Bank performance in Latvia 2014: development in a challenging environment

13.02.2015
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Riga, 12.02.2015
Press Release

Bank performance in Latvia 2014: development in a challenging environment

Preliminary data on Latvian banks’ performance collected by the Financial and Capital Market Commission (FCMC) show that despite some uncertainty in the geopolitical situation and economic growth, in 2014 like in previous years, the banks continued to follow a development route, improving their key performance indicators: the banking sector maintained high capitalization and liquidity levels, profitability and loan portfolio quality improved, the growth in deposits continued, as well as the pace of decrease in banking loan portfolio slightly declined.

FCMC Chairman Kristaps Zakulis describes the last year as a challenging year. “The events in neighbouring countries, though they have not had a direct impact on the banking sector overall, supported a rather cautious outlook for the future development and growth prospects. Therefore adequate risk management and ability to maintain sound performance ratios have been and still remain in the limelight both for the regulators and market participants. Also, credit development and availability of loans to groups of different segments will remain topical issues in the next few years. The purpose of the currently ongoing debate between commercial banks and politicians is to reach a compromise regarding the further action for reviving lending in Latvia,” Kristaps Zakulis outlines future trends.

In relation to the most topical targets this year, Ludmila Vojevoda, Director of Regulations and Statistics Department, Member of the FCMC Board points to the activities aimed at strengthening stability in the banking sector and financial system as a whole: “In November 2014, we successfully introduced the single supervisory mechanism, it was the first step towards the creation of the European banking union in order to restore confidence in the banking sector and expand monitoring of banks under uniform standards. This year, next steps will be taken – setting up a harmonized deposit guarantee scheme that, in case of Latvia, to a great extent already meets the EU requirements, and the single resolution mechanism. Thinking of stability of the financial system as a whole, implementation of macro-prudential supervision is taking place in Latvia that provides for appropriate measures aimed at promoting sustainability of the system.”

„We are at the starting point – this year banks are willing to resolve long-lasting problems and improve customer relations in the future. Therefore in the next few months a new customer service centre will be available for Latvian residents, to render assistance free of charge to the borrowers facing financial difficulties and incapable of meeting their obligations towards the lenders. Whereas to further improve the banking and customer relationships the Banking Social Charter will be developed – a future-oriented self-regulatory document for the industry covering different issues such as consumer rights, qualitative service, responsible lending, safe and modern remote services, educating the customers, as well as rational relationship with the state,” points out President of the Association of Commercial Banks of Latvia Mārtiņš Bičevskis.

The banks were still well-capitalized and the total banking sector capital adequacy by the end of September  was 20.6%, whereas the Common Equity Tier 1 capital ratio (CET1) stood at 17.9%. All the banks met the regulatory minimum capital requirement (8%), minimum Tier 1 capital requirement (6%), as well as minimum CET1 capital requirement (4.5%). The high-level capital quality in the banking sector has been maintained by the key element of bank equity – CET1 capital that it the highest quality capital and currently it corresponds with the Tier 1 capital in Latvian banks.

Bank liquidity
In 2014, the amount of demand deposits continued growing as well as their share in total deposits; however, liquidity risk was still limited because of growing liquid assets.
By the end of December, the liquidity ratio reached 63.1% (minimum requirement – 30%).

Profit and loss
The banking sector demonstrated sound profitability and reported a profit of 311 million euro (compared to 246.2 million euro in 2013). Meanwhile 13 Latvian banks and three foreign bank branches (covering almost 80% of total banking sector assets) in 2014 made a profit of 339.7 million euro in total. During 2014, profitability of the banking sector improved and return on equity (ROE) reached 11.1% by the end of December (compared to 8.65% in 2013).
The structure of banking income and expenditures has stabilized. In 2014, the increase in banking profits was mainly due to the decrease in expenditures (net expenditures for loan loss provisions shrank by 40.3%, whereas administrative expenditures – by 6.8%) and the increase in the commission fee income (8.3%).

Deposits
Following a steep growth at the end of 2013, resident deposits continued to grow also in 2014. The increase in households’ deposits materially facilitated the total resident deposit growth (by 446 million euro or 4.3%) and resident deposits by the end of the year reached 10.7 billion euro.
The rapid rise in the value of the US dollar (12%) significantly affected the increase in non-resident deposits. Over the year, non-resident deposit stock had grown by 2.2 billion euro, amounting to 11.5 billion euro by the end of December.  

Funds raised by banks
Though in 2014 overall liabilities to monetary financial institutions continued declining mostly due to reduction in the financing attracted from subsidiaries and branches of foreign banks (by 927 million euro), the decrease in parent bank five-year liabilities came to a halt in the second half of the year, even showing a slight increase in the amount of liabilities.

The amount of long-term bonds issued kept growing in 2014, by 180 million euro or 54%, and amounted to 513 million euro, thus facilitating the balance of the financing term structure for individual banks with a high demand deposit share in total deposits.

Loan portfolio
The total loan portfolio of the banking sector reduced by 6.1% or 951.9 million euro in 2014, including the resident corporate portfolio shrank by 7.2% and resident household portfolio – by 7.1%, while the non-resident portfolio grew by 4.1%. To a great extent, reduction in the loan portfolio was affected by the decreasing number of market operators  (i.e. by above 400 million euro).
The decrease in loan portfolio was facilitated also by a lesser amount of new loans granted to resident non-financial corporations – 1.2 billion euro in 2014, compared to 1.8 billion in 2013. At the same time, no rapid changes were observed in resident household crediting where the loans in the amount 434 million euro were available (including for house purchase – 288 million euro), only by 14 million euro up from 2013.

Overdue loans
The share of loans that were past due more than 90 days in the total loan portfolio continued shrinking and by the end of December it was 6.9% (compared to 8.1% at the end 2013). The share of such loans in the resident household loan portfolio made up 9.4%, whereas in the resident corporate loan portfolio – 5.4%. The total share of overdue loans in the banking sector loan portfolio shrank from 14.6% to 12.3% (year-on-year). The balance of loan loss provisions made by the banks at the end of 2014 shrank to 779.1 million euro or 5.3% of total banking loan portfolio (compared to 6.1% at the end of 2013), but the ratio of provisions to the balance of loans with payments more than 90 days overdue remained high, 77.2%.

Summary of balance sheet statements of Latvian banks for 2014 is available on the Financial and Capital Market Commission’s website atwww.fktk.lv/en; Statistics/Credit Institutions.

Further information:
Marija Makareviča
Head of Communications Division
Financial and Capital Market Commission
Telephone: +371 67774808; +371 26893967
marija.makarevica@fktk.lv

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