Household borrowing remains large

  • The growth in the volume of car leases accelerated even further in April
  • Real estate companies borrowed a little more modestly than in previous months
  • Bank deposits continued to grow strongly in April and were up 10% over the year

Borrowing by households was again large in April, with especially strong demand for car leases. The value of new car leases signed in April was 43% larger than in the previous April, and the yearly growth in the portfolio of car leases accelerated to 20%. Other consumption loans also grew fast, at a yearly rate of 9%. The strong growth in consumption loans reflects both the favourable economic environment and the increased supply. Consumption loans provide a substantially smaller share of the loan and lease portfolio than do housing loans at only 9%.

Interest in housing loans remained strong among households in April. Some 101 million euros of new housing loans were taken out, which was 15% more than at the same time a year earlier. The yearly growth in the portfolio was 6.7%, like it has been for the past half year.

The new corporate loans issued in April were more evenly divided between sectors than in earlier months of the year. Some 213 million euros of new corporate loans were issued, which was a little less than at the same time a year earlier. Although real estate and construction remained the sectors that took the largest amount of new loans, like before, the amount they took in loans was less than in previous months. Given that loans to real estate and construction account for a large share of the portfolio of the banks, a more even division of loans represents positive progress. Companies in agriculture stood out particularly for borrowing more than in previous months[1].

The average interest rate on new long-term corporate loans was a little higher in April than it was a year ago at 2.7%. This was partly because fewer loan contracts for large loans with low rates were signed in April. In the second half of last year there were some individual large loan projects with low interest rates that affected the average margin quite significantly. The average interest rate for housing loans remained at 2.4%, which is comparable to what it was a year earlier.

Alongside the elevated activity in borrowing, deposits also grew strongly. The deposits of both households and companies were up 10% on a year earlier, meaning they grew faster than the loan and lease portfolios. At the end of April the total deposits of companies and households stood at 13.2 billion euros.

Author: Kirstin Saluveer, Economist at Eesti Pank

See more from Bank of Estonia website


The net profit of the banks was 13 pct smaller in 1Q

• Real estate companies have borrowed more in recent months
• The rapid growth in housing and consumption loans to households continued
• The net profit of the banks was 13% smaller in the first quarter than a year ago

Estonian non-financial companies were quite active in borrowing from banks and leasing companies operating in Estonia in March 2018. The 278 million euros of new long-term loans and leases was 11% more than was issued in the same month a year earlier. Lending to real estate companies has particularly increased in recent months, and almost half of the new long-term loans issued in March went to such companies. Companies in transportation and storage also stood out in the first quarter for borrowing more than previously (1) .

The fast growth in loans and leases to companies and households continued in March. The demand from households for loans remained strong and was driven by rapid wage growth and high levels of confidence, and the total stock of housing loans increased by 6.6% over the year. New housing loans worth 96 million euros were taken, which is a little less than at the same time a year earlier. Meanwhile, the amount taken by households in car leases has increased faster in recent months. This has partly been driven by the change that came in from the start of the year to the taxation of vehicles owned by companies, which has led to company cars being registered to private individuals. The stock of car leases was 18.5% larger in March than a year earlier. Other consumer loans also saw strong growth of 9.5% over the year. Demand for borrowing with overdrafts and credit cards has been weaker as incomes have risen fast and the stock of such loans changed little over the year.

The average interest rates on new loans were at around the same level in the first quarter of this year as in the first quarter of last year. The interest rate on both new housing loans and long-term corporate loans was 2.4% in March.

The good capacity of borrowers to pay their loans meant the loan quality of the banks remained good. The total stock of corporate and household loans overdue for more than 60 days shrank to 135 million euros in March to make up 0.9% of the loan portfolio. The banks have made provisions against possible loan losses, almost entirely covering the loans overdue by more than 60 days.

The deposits of companies and households in banks also grew strongly in March. Bank deposits were 9.4% larger than a year earlier at 13.1 billion euros.

The net profit of the banking sector fell in the first quarter of 2018. Total net profit of 77.5 million euros was earned in the quarter, which was 13% less than a year earlier. The return on assets on an annual basis was 1.2%, which is 0.3 percentage point less than a year previously. Interest income increased, but expenses increased by more. A new income tax regime came in from the start of the year that requires banks to pay income tax on the profit earned during each quarter, increasing income tax expenses. In addition the merger of two banks raised personnel costs and a correction in stock markets created losses from the changes in the market value of financial instruments.

Read more on the Bank of Estonia website

Author: Mari Tamm, Economist at Eesti Pank

Estonia stands out in Europe for its use of bankcards

In the first quarter of 2018 private individuals withdrew an average of 7.7 million euros a day from ATMs in Estonia and made an average of 11.3 million euros of card payments each day. Estonia stands out within Europe for these statistics. Research by the European Central Bank shows the only country where cash is used less at points of sale than in Estonia is the Netherlands.

Statistics on the use of cash and bankcards vary widely from country to country in the euro area. Residents of Malta make 92% of their purchases using cash, while people in Estonia use cash for only 48% of payments at points of sale. Other countries alongside Malta where cash is popular are Greece and Spain, while people in Finland and the Netherlands join those in Estonia in preferring card payments.

The number of ATMs in Estonia has fallen by a fifth in the past decade, but the number of cash withdrawals from ATMs has fallen even further, dropping by 31%. The turnover of ATMs has increased by 15% though, which means that larger amounts are being withdrawn at a time. The average withdrawal by private individuals was 56 euros in 2009, but in the first quarter of this year it had climbed to 94 euros.

The research also looked at how much cash people on average have on them. Residents of the euro area have an average of 65 euros in their wallet, with Germans carrying the largest sum of 103 euros, and the Portuguese the smallest at 29 euros. People in Estonia have 43 euros in their wallet on average. Men and older people carry more cash on them on average than others.

The research by the European Central Bank into the countries of the euro area can be found on the website of the European Central Bank.

See more on Bank of Estonia website

Author: Tiina Soosalu, Payment and Settlement Systems Department

Corporate debt shrank in 2017 and that of households increased

  • Corporate debt liabilities shrank as investment in fixed assets is low and companies can finance investments from their own funds
  • Domestic borrowing by Estonian companies increased while their borrowing from abroad decreased
  • Households are borrowing enthusiastically both to buy real estate and for consumption
  • Around one billion euros more was invested abroad in 2017 than was taken in from there

Corporate debt was down by around 1% in 2017. Debt liabilities shrank as investment in fixed assets is low despite increasing recently and companies can finance their investments and purchase assets using their own funds. Furthermore, companies have reduced the amount of short-term debt liabilities taken from foreign associated enterprises. Borrowing is still mainly from banks operating in Estonia, which reflects the relatively good access to bank loans in the country.

Households are buying a lot of housing and cars, and so their debt liabilities increased by 7% in the past year. Although the risks from credit growth have increased, they are softened by the growth in debt liabilities not exceeding that in savings or incomes. Banks became more active in the consumption loan market and the growth in the stock of loans and leases issued by them accelerated in 2017. The previously very strong growth in loans from other lenders, including instant loan providers, slowed.

The indebtedness of companies and households in the Estonian private sector, or the debt-to-GDP ratio, declined notably in 2017 to 116% at the end of the year. The decline was due to the fall in corporate debt and the rapid growth in nominal GDP. The debt burden of the Estonian private sector could have been considered excessive ten years ago and after the economic crisis, but its current level is much more in keeping with the core indicators, especially income levels. The indebtedness of the Estonian general government, which is still the smallest of any country in the European Union, declined a little last year and was 9.5% of GDP at the end of the year.

The Estonian economy was again a net lender to the rest of the world last year and the net outflow of financial assets grew by one billion euros to over 4% of GDP. Since 2009, Estonian residents have put more financial assets abroad than they have taken in from abroad. The difference with the past decade is primarily that Estonian households are saving more now and companies are investing less. The position as a net lender has meant the figures for the external debt and the international investment position have improved, but low investment also restricts the future capacity for growth of the economy.

For more details see the infographic.

Financial sector statistics and their publication calendar

Read more on the Bank of Estonia website

Author: Taavi Raudsaar, Economist at Eesti Pank

Central bank allocated a quarter of its profit to the state budget

  • The central bank has allocated one quarter of last year’s profit, or 1.1 million euros, to the state budget
  • Eesti Pank’s capital has increased by around 0.5 billion euros and the long-term goal is to increase its capital to 1.4 billion euros
  • Eesti Pank’s share of the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros

The Supervisory Board of Eesti Pank decided on April 3, 2018 to accept the proposal of the Executive Board to transfer one quarter, or 1.1 million, of the 4.3 million euros it made in profit last year to the state budget. The Supervisory Board allocated 3.2 million euros of last year’s profit to increasing the capital of the central bank.

Since 1992 Eesti Pank has allocated a total of 149.8 million euros to the state budget.

Chair of the Supervisory Board Mart Laar said, “The long-term goal of the Supervisory Board is to create a large enough reserve that the central bank would be able to help the state if problems were to arise. The loose monetary policy of the euro area central banks of recent years and the large volume of assets that have been purchased in connection with it have increased the financial risks faced by Eesti Pank, and that risk is likely to increase in the years ahead”.

The ratio of Eesti Pank’s increased capital to the assets used for monetary policy is one of the lowest of any of the central banks of the euro area. The comparison with the other central banks of the euro area is important, as the balance of risks to capital of the central banks of the euro area and the European Central Bank as a whole is considered when joint monetary policy decisions are made.

For this reason the Supervisory Board set a long-term goal in 2012 of increasing Eesti Pank’s capital ratio to the average level of the central banks of the euro area. This means it is necessary to raise the level of capital from the current level of half a billion euros to 1.4 billion. The central banks of the euro area have purchased a total of 1.5 trillion euros of assets for monetary policy purposes and the income and risks from them are shared equally, and Eesti Pank’s share of that is 4 billion euros.

Eesti Pank received 32.7 million euros last year in income from the joint monetary policy and currency issuing of the Eurosystem, up from 30.5 million euros the year before. Eesti Pank’s operating expenses were 19.8 million euros last year, which was 2.1 million euros more than a year before.

The net income was reduced by a general risk provision of 7.5 million euros to cover risks, which was the same amount as last year. In the past five years Eesti Pank has built up a risk provision of 45 million euros in total. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.

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 joint activities of the euro area central banks, which mainly stem from monetary policy loans and asset purchases.

The euro area central banks divide the income and costs of the single monetary policy, so that the income earned from monetary policy loans to commercial banks, or the costs from them, is divided among the national central banks to match their participation in the European Central Bank. This participation is called the capital key of the European Central Bank, and since the start of 2015 Eesti Pank’s capital key has been 0.274%.

The total volume of assets bought by the central banks of the euro area in their monetary policy transactions stood at 3.2 trillion euros on 23 February this year. Of this, 1.5 trillion euros is in monetary policy assets where the risks and income are shared among the euro area central banks using the capital key. Eesti Pank’s share of all the assets purchased by the central banks of the euro area for monetary policy purposes is 4 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 risks for the central banks are 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 that is meant is the wider sense of 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 (Estonian central bank Eesti Pank)

The closure of Versobank has little effect on the Estonian economy

  • The Estonian banking sector as a whole is stable and strong
  • Deposits at Versobank account for 1.5% of all the deposits in banks operating in Estonia
  • Versobank had 253 million euros of deposits, 87% of them held by non-residents

The closure of Versobank after its breach of anti-money laundering rules will have very little impact on the Estonian economy and banking as Versobank had only a marginal market share and the majority of the deposits in the bank are owned by non-residents.

Deputy Governor of Eesti Pank Madis Müller said that Versobank, which was closed for persistent breaches of anti-money laundering rules, was not a systemically important bank for Estonia. “The Estonian banking sector as a whole is stable and strong. The closure of Versobank shows that oversight of Estonian banks is effective and Estonia will not tolerate breaches of anti-money laundering rules”.

Versobank had a marginal share of the market and mainly handled services for clients from outside Estonia. At the end of last year, clients had around 253 million euros of deposits in Versobank, which is equal to only 1.5% of all the deposits in banks operating in Estonia. Of the deposits in Versobank, 87% were held by non-residents.

“Before the operating licence was withdrawn from Versobank, the Financial Supervision Authority carried out on-site inspections four times since 2015 and wrote an injunction requiring shortcomings to be eliminated. The closure of Versobank is a message that there is no place for money laundering in Estonian banking”, said Mr Müller, who is also a member of the supervisory board of the Financial Supervision Authority.

Suspicions about money laundering have touched banks operating in Estonia and Latvia in recent years. The Financial Supervision Authority uncovered serious shortcomings at the Estonian branch of Danske Bank in 2014 and wrote an injunction in 2015 requiring them to be eliminated. Danske responded to this by closing its problematic business lines aimed at risky non-resident clients. An additional independent enquiry has now been opened at the head office level of Danske Bank looking at banking transactions in the whole period from 2007 to 2015. The third largest bank in Latvia, ABLV, also came under suspicion of money laundering recently and the liquidation of the bank was initiated at the end of February this year.

Deposits of non-resident companies and household clients in the Baltic states are largest in Latvian banks and smallest in Lithuania. At the peak in 2014, 56% of all the deposits in Latvian banks were deposits of non-residents. This share had fallen to 41% by 2017. The share of non-resident deposits in bank deposits in Lithuania is only 2.8%. The share of deposits in Estonia held by foreign non-financial sector companies and households has been declining steadily, and it fell from a peak of 21% in 2012 to 8.5% by 2017.

More information about compensation of the deposits of Versobank clients and the liquidation of the bank can be found on the website of the Financial Supervision Authority.

Source: Bank of Estonia

See graph here (The share of non-resident household and non-financial sector corporate deposits)

Demand from households for loans remains strong

  • Estonian companies were active in borrowing from banks and leasing companies operating in Estonia
  • The share of loans overdue for more than 60 days in the loan portfolio was below 1%
  • Bank deposits continued to grow rapidly and were up 10% on February 2017

Estonian companies borrowed actively in early 2018 from banks and leasing companies operating in Estonia in the same way as at the end of last year. Borrowing activity was boosted by somewhat higher investment and the good access to domestic bank loans. Some 30% more was taken in new long-term loans and leases in the first two months of the year than in the same months of last year. Companies in almost all sectors took out more long-term loans than a year earlier, and the largest taker of the new loans was the real estate and construction sector. The portfolio of corporate bank loans was still smaller than a year ago though, as one bank transferred a part of its loans to the portfolio of its foreign parent bank in the autumn. Without this the portfolio of corporate loans, leases and factoring would have grown by 6-7% over the year.

Demand from households for loans remains strong. The yearly growth in the portfolio of loans and leases to households accelerated to 7.7% in February. Housing loans, consumption loans and car leases were all taken out more than previously. The amount taken in new housing loans was 14% more in February than a year earlier, and the portfolio of housing loans increased by 6.9% over the year to 7.1 billion euros. The car lease portfolio grew by 19% over the year. The growth in car leases has partly been driven by the change that came in from the start of 2018 to the taxation of vehicles owned by companies, which has led to company cars being registered to private individuals. The yearly growth in the portfolio of overdrafts and credit card loans slowed to 1.7%.

The average interest rates on new loans have risen slightly at the start of this year. The average interest rate on new housing loans issued in February was 2.3%, which is similar to the average rate last year. The average interest rate on new long-term corporate loans was 2.6% in February. The average interest rate depends largely on which companies have signed loan contracts for which projects in the particular period, and so can fluctuate quite widely.

The good state of the economy and low interest rates mean that the loan quality of the banks remains good. There were 146 million euros of overdue loans to companies and households at the end of February, accounting for only a small share of the portfolio at less than 1%. The share of loans that are overdue was smaller than in February 2016 in almost all sectors.

As companies and households have borrowed extensively, so financial buffers have also continued to increase. The bank deposits of Estonian companies and households grew by 10% over the year to 13 billion euros. Growth in the deposits of households has been built on strong growth in incomes. Deposits grew a little more slowly in February than at the end of last year, but at a rate that is still rapid. The bank deposits of households grew by 9.4% over the year to 7 billion euros, while the deposits of companies were up 11% over the year in February.

 See graph here
Source: Bank of Estonia
Author: Mari Tamm, Economist at Eesti Pank