Bank performance in Latvia 2012: from stabilization to prudent development

27.02.2013
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Riga, 05.02.2013
Press Release

Bank performance in Latvia 2012: from stabilization to prudent development

According to the Financial and Capital Market Commission’s (hereinafter – the FCMC) preliminary data on Latvian banks’ performance for 2012 there were some optimistic trends emerging in the banking sector last year as well as stabilization of key performance ratios was observed – overall the banking sector earned profit, the pace of decrease in loan portfolio slowed down and the deposit volumes gradually grew. Though risks still remained in the financial sector (mainly due to external economic factors), a prudent development in the sector is projected in 2013 and, as a result, it might be more difficult for banks to ensure the growth in their profits.

Characterizing the banking sector in 2012 the FCMC Chairman Kristaps Zakulis emphasizes: „In general, the year has passed in the sign of stabilization – the banks were well-capitalized and a high-level liquidity was maintained. Like previous year, this year topical issues will be to continue enhancing of the loan portfolio quality and ensuring more active crediting of sustainable projects in line with the economic growth rate. However, despite of improvement in economic indicators, the people experience the positive changes later than the corporate sector, therefore the household loan quality has not changed significantly in 2012, and the necessity for new loan loss provisions is not ruled out this year as well. Also, risk management in conformity with the amount of deposits placed by non-residents will remain a topical issue.”

President of the Association of Commercial Banks of Latvia Mārtiņš Bičevskis outlines the key tasks for this year: “The main challenge for the Latvian economy this year will be to maintain the current development pace, and for the banks respectively – to ensure funding for such development. As regards projects, the introduction of the euro, of course, will be the most rigorous work for the banks, to ensure that this process would be comfortable, clear and smooth for all the customers. Also, the banks and the Association of Commercial Banks in collaboration with other parties concerned will continue activities for strengthening financial literacy, in order to raise the level of knowledge and awareness of the financial and economic matters among the Latvian public.”

Liquidity and capitalization ratios
Still comparatively low lending activity determined the high level of the banking liquid assets and the liquidity ratio retained a high level – at 59.8% by the end of December (regulatory requirement – 30%), though several banks had made partial repayment of subordinated investments over the year and as a result there was a slight decrease in the liquidity ratio (compared to 63.9% at the end of 2011).

The bank capitalization level had minor improvement in the second half of 2012, as a number of banks had made use of the possibility to strengthen capital base by including (interim) audited profit of current operational year, whereas the amount of banking risk-weighted assets shrank insignificantly and by the end of December the capital adequacy ratio was 17.6% (minimum capital requirement – 8%), whereas the tier 1 ratio stood at 15.3% (compared to 17.4% and 14.2%, respectively, at the end of 2011). Over the 2012, 12 banks increased the capital in total of 124.2 million lats.

Profit and loss
After the three loss-making years, the year 2012 was the first one where the banking sector made profits amounting to 122.3 million lats (compared to 2011, with total banking sector losses at 179 million lats, but excluding losses made by „Latvijas Krājbanka” and „Parex banka” – 97 million lats). Meanwhile 19 Latvian banks and foreign bank branches (covering 94.1% of total banking sector assets) in 2012 posted the profit of 196.3 million lats in total.

In 2012, banking profitability was positively affected by both the increase in the commission fee income and comparatively high interest rate spread on loans and deposits, as well as stabilization of amount and quality of loan portfolio. Key banking income items continued growing in comparison with the previous year, i.e. net interest income – by 2% and net commission fee income – by 19%, whereas the most significant banking sector expenditure item, namely, provisions for bad debts shrank by 13%.

Deposits
At the end of December 2012, the bank deposit stock amounted to 12.7 billion lats, having increased by 1.4 billion lats, or 12.7% over the year (excluding the ratios of the banks deprived of their licences in 2012, deposits grew by 15.8%), where resident deposits increased by 530 million lats (mainly deposits by the government, non-financial undertakings and households), whereas non-resident deposits grew by 876 million lats. Resident deposit stock remained comparatively unchanged over the year and an upward trend was observed only in the last quarter of the year. As for non-resident deposits, there was a faster increase in their stock in the first half of the year, while in the second half of the year there was a slowdown in the non-resident deposit growth rate. As deposit interest rates still remained low, the share of demand deposits in the total deposits kept growing in 2012.

Funding raised by banks
With a loan portfolio contraction and increase in deposits the necessity for additional financing also reduced and the funding raised by banks from monetary financial institutions continued declining in 2012 and over the year contracted by 980 million lats, or 19.1%, mainly due to contraction in funding volumes from foreign bank subsidiaries and branches by 827 million lats.

Loan portfolio
In 2012, total loan portfolio of the banking sector (excluding performance ratios of the banks deprived of their licences in 2012) reduced by 2.8%. The balance of the loans granted to the corporate resident customers shrank only by 0.9% over the year, whereas reduction in the resident household loan balance was at a faster pace, i.e. by 8%. Meanwhile the non-resident loan balance over the year grew by 7.4%.

New loans
New loans in the amount of 1.9 billion lats were issued in the banking sector over the year, of which
654.8 million lats were granted to the development of Latvian enterprises, 285.8 million lats – to the Latvian financial institutions, 184.4 million lats – to the resident households, whereas 818.5 million lats – to non-residents. In the corporate sector, over the year the bulk of new loans were granted to the energy sector (150.6 million lats), followed by the trading industry (105 million lats), real estate transactions (69.9 million lats), agriculture sector (63.3 million lats) and manufacturing industry (58 million lats). Whereas in the household sector, slightly more than two thirds (67%) of new loans in 2012 were the loans for housing purchase, reconstruction and/or repair (123.5 million lats).

Overdue loans
The share of loans with more than 90 days overdue payments in the total loan portfolio continued shrinking and by the end of December it was 11.1% (compared to 13.3% at the end of 2011). The share of such loans in the resident household loan portfolio amounted to 15.2%, whereas in the resident corporate loan portfolio – 9.2%. The total share of overdue loans in the banking sector loan portfolio reduced from 20.6% to 17.4% over the year. The balance of loan loss provisions made by the banks at the end of 2012 shrank to 937.4 million lats or 8.0% of total banking loan portfolio (compared to 9.8% at the end of 2011).

Summary of balance sheet statements of Latvian banks for 2012 is available on the Financial and Capital Market Commission’s website at www.fktk.lv/en; Statistics/Credit Institutions/.

Further information:
Laima Auza
Head of Communications Department
Financial and Capital Market Commission
Phone: +371 67774860, +371 26148001
laima.auza@fktk.lv

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