Nordea and DNB will be the second biggest bank in the Baltic states

  • The newly created bank will increase the volume of assets in the Estonian banking sector by around 40%
  • The new bank will be the second biggest in the Baltic states
  • The new bank could strengthen competition in the market for banking services for private clients in Estonia
  • Financial stability in Estonia will start to be affected by risks to the banking markets in Latvia and Lithuania

The merger of the Baltic operations of Nordea and DNB banks as a new independent Baltic bank with headquarters in Estonia and branches in Latvia and Lithuania will mean that the Latvian and Lithuanian banking markets will become more important in terms of risks to financial stability in Estonia.

Deputy Governor of Eesti Pank Madis Müller said that the creation of the second largest bank in the Baltic region is the biggest news in recent years in the Estonian financial market and could lead to increased competition in retail banking. “Danske recently withdrew from retail banking in Estonia, which did not have a good impact on competition. Meanwhile DNB bank has not been active in retail banking before now. I hope that the launch of the big, new universal bank focusing on the Baltic states will lead to stronger competition than there has been, especially in the market for banking services aimed at private clients. Competition is a force that drives development, and so this merger is good news.”

The Nordea and DNB banking groups unveiled their programme on Thursday, and it will see them set up a new and independent bank built on their existing Baltic operations, with its head office in Estonia and branches in Latvia and Lithuania. If the plan is approved by the different national authorities, it will create the second biggest bank in the Baltic states, and the volume of assets in the Estonian banking sector will increase by some 40% after the merger.

If the head office of the big new bank is in Estonia and branches in Latvia and Lithuania, the stability of the financial sector in Estonia will start to be affected directly by events in banking in Latvia and Lithuania. “The size of the new bank means it will be systemically important for Estonia. The risks to Estonian banking will start to depend more on Latvia and Lithuania if the new bank has a lot of business there. If the creation of the new bank is approved, Eesti Pank will need to start paying more attention to the markets in Latvia and Lithuania when we analyse the risks to our financial stability, and additional capital buffers will need to reflect that”, said Mr Müller.

Both Nordea and DNB are among the leading banks in Scandinavia and as owners with equal voting rights, both have confirmed their readiness to provide additional funds for the Baltic bank if needed. Mr Müller said that having such strong ownership behind the bank is important for the stability of the Estonian financial sector.

The size of the balance sheet of the new bank means it will be supervised by the European Central Bank working together with the Financial Supervisory Authority.

Source: Bank of Estonia

The average interest rate on housing loans rose in July

  • The loan and lease portfolio continued to increase relatively quickly in July, growing by 5% over the year
  • The average interest rate on loans has risen slightly in recent months
  • The volume of deposits was 7.3% larger in July than a year earlier

The loan and lease portfolio of Estonian companies and households grew relatively quickly in July, as it had in the preceding months, to be 5.3% larger than a year earlier. The total volume of loans and leases increased during the month by almost 100 million euros to 16.6 billion euros.

The yearly growth in the corporate loan and lease portfolio was 5.8% in July. Long-term loans of 199 million euros were granted in July and more than one third of them went to companies in real estate and construction.

Household borrowing activity remained at a similar level to that of the preceding months. The value of new housing loans issued in July was 88 million euros, and the total portfolio grew by 4.4% over the year. The volume of car leases also increased in July at the same rapid rate as previously, growing by 16.4% over the year.

The average interest rate on loans has risen in recent months. EURIBOR, which is the base interest rate for a majority of loans, has fallen further, leading to lower interest income for the banks. This has allowed banks to increase their interest margins on new loans in order to maintain their income. The average interest rate on housing loans issued in July was 2.4% and the average interest rate on long-term corporate loans was 2.5%.

The volume of loans that are long-term overdue is small and remained at the same level as in previous months. There were 195 million euros of loans in the portfolio that were more than 60 days overdue in July, which is 1.3% of the loan portfolio.

The total deposits of companies and households stood at 11 billion euros in July, which is 7.3% more than a year ago. The average wage has continued to rise relatively quickly, which has led household deposits to grow stably in volume. Corporate deposits were 7.6% larger in July than a year earlier.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Estonia gets new borrower database

Together with credit information and risk assessment firm Krediidiinfo, several Estonian banks are starting a new borrower database on Monday. Provided the private individual in question agrees to such an exchange, the system will facilitate the exchange of information about loan applicants.

In addition to Krediidiinfo, which has offered this kind of service since the early 1990s, LHV Bank, Bigbank, and Inbank are participating in the project, among others.

Read more from ERR News

About 66 pct of all domestic payments are made by card at the point of sale

  • The number of domestic cashless payments is growing continuously
  • Card payments account for 2/3 of all payments
  • Use of cards abroad by Estonian residents is also increasing and payments were made by card in 185 foreign countries in the second quarter

An average of 1.1 million domestic cashless payments were made each day in the second quarter of 2016 in Estonia, with a total value of 370 million euros. The number of payments was 7% higher than in the first quarter of last year, but the turnover was 6% smaller. The number of payments made by individuals and by companies has risen steadily, though the turnover of payments has been notably more volatile. The turnover of corporate payments is affected by the general level of economic activity, and also by the activities of individual large companies.

About 66% 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. A daily average of 739,000 card payments were made in Estonia in the second quarter and 98% of them were made by private people.

Estonian residents made a daily average of 48,000 card payments outside Estonia in the second quarter. While December is the month that sees the most card payments in Estonia, it is the holiday months of June and July when cards issued in Estonia are used most frequently for payments abroad. The number of card payments made outside Estonia is 60-74% higher in the summer months than in January. Residents of Estonia paid by card in 185 different countries. Around one third of the card payments made abroad were made in Finland, where an average of 14,000 payments a day were made in the second quarter. Increased numbers of card payments were made in Sweden, Latvia and Russia too. In around half of the countries, Estonian residents made payments once a day on average. These were countries where the ability to pay by card is limited and to where fewer visits are made.

Data from Statistics Estonia show Estonian residents made 1.25 million trips abroad with an overnight stay in 2015, which is around one third more than ten years ago. At the same time that the number of card payments made outside Estonia has increased more than fourfold, the turnover is only 2.7 times higher, which indicates that cards are used more and more abroad for paying smaller amounts. The average payment abroad in 2006 was for 54 euros, but in the second quarter of this year, the average was 32 euros. The size of the average payment outside Estonia may be affected by the minimum sum for card payments imposed by some merchants.

Cash was withdrawn from ATMs outside Estonia an average of 3900 times per day, with withdrawals averaging 150 euros. The average withdrawal from cash machines in Estonia was 100 euros. While it is generally free to make card payments abroad, there is a service fee for making withdrawals from ATMs. More information about service fees can be found in Estonian from www.minuraha.ee.

Source: Bank of Estonia
Author: Tiina Soosalu, Payment and Settlement Systems Department

The portfolio of loans and leases to companies grew by 8 pct

  • The volume of loans and leases to companies continued to grow rapidly, increasing by 8% over the year
  • Households and companies had deposits of over 11 billion euros in banks at the end of June
  • The net profit of the banks was 89 million euros in the second quarter

The stock of loans and leases from banks to Estonian companies and private individuals was 6.4% larger in June than a year earlier at 16.5 billion euros. Growth accelerated in the loan and lease portfolio primarily because of loans to companies, which increased by 8% over the year.

In June, 230 million euros of long-term loans and leases were issued to companies, which is a similar amount to that of the preceding months. There was an increase of 18% in the loans and leases issued in June compared to the previous June. More loans went to companies in manufacturing and logistics in June than in the previous months.

Yearly growth in the portfolio of loans and leases to households has remained a little below 5% in the past half year. The largest share of loans to households was made up of housing loans, as 92 million euros of such loans were issued in June, 14% more than a year earlier. Having previously been relatively quick, growth in car leases slowed in June as sales of new cars were down on the previous two months.

The quality of the loan portfolio of the banks did not change, and the share of loans overdue by more than 60 days remained at 1.3%.

Households and companies had deposits of over 11 billion euros in banks for the first time in June, which was 7.5% more than a year earlier. The deposits of non-residents continued to shrink though.

The average interest rate on new housing loans rose slightly to 2.3% in June. This is the highest average interest rate on housing loans of recent years. The interest rate on corporate loans was the same as in the previous month at 2.5%.

Banks earned 89 million euros in net profit in the second quarter. Excluding dividends from subsidiaries and income tax paid, this is the biggest quarterly profit in recent years. Net interest income has particularly increased, primarily because interest expenses have declined.

Source: Bank of Estonia

Author: Jaak Tõrs, Head of the Financial Stability Department of Eesti Pank

Swedbank and SEB will hold additional buffers from August

  • From August the commercial banks will have to hold systemic risk buffers of 1% rather than 2%
  • Eesti Pank will require Swedbank and SEB to hold a further buffer of 2% because they are systemically important banks

Changes to the capital buffer requirements for the commercial banks will start to apply from 1 August. Eesti Pank will replace the earlier 2% systemic risk buffer requirement with a 1% requirement for all banks operating in Estonia and will also require Swedbank and SEB, the two largest banks, to hold an additional buffer of 2%.

Eesti Pank introduced the 2% systemic risk buffer requirement for all commercial banks in 2014. The buffer was intended to make the banks hold more capital and so increase their resilience 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.

“The systemic risk buffer has so far protected the banking sector against two risks, but from August we will cut this tool into two pieces in effect. We will start to require that all banks hold a buffer of 1% to reduce the risk of a sharp fall in the economy that arises because Estonia has a small and open economy. We will require the two largest banks to hold an additional 2% buffer though, as the banking sector in Estonia is one of the most concentrated in the European Union. Furthermore, the big banks here are vulnerable to the same risks as the structure of their assets and their funding is very similar”, said Ardo Hansson, Governor of Eesti Pank.

From August, the two biggest banks operating in Estonia will have a total capital requirement of 13.5% of total own funds, and all the other banks will have a requirement of 11.5%.

Eesti Pank informed the banks of its intention to change the capital buffer requirements at the end of April.

 

Currently

From 1 August 2016

Minimum own funds requirement

8%

8%

Capital conservation buffer

2.5%

2.5%

Countercyclical buffer

0%

0%

Systemic risk buffer

2%

1%

Systemically important institutions buffer

2%

Total requirement for Swedbank and SEB

12.5%

13.5%

Total requirement for other banks

12.5%

11.5%

The analysis by Eesti Pank of the introduction of the buffer requirements can be found on the website of the central bank.

Source: Bank of Estonia

Loans and leases to companies grew in April, 7 pct over the year

  • Loans and leases to companies grew fast in April (7%), just like in the preceding months
  • The stock of housing loans increased in April at the same rate as in recent months, 4% over the year
  • The average interest rate on long-term corporate loans has fallen this year
  • Deposits continued to grow strongly in April and did so by more than loans and leases

The portfolio of loans and leases to Estonian companies and households grew at the same rate in April as in the preceding months.The total value of the portfolio was 6% higher in April than a year earlier. The total volume of loans and leases increased during the month by 56 million euros to 16.3 billion euros.

Growth accelerated in the early months of the year in the volume of corporate loans and leases and it was relatively fast in April as well, at 7%. Some 880 million euros of new long-term loans were issued to companies in the first four months of the year, which is approximately one quarter more than a year previously, though some of this was refinancing earlier loans. The majority of the new long-term loans were to companies in real estate and manufacturing.

The stock of housing loans was 4% larger in April than a year earlier, meaning it grew at the same rate as in the preceding months.Activity in the housing loan market has declined a little though, and 10% fewer new housing loans were issued in March and April than a year before. The volume of other loans to households again grew faster than the volume of housing loans because of strong growth in car loans, and it was up 7% over the year in April.

The average interest rate on long-term corporate loans has fallen this year, if a sharp spike in March caused by individual transactions is excluded. The average interest rate for loans issued to companies was 2.1% in April, while the average interest rate for housing loans issued was 2.3%.

The volume of loans that were long-term overdue remained small. The volume of loans overdue by more than 60 days declined slightly in April and made up 1.3% of the loan portfolio at the end of the month.

Growth in corporate and household deposits remained fast in April. Total deposits were up 8% over the year at 10.8 billion euros. Corporate deposits have been increasing faster than household deposits since the second half of last year. Like before, deposits by both companies and households individually grew faster than loans and leases.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank