The profits of the banking sector were supported in 2017 by growth in the loan portfolio and by the good quality of it
Economist at Eesti Pank
- The borrowing activity of Estonian companies and households increased last year
- The average interest rate on corporate loans fell over the year but the rate on household loans rose a little
- Deposits at banks grew by 9% over the year
- The profits of the banking sector were supported by an increase in net interest income
Borrowing by Estonian companies from banks operating in Estonia increased in the fourth quarter of 2017. Investment in fixed assets increased last year, which was reflected in an increase in borrowing activity. The amount taken from banks operating in Estonia in new loans and leases was 10% larger in the fourth quarter than a year earlier. In total 881 million euros were taken out in long-term loans, which was 12% more than a year ago, most of them to companies in real estate, construction, transport or manufacturing. The stock of the corporate loan portfolio was smaller than in the fourth quarter of 2016 however, as one bank transferred a part of its loans to the portfolio of its foreign parent bank. Without this the portfolio of corporate loans, leases and factoring would have grown by around 6% over the year.
Borrowing by households also increased last year as incomes rose strongly and interest rates stayed low. The main growth was in housing loans and in the car lease portfolio. The value of new housing loans taken last year was 16% more than in 2016, and the portfolio increased by 6.6% over the year to 7 billion euros. The amount taken in new car leases was 20% more than in 2016, and the portfolio of leases increased by 16% over the year to 557 million euros. Overdrafts and credit card loans grew relatively modestly though, by 2.3% over the year.
The average interest rates on new loans fell in the fourth quarter of 2017. There is tight competition between banks in the corporate loan market, and this led the average interest rate on new long-term loans to companies to fall in December to below 2%. The average interest rate on new housing loans also fell in the fourth quarter having climbed in the first half of the year. The average interest rate on new housing loans issued in December was 2.3%, which is still a little higher than it was a year earlier.
The favourable economic environment and low interest rates have meant that the volume of overdue loans has shrunk. The value of loans overdue by more than 60 days in the loan portfolio had fallen to 141 million euros by the end of the year, or 0.9% of the total portfolio. The volume of overdue loans declined in most sectors. The banking sector has also made provisions of 124 million euros against possible loan losses in the future, covering 89% of the loans overdue by more than 60 days.
The deposits of Estonian companies and households grew by 9% over the year to 13 million euros. The growth in corporate deposits slowed a little in the second half of last year, but it still remained fast at 8.4% in December. Increased investment can lead to slower growth in the liquid assets of companies and so in deposits. The growth of household deposits accelerated somewhat last year, reaching a rate of 10% at the end of the year, which is the largest growth of recent years.
The banking sector earned net profit of 335 million euros in the year, which was 6% less than in 2016. Profits mainly declined because the dividend income earned from subsidiaries dropped, having been large in 2016 as undistributed profit from earlier years was paid out. Without dividend income, net profit in 2017 would have been about 5% more than a year earlier. Profit was mainly aided by the growth in the loan portfolio, which raised interest income, and by the good quality of the portfolio. About the same amount was earned in net service fee income as in 2016.
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