The strong profitability of the banks will diminish in future

Autori Taavi Raudsaar pilt

Taavi Raudsaar

Economist at Eesti Pank



The banks operating in Estonia were very profitable in the third quarter of 2023 as they earned around 217 million euros in profit. The profitability of the banks in the first three quarters of this year, shown as profit as a share of assets, was around 60% higher than the long-term average. Profits have grown fast because the income earned on loans linked to Euribor has increased strongly as Euribor has risen. Most housing loans, leases and corporate loans in Estonia have contracts that are linked to Euribor. Financial market participants are not forecasting any further rise in Euribor in the near future though. Their average estimate is rather that the six-month Euribor will have fallen in a year from now from its current 4.1% to around 3.5%. This assumption means that the interest income of the banks will also stop increasing within the next year and will fall a little instead.

The profitability of banks will diminish in future as their interest expenses will probably continue to rise for some time yet in contrast to their interest income. The main interest expense of the banks operating in Estonia is the interest paid on deposits. Interest rates on demand deposits, which is the money held on everyday bank accounts, are very low, but the rates on term deposits have risen fast. Depositors can currently get interest rates of 4-4.5% on term deposits of one year held in the banks. It is probable that interest rates on term deposits will not rise further, but if the large gap between interest rates on term deposits and demand deposits will remain, and so ever more money will move into term deposits. As this happens, so the costs for the banks will rise. At the end of September, 28% of the deposits of people in Estonia and 22% of corporate deposits were term deposits, but when interest rates were last so high, around half of the money in deposits was in term deposits. It may equally be expected with market interest rates higher than the average that the banks will pay interest on demand deposits not only to companies, but also to individuals.

There is a risk in future of the volumes of non-performing loans and loan losses increasing. Although the economic circumstances are difficult, people and companies in Estonia have so far coped well with repaying their loans. At the end of September, 0.3% of corporate loans were overdue by more than 60 days, and 0.1% of housing loans were. Unemployment remaining low has helped people to cope with larger loan payments, while companies have been helped by the earlier rapid growth in sales revenues and the buffers they built up. If the economy continues to struggle for a long time and unemployment rises though, the banks will need to be ready for additional loan write-downs and loan losses.


Please note: Eesti Pank published the statistics for banks and leasing companies for September on its website today. The statistical release describes the main changes in the statistics on banks and leasing companies, covering the volume and structure of assets, loans and leases issued, deposits, and interest rates on loans and leases. The statistical release is independent of economic policy releases and is presented separately from them.

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Viljar Rääsk
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Eesti Pank
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