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UPDATED: Boutique banks will have to seek new sources of income, say experts

Banks that specialize in serving non-resident clients will have to look for new ways of earning income, say experts. However they are cautious over predicting whether the number of banks will decrease in Latvia, reported Latvian Radio Wednesday.

According to the Financial and Capital Markets Commission (FKTK), in late September the volume of non-resident deposits decreased almost 20% on year to €9.7 billion. 

Investment banker Ģirts Rungainis, who previously forecast that the number of banks will shrink, shies away from predicting that banks will perform mergers.

However Rungainis is sure that profits of the banks serving non-residents will fall, which will inevitably lead to changes in the market.

"This industry will not be able to achieve an income or profit levels this big. It means that in some way the small banks will have either to disappear or join larger ones," said Rungainis.

"The industry leaders are, of course, ABLV and Rietumu bank. They are the best-prepared for such a situation. They have the largest number of highly qualified specialists and the power to develop other services and compete in the market. [They can] practically spark fiercer competition in a number of services. If not in handing out loans, then [against] the Scandinavian banks," said Rungainis.

He thinks that ABLV and Rietumu bank could turn to serving Latvian clients. He doesn't rule out the chance that ABLV or Rietumu bank could acquire the Citadele bank. However the smaller banks will have trouble finding new sources of income, thinks Rungainis.

Rungainis said that the boutique banks, the business of which is based in the profitable non-resident sector, might have trouble adjusting to a shrinking non-resident market.

"They also don't have enough highly qualified specialists that could create substantial new services and operate in new markets," said Rungainis.

Meanwhile Andris Nātriņš, research director at the BA business school, said that Latvian banks are dealing with the anti money laundering procedures well, but the problem is posed with that Latvian banks aren't enjoying enough partners' trust that the system has been put in order.

A new audit of the Latvian banking system that was carried out by US companies could improve the partners' trust, said Nātriņš.

However Nātriņš too said that banks must think about new sources of income. He said that the fact that CIS clients are mostly interested in transactions but not other banking services poses a problem in this regard.

He said that banks could look for new clients in, for example, Central Europe. Banks could also invest in different finance technologies. Nātriņš was reluctant to forecast any changes in the number of banks in Latvia, however he said that it's unlikely that the small banks could be bought up by a larger investor.

At a media briefing on the results of the US audit, FKTK chairman Peters Putnins said: "Latvian banks' capacity to effectively combat money laundering and to provide the highest standards of the industry's regulation is an important step forward in order to continue the sustainable development of the regional financial center. To achieve this goal it is important that Latvian banks serve not only non-resident customers of cash flows, but are able to offer added-value investment services appropriate to a regional financial center."

Latvia's enforcement of anti-money-laundering rules has strengthened noticeably under Putnins following the resignation in January of his predecessor Kristaps Zakulis.

You can read the main conclusions of the US audit HERE (in Latvian), chief among which are that while there are a fair few positive aspects of the Latvian banking sector, banks need to improve their security checks if Riga is to become a long-term financial sector and that they have until the end of 2017 to do so in order to ensure their links to correspondent banks in the US are safeguarded. 

 

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