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Financial Stability Review 1/2013


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Financial Stability Review 1/2013

  1. 1. Financial Stability Review24.04.2013
  2. 2. Key topics• The European and Nordic financial sectors• The developments and risks of the Estonian financial sector• Assessment of Estonian financial stabilityFinancial Stability Review / Spring 2013 2
  3. 3. Tensions on the financial markets have easedThe positive impact of the steps taken in Europe in autumn is still thereFinancial Stability Review / Spring 2013 2007 2008 2009 2010 2011 2012 2013Systemic Stress Composite Indicator, IndexSource: European Central Bank
  4. 4. The banking crisis in Cyprus increased marketuncertainty slightly but contagion was avoidedEuropean banks’ CDS premiums rose by 50 basis pointsFinancial Stability Review / Spring 2013 40501001502002503003504002011 2012 2013BasispointsCDS premiums of Nordic banks and European financial institutionsItraxx Europe Senior Financial Nordic BanksSource: Bloomberg
  5. 5. The weak economy in the euro area makes debt servicingharder and could worsen the state of European banksFinancial Stability Review / Spring 2013 5Sources: European Central Bank, Eurostat-6%-5%-4%-3%-2%-1%0%1%2%3%4%2007 2008 2009 2010 2011 2012 2013 2014other net exports domestic demand GDP forecastAnnual GDP growth in the euro area and contributions to growth
  6. 6. The financing of Swedish banks remains mainlyshort term and based on financial marketsSweden amended its liquidity requirements for banks this yearFinancial Stability Review / Spring 2013 6Sources: Swedish statistical office, European Central Bank, Eesti Pank’s calculations0%10%20%30%40%50%60%70%80%90%100%2008 2009 2010 2011 2012 2008 2009 2010 2011 2012Rootsi euroalaDebt and equity structure of Swedish and euro area banksequity other funds (incl market funding) deposits loans to total assets
  7. 7. Financial Stability Review / Spring 2013 720%30%40%50%60%70%80%90%100%0510152025302005 2006 2007 2008 2009 2010 2011 2012billioneurosCorporate debt and equityequity (left scale) debt (left scale)Estonian corporate sector debt/equity (right scale) euro area corporate sector debt/equity (right scale)The improved financial state of Estonian companiesand households is supporting borrowingThe corporate total debt ratio has declined steadily with support from profits
  8. 8. The uncertain external environment reducesthe risk of excessive borrowingLoan growth remains today lower than nominal economic growthFinancial Stability Review / Spring 2013 80510152025300%20%40%60%80%100%120%140%160%180%2004 2005 2006 2007 2008 2009 2010 2011 2012billioneurosEstonian corporate and household debt and debt as a ratio to GDPdebt / GDP (left scale) debt (right scale)
  9. 9. More than one tenth of households have housing loanbalances that are larger than the value of the collateralThis is particularly a problem for borrowers wanting to change their place of residenceFinancial Stability Review / Spring 2013 90% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%by value ofloansby numberof loansHousing loan portfolio by loan and collateral value ratio at the end of 2012up to 50% 51–70% 71–80% 81–90% 91–100% 101–150% over 150%
  10. 10. Buffers of households with loans have been increasedby growth in incomes and falls in base interest ratesFinancial Stability Review / Spring 2013 1044%48%52%56%60%64%2008 2009 2010 2012Share of households with financial savingsall households households with loansSource: TNS Emor, F-monitor 2012*Financial savings after unavoidable spending on food, shelter and loan repayments
  11. 11. Despite the weak external environment, the ability ofcompanies and households to borrow has improvedThe share of loans that are overdue is now 3.3%Financial Stability Review / Spring 2013 110%1%2%3%4%5%6%7%8%2006 2007 2008 2009 2010 2011 2012 2013 2014Share of loans in the portfolio that are more than 60 days overdueactual forecast spring 2013 stress scenario
  12. 12. The profitability of banks is affected by the fall in base interestrates and by the recording of earlier loan write-downs as profitFinancial Stability Review / Spring 2013 12-3%-2%-1%0%1%2%3%-800-600-400-20002004006008002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012millioneurosNet profits of banks and loan write-downsnet profit loan losses (net) net profit without extraordinary income net profit / total assets
  13. 13. The loan to deposit ratio stabilised this year at 112%The improvement in the loan to deposit ratio was one of the most notable in EuropeFinancial Stability Review / Spring 2013 13-80 -60 -40 -20 0 20 40EstoniaLatviaLithuaniaSwedenFinlandGermanyIrelandHungaryNetherlandsBelgiumSpainFranceItalyppChanges in the loan to deposit ratio 2008-2012Source: European Central Bank, Eesti Pank calculations
  14. 14. The volume of savings of non-residents issomewhat smaller than it was in the autumnFinancial Stability Review / Spring 2013 1401,0002,0003,0004,0005,0006,0007,0008,0009,00010,0002007 2008 2009 2010 2011 2012 2013millioneurosSavings of residents and non-residentsresident deposits non-resident deposits
  15. 15. Low interest rates affect the lendingbehaviour of borrowers and banksBank loan margins have increasedFinancial Stability Review / Spring 2013 150%1%2%3%4%5%6%7%2005 2006 2007 2008 2009 2010 2011 2012 2013Interest rate components in housing loans6m EURIBOR interest margin
  16. 16. Borrowers should ensure that their buffers areenough to cope with a rise in interest ratesFinancial Stability Review / Spring 2013 160%10%20%30%40%50%60%70%80%90%100%01/201104/201107/201110/201101/201204/201207/201210/2012Structure of the base interest rates for new housing loans6-month EURIBOR 3-month EURIBOR 1-month EURIBOR prime rate fixed interest rateSources: Swedbank, SEB, Nordea branch, Eesti Pank calculations
  17. 17. Financial Stability Review / Spring 2013Summary and Assessment
  18. 18. Balanced economic development and strong capitalisationof banks aid Estonian financial stabilityFinancial Stability Review / Spring 2013 18• Despite the increase in lending activity, the risk of excessive loan growthin the short term is small– Loan demand remains moderate and has a strong foundation in theimproved financial circumstances of companies and households• Low interest rates have improved loan repayment ability, though a long-term risk could arise if they remain low for too long• Bank capitalisation and liquidity remain strong– Growth in domestic deposits has lowered the financing risk of theloan portfolio
  19. 19. The Estonian banking sector is a fraction the size of thatin the Nordic countries given the size of the economiesFinancial Stability Review / Spring 2013 19Sources: European Central Bank, Eurostat, Eesti Pank calculations1809%809%0%100%200%300%400%500%600%700%LuxembourgMaltaIrelandCyprusUnitedKingdomNetherlandsSwedenAustriaDenmarkSpainFranceFinlandGermanyBelgiumPortugalGreeceItalySloveniaLatviaEstoniaHungaryCzechRepublicBulgariaPolandSlovakiaLithuaniaRomaniaBanking assets as a ratio to GDP (June 2012)
  20. 20. The main risks to Estonian financial stabilitycome from the external environment• Even though the situation in financial markets has improved, newtensions could cause major macroeconomic and political risks– The weak economy in the euro area has worsened the creditquality of European banks• Nordic banks have got credit on better terms than other bigbanks in Europe– The financing of Swedish banks is largely based on the trustof financial markets and this makes it very vulnerableFinancial Stability Review / Spring 2013 20
  21. 21. Conclusions (1)• It continues to be of critical importance that member states contribute toimplementing European Union reforms and strengthen their public finances• Assessments of the quality of banking assets should be conservative andtransparent– Estonia’s experience shows that an immediate response to challengesand larger write-downs of loans contribute to a speedier recovery• A new capital regulation will come into force in 2014 and the euro area willstart joint banking supervision– It is important for Estonia that the effective cooperation in the Nordicand Baltic region continue25.04.2013 Financial Stability Review / Spring 2013 21
  22. 22. Conclusions (2)• The current low interest rates could increase the risks to Estonian financialstability in the future– Borrowers should assess the size of their financial buffers when consideringnew loans, and should remember that it may be necessary to adjustconsumption if interest rates rise– For the sake of financial stability it is important that banks do not takeexcessive risks in order to increase their profits– Margins must not endanger the long-term growth of the economy byremaining high for too long• The strength of the Nordic parent banks is a prerequisite for financial stability inEstonia– Measures taken by Sweden to strengthen liquidity are needed because ofthe uncertainty in the external environment and the domestic vulnerabilityof the financial sector25.04.2013 Financial Stability Review / Spring 2013 22