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PricewaterhouseCoopers has completed due diligence on Parex banka

February 04, 2009 | OMX

PricewaterhouseCoopers (hereinafter - PWC) has announced the results of the due
diligence on Parex banka's finances, taxes and IT as assigned by Parex banka's
shareholders.

Auditors' task was to specifically evaluate the situation at Parex banka
(hereinafter - the Bank) on the takeover date. The report particularly
emphasizes that PWC has not audited Bank's operations and financial situation
after the date of appointment of the new Management Board of the Bank on 5
December 2008. All the risks indicated in the report had been identified by the
new Management Board of the Bank during the first weeks of its activities and
the prevention plan has been developed. Most of the issues falling under the
terms of reference of the Board have already been solved.

The report acknowledges that part of the risks have been entailed by both
global and local economic crisis, which has had an impact on operations of all
Latvian commercial banks and may not be considered exceptional and affecting
Parex banka alone.

However, the report displays several most important factors that have had an
effect on the Bank over the period of time until 30 November 2008:

Liquidity: The report indicates that in 2008 a risk of liquidity support in the
form of additional deposits from the State Treasury existed in case of
difference between the incoming money flow from loans and the outflow of
deposits in line with the payment schedules. The State Treasury has provided
support to the Bank in 2008 and currently the Bank is in negotiations with the
syndicated lenders who, according to the existing agreements, are entitled to
request the repayment of the loans granted to the Bank. The prior business
model of the Bank was based on the availability of short-term resources
allowing speedy growth and providing good profit. Historically the liquidity of
the Bank was guaranteed by the security portfolio, which became practically
nonmarketable and lost its value as a result of the global economic crisis.
Inaccessibility of tradable instruments alongside with the decrease of deposits
triggered the liquidity crunch of the Bank. The outflow of deposits has
gradually declined compared to November and December 2008 as well as January
2009 compared to December 2008;

Reserves for loans: According to the report, as at 30 November 2008, Bank's
reserves for doubtful loans were insufficient; however, it is noted that since
the new Board has taken office on 5 December 2008, the necessary reserves have
been accurately analysed and accumulated. Additionally, the auditing firm Ernst
& Young is working on Bank's financial report for 2008, which is expected to be
completed on 31 March 2009 and will report the state of the Bank as at 31
December 2008. The additionally accumulated reserves demand the increase of
Bank's capital, that will allow Bank to re-establish its status of a reliable
partner of both customers and other banks;

Dependence of loan repayment on the real estate market trends: Mortgage secured
loans are a constitutive part of the loan portfolio. According to the Bank's
policy, provided that the customer pays off the loan in due time and no
amendments are made to the terms; no additional loan evaluation is required
during the tenor of the loan. Thus, assessments in Bank's possession acquired
at the time of granting the loan might not reflect accurate current value of
collateral. It must be noted that the Bank requested co-funding from the client
and the credits have been repaid in the negotiated terms;

High concentration of customers outside European Union countries: a substantial
part of borrowers and attracted deposits are from non-EU countries, which have
also been heavily affected by the economic crisis. Due to the diversification
of risks and greater profit potentialities the policy of the Bank till now
envisaged active cooperation with the said customers. For instance, according
to the financial report for 2007, as at 31 December 2007, 25% of Bank's
liabilities (including deposits) and 16% of issued loans were related to non-EU
countries. Taking into account that the network of Bank's branches outside
Latvia providing services to private customers and small and medium-sized
enterprises is not wide, the conclusion can be made that large corporate
clients have formed a relatively high concentration of loans and deposits in
the respective portfolios of the Bank. However, it must be noted that these
concentration levels are in line with the requirements determined by the FCMC.

About Parex banka:
Being founded in 1992, Parex banka offers universal banking services throughout
the Baltic region, the CIS and other European countries such as Germany,
Switzerland and Sweden. Parex Group companies operate across the banking,
finance, leasing, asset management and life insurance sectors. Parex banka is
the only partner of American Express in Latvia and Lithuania, allowed to issue
American Express credit cards. Since 05 December 2008 the State owned Mortgage
and Land Bank of Latvia is the majority shareholder of Parex banka.

Company: Parex Bank

Full company nameParex Bank
Country of riskLatvia

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