FCMC Chairwoman Santa Purgaile, describes the indicators: ”The overall banking performance in 2019 demonstrates stability. Consequently, the phase of changes in the banking sector has been completed, significantly changing the structure of deposits and bank customers. Besides, the banks that had previously focused on foreign customer service developed and started to introduce new business models. Overall, banks are well capitalised and liquidity ratios are high. This is a good safety cushion for the economic challenges we are facing at the moment – during the spread of Covid-19. Developments in Latvia and the world, which are currently difficult to predict, will show how the impact of Covid-19 on the finance, in particular the banking sector, will evolve.”
Structural changes in the banking sector
At the end of 2019, 13 banks and five branches of European Union (EU) Member States’ banks were operating in Latvia. The merger of DNB Bank ASA and Nordea Bank AB in the Baltic States, started in the autumn of 2017, was concluded at the beginning of year, and as a result the combined bank Luminor Bank AB continued operations in Latvia and Lithuania as branches of Estonia’s Luminor Bank AS. During 2019, a strategic decision of Danske Bank Group on the termination of business activities in the Baltic States was also implemented. In Q3 2019, the activities of AS PNB Banka were suspended. Moreover, in the last quarter of the year the licence for the credit institution operation was revoked also for Scania Finans Aktiebolag Latvia’s branch, which will continue its activities in Latvia as a leasing company.
Over the past year, the total amount of assets in the Latvian banking sector did not change significantly. Changes in the amount and structure of assets remained the subject of different trends between banking groups. Although the assets of banks that had changed their business models as a whole did not change significantly (shrinking by 1.1%), there were changes in their asset structure. A decline in lending to foreign customers was partially offset by an increase in lending to domestic customers. Investments of those banks in securities also grew significantly, replacing the funds previously held in other credit institutions, which decreased by 40.3% during the year.
Deposits and their structure
The amount of non-bank clients’ deposits attracted in the banking sector increased overall by 477 million euro or 2.8%. Domestic deposit balances increased significantly, i.e. by 983 million euro or 7.6%, while the deposits of foreign customers continued to shrink by 12.6% or 505 million euro. The geographical structure of deposits continued to change in favour of the deposits from the EU countries. The share of non-EU customer deposits in the total deposits continued shrinking and reached 6.8%. The risk mitigation process launched in the previous years also continued in the reporting year. The banks still scrupulously assessed their customer base in line with a much more prudential approach, replacing non-EU deposits with domestic deposits and deposits of EU households through an active use of deposit platforms mediation.
The total amount of loans granted to non-bank customers by the Latvian banking sector shrank by 2% over the year. The overall decrease in lending to non-bank customers was due to structural changes in the Latvian banking sector – both the termination of the business activities of individual credit institutions and the implementation of strategic decisions of two branches of foreign banks, consistently reducing the amount of their loan portfolio.
Excluding the effects of above structural changes, the amount of non-bank loan portfolio grew by 4.7% in the reporting year. Equally high lending growth rates were observed for domestic households (by 6.4%) and for domestic non-financial corporations (by 6.7%). For the banks that continued to switch business models, the portfolio of loans to domestic customers increased by 18.1% or 97 million euro during the year, thus confirming their involvement in the domestic customer lending market in line with business strategies’ settings.
Profit and profitability
In 2019, the Latvian banking sector operated with a profit of 229 million euro. The sector’s overall Return on Equity (ROE) was 9.6%, and it was higher than the EU average (6.6%). Operating income of banks that changed their business models diminished by 20% during the year, but the rate of decline gradually decreased during the second half of the reporting year.
Capital and liquidity ratios
The capital and liquidity ratios of active banks remained at high levels – Common Equity Tier 1 (CET1 ratio) was 21.3%, while the total capital ratio – 22.7%, ensuring sufficient buffers to cover unforeseen losses and exceeding the EU average (15.0% and 19.3%, respectively).
The average EU harmonised Liquidity Coverage Ratio (LCR) did not change significantly and remained high (304.6%), including between 157% and 753% for individual banks, (since 1 January 2018 LCR minimum requirement has been set at 100%).
Infographic on the Latvian banking sector figures in 2019 is available here.
FCMC’s Communications Division
Phones: +371 67774808; +371 67774807