Update: Latvian banking sector performance: August 2011
The Financial and Capital Market Commission releases data covering the Latvian bank performance for August 2011.
The liquidity ratio of banking sector has increased and at end-August stood at 60.0% (compared to 59.7% at end-July). As banking profitability showed signs of improvement, banks made good use of an opportunity to strengthen their capital base including their audited half-year profit, therefore the overall banking sector capital adequacy ratio* grew reaching 16.2% by end-August, whereas tier 1 capital ratio * was 12.9% (compared to 15.9% and 12.6% by end-July, respectively) (see Figure 1). Since the beginning of 2011 seven banks had increased their capital for the total of 27.6 million lats and the banking sector paid-up share capital amounted to 1 925.3 million lats at end-August.
Banking sector liquidity ratio and capital adequacy ratio dynamics
By end-August profits of the banking sector amounted to 112.8 million lats (to the contrary of the 299.2 million lats in losses in the respective period in 2010), where 15 Latvian banks and five branches of foreign banks (constituting 81% of total banking sector assets) reported profits, earning 169 million lats in total. The banking sector profit was affected both by the performance results (excess of revenues from interest and commission fee over the current operating expenses) and the quality of loan portfolio (an essential decline in expenses for loan loss provisions compared to the respective period of previous year).
In August, the banking deposit stock climbed by 3.3%, or 354.5 million lats, where non-resident deposit stock grew by 6.2%, or 282.4 million lats, while resident deposit stock – by 1.1%, or 72.1 million lats (an increase in resident deposits – both corporate and household deposits by 2.3% and 0.1%, respectively). By end-August deposit stock in the Latvian banking sector accounted for 11.2 billion lats (see Figure 2).
Bank deposit stock
In August, 8.7 thousand new loans were granted in the banking sector for a total of 153 million lats, whereas 113 thousand new loans for the total of 830 million lats were granted since the beginning of 2011 (including 363.4 million lats were granted to the development of the Latvian non-financial enterprises, 66.4 million lats – to Latvian financial institutions, 100 million lats – to resident households, whereas 297.4 million lats – to non-residents) (see Figure 3). Though overall the amount of new loans was still less than those repaid by customers and written-off by banks, and the total loan portfolio continued shrinking, however, in August the balance of loans granted to resident non-financial enterprises continued growing (as from July) (in August – by 0.1%, or 7 million lats, in July – by 0.6% or 34 million lats). Whereas the amount of the loans granted to resident households was still declining in August (by 0.4%) and totalled 5.4 billion lats by end-August. Since the beginning of the year the banking loan portfolio had shrunk by 6.1% in total, or 874 million lats, and at end-August stood at 13.5 billion lats.
New loans granted in the banking sector (by relevant month)
* Adjusted data 09.2011
The share of loan balance with no overdue payments had increased and reached 73.3% of total loans by end-August (compared to 72.9% at end-July). Total loan balance in arrears had been diminishing already for the fourth month in a row and since the end of April it had shrunk by 4.8%, or 180.8 million lats. Decrease in the corporate loan portfolio was most rapid of all loans with overdue payments, whereas the quality of the loans granted to households was still rather instable and at end-August 30.8% of household loans were past due. In August, the amount of loans past due only for up to 30 days (48 million lats) as well as the amount of loans with more than 90 days overdue payments continued shrinking and their share in the loan portfolio at end-August was 18.2% (compared to 18.4% at end-July). With improving loan quality and gradual writing off lost loans, the amount of loan loss provisions made by banks continued moderate shrinking and by end of August made up 11.1% of total banking loan portfolio (11.2% at end-July), including loans to resident corporate loans – 12.6%, resident household – 10.2% (see Figure 4).
Overdue loans and provisions (% of loan portfolio)
Banks continued dealing with problem loans. In August, 2.7 thousand new loans for the total of 62 million lats were included in the category of restructured loans, whereas 2.6 thousand new loans for the total of 33 million lats fell in the category of loans in work-out process (see Figure 5). Customer creditworthiness was improving at a very slow pace and household financial vulnerability was still high – of total restructured loans and loans in work-out process 45% were loans granted to households for housing acquisition. Loan restructuring as a debt resolution option in August was used mainly by enterprises dealing with real estate transactions and construction sector that constituted 23% and 7% of new loans in the category of restructured loans, respectively. Whereas in the category of loans in work-out process, the greater share of new loans went to the enterprises operating in such branches as transport and storing, real estate transactions and manufacturing industry, i.e. 11.4%, 8% and 7%, respectively.
Restructured loan balance amounted to 2.65 billion lats by end-August, or 19.7% of the total banking sector loan portfolio (compared to 20.1% at end-July). At end-August, the balance of loans in work-out process accounted for 1.93 billion lats or 14.3% of total banking loan portfolio (compared to 14.5% at end July). Since the beginning of the year the banking sector had written off debts in the amount of 170 million lats, of which 36% were loans granted to resident households while 61.2% were corporate loans.
New loans falling under categories of restructured loans and loans in work-out process
(by relevant month)
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 Only the highest quality capital elements are included in Tier 1 own funds: paid-up share capital and reserves, as well as retained earnings of previous years.
* Parex banka data are not included in the calculation of total ratios because following its restructuring Parex banka no longer offers financial services but has engaged in asset recovery.