According to the preliminary data on Latvian banks’ performance for 2015 compiled by the Financial and Capital Market Commission (FCMC) there has been steady progress in the Latvian banking sector in 2015, still providing a high level of key performance indicators, i.e. levels of liquidity and capitalization, positive profitability development, increased new lending and improved overall quality of loan portfolio, as well as a growth in resident deposit rate that considerably exceeded the growth rate of Latvian national economy.
FCMC Chairman Pēters Putniņš: “The year has been stable but not an easy one. Our first year of operation within the Single Supervisory Mechanism of Europe’s banking union has been successfully completed. The Latvian banking sector has been commendably successful in profitability, generating profits almost one third higher than in the previous period and at the same time maintaining high key performance ratios. It is just as important, however, to have appropriate management of risks inherent in the activities of our banking sector that arise from existing bank strategies. I would urge our market participants “not to rest on their laurels” or fall in self-complacency, but to perfect their performance and take an active role in revising their further strategies in line with developments in a rapidly changing financial as well as geopolitical environment. At this stage of development it applies most to the area of anti-money laundering and combating terrorist financing.”
Among the future trends in the banking sector P. Putniņš pointed to a dynamic period of close cooperation with monitoring experts in order to introduce the envisaged changes in the AML/CFT area and the OECD accession negotiations, as well as to boost international reputation of the Latvian financial sector concerning the prevention of money laundering, establishing the highest standards in this area and ensuring that they are maintained in further banking practice. FCMC has drawn up an independent draft audit process, within it the assessment of compliance of the activities of Latvian banks, focused on the non-resident business, with AML/CF provisions will be carried out involving also experts from the U.S. The process will be completed in the first half of 2016. The findings of the process will serve not only to identify deficiencies but also to carry out the necessary improvements in the monitoring of money laundering and terrorist financing risks and to boost cooperation between the Latvian banks and major U.S. banks.
Key performance indicators 2015
Banks still maintained high capitalization levels and total capital adequacy ratio of the banking sector was 21.6% at the end of September , while Common Equity Tier 1 (CET1) was 18.8%. 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 currently corresponds with the Tier 1 capital in Latvian banks.
With liquid assets growing faster than current liabilities, liquidity risk remained limited. In 2015, liquidity ratio significantly increased (by 3.6 percentage points) and at the end of December reached 66.7% (minimum requirement – 30%)
Profit and loss
The banking sector recorded sound profits in 2015, earning 416 million euro in profits (compared to 311 million euro in 2014). Of total, 15 Latvian banks and five foreign banks’ branches in Latvia (making up 96% of total assets) earned 426.9 million euro in profit in 2015. During the reporting year, profitability of the banking sector improved and return of equity (ROE) reached 12.5% by the end of December (compared to 11.1% in 2014).
The structure of banks’ income and expenditures has been stable. Key factors affecting a growth in banking profits were from the growth of net operating income (including an increase in net interest income by ~8% and net commission and fee income – by 0.6%, whereas net revenues from trading and revaluation of financial instruments grew by ~48%) and the shrinking loan loss provisions (by ~20%).
In 2015, the resident deposit stock overall increased by 110 million euro or 1% reaching 10.8 billion euro. A reduction in government deposits by 745 million euro had an adverse effect on the growth of resident deposits while deposits by non-financial enterprises and households rose by 317 million euro or 10.3% and 323 million euro or 6.4%, respectively.
In 2015, the balance of non-resident deposits grew 954 million euro or 8.3% reaching 12.4 billion euro. The appreciation of the US dollar had a material impact on the growth in non-resident deposits increasing their amount by 0.9% over last year.
Funds raised by banks
In 2015, liabilities to monetary financial institutions (MFI) declined mostly due to a reduction in the financing attracted from subsidiaries and branches of foreign banks (451 million euro), and overall liabilities to MFI also contracted (588 million euro).
The amount of long-term bonds issued kept growing to 170 million euro or 33% amounting to 683 million euro in 2015, thus facilitating the balance of the financing term structure for individual banks with a high demand deposit share in total deposits.
In 2015, the banks continued to attract funds (168 million euro) as part of targeted longer-term refinancing operations (ECB monetary policy instrument for boosting crediting in the euro area). Since September 2015 when the ECB launched refinancing operations, five banks have already raised long-term financing in the amount of 254 million euro in total.
In 2015, the aggregate loan portfolio of the Latvian banking sector did not change significantly growing by 10 million euro or 0.1%, including resident companies’ portfolio increased by 0.6%, whereas resident household portfolio shrank by 4.1%, but non-resident loan portfolio grew 3% due to the appreciation of the US dollar.
The amount of new lending increased compared to 2014, credit institutions granted loans both to resident households for house purchase and resident non-financial enterprises. New loans to resident households reached 321 million euro and to resident non-financial enterprises, 1.3 billion euro.
The share of loans overdue for more than 90 days in total loan portfolio continued decreasing in 2015 to 6.4% by the end of December (compared to 6.9% in 2014). Such loans accounted for 7.5% of the portfolio of loans to resident households, and 4% of the portfolio of corporate loans to residents. Total share of overdue loans in the loan portfolio of the banking sector fell from 12.3% to 10.9%. Loan loss provisions made by banks shrank to 687.4 million euro or 4.7% of the total bank loan portfolio at the end of December (compared to 5.3% in 2014).
Summary of balance sheet statements of Latvian banks for 2015 is available on the Financial and Capital Market Commission’s website at www.fktk.lv/en/; Statistics/Credit Institutions /.
Chief Public Relations Specialist
Financial and Capital Market Commission
Phone.:+371 67774807; +371 29476003