Bank performance in Latvia in 2013 – balanced development and challenges posed by the euro
According to the Financial and Capital Market Commission’s (hereinafter – the FCMC) preliminary data on the performance of Latvian banks, the year 2013 in the banking sector was a year of moderate development, with continuing improvements in the key performance ratios. This was evidenced by a number of trends: the banking sector capitalization and liquidity levels remained high, profitability and credit quality improved, the pace of decrease in loan portfolio declined, as well as a rapid growth in resident deposits a. o.
„One of the last year’s biggest challenges and labour-intensive projects in the banking sector was a successful introduction of the euro, it was excellently completed,” Ludmila Vojevoda, Director of Regulations and Statistics Department, Member of the FCMC Board, characterizes the year 2013. „The introduction of the euro contributed to the strongly growing volumes of resident deposits, which can be regarded as the steepest post-crisis increase – 13.3% a year. In December, even the historically highest monthly increase in resident deposits was recorded, ~478 million lats (~680 million euros). Also, the forecast previously uttered by the FCMC came true – the developments in the Cypriot banking sector had not led to a dramatic inflow of non-resident deposits in Latvia – their growth rate even decreased to 6.3% at the end of the year,” emphasizes L. Vojevoda.
FCMC Chairman Kristaps Zakulis outlines the challenges and main tasks for this year: „When last year three banks decided to cease operations of a credit institution on their own initiative, most powerful market participants strengthened. At the same time, accessibility to services in regions still remains a pressing matter this year. One of the challenges this year will be related to retaining and maintaining the volumes of resident deposits attracted by banks, which had rapidly grown at the end of last year. Among other priorities there will be also improvement of loan portfolio quality and new lending in line with economic development pace.”
President of the Association of Commercial Banks of Latvia Mārtiņš Bičevskis: „Let’s say briefly and figuratively – last year in the Latvian banking sector was the year of 3E – it passed in the sign of the euro, efficiency and export. The process of the euro introduction speaks for itself – an easy, user-friendly and clear national currency changeover was ensured for the bank customers because of the timely devoted efforts and resources. Raising efficiency and changes in business models are the primary banking activities not only in Latvia, but also across the Europe and worldwide. In this respect, electronic service development and customer awareness of these services constitute the most obvious part for the customers in Latvia, as well as a decrease in the number of market participants. Whereas the financial service export is still developing and provides for the greatest return on equity, or profitability.”
„For its part, the adaptation of both the banks and their customers to new business conditions in the euro zone will be among the most significant tasks in 2014, as well as the further development of services, particularly facilitating accessibility and use of electronic environment and remote services. Besides, changes in the Latvian regulatory environment in 2014 will be of particular importance for the banks, in view that this year two elections will be held that, unfortunately, usually brings along waves of populism,” M. Bičevskis added.
The banking sector still well-capitalized. Several banks had made use of the possibility to strengthen their capital base by including (interim) audited profit of current operational year, whereas reduction in the amount of banking risk-weighted assets was facilitated by a gradual improvement of the loan portfolio quality and still a slow lending development pace, and by the end of December the capital adequacy ratio was 18.9% (regulatory minimum capital requirement – 8%), whereas the tier 1 capital ratio stood at 17.3%1 (compared to 17.6% and 15.3% at the end of 2012). Over the year 2013, six banks increased the share capital in total of 41 million lats. Besides, following the repayment of subordinated loans by banks in 2013 the total amount of tier 2 capital shrank by 34%. Therefore the ratio of tier 1 capital had grown in the banking own capital structure (from 87% at the beginning of year to 91% at the end of December), thus complying with the regulatory capital adequacy requirements aimed at raising the tier 1 capital ratio in the level of own funds (in effect as from 01.01.2014).
Despite the increasing amount of demand deposits and their share in total deposits, with the growing amounts of liquid assets there was still a limited liquidity risk. By the end of December 2013, liquidity ratio was 64.4% (regulatory requirement – 30%), increasing by 4.7 percentage points during the year.
Profit and loss
In 2013, for the second year in a row (after the three loss making years) the banking sector reported profits of 173 million lats or 246.2 million euros (compared to profit of 122.3 million lats in 2012). Meanwhile, 15 Latvian banks and five foreign bank branches (in total covering almost 95% of banking sector assets) in 2013 posted a profit of 213.1 million lats overall. During 2013, profitability of the banking sector improved and return on equity (ROE) reached 8.65% at the end of December (compared to 5.56% at the end 2012).
The structure of banking income and expenditures has not changed significantly. As a result of a decrease in interest rates, interest income continued declining, while due to the shrinking of bank liabilities to the monetary financial institutions (MFI) by almost one-fourth over the year, as well as the low interest rate environment the banks were able to materially reduce their interest expenditures related to the leverage, and as a result net interest income grew by 10.4%. In 2013, banking profitability was positively affected by the increase in the net commission fee income (by 13.6%) and gradual improvement of loan portfolio quality (still the most significant banking sector expenditure item, i.e., net expenditures for loan loss provisions shrank by 10.9%).
Latvia’s changeover to the euro has facilitated a steep growth in resident deposits by 848 million lats (1.2 billion euros) or 13.3%, whereas following an increase in non-resident deposits by 384 million lats (546 million euros) or by 6.3%, the amount of total deposits reached 13.7 billion lats (19.5 billion euro) by the end of 2013. In early 2013, a moderate growth in the resident household deposits resumed a pace, but in the last quarter just before the introduction of the euro there was a dramatic upsurge in both the household deposits and corporate deposits – overall increasing by 390 million lats (556 million euros) and 332 million lats (472 million euros), respectively in 2013. Also governmental and financial institution deposits increased.
The developments in Cyprus, however, did not affect the non-resident deposit flow to the Latvian banking sector in 2013, the growth rate in non-resident deposits declined, and it was also due to the two banks – VAS „Latvijas Hipotēku un zemes banka” and AS „UniCredit Bank” quitting the market, as well as US dollar weakening.
Funding raised by banks
In 2013, liabilities to MFI continued declining, mainly because of a downslide in funding attracted by subsidiaries and branches of foreign banks from their parent banks by 923 million lats (1.3 billion euros), contributed by consolidation of the banking sector, resident deposit growth and decrease in loan portfolio.
Upon the growing demand deposit share in total deposits, in order to balance a financing term structure the long-term bonds were issued increasingly, though their share to total assets still was low, the amount of bonds had grown by 68% or 95 million lats (135 million euros) over the year and reached 234 million lats (333 million euros).
In 2013, the loan portfolio reduced by 6.5%. Except for the effect of loan write-offs, which was rather the final stage of putting the bank balance sheets of the years of crisis in order, than the reflection of the current situation, the loan portfolio shrank by 3.1% (including resident non-financial undertakings – by 1.8% and resident households – by 4.5%).
In 2013, new loans granted to resident non-financial undertakings and households totalled 1.6 billion lats (2.3 billion euros) – up by 5% from the previous year. An increase was observed in the real estate transactions, as well as construction, trade and transport sectors. In the household sector, loans were issued for house purchasing, renovating and/or repairing amounting more than 191 million lats (270 million euros) – by 21.8% up from 2012.
The share of loans that were past due more than 90 days in the total loan portfolio continued contracting and by the end of December it was 8.3% (compared to 11.2% at the end of 2012). The share of such loans in the resident household loan portfolio amounted to 12%, whereas in the resident non-financial undertakings loan portfolio – 7%. The total share of overdue loans in the banking sector loan portfolio shrank from 17.4% to 14.6% over the year. The balance of loan loss provisions made by the banks at the end of 2013 fell to 674 million lats (958 million euros) or 6.1% of total banking loan portfolio (compared to 8% at the end of 2012), but the ratio of provisions to the balance of loans with payments more than 90 days overdue remained high, namely, 73.6%.
1 Only the highest quality capital elements are included in the tier 1 own funds: paid-up share capital and reserves, as well as retained earnings of previous years.
Summary of balance sheet statements of Latvian banks for 2013 is available on the Financial and Capital Market Commission’s website at www.fktk.lv/en; Statistics/Credit Institutions/.
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Financial and Capital Market Commission
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