Estonian financial stability review

The international financial environment became less confident at the start of 2016, Bank of Estonia reports in its financial stability review. The review is published twice a year.

Doubts about the outlook for global growth led to increased volatility in international securities markets and falls in the prices of financial assets. With commodities prices remaining low for a long time and inflation very low, central banks maintained their position of using accommodative monetary policy to support inflation and GDP growth. At the same time, the activities of banks in several European Union countries are continuously being affected by the problem assets that appeared at the time of the global financial crisis, and more and more by the combination of weak economic growth and low monetary policy interest rates.

There has been no reduction in the main risks to the stability of the Estonian financial sector, which arise from imbalances in the Swedish economy and from the funding of the large Nordic banking groups. Relatively strong growth continued in Sweden and the loose monetary policy environment saw rapid growth in loans with real estate as collateral and in real estate prices. Macroprudential supervisory institutions in the Nordic countries have put in place measures to support the resilience of the banks, but this has not slowed the build up of risks in Sweden. Although the larger banking groups in the Nordic countries are well capitalised by international standards, their capital buffers have not particularly increased as a ratio to total assets while risks have been increasing, and in international comparison they are around the average.

The ability of Estonian companies and households to repay their loans remains good. Rapidly rising incomes have led to increased demand for loans from households. However, indebtedness remained at the same level for the second consecutive year and the coverage of debt liabilities with liquid assets increased further. Corporate results worsened further in the second half of 2015 though because of weak demand for exports and the continuing rapid rise in labour costs. Investment activity was sluggish, and so demand from companies for loans did not increase. Although sales turnover was down, companies managed to increase their liquid assets. This means that the borrowing capacity of companies and households is being supported both by larger liquidity buffers than before and by low loan servicing costs, and also by the continuing rapid rise in household incomes.

Together with the rise in real estate prices, construction of residential property picked up, and increased supply restrained the growth in average prices in the second half of 2015. Demand for dwellings has been aided in recent years by relatively fast growth in wages, a labour market that favours households, and low interest rates, while credit growth has remained moderate. Alongside residential property, office and retail space is being developed at quite a rapid rate. The bigger banks remained fairly conservative in lending for real estate development however, and the volume of loans to real estate companies has not increased faster than volumes to other companies. However more has been lent to real estate companies by companies in other sectors than was the case before, which means that exposure to risks in the real estate market could affect businesses more broadly.

The resilience of the banks to risks remained strong. The portfolio of loans and leases was up around 5% over the year in 2015 and its quality remained generally good. The funding of the banks was mainly supported by growth in domestic deposits. The banks kept a high level of liquid assets and new liquidity requirements that started to apply from the start of 2015 will help to ensure that banks maintain their liquidity. The capital buffers of most banks increased last year and the share of CET1 capital was very large at the end of the year, standing at 35% of risk weighted assets for the banks on a consolidated basis. Although the low rate of base interest rates put pressure on the income of the banks, improved cost effectiveness means this has not really yet affected the return on assets, and profitability remained high by international standards. Weak GDP growth and low interest rates and additional legal requirements for the banking sector mean that banks will probably continue to make changes in their business operations.

Read more from the Bank of Estonia website

Source: Financial Stability Review 1/2016

Savings continue to grow faster than debt liabilities

  • As investment activity remained quiet, savings continued to increase faster than debt liabilities
  • Around one billion euros more was invested abroad in 2015 than was taken in from there
  • Domestic borrowing by Estonian companies increased while their borrowing from abroad decreased
  • The indebtedness of the Estonian private sector is around the international average level, while general government indebtedness is small

The saving of Estonian households, companies and general government in the fourth quarter of last year and in the year as a whole were more than their investments, 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 than were taken in from there. The net outflow of financial assets became faster in 2015 and reached around one billion euros, or 5% of GDP.

Weak investment activity meant that corporate debt liabilities grew only a little. Debt liabilities increased by less than 1% over the whole year. Liabilities from Estonia increased by around 3% and foreign liabilities decreased by 6%. The decrease was mainly because companies reduced their short-term intra-group loan liabilities. Despite lower sales revenues, reduced investment in fixed assets has increased the liquid assets of companies. The deposits held both in banks operating in Estonia and abroad increased in 2015 by around 12%.

The income and savings of households are still increasing faster than their debt liabilities. The rate of growth in debt liabilities increased on the back of loans for real estate investment and car leases to 5% by the end of last year, and loan liabilities stood at 8.2 billion euros. The relatively rapid growth in incomes and the high savings rate helped the cash and deposits of households to increase by around 9% over the year to 6.7 billion euros. Despite the rapid growth, the financial savings of Estonian households in relation to incomes are still below the European Union average.

The European Commission treats the indebtedness of companies and households in the private sector and the general government, or the debt-to-GDP ratio, as an indicator that can reveal potential imbalances in an economy. The threshold where there is a risk of imbalance is set at 160% for the private sector1 and 60% for the general government. The indebtedness of the Estonian private sector declined slightly in 2015 to 128% at the end of the year, which is around the average level for the European Union. The indebtedness of Estonian companies and households is relatively large compared to that in countries with a similar income level. The general government debt level also shrank slightly last year, and it stood at 9.7% of GDP at the end of the year, which is still the lowest figure in the European Union.

1 The threshold is 160% for unconsolidated data and 133% for consolidated data. The consolidated debt level of the Estonian private sector was put at 116% of GDP at the end of 2014 by Statistics Estonia.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank


Over 70,000 online purchases are made per day

An average of one million domestic payments were made each day in the first quarter of 2016 in Estonia, with a total value of 352 million euros. The number of payments was 5.3% higher than in the first quarter of last year, but the turnover was 4.7% smaller. About 64% of all domestic payments are made by card at the point of sale. As card payments are used for small sums however, they account for only 3% of the total turnover.

There has been a notable increase recently in the number of online purchases made using a bank link or a bank card1. Bank links were used 49,000 times a day to make payments in the first quarter of 2016. Eesti Pank has been collecting statistics on the use of bank links since 2012, when they were used for 30,000 purchases a day. Bank links can only be used for purchases from Estonian online stores, of which the Estonian E-Commerce Association estimates there are around 2000. It is also possible to pay by bank card in many online stores, but only 1000 card purchases are made each day in Estonian online stores, which is many fewer than the number of purchases by bank link.

Purchases from foreign merchants by bank card were made an average of 20,000 times a day in the first quarter of 2016, which is three times as much as in 2012.

The average payment by bank link was for 51 euros in the first quarter of 2016, and the average online card payment was for 49 euros. Card purchases in Estonian internet stores averaged 66 euros, which is notably more than the average bank link payment. There is also a difference in the size of payments made with debit and credit cards, as the average debit card payment was 43 euros and the average credit card payment 59 euros.

Online transactions in Q1 2016 (daily averages)
number of payments (thousand) turnover (thousand euros) average purchase (euros)
Total 71 3 525 50
purchases from Estonian online stores 50 2 546 51
of which by bank link 49 2 487 51
of which by bank card 1 59 66
purchases from foreign online stores by bank card 20 979 48

The rapid growth in online shopping is also reflected in the data from Statistics Estonia. The number of retail merchants was 3% higher in 2015 than a year earlier, but the turnover of companies whose main business is retail by post or online increased by 35%. Their turnover still remained small as a share of total retail turnover at 2.6% in 2015, up from 2% the previous year. The most active online shoppers in the European Union are to be found in the United Kingdom, where internet purchases are estimated at 15% of total retail turnover. Estonian residents are also active users of internet stores from the United Kingdom, making 9000 purchases a day from them. This is around 40% of all the online purchases made by Estonian residents from foreign countries.

Data from Statistics Estonia show online purchases are used most for travel and accommodation services, concert, cinema and theatre tickets, and clothes and sporting goods. Online purchases were made by 568,000 people in 2015, which is two and a half times as many as in 2012, and 59% of people aged 16–74 have made purchases over the internet.

Source: Bank of Estonia

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

Risks to financial stability are small

  • The risks to financial stability in Estonia in the near future are small
  • The ability of households to repay their loans remains good and is supported by rapid growth in incomes
  • The ability of companies to repay loans may deteriorate in future if profitability continues to decline
  • The rapid growth in loans and real estate prices in Sweden has not been reduced despite the efforts of the authorities
  • Rising real estate prices in Sweden pose risks to the Estonian economy and the banks operating here
  • The capital buffers of the banks may change as it is planned to require the commercial banks to hold systemic buffers of 1% rather than 2% from August
  • It is planned to apply an additional systemically important bank buffer of 2% to Swedbank and SEB

The risks to Estonian financial stability in the near future are small. Although there is a lot of uncertainty coming from the external environment, the risks to the functioning of the financial sector are reduced by the financial buffers of companies, the relatively good finances of households, and the high levels of own funds in the banking sector.

The international financial environment became less confident at the start of 2016. The uncertainty about the outlook for global growth led to falls on international securities markets. The banking sector in the European Union is facing a large share of bad loans, weak economic growth and low monetary policy interest rates. The risks are made worse by the large debts of many European countries and by the possibility that the United Kingdom might leave the European Union.

Estonian economic growth in 2015 was the slowest of the past six years. Growth mainly slowed because of the economies of several neighbouring countries were weak and there were fewer export opportunities. The acceleration of Estonian economic growth will depend a lot on how the  target markets for exports perform. Despite the slower growth, the ability of Estonian companies and households to repay their loans remains good. For households this was supported by faster growth in incomes while indebtedness remained at the same level. The profitability of companies was reduced by weak foreign demand and rapidly rising labour costs. If profitability continues to decline, the ability of companies to repay their loans may deteriorate in future, and this could worsen the loan quality of the banks.

Although Sweden has taken measures to reduce the risks related to rising real estate prices, rapid growth continued in loans collateralised by real estate and in real estate prices. The high debt level of Swedish households poses the danger that a fall in real estate prices or an increase in loan servicing costs could reduce household consumption. This would affect economic development in the Nordic and Baltic region and lower demand for the output of Estonian companies. It could also increase the liquidity risks of banks operating in Estonia and the risk to the financing of the economy, as the liquidity management of the biggest banks in Estonia is tightly integrated with their parent groups.

Real estate prices rose more slowly in Estonia in 2015 but low interest rates and relatively fast wage growth mean that the risk of excessive growth in real estate prices and in lending remains. To reduce the risk of a credit boom in the future, Eesti Pank took precautionary steps last year by introducing limits on the issuing of housing loans. Eesti Pank stands ready to tighten the current requirements in future and to restrict the use of exceptions if there is a significant decline in the down payments of borrowers and if risks should increase.

To ensure the functioning of the financial system, Eesti Pank has introduced additional capital buffer requirements for the banks. Since 2014 they have been subject to a systemic risk buffer of 2%. The buffer is intended to increase the resilience of the banks so that they could cope with a sharp drop in the economy, and to reduce the risks that come from the concentration of the structure of the banking sector. Eesti Pank plans to change the principles behind the systemic risk buffer from August this year. All the banks operating in Estonia will have to hold a systemic risk buffer of 1%, rather than the current 2%, to mitigate the risks of a sudden economic downturn, which arise from Estonia having a small and open economy. The two systemically important banks, Swedbank AS and AS SEB Pank, will have to hold an additional buffer of 2% to hedge against the risks that come from the concentration of the banking sector. After the change, the two biggest banks operating in Estonia will have a total capital requirement of 13.5%, and all the other banks will have a requirement of 11.5%.

Source: Bank of Estonia

The loan and lease portfolio grew by 6 pct over the year

  • The volume of loans that are long-term overdue remains small at only 1.4% of the portfolio in February
  • The total deposits of Estonian companies and households in February were at the same level as in the previous month and stood at 10.8 billion euros

The loan and lease portfolio of Estonian companies and households grew by 6% over the year to February. The total volume of loans and leases increased over the month by 87 million euros to 16.2 billion euros.

The total stock of loans and leases to companies was 7% larger in February than a year earlier. The 770 million euros of new loans and leases to companies was around the same as the average for last year. More than half of the long-term loans issued in the first months of 2016 were granted to companies in real estate and retail that are mainly focused on domestic consumption.

The stock of housing loans continued its stable growth in February and was 4.3% larger than a year earlier. As is usual in the first months of the year, the volume of new housing loans was lower in February and stood at 68 million euros. As in previous months, the volume of car leases grew fast and was 18% larger in February than it was a year earlier. The stock of overdraft and credit card lending increased in February for the first time in several years, increasing by 0.7% over the year.

The average interest rates on the new loans issued during the month were at the same level as in the preceding months. The interest rate for long-term loans taken by companies was down slightly in February at 2.1%, but this rate varies with the risks of the project that the loan is for. Competition is tight between the banks in the corporate loan market, and this is leading to a reduction in interest margins. The average interest rate on housing loans issued during the month remained stable at the level of the preceding months of 2.2%.

The quality of the loan portfolio has remained good. The percentage of loans overdue by more than 60 days in the loan portfolio increased slightly in February to 1.4%, but this is still small. The volume of long-term overdue loans increased mainly because of an increase in the volume of overdue loans to industrial companies.

The total deposits of Estonian companies and households in February were at the same level as in the previous month and stood at 10.8 billion euros. Total deposits were 9.7% larger in February than a year before, meaning that the deposits of Estonian companies and households continue to grow faster than their bank loans.

Source: Bank of Estonia

Auhtor: Mari Tamm, Economist at Eesti Pank

Estonians have a small loan burden

  • The primary residence in the most valuable asset of Estonian households as its value accounts for roughly half of that of all assets
  • One fifth of the real assets of households are the assets of businesses that they own and that they work for
  • The largest part of the financial assets of Estonian households are bank deposits and financial assets account for a smaller share of assets than they do in other euro area countries
  • The loan burden of Estonian households is smaller than the euro area average and their financial buffers are also smaller

Eesti Pank and Statistics Estonia jointly carried out the Household Finance and Consumption Survey (HFCS) of Estonian households in 2013. A survey of households collected data on their assets, liabilities, income and consumption.

The results of the survey show that Estonian households have less in assets than households in the rest of the euro area do, though the results for Latvia and Lithuania have not yet been published. The median value of net assets in Estonia (the value of a household’s assets minus the total of its liabilities) was the smallest of any country in the euro area, coming in last place behind Germany and Slovakia. The median value is the central figure where half of households are above and half are below. The median value for the net assets of Estonian households was 43,600 euros in 2013.

In Estonia and in other countries, net assets are more unevenly distributed among households than incomes are. The Gini coefficient for the distribution of net assets in Estonia, which is a measure of inequality, is one of the highest in the euro area. The higher the coefficient, the greater the inequality that it expresses1. The coefficient was only higher than it was in Estonia in Germany, Austria and Cyprus. One possible cause of the inequality in assets is the large variation in real estate prices across the different regions of Estonia.

The most valuable asset that Estonian households have is their main residence. The share of home owners is higher in Estonia at 77% than the euro area average of 60%. The value of the primary residence accounts for roughly half of that of all the assets of households, which means that the wealth of households is largely dependent on the value of their homes.

Equally, a relatively large share of the real assets of Estonian households are the assets of businesses that they own and that they work for on a daily basis. These assets account for one fifth of all real assets, which is almost twice the euro area average. Such assets are owned by around 12% of households in Estonia and their median value is 11,700 euros.

The financial assets of Estonian households are mainly in bank deposits and they account for a smaller share of assets than they do in other euro area countries, making up 10% of assets in Estonia and 17% in the euro area. The low share of financial assets is similar to the shares in other euro area countries with relatively lower income levels like Slovakia, Slovenia, Portugal and Greece. Like in Estonia, the financial assets in these countries are not very diversified and mainly consist of bank deposits.

The lion’s share of loans in Estonia are real estate loans, and housing loans make up the largest share of them, accounting for 85% of the total loan burden. The loan burden of Estonian households is smaller than the euro area average as 37% of households in Estonia have a loan, while the euro area average is 44%. In comparing the loan burden, it should be remembered though that its optimal level depends on incomes and the income levels in other countries in the euro area are generally higher than that in Estonia. The loan burden of Estonian households is relatively large compared to those in countries of a similar income level.

It is worth noting for Estonia that the majority of loans are to younger households, for two main reasons. Firstly, there are many people in older households who got their residence through privatisation and did not need a loan to buy it. Secondly, the housing loan market in Estonia only emerged relatively recently, from the start of the 2000s.

Although the loan burden here is smaller than in other euro area countries, Estonian households also have relatively small financial buffers. The median household, which is where half of households have smaller financial buffers and half have larger, has sufficient resources to cope for about a month, while the median household in the euro area has sufficient assets to last for a little over two months.

Overall the structure of the assets and of the net assets of Estonian households is similar to the structures in other Central and Eastern European countries in the euro area. In comparison to the situation in those countries however, the net assets of households in Estonia are more unequally distributed despite the high share of home ownership. From a financial stability standpoint, the loan burden of Estonian households is smaller than in other euro area countries, but Estonian households are vulnerable because of their modest financial buffers.

1 The Gini coefficient is a measure of inequality that ranges from zero to one. The closer it is to one, the more unequal is the distribution of assets. If the Gini coefficient is zero, assets are equally distributed, while a value of one indicates perfect inequality. The Gini coefficient for net assets in Estonia in 2013 was 0.69, and the Gini coefficient for incomes was 0.36.

The Household Finance and Consumption Survey is carried out regularly every three years in the countries of the euro area. It is a comprehensive survey that covers all the countries of the euro area and allows the financial positions of households to be compared across countries. The survey was carried out in Estonia in 2013 and 2220 households were interviewed for it. The next household survey in Estonia will be carried out in 2017.

Source: Bank of Estonia



Estonia paid 188 mEUR to IMF

Eesti Pank made an additional payment to the International Monetary Fund on Feb.10,2016 of 188 million euros, which will increase Estonia’s participation in the IMF. This is part of the final phase of reform of the IMF quotas, which aims to increase the voting rights of developing countries.

Estonia’s participation or quota increased by some 150 million SDRs, or 188 million euros, and will be 244 million SDRs after the payment, or about 306 million euros. This will give Estonia 0.07% of the voting rights in the IMF. The increase in Estonia’s quota was approved by the Riigikogu in June 2012.

SDRs, or Special Drawing Rights, are units of account created by the International Monetary Fund. Their value is based on a basket of four currencies, the US dollar, the euro, the Japanese yen, and the pound sterling*.

The Riigikogu appointed Eesti Pank as the representative of Estonia at the IMF, and Eesti Pank made the payment to the IMF in relation to the increase in the quota, paying 25%, or 47 million euros, in SDRs and 75%, or around 141 million euros, in the local currency, which is the euro. The quota payment does not affect the state budget, as the only changes are in the structure of Eesti Pank’s assets.

On 30 June 2012 member states whose quotas added up to 70% of the total approved the increase in quotas. The increase in quotas also needed changes to be made to the Articles of Agreement of the IMF, which required the approval of 60% of the member states, representing 85% of the total votes. The last to ratify the reform was the USA, which did so in January 2016, after which all the member states, including Estonia, had to make their payments within not more than 30 days. Estonia’s increased participation in the IMF will apply after today’s payment.

* From 1 October 2016 the Chinese yuan will be added to the currency basket.

Background Information

The total value of the IMF quotas will be almost doubled from 238 billion SDRs to 477 billion SDRs. The IMF’s proposal to raise the quotas was prompted above all by the need to double the its resources in the face of a global financial crisis, given the changed position of quickly developing member states, including Estonia, in the global economy. The IMF regularly reviews the quotas of its member states at least once every five years.

The quota determines the maximum participation of the member state in the IMF. The size of the quota is calculated for each country using a formula that considers that country’s GDP, openness to trade, economic volatility in terms of capital flows and the current account, and currency reserves. Quotas are also important in determining whether member states can borrow from the IMF, as access to the IMF’s credit lines is usually linked to the applicant’s quota.

In June 2012 the Riigikogu ratified the proposed changes to the IMF’s Articles, which aimed to make the management of the IMF more flexible and to increase the voting rights of developing countries. Following the decision of the Riigikogu, Estonia gave its approval to the increase in the Estonian quota and to the changes in the IMF Articles. See also

Source: Bank of Estonia


Get every new post delivered to your Inbox.