The profits of the banks were down in the first quarter after a change in the income tax regime
Economist at Eesti Pank
• Real estate companies have borrowed more in recent months
• The rapid growth in housing and consumption loans to households continued
• The net profit of the banks was 13% smaller in the first quarter than a year ago
Estonian non-financial companies were quite active in borrowing from banks and leasing companies operating in Estonia in March 2018. The 278 million euros of new long-term loans and leases was 11% more than was issued in the same month a year earlier. Lending to real estate companies has particularly increased in recent months, and almost half of the new long-term loans issued in March went to such companies. Companies in transportation and storage also stood out in the first quarter for borrowing more than previously (1) .
The fast growth in loans and leases to companies and households continued in March. The demand from households for loans remained strong and was driven by rapid wage growth and high levels of confidence, and the total stock of housing loans increased by 6.6% over the year. New housing loans worth 96 million euros were taken, which is a little less than at the same time a year earlier. Meanwhile, the amount taken by households in car leases has increased faster in recent months. This has partly been driven by the change that came in from the start of the year to the taxation of vehicles owned by companies, which has led to company cars being registered to private individuals. The stock of car leases was 18.5% larger in March than a year earlier. Other consumer loans also saw strong growth of 9.5% over the year. Demand for borrowing with overdrafts and credit cards has been weaker as incomes have risen fast and the stock of such loans changed little over the year.
The average interest rates on new loans were at around the same level in the first quarter of this year as in the first quarter of last year. The interest rate on both new housing loans and long-term corporate loans was 2.4% in March.
The good capacity of borrowers to pay their loans meant the loan quality of the banks remained good. The total stock of corporate and household loans overdue for more than 60 days shrank to 135 million euros in March to make up 0.9% of the loan portfolio. The banks have made provisions against possible loan losses, almost entirely covering the loans overdue by more than 60 days.
The deposits of companies and households in banks also grew strongly in March. Bank deposits were 9.4% larger than a year earlier at 13.1 billion euros.
The net profit of the banking sector fell in the first quarter of 2018. Total net profit of 77.5 million euros was earned in the quarter, which was 13% less than a year earlier. The return on assets on an annual basis was 1.2%, which is 0.3 percentage point less than a year previously. Interest income increased, but expenses increased by more. A new income tax regime came in from the start of the year that requires banks to pay income tax on the profit earned during each quarter, increasing income tax expenses. In addition the merger of two banks raised personnel costs and a correction in stock markets created losses from the changes in the market value of financial instruments.
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(1) The portfolio of corporate bank loans was smaller than a year ago, as one bank transferred a substantial part of its loans to the portfolio of its foreign parent bank in the autumn 2017. Without that the growth in the corporate loan and lease portfolio would have been 6–7%.