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Financial Stability Review
23.04.2014
Key points
• Development and current state of the Estonian Financial
Sector
• Additional topics covered in the Review: sav...
Economic activity in the euro area has increased, but
growth remains modest
Source: Eurostat
-15%
-10%
-5%
0%
5%
-3%
-2%
-...
Sources: Finnish customs board, national statistical offices
Any worsening of the Ukraine crisis poses a serious
risk of d...
The slowing of Estonian economic growth reduced
the profitability of companies, but payment
behaviour and finances continu...
Wage pressures may start to affect the ability of
companies to repay loans
6
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
5...
Overdue loans are forecast to continue
falling as a share of the loan portfolio
If the external environment were to deteri...
Household indebtedness and housing prices have
continued to rise in Sweden
Sources: statistical offices, Valueguard
Swedis...
Capital indicators for parent banking groups have
been supported by good profitability and low volumes
of problem loans
So...
Banks operating in Estonia are using fewer funds
from parent banks to finance lending
Parent banks play an important role ...
The profitability of the banks has been helped by low
funding costs, by the recording of earlier loan write-
downs as prof...
Loan and deposit interest rates in Estonia are lower than
in most European countries
Source: European Central Bank
12
0%
1...
The level and quality of capitalisation in the
Estonian banking sector are very good
13
5%
10%
15%
20%
25%
2008 2009 2010 ...
There are more problems with loan repayments in
the instant loan market than with the much larger
volume of bank loans
Sou...
Low interest rates meant that household deposits with
savings and loan associations increased
• Unlike bank deposits, depo...
Prices for housing have increased significantly
faster than incomes since the second half of 2013
Sources: Estonian Land B...
Housing prices have risen faster in bigger cities
and in the Tallinn districts with larger populations
Source: Estonian La...
Banks have a smaller role in the housing market than
during the boom
Sources: Estonian Land Board, Eesti Pank18
0%
20%
40%...
The banks have not run lending campaigns, which
would have boosted demand for housing further
Lending standards and condit...
Main risks and conclusions
Risks to Estonian financial stability from the
external environment have increased
The main risks to Estonian financial st...
Any worsening of the risk assessment for the Nordic
countries will increase the funding and liquidity risks of
the parent ...
Any deterioration in the external environment
could damage the outlook for economic growth
in Estonia and worsen the loan ...
The rapid rise in Estonian real estate prices could lead to
risky behaviour and a build-up of risks to the financial
syste...
Eesti Pank has been granted responsibility for
macroprudential supervision
• One week ago the Riigikogu changed the law to...
Capital requirements in Estonia from 2014
The systemic risk buffer requirement will come in under a decree of the Governor...
The risks to the Estonian financial sector are small,
but have increased in the past six months
• Estonian financial stabi...
Risks to Estonian financial stability from the external
environment have increased
The main risks to Estonian financial st...
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Financial Stability Review 1/2014

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Financial Stability Review 1/2014

  1. 1. Financial Stability Review 23.04.2014
  2. 2. Key points • Development and current state of the Estonian Financial Sector • Additional topics covered in the Review: savings and loan associations, instant loans, real estate prices • An assessment of the main risks affecting Estonian financial stability 2
  3. 3. Economic activity in the euro area has increased, but growth remains modest Source: Eurostat -15% -10% -5% 0% 5% -3% -2% -1% 0% 1% 2005 2006 2007 2008 2009 2010 2011 2012 2013 GDP real quarterly growth in the euro area and Estonia euroala (vasak telg) Eesti (parem telg) Uneven development in emerging markets could raise tension in financial markets and weaken the outlook for growth 3 euro area (left scale) Estonia (right scale)
  4. 4. Sources: Finnish customs board, national statistical offices Any worsening of the Ukraine crisis poses a serious risk of deterioration in the external environment for Estonia Trade with Russia is also important for our main trading partners 4 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Share of exports going to Russia in 2013 Estonia Latvia Lithuania Finland Sweden
  5. 5. The slowing of Estonian economic growth reduced the profitability of companies, but payment behaviour and finances continued to improve Sources: Krediidiinfo, Eesti Pank 5 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Q1-2 Q3-4 Q1-2 Q3-4 Q1-2 Q3-4 Q1-2 Q3-4 Q1-2 Q3-4 Q1-2 Q3-4 Q1-2 Q3-4 2007 2008 2009 2010 2011 2012 2013 Payment behaviour of companies overdue loans as a share of the portfolio share of companies with tax debts share of companies with payment difficulties
  6. 6. Wage pressures may start to affect the ability of companies to repay loans 6 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 2005 2006 2007 2008 2009 2010 2011 2012 2013 Annual growth in corporate profits and gross monthly wages average gross monthly wages (left scale) company profits (right scale)
  7. 7. Overdue loans are forecast to continue falling as a share of the loan portfolio If the external environment were to deteriorate, overdue loans would grow less than during the last downturn 7 0% 1% 2% 3% 4% 5% 6% 7% 8% 2008 2009 2010 2011 2012 2013 2014 2015 Loans overdue by more than 60 days as a ratio of the loan portfolio actual base scenario 5 pp 10 pp 15 pp
  8. 8. Household indebtedness and housing prices have continued to rise in Sweden Sources: statistical offices, Valueguard Swedish banks are largely funded through financial markets, and so their funding can be rather fragile 8 100 120 140 160 180 200 220 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Indices of house prices in Sweden (January 2005=100) Sweden Stockholm flats Stockholm houses
  9. 9. Capital indicators for parent banking groups have been supported by good profitability and low volumes of problem loans Source: public reports of banks * based on Basel III 9 0% 5% 10% 15% 20% 25% 2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013* 2010 2011 2012 2013* Danske Nordea SEB Swedbank Capital adequacy of Nordic parent banking groups total capital ratio Tier 1 Core Tier 1 Tier I Basel II according to transition rules
  10. 10. Banks operating in Estonia are using fewer funds from parent banks to finance lending Parent banks play an important role in centralised liquidity and capital management 10 0 5 10 15 20 0% 50% 100% 150% 200% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EURbillion Loans and deposits loan to deposit ratio (left scale) volume of loans (right scale) volume of deposits (right scale)
  11. 11. The profitability of the banks has been helped by low funding costs, by the recording of earlier loan write- downs as profit and by dividends from subsidiaries 11 -4% -3% -2% -1% 0% 1% 2% 3% -1,500 -1,000 -500 0 500 1,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EURmillion Components of bank profitability write-downs expenses other income income from fees and services net interest income return on assets (right scale)
  12. 12. Loan and deposit interest rates in Estonia are lower than in most European countries Source: European Central Bank 12 0% 1% 2% 3% 4% 5% 6% CY PT SK FR IT SI BE NL MT LV ES IE GR EE DE AT FI LU euroarea LT SE DK Average interest rates for loans and deposits for households in February 2014 housing loans household deposits of up to one year -3% -2% -1% 0% 1% CY PT SK FR IT SI BE NL MT LV ES IE GR EE DE AT FI LU euroarea LT SE DK Net write-downs by banks as a ratio to total assets in Q1-Q2 2013
  13. 13. The level and quality of capitalisation in the Estonian banking sector are very good 13 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 2013 Capital and leverage ratios common equity tier 1 capital ratio capital adequacy ratio leverage ratio
  14. 14. There are more problems with loan repayments in the instant loan market than with the much larger volume of bank loans Sources: Eesti Pank, commercial register, Ministry of Economic Affairs and Communications14 0 100 200 300 400 500 600 700 800 2010 2011 2012 EURmillion Consumer loans issued by instant loan companies and banks assets of instant loan companies consumer loans issued by banks 0 10 20 30 40 50 60 70 80 90 100 estimated volume of problem loans at instant loan companies (2012) instant loan assets passed on to debt collection companies or subject to court proceedings (2013) household consumer loans from commercial banks overdue by more than 60 days (2013) household mortgage loans from commercial banks overdue by more than 60 days (2013) EURmillion Instant loans subject to claims by debt collection companies or to court proceedings
  15. 15. Low interest rates meant that household deposits with savings and loan associations increased • Unlike bank deposits, deposits in SLAs are not covered by the deposit guarantee scheme and income tax must be paid on the deposit interest earned • There is no supervision of SLAs, the members themselves are responsible for the sound operation of SLAs Deposits in SLAs are equal to 0.1% of deposits in banks 15 2 4 6 8 10 12 14 2 4 6 8 10 12 2009 2010 2011 2012 2013 2014 EURmillion EURmillion Deposits with banks and savings and loan associations savings and loan associations (right scale) banks (left scale)
  16. 16. Prices for housing have increased significantly faster than incomes since the second half of 2013 Sources: Estonian Land Board, Statistics Estonia 16 0.0 0.5 1.0 1.5 2.0 2.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Ratio of median price per square metre of an apartment to average gross monthly wages Tallinn Estonia
  17. 17. Housing prices have risen faster in bigger cities and in the Tallinn districts with larger populations Source: Estonian Land Board 80 90 100 110 120 130 140 150 160 170 180 2009 2010 2011 2012 2013 Real estate prices in largest Estonian towns Q3 2009 = 100 Tartu Pärnu Narva Kuressaare Tallinn 90 110 130 150 170 190 210 2009 2010 2011 2012 2013 Real estate prices in Tallinn districts Q3 2009 = 100 Haabersti Kesklinn Lasnamäe Mustamäe Põhja-Tallinn 17
  18. 18. Banks have a smaller role in the housing market than during the boom Sources: Estonian Land Board, Eesti Pank18 0% 20% 40% 60% 80% 100% 120% 140% 0 500 1,000 1,500 2,000 2,500 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EURmillion Volume of mortgage loans issued in the year and value of real estate transactions for residential space volume of new housing loans value of real estate transactions by private people mortgage turnover / transaction value (right scale)
  19. 19. The banks have not run lending campaigns, which would have boosted demand for housing further Lending standards and conditions have not changed greatly 19 0% 1% 2% 3% 4% 5% 6% 7% 8% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Interest rate on new housing loans by components 6m EURIBOR interest margin
  20. 20. Main risks and conclusions
  21. 21. Risks to Estonian financial stability from the external environment have increased The main risks to Estonian financial stability A worsening of risk assessments for Nordic economies and banks could increase the funding and liquidity risks of parent banking groups A deterioration in the external environment could worsen the outlook for economic growth in Estonia and lower the loan quality of the banks The rapid rise in Estonian real estate prices may affect the financial behaviour of households and companies and lead risks to the financial system to build up minor risk major risk arrow indicates changes in the risk level from the previous assessment of October 2013 21
  22. 22. Any worsening of the risk assessment for the Nordic countries will increase the funding and liquidity risks of the parent banking groups • The banks have largely funded the growth in household indebtedness using funds from the financial markets. A funding model which is excessively based on market confidence can be rather fragile • As Nordic bank groups have over 90% of the Estonian banking market, and Swedish banks have around 80%, then there would be a significant weakening of Estonian financial stability if this risk were to be realised – Realisation of this risk would damage the Estonian economy through external trade links and the funding and liquidity risk to local banks that would come through the banking groups • The Swedish central bank and financial supervisory authority have tightened requirements for liquidity and capital. Although this is necessary to ensure financial stability, it may not have enough effect to prevent risks building up further 22
  23. 23. Any deterioration in the external environment could damage the outlook for economic growth in Estonia and worsen the loan quality of banks • The Estonian economy is dependent on a recovery in external demand and on confidence – Wage pressure could restrict the competitiveness of companies in export markets – Events in Ukraine could raise uncertainty for Estonian companies and for our main trading partners • The banking sector has good buffers – The direct exposures of the Estonian financial sector in Ukraine and Russia are small and so the immediate systemic risk is limited – The Estonian economy and banking sector are more resilient now to any deterioration in the external environment than they were before the Russian crisis in 1998 or the global financial crisis in 2008 23
  24. 24. The rapid rise in Estonian real estate prices could lead to risky behaviour and a build-up of risks to the financial system • The build-up of risk comes from unreasonable expectations for real estate prices and for the continuation of rapid wage growth • There is a greater chance risks will be underestimated when interest rates are low A cautious housing loan market is helping keep risks under control • The role of the banks in financing residential real estate transactions is smaller than in the past and lending conditions (interest margins and loan maturities) have not been loosened • Banks need to continue to follow responsible lending principles when assessing the loan repayment ability of borrowers and requiring them to make sufficient down payments • Eesti Pank is prepared to impose requirements for stricter lending conditions if necessary 24
  25. 25. Eesti Pank has been granted responsibility for macroprudential supervision • One week ago the Riigikogu changed the law to give Eesti Pank the right to act as a macroprudential authority • Eesti Pank has the right to set additional capital and liquidity requirements for banks when necessary – Banks in the European Union are subject to a single set of minimum requirements, but additional capital and liquidity requirements can be imposed in response to the condition of the local economy or financial sector or the credit cycle • Eesti Pank also has the right to set stricter requirements for lending standards, such as limits on the loan to value ratio and the ratio of a borrower’s monthly repayments and income 25
  26. 26. Capital requirements in Estonia from 2014 The systemic risk buffer requirement will come in under a decree of the Governor of Eesti Pank Core Equity Tier 1 (CET1) requirement Total equity requirement Base requirement 4.5% 8% Buffer requirement Systemic risk buffer 2% Capital conservation buffer 2.5% Counter-cyclical buffer 0% Total capital requirement 9% 12.5% 26
  27. 27. The risks to the Estonian financial sector are small, but have increased in the past six months • Estonian financial stability is still supported by – increased economic activity in the euro area – market confidence in the Nordic countries – the strengthened financial position of Estonian companies and households, and the high capitalisation of the local banking sector • Risks have increased since the autumn – The conflict between Ukraine and Russia has increased uncertainty about the external environment – Real estate price rises have accelerated, which risks creating imbalances in the Estonian economy 27
  28. 28. Risks to Estonian financial stability from the external environment have increased The main risks to Estonian financial stability A worsening of risk assessments for Nordic economies and banks could increase the funding and liquidity risks of parent banking groups A deterioration in the external environment could worsen the outlook for economic growth in Estonia and lower the loan quality of the banks The rapid rise in Estonian real estate prices may affect the financial behaviour of households and companies and lead risks to the financial system to build up minor risk major risk arrow indicates changes in the risk level from the previous assessment of October 2013 28

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