The latest financial stability review from Eesti Pank finds that companies and households in Estonia have coped well so far with repaying their loans despite the recession. Of key importance moving forward is that growth in the economy recover, as that will underpin the capacity to repay loans. The banks have sufficient capital buffers to cover any possible increase in loan losses compared to what is expected at the moment, despite the extraordinarily large dividends they paid out.

Companies have been helped in coping with the increased costs of their loans by the earlier good years and the buffers they have accumulated. Households have been helped in repaying their loans by unemployment rising little despite the recession. Further support has come from Euribor falling because the European Central Bank cut interest rates, as this has reduced the size of loan payments.

The recession and weak confidence among consumers have quietened the housing market and borrowing activity for housing loans. Given this, some banks have made increasing efforts to attract housing loan clients from other banks, and so competition in the market has increased and interest margins have narrowed a little. There is a risk that tighter competition could at some point lead to lending conditions being excessively loosened, which could cause serious difficulties in the event of any future economic crisis both for the banks that have issued loans and for the borrowers that have taken them. The central bank consequently considers it important that the banks remain conservative when they assess the risks relating to clients.

The share of problem loans within the banking sector remains small at under 0.4% of the loan portfolio. As expected, the problems have arisen more for consumer loans, where 2.6% of loans were long-term overdue as an average of the third quarter. Only 0.2% of housing loans and 0.4% of corporate loans were problem loans. The quality of the corporate loan portfolio is generally good. Manufacturing is facing somewhat greater problems than other sectors, because that sector has been hit hardest by the recession. Bad loans are at 2% of all the loans to manufacturing, and 10% of all the loans in the loan portfolio of the banks have gone to the sector.

The capital buffers of the banking sector in Estonia have been reduced because of the extraordinarily large amounts paid out in dividends, but the capitalisation of the sector remains at quite a high level. The generous dividend payments from the large banks exceeded the profit earned last year, and that means that they will have fewer funds available to cover loan losses and continue lending in an unexpected serious crisis. The central bank still considers though that the capital buffers of the banks in Estonia are sufficient for the near future, and the banking sector as a whole is ready if loan losses should  increase further.

Eesti Pank raised the countercyclical capital buffer requirement to 1.5% from December 2023 because of the very rapid growth in real estate prices and in lending in 2021-2022. As the danger has not yet passed of larger loan losses than at present arising, the central bank considers that it is reasonable to maintain the countercyclical capital buffer at its current rate of 1.5%.

The capital buffer that applies to the banks in Estonia to let them cope with systemic risks is a little higher than the average level in the European Union. The central bank considers it necessary for capital requirements for the banks to be a little above the average because the small and open Estonian economy reacts with greater sensitivity to any deterioration in the economic climate. It should also be noted that loans to real estate and construction are a large part of the loan portfolio of the banks in Estonia. As the real estate sector leans heavily on borrowed money to finance its activities and the financial position of real estate companies generally takes a bigger hit than that of companies in other sectors if the economy turns down, loans to real estate companies are considered riskier than the average. The central bank considers in summary that the requirements set for the banks in Estonia to preserve financial stability remain appropriate.

Steady growth in their market share has led to Coop Pank and Bigbank being named as systemically important banks from the point of view of the stability of the financial system from next year. Eesti Pank has consequently set an additional capital buffer requirement for them of 0.5%. Swedbank, SEB, LHV and Luminor, which have even bigger market share, are subject to an additional capital buffer as systemically important banks that Eesti Pank earlier set at 2%.

The full Eesti Pank Financial Stability Review.

Additional information:

Viljar Rääsk
Head of Communications
Eesti Pank
6680 745, 5275 055
Email: [email protected]
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