The July decision on Estonia's euro adoption resulted in unification of deposit interest rates
Jana Kask, Head of the Financial Sector Policy Division of Eesti Pank
In July, the corporate and household loan and leasing stock declined by 1.7 billion kroons, i.e., 0.7%. The volume of the financing portfolio accounted for 241.7 billion kroons by end-July, having shrunk 6.8% year-on-year. The loan and leasing stock contracted nearly as much as in June, irrespective of the fact that the volume of new corporate loans was nearly a third larger in July than the average of the previous six months. The notable rise in loan turnover was partly caused by a syndicated loan issued to the industrial sector.
The average interest rate on long-term business loans issued in July decreased to 3.7%. The fall was impacted by the large syndicated loan transaction. The average interest rate on housing loans (3.3%) did not change remarkably compared to previous months.
With the exclusion of some large loan transactions, lending activity has remained relatively modest this year. Car lease, which underwent a very steep fall at the start of the year, has started showing signs of a revival. However, the turnover is still below the level of 2004.
With the economy rekindling, the second half of the year may experience a more broad-based pick-up in lending activity. Nevertheless, private sector indebtedness will decline and compared to the peak reached in autumn 2008, loan stock will remain more than 10% smaller by end-2010.
The share of loans overdue by more than 60 days remained unchanged in July. As a result of the shrinkage in the loan portfolio, the amount of loans overdue for a longer time increased by 0.1pp to 7.2%. Meanwhile the housing loan portfolio continued to deteriorate and the share of loans overdue by more than 60 days has this year risen by 0.5pp to 4.7%.
The average capital adequacy ratio of the banking groups operating in Estonia remained at a relatively high, 14.9% level in the second quarter.
In July, the volume of household and corporate deposits decreased by 2.2 billion kroons, i.e., by 2%, amounting to 111.1 billion kroons. The annual deposit growth rate slowed to 4.9%. As is characteristic of summer, enterprises were the main reason behind the shrinkage in deposit volume. After the positive decision on Estonia's accession to the euro area taken in mid-July, banks unified interest rates on kroon and euro deposits. The interest rates on kroon deposits plunged in the first months of the year and their continuously low level has reduced households' inclination to place their free funds in time and saving deposits. Compared to end-2009, the share of such deposits in the total volume of household deposits contracted by 6pp in July, making up 55%.
Figure 1. Corporate loans issued per month (excluding overdraft) by economic sectors
Figure 2. The weighted average interest rate on housing loans and long-term corporate loans issued within a month and 6-month EURIBOR
Figure 3. The volume of corporate and household deposits and the annual deposit growth rate
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