Code card identification still popular in Estonia

A recently conducted survey shows that though Estonian residents’ awareness of the need for cyber security is high, up to 40 percent still prefer code cards to other means of identification when logging in to their Internet bank.

The Nutikaitse 2017 project looked into residents’ skills and knowledge of cyber security procedures, and how aware they are of potential threats. One of the project’s advisors, Erki Peegel, told ERR’s radio news that a majority of respondents also applies this knowledge.

More than 90 percent of residents use passwords for their smart devices and don’t share them with others. At the same time, the fact that some 40 percent of respondents still prefer outdated code cards to more up-to-date means of identification when dealing with their bank online is a cause for worry, Peegel said.

Read more from ERR News

Housing loan portfolio up 6 pct year-on-year in April

  • Corporate and household loan and lease portfolio grew strongly in April, up almost 7% year-on-year
  • Issuance of new long-term loans to companies remained unchanged from April 2016
  • New housing loans have seen an increase relative to a year ago
  • Deposits with banks continued to grow faster than the loan and lease portfolio

Corporate and household loan and lease portfolio continued to grow solidly in April, increasing 6.6% year-on-year. The loan and lease stock grew by approximately 73 million euros, amounting to around 17.4 bn euros as of the end of the month.

The corporate loan and lease stock grew 7% year-on-year. Growth has been stable this year at a level close to last year’s average. Short-term loans have picked up over the past few months. Growth has been fastest for loans to the primary sector and trade companies. New long-term loans were issued to companies in the value of 228 million euros, a level more or less unchanged from April 2016.

Housing loan portfolio was up 6% year-on-year in April. Housing loans have been gathering pace since the second half of 2016. The housing and loan market activity has been intensified by an increase in transactions with new apartments. The volume of housing loans issued in the year to April has grown, relative to last year’s figure. There has been an increase in the number of contracts as well as the average amount of a loan.

Household car leasing continued to grow at a fast pace, up 14% year-on-year. The stock of overdraft and credit card loans started to increase in the second half of 2016 and gained slightly over 3% in March and April compared to a year earlier.

The average interest rate for new housing loans has risen slightly, resuming the mid-2016 level. The average interest rate of housing loans issued in April was 2.3%. The interest rate of corporate long-term loans was, on average, considerably high in April relative to the past months, affected by the refinancing of loans restructured to avoid default.

The volume of loans overdue over 60 days remained low in April. The volume of loans overdue over 60 days was 163 million euros, accounting for 1.1% of the loan portfolio. 97% of such loans are covered by loan-loss provisions.

Corporate and household deposits continue to outpace the loan and lease portfolio. Corporate and household deposits were up 11% year-on-year in April, amounting to almost 12 bn euros as of the end of the month. Annual growth in corporate deposits accelerated to 15%. Similar to previous months, household deposits gained approximately 8% on a year earlier.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

The costs of card payments has fallen for larger businesses

At the Estonian Payment Environment Forum on June 1, 2017  Eesti Pank presented the results of a survey of the impact of the regulation on interchange fees for card payments. The survey clearly showed that the costs of card payments have fallen primarily for larger businesses.

Eesti Pank surveyed members of the Estonian Traders Association and the Estonian Association of Small and Medium Enterprises in April and May this year to find out whether the Europe-wide Regulation on Interchange Fees had led to any changes for Estonian businesses. It was apparent from the results that the costs of card payments have fallen for large businesses, but the changes have not trickled down to all small businesses.

The banks that responded to the survey had not managed to inform all the businesses among their clients about the regulation on interchange fees or explain the principles behind the changes in the fees for card payments. Several large companies also confirmed that they had only received the information in part, but they still found that the costs of card payments had become more transparent. At present it is principally smaller companies that are in the dark, and that have not felt the impact of the regulation yet.

“For companies that have not contacted their bank about changing their contract conditions in the past two years, now is the time to look into what the fees for card payments are made up of”, advised Madis Müller, Deputy Governor of Eesti Pank.

One of the biggest changes in the Regulation on Interchange Fees was the introduction of a cap on interbank interchange fees, which the banks later reclaim from the card transactions of merchants, of a maximum of 0.2% of the value of transactions with debit cards, and 0.3% of the value of transactions with credit cards. Although the interbank interchange fees are only one part of the fees for card payments, the change should still lower the costs of card payments for merchants. The introduction of the cap was intended to ensure that it makes no difference to the costs to merchants whether their client pays for goods and services by card or in cash.

The Regulation on Interchange Fees for card payments was designed to help create a payments market for the whole of the European Union, allowing consumers, retailers and other companies to benefit fully from the internal market of the European Union by capping interchange fees for card payments.

The regulation came into force on 8 June 2015 and was implemented in three stages. The cap on interchange fees of 0.2% for transactions with debit cards and 0.3% for transactions with credit cards was introduced on 9 December 2015, while the business rules distinguishing card schemes and processors and covering the transparency of fees came in from 9 June 2016. The regulation allowed for a five-year transition period for domestic debit card transactions, but Estonia did not apply this.

The Estonian Payment Environment Forum was founded jointly in April 2012 by Eesti Pank, the Estonian Banking Association and the Ministry of Finance. It is attended by the banks and other market participants. The forum is chaired by Eesti Pank. More detailed information about the Forum, including the topics discussed there and the participants, can be found in Estonian at

Source: Bank of Estonia

Financial stability could be threatened by rising prices

Estonian economic growth in 2016 was slow, but it picked up in the second half of the year. Value added increased in most parts of the economy, including oil shale and energy, where it had earlier fallen. Signs of faster GDP growth were also apparent in the first quarter of 2017. Growth picked up a little in the sales revenue of companies in the fourth quarter of 2016 and the rise in labour costs slowed. The profitability of the corporate sector remains nonetheless low and wage pressures remain high. A further fall in profits could threaten the ability of companies to service their loans.

The recovery in economic growth is endangered by investment remaining at a low level. Investment by companies has declined constantly for four years. Investment activity depends on confidence about the future, which in turn is based on credibility in economic policy, including tax policy. Frequent changes in the tax system with short notice increase uncertainty. When the labour market is rather overheated and there have been no major obstacles to growth for companies focusing on the domestic market, additional spending funded by a government budget deficit would do more harm than good. The government should support economic growth by making the business environment as stable as possible.

The planned taxation of financial services could have negative side effects for financial stability in Estonia and could impede the financing of the economy. For this reason the possible impact of such a tax needs to be analysed carefully before it is introduced. If the tax is introduced it would be sensible to apply it not only to commercial banks but to a wider group of financial institutions in order to reduce market distortions having negative effects on financial stability. Given the free movement of services and capital around the European Union and the integration of the Estonian financial sector, an asset-based tax could also lead to a reduction of the liquidity and capital buffers in Estonia that are important for maintaining financial stability.

Prices in the Estonian real estate market started to rise faster in the last quarter of 2016, but the growth rate is still in line with the growth of income. More transactions were made in the real estate market than a year earlier and the average price of transactions rose rapidly in the fourth quarter of 2016 and at the start of 2017. Real estate developers brought more new residential property to the market than before though, so a larger share of transactions were for new and more expensive residential space, which affected the average price of transactions. If the structure of the transactions had been the same as a year earlier in terms of the location and quality of the apartments, the average transaction price would have increased by an estimated 5-6% in the second half of 2016.

The rapid growth in the loan portfolio of the banks operating in Estonia continued in the first months of 2017. Corporate loans increased in most sectors. Although the growth was fastest in the stock of loans to the retail sector, the biggest contribution to the growth in the corporate loan portfolio came from the real estate and construction sector. Loans have mainly been made to the real estate and construction sector for development of commercial real estate, meaning that the credit risk faced by the banks is related more and more to the development of the commercial real estate market. However, the profitability of the banks remained at a similar level to that of the previous year and the capitalisation remained high.

Lending standards and conditions are currently appropriate, and Eesti Pank does not consider it necessary to change the requirements for issuing housing loans. At a time of rapid growth in wages and real estate prices and low interest rates, there is a danger that both lenders and borrowers may overestimate the ability of borrowers to pay their loans in the future, and may let their debt burden rise to unreasonable levels. Although there is no urgent need to change the housing loan requirements for the banks in the current credit environment, Eesti Pank monitors changes in leverage and the ability to repay loans in the housing market, and is ready to make the requirements stricter if necessary.

Eesti Pank will keep the countercyclical buffer rate at 0%. The debt burden of the non-financial sector as shown by the credit-to-GDP ratio has not changed in recent years and is predicted by the Eesti Pank December forecast to remain at around the same level in the years ahead. However, low interest rates and fast wage rises contain the risk that trading activity and prices could increase further in the real estate market, leading to growth in debt levels. The corporate debt burden could also start to grow again if investment and confidence increase. For this reason Eesti Pank monitors the indicators that could show a possible build-up of risks and can, if necessary, raise the countercyclical buffer rate above 0%.

There was no major reduction in the risks related to the parent groups of the banks operating in Estonia that arise from the high levels of household indebtedness and rising real estate prices in Sweden. Real estate prices in Sweden rose a little more slowly in the first half of 2016 than before, but the rate started to pick up again at the end of the year. Population growth, the movement to towns and low interest rates are keeping demand for housing loans strong. The financial position of the parents of the banks operating in Estonia remains vulnerable with growth in housing loans rapid, as a major part of the funding of the parent banks comes from financial markets. Almost half of this is in the form of covered bonds, which are used to fund housing loans.

The biggest risks to financial stability in the European Union are of a possible fall in international bond markets. Market interest rates are at historically low levels and could rise if the outlook for economic growth improves. A rise in market interest rates and a fall in the value of bond markets would have a negative effect in Estonia primarily through the financial results of pension funds and insurance companies.


Source: Bank of Estonia

Private and government sector debt burdens unchanged

Growth in corporate debt has been restrained by the modest level of investment and the reduction in lending between companies.There was a rapid increase of 8% in 2016 in the stock of loans and leases taken from banks operating in Estonia. Borrowing from abroad by companies remained at about the same level throughout the whole year but lending between companies and borrowing from holding companies contracted substantially. This meant that corporate debt liabilities increased by only 0.2% during the whole of 2016.

The loan liabilities of households increased last year at the same rate as incomes, but a little more slowly than savings. Rising wages, low unemployment and low interest rates on loans all encouraged increased demand for loans from households, and their loan liabilities increased by 6%. Both housing and consumption loans from banks and loans from other lenders increased in volume. The rapid growth in incomes and the high savings rate helped the cash and deposits of households to increase by more than 8% over the year. There was also growth of more than a quarter over the year in the value of tradeable securities held by households. Despite the rapid growth, the financial savings of Estonian households are still below the European Union average in relation to incomes.

The indebtedness of households and companies in the Estonian private sector did not change substantially in 2016, and was 127% at the end of the year, which is around the average level for the European Union. The indebtedness of Estonian companies and households is relatively large compared to that in countries with a similar income level. The indebtedness of the Estonian general government, which is still the smallest of any country in the European Union, declined very little last year and was 9.7% of GDP at the end of the year.

The Estonian economy was again a net lender to the rest of the world in the fourth quarter of last year and in the year overall. Since 2009, Estonian residents have put more funds abroad than they have taken in from abroad. This is because Estonian households and companies have started to save more and investment in the Estonian economy has declined. Increased saving and the position as a net lender have led to an improvement in the figures for the external debt and the international investment position, but low investment also restricts the future capacity for growth of the economy.

Source: Bank of Estonia (read more here)

Author: Taavi Raudsaar, Economist at Eesti Pank

The profitability of the banks similar to last year in 1stQ

  • The portfolio of corporate loans and leases grew by a rapid 7% over the year
  • There was more activity in the housing loan market than a year earlier
  • The average interest rates on new loans rose

In the first quarter of 2017 the portfolio of loans and leases to Estonian companies and households continued to grow rapidly. The total volume of loans and leases was 6.5% larger in March than a year previously. The portfolio increased by 220 million euros during the quarter to 17.3 billion euros.

The total volume of loans and leases increased quickly, though a little more slowly than in the final quarter of 2016. The portfolio of loans and leases to companies was 7% larger in March than a year previously. Companies received 584 million euros in new long-term loans in the quarter, which is about 10% less than in the same quarter of last year.

Growth accelerated in the housing loan portfolio. The total volume of housing loans was 5.9% larger in March than a year earlier and there was more activity in the housing loan market in the first quarter than a year earlier. Both the number of loans and their average value rose. The portfolio of car leases to households was 14% larger over the year in March and the volume of overdrafts and credit card loans was 3% larger.

The average interest rates on new loans rose. The average interest rate on housing loans issued during the month climbed in both February and March, and the average interest rate in March was 2.3%. The average interest rate on loans to companies also rose in March. However, the margins on loans to companies are quite variable depending on the exact timing of the particular project.

The quality of the loan portfolio of the banking sector remained good at the beginning of 2017. The stock of loans overdue for more than 60 days shrank mainly because of a decline in the long-term overdue loans of industrial companies. At the end of March, 1% of the loan portfolio of the banking sector consisted of loans overdue for more than 60 days.

The deposits of companies and households again grew faster than the loan and lease portfolio. Total deposits increased by 11% over the year in March to 12 billion euros. Corporate deposits grew a little faster and were up 14% in March on a year earlier, while those of households were up 8.1%.

The profitability of the banks remained at a similar level to last year in the first quarter. Net profit of 89 million euros was earned in the quarter, which is equivalent to 1.5% as a ratio to total assets on an annualised basis. Increased interest income and a reduction in provisions contributed to profit, with interest income itself driven by growth in the loan portfolio and a rise in the interest margin on it. The fall in net service fee income and income tax expenses had a negative impact on profit.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Payments in real time are popular in Europe

It is planned that at the end of 2017, real-time payments will be introduced in several euro area countries, but Estonia has not yet fixed a date for this to happen. The experience of the United Kingdom and Denmark shows that real-time payments are very popular with clients of banks.

There is currently no system in the euro area for real-time payments, but several projects are in hand that would let client payments move between banks in real time, like they do now within banks. A real-time payments service will be available in the euro area from the end of 2017 and the commercial banks in each country will decide whether and when to introduce the service. Several euro area countries will launch the service at the end of this year. The commercial banks in Estonia are also making preparations to provide the service, but no date has yet been set for when the service will be launched.

The experience of the United Kingdom, Denmark and Sweden shows that there is a lot of demand in the market for real-time payments. The instant payments system was first launched in the United Kingdom in 2008 and around four million payments a day are made through it, accounting for one fifth of all cashless payments. A similar payment system was started in Denmark in 2014 and from the very start it was handling 100,000 payments a day, out of a little over one million payments made each day in Denmark. The six biggest banks in Sweden started using a real-time payments system in 2012. The system has over five million users, meaning more than half of all Swedes.

Payments within banks are currently made in real time in Estonia, while payments are made between banks five times a day from Monday to Friday. As the banking sector in Estonia is highly concentrated, two thirds of payments are within banks. A daily average of 123,000 interbank payments with a total turnover of 145 million euros were made last year.

Payments in real time would be good news for merchants who are waiting to receive money. People in Estonia pay by card a great deal, but paying by card can mean that the merchant only receives the money the next day. The money from card payments made on a Friday evening only reaches the merchant on Monday morning in most banks. This means that both bank clients and merchants would benefit from interbank payments in real time.

Read more on Bank of Estonia website here

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