Relatively low investment activity in Estonia

  • Relatively low investment activity meant that savings grew faster than debt liabilities did
  • Corporate profits have fallen and both resident and non-resident owners have increased dividend payouts
  • The income and savings of households have increased faster than their debt liabilities

The saving of Estonian households, companies and general government was more in the third quarter of last year than their investment and so the Estonian economy as a whole was a net lender to the rest of the world. This means that as in the past six years, more funds were invested abroad or returned there than were taken in from abroad. Relatively low investment activity meant that savings again grew faster than debt liabilities did

The debt liabilities of non-financial companies increased in the third quarter by around 2% over the year. Annual growth in short-term corporate loan liabilities remained relatively fast at around 7% a year. Growth was fast mainly because company inventories and the turnover of retail companies were growing. The liquid financial assets of companies, in the form of cash, deposits, short-term loan assets and securities, increased at the same time by around 7%.

Corporate equity has decreased slightly in recent years. Corporate profits have fallen and both resident and non-resident owners have increased dividend payouts. In consequence, reinvested earnings have shrunk, and the rapid growth in equity that followed the economic crisis has come to an end. The level of capitalisation in the Estonian corporate sector is still quite high in international comparison.

The income and savings of households are still increasing faster than their debt liabilities. Higher incomes helped the cash and deposits of households to increase by around 9% to 6.5 billion euros. Debt liabilities increased by 4.5% to 8.1 billion euros at the same time. Loan growth is mainly being led by growth in long-term housing loans, but there has also been an increase in the volume of car leases.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

Estonia’s e-residents can open bank account from abroad

A bill of amendments has exited the Estonian Interior Ministry that is aimed at simplifying the activities related to e-residency and concluding an agreement with credit institutions; among other things the amendments would enable e-residents to open an Estonian bank account from abroad.

According to the amendments, applicants for e-residency will not have to prove in their future their strong connection with Estonia. Where at present applicants for e-residency must prove either their relationship with the Estonian state or legitimate interest in the use of e-services of the Estonian state, the ministry wants these requirements to be dropped on the grounds that ascertaining the presence of these circumstances requires excessive work and time, whereas most would-be e-residents may not necessarily know exactly about their need for the use of digital ID at the time when they apply for a digital ID.

Abolition of the requirement to have a relationship with Estonia, which will expand the circle of potential applicants for e-residency, will according to the ministry increase of the frequency of the risk of misuse of the e-resident’s digital ID.

Ruth Annus, head of the department for citizenship and migration policy at the ministry, said that in the future also people who have no relationship with Estonia but wish to become an e-resident in good faith can become e-residents of Estonia.

“It makes sense to direct the resource that is now spent on checking a person’s relationship with Estonia to make a background check and ex-post monitoring of individuals,” Annus told BNS.

The duties of gathering applications for e-residency and issuance of e-residency can in the future be placed on persons in private law. Under current law the applicant must turn either to the office of the Estonian Police and Border Guard Board or a mission of Estonia abroad. The new arrangement would be similar to that of gathering biometric data with visa applications, where the Foreign Ministry is entitled to assign these duties to a person in private law that meets valid requirements.

“Also in that case the decision about the issuance of a digital ID or refusing thereof would be made by the Police and Border Guard Board. In which countries that possibility will be made available first depends first and foremost on the foreign and economic policy interests of Estonia. While with the bill the possibility will be created for the involvement of trustworthy service providers, the concrete steps as regards expanding it are still to be decided about,” Annus said.

The fact that a person must come to Estonia physically to open a bank account necessary for engaging in business has been an obstacle to the use of e-services so far. The amendment would allow interested credit institutions to verify the identity of the applicant by means of IT channels. This is provided that four conditions are met – IT means are used for authentication which enable to record and reproduce the process, a document meant for digital identification issued by the Republic of Estonia is used for authentication, the identity of the applicant is verified on the basis of data for identification of the person entered in the identity documents database, and the credit institution observes stepped-up diligence measures.

If credit institutions verify the identity of an applicant indirectly, a stepped-up diligence measure must be applied – the first transaction related to the transaction must be made via a bank account opened to the name of the person or client in a credit institution registered in or whose place of business is in a contracting state of the European Economic Area or a third country where requirements equal to those provided in the Money Laundering and Terrorist Financing Prevention Act apply.

Source: Baltic News Service via Estonian Review

Estonian banks were profitable in 2015

The major banks active in Estonia see the current year as very good for their business and several of them say they are on course to setting a new record for full year profit.

The board chairman of LHV Pank, Erki Kilu, said at a media event of the Estonian Banking Association on Monday that the outgoing year has been very successful for LHV. “The first thing is the issuance of bonds and second the opening of ATMs. Aside from all this we are on course for a record profit. The banking market is in a good shape,” Kilu said.

The head of the Baltic units of Danske, Ivar Pae, also said the banking sector is enjoying a solid base now. “Why have banks been able to post continuously good results? First, good loan quality, which is at its best since the financial crisis now. Second, banks have been able to manage their cost base. Third, banks have adapted and their asset quality is high,” Pae said.

Pae added that even though Danske exited the private customer segment this year, it has boosted its operating volumes by one-third. “I can be altogether satisfied,” he said.

Silver Kuus, head of corporate banking at Nordea Eesti, said the outgoing year has been very good for the bank particularly because they were successful in activating their customer base.

“We earned money where we hadn’t earned before. A double digit figure will represent the increase in our profitability this year. We are in for a very upbeat figure,” Kuus said.

Allan Parik, board chairman of SEB Estonia, said the figures for the first three quarters of the year suggest a modest increase in expenses. “Our results reflect the environment. Despite challenges, we can be very satisfied with this year. The liquid savings of individuals and businesses alike are growing at a rapid rate,” Parik said.

The board chairman of Swedbank Eesti, Robert Kitt, also said there were indications that 2015 will turn out to be a very good year when it comes to earnings. The bank is not planning to pay out extraordinary dividend next year like it did using accumulated profit this year.

In their forecasts for next year, all the banks emphasized their expectation of faster economic growth and, first and foremost, that investments by the business sector and the private sector would start to grow.

Source: Baltic News Service via Estonian Review

Estonian companies are ready to go fully over to SEPA

At a meeting on Dec.10, 2015 of the Estonian Payment Forum in Eesti Pank, the banks confirmed that companies that make bulk payments have largely finished upgrading their systems and the conditions of the Single Euro Payments Area (SEPA) will apply in full from 1 February 2016.

“By now, most companies that use bulk payments have adopted the new format or are finishing working on it, so we can confirm that Estonia will make the final transition to SEPA smoothly. This will not mean any additional changes for private individuals. It should be remembered that from February next year it will only be possible to make bank transfers using the IBAN format for bank account numbers. Though in fact it is now generally the rule in most banks to use the IBAN, and people have got used to that change”, said Madis Müller, Deputy Governor of Eesti Pank.

Companies making bulk payments have had two years to change over to the new format for payments. During this time, the banks had to provide conversion services, which they may provide from February next year as an extra service.

The initial deadline for the Estonian changeover to SEPA was February this year, and companies should have been ready by then to use only the new format for their bulk payments. By that date however, only 53% of companies making bulk payments had made the necessary changes. As a result, the central bank, the Estonian Banking Association, the Ministry of Finance and market participants decided that the deadline should be extended by a year to 1 February 2016, which was the maximum transmission period for Estonia.

The Estonian Payment Forum also discussed current topics relating to settlements in Europe and the current state of legislation for settlements in the European Union and within Estonia.

Background Information

It is principally large companies that are affected by the move to the new format for bulk payments. Companies that make bulk payments had to update their IT systems to fit with the ISO 20022 XML messaging format. Ten of the banks operating in Estonia offer a service for bulk payments.

The banks made all the necessary changes for private individual clients themselves and the domestic bank account numbers were automatically converted into the IBAN, or International Bank Account Number. When the changeover period ends on 1 February 2016, private clients will only be able to use the IBAN,

The Estonian Payment Forum was founded jointly in April 2012 by Eesti Pank, the Estonian Banking Association and the Ministry of Finance, and is also 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

Systemically important credit institutions are Swedbank and SEB Pank

According to the Bank of Estonia systemically important credit institutions are institutions whose failure to function could seriously endanger the financial system and the real economy. Their importance may stem from their size, their complexity or their interdependence with other participants in the financial system.

Credit institutions that are systemically important to the domestic financial system are identified in Estonia by Eesti Pank. Eesti Pank uses the guidelines issued by the EBA for its assessment, and also considers the specific features of the Estonian financial system. The bank assesses the systemic importance of credit institutions each year and updates its list of the credit institutions that are important to the domestic financial system.

In 2015 Eesti Pank named two banks as systemically important credit institutions: Swedbank AS and AS SEB Pank.

As well as identifying systemically important credit institutions, Eesti Pank has the right to set requirements for holding own funds of up to 2% of total risk exposure for institutions that are important to the domestic financial system. Eesti Pank will decide on the buffer rates for credit institutions that are important for the domestic financial system in the first half of 2016, and at the same time will reassess the systemic risk buffer rate.

Read more from Bank of Estonia website

Read also Countercyclical capital buffer

The risks to financial stability in Estonia have increased slightly

  • The risks to financial stability in Estonia have increased slightly, though they remain small
  • Weak external demand and rapidly rising labour costs are hurting the ability of companies to repay loans
  • The credit and real estate boom in Sweden and Norway is increasing the risks to banks operating in Estonia
  • Steps have been taken in the Nordic countries to contain the boom, but they have not been sufficient in Sweden
  • Rapid growth in incomes and low interest rates on loans are boosting the rise in property prices
  • The countercyclical capital buffer will probably be 0% for the next half year

International financial markets have been affected by the continuation of very accommodative monetary policy and by the increased risks in emerging markets. Bond yields continued to fall at the start of the year and stock markets to climb. In the spring there was uncertainty because of Greece, as negotiations about the debt programme dragged on, and because of the expectation for further US monetary policy decisions. On top of this came the impact of the correction that started at the end of summer in the Chinese stock market. Falling prices spread to other large stock markets and also affected the price of shares listed on the Tallinn stock exchange.

Estonian economic growth slowed a little in the first half of 2015, to 2% over the year in the second quarter. The growth was largely based on rising private consumption, which was driven by increased employment and rapid wage rises. Higher incomes and low base interest rates back up the ability of households to pay their loans. Estonian exports were smaller in the first eight months of this year than at the same time last year, and the outlook for growth in Estonia’s main export partners has deteriorated. Labour costs have continued to rise for Estonian companies relatively rapidly, and this has reduced the profitability of those companies. The risk has increased that the profitability of Estonian companies will be reduced even further by weak foreign demand and rapidly rising labour costs. This could weaken the ability of companies to pay their loans and thus worsen the loan quality of banks.

Increased credit volumes and continuing rises in real estate prices in Sweden and Norway have increased the risks to financial stability for the whole economy. The Swedish banking groups that make up a large part of banking in Estonia get the majority of their funds using market-based financing. This makes them vulnerable to changes in the risk sentiment of financial markets. If financial markets were to reassess the risks to the Nordic economies and banks, it would increase the financing and liquidity risks of the banks operating in Estonia. If interest rates were to rise and loan servicing costs increase, or real estate prices to fall, the high indebtedness of Nordic households could lead them to consume less, and this would then affect the revenues of Nordic companies and their ability to repay their loans. As the Nordic countries are an important export market for Estonian companies, this would have an impact on growth in Estonia. To reduce such risks, it is important that macroprudential measures be taken, some having already been taken with a view to strengthening the banks. Sweden still needs to do more, particularly to contain the rise in property prices and indebtedness.

Rising incomes and low interest rates have increased the risk of the rise in Estonian real estate prices accelerating, and lending becoming concentrated in the real estate sector. Average prices for apartments have risen relatively fast, but the share of borrowing in financing for residential property purchases has not risen at the same time. There has been more activity in real estate development for both residential and commercial space, and the growth in loans to developers has become faster. For the sake of financial stability it is important that lenders and borrowers remember that the extremely low interest rates could rise and the cost of servicing loans could increase.

Low base interest rates and bond purchases by central banks have led bond yields to fall. This has made investors more interested in alternative assets. Increased appetite for risk has led asset prices to rise and has increased the risk that they may fall sharply. Low interest rates also affect the ability of financial institutions to earn income. This is reflected in a slight reduction in the net interest income earned by the banks operating in Estonia. More vulnerable to interest rates remaining low are life insurance companies, whose liabilities largely consist of insurance contracts with guaranteed interest rates. As life insurance is only a small part of the Estonian financial sector, and the insurers have sufficient buffers, the risk to Estonian financial stability from this vulnerability is modest.

As the macroprudential supervisor, Eesti Pank monitors and analyses the risks to the functioning of the financial system and where necessary takes measures to reduce such risks. One way Eesti Pank can reduce the risks from loan growth is by introducing a countercyclical capital buffer requirement. As loan growth is set to be in line with general economic developments for now and for the near term, the countercyclical capital buffer will probably be 0% for the next half year.

Source: Bank of Estonia

The use of bank cards increased by 6.5 pct over the year

Bank cards issued in Estonia are being used more and more, and in the third quarter an average of around 740,000 card payments were made each day at a total value of 12.6 million euros. The number of card payments made was 6.5% larger than in the same quarter of 2014, and the total value was up 8%. Wider use of bank cards in Estonia is encouraged by merchants making it ever easier to pay for purchases with cards. At the end of September 2015 there were 30,424 points of sale in Estonia that accepted cards, which is 2100 more than a year earlier.

The number of card payments made per person is large in Estonia, but the amount of the average payment is small. Estonia stands out in comparison to other European countries for its high number of card payments. Data for 2014 show that the most card payments per person were made in Sweden, where 270 payments per person per year were made, and Denmark where there were 269, followed by Finland on 244 and Estonia on 188. The average card payment in Estonia was the smallest in Europe at 17 euros, which indicates that bank cards are preferred in Estonia for small purchases. The average card payment was largest in Germany at 77 euros and in Luxembourg at 72 euros.

There was an increase in the value of cash transactions at ATMs in the third quarter, as an average of around 111,000 withdrawals were made each day for a total value of 11.2 million euros, making the average withdrawal 101 euros. Cash was paid in on average around 14,900 times a day for a total value of 5.9 million euros, and the average amount paid in was 396 euros. The sums paid in and withdrawn were both around 4% larger than a year earlier.

There were 810 ATMs in Estonia at the end of September, of which 552 were able to handle cash transactions and also allow payments to be made. Of those 810 ATMs, 97% can be used with cards of different banks, but only for withdrawals. In the past six years the number of ATMs has been reduced by 207, but the number of ATMs which can only accept cash transactions has increased. In the third quarter alone, 31 ATMs were added where cash can be paid into accounts, and at the end of September there were a total of 169 such machines.

There were 642 ATMs per million residents of Estonia at the end of 2014, which is close to the average for the European Union. The largest number of ATMs per million residents in the European Union is in France, where there are 1736, and Portugal, where there are 1516. The lowest numbers are in Sweden, where there are 333 ATMs per million residents, and Finland with 405. The number of ATMs has fallen in recent years in most countries.

Author: Teet Puusepp, Eesti Pank Payment and Settlement Systems Department

Read more from Bank of Estonia website here


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