Rapid growth in loans and leases to companies continued in October

  • The portfolio of loans and leases to companies was up by 8.4% over the year in October with support from long-term loans
  • Growth in housing loans has picked up since the second quarter of this year, and was 4.9% in October
  • The volume of new housing loans was one tenth larger in October than a year earlier

The loan and lease portfolio of Estonian companies and households grew in October at a similarly fast rate to that of the preceding months. The stock of loans and leases was 6.9% bigger last month than a year before and at the end of the month it totalled 17 billion euros.

There was an increase of 8.4% over the year in the portfolio of loans and leases taken by companies from banks operating in Estonia. Growth in the domestic bank loans and leases of companies has been faster this year than last, mainly because of growth in long-term loans. There was a reduction in borrowing from abroad by companies in the first half of the year though, and so the total corporate debt has not changed in size substantially. The volume of domestic bank loans and leases to companies was affected significantly in October by individual large transactions.

Growth in housing loans has picked up since the second quarter of this year. The housing loan portfolio was 4.9% larger in October than a year earlier. The 95 million euros of new housing loans issued during the month was one tenth more than was issued a year previously. However, the number of new loan contracts signed in recent months is not notably more than a year ago, and the amount issued in new loans has mainly increased because the average value of transactions has risen. This indicates that the share of transactions with new apartments has increased. Other loans to households increased mostly because of car leases, like in previous months, and there was growth of 16% over the year in such leases.

The average interest rate for long-term loans issued to companies in October was 2.1%. The average interest rate on long-term loans to companies can fluctuate depending on the different projects that have been granted loans in each month, but the average for the year has remained close to the average for last year.

The share of loans overdue in the loan portfolio remained small. The value of loans overdue by more than 60 days at the end of October was 181 million euros. The share of long-term overdue loans was reduced a little by growth in the portfolio to stand at 1.2%.

The total deposits of companies and households continued to grow strongly in October. Total deposits increased by 163 million euros during the month to 11.4 billion euros. The volume of corporate deposits grew slightly faster, increasing by 9.5% over the year, while household deposits increased by 7.5%.

Source: Bank of Estonia

Author: Mari Tamm, economist at Bank of Estonia

Erkki Raasuke to head merged DNB-Nordea bank

Erkki Raasuke, who announced on Nov.24, 2016 that he was leaving listed Estonian banking group LHV Group, is set to head the merged Baltic operation of Nordea and DNB.

“I am very pleased to accept the role of director of the future combined bank,” Raasuke said in a press release. “The way I see it, this is not just a merger but the emergence of a new, more focused and faster growing bank. I am looking forward to meeting all the employees and the opportunity to start working towards creating a clearly locally-focused bank that will bring us even closer to clients.”

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Finances of Estonian families have imrpoved

  • Three quarters of families are able to save if they need to, and the number of households with savings has risen
  • Loans have been taken by 41% of families, which is the same as two years ago, and half of the loan liabilities are related to real estate
  • Around one fifth of families are planning to take a loan in the next year, and most of them already have some loan liabilities

Around 70% of families consider the trajectory of their family to be good and three quarters believe they can make savings if they needed to. The share of families able to save was about the same before the economic crisis, but it had fallen to 65% by 2012. In the immediate aftermath of the economic crisis it was mainly families with higher incomes that saw growth in the ability to save, but in recent years families with average and lower incomes have found that their capacity for saving has improved.

The share of families with savings has increased from year to year together with incomes and the capacity to save. Data from August 2016 show that 66% of families had financial savings in cash or in a bank. In 2014, 59% of families had such savings and in 2012 only 53% did. The share of families with savings increased mainly through families with average incomes, but also to a small extent through families with lower incomes. Even so, less than half of families in the bottom third of the income distribution, with net incomes of up to 350 euros per family member) saved. The savings of Estonian families are quite small and only around half of the families who said how much they had in savings in August 2016 had more than 1000 euros.

Savings are mostly held for a rainy day to provide some safety margin above income, but there was an increase in saving for leisure activities, health, and costs of residential property. The preference was to hold savings on a bank account or at home in cash. Around 6% of families own exchange-traded securities or units in investment funds, which is a little less than 10 years ago.

In August close to 245,000 families in Estonia, or 41% of all households, had loans. These numbers have been relatively stable throughout the past six years, and loans are mostly taken for buying, building or repairing homes. However, there has again been growth in in car leases and in the use of instalment payments from shops. Higher incomes have slightly reduced the principal and interest payments of loans as a percentage of income, and that figure is below 20% for more than half of families with loans. The households with the greatest difficulties are those whose monthly loan repayments exceed 40% of their income, and 8% of the families with loans were in that category.

In the past year, 9% of families in Estonia have wanted to take a loan to buy or renovate a property. A little over half of them had their loan applications granted, which is about the same as in 2014. About as many families are planning to take a loan in the next year as did so in 2014, and 70% of them already have some loan liabilities

The survey by TNS Kantar was conducted in August this year and covered 984 families, with respondents aged between 18 and 74. The survey was commissioned by Eesti Pank.

TNS Kantar has been conducting the F-monitoring survey since 1998. The survey maps changes in how Estonian residents use money and in the options and desires behind their financial behaviour.

Source: Bank of Estonia

The risks to the financial sector in Estonia are small

  • Faster loan growth could increase the risks to banks from real estate
  • Although corporate profits were down, the ability of companies and households to repay their loans remains good
  • The rate of growth of bank loans should be in line with nominal GDP growth in the years ahead
  • The banks operating in Estonia are well capitalised
  • The risks coming to the Estonian economy and commercial banks from Sweden remain at the same level as in spring
  • The impact of Brexit on Estonian financial stability will be small, and the effect will be felt indirectly and over a long time
  • Rapid growth in the deposits and assets of savings and loan associations reduces the control that depositors have over their own investment and their understanding of the possible risks

Most of the risks to the operation of the financial sector in Estonia are low. Although the uncertainty coming from the external environment increased and risks caused by imbalance in the labour market remain, 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 capitalisation in the banking sector.

The economy was 0.8% bigger in the second quarter than a year earlier, which is below its long-term growth potential. Value added grew in most economic sectors however, and the main obstacle to achieving potential growth was the decline in value added in energy and mining. Uncertainty about the recovery of external demand was increased by the referendum in the United Kingdom in June in which the British voted to leave the European Union. The direct impact of this on the Estonian economy and Estonian companies will be quite modest.

The ability of Estonian companies and households to repay their loans remains good. Labour costs continued to grow fast, with the consequence that corporate profits continued to shrink, though at a slower rate than previously. The contraction of profits has not yet seriously affected the ability of companies to pay, as their loan service costs are low and they have built up financial buffers, which have been kept high because investment volumes have been small. At the same time, rapid wage growth and high employment supported credit demand from households and their ability to loan servicing.

Growth in the loan and lease portfolio of the banking sector accelerated in August to 6% over the year. Loans to real estate companies and loans for buying residential property have contributed the most to the increase in the loan stock. The share of such loans in the total loan portfolio is relatively high at 55%, though this has not changed during recent years. Rising incomes and low interest rates create the risk that Estonian real estate prices and housing loans and lending to companies in real estate may start to grow faster. This would make the banks more vulnerable to risks coming from real estate. To guard against excessive growth in the risks from housing loans, Eesti Pank has introduced requirements for the issuance of housing loans by banks, and can tighten those requirements if the risks in the credit or real estate markets should increase.

Although credit growth has sped up a little, Eesti Pank is maintaining the countercyclical buffer requirement for the banks at 0% as the debt to income of the non-financial sector has not increased. Eesti Pank forecasts that the rate of growth of bank loans should be similar to the nominal rate of GDP growth in the coming years, and no developments or trends in bank behaviour are in view that would amplify lending activity. Eesti Pank continually monitors whether risks are building up and if necessary it can set additional capital buffer requirements for the banks.

The capitalisation of the banks operating in Estonia has remained strong, and this is further underpinned by the capital buffer requirements introduced by Eesti Pank. From August this year, all the banks operating in Estonia have to hold a systemic risk buffer of 1% to mitigate the risks of a sudden fall in the economy, which arise from Estonia having a small and open economy. The two systemically important banks, Swedbank AS and AS SEB Pank, have to hold a further buffer of 2% to hedge against the risks that come from the concentration of the banking sector.

In recent years the rapid development of alternative financial intermediaries has been eye-catching in the bank-centred financial sector. Attention has been drawn to the growth in the savings and loan associations, and the activities of creditors and credit intermediaries. The relatively rapid development in the real estate market has been accompanied by quick growth in real estate funds. The risks to financial stability from all these financial intermediaries are reduced by their small size in the financial system as a whole, and their weak links with the rest of the financial sector. The risks from creditors and credit intermediaries were reduced by them being brought under financial supervision. Savings and loan associations do not come under financial supervision and the rapid growth in their membership and the spread of their activities across Estonia could overshadow the original cooperative principle behind their operation and reduce the control that depositors have over their own investment and their understanding of the possible risks.

The risks to the Estonian financial sector coming from the Swedish economy remained at a similar level to that of spring 2016. With economic growth relatively fast in Sweden, real estate prices and household indebtedness continued to increase. Swedish bank groups are made vulnerable to a deterioration in credit conditions by the large share of market-based financing in their total funding. If international investors were to reassess the risks from rapidly increasing real estate prices and loans upwards, the financing conditions for the banks could worsen. Funds received from parent banks account for around one fifth of the funding of banks operating in Estonia, meaning they have an important role in the functioning of the Estonian loan market. The conditions of market-based funding have so far remained favourable for the Swedish banking groups. The parent banks of the biggest banks operating in Estonia are subject to high capital requirements at the group level in Sweden, and that has a positive effect on the financial strength of the banks in Estonia.

Source: Bank of Estonia

Estonia stands out for its use of cashless payments

  • Like those in the Nordic countries, payments in Estonia are mainly cashless
  • The largest share of cashless payments around the world are card payments
  • Cashless payments initiated in the USA and the euro area account for half of the cashless payments made around the world

Statistics from the European Central Bank on cashless payments show 220 cashless payments were made per person in the European Union in 2015. This is more than twice as many as in 2000, when 98 cashless payments were made per person. The fastest growth was in the number of card payments, which has approximately quadrupled in 15 years, as an average of 104 card payments are made per person in the European Union.

The differences between the payment habits of residents of different European Union countries are quite marked, and the Nordic countries stand out for their large number of cashless payments. Estonia is also one of those countries where residents make more than 300 cashless payments a year. Although the payment habits of residents of Estonia are already quite set, there were still 6% more cashless payments made in the third quarter of 2016 than in the third quarter of 2015. The average Estonian resident makes 331 cashless payments a year, of which 223, or 66%, are card payments.

In countries where cashless payments are used more, it is typical that card payments are a large share of the payments. More than 60% of cashless payments in Sweden, Finland, the United Kingdom and Estonia are made by bank card, while in Denmark 81% of cashless payments are card payments. Card payments accounted for an average of 47% of all cashless payments in the European Union in 2015, while 26% were credit transfers and 21% were direct debits1. As some large countries like France, Italy and Portugal still use cheques, payments by cheque account for 2.9% of all cashless payments. In 2000 cheques were still used for an average of 18.7% of all cashless payments in the European Union countries.

Paying in cash is so established in many countries in central and Eastern Europe that cashless payments are made only a fraction as often as in the northern countries. In general the changes in payments around the world have been the same as in Europe, and the number of cashless payments is increasing constantly. Within this, the number of card payments is rising and the share of cheques is shrinking. In 2014, 387 billion cashless payments were made around the globe, which was 9% more than a year previously2. The largest share of such payments were made in the USA, followed by the euro area, Brazil, China and the United Kingdom. The number of cashless payment made in China shot up during that year and China overtook the United Kingdom, though payments per resident are still lower in China at 17 per year than in the countries in Europe with the lowest figures.

The countries with the most cashless payments per resident in 2014 were the USA, Finland, the Netherlands, South Korea and Australia. More than half of all cashless payments around the world are made by card, and other areas of the world use cards even more than Europeans. In North America for example, 71% of cashless payments were card payments in 2014, and in the developing countries of Asia, like China, India and Hong Kong, 84% were.

1 Direct debits within Estonia were replaced by e-invoice standing orders in February 2014.

2 Comparable data on all countries are from 2014: https://www.worldpaymentsreport.com/. This is why the comparison of countries uses 2014 data.

Statistics for Eesti Pank’s payment and settlement systems

Source: Bank of Estonia (see better graphs here)

Author: Tiina Soosalu, Payment and Settlement Systems Department

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