Banks earned more than 85 mEUR net profit in 2Q

  • Households continued to borrow at a fast pace in June
    The deposits of companies and households were up 11% over the year
    The ability of companies and households to service their loans is good, which keeps bank loan losses low

The stock of loans and leases from banks to companies and households was 6% larger in June than a year earlier at 17.5 billion euros. Loans to households grew faster, but the increase in corporate lending decelerated slightly compared to its previously strong growth.

Compared to last year, companies took out 5% more loans and leases from banks in the second quarter of 2017. The growth of short-term financing became more rapid as economic activity increased. Long-term loans and leases for companies as a whole grew rather modestly at 3%, but the situation varied across sectors. The volume of new loans increased substantially in the industrial, transport and real estate sector, while retail companies took out significantly less in loans than a year ago. The yearly growth in the stock of the corporate loan and lease portfolio slowed down somewhat, to 5.7% at the end of June.

Household borrowing activity has remained strong on the back of improved confidence and increased income. Around 15% more was taken in new housing loans in the last three months than at the same time last year, and 17% more in car leases. The yearly growth in the housing loan portfolio accelerated to 6.2% in June and the growth in the volume of car leases remained high at 14%.

Loan interest rates have not changed much over the past months. The average interest rate on new housing loans increased slightly due to a rise in the interest margin, from 2.3% to 2.4%, but remained low. The average interest rate for long-term loans taken by companies in June was 2.3%.

The share of loans overdue by more than 60 days in the loan portfolio fell to 0.9%. The reduction in overdue loans shows the borrowers’ good ability to service their loans thanks to faster economic growth and still very low base interest rates. The volume of long-term overdue loans fell by around 25% in a year.

Deposits continue to grow rapidly. Estonian companies and households held 12.3 billion euros in deposits at banks at the end of June, which was 11% more than a year before.

Banks earned more than 85 million euros in net profit in the second quarter. The net profit made up 1.4% of assets, which is a bit higher than the level of the past two years. Profitability was mainly supported by net interest income, which grew 6.5% year-on-year. The fact that loan losses continued to be small and administration costs were lower also had a positive impact.

Source: Bank of Estonia (see graphs here)

Author: Jana Kask, Economist at Eesti Pank

Corporate and household debt has started to increase

  • Companies are still borrowing mainly from banks operating in Estonia
  • Household savings continued to increase faster than their debt liabilities in the first quarter
  • Growth in incomes and savings helps to reduce risks arising from credit growth

Corporate debt liabilities were 2.5% larger at the end of the first quarter of 2017 than a year earlier. Investment, which grew rapidly in the first quarter, was mainly financed from companies’ own funds and loans taken from banks operating in Estonia. The amount of foreign money brought in the country in the form of equity and debt capital increased modestly. Faster economic growth caused a slight decrease in the corporate debt burden, or the ratio of debt liabilities to GDP.

The loan liabilities of households increased almost at the same rate as their incomes. 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 have increased in volume.

Household savings have also grown quickly thanks to increased incomes and a high propensity to save. The volume of household deposits and cash was 9% larger than a year earlier. There was also growth of more than a quarter over the year in the value of tradeable securities held by households – which was supported by an increase in the price of securities in particular. Despite the rapid growth, the financial savings of Estonian households in relation to incomes are still below the European Union average.

The Estonian economy was still a net lender to the rest of the world in the first quarter: Estonian residents put more funds abroad than they took in from abroad. This means that in line with the trend of the past few years, Estonian residents save a lot and the level of investment in fixed assets is low in spite of the growth in the first quarter.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

Household borrowing grows strongly

  • Corporate loan and leasing portfolio grew 6.3% year on year, comparable to the previous months
  • The number of new housing loan agreements signed in May was 12% up from last year
  • Both corporate and household deposits continued to show a strong growth

Corporate and household borrowing from the banks and leasing companies operating in Estonia increased in May 6.3% year on year, in line with the previous months. While y-o-y growth in the corporate loan and lease portfolio slowed slightly relative to the previous months, housing loans were gathering pace. The total loan and leasing portfolio increased in the month by EUR 90 million to EUR 17.5 bn.

The corporate loan and leasing portfolio increased in May by 6.3% year on year. The fastest rise was recorded for companies in the trade, agriculture and transport and warehousing sectors. New long-term loans were issued to companies in the value of EUR 237 million, 7% up from last year’s figure. Manufacturing companies have taken more long-term loans in the recent months than a year ago.

The y-o-y growth in the housing loan portfolio increased to 6.1% in May. The number of housing loan agreements signed was 12% up from last year’s figure, while the average loan amount grew by 4%. Similarly to previous months, household car leasing went up in May, gaining 14% on a year earlier. The demand for loans and leases is backed by a relatively rapid growth in household income and low interest rates.

The average interest rate on housing loans has not changed in the past months. Since February, the average interest rate for new housing loans has stood steady at 2.3%. The average interest rate for corporate loans was 2.4% in May, also in line with the average figure for recent months.

Deposit growth was picking up and continues to outpace the growth of the loan and lease portfolio. Corporate deposits grew in May by 15% compared to a year earlier. Household deposits have similarly shown a strong growth, increasing in May by nearly 9% year on year. By contrast, non-resident deposits have shrunk significantly in recent months and stood at EUR 1.5 bn as of the end of May, representing 11% of the total deposit stock.

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

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