Steady growth in the loan and lease portfolio

The total volume of loans and leases issued to Estonian companies and households by banks operating in Estonia was 3% larger in April than a year earlier. The financing portfolio increased by 71 million euros during the month to 15.4 billion euros, with around half of the monthly growth in the stock of loans and leases coming from corporate debt liabilities.

Companies took out about the same amount in loans and leases during the month as they did in the previous year. Some 769 million euros in new loans and leases were given to companies in April. The amount issued in long-term loans was smaller in April than it had been in the preceding months. As in earlier months, the majority of long-term loans issued in April went to real estate companies. Agriculture companies have also taken somewhat more  in long-term loans in the past two months.

Annual growth in the volume of housing loans increased in April to 3.4%. Around 82 million euros of new housing loans were issued, which is about the same amount as in autumn last year. The volume of other household loans and leases has also been growing faster in recent months. New sales of car leases to households have been around 40% higher in the last two months than the average for last year, which has partly been because of changes that were introduced last year to the taxation of company cars. Fewer car leases have been issued to companies this year than last year.

The interest rates on loans issued by banks have remained the same for several months. The average interest rate for long-term loans taken by companies was 2.6% in April, and the average rate for housing loans was 2.2%.

The share of loans overdue by more than 60 days in the loan portfolio stood at 1.5% in April, the same level as in the previous month. There was no change in the coverage of loans overdue by more than 60 days  by provisions, and coverage was 80% at the end of April.

The deposits of Estonian companies and households grew by 7.8% over the year to April. Total deposits increased by 51 million euros during the month to 10 billion euros. The growth came mainly from household deposits, which were up 8.1% over the year in April, while corporate deposits grew only a little during the month, adding 3 million euros.

Source: Bank of Estonia

Estonians make an average 169 card payments per year

An average of more than one million domestic payments were made each day in Estonia in the first quarter of 2015, with a total turnover of 371 million euros. The number of payments was 5% higher than in the first quarter of last year, but the turnover was 14% smaller. Bank cards were used for 63% of all the payments but as cards are used for the smallest payments, card payments provided only 3% of the turnover of all domestic payments.

The main use of bank cards in Estonia is for making payments, for which they are used around 634,000 times a day, while they are used around one seventh as often for cash withdrawals, around 95,000 times a day. This is the opposite to how things were at the start of the 2000s when cards were mainly used for withdrawing cash and rarely for making payments.

There were up to 3000 withdrawals of cash in foreign countries each day, accounting for 3% of all withdrawals. Larger amounts are taken out in each transaction in foreign cash machines, and the sum averaged 163 euros in the first quarter, while an average of 93 euros per transaction was withdrawn in Estonia.

Bank cards issued in Estonia were used in 184 countries in the first quarter of 20151. A daily average of around 36,000 card payments were made outside Estonia, which was equal to 5% of all the card payments using cards issued in Estonia. Cards were used for payments most in Finland, Sweden, Latvia, Russia and the United Kingdom. The individual payments outside Estonia are for larger amounts, averaging 34 euros, while the average in Estonia was 15 euros.

Residents of Estonia are among the most active users of card payments in the euro area. Card payments are made most per person in Finland, where 225 payments per person per year are made, followed by the Netherlands on 170 and Estonia on 169. Latvian residents in contrast average only 75 card payments per person per year.

Estonian residents made an average of close to 16,000 internet purchases per day in the first quarter of 2015, with a total value of around 847,000 euros. Interest in making purchases over the internet has increased rapidly among Estonian residents. The number of transactions was one quarter larger than in the same period of the previous year, and double the number of two years ago. More and more purchases are being paid for using debit cards that can function like credit cards. Such cards were used for 61% of all e-commerce card transactions in the first quarter. Estonian residents buy most from internet shops in the United Kingdom, while Estonian shopping sites are only the fifth most popular. Internet purchases in Estonia are paid for more by bank link rather than by card and some 41,000 purchases per day were made using a bank link in the first quarter.

Source: Bank of Estonia

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

The volume of housing loans continues to grow steadily

The total volume of loans and leases to Estonian companies and households was 3% larger in March than a year earlier. The loan and lease portfolio increased by 43 million euros during the month to 15.3 billion euros.

Annual growth in loans to companies was 3.3% in March as it had been in the previous month. Annual growth in new loans slowed in the first quarter to 5%, but new long-term borrowing increased as fast as before. Companies took out 12% more in long-term loans during the quarter than they did a year earlier and almost half of those went for financing real estate projects.

The volume of housing loans continues to grow steadily. Annual growth in the housing loan portfolio accelerated slightly to 3.2% in March and around 13% more was taken out in new loans in the first quarter than a year earlier. The amount taken out in housing loans in March was the same as in autumn last year. The volume of new car leases taken by households climbed to its highest level in six years in March. The car lease portfolio grew by more than 10% over the year, a little more than its average for the past two years.

Loan interest rates remained low. The average interest rate for housing loans granted in March was 2.2%, and that for long-term corporate loans was 2.5%. Loan interest rates have not changed in the past six months and remain favourable for borrowers as EURIBOR remains low.

The share of overdue loans in the loan portfolio shrank to 1.5% in March. The value of loans overdue for more than 60 days fell by 25 million euros during the first quarter and there was around 200 million euros in long-term overdue loans outstanding at the end of March. The last time that the volume of overdue loans was so low was in the middle of 2008.

Deposits continue to grow rapidly. The annual growth in household deposits has remained relatively fast at around 8% for a year already. The annual growth in corporate deposits also picked up in March and reached 8%. The total deposits of Estonian companies and households at the end of March stood at 9.9 billion euros.

Banks earned 191 million euros in net profit in the first quarter. Around 60% of this came from dividends paid out by subsidiaries. Without these dividends the net profit for the quarter would have been 3% smaller than a year earlier. The decline in net profit was partly due to the increased operating costs of the banks. The fall in EURIBOR reduced the interest income of the banks, which was down for the third consecutive quarter. As interest expenses also fell at the same time, net interest income barely changed from a year earlier.

Source: Bank of Estonia

Author: Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank

The quality of the loan portfolio of the banks continued to improve

Loans and leases were issued to Estonian companies and households moderately in February, which is common at the start of the year. The financing portfolio grew by relatively little over the month, and stood at 15.3 billion euros at the end of February.

The annual growth in the corporate loan and lease portfolio was 3.3% in February. The 704 million euros of new loans and leases to companies was around one tenth more than was issued in February last year. Financing in recent months has mainly been for companies in real estate, manufacturing and trade. Some 70% of the total value of long-term loans issued in February went to companies in these sectors.

The volume of new housing loans issued during the month was about the same as a year earlier. The annual growth in the portfolio was 2.9% in the first two months of the year. The volume of other household loans has remained the same for a long time now at 1.4 billion euros.

Average interest rates on loans have been affected in the second half of last year and the start of this by the decline in the 6-month EURIBOR, which is the base interest rate for most loans. The average interest rate for housing loans issued in February fell to 2.2%, while the average interest rate for corporate loans has remained at 2.5% in recent months.

The quality of the loan portfolio continued to improve in February. Loans overdue by more than 60 days were lower in volume than in January, accounting for 1.6% of the loan portfolio at the end of the month. The quality of loans to trading companies has declined slightly in recent months, though this has been offset by an improvement in the quality of other loans.

The annual growth of household and corporate deposits was 5.5% in February, similar to what it had been in the previous month.The growth in deposits was mainly driven by an increase in household deposits. There was little change in the volume of corporate deposits in February and annual growth in them remained at 2% for the second consecutive month. Non-resident deposits increased modestly in February and they remained at 21% of the total of corporate and household deposits.

Source: Bank of Estonia
Author: Mari Tamm, Financial Sector Policy Division of Eesti Pank

The Supervisory Board of thecental bank discussed the profit distribution

At the regular meeting of the Supervisory Board of Eesti Pank on Tuesday, the board confirmed the current strategy for profit distribution, whereby the central bank gives the state between 0 and 25% of its profit from the previous year.

The Supervisory Board will start to discuss the distribution of Eesti Pank’s profit for 2014 at the next meeting on 28 April.

The Supervisory Board decided that the relative level of Eesti Pank’s capital should increase to the average level of the central banks of the euro area, as the balance of risks to the capital of the Eurosystem as a whole is considered when joint monetary policy decisions are made. This means it is necessary to raise the level of capital by about a billion euros to 1.3 billion.

The ratio of Eesti Pank’s increased capital to the risk assets used for monetary policy is one of the lowest of any of the central banks of the euro area.

Since 1992 Eesti Pank has allocated a total of 129 million euros to the state budget.

Source: Bank of Estonia

A book about Estonian currency EEK

This book is different from most similar ones as it tells a story that has finished. It is very rare in monetary and economic policy to find stories with a clear beginning and end, but the story of the Estonian currency board is one such, as it started with a monetary reform on 20 June 1992 and ended on 1 January 2011 when Estonia joined the euro area.

Such a framework provides a unique opportunity to describe a clearly defined stage in the modern history of the economy. Although this book tells the story of Estonia, it also gives a picture of the age as a whole, because although Estonia is small and exceptional in some ways, most of the major events of the last decade of the 20th century and the early years of the 21st appear here in one way or another.

This is particularly true of the main processes of the period in Central and Eastern Europe as the economy changed from a command economy to a market economy. There was, and still is to some extent, a mix of very different economic policy choices. Looking back more than twenty years later we can say that there was no single and only route through these processes and towards the living standards of the ‘old’ member states of the European Union. There were better and worse choices in the short term but no one country from Central and Eastern Europe stood out as much more successful than the others.

This period is made more interesting by its coincidence with changes in the global economy. Globalisation became a torrent, the role of emerging markets increased, financial markets were liberated, and information and communications technology advanced. With the great changes came great crises, in the form of the Great Recession and the subsequent European debt crisis. The changes they caused have not yet ended and they will be considered in greater depth in the future.

This book concentrates on the changes of 1990–2010 looking through the prism of monetary policy, which in Estonia’s case meant the monetary policy based on the fixed exchange rate. As a broader perspective is needed, the book covers the modern history of Estonia’s economy in a wider sense, at least where it concerns the general logic of development, the essential features of economic policy and the main macroeconomic indicators such as GDP growth, inflation and employment or unemployment.

The small size of the country sets its own limits. A country the size of Estonia is not able to have a fully free choice among all the possible doctrines of monetary policy and so this is a study of a small and open economy in transition, where the distinctive feature of Estonia, the currency board arrangement, takes centre stage and the story unfolds in several acts with two crises in the Asian and Russian crisis and the later Great Recession.

Another distinctive feature is that the policy-makers and the people of Estonia travelled a path in twenty years that normally takes many times longer, starting from essentially zero with hyperinflation and an economy collapsing out of the break-up of the Soviet Union, and finally arriving at accession to the European Union and the euro area. This required a new financial system to be built and to evolve, and needed new markets to be created such as the securities market and the credit market. Furthermore, the global crisis required a section of the road to be travelled twice for the pre-crisis level of wealth to be regained, and so it is clear that this was an exciting and challenging time.

Ardo Hansson, Governor of Eesti Pank

Read more from Bank of Estonia website

Eesti Pank has set three requirements for issuing housing loans

Three requirements for commercial banks issuing housing loans start to apply from this week. They are a precautionary measure by Eesti Pank to reduce the risks of a lending bubble inflating in the future.

Governor of Eesti Pank Ardo Hansson explained that the move by the central bank will help contain the risk of a housing bubble in the future. “These requirements will not have any noticeable effect on the loan market at the moment as we have introduced them at a level that is close to where the banks are currently lending. The requirements will start to have an effect when competing banks look to take on excessive risks when lending is growing fast”.

Mr Hansson noted that the requirements will also protect borrowers by helping them avoid making commitments in an overheated market that they could struggle to meet if the economy later turned downwards.

The first limit is that the amount lent can only be up to 85% of the collateral, which is the housing property being purchased. If the loan is guaranteed by KredEx then it can be for up to 90% of the value of the collateral.

The second limit is that all the monthly loan and lease payments of the borrower taken together may amount to only 50% of the borrower’s net income. Net income is regular income that reaches the bank account after taxes have been deducted.

The third limit is that the maximum length of housing loans is 30 years.

The requirements for housing loans have been set close to the current lending standards of the banks, meaning they will not have any significant impact on the conditions currently available in the Estonian housing loan market. The banks are permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a quarter, which will allow them flexibility in making decisions about loans. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.

Eesti Pank is applying the limits for all the banks operating in Estonia, including branches of foreign banks operating in Estonia. The limits will apply to loans to private people in Estonia for buying, renovating or building housing. The Financial Supervision Authority will supervise how the limits are met.

Eesti Pank got advice on its plan for the requirements for housing loans from the Ministry of Finance, the Financial Supervision Authority and the commercial banks.

Eesti Pank has published background analysis on its website explaining the aims of the requirements and describing them in more detail.


Source: Eesti Pank


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