Household deposits grow strongly

The portfolio of loans and leases to Estonian companies and households was largely unchanged in the first month of 2015 at 15.2 billion euros. The classification of clients for statistical purposes was adjusted in January, as it had been in December, and this affected the way the loan portfolio is divided between client sectors and operating sectors. Fewer new loans were issued as well, as is usually the case at the start of the year. The loan and lease portfolio increased in size by 2.7% in the year to January.

New loans and leases worth 678 million euros were issued to companies in January, which was the about the same amount as a year earlier. There were slightly fewer new short-term loans than a year earlier but around one quarter more long-term loans. The largest volumes of long-term loans issued in January went to real estate companies.

The housing loan and lease portfolio was 2.9% larger in January than a year ago. The 51 million euros of new housing loans was 14% more than was issued a year earlier. The total value of other household loans was not very different from what it was a year ago.

The average interest rate on housing loans issued in January did not reflect the fall in the six-month EURIBOR, which is the base interest rate for most housing loans. The average mortgage interest rate rose because the average marginal was raised. The average interest rate on new long-term corporate loans was 2.5% in January.

Loans overdue by more than 60 days were at around the same volume in January as in the previous month, accounting for 1.7% of the loan portfolio. A certain deterioration in the quality of loans to the retail and wholesale sector and to the primary sector of agriculture, hunting, forestry and fishing has been noticeable in recent months. This has been offset by an improvement in the quality of other loans.

The deposits of Estonian companies and households grew by 5.6% over the year to January. Growth in deposits was restrained by a reduction in corporate deposits, which have more variable growth patterns. Household deposits again grew fast, at a rate of 8.3% over the year to January. Non-resident deposits have also grown in recent months and they stood at 2.6 billion euros at the end of January, or 21% of the total of corporate and household deposits.

Source: Bank of Estonia

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

The need for corporate credit increased somewhat in 2014

The ability of companies to finance their own activities remains relatively good. This is because of the buffers that have been built up, relatively good access to bank lending, and the very low base interest rates. However, reduced profits last year meant that the financing position of companies worsened to an extent. The situation is somewhat more complicated for smaller companies as their options for financing are more limited and their loans are generally more expensive than those of large companies.

Estonian companies have a larger need for external capital, which is also seen in an increase in their debt liabilities. The increased need for external capital comes mainly because of the decline in profitability, which has reduced the internal resources available to companies for financing operations. At the same time, companies in some sectors have increased their investments in fixed assets and inventories, pushing up corporate debt liabilities to 17.7 billion euros at the end of the third quarter of 2014, which was 11% more than a year earlier*.

Household finances improved in 2014. Household purchasing power and capacity for saving increased as incomes rose and inflation fell. Not all the additional financial resources were directed to consumption, and so household deposits grew by over 8% during 2014 to 5.4 billion euros. This growth once again came mainly from large deposits, but there was also an increase in the number of households with deposits.

Household borrowing is growing at a moderate speed. Higher incomes and the improved financial situation of borrowers have helped boost borrowing activity. Demand has increased most noticeably for housing loans but also to a lesser degree for other loans. The annual growth in the housing loan portfolio of banks operating in Estonia accelerated to reach 2.8% at the end of 2014, while growth in the portfolio of other household loans remained below 1%. The use of consumer loans and instalment credit from sources other than banks has also increased.

The capacity for lending of the banks operating in Estonia remains good. This is aided again by high levels of capitalisation and profitability and by favourable financing conditions. Interest rates on loans to companies and households fell in 2014 as base interest rates and, to a lesser extent, interest margins declined, but the deterioration in the outlook for the economy led some banks to tighten their credit standards.

The main risk for the financing of companies and households remains the danger of the general economic environment worsening. This would hurt the capacity of the banks to lend and their risk assessments, and it would reduce the ability of companies and households to finance their activities.

* These statistics are affected significantly by the reclassification of companies between institutional sectors at the end of 2013, without which the increase would have been a little below 8%.

Source: Bank of Estonia

Author: Taavi Raudsaar, Financial Sector Policy Division of Eesti Pank

First bitcoin ATM in Baltics opens in Tallinn

The first bitcoin ATM in the Baltics is now available to cryptocurrency users in the Estonian capital.

The ATM allows users to exchange euros into bitcoins, a virtual peer-to-peer currency, and transfer the sum into user’s digital wallet. The euro to bitcoin exchange rate is dependent on the current market price.

According to the company responsible for the ATM, there are currently about 13 bitcoin ATMs in Finland, and around 300 in the world.

The bitcoin ATM is open on weekdays from 10:00 to 19:00 and is located at the Spotex currency exchange in Tartu street, Tallinn.

Source: ERR via Estonian Review

Requirements for housing loans

The requirements regulating the issuing of housing loans are intended to strengthen the resilience of borrowers and lenders against losses from unfavourable developments, and to reduce the chances of a real estate boom being caused by excessive lending.

From 1 March 2015 all the banks operating in Estonia will have to comply with three requirements when issuing housing loans. These limits are an LTV limit, a DSTI limit, and a limit on the maximum maturity of loans.

1) The LTV ratio is found by dividing the amount of a housing loan by the value of the property used as collateral for it. At the moment the decision to grant the loan is taken, the LTV ratio may not exceed 85%. The LTV ratio for housing loans with KredEx guarantee can be up to 90%.

2) The debt service-to-income ratio is found by dividing all the principal and interest payments that the borrower must make for loans each month by the monthly net income of the borrower. The calculation of the loan payments for loans with variable interest rates uses either the interest rate in the loan contract (base rate plus margin) plus two percentage points, or an annual rate of 6%, whichever is higher. At the moment the decision to grant the loan is taken, the DSTI ratio may not exceed 50%.

where n is all the credit agreements of the borrower including the new housing loan.

3) The maximum permitted maturity of a housing loan contract is 30 years.

Banks will have to abide by all three requirements when issuing new housing loans. To ensure that banks have sufficient flexibility in making decisions about lending and in assessing the risks associated with it, and thus to help make sure that the credit market operates as efficiently as possible, Eesti Pank will permit banks to issue up to 15% of their housing loans each quarter with conditions that breach the limits.

Requirements 1) Loan-to-value (LTV) limit for housing loans: 85%*
2) Debt service-to-income (DSTI) limit: 50%
3) Maximum maturity of a housing loan: 30 years

* Up to 90% for housing loans guaranteed by KredEx

Permitted exceptions up to 15% of the amount of housing loans issued by a credit institution in a quarter
Applies to all credit institutions operating in Estonia, including the branches of foreign credit institutions
Entry into force 1 March 2015

Source: Bank of Estonia

The average interest rate on housing loans fell

The volume of loans and leases issued to Estonian companies and households was 3.4% larger in November than a year earlier. The portfolio increased during the month by 40 million euros and the total loan liabilities of companies and households at the end of November stood at 15.4 billion euros.

Annual growth in loans to companies was 4.5%, as it had been in the previous month. Corporate loan liabilities increased during November by 27 million euros as the volumes of both long-term and short-term loans issued during the month were above their averages for the year. Growth in long-term loans was also affected by car leases, which grew partly because of a change in the law affecting the taxation of company cars, which came into force in December. The largest volume of new loans issued in November went to companies in trade, industry and real estate.

Annual growth in mortgages accelerated in November to 2.6%. New housing loans worth 71 million euros were taken out, which is comparable to the amount in the preceding months. The volume of other loans issued to households was smaller than it had been in the preceding months.

The average mortgage interest rate fell in November, as it had in October, as the average marginal was lowered. The average interest rate for mortgages issued in November fell to 2.2% and the average interest rate for long-term loans taken by companies was 2.5%.

The share of loans overdue for more than 60 days accounted for 1.9% of the loan portfolio in November. The volume of overdue loans has remained relatively unchanged since the end of last year. Overdue loans are being reduced because earlier loan repayment problems are being solved, but at the same time new problems with repayments of loans are appearing. Long-term overdue loans have increased in the trade sector in recent months, and in November they also increased for industrial companies.

The growth in household savings remained rapid and stood at 8.4% over the year. Corporate deposits, which tend to be more volatile, fell by 94 million euros in November. The total deposits of companies and households stood at 9.6 billion euros at the end of November, which is 6.7% more than a year ago. Non-resident deposits increased slightly in November, but the change in their volume from a year earlier was only very small at 0.8%.

Source: Eesti Pank

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


The budget for central bank of Estonia is 20 mEUR

Eesti Pank’s budget for 2015 will be 20 million euros, which is 3.2% more than the budget for 2014.

The budget of the central bank is 4.5% higher than in 2014 without the costs of cash handling, which can vary greatly from year to year.

“The main growth in our budget has come from personnel costs as we have to remain competitive in the labour market. However, we have reduced staff numbers through internal reorganisation and found ways to make savings from infrastructure and other service costs”, said the Governor of Eesti Pank, Ardo Hansson.

New activities that have increased Eesti Pank’s costs are the supportive function for the Fiscal Council in Estonia, participation in the Single Supervisory Mechanism’s work, macroprudential supervision in Estonia, and activities connected to statistical data collection agreed upon in the euro area. The increase in work volume has led to additional employment in these areas.

The bank employed 2.8 fewer people in 2014 than in the previous year. The reduction was achieved by an internal reorganisation of work within the bank.

The management board’s aim is to have an efficient organisation and according to Mr Hansson this aim has been achieved if costs are compared over a long period. “The budget of Eesti Pank without the costs of cash handling has increased by slightly more than 2% over the last two years, at a time when Estonia’s nominal economic growth has probably been over 9%. In the longer term, wage and IT costs will continue to increase, and so we are looking to make savings elsewhere, principally from support services, and we are carefully considering the need for all our positions of employment”, he added.

The central bank payroll will be 5% larger than in 2014 at 9.1 million euros. This will make salaries roughly comparable to those for similar positions in the financial sector in Tallinn, where Eesti Pank competes for employees.

The costs of various services will remain steady next year at 7.2 million euros. IT costs will increase, mostly due to joint IT projects with other central banks in the euro area, while the central bank has found ways to decrease electricity and heating costs.

Spending on training, business travel and office expenses will be reduced by 1.5% in total to one million euros. Eesti Pank is planning 540 business trips next year in connection with the European Central Bank, down from the 550 planned for 2014.

Investments in fixed assets will increase from 1.3 million euros in 2014 to 1.8 million in 2015. The central bank is planning building work next year for archive space and training classrooms and around the exterior of the bank, and additional office space will be built for the Financial Supervisory Authority. The bank will buy in additional computer servers and a large amount of development work will focus on a data collection system for statistical reporting and document management, in addition to software solutions for data communication and the changeover to the Single European Payments Area (SEPA).

Eesti Pank’s forecast shows that the income for next year for the central bank will fall to 28.3 million euros. The largest share of Eesti Pank’s income comes from income related to the single monetary policy of the euro area. The bank also expects to gain income from management of foreign reserves and other operating revenues and is expected to make a profit of 8.3 million euros in 2015.

Eesti Pank and the other central banks of the euro area are responsible for maintaining price stability in the euro area. To do this, Eesti Pank must be independent, and for this reason the bank is not covered by the state budget.

Eesti Pank aims to provide Estonian society with the highest possible quality of central banking services as efficiently as possible. Among other measures, the central bank considers it a priority that its costs should not rise relative to gross domestic product (GDP). As cash handling costs can vary widely from year to year, they are not included in comparisons. The central bank budgets for both 2014 and 2015 were worth 0.087% of forecast GDP.

Eesti Pank’s operating revenues for 2014 will be published in the central bank’s annual report in the first half of 2015. Reports for earlier years can be accessed from the bank’s website:

Source: Eesti Pank

Estonian banks the most cost-effective in the EU

According to data presented by Bank of Estonia, Estonian banks have done well in the post-financial crisis period, mostly due to structural advantages they had going into it.

“In short, there are three main reasons for the banks profitability in Estonia,” said Jaak Tõrs from the country’s central bank.

“Firstly, in half of the banks in the Eurozone, they have had to make sizable discounts after the financial crisis to cover the losses on loans.

Secondly, the Estonian banking industry was able to regain profit from the discounts made during the financial crisis. And thirdly, the Estonian banks are among the most cost-effective in the EU,” he said.

Source: Estonian Review via ERR


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