Update: Latvian banking sector performance: Q3 2011

31.10.2011
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Riga, 21.10.2011

Press Release

Update: Latvian banking sector performance: Q3 2011

The Financial and Capital Market Commission provides Latvia’s quarterly banking profile for the third quarter of 2011

The liquidity ratio of banking sector had slightly increased and climbed to 60.1% at end-September (compared to 60.0% at end-August). With bank profitability improving several banks made good use of an opportunity to strengthen their capital base by including their audited half-year profit in it, therefore the overall banking sector capital adequacy ratio* also grew and at end-September reached 17.0%, whereas tier 1 capital ratio* was 14.0% (16.2% and 12.9% at end-August, respectively) (see Figure 1). Since the beginning of 2011 eleven banks had increased their capital for a total of 112.6 million lats and the banking sector paid-up share capital amounted to 1 945.8 million lats by end-September.

Figure 1
Banking sector liquidity ratio and capital adequacy ratio dynamics

* Parex banka not included

In the third quarter, almost 23 thousand new loans were granted in the banking sector for a total of 455 million lats, while since the beginning of 2011 – already 121 thousand loans for a total of 975 million lats, namely, nearly one billion lats (including 411 million lats were granted to the development of Latvian non-financial corporations, 71 million lats – Latvian financial institutions, 117 million lats – resident households, whereas 375 million lats – to non-residents) (see Figure 2).

In September, an increase in the balance of loans granted to resident non-financial corporations, which had started in July, continued growing and by end-Q3 climbed by 0.7% or 44 million lats.

September was also the first month since August of 2010 when the balance of banking sector loan portfolio increased (by 0.2% or 22.4 million lats). However, the amount of new loans granted to resident households still was less than of those repaid by clients and written-off by banks, and the household loan portfolio continued shrinking (by 1.7% in Q3) by end-September reaching 5.4 billion lats. Since the beginning of the year the banking sector loan portfolio overall had shrunk by 5.9% or 851.5 million lats and at end-September was 13.5 billion lats.

Figure 2
New loans granted (by months)

By the end of September, the banking sector profit amounted to 71 million lats (to the contrary of a 314.3 million lats loss in the respective period in 2010), where 16 Latvian banks and five branches of foreign banks (constituting 84.8% of total banking sector assets) reported profits, earning a total of 178.8 million lats. 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 changes in the loan portfolio quality (net expenses for loan loss provisions) (see Figure 3).

Figure 3
Income and expense structure

In the course of Q3, the banking deposit stock overall climbed up by 2.7% or 300 million lats, where non-resident deposit stock grew by 8.8% or 397 million lats, whereas resident deposit stock – by 1.5% or 97 million lats (including mostly short-term deposits). Since the beginning of the year, deposit stock overall increased by 1.2% or 130.5 million lats and at end-September accounted for 11.2 billion lats (see Figure 4).

Figure 4
Bank deposit stock

Since the beginning of the year, the share of delinquent loans contracted by 7.3% or 276.5 million lats and at end-September accounted for 3.5 billion lats or 26.2% of the aggregate loan portfolio. For a greater part, a decrease was mainly in the amount of loans past due for more than 30 days, i.e. loan balance of those loans had shrunk by 12% or 370 million lats from the beginning of the year. Meanwhile the share of loans past due up to 30 days grew by 12.8% or 93.2 million lats, of which the greater part was constituted of loans granted to resident households and small enterprises. The risk of further growth in overdue payment volumes still retained high because of the sensitivity of loans, which fall into the category of minor delinquencies, both to the changes in household creditworthiness (because of rather slow improvement in the labour market situation there was no reduction in household expenses) and in the financial situation of small and micro enterprises (mainly in the sectors such as real estate transactions, transport and trade). The share of loans with more than 90 days overdue payments continued decreasing in Q3 as well (by 2.8% or 68.6 million lats) and their share in the loan portfolio was 18% at end-September (18.4% at end-June). The quality of loans granted to households still was rather instable and by end-September of all loans granted to households, 31% were delinquent loans (30.7% by end-June) and banks had cautious attitude towards additional provisioning in this loan portfolio. However, with the quality of corporate client loans stabilizing and lost loans writing-off (from the beginning of the year till the end-August, i.e. 170 million lats) the amount of loan loss provisions made by banks continued moderate shrinking and by end-September stood at 11.2% of the aggregate loan portfolio (compared to 11.3% at end-June), including resident corporate clients – 12.3% and resident households – 11% (see Figure 5).

Figure 5
Overdue loans and provisions (% of loan portfolio)

In Q3, the banks continued dealing with problem loans. Since the beginning of the year 23.7 thousand of new loans for the total of 1 045 million lats were included in the category of restructured loans, whereas 18.1 thousand new loans for the total 343 million lats fell in the category of loans in work-out process over the same period of time. In the accounting period, new loans that were granted mainly to resident households as well as real estate transactions and construction sector fell in both the category of restructured loans and the category of loans in work-out process. By end-September, the share of restructured loans stood at 19.3% of the aggregate banking sector loan portfolio, whereas the share of loans in work-out process – 13.6% of total portfolio (compared to 20.4% and 14.7% at end-June respectively) (see Figure 6).

Figure 6
New loans falling under categories of restructured loans and loans in work-out process
(by relevant month)


Anna Dravniece
Head of Office
Financial and Capital Market Commission

For additional information:
Agnese Licite
Public Relations Specialist
Financial and Capital Market Commission’s Office
Phone: +371 67774808; email: Agnese.Licite@fktk.lv

[1] Only the highest quality capital elements are included in 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 been engaged in asset recovery.

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