Update: Latvian banking sector performance: October 2011
The Financial and Capital Market Commission releases the Latvian bank performance data for October 2011 .
The banking sector maintained high liquidity level in October, i.e. liquidity ratio* stood at 61% by the end of October (compared to 60.1% at end-September). With bank profitability improving several banks made good use of an opportunity to strengthen their capital base by including their audited half-year profit in it, therefore the overall banking sector capital adequacy ratio* also increased and by the end of October reached 17.2%, whereas tier 1 capital ratio * was 14.1% (compared to 17% and 14%, respectively, at end-September) (see Figure 1). Since the beginning of 2011 twelve banks had increased their capital for the total of 125 million lats and the banking sector paid-up share capital amounted to 1 956.2 million lats.
Banking sector liquidity ratio and capital adequacy ratio dynamics
By the end of October, the banking sector profit amounted to 74 million lats (to the contrary of a 321.1 million lats loss in the respective period of 2010), where 14 Latvian banks and five branches of foreign banks (constituting 78.4% of total banking sector assets) reported profits over the accounting period. The banking sector profit was affected both by the performance results (excess of revenues from interest and commission fee over the current operating expenses) and changes in the loan portfolio quality (net expenses for loan loss provisions) (see Figure 2).
Income and expense structure
In the course of October, the banking deposit stock overall fell by 0.3%, or 33.9 million lats, where resident deposit stock shrank by 1.1%, or 71.5 million lats (mainly due to a decrease in the financial institution deposit stock, i.e. by 13.2% or 67 million lats), whereas non-resident deposit stock rose by 0.8%, or 37.6 million lats. Since the beginning of the year, deposit stock overall increased by 0.9%, or 96.7 million lats, and by end-October accounted for 11.2 billion lats (see Figure 3).
Bank deposit stock
In October, 7.2 thousand new loans for the total of 212 million lats were granted in the banking sector, whereas since the beginning of 2011 almost 128 thousand new loans were granted in the banking sector for the total of 1.2 billion lats (where 523 million lats were granted to the development of Latvian non-financial corporations, 74 million lats – to the Latvian financial institutions, 131 million lats – to resident households, whereas 455 million lats – to non-residents) (see Figure 4).
New loans granted in the banking sector (by months)
In October, an increase in the balance of loans granted to resident non-financial corporations, for the first time observed already in July, continued growing (by 0.1%, or 5.3 million lats amounting to 6 billion lats by end-October). However, the total banking sector loan portfolio shrank by 0.4%, or 56.1 million lats, mainly because the overall amount of new loans granted to resident households still was considerably less than those repaid by clients and written-off by banks. The household loan portfolio continued reducing (by 0.7% or 37.7 million lats in the course of the month, reaching 5.4 billion lats at end-October). Since the beginning of the year the banking sector loan portfolio overall had contracted by 6.3% or 907.6 million lats and by end-October accounted for 13.4 billion lats.
Since the beginning of the year, total overdue loan balance had shrunk by 6.9%, or 261.6 million lats, totalling 3.5 billion lats, or 26.4% of loan portfolio by the end of October, however, in October total overdue loan amount grew by 0.4%, or 15 million lats. Meanwhile the share of loans with more than 90 days overdue payments had decreased by 12.1%, or 328 million lats, since the beginning of the year, mainly due to improving loan quality in the corporate sector that was partially affected also by the writing-off of lost loans.
Also in October, the balance of loans with more than 90 days overdue payments continued decreasing (by 1.2% or 28.6 million lats) and their share in loan portfolio shrank by 17.8% by end-October (compared to 18% at end-September).
The amount of loan loss provisions made by banks in the course of the month shrank by 21.5 million lats, or 1.4%, and accounted for 1.5 billion lats or 11.1% of the aggregate loan portfolio at the end of October (compared to 11.2% at end-September).
There have been distinct trends in the quality of corporate and household loans apparent for about one year. With the revival of the Latvian economic growth and more active involvement of banks in corporate lending activities, the quality of corporate client loans have been improving step by step, however, still high unemployment rate and inflation, as well as low activity in the household lending segment resulted in the further deterioration in the quality of household loan portfolio. By end-October of all loans granted to households, 30.4% were delinquent (at end-September 30.8%) and the share of loans with more than 90 days overdue payments remained unchanged (19.6%), while the aggregate amount of overdue loans shrank by 2.1%, or 34 million lats, as well as the total of loans more than 90 days past due by 0.7%, or 7 million lats (see Figure 5). The quality of the single loans for housing purchase was better – the share of loans with more than 90 days overdue payments at end-October was at 13.2% (by end-September, the aggregate amount of single loans for housing purchase made up 3.3 billion lats ).
Though the quality of loans granted to corporate clients had showed explicit signs of improvement as from the beginning of the year, the October data gave cause for concern that the new clients might have faced problems with carrying out credit payments in due time, and that was evidenced by an increase in the overdue loans falling in the category of loans past due from 31 – 90 days. At the same time there was a continuous tendency typical of previous months – the amount of loans with more than 90 days overdue payments decreased by 17.6 million lats or by 1.7% in the corporate sector, shrinking to 16.1% of such loans (compared to 16.4% at end-September) (see Figure 5).
Overdue loans and provisions (% of loan portfolio)
Banks continued dealing with problem loans; however, since this past spring there has been a tendency for new loans classified as restructured loans to decrease, as well as less amounts of new loans have been included in the category of loans in work-out process. Since the beginning of the year, about 26 thousand new loans for the aggregate amount of 1 093 million lats were categorized as restructured loans (see Figure 6).
New loans included in the category of restructured loans (by relevant month)
Whereas 19.8 thousand new loans for the total amount of 394 million lats were included in the category of loans in work-out process during the accounting period (see Figure 7). Loans granted to non-residents constituted one half of the loans that were included in the category of loans in work-out process in October.
New loans included in the category of loans in work-out process (by relevant month)
In the accounting period, new loans that were granted mainly to resident households as well as real estate transactions, construction sector and to non-residents fell in both the category of restructured loans and the category of loans in work-out process. At end-October, the share of restructured loans stood at 17.9% of the aggregate banking sector loan portfolio, whereas the share of loans in work-out process - at 13.6% of total portfolio (compared to 19.3% and 13.6% at end-September).
Since the beginning of the year the loans in the amount of 227 million lats were written-off by banks (where loans to households made up 77 million lats, to resident corporate clients – 145 million lats, and to non-residents – 5 million lats).
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Head of Office
Financial and Capital Market Commission
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Financial and Capital Market Commission's Office
Phone: +371 67774808; email: Agnese.Licite@fktk.lv