Estonia was net lender for fifth straight year in 2013

The outflow of financial investments from Estonia surpassed inflow by 534 million euros in 2013, which is almost double the figure for 2012, the Bank of Estonia said on March 11, 2014, adding that Estonia has been a net lender for the past five years.

Although net inflow of direct investments was approximately on a par with 2012, both outflow and inflow lagged behind 2012 in absolute terms. Of investments placed abroad equity investments accounted for the lion’s share, the central bank said.

In investments made in Estonia, equity investments declined partially as a result of Estonian owners buying back companies from foreign investors.

Of institutional sectors, credit institutions financed the outside world with 482 million euros, the business sector with 307 million euros and the central bank with 59 million euros. The general government saw a capital inflow of 314 million euros.

Source: Baltic News Service via Estonian Review

Companies take more loans and leases

Companies took 15% more in loans and leases in February this year than they did a year earlier. The increase was greater for long-term loans, more than half of which went to finance real estate and manufacturing companies.

Increased activity in the housing market was accompanied by an increase in housing loans. More than 15% more new loan contracts were signed in February than a year earlier, while the yearly growth in the turnover of housing loans reached 37%. As the volume of new loans was only slightly larger than the amounts repaid from earlier loans, the growth in the loan stock was modest. The housing loan portfolio was 1.2% larger at the end of February than it was a year ago.

The total stock of loans and leases issued to Estonian companies and households stood at 14.8 billion euros in February, which is 0.8% more than a year ago.

Borrowing has been facilitated by low interest costs. The six-month EURIBOR, which is the base rate for a majority of loans, remained at 0.4% in February, and the average interest margin on new housing loans was 2.1%. The average interest margin on long-term corporate loans was 2.7%, equalling the average for the past two years.

The volume of loans overdue for more than 60 days constituted less than 2% of the total portfolio in the end of February. As the quality of loan portfolio is improving, the banks continued to reduce the provisions made earlier to cover loan losses, and at the end of February provisions covered 75% of the long-term overdue loans.

The deposits of Estonian companies and households grew at an annual rate of 8% in February. Deposits from households and companies in the domestic non-financial sector increased during the month by a total of 128 million euros to reach 9.3 billion euros by the end of the month. The deposits of non-residents increased by 20 million euros in February to 2.3 billion euros, as before accounting for 20% of all the deposits in banks.

Source: Bank of Estonia

Author: Kadri Salumaa, Financial Stability Department of Eesti Pank

Number of card frauds lowest in Estonia

In Estonia the number of bank card frauds is the smallest within the Eurozone, it appears from a report published by the European Central Bank on  Feb.25.

In 2012 card fraud increased within the Single Euro Payment Area (SEPA) for the first time since 2008, driven mainly by higher internet fraud. In that year one euro in every 2,635 euros spent using credit and debit cards issued within SEPA was lost to fraud. Compared with 2011, the total value of fraud increased by 14.8 percent in 2012, reaching 1.33 billion euros.

In 2012 around 5,400 frauds in the amount of 900,000 euros were connected to cards issued in Estonia. Although the number of transactions connected to fraud in Estonia increased by 8 percent, the percentage of frauds of all card transactions remained at 0.002 percent. The number of frauds carried out with debit or credit cards issued in Estonia is the smallest among Eurozone countries, spokespeople for the Bank of Estonia said.

Four in every 1,000 Estonians fell prey to card frauds and the average loss was about 160 euros. In SEPA 17 fraud cases for every 1,000 residents were registered while the highest number of frauds was recorded in France — 46 for every 1,000 residents.

In Estonia the biggest number of card frauds or 43 percent of all cases took place in ATMs.

Estonians have on average 1.3 bank cards per resident while in Europe the number is 1.4 cards per resident. In Estonia on average 189 card transactions are made per resident while in Europe the number is 103.

Source: Estonian Review / BNS

Deposits grew by 8 pct over the year

The annual growth of the loan and lease portfolio in the Estonian non-financial sector slowed in January to 0.7%. The total volume of loans and leases to companies and households shrank over the month by 8 million euros to 14.8 billion euros.

Demand for credit was held down in January by the low level of investment activity among Estonian companies. Companies took 660 million euros in loans and leases during the month, which was 10% less than in January 2013. The January turnover of long-term loans was half the level of the previous year at 111 million euros but the turnover of short-term loans remained close to the monthly average for the last quarter of 2013. Loan turnover was higher than usual in the infrastructure sector in January.

In contrast, household borrowing in the housing loan market is growing as before. Households signed around 1300 new loan contracts in January and banks issued housing loans worth 45 million euros to them. This was 23% more than a year earlier, though it was one fifth less than the monthly average for last year. Annual growth in the housing loan portfolio reached 1% in January.

Interest rates for loans did not change much in January. Despite the small rise in the 6-month EURIBOR that serves as the basis for most loan contracts, the average interest rate on long-term corporate loans fell to 2.9% while the average interest rate on new housing loans was 2.6%.

The steady improvement in the quality of the loan portfolio of the banks halted. The stock of loans overdue for more than 60 days increased in January by around 1 million euros as the quality of the housing loan portfolio declined. Overdue loans continued to make up 1.9% of the total loan portfolio.

Annual growth in deposits accelerated in January from 5% to 8%. Deposits by households and companies grew by 76 million euros in total to 9.2 billion euros. Corporate deposits supported growth in time deposits and savings deposits.

Source: Bank of Estonia

Author: Kadri Salumaa, Financial Stability Department of Eesti Pank

The borrowing activity of Estonian companies is low

The funding position of companies was relatively good in 2013 and that of households improved. The financing position of companies was good and their business operations and investments were not much restricted because of their increased current internal resources, the buffers they have built up, their increased ability to borrow and the low base interest rates on bank loans. Higher incomes and an improved financial position meant that the capacity of households to consume and to invest also increased.

Weak demand and investment meant that the borrowing activity of Estonian companies was low. The lack of demand coupled with uncertainty about the future for the economy discouraged companies from significantly increasing their investments in fixed assets. As corporate profitability remained relatively high and current revenue was enough to finance investment, companies did not have a great need to access external funds.

Household borrowing has picked up somewhat due to increased confidence and an improved financial position. This is most noticeable with housing loans but also to a lesser degree with consumer loans. The volume of housing loans issued has been larger than repayments of old loans since March 2013 and as a result the housing loan portfolio has grown by 0.9% over the year. The volume of new consumer loans has also started to grow, though the growth has not passed that of repayments of earlier loans.

Both corporate and household borrowing will remain moderate in the coming years. Loan growth will be supported by the expected growth in demand and in investment activity. The Eesti Pank forecast of December 2013 expects the total stock of domestic bank loans to companies and households to increase by 4% in 2014 and by 6% in 2015.

Interest rates remain favourable for borrowers. Domestic deposits and loan repayments were again sufficient in 2013 to cover the new loans that were issued. Even though the interest margins on new bank loans are somewhat higher than in the past couple of years, the interest expenses of companies and households are small because base interest rates are very low.

The Lending Review 2014 will be published on the Eesti Pank website in English soon.

Source: Bank of Estonia

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

Borrowing activity of Estonian companies is low

The funding position of companies was relatively good in 2013 and that of households improved. The financing position of companies was good and their business operations and investments were not much restricted because of their increased current internal resources, the buffers they have built up, their increased ability to borrow and the low base interest rates on bank loans. Higher incomes and an improved financial position meant that the capacity of households to consume and to invest also increased.

Weak demand and investment meant that the borrowing activity of Estonian companies was low. The lack of demand coupled with uncertainty about the future for the economy discouraged companies from significantly increasing their investments in fixed assets. As corporate profitability remained relatively high and current revenue was enough to finance investment, companies did not have a great need to access external funds.

Household borrowing has picked up somewhat due to increased confidence and an improved financial position. This is most noticeable with housing loans but also to a lesser degree with consumer loans. The volume of housing loans issued has been larger than repayments of old loans since March 2013 and as a result the housing loan portfolio has grown by 0.9% over the year. The volume of new consumer loans has also started to grow, though the growth has not passed that of repayments of earlier loans.

Both corporate and household borrowing will remain moderate in the coming years. Loan growth will be supported by the expected growth in demand and in investment activity. The Eesti Pank forecast of December 2013 expects the total stock of domestic bank loans to companies and households to increase by 4% in 2014 and by 6% in 2015.

Interest rates remain favourable for borrowers. Domestic deposits and loan repayments were again sufficient in 2013 to cover the new loans that were issued. Even though the interest margins on new bank loans are somewhat higher than in the past couple of years, the interest expenses of companies and households are small because base interest rates are very low.

Source: Bank of Estonia

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

Bank profits up by a quarter in 2013

According to data from the Bank of Estonia, banks in Estonia earned a total of 444 million euros in profits in 2013, a quarter more than in the previous year.

Swedbank Estonia led the table, recording 176 million euros in profits last year, although that represents a decrease of 22 million compared to 2012, the bank said in a statement on Tuesday.

Head of the bank’s Estonian branch, Priit Perens, said that the reason for the decrease lies in a standstill in economic development, as fewer investments were made and Swedbank earned less on loan interest. Interest rates also decreased, he noted.

Nordea today announced profits of 30 million euros in Estonia last year, an increase of 15 percent compared to 2012.

Estonian-owned LHV reported a 4.3 million-euro profit, a huge change compared to its 1.7 million euro loss of 2012. Private deposits in the bank grew by 26 percent to 356 million euros, while the loan portfolio grew by a whopping 94 percent to 206 million euros.

SEB and Dankse have yet to release their financial results from last year, but their profits are included in the totals reported by the central bank.

Source: Estonian Review / ERR

Changes in bank payment times

From the start of February the commercial banks will settle payments between themselves using a pan-European retail system. At the end of the working day on 31 January in consequence, Eesti Pank will close its retail payments system ESTA, where around one fifth of the payments made in Estonia are settled.

As interbank payments within Estonia will now move through the pan-European retail payments system STEP2, the working hours of that system will have an impact. The current ten settlement cycles will be reduced to five cycles, meaning that rather than the current hour or hour and a half, it will take around 3-5 hours for money to be transferred. The conditions for each bank depend on whether the bank is connected to the system directly or through another bank.

Bank clients will be need to be aware that if money has to reach its destination in another bank on the same working day, the payment will need to be initiated in Swedbank, SEB or Danske Bank by 16.30 at the latest, and in Nordea by 15.30 at the latest. For some banks the final deadline for making payments could be 15.00. Further information and answers to questions can also be obtained from the banks. If a payment is started later, it will reach the payee on the next working day, at around 10.00. Payments currently reach their destination on the same working day if they are made before 17.00.

Payments within banks will be made in the same way as they have been up to now. Payments within one bank will be made around the clock, even at weekends and holidays.

ESTA

Eesti Pank has settled interbank retail payments within the country since 1992 and the current retail payment system started operations in 2005. The speed and frequency of the payments has been the same since October 2006, with payments being made ten times a day between 08.00 and 18.00. During its eight years and four months of operation, the ESTA retail payments system has settled over 200 million interbank payments with a total value of 232 billion euros, equivalent to 95,000 payments worth 110 million euros each day.

Eesti Pank started preparing in 2012 for the change to SEPA so that the settlement systems for interbank retail payments could be brought into line with the new requirements. The results of the tendering process allowed Eesti Pank to offer the commercial banks improved payment conditions and lower prices, which were down one third on current prices at two euro cents per payment, and to develop a SEPA direct debit service. The prices of the retail payments systems operating in Europe were still cheaper though, and the parent banks of many of the banks operating in Estonia were already connected to the pan-European STEP2 settlement system, so the banks did not choose the solution offered by Eesti Pank. Only a few European central banks, such as the German, Italian and Austrian central banks, provide an interbank retail settlement service.

The pan-European STEP2 retail payments system

The STEP2 system is managed by EBA Clearing, a private company which was founded in 1998 and is now owned by 63 European and international banks. EBA Clearing is responsible for the reliability of the system and for keeping it working without interruption. The responsibility for oversight falls to the European Central Bank, which makes sure the system is working efficiently and that risks have been minimised.

Eesti Pank will continue to operate the Estonian part of TARGET2, the pan-European system for express interbank payments. The express system can be used for very large payments that reach their destination within around thirty minutes.

Source: Bank of Estonia

Amendments to the law coming into force this year

The Ministry of Finance reminds everybody on the amendments to the legislative acts that enter into force this year.
This year’s budget expenditure will be 8.06 billion euros and the expected revenue will be 8.02 billion euros. The increase in state revenue is five percent, soon to reach all spheres of life. The budget was prepared conservatively, as indicated by the 0.7 percent structural surplus measuring the substantive coping with expenditure.
An amendment to the Taxation Act enters into force, which reduces the limitation period for enforcement of compulsory tax levied pursuant to returns as well as administrative acts (e.g. orders) from seven years to five years. The practice has shown that the percentage of collection of tax debts older than five years is extremely low.
Amendments to the Income Tax Act enter into force, which allow equal taxation of real estate income of contractual investment funds established either in Estonia or in any foreign country. From now on also the Estonian-sourced real estate income of Estonian contractual investment funds will be taxed.  The income taxed at the fund level will no longer be taxed at the level of the unit-holders. These amendments only apply to real estate income and not to pension funds or their unit-holders.
EU 2014-2020 Structural Assistance Act sets out the national allocation of tasks from the Structural Funds, allows the ministries to impose conditions for granting aid, specifications regarding the procedure of granting aid, supervision and settling disputes.
Amendments to the Public Procurement Act allow to nullify procurement contracts unlawfully entered into under the framework contract. The term of submitting the request for review of public procurement has been changed from seven working days to ten calendar days. From now on, the disputes related to state secrets will be submitted to administrative court.
As agreed in the State Budget Strategy in spring 2012, the excise duty on tobacco increases by 6% and on alcohol by 5%.
As of February 1, 2014, a bailiff will have the right under an administrative regulation and at the request of a tax authority to order detention in accordance with the procedure of preliminary detention. 
As of April 1, 2014, the court and prosecution claims as well as the administration of state fees collected by courts will be transferred to the Tax and Customs Board’s Taxable Persons Register database.  This means that the claims of several state authorities will be gathered into a single register providing individuals a better overview of their financial obligations to the state. The court and prosecution claims will have a separate reference number. In cases stipulated by law, the prepayment account of an individual will be used for settling the claim in the extent of the sum calculated.
Amendments to the Value Added Tax Act allow extended options of providing proofs of tax free purchases, the place of taxation of electronic communication services and electronic services will change and quantitative restriction will be set to coffee (500 g) and tea (100 g) sent without VAT from a country outside EU. The amendments will enter into force from March 1, 2014.
Additional exemption rate of pensions increases.  As of January 1, 2014, the additional tax-exempt income of pensions is 2520 euros per year, which is 210 euros per month. This is 18 euros more than before.
Amendments to the Insurance Act and the Investment Funds Act enter into force. These will change the insurers’ management requirements based on EU-wide rules, allow insurers, in addition to being an insurer’s agent, operate as an agent of credit institution, management company or investment firm, raise the insurance amounts of insurance brokers’ liability insurance contracts.
Amendments to the Credit Institutions Act and related acts enter into force. The amendments based on EU legislation set new obligations to banks, investment firms and hedge fund managers. Banks and investment firms will have to maintain more quality capital and create additional risk buffers. Additional requirements are also set for management bodies. Hedge fund managers will be monitored more closely. The act increases financial stability and allows for increased reliability and transparency in financial sector.
The validity period of the limits of pension fund management fee will be extended. The act of amendment of the Investment Fund Act, the Funded Pensions Act and the Social Tax Act extends the validity period of the limits of pension fund management fees of mandatory funded pension (in case of conservative funds 1.2% and the rest 2%) by five years. The act also amends the rules of succession of units of mandatory pension fund. Now, the units can also transfer to legal persons, in addition to natural persons. The regulation of estate bankruptcy has also been amended. If the estate is declared bankrupt the creditors can satisfy their claims out of the units of mandatory pension fund.
The acts of amendment of the Financial Supervision Authority Act and the Investment Funds Act improve the financial supervision over financial conglomerates, facilitate the offering of units of other member states’ investment funds in Estonia, and give the financial supervision authority a more comprehensive role in promoting financial knowledge among the population.
Source: Estonian Ministry of Finance

20% of domestic payments are made between different banks

A notable feature of the Estonian payment environment is the large share of electronic payments. In the fourth quarter of 2013, 99.6% of all payments between banks were initiated electronically. An average of only 1100 payments per day were made in cash in bank offices, a number that was five times higher fifteen years ago.

The preferred payment method for Estonian residents continues to be card payments. Card payments accounted for 63% of all domestic payments in the fourth quarter, and over 610,000 card payments were made each day. The share of payments that are made by card has now been over 60% for three years. The number of payments made by card has also increased and in the last quarter of 2013 it was 7% higher than a year earlier.

Payments through an internet bank are the next most popular method of payment. In the fourth quarter of 2013, 21% of payments were made through an internet bank and an average of 210,000 were made each day, which is a tenth more than a year ago. Payments through internet banks have fallen as a share of payments by a couple of percentage points in the last three years.

The third most commonly used non-cash means of payment in Estonia is the direct debit, which includes e-invoice standing orders and made up 6% of all non-cash payments. In 2013 the banks in Estonia started to change over from direct debits to e-invoice standing orders. In the last quarter of 2012 an average of 55,000 payments were made each day by direct debit, but by the fourth quarter of 2013 the number had fallen to 42,600, while 15,100 payments were made each day with e-invoice standing orders. The migration from direct debits to e-invoice standing orders will end on 1 February when domestic direct debits will no longer be shown in the national statistics.

Payments within a single bank accounted for 78% of all domestic payments other than card payments in the fourth quarter of 2013, and 22% were interbank payments. The shares of payments that are within and between banks has barely changed for the last three years. One fifth of the total number and value of payments were made between banks using the ESTA retail payments system run by Eesti Pank. On 31 January ESTA will be closed down and after that, domestic interbank payments will be made through the pan-European STEP2 system run by EBA Clearing. Deadlines for interbank settlements will change as a result of this. Movements of funds from one bank to another will now take 3-5 hours and if a payment needs to be made on the same day, it will need to be made by 15.00 or 16.30, depending on the bank. Further information and answers to questions can also be obtained from the banks.

Source: Bank of Estonia

Author: Tiina Soosalu, Eesti Pank Payment and Settlement Systems Department

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