater than 100 million kroons ($7.1 million) and owners of the remaining 49.75 per cent shares of EstIB will become shareholders of Forekspank.

According to the agreement, which lays down the principles of a planned merger, the two banks will set up a working group to conduct the negotiations and set a share exchange rate based on audited net assets.

Forekspank has close to 2.5 billion kroons and EstIB 1.7 billion kroons in total assets. After a merger, the assets would total more than 4.2 billion kroons. Forekspank and EstIB are Estonia’s third and fourth largest banks, respecitvely. In the entire Baltic region, a merger would make the enterprise the ninth largest bank.

As the merging banks are too small to compete with Hansapank and Uhispank, the banks will have to decide which niche to choose, whether to focus on investment banking or make a bigger impact on the retail market.

The Investment Bank has a big loan portfolio, and according to the competing banks, it is the most qualified Estonian loan portfolio with only 1.5 percent bad loans. EstIB has few deposits and it has not dealt with retail banking, while Forekspank’s representation in retail banking is weak. The loan portfolio of EstIB is 1.1 billion kroons and of Forekspank is 1.35 billion kroons.

EstIB’s clients are leading Estonian firms and the bank has a strong basis of know-how and professional staff to handle corporate financing but has no individuals’ deposits and does not do intermediate payments and settlements. EstIB has mostly dealt with intermediating international financing.

Forekspank has mostly been active outside the local market – mostly in Russia – until the purchase of a stake in a Russian bank failed. The merger of the two banks will improve Forekspank’s low capital adequacy normative, as EstIB will bring along a huge amount of capital.

The new entity also plans to bring in a strategic investor to enlarge its capital base. The biggest shareholders of the new entity are AS Immerman and Swiss Ueberseebank AG clients. AS Immerman, which belongs to the leaders of the bank, controls 64 percent of EstIB. Swiss Ueberseebank controls 53 percent of Forekspank.

According to Forekspank, the merger costs will be low as the personnel of EstIB is moving to the Forekspank’s main office and only 5 to 10 people will be made redundant. The number of employees in Forekspank is 300 and in EstIB it is 30.

EstIB’s half year profit was 18 million kroons and Forekspank had 8.8 million kroons in losses.

The Estonian banking market has been reduced by four banks in one year now that Forekspank and EstIB are going to merge. Eight banks out of 12 are left after the mergers of Hansapank-Hoiupank, Uhispank-Tallinna Pank, Forekspank-EstIB and the bankruptcy of Maapank.

Depositing is popular investment alternative

The Baltic Times, TALLINN
By Kairi Kurm
Sep 03, 1998

Although trading on the Tallinn Stock Exchange calmed down and banks are halting their expansion plans, Uhispank’s vice president Margus Schults (ICM conference speaker) is optimistic about the future of the Estonian financial market where depositing is becoming more popular. Schults said he sees the merger of Uhispank and Tallinna Pank as a positive step toward further consolidation of the Baltic financial markets.

However, the number of banks in the Baltic region is still too large in proportion to its size, he said. Following the Swedish example, only four or five banks along with some smaller co-operative banks should be left in the Baltics.

“If two of Estonia’s biggest banks, Hansapank and Uhispank are active in the whole Baltic region, there is no doudt that we can manage with only a few banks in this region.”

“The two Estonian banks are expanding on the whole Baltic region, but at the same time can not neglect the local market,” Schults said.

According to Schults, foreign banks are less eager to enter the Estonian market. Foreign investors are most interested in directly controlling possibilities like a strategic stake in a bank for example.

Foreign investors have already acquired almost half of the share capital of Estonian banks, and Schults takes it as a positive sign in the long-term perspective towards globalization and the European Union integration.

“You need a partner to be strong,” Schults said.

Schults does not see investment banking as a weakness and said it should not be separated from ordinary banking activities.

“If the banks would take minimal stock risks and the risk was better managed, it would still be better if a client received the whole package of services from one bank,” Schults said.

According to Schults, the number of small investors interested in stocks is still very small. There are about 40,000 stock account holders, the number of active traders is even smaller.

In West-European countries the number of investors is about 12 percent of the whole population, while in Estonia they make about 3 percent.

Schults said he thinks a larger number of small investors would make the market more stable. Also the stock exchange, which is presently dominated by the banks, will certainly become more attractive when big companies enter the market.

According to Schults, the situation on the stock exchange market is “poor.”

Schults describes the Estonian stock market as “a year ago it was ultra optimistic and now it is ultra pessimistic.” This is mainly caused by the developments in Russia.

Schults explained why depositing is so popular. “There are few alternative investment and risk management possibilities on the financial market so people are looking more on saving possibilities. Depositors receive a sufficient interest with a low risk, as interests are not taxable and the inflation is decreasing.”

World processes influence Estonian securities market

The Baltic Times, TALLINN
Interview by Kairi Kurm
Sep 03, 1998

Reporter Kairi Kurm talked to Helo Meigas, former chairman of the Tallinn Stock Exchange and vice president of the Bank of Estonia, about the mood on the financial market.
How would you characterize the stock market today and its development during the last year?

The present situation is, in essence, a reflection of the global developments over the last year. There has been a clear shift in the attitudes of international investors. There is an increased caution and, in the aftermath of the Asian crisis, risks in all developing markets, including the Eastern European markets, are perceived to be somewhat higher than previously thought. It is the first time the direction of the Estonian market has been clearly influenced by international trends.

The changes in the Estonian economy in general have also had an impact on the stock market. Over the last year the central bank has taken measures to curb an excessive optimism and too rapid expansion by imposing stricter capital adequacy requirements, an additional liquidity requirement and broadening the list of financial instruments that must be covered by reserves held with the central bank.

Besides, the existing central bank reserves which form the backup for the Estonian kroon, cannot, in any circumstances, either directly or indirectly, be used by the government. This special reserve is placed with international financial institutions outside Estonia following the same risk management guidelines that apply to the management of the central bank’s reserves.

These developments have had an obvious impact on the liquidity – and banks’ ability to receive and to lend money. The funds available for investment on the securities market decreased. The same applies to the turnovers and the prices of shares. Obviously the psychology of the local investor has changed.

How has the stock market influenced the Estonian economy?

The influence is not one-sided. The economy and the stock exchange influence one another. The same developments and processes that affect the situation on the financial market inevitably have an effect on the broader economic scene. It should be stressed, however, that while the level of sophistication, development and capitalization of the Estonian financial markets in general is quite high for a transition economy, the Estonian stock market is relatively small compared to the economy. In other countries the share of the stock markets in the GNP is much higher.

What do you think about separating investment banking from the commercial banking activities?

The separation of investment banking activities from commercial banking activities is one of the possible ways to decrease the risk environment in the banking sector from the point of view of the depositor. However, there have been examples in the United States, when the former strict separation of investment banking and commercial banking was abandoned.

How does the consolidation of banks influence the stock market?

The consolidation makes it harder to supervise the stock market. Implementing an effective regulatory and supervisory framework should create a counterbalance. Listing new companies like Estonian Telecom and other infrastructure companies on the stock exchange could solve another problem – the problem of dominant shares or stocks on the market.

How is the development of the common Baltic stock exchange proceeding?

The preparations for this project have proceeded somewhat more rapidly in Latvia and Estonia. There is an active exchange of information and ideas between the two countries. The cooperation with Lithuania is still in its initial stages. The project would offer obvious benefits. The merger would create a stock market with better investment possibilities. The share of the dominant stocks would diminish and the market’s volatility would decrease. It should also be noted that small stock markets face certain difficulties in attracting foreign investors who are interested in minimizing the fixed costs on familiarizing themselves with the market.

Swedes acquire one-fifth of Hansapank

The Baltic Times, TALLINN
By Kairi Kurm
Sep 03, 1998

The Swedish bank group, Swedbank, increased its stake in the largest Estonian bank group Hansapank to a strategic 20 percent.

Swedbank’s key priority was to bring its stake in Hansapank to the same level as it had earlier in Hoiupank. The Swedish bank group had a 19.9 percent stake in Hoiupank, but after it merged with Hansapank, its share in the new bank group went down to 6.97 percent.
According to the Estonian daily Sonumileht, Swedbank remains interested in the Baltic banking sector and its activities on the Estonian market are of a long term nature.

After acquiring 20 percent of Hansapank’s shares, the Swedish bank has to get permission from the Bank of Estonia to hold these shares. Banks need permission from the central bank for each 10 percent of any bank’s shares they acquire.

Hansapank has plans to increase its share capital by 10 percent this year and find a strategic partner. The leaders of Hansapank are not quite sure about the future plans of Swedbank and believe that Swedbank does not want to increase its stake any more.

Swedbank bought the shares of Hansapank through different Scandinavian investment companies. Hansapank’s stock price increased by 65 percent during the last two weeks, and the turnover of Hansapank’s shares was more than 80 percent of the total turnover of the Tallinn Stock Exchange.

The other big owner of Hansapank is MeritaNordbanken, which controls about 28 percent of Hansapank’s shares.

According to unofficial sources, another Scandinavian bank, Skandinaviska Enskilda Banken, has also been actively trading with Hansapank shares. Some local speculators have come on the market selling other stocks to buy Hansapank shares.

The continued buying pressure from Scandinavian investors increased the Estonian stock market’s activity contrary to falling activity on the world markets during the last two weeks.

However, brokers say once the buying interest of the Hansapank shares decreases market activity could fall.