The need for corporate credit increased somewhat in 2014

The ability of companies to finance their own activities remains relatively good. This is because of the buffers that have been built up, relatively good access to bank lending, and the very low base interest rates. However, reduced profits last year meant that the financing position of companies worsened to an extent. The situation is somewhat more complicated for smaller companies as their options for financing are more limited and their loans are generally more expensive than those of large companies.

Estonian companies have a larger need for external capital, which is also seen in an increase in their debt liabilities. The increased need for external capital comes mainly because of the decline in profitability, which has reduced the internal resources available to companies for financing operations. At the same time, companies in some sectors have increased their investments in fixed assets and inventories, pushing up corporate debt liabilities to 17.7 billion euros at the end of the third quarter of 2014, which was 11% more than a year earlier*.

Household finances improved in 2014. Household purchasing power and capacity for saving increased as incomes rose and inflation fell. Not all the additional financial resources were directed to consumption, and so household deposits grew by over 8% during 2014 to 5.4 billion euros. This growth once again came mainly from large deposits, but there was also an increase in the number of households with deposits.

Household borrowing is growing at a moderate speed. Higher incomes and the improved financial situation of borrowers have helped boost borrowing activity. Demand has increased most noticeably for housing loans but also to a lesser degree for other loans. The annual growth in the housing loan portfolio of banks operating in Estonia accelerated to reach 2.8% at the end of 2014, while growth in the portfolio of other household loans remained below 1%. The use of consumer loans and instalment credit from sources other than banks has also increased.

The capacity for lending of the banks operating in Estonia remains good. This is aided again by high levels of capitalisation and profitability and by favourable financing conditions. Interest rates on loans to companies and households fell in 2014 as base interest rates and, to a lesser extent, interest margins declined, but the deterioration in the outlook for the economy led some banks to tighten their credit standards.

The main risk for the financing of companies and households remains the danger of the general economic environment worsening. This would hurt the capacity of the banks to lend and their risk assessments, and it would reduce the ability of companies and households to finance their activities.

* These statistics are affected significantly by the reclassification of companies between institutional sectors at the end of 2013, without which the increase would have been a little below 8%.

Source: Bank of Estonia

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

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