Private clients make 85 pct of all domestic payments

A daily average of one million cashless payments were made in Estonia in the second quarter of 2015, with a total turnover of 393 million euros. The number of cashless payments was 5% higher compared to the same period a year ago, but the turnover was 8% less. The number of cashless payments has kept increasing over the past ten years, but turnover has been a lot more volatile, since it depends on both the general economic activity and, to a certain extent, the activity of larger individual companies. Private clients make 85% of all domestic payments, but it only makes up 9% of the total turnover of payments. Around one fifth of the cashless payments made in Estonia are settled using the interbank retail payments system STEP2.

A daily average of 116,000 domestic payments were made in the second quarter of 2015 between banks using STEP2, with a total turnover of 144 million euros. The number of payments was up 7% from the same time a year ago, while turnover increased 1% year-on-year. Although the majority of the payments are made within one bank, interbank payments have steadily made up 20-24% of all domestic payments over the past ten years. An average of 12,000 payments a day were made from Estonian banks to other countries using STEP2. Payments were made to 34 countries, with most of them going to Finland and Germany (a total of 31% of all cross-border payments).

TARGET2 express transfers, which transfer money from one bank to another in up to 15 minutes, are also used to send payments to another bank.1 This option is still not very widely used in Estonia: only 100 domestic express transfers per day were made by bank clients in the second quarter.

Private clients tend to use bank cards for purchases more and more. In the second quarter of 2015, private clients made 667,000 card payments every day, which is more than triple the number of card payments made in 2005. The share of card payments among all domestic payments made by private clients was 75% in the second quarter, while ten years ago it was 10% smaller. Private clients are withdrawing cash less and less frequently. Ten years ago, private clients withdrew cash from ATMs an average of 137,000 times a day, but in the second quarter of 2015, that number had dropped to 103,000 (117,000 times a day in the second quarter of 2011 and 108,000 times a day in the same period in 2013).

Among other cashless methods of payment, private clients use internet bank payment orders the most. An average of 109,000 internet bank payment orders per day were made in the second quarter, which is 1.7 times more than ten years ago. The share of internet bank payment orders among domestic payments has decreased, though: from 19% ten years ago to 12% now. In 2005, the third most important cashless method of payment was direct debit (10%). Now, however, e-invoice standing orders make up 6% of all cashless methods of payment. Payments made through a bank link reached 4% in the second quarter, while the share of other cashless methods of payment was 1% or less.

Read more from Bank of Estonia website

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

Estonians paying less in cash

More Estonians than ever are using debit cards to make payments, instead of cash.

Almost 700,000 card payments are conducted in Estonia every day, over three times more than 10 years ago, the country’s central bank said on Friday.

This forms 75 percent of all internal payments in the country, compared to 65 percent in 2005.

The number of cash withdrawals has also declined by roughly 35 percent.

Estonia’s success as an e-state started largely due to introduction of online banking in the 1990s. Today, practically all banking transactions are done electronically.

Source: ERR via Estonian Review

The volume of deposits has increased by 11 pct over the year

The volume of loans and leases issued to companies and households was 15.5 billion euros at the end of June. Year-on-year, the loan and lease portfolio has grown by 2.9%. Annual growth in the volume of loans and leases to companies decelerated to 2% in June. The areas that saw the fastest growth in corporate borrowing over the past year were trade and real estate development.

The growth of the household loan and lease portfolio accelerated somewhat. Over the year, the volume of housing loans has increased by 3.8% and the volume of other loans by 4.3%. Housing loans worth 81 million euros were issued in June, i.e. about the same amount as in the previous months. Car leases issued to individuals have increased quickly, while car leases to companies have decreased by the same amount. In June, 3% more car leases in total were issued than the same time a year before.

The interest level of loans and leases continues to be low thanks to low base interest rates. The interest rate on both housing loans issued to households and long-term loans issued to companies was 2.2% in June.

The quality of loans issued by banks declined a little, similarly to the previous months. The share of loans overdue for more than 60 days grew to 1.7% of the loan portfolio. The share of loans overdue has increased the most among companies related to agriculture and real estate development.

Companies and households are still actively depositing their funds. Over the past year, the amount of corporate and household deposits in banks’ balance sheets has increased by 10.7%. Corporate deposits have seen a particularly fast rise, as their annual growth increased by 14.2%. Like in the previous months, household deposits have gone up by almost 8% per year.

Banks earned 261 million euros in profit in the second quarter. The greatest factors impacting the change in profits were the dividend income from subsidiaries (229 million euros) and the income tax withheld from the large dividend payment made from the profit of the previous years (45 million euros). Without one-off transactions, the banks earned 77 million euros in profit in the second quarter, which is 6% less than in the second quarter of last year. Profits were supported by an increase in commission income, but decreased because of smaller net interest income and larger administrative expenses.

Source: Bank of Estonia

Author: Jaak Tõrs, Head of the Financial Stability Department

The low investment activity is reflected in the slower growth of corporate debt

The growth of corporate debt decreased at the start of the year. In quarterly terms, the volume of loans taken and bonds issued stopped increasing by the end of the first quarter of 2015, but year-on-year, the growth reached nearly 4%. The volume of long-term loans has decreased because of moderate investment activity, both in case of loans taken from the Estonian financial sector and loans taken from abroad.

Corporate equity decreased somewhat in the first quarter. Reduced profits and relatively substantial dividend payouts meant that reinvested profits also decreased, and the growth of equity, which was fast-paced after the economic crisis, stopped. In international comparison, however, the level of equity in the Estonian corporate sector is quite high.

The incomes and savings of households are still growing faster than their loan liabilities. Higher incomes helped the cash and deposits of households to increase by 9% over the year, to 6.3 billion euros. At the same time, loan liabilities grew by 3.5% and reached 7.8 billion euros. The growth rate of both long-term housing loans and short-term loan liabilities has accelerated somewhat. The indebtedness of households as a ratio of disposable income decreased and as a ratio to GDP remained at 40%.

Like in the past five years, Estonian residents still invested or returned more funds abroad than they took in from there. This was because Estonian residents still saved more in the first quarter than they invested.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

The average interest margin for housing loans rose in May

The total volume of loans and leases to Estonian companies and households was 3.2% larger in May than a year earlier. The financing portfolio increased by 103 million euros during the month to 15.5 billion euros with around 70% of the monthly increase coming from corporate debt liabilities.

The volume of loans and leases to companies continued to grow stably in May. The total volume of loans and leases to companies grew by 3% over the year and some 759 million euros in new loans and leases were given to companies during the month, about the same amount as a year ago. New long-term loans worth 179 million euros were granted, most of them to companies in trade, real estate or manufacturing.

Annual growth in the volume of housing loans picked up in May to 3.6%. An average of 80 million euros has been issued each month over the past three months, which is around one fifth more than in the same period last year. There was also an increase in other household loans and leases issued in the first half of this year, mainly because of car leases, which have been increasing in volume since December last year and are around 20% up over the year. At the same time there was a fall of about the same amount in the volume of car leases issued to companies.

The average interest margin for housing loans issued by the banks rose. EURIBOR, which is the base interest rate for a majority of housing loans, fell in the first half of this year, but the average interest rate on housing loans rose at the same time. This reflects the efforts of the banks to maintain profitability when interest rates are low. The average interest rate for housing loans issued in May rose to 2.3% and the average interest rate for long-term loans taken by companies was 2.5%.

The share of overdue loans in the loan portfolio remains small. The share of loans overdue by more than 60 days in the loan portfolio increased slightly to 1.6% in May with increases in overdue loans to companies in agriculture, trade and manufacturing.

The deposits of companies and households continued to grow rapidly. The annual growth in the deposits of companies accelerated to 9%, while household deposits grew by an annual 8%. Total deposits stood at 10.1 billion euros at the end of May.

 

Source: Mari Tamm, Economist at Eesti Pank

First municipal bank founded in Estonia since reindependence

Eesti Ühistupank (Estonian Cooperative Bank) was established on Tuesday by 119 individuals and 334 corporations.

This is the first cooperative bank in Estonia since the country regained its independence in 1991.

Taavi Aas, acting mayor of Tallinn and member of the bank’s board, said the aim is to launch a universal quality bank with a wide base of investors, which focuses on serving Estonian people and companies.

Mae Hansen, the chairman of the board, added that the cooperative bank makes decisions with local development in mind and it helps to diversify the situation in Estonian loan market.

“Almost 90 percent of the market is dominated by four banks and these are all based on Nordic capital,” Hansen told ERR. “Imagine the situation if the next financial crisis is to take place in the Nordic countries. It will have a tremendous effect on our market. That’s why we need to diversify, and having a cooperative bank, which is based on local capital, is of great help here,” she explained.

The cooperative bank is the initiative of the City of Tallinn, but includes founding members from all over the country. Tallinn City Council allocated 5 million euros of city funds to the establishment of the bank last week. The Reform Party faction of the city council called the allotment a waste of tax payers’ money.

Once the bank gets an approval from the Financial Supervision Authority, it will start handing out loans to private persons and companies, as well as agricultural, energy and housing societies. The bank should open its doors next fall.

The CEO of the new cooperative bank is Ülle Mathiesen.

Source: ERR News

Governer speeks about the work of Eesti Pank

The Eesti Pank Act has given us a wide range of responsibilities, said Ardo Hansson, Governor of Eesti Pank in his speech to the Estonian Parliament on May 26, 2015. Our first responsibility is to keep inflation low and stable, setting a joint monetary policy together with the other central banks of the euro area and implementing it in Estonia. Secondly we must keep the financial system here stable, as strong and functioning banks are vital for economic growth.

On top of this we supply the country with high-quality cash, produce timely and authoritative statistics, manage and invest the state foreign reserves, and act as advisor to the government. Last year we succeeded in all of this.

Last year the previous Riigikogu issued the central bank with a clearer mandate than ever before for macroprudential supervision in Estonia, and we have started to act on this mandate. Macroprudential supervision aims to increase the resilience of the banks and the rest of the financial system to systemic problems and to restrain the accumulation of major risks.

  • The first measure introduced by Eesti Pank was the requirement for commercial banks to hold a 2% systemic risk buffer. The systemic risk buffer is needed to manage the banking risks that are specific to a small and open economy. The introduction of the buffer did not imply any major changes for the banks operating in Estonia, as their capitalisation levels were already above that required. The measure was a precautionary step by the central bank to guard against possible risks in the future.
  • The second step was taken three months ago when requirements for housing loans were applied to the commercial banks by the central bank with the aim of pre-empting possible credit booms in the future. The requirements do not have any noticeable effect on the loan market as things stand, as the banks are in any case currently acting conservatively. Both of these measures are precautionary steps taken against any significant future increase in the risks in the real estate market should competing banks start to take on excessive risk.

The crisis management measures taken by the central banks of the euro area in recent years have been successful, but they have come at a price. Both the balance sheets of the central banks and the associated risks have increased many times over in consequence. However, the ratio of Eesti Pank’s increased equity to the assets used for monetary policy remains 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 as a whole is considered when joint monetary policy decisions are made.

This makes it very important that the Supervisory Board of Eesti Pank decided to transfer three quarters of the 17 million euros that the bank made in profit last year to strengthening the capital of Eesti Pank. One quarter of last year’s profit, or 4.3 million euros went to the state budget, and since 1992 Eesti Pank has allocated a total of 133 million euros to the state budget.

It may be asked what exactly the central bank’s reserves are for, given that the Riigikogu bears the responsibility of last resort for capitalising Eesti Pank? History has shown that central banks fall into difficulties at times when there is a general economic or financial crisis. I want to make every effort to see that Eesti Pank has no need to come to the Riigikogu asking for capital at a time of such crisis. It is to avoid precisely this that the central bank builds up reserves and I am glad that the Eesti Pank Supervisory Board shares this opinion.

For the central bank to be financially independent, it needs to maintain and invest its assets. The current situation in the financial markets, where interest rates on sovereign bonds have fallen to very low levels, poses new challenges for the central bank as a long-term conservative investor. Eesti Pank has reacted to changes in the operating environment and has spread its risks by adding further asset classes to the investment portfolio and investing money in the sovereign bond markets of more countries than before.

  • Eesti Pank’s return on its investment was several times higher in 2014 than the target set at the start of the year, and reached 22.8 million euros. Falling interest rates throughout the year made investments in bonds profitable and the increasing share portfolio of Eesti Pank meant that we earned significant income from investments in shares.

As well as earning income, Eesti Pank is careful to keep control over its spending and to use its money efficiently. For this reason we have put the Maardu manor site up for sale, as we do not need it in carrying out the main functions of a central bank. We would have done this earlier, but first it was necessary to complete the process of registering the manor house and the land it stands on.

It is worth noting under cost efficiencies that Eesti Pank has added technical support for the Fiscal Council to its list of responsibilities together with the macroprudential supervision and increased requirements for compiling financial statistics. Despite this, the number of people employed at the bank is roughly the same as a year ago, and Eesti Pank remains the smallest central bank by staff size in the European Union. Eesti Pank’s operating expenses fell last year to 17 million euros from the 17.4 million of a year before.

Although the central bank’s duty is to keep inflation low and not to chase every possible source of higher revenues, it is good to be able to note that we ended last year comfortably in profit.

Source: Speech of the Governor of Eesti Pank to the Riigikogu at the presentation of Eesti Pank’s Annual Report 2014

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