Low base interest rates are weakening the profits of banks

The growth rate for new housing loans slowed in June. The annual growth in new housing loans, which has reached over 20% in some months this year, slowed in June to 2.5%. Higher confidence among households, rising incomes, very low interest rates and an improved outlook for the housing market will continue to support activity in the housing market and the housing loan portfolio is likely to continue to grow.

Companies took 3% less in new loans and leases in June than a year earlier. Although loan issuance has shrunk, lending has become markedly more broad-based than last year and more new loan contracts have been signed. Large amounts of financing went to agriculture and transport in June, with annual growth reaching 40%.

The annual growth in the loan and lease portfolio of the banks remained at 1.5%, the same level as in the previous month. The total volume of loans and leases increased in June by 22 million euros to 14.7 billion euros. The growth in the portfolio has slowed somewhat in recent months after the branch of one foreign bank was closed in May.

The average interest rate on housing loans remained at 2.5% in June. The average interest rate on loans given to companies has been much more volatile and dependent on the nature and riskiness of the projects financed during the month. The average interest rate for long-term loans taken by companies was 2.9% in June.

The speed of annual growth in household deposits continued to slow. Household deposits increased by 68 million euros in June, mainly due to seasonal factors, which meant that growth was slower than at the same time last year. The annual growth rate for household deposits slowed by half a percentage point during the month to 6%. The total deposits of companies and households reached 8.7 billion euros at the end of the month.

The quality of loans continued to improve. The share of loans overdue by more than 60 days in the loan portfolio fell in June from 2.9% to 2.8%. The improvement in the ability of borrowers to repay their loans meant that banks could reduce their loan loss provisions, and this contributed to their profits.

Low base interest rates are limiting the growth of income for banks. In the second quarter, banks earned around one quarter less in interest income from loans than they did a year earlier. The impact of low base interest rates on net interest income was noticeably less, as the banks also had to pay less for their funding. The net profit of the banking sector in the second quarter was 155 million euros, of which around 48% came from dividends paid out by subsidiaries. Without this financial income the net profit of the banking sector would have been around 11% lower than a year earlier.

Source: Bank of Estonia

Author: Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank