The latest Financial Stability Review from Eesti Pank finds that the financial sector is in a generally good position and the gradual improvement in the economy is helping to reduce risks. Lending has picked up as part of this, especially to businesses and for house purchases. It will be important moving forwards to see that the growth in lending, which has been fast for some time now, should not cause risks to accumulate in the financial sector, and that the banks remain able to lend even if the economy were to turn down.

Companies and households have coped well with paying their loans in recent years. This has been supported by the financial results of companies improving, and by people’s incomes growing and unemployment remaining moderate. The capacity to repay loans has been bolstered by the financial buffers built up earlier and by the European Central Bank cutting interest rates, which has brought Euribor down and reduced loan payments.

The recovery in the economy has at the same time encouraged borrowing, which has raised the debt levels of both companies and households. This is particularly evident in the growth in loans to companies in real estate and construction, and growth of more than 10% in a year in housing loans. Loans to real estate companies are one of the largest parts of all corporate loans and are increasing that share, and so any problems arising in the real estate market would make the banks more vulnerable than they currently are. The rapid growth in borrowing is also increasing indebtedness, which may make it harder in future to repay loans. The risk profile of banking in Estonia is also affected by the very fast growth in lending in Latvia and Lithuania, as those two countries account for about a quarter of the total loan portfolio of the Estonian banking groups.

Rapid growth in lending over a prolonged period has caused the banks to fund their lending increasingly with money from international bond markets alongside local deposits. The banks operating in Estonia have been successful in accessing such funds this year, though the bond markets have at times been volatile. It should be noted though that a more serious international crisis or an increase in geopolitical stresses in the region could make borrowing from bond markets much more expensive, and borrowing large enough amounts could become problematic.

The resilience of the banks operating in Estonia and their capacity to cope with risks remain generally good. Eesti Pank finds though that the rapid growth in lending makes it necessary for the countercyclical capital buffer rate for the banks to be held at 1.5%, which is a little higher than the base requirement. It will be important moving forwards that the banks remain cautious in assessing the borrowing capacity of borrowers and the market value of collateral. The profits of the banks have diminished but their profitability remains good and is enough to support the capital buffers they need so they can be prepared if loan losses should increase.

The full Eesti Pank Financial Stability Review will soon be on the website of the central bank.

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