The coronavirus crisis has so far had little effect on the profitability of the banking sector
The operating environment of the banks has been changed substantially by the coronavirus crisis, but the crisis has so far had little impact on the profitability of the banks. The Estonian banking sector earned a profit of 383 million euros last year, or 1.2% as a ratio to the total assets of the banks. A major part of this was the dividends of 176 million euros paid by subsidiaries. Without dividends and income tax expenses, which change substantially from year to year, the profit of the banks as a ratio to total assets was 0.8%, or a little less than in the two previous years.
The most important source of revenues for the banks is interest income. The net interest income of the banking sector last year was 1.5% of total assets. The Estonian banks have diversified the sources of funding for their activities in the past couple of years. Some banks have accessed funding from financial markets to add to the funds from deposits. The price of market-based financing has been higher than the interest paid on deposits, and the interest expenses of the banks have risen by that amount. The net interest income of the banks as ratio to total assets has fallen a little in consequence.
Another major source of revenues is service fees, and service fees earned in 2020 were 0.4% as a ratio to total assets. Some service fees were cut last year, such as those for investment transactions, and that was also reflected in the profit of the banks. The operating expenses of the banks have increased more slowly than total assets, meaning that the banks have managed to make their operations more efficient. Operating expenses were 1.1% of total assets.
Despite the difficulties caused by the coronavirus crisis, both businesses and households have generally managed to repay their bank loans, or have taken the payment holidays that the banks proposed as a solution. Data from the Estonian Banking Association show that there were 715 million euros of loans with a payment holiday by the end of the year, which was 2.6% of the loan portfolio of the banks. There are now less than a quarter as many loans with a payment holiday as there were when the number peaked in June, indicating that payment holidays have generally not been extended beyond their planned end date.
The banks wrote down 92 million euros of loans issued in Estonia last year, or 0.3% of total assets. At the end of the year only a very small part of the loan portfolio of the banks to businesses and households was overdue by more than 60 days, at less than 0.5%. Although the quality of the loan portfolio has remained very good so far, it should be remembered that the crisis is continuing to hurt the economy seriously, and payment difficulties may start to appear only during this year.
The banks followed the guidelines of the supervisory authorities limiting the payment of dividends last year. The banks should also remain conservative in distributing a profit this year, as the amount of loan losses that will build up as a consequence of the crisis remains unclear. Maintaining profits will allow the banks to keep their capitalisation strong. Having sufficient buffers is important if they are to cope with loan losses and continue to finance the economy as it exits the crisis.
Please note: Eesti Pank published the statistics for credit institutions and lease companies for December 2020 on its website today. The statistical release describes the main changes in the statistics on credit institutions and leasing companies, covering the volume and structure of assets, loans and leases issued, deposits, and interest rates on loans and leases. The statistical release is independent of economic policy releases and is presented separately from them.
 This applies here to the profit earned by the Estonian banking sector in Estonia, not including branches abroad.