28.01.2025
The high profitability of banks is gradually decreasing

Taavi Raudsaar
Economist at Eesti Pank
Postitatud:
25.07.2024
The profitability of the banks operating in Estonia was still high in the second quarter of 2024. Commercial banks earned a net profit of 145 million euros in Estonia, which is approximately 65 million euros, and that is 30% less than at the same time a year ago. Nevertheless, this year an extraordinary amount of dividends were also paid, so the income tax expense was remarkable. In the second quarter of this year banks paid a total of 96 million euros income tax, while a year earlier it was 34 million euros. The fact that gradually decreasing market interest rates (including the euribor) reduce banks' interest income faster than interest expenses on deposits and other sources of financing have also reduced banks' profits. The opposite happened when market interest rates rose. However, without taking into account the exceptional income tax expense, the profitability of the banks, i.e. the ratio of profits to assets, was around 45% higher than the long-term average.
The loan portfolio of the banks has grown steadily. The stock of corporate loans was a little more than five per cent larger at the end of June than it was a year earlier. This shows that, despite the weak state of the economy and the higher-than-usual levels of interest rates, corporate investment remains relatively solid. However, the loan portfolio has grown very differently across sectors. While in the energy sector, where investments are made in the production of green electricity, loan growth remains above 10%, the loan stock of the struggling industrial sector is in a slight decline. The yearly growth in the stock of housing loans has remained close to 6% in the last half-year.
Businesses and households have so far done well in repaying their loans, but it is still possible that the volume of non-performing loans and loan losses will increase in the coming year. At the end of June, the share of corporate loans overdue by more than 60 days was 0.3%, and such housing loans accounted for 0.2%. Compared to 2023, the share of problem housing loans has increased, but both indicators are still small compared to the last few decades. However, the share of problem loans among other loans to households (especially consumer loans) has increased. They have grown to 2.6%. This is about twice as much as a few years ago, but still slightly below the long-term average. Households’ ability to repay their loans depends primarily on the situation on the labour market. Although no significant increase in unemployment is expected, in case of more adverse scenarios, it might be wise to prepared for an increase in non-performing loans.
Statistics on credit institutions and leasing companies (June 2024)
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