The 1999 third-quarter figures on the financial sector, mainly on banking, indicate to the end of downturn phase following external shocks. In addition to increasing deposits, it is also visible in a modest growth of loan portfolio, although only in domestic demand-driven sectors. The larger share of liquid assets in total assets reflects the sustained shortage of feasible loan projects as well as banks' larger liquidity buffers due to the year 2000 problems.

The number of companies decreased in the insurance sector: licenses of ASA Varakindlustus and AB Elukindlustus were revoked and bankruptcy proceedings initiated. The market for investment funds has expanded: new funds were set up and a license was issued to an asset management company (see Figure 5.1).


Banks' Assets and Their Quality

The abrupt inhibited growth of inflation and credit volume in previous periods has not caused any significant instability in banking sector.

The increasing share of liquid assets accompanying the general growth of assets still reflects low borrowing demand (see Figures 5.2 and 5.3). In the third quarter, the share of loans with more than 10-year maturity increased significantly in the loan maturity structure, mainly due to increase in long-term crediting of resident undertakings and private individuals.

The sensitivity of asset prices has added to business conjuncture[1]. The growth of mortgage-secured loans is generated by property reform-related processes and the above-mentioned shifts in the maturity structure and in the share of private individuals in the loan portfolio. Regardless the described development trends, decreasing volume of loan loss reserves[2], the relatively large volume of overdue loans against previous periods as well as the sustained high capitalisation of banks[3], the banks' openness to credit risks has not much increased (see Figure 5.4).

The trend of foreign currency loans is unsteady: their share decreased in previous periods, started to increase in the third quarter and has decreased again during last months. The lengthening of the net open foreign exchange position was mainly due to the slight decrease in the position of short off-balance sheet position in EMU currencies which could also be taken for foreign investor confidence in the sustainability of Estonia's monetary policy.

In the securities portfolio developments born in the beginning of the year continued in the third quarter as well - the share of long-term financial investments decreased and that of the trading portfolio increased with the overall volume remaining relatively stable (growing by 1.3% over the quarter). The 4% growth of stocks in affiliated undertakings and the 16% growth of stocks in associated undertakings in the consolidated portfolio can also refer to the upcoming expansion of financial deepening (see Figure 5.5).

External Liabilities

Both the growth and depreciation of involved external liabilities continued in the third quarter. The 5.7% growth of corporate deposits indicates the recovered liquidity position of the real sector. The decrease in the volume and share of government claims reflects the tight fiscal position as well as changes introduced in the government asset management policy.

Decreasing volume of non-resident external liabilities (1.3% over the quarter) reflects also banks' diminished demand for external liabilities. Although the share of bonds has slightly deceased, the structure of instruments and maturities has stabilised.

Changes in the net positions of balance sheet assets and liabilities were aimed at reducing the liquidity risk. In demand liabilities the net position became somewhat shorter but cannot be considered as a problem enhancing factor anyway due to the position specificity and growth of more liquid assets (see Figure 5.6).

Return on Equity

Modest loan demand and limited trading opportunities in the stock market reduced the return on equity. Despite the return on equity decreasing from 2.38% in the second quarter to 2.13% in the third quarter, banks earned 148.7 million kroons of net profit. Although the profit base as a whole grew, changes in its structure still reduced return on equity (see Table 5.1).

Both the interest income as well as the interest expenses diminished over the quarter. The interest income decreased due to modest lending volume and a price decrease of interest bearing assets. Non-interest income diminished, first and foremost, because of the fall in service fees due to passive securities market and modest lending turnover in the first months of the quarter. As borrowing is expanding, the downfall of interest income should be suspended in upcoming quarters.

Despite the depreciation of external liabilities, the fall in interest expenses exceeded that of interest income. The spread and net interest margin have grown for the first time this year but it can be interpreted as achieving of a new balanced position. Thanks to smaller management costs, administrative costs have decreased as well.


Bond Market

The bond market capitalisation has stayed close to 4 billion kroons throughout 1999. Still a slight drop can be seen in the third quarter compared to the second quarter. This can be ascribed to the shrunken volume of bonds issued by local undertakings. Resident institutions have a modest impact on bond market activities as bonds issued by non-residents covered 80% of the primary market in the third quarter (see Figures 5.7 and 5.8).

The average interest rate of bonds dropped from 11% at the beginning of the year to 6% in the third quarter. The maturity structure did not change much: the share of up to 6 months issues has remained at 80% throughout the year.

Stock Market

The close to 10% drop in the capitalisation of the stock market and in TALSE in the third quarter was mainly due to decreasing prices of Eesti Telekom (Estonian Telecom) and other most tradable stocks. Since in share index portfolios of international investment banks Estonian stocks are together with Russian and Polish stocks, investor attitudes as regards Russia and partially also Y2K have made them cut their investments. Therefore some non-residents have reduced their holding in Eesti Telekom and major Estonian banks influencing, thus, the relatively thin stock market (see Figure 5.9).

Swedish banks have continuously increased their share in Estonian banks but nevertheless due to the depreciation of the stocks of listed companies and the above process the share of non-resident investors did not change much during the third quarter. During this year Dutch investors and US have appeared among major foreign investors besides traditional Finnish and Swedish ones as well.

A consultation started to connect the Tallinn Stock Exchange with the Nordic stock exchange system NOREX is definitely positive news. Current Baltic cooperation will be combined with Scandinavian direction. Cooperation with the respective Nordic organisations should simplify investments in the stocks of Estonian companies and enable Estonian investors to diversify share portfolios in an easier and cheaper manner.



In the third quarter gross premium suffered a slight setback against previous periods of 1999. Mostly for seasonal reasons compulsory motor TPL insurance was the main source of shrinking non-life insurance. Life insurance premiums continued growing, the major factor being ever-growing pension insurance. Although the annual growth was sevenfold, the gross premium collected in the third quarter of 1999 reached a mere 3 million kroons (see Figure 5.10).

Insurance companies have been generating losses for a long while already and several of them have had serious liquidity problems. In 1999, supervisory authorities have initiated bankruptcy proceedings against five insolvent companies already. Most of the losses are generated from the main activity of the insurance companies: majority of the companies has negative operating results and the share of expenses to gross premium is far too large. Several non-resident companies suffer losses due to single expenses attached to the acquired portfolios.

Investment Funds

Investment funds' market manifests an upward trend: the funds investing in fixed income instruments have become its driving force. Apart from the Hansa Assets Management other banks' asset management companies are also contemplating launching interest and pension funds. The number of asset management companies has increased: in early October the Ministry of Finance issued a license to the Lõhmus-Haavel-Viisemann investment company.

The growth of time deposits in the asset structure characterises continuous growth of money market and interest rate fund volumes. Should the volume of involved resources be maintained, the focus of further periods would be shifted to bonds and commercial papers. Developments in bond markets sent the productivity of interest rate funds slightly down (from 6% to 4%) over the third quarter. The yield of share and index funds has been relatively unsteady, fluctuating from -200% to +100% (see Figure 5.11).


Changes in the leasing and factoring market confirm the revival of economic development. Unlike the banking loan market, leasing hit the bottom already in the second quarter, although the portfolio grew relatively modestly - remaining below 100 million kroons in the third quarter. Capital lease and factoring were the main growth generators, constituting 61% and 7%, respectively, of the 6.5 billion kroon consolidated leasing and factoring portfolio (see Figure 5.12).

The environment has stabilised as manifested also in continuously decreasing base interest rates over the year, being within 10-13% for different products in the end of the third quarter. Hansa Capital and Tööstusliising have increased their market share during the last year.


The number of payments grew by 18% against the third quarter of 1998, reaching an average of 3 million transactions per month, although the average turnover of payments dropped by 11%. The largest change took place in incoming external payments, with the turnover nearly doubling whereas the turnover of outgoing external payments remained on the same level displaying Estonia's improved foreign balance. In domestic settlements the average turnover of payments decreased by 19%. Private individuals were more active in domestic transactions and the share of retail payments increased (see Figure 5.13).

In Estonia customers prefer more and more electronic payment channels to paper-based orders[4]. The share of card payments and Internet banking has grown most in the electronic payment whereas the share of telebanking has been contained. Regardless the positive structural changes, any further expansion of electronic payment modes will be hindered by human habits to use cash and low awareness of the Internet banking, telebanking and ATM usage.

[1] The share of loans secured by securities, mortgage or pledged construction in the consolidated loan portfolio reached 61.2%.
[2] The reserve of unlikely collectable loans decreased from 807 million kroons in end-June (3.4% of the consolidated loan portfolio) to 771 million kroons in end-September (3.1%). The general banking reserve maintained the level it had had at the beginning of the year - 633 million kroons. Thus, the ratio of the summary reserve into the loan portfolio decreased from 6.1% to 5.65%.
[3] The capital adequacy did not change compared to the end of the second quarter - growing from 16.63% to 16.74% by end-September. Whereas both credit-risk-weighted assets (26,397 million kroons in June; 26,390 million kroons in September) and net own funds remained unchanged (5,458 million kroons in June; 5,472 million kroons in September).
[4] The share of paper-based payment orders were 32% in the third quarter of 1998. By the end of the third quarter of 1999 their share had shrunk to 17%.