Estonians offer credit scoring solution based on social media

Estonian company Big Data Scoring that is managed and co-owned by Erki Kert, former board member of LHV Pank, is offering credit scoring based on social media data, writes Äripäev.

The company is active at this point in Estonia, Finland and Poland.

The models used by Big Data Scoring predict on the basis of data from Facebook and other online sources which clients are more likely to default on their loan. In developing the model the company has gathered over 45 million lines of data on the internet which it has combined with real-life payment behavior data in a number of European countries over a period of more than a year.

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http://www.bigdatascoring.com/

Swedbank has the biggest market share in Estonia

Four largest banks in Estonia – Swedbank, SEB, Nordea and Danske Bank – account for 91% on the loan market and 89% for deposits, shows a survey by the Financial Supervisory Authority.

In the loan market, Swedbank’s market share was 41% last year, followed by SEB which has 23% of the loan market.

In the market of deposits, Swedbank’s market share was 45%, as opposed to the market share of SEB at 21%.

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Bank of Estonia allocated 25 pct of its profit to the state budget

The Supervisory Board of Eesti Pank decided on May 7, 2013 to transfer three quarters of the 34.1 million euros it made in profit last year to strengthen its capital. One quarter of last year’s profit, or 8.5 million euros, is to go to the state budget.

“The Supervisory Board of Eesti Pank confirms the long-standing strategy for profit distribution that the central bank gives the state up to 25% of its profit. The Supervisory Board decided today to give the maximum permitted under this strategy. Eesti Pank will cover part of the profit distribution from its share of the income that the central banks of the euro area earned last year from the Greek government bonds bought within the framework of the bond purchase programme” said Chairman of the Supervisory Board of Eesti Pank, Jaan Männik.

The ratio of Eesti Pank’s capital to the risk assets used for monetary policy is the lowest of any of the central banks of the euro area. Last year the Supervisory Board set a long-term goal of increasing its capital to 3.5 times its then level, meaning an increase in capital of around one billion euros to 1.3 billion euros.

The Supervisory Board decided that the relative level of Eesti Pank’s capital should increase to the average level of the central banks of the euro area, as the balance of risks to the capital of the Eurosystem as a whole is considered when joint monetary policy decisions are made.

Last year, Eesti Pank received 51.6 million euros in income from the joint monetary policy and currency issuance activities of the Eurosystem, which is made up of the national central banks of the euro area and the European Central Bank. In 2011 income from this source was 20.2 million euros. Earnings from investment activities were 8.1 million euros last year, and 14.7 million in the previous year. Eesti Pank’s operating expenses fell last year to 16.2 million euros from the 19.4 million of 2011.

Since 1992 Eesti Pank has allocated a total of 123 million euros to the state budget.

Background Risks to Eesti Pank in monetary policy The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the euro area as a whole, which are mainly related to monetary policy operations.

The Eurosystem is made up of the central banks of the euro area countries and the European Central Bank. The Eurosystem divides the income and costs of the single monetary policy, so that the income earned from monetary policy loans to euro area banks is divided among the central banks to match their participation in the Eurosystem, and the same is done with risks. Eesti Pank’s participation in the Eurosystem is 0.26 per cent.

The Eurosystem’s monetary policy operations currently fall into two groups, monetary policy loans to commercial banks, which stood at 852 billion euros at the end of April, and the Securities Markets Programme, SMP, which stood at 203 billion euros.

Hedging of monetary policy risks To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risk for the central banks is reduced by the national authorities and their desire to recapitalise their insolvent banks.

The SMP is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.

The capital of central banks and its importance In this case, the capital of Eesti Pank and the other central banks is taken in the wider sense to mean the part of the reserves and capital that the bank can use to cover losses.

The level of capital of the central bank is important because a central bank that has little or negative capital can cause two sorts of public concern. The first is the question of the central bank’s independence if the bank needs to ask the government for additional capital. The second is the question of how much the central bank really wants to meet its inflation targets, which will then cause increased public expectations of inflation. The result of both these concerns is a loss of trust and of public faith that the central bank will be able to keep inflation under control successfully.

Source: Bank of Estonia

The risks to financial stability are low

The risks to financial stability in Estonia are low. The situation in international financial markets has improved in the last half year, partly through the steps taken to strengthen the financial framework of the euro area and the efforts of the euro area central banks. The main threat to Estonian financial stability remains the fragmentation of the euro area debt markets, which could hinder growth across all of the European Union. The markets partly recovered their confidence at the end of last year, but this could disappear rapidly if not all member states contribute sufficiently to implementing the European Union reforms or if they do not improve their own national fiscal position. For any potential banking crisis to be resolved quickly and effectively, it is necessary for public finances to be in good condition.

The financial environment is also weakened by the delay to the recovery of growth in the euro area, as the worsening ability of borrowers to repay loans is increasing the loan losses of European banks and may erode their capitalisation. The assessments by banks of the quality of their own assets should be conservative and transparent for uncertainty to be reduced and the economy to be stably financed in the euro area. Problem loans should be written down rather more than less, because this helps confidence to recover.

The parent banks of banks operating in Estonia have borrowed funds on better terms than other big banks in Europe. However, it should be noted that the financing model of Swedish banks continues to be based in large part on short-term funding from the financial markets. The Swedish central bank and financial supervision authority have placed new liquidity requirements on the biggest banks from the start of this year in order to strengthen financial stability and maintain the confidence of the markets. Eesti Pank considers this to be quite appropriate given the indebtedness of the private sector, real estate market risks and the relatively large and concentrated banking sector in Sweden.

Despite the poor state of the external economy, Estonian growth accelerated in the second half of 2012 with support from private consumption and investment. The increased confidence of households meant that private consumption grew faster than wage income and savings decreased to some extent. Low interest rates and the income from the sale of emission quotas continued to support investment activity. Although the confidence indicators of Estonia’s trading partners show that their expectations for the external environment have improved, a recovery in external demand is not yet evident. The outlook for Estonian growth depends to a large extent on exports, as economic growth based solely on domestic demand is not sustainable.

The short-term risks to financial stability arising from the Estonian economy remain small. Although the loan portfolio started to increase again last year and the real estate market picked up, it is too early to speak of excessive loan growth. Against the output growth of recent years, loan demand has been moderate. However, the volatility of the external environment needs to be taken into account when new financial obligations are taken, as it may affect the ability to service debt. Most loans in Estonia are taken with a floating interest rate, so borrowers need to bear in mind that interest rates have been very low for a relatively long time, but at some point they will start to rise. To cope with that happening, the borrowers need to be able to adjust their spending levels. Having sufficient financial buffers helps to reduce the risks to loan repayment ability.

The low interest rates have reduced the profitability of banks, adding pressure on them to increase their lending margins. The larger banks have so far avoided widening their revenue base with riskier loan projects or other high-yield investments. If the lending margin remains high for too long, it could start to hinder the financing of viable projects that support the long-term development of the economy.

Source: Bank of Estonia

1.2 million internet purchases are made each month

Eesti Pank’s statistics show that in the past 11 months*, 1.2 million internet purchases have been made through Estonian banks, with a total turnover of 54 million euros. Of these purchases, 4/5 were payments within Estonia made through a bank link service, accounting for 40 million euros in value. The average size of these payments was 42 euros. Credit cards were used more over the internet for making payments for goods and services ordered from other countries. Credit card payments were made on average 235 thousand times a month for a total value of 15 million euros. Only one tenth of these payments were within Estonia. The average credit card payment was 64 euros.

Three methods are used for paying for internet purchases: card payments, internet bank payments through a bank link service, and wallet solutions like PayPal. Paying for purchases made over the internet within Estonia is convenient and safe. It is possible to use a bank link service so that the purchase can be made within the internet bank of the purchaser’s own bank, or else a credit card can be used. When MasterCard or VISA cards are used for internet payments, an additional password is required to ensure security. The payment options for cross-border payments are more limited and the most popular is card payments, though various wallet-solutions are also used. These are provided by various payment institutions and e-money organisations and allow consumers to pay for internet purchases more flexibly.

As internet shopping becomes ever more popular, it should be remembered that the payment solutions offered for paying for purchases are provided by both licensed payment service providers

and by some companies  that have no licence to offer such services. The Estonian Financial Supervision Authority supervises companies with licences, and its website provides information on whether a company offering payment solutions has a licence or not. Consumers using payment solutions offered by companies that are not under supervision do so at their own risk. Research by the European Commission shows that only rarely do internet purchasers have problems with criminal misuse of personal data, bank card data or internet bank passwords. The main worries of internet purchasers are more the difficulty of returning goods and getting reimbursed, problems with the delivery of goods, and inaccurate descriptions of goods on websites. The research also showed that awareness among consumers of the rights of internet purchasers is low.

Recommendations from the European Central Bank to payment service providers should be implemented by February 2015, increasing the security of internet payments around Europe and increasing consumer understanding. The new recommendations will also affect companies selling goods and services over the internet through payment service providers like banks, payment institutions and e-money institutions.

Data from Statistics Estonia show that one in five Estonian residents used the internet for purchases in 2012. The number of purchasers using the internet in Estonia grew by 11% or 24 thousand during 2012.

Information on buying goods and services over the internet can be found on the website of the Consumer Protection Board, which also gives a list of e-shops that do not meet all the legal requirements.

* Eesti Pank has been collecting and publishing statistics on internet purchases made through banks since May 2012.

Source: Bank of Estonia

Lower interest income reduced bank profits

In March, the annual growth of the loan and lease portfolio in the domestic real sector rose to 2.8%. The corporate loan portfolio grew faster and at the end of March the volume of loans and leases to Estonian firms was 7.1 % larger than at the same point in 2012. During the month the loan and lease portfolio of Estonian companies and households grew by 66 million euros to 14.8 billion euros.

Companies took out 16% more new loans and leases in March than in the same period last year. Almost half, or a total of 96 million euros, of the long-term loans that have been issued have been to the real estate, construction and manufacturing sectors to finance large individual transactions.

Activity in the housing loan market continued at a similar rate to that of the previous months. In March, 22% more housing loans were taken out than a year earlier. Despite this, the annual growth rate of the housing loan portfolio still did not turn positive.

Loan interest rates in March were at a similar level to those of the start of the year. The average interest rate for housing loans granted in March was 2.6%, and the average rate for long-term corporate loans was 3%.

The improvement in the quality of the loan portfolio continued as expected. The volume of loans overdue by more than 60 days fell in March by 25 million euros, and their share in the portfolio fell to 3.1%. The volume of problem loans fell for both firms and households.

The deposits of Estonian companies and households grew at an annual rate of 8% in March. The volume of deposits of the domestic real sector increased on the back of corporate resources to 8.6 billion euros, with 31 million euros added to deposits in March.

Banks earned around 81 million euros in net profit in the first quarter of 2013. The net profit of the banks was 22% lower than in the first quarter of 2012. The main reason for the fall in profits was the drop of 16% in net interest income caused by the low level of base interest rates. In addition, the impairment reserves set up earlier to cover loan losses were reduced by less than a year ago. Net profitability in relation to assets fell from 2.2% a year ago to 1.7%

Source: Bank of Estonia

Author: Kadri Salumaa, Financial Sector Policy Division of Eesti Pank

Corporate debt rose in the fourth quarter

The increased financing needs and improved borrowing capacity of firms led corporate debt to grow by 7.3% in 2012. At the start of the year equity was still growing faster than debt, but in the final quarter of the year this trend was inverted by major growth in debt.

Firms continued to borrow from abroad in 2012. The volume of loans taken from abroad and debt issued there grew by 16% during the year and made up 35.6% of total corporate debt by the end of the year. A major contribution to the growth of corporate debt in the fourth quarter came from very large one-off transactions in the transport sector.

Household borrowing behaviour continues to be cautious. The volume of household loans has remained essentially unchanged for the past three quarters. The total household indebtedness measured as the ratio of debt to GDP fell to 44% by the end of 2012. This means that the indebtedness has fallen by 15 percentage points from its peak three years ago and has returned to its level of 2007.

The Estonian economy as a whole was a net lender to the rest of the world in the fourth quarter and in the year as a whole. This was principally due to the cautious financial behaviour of households and the relatively good profitability of firms.

Author: Taavi Raudsaar, Financial Sector Policy Division of Eesti Pank

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Opposition cries foul over nomination of ex-PM Mart Laar

Opposition politicians are not happy over the nomination of former prime minister Mart Laar to head the supervisory board of the Bank of Estonia, reports Postimees.

“I am not too sad about the exit of Jaan Männik, but I was expecting a less political replacement,” said Eiki Nestor, vice chairman of Social Democrat parliamentary faction.

According to the Social Democrat, Laar is likely to have the support from IRL and Reform Party that he needs for the nomination to become official, but Social Democrats and Centre Party are still considering their support.

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Migration to Single Euro Payments Area (SEPA)

In Estonia, consumers, businesses and public sector institutions have been ensured with a smooth transition to SEPA.

Migration to SEPA in Estonia:

1. Banks will complete preparations for full SEPA migration by 1 February 2014. Currently, of the entire payment traffic of Estonia, only cross-border euro payments within the EEA comply with SEPA technical and business requirements. After 1 February 2014, all payment orders will be changed to comply with SEPA.
2. Estonia is going to use a one-year transition period (until 1 February 2015 with an option to extend it for a further 12 months). During that time, banks may provide payment conversion services to consumers (changeover to the IBAN format) and businesses (changeover to the ISO 20022 XML format). The transition period is necessary because banks will be unable to complete their respective preparations by 1 February 2014, so consumers and businesses cannot be required to adapt to changes at the same time.
3. Estonia will not migrate to SEPA direct debits. Instead, a new payment service based on e-invoicing and SEPA credit transfers will be launched (called the e-invoice standing order service). The provision of the domestic direct debit service will terminate on 31 January 2014. The transition to the new payment service will start in the second half of 2013.
4. SEPA direct debits will be introduced as a separate service. The service will be made available for payers, enabling them to pay for products and services purchased from Europe on a cross-border basis. In providing the service, banks must ensure payer protection measures as stated by the SEPA regulation (for example, direct debit periodicity, limit, blacklist).
5. SEPA communication, press relations. Eesti Pank supports information activities and press relations using their own channels – the Estonian Payment Forum, press releases, press events, homepage. Banks use their own channels to communicate with customers and they organise seminars. Currently no media campaigns are planned.

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Estonians prefer paying with a card to withdrawing cash

Statistics from Eesti Pank show a clear trend of increased growth in the use of cards for payments. In 2012 turnover from card payments exceeded total cash withdrawals, with average monthly card payments reaching 325 million euros last year, while cash withdrawals from ATMs averaged 303 million euros a month. The difference between the number of transactions from card payments and the number of cash withdrawals was particularly significant, with an average of 18.5 million card payments being made each month in 2012, which is equivalent to 600 thousand a day, while cash withdrawals were less than one fifth of that number at 117 thousand transactions per day.

The average sum of each card payment transaction was 17.6 euros in 2012, which was similar to the 17.1 euros of 2011. Individual cash withdrawals have increased by 10% over the year, averaging 86 euros in 2012, up from 78 euros in 2011.

The number of ATMs in Estonia has fallen. In 2012 there were a total of 934 ATMs operating in Estonia, whereas in 2008 there were over 1000. The number of points of sale has remained the same and at the end of 2012 they numbered more than 28 thousand.

Source: Bank of Estonia