Structural change and fading of the Covid-19 impact in the banking sector in 2021

29.03.2022
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Trends in the banking sector of 2021 were still closely linked to the shock for the economy caused by Covid-19. Following a substantial drop in the previous year, the banking sector experienced a sharp improvement in profitability, and increases in deposits continued due to limited consumption opportunities and precaution. On the other hand, asset quality indicators showed that overall impacts had been less than initially forecast. At the same time, uncertainty remained high and, along with other factors, stifled lending to long-time weakened domestic businesses.

Structural change in the banking sector
In the first quarter of 2021, AS Citadele Banka became the 100% owner of SIA UniCredit Leasing in the Baltics, which had a significant impact on a number of banking sector performance indicators. In Q3 2021, TF Bank AB Latvia’s branch started operations in Latvia. Later in October, Rigensis Bank AS carried out reorganization by re-registering it as a commercial company the activities of which are not related to the activities of credit institution, ensuring the protection of its customer interests and keeping them informed, as well as fulfilling its obligations to depositors. In October, following the consent of the European Central Bank and other supervisory authorities, the shares of the Swedbank Group banks in the Baltics were transferred to the holding company Swedbank Baltics AS registered in Latvia. Consequently, at the end of the reporting year, 12 banks and four branches of foreign banks of European Union (EU) countries were operating in Latvia, as well as one holding company.

Significant increase in deposits
In 2021, domestic deposits grew by EUR 1.6 billion, or 7.1%. Domestic household deposits increased by 15.2% due to high uncertainty and limited consumption opportunities. Meanwhile, deposits of domestic non-financial corporations surged 8.8%, indicating the wait and see position by the companies and the limited willingness to invest in high-uncertainty conditions. The amount of deposits held by foreign customers shrank by EUR 288 million or 8.4% during the year. The total increase in deposits also resulted in a rise in the assets of the banking sector of EUR 1.0 billion, or 4.2%.

Lending: growth in household segment
There was an increase in lending activity in the domestic household segment, while corporate lending remained generally weak. In 2021, the volume of loans to domestic customers grew by 7.5% or EUR 862 million compared to the previous year. This increase was substantially affected by the acquisition of UniCredit S.p.A in the Baltics implemented by AS Citadele Banka, as well as the acquisition of the mortgage portfolio of ABLV Bank AS in liquidation. Excluding the impact of Citadele Banka, domestic loan portfolio growth was 4.1% in 2021. This was mainly due to the growth of the portfolio of loans (mostly housing loans) to domestic households (by 4.7%), while the amount of loans to non-financial corporations declined by 0.3% during the year.

Loan quality showed that overall the Latvian banking sector had been resilient to the shock caused by Covid-19. The quality of loans improved during the year: the proportion of non-performing loans (NPL) gradually fell to 3.6%. Although the negative effects of the pandemic on asset quality in general had been negligible, there was still a high share of NPL in the sector particularly affected by Covid-19: accommodation and catering.

Profitability indicators: significant improvements
Following a significant drop in the previous year, the earning capacity ratios of the banking sector improved significantly. In 2021, the banking sector posted a profit of EUR 292 million, nearly twice the previous year’s profit. Profit growth was driven by factors such as the low base level of 2020, structural changes in the banking sector, some one-off factors, as well as increased overall economic activity and business volumes in individual segments. The improvement in profit figures was also driven by significantly lower spending on provisions, which were EUR 57.7 million or 88.5% lower in 2021. With profits growth, return on equity (ROE) also improved from 5.4% to 10.2%.

Capitalisation and liquidity of banks at high levels
In 2020, in view of the request of the European Central Bank and the Financial and Capital Market Commission to refrain from the distribution of dividend, the banks decided on incorporation of retained earnings in capital, thus significantly improving overall banking sector capital ratios. At the beginning of 2021, there was a relatively rapid reduction in the overall capital ratios of the sector determined by strategic deal of AS Citadele Banka and related significant increase in the loan portfolio and risk exposure value accordingly. In consecutive quarters, capital ratios remained substantially unchanged and remained at high level, reaching 24.2% for the total capital ratio at the end of 2021 and 23.2% for Common Equity Tier 1 capital ratio (CET1). The average EU harmonised liquidity coverage ratio (LCR) declined by 54 percentage points to 320.4%, still more than three time exceeding the minimum requirement (100%).

These and other banking sector performance indicators are available in the infographic.

 

Further information:
Dace Jansone
Head of Communications Division
Financial and capital Market Commission
Phone: +371 67774808
E-mail: dace.jansone@fktk.lv

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