Financial authority to close Danske Estonia branch

ERR has learned that the Estonian Financial Supervisory Authority (FSA) has issued a precept which requires the Estonian branch of Danske Bank to close.

The Tallinn branch of Danske, a Danish-owned bank, has been at the centre of a money laundering scandal. Around €200 billion in potentially illicit funds, principally from the Russian Federation and other former Soviet nations, is thought to have passed through the branch between 2007 and 2015.

The story came to light through the course of 2018, causing Danske chief Thomas Borgen to resign, and the arrest of 10 Danske Estonia employees and former employees.

Read more from ERR News

The value of car leases taken is up one fifth on a year ago

Demand remains strong for loans. One fifth more car loans were taken out in August than a year earlier. The same number of new housing loans was taken as a year ago, though a little fewer than in the preceding months. The average interest rate on housing loans continued to rise in August. Companies have taken 16% more in new loans and leases this year than a year previously. The activity in borrowing has been accompanied by rapid growth in deposits too.

The demand from households for loans is supported by the rapid rise in incomes. New loans of 107 million euros in value were taken out, which was about the same amount as in August last year, but less than in May, June and July. The stock of housing loans has grown by 6.8% over the year. The value of new car lease contracts signed was more than one fifth higher than last year and the growth in the total volume of car leases over the year has been about the same. The portfolio of other loans increased by 4.5%.

The value of new corporate loans and leases issued this year is up 16% on a year earlier, with long-term loans up 20%. New loans were issued to almost all sectors. Some of the new loans taken have been used to refinance old loans, and so the yearly growth in the stock of corporate loans and leases picked up a little to nearly 7% in August, if a one-off sharp reduction in the loan stock in autumn 2017 is disregarded [1].

A lively real estate market with strong demand for loans has seen the average interest rate on new housing loans rise in 2018, and the growth rate reached 2.6% in August. Interest rates for corporate loans have not changed though. The average interest rate on new long-term corporate loans was 2.7% in August, as it was in July.

Growth in corporate and household deposits remained fast. The total volume of corporate deposits in banks operating in Estonia increased by 12% over the year. Household deposits were up 10% on the year, meaning they have grown at about the same rate throughout 2018. Non-resident deposits fell by 25% over the year however, and at the end of August they were equal to 7.5% of the stock of corporate and household deposits.

Source: Bank of Estonia

See graph here

Author: Mari Tamm, Economist at Eesti Pank

Households continued to borrow enthusiastically in July

  • Demand remained strong for both housing loans and consumption loans
  • Businesses increased their short-term borrowing in July
  • The average interest rate on new housing loans continued to rise and climbed a little above 2.5%

Households were again active in taking out new loans and leases in July. The 111 million euros of new housing loans was 7% more than was issued in the same month a year earlier. The yearly growth in the portfolio was around 7%, as in previous months. The volume of new car leases was 28% more than a year earlier and the portfolio as a whole increased by 21% over the year. Yearly growth in other loans to households remained fast at 8%.

Businesses increased their short-term borrowing above all in July. Around one third more was taken in short-term loans from domestic banks and lease companies than in the previous July, but long-term borrowing tailed off a little as the same amount was taken as a year earlier. The corporate loan and lease portfolio shrank a little during the month[1]. Borrowing by companies was restrained by their modest levels of investment and quite large reserves offunds.

The average interest rate on new housing loans rose a little in the first half of the year and in July too. With demand from households for loans strong, the average interest rate on housing loans rose to slightly above 2.5%. The average interest rate for long-term loans taken by companies reached 2.7%.

The rapid growth in the economy and in incomes saw strong growth in bank deposits. Corporate deposits decreased in June and July, but were still up 11% on a year earlier. Household deposits were up 9% over the year in July, meaning they grew at about the same rate as in the first half of the year.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

See graph here

Low level of investment in businesses

  • Annual growth in corporate debt increased to 3.2%
  • Household savings continue to grow faster than their loans
  • Private sector debt growth accelerated, but remained slower than nominal GDP growth

The growth in the debt of Estonian companies remains moderate. Although the annual growth of total corporate debt accelerated to 3.2% in the first quarter after a three-year standstill, it was still modest considering the favourable economic situation. This is due to the low level of investment that holds back a more prominent increase of long-term debt liabilities first and foremost. At the same time, the decrease in short-term loans taken from foreign associated undertakings has stopped, and if economic activity stays the same, it can be assumed that the growth in total corporate debt may pick up somewhat going forward.

Households are still active borrowers. Demand for loans remained high in the first months of the year, backed by quick income growth, high confidence levels and low interest rates. Households’ debt liabilities increased by about 7% compared to last year, and most of the growth came from housing loans given out by banks, as well as car leases. Loans from other loan providers grew much more slowly than the consumer loans taken out from banks.

The income and savings of households have increased faster than their debt liabilities, which somewhat helps to alleviate the risks associated with fast loan growth. In the first quarter, the outstanding debt liabilities of households were 12% larger than the total volume of their cash and deposits, but the spread has narrowed considerably over the past years. However, the stock of households’ other liquid financial assets (bonds, shares listed on the stock exchange, and investment fund units) remains relatively modest.

The annual growth of the Estonian private sector (companies and households) debt accelerated to 4.3%. Loan growth was therefore smaller than nominal GDP growth. The private sector indebtedness or the debt-to-GDP ratio stood at 118%, the same as the end of last year.

Read more on Bank of Estonia website

Author: Jana Kask, Economist at Eesti Pank

Bank profits decreased somewhat in the second quarter

  • Borrowing by households remained large in June
  • The average interest rate for new housing loans has risen slowly
  • Household and corporate deposits continued to grow strongly

Households continued to borrow actively in June, and the demand for car leases remained especially large. The value of new car leases signed in June was 30% more than a year earlier, and the annual growth of the car lease portfolio reached 20%. The annual growth of other consumer loans was also rapid at almost 9%. The fast increase of consumer loans reflects both the current favourable economic environment and increased supply. Consumer loans and leases make up around one fifth of the total loan and leasing portfolio of households.

The stock of housing loans grew in June at around the same rate as it had in previous months. 117 million euros’ worth of new housing loans were taken out, which was 12% more than a year earlier. The growth stems from higher-priced real estate and larger average loan sums, but also from the fact that more transactions were made. The annual growth of the housing loan portfolio has been close to 7% over the past six months.

Corporate loan growth has been more moderate than household loan growth due to low investment activity. However, companies’ loans from banks operating in Estonia did increase in the second quarter. The stock of new loans grew in all major sectors compared to the year before, and the increase of the loan portfolio has been relatively homogeneous.[1]

The average interest rate for new housing loans has risen somewhat since the start of the year, reaching 2.5% in June. Despite being the highest level of the past four years, it can still be considered low long-term. The average interest rate of new corporate loans largely depends on the kind of companies that sign loan contracts over a specific period and the kind of projects they undertake, and it can therefore fluctuate quite a lot. In July, it was down to 2%.

The deposits of Estonian households and companies grew rapidly alongside active borrowing. The stock of deposits held by banks increased by almost 12% or 13.8 million euros in a year.

The net profit of the banking sector fell a bit in the second quarter of 2018. The net profit of the quarter was 82.5 million euros in total, which was 3% less than in the previous year. At the same time, net interest income rose by almost 3% year-on-year, mostly thanks to smaller interest expenses. Service fee income increased, as did wage costs and administrative costs. One-off factors boosting profit were the reversal of previous provisions, and dividends from subsidiaries. As a result of the new income tax rules that took effect at the start of the year, banks calculated around 8 million euros for income tax expenses in the second quarter.


Read more on Bank of Estonia website
Author: Taavi Raudsaar, Economist at Eesti Pank

The average card purchase made in Estonia is 15.5 euros

In the second quarter of 2018, an average Estonian aged 15 or over made 24 card payments a month, 22 of which were made in Estonia and two abroad. Finland accounted for a quarter of all card payments made abroad with Latvia coming second in this statistics. On average, every second Estonian resident made one card payment in Finland per month and every fifth resident did so in Latvia. All in all, Estonians made card purchases in 185 countries.

Latvian figures are particularly noteworthy in the card payment statistics –  compared to three years ago, the number of card payments made by Estonians in Latvia has increased nearly threefold and card spending has leapt by over four times.

While the average card purchase made in Estonia was 15.5 euros, the average value of card transactions abroad amounted to 25.6 euros. Latvia stands out again with an average purchase value of 30 euros, compared to 19 euros in Finland, 21 euros in Russia, 18 euros in Sweden and 12 euros in the Netherlands.

An average consumer spent 396 euros on card purchases per month, of which 348 euros was spent in Estonia and 48 euros abroad. Most of the card payments were made at points of sale. An average Estonian used a bank card for one online purchase a month.

Payment orders were used on average for just over seven transactions a month. Bank transfers via Internet banking were used 3.5 times a month, standing orders for e-invoices and bank link payments 1.5 times each. Other modes of payment (standing orders, payment orders on paper) were used less frequently. In most cases, the payee’s account was also in Estonia, transfers to clients of foreign credit institutions accounted for less than one per cent of all payment orders.

Read more on Bank of Estonia website
Author: Tiina Soosalu, Payment and Settlement Systems

There is great demand in Estonia for faster payments

Estonia is moving together with the rest of the euro area firmly in the direction of interbank payments taking only seconds and being made on national holidays and weekends as well, said Deputy Governor of the central bank, Madis Müller, at a debate on instant payments held at Eesti Pank.

“There is certainly demand in Estonia for instant payments, as surveys show that 70% of people in Estonia want interbank transfers to be faster than they are at present. More than one third want money to reach the payee in less than five minutes”, explained Mr Müller.

He added that being a small country gives Estonia advantages. Currently SEB is the only bank that offers instant payments to its clients, but if only five banks join the instant payment system, it would be possible to make almost all interbank payments instantly.

The European Payments Council estimates that the majority of banks in the euro area will be offering their clients instant payments by 2020. So far, 580 banks in Europe have joined the instant payments system. SEB started to offer its clients the instant payment service from last November. All banks and payment service providers have been able to join the pan-European instant payment system since the end of November 2017. The system allows payments to be made from one bank to another within only seconds. In Latvia the instant payment service is offered by SEB and also by Citadele. An average of 10,000 instant payments are made in total in Europe each day, and the majority of those payments are initiated in the Baltic region.

Participants in the debate were Deputy Governor of Eesti Pank Madis Müller, Chairman of the Executive Board of Tallinna Kaubamaja group Raul Puusepp, Chairman of the Management Board of SEB Allan Parik, and Product Manager at TransferWise Lars Trunin. The panel discussion was chaired by technology journalist Ronald Liive.

Source: Bank of Estonia

Household borrowing remains large

  • The growth in the volume of car leases accelerated even further in April
  • Real estate companies borrowed a little more modestly than in previous months
  • Bank deposits continued to grow strongly in April and were up 10% over the year

Borrowing by households was again large in April, with especially strong demand for car leases. The value of new car leases signed in April was 43% larger than in the previous April, and the yearly growth in the portfolio of car leases accelerated to 20%. Other consumption loans also grew fast, at a yearly rate of 9%. The strong growth in consumption loans reflects both the favourable economic environment and the increased supply. Consumption loans provide a substantially smaller share of the loan and lease portfolio than do housing loans at only 9%.

Interest in housing loans remained strong among households in April. Some 101 million euros of new housing loans were taken out, which was 15% more than at the same time a year earlier. The yearly growth in the portfolio was 6.7%, like it has been for the past half year.

The new corporate loans issued in April were more evenly divided between sectors than in earlier months of the year. Some 213 million euros of new corporate loans were issued, which was a little less than at the same time a year earlier. Although real estate and construction remained the sectors that took the largest amount of new loans, like before, the amount they took in loans was less than in previous months. Given that loans to real estate and construction account for a large share of the portfolio of the banks, a more even division of loans represents positive progress. Companies in agriculture stood out particularly for borrowing more than in previous months[1].

The average interest rate on new long-term corporate loans was a little higher in April than it was a year ago at 2.7%. This was partly because fewer loan contracts for large loans with low rates were signed in April. In the second half of last year there were some individual large loan projects with low interest rates that affected the average margin quite significantly. The average interest rate for housing loans remained at 2.4%, which is comparable to what it was a year earlier.

Alongside the elevated activity in borrowing, deposits also grew strongly. The deposits of both households and companies were up 10% on a year earlier, meaning they grew faster than the loan and lease portfolios. At the end of April the total deposits of companies and households stood at 13.2 billion euros.

Author: Kirstin Saluveer, Economist at Eesti Pank

See more from Bank of Estonia website

The net profit of the banks was 13 pct smaller in 1Q

• Real estate companies have borrowed more in recent months
• The rapid growth in housing and consumption loans to households continued
• The net profit of the banks was 13% smaller in the first quarter than a year ago

Estonian non-financial companies were quite active in borrowing from banks and leasing companies operating in Estonia in March 2018. The 278 million euros of new long-term loans and leases was 11% more than was issued in the same month a year earlier. Lending to real estate companies has particularly increased in recent months, and almost half of the new long-term loans issued in March went to such companies. Companies in transportation and storage also stood out in the first quarter for borrowing more than previously (1) .

The fast growth in loans and leases to companies and households continued in March. The demand from households for loans remained strong and was driven by rapid wage growth and high levels of confidence, and the total stock of housing loans increased by 6.6% over the year. New housing loans worth 96 million euros were taken, which is a little less than at the same time a year earlier. Meanwhile, the amount taken by households in car leases has increased faster in recent months. This has partly been driven by the change that came in from the start of the year to the taxation of vehicles owned by companies, which has led to company cars being registered to private individuals. The stock of car leases was 18.5% larger in March than a year earlier. Other consumer loans also saw strong growth of 9.5% over the year. Demand for borrowing with overdrafts and credit cards has been weaker as incomes have risen fast and the stock of such loans changed little over the year.

The average interest rates on new loans were at around the same level in the first quarter of this year as in the first quarter of last year. The interest rate on both new housing loans and long-term corporate loans was 2.4% in March.

The good capacity of borrowers to pay their loans meant the loan quality of the banks remained good. The total stock of corporate and household loans overdue for more than 60 days shrank to 135 million euros in March to make up 0.9% of the loan portfolio. The banks have made provisions against possible loan losses, almost entirely covering the loans overdue by more than 60 days.

The deposits of companies and households in banks also grew strongly in March. Bank deposits were 9.4% larger than a year earlier at 13.1 billion euros.

The net profit of the banking sector fell in the first quarter of 2018. Total net profit of 77.5 million euros was earned in the quarter, which was 13% less than a year earlier. The return on assets on an annual basis was 1.2%, which is 0.3 percentage point less than a year previously. Interest income increased, but expenses increased by more. A new income tax regime came in from the start of the year that requires banks to pay income tax on the profit earned during each quarter, increasing income tax expenses. In addition the merger of two banks raised personnel costs and a correction in stock markets created losses from the changes in the market value of financial instruments.

Read more on the Bank of Estonia website

Author: Mari Tamm, Economist at Eesti Pank

Estonia stands out in Europe for its use of bankcards

In the first quarter of 2018 private individuals withdrew an average of 7.7 million euros a day from ATMs in Estonia and made an average of 11.3 million euros of card payments each day. Estonia stands out within Europe for these statistics. Research by the European Central Bank shows the only country where cash is used less at points of sale than in Estonia is the Netherlands.

Statistics on the use of cash and bankcards vary widely from country to country in the euro area. Residents of Malta make 92% of their purchases using cash, while people in Estonia use cash for only 48% of payments at points of sale. Other countries alongside Malta where cash is popular are Greece and Spain, while people in Finland and the Netherlands join those in Estonia in preferring card payments.

The number of ATMs in Estonia has fallen by a fifth in the past decade, but the number of cash withdrawals from ATMs has fallen even further, dropping by 31%. The turnover of ATMs has increased by 15% though, which means that larger amounts are being withdrawn at a time. The average withdrawal by private individuals was 56 euros in 2009, but in the first quarter of this year it had climbed to 94 euros.

The research also looked at how much cash people on average have on them. Residents of the euro area have an average of 65 euros in their wallet, with Germans carrying the largest sum of 103 euros, and the Portuguese the smallest at 29 euros. People in Estonia have 43 euros in their wallet on average. Men and older people carry more cash on them on average than others.

The research by the European Central Bank into the countries of the euro area can be found on the website of the European Central Bank.

See more on Bank of Estonia website

Author: Tiina Soosalu, Payment and Settlement Systems Department