Latvia 061009 Update
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Investment Research General Market Conditions
6 October 2009
Latvia - Escalation of crisis Non-recourse loans in Latvia? THE STATEMENTS IN THIS TEXT ARE SUBJECT TO CONSIDERABLE UNCERTAINTY DUE TO THE UNCLEAR INFORMATION SITUATION. According to several news agencies the Latvian prime minister has asked his legal experts to bring forward a bill that will limit mortgage lenders’ liability to the value of the collateral – not the size of the loan. As far as we can tell, there are indications that the proposal will apply to prime residence loans only; second homes and buy-to-let properties would thus not be covered if this is correct. These make up some 50% of all mortgage loans. However, the Latvian newspaper Diena today states that the law would apply to all existing loans without closer specification, so the situation is unclear. Any legal bill will probably take a few months to draught; however, a law to the effect implied here can be made to be applied retroactively. This will for all practical reasons be a non-recourse model, where mortgage borrowers can hand in the keys to the bank, and not be liable for anything.
Todays key points The tensions between Latvia and their lenders have reached a new level. There is news out that the Latvian Prime Minister may propose draconian legal measures that will have large ramifications for foreign banks in Latvia The proposal as it stands also implies a removal of a major obstacle for the Latvians to devalue their currency
According to the article, the purpose is to stop lenders (=banks) to make claims on borrowers’ other assets, if a sale of the collateral cannot cover the loan. Furthermore, the legal experts are asked to come up with a proposal, where a bank that repossesses a house is liable to provide the family with somewhere else to live, and the new place should be accepted by the borrower => this could mean that if a bank repossesses a 150sqm home it has to offer the previous owner another home – however, this does not have to be the same size, and the borrower can reject the home, thereby prolonging the situation. According to the spokesman of the Prime Minister these steps have been taken on the back of the current situation on the financial markets and borrowers’ increasing problems to service their loans. Where does this leave the banks active in Latvia? In a very bad position. With property prices down some 70% from the peak, it must be tempting to stop paying mortgage loans for borrowers with negative equity, which applies to the majority of mortgage borrowers in Latvia today. The major advantage from the Latvian government’s point of view is that devaluation will no longer pose a big problem! The major obstacle has been the fact that loans are made out in EUR, but collateral has been in LVL, and thus a devaluation would make loans increase substantially relative to the value of the collateral (i.e. real estate). This issue would be removed since the value of loans can never exceed the value of the LVL-denominated collateral, and all mortgage loans implicitly would be in LVL. Senior Analyst Pär Magnusson +45 45 12 85 15 [email protected] Senior Analyst Per Grønborg +45 45 12 80 51 [email protected]
www.danskeresearch.com
Latvia - Escalation of crisis
Why is this proposal flashed now? Maybe it should be viewed as a bargaining chip in the light of the increased pressure from both IMF and the Swedish government on the Latvian government to deliver on the terms agreed upon with the IMF and EU funding. Conclusion: This proposal could be a part of the political bargaining with IMF/EU. Everything might be solved overnight if a compromise can be reached, but the risk premium on Latvian banking business is sky-rocketing at the moment. The ramifications of this proposal lest 50% or more of all mortgage loans are covered by the proposal could be very severe for especially Swedbank and SEB. EUR/SEK is no doubt vulnerable to this growing tension, as is the mortgage bond spreads of especially Spintab bonds.
Latvian lending book (Q209A) Swedbank: SEK 61bn – of which SEK 29.5bn to private customers SEB: SEK46bn – of which SEK11bn is household mortgages Nordea: EUR3.1bn Danske Bank: 1.4% market share in Latvia – approx. DKK3bn DnB Nor: NOK 22.5bn of which 49% is at the risk of Nord LB.
Source: Danske Markets
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6 October 2009
www.danskeresearch.com
Latvia - Escalation of crisis
Disclosure This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the Danske Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or dept capital transactions. Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals Ethical rules and the Recommendations of the Danish Securities Dealers Associations. Risk warning Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
Disclaimer This publication has been prepared by Danske Markets for information purposes only. It has been prepared independently, solely from publicly available information and does not take into account the views of Danske Banks internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory Authority and is subject to provisions of relevant regulators in all other jurisdictions where Danske Bank A/S conducts operations. Moreover Danske Bank A/S is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
3|
6 October 2009
www.danskeresearch.com
6 October 2009
Latvia - Escalation of crisis Non-recourse loans in Latvia? THE STATEMENTS IN THIS TEXT ARE SUBJECT TO CONSIDERABLE UNCERTAINTY DUE TO THE UNCLEAR INFORMATION SITUATION. According to several news agencies the Latvian prime minister has asked his legal experts to bring forward a bill that will limit mortgage lenders’ liability to the value of the collateral – not the size of the loan. As far as we can tell, there are indications that the proposal will apply to prime residence loans only; second homes and buy-to-let properties would thus not be covered if this is correct. These make up some 50% of all mortgage loans. However, the Latvian newspaper Diena today states that the law would apply to all existing loans without closer specification, so the situation is unclear. Any legal bill will probably take a few months to draught; however, a law to the effect implied here can be made to be applied retroactively. This will for all practical reasons be a non-recourse model, where mortgage borrowers can hand in the keys to the bank, and not be liable for anything.
Todays key points The tensions between Latvia and their lenders have reached a new level. There is news out that the Latvian Prime Minister may propose draconian legal measures that will have large ramifications for foreign banks in Latvia The proposal as it stands also implies a removal of a major obstacle for the Latvians to devalue their currency
According to the article, the purpose is to stop lenders (=banks) to make claims on borrowers’ other assets, if a sale of the collateral cannot cover the loan. Furthermore, the legal experts are asked to come up with a proposal, where a bank that repossesses a house is liable to provide the family with somewhere else to live, and the new place should be accepted by the borrower => this could mean that if a bank repossesses a 150sqm home it has to offer the previous owner another home – however, this does not have to be the same size, and the borrower can reject the home, thereby prolonging the situation. According to the spokesman of the Prime Minister these steps have been taken on the back of the current situation on the financial markets and borrowers’ increasing problems to service their loans. Where does this leave the banks active in Latvia? In a very bad position. With property prices down some 70% from the peak, it must be tempting to stop paying mortgage loans for borrowers with negative equity, which applies to the majority of mortgage borrowers in Latvia today. The major advantage from the Latvian government’s point of view is that devaluation will no longer pose a big problem! The major obstacle has been the fact that loans are made out in EUR, but collateral has been in LVL, and thus a devaluation would make loans increase substantially relative to the value of the collateral (i.e. real estate). This issue would be removed since the value of loans can never exceed the value of the LVL-denominated collateral, and all mortgage loans implicitly would be in LVL. Senior Analyst Pär Magnusson +45 45 12 85 15 [email protected] Senior Analyst Per Grønborg +45 45 12 80 51 [email protected]
www.danskeresearch.com
Latvia - Escalation of crisis
Why is this proposal flashed now? Maybe it should be viewed as a bargaining chip in the light of the increased pressure from both IMF and the Swedish government on the Latvian government to deliver on the terms agreed upon with the IMF and EU funding. Conclusion: This proposal could be a part of the political bargaining with IMF/EU. Everything might be solved overnight if a compromise can be reached, but the risk premium on Latvian banking business is sky-rocketing at the moment. The ramifications of this proposal lest 50% or more of all mortgage loans are covered by the proposal could be very severe for especially Swedbank and SEB. EUR/SEK is no doubt vulnerable to this growing tension, as is the mortgage bond spreads of especially Spintab bonds.
Latvian lending book (Q209A) Swedbank: SEK 61bn – of which SEK 29.5bn to private customers SEB: SEK46bn – of which SEK11bn is household mortgages Nordea: EUR3.1bn Danske Bank: 1.4% market share in Latvia – approx. DKK3bn DnB Nor: NOK 22.5bn of which 49% is at the risk of Nord LB.
Source: Danske Markets
2|
6 October 2009
www.danskeresearch.com
Latvia - Escalation of crisis
Disclosure This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the Danske Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or dept capital transactions. Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals Ethical rules and the Recommendations of the Danish Securities Dealers Associations. Risk warning Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
Disclaimer This publication has been prepared by Danske Markets for information purposes only. It has been prepared independently, solely from publicly available information and does not take into account the views of Danske Banks internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory Authority and is subject to provisions of relevant regulators in all other jurisdictions where Danske Bank A/S conducts operations. Moreover Danske Bank A/S is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
3|
6 October 2009
www.danskeresearch.com
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