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Financial Stability Review 
29.10.2014
The continuing accommodative monetary policy of 
major central banks affected financial markets 
4.5% 
4.0% 
3.5% 
3.0% 
2...
Real estate prices in Sweden continued 
to rise and debt levels to increase 
The main risk is that economic growth will be...
The Swedish financial supervisory authority has 
tightened their capital requirements 
25% 
20% 
15% 
10% 
5% 
0% 
The maj...
The loan and lease portfolio of banks operating 
in Estonia grew faster in the second quarter 
15% 
10% 
5% 
0% 
-5% 
-10%...
Growth in corporate loans was led by manufacturing 
and by real estate and construction 
20% 
15% 
10% 
5% 
0% 
-5% 
-10% ...
The financial results of Estonian companies 
declined somewhat 
The main risks are a slow recovery in economic growth in t...
Corporate liquidity, capitalisation and 
ability to pay remain strong 
* The current ratio is the ratio of short-term fina...
Possible impacts of the conflict between Russia 
and Ukraine on the banking industry 
• The impact of Russian restrictions...
The ability of households to pay their loans 
remained good as incomes rose and interest 
rates remained low 
25% 
20% 
15...
The quality of the loan portfolio has 
mainly improved across all sectors 
It is forecast that the share of loans overdue ...
Prices are rising more slowly in the housing 
market and the number of transactions has 
stabilised 
1400 
1200 
1000 
800...
The role of banks in financing housing 
has remained stable 
0 
0% 
200 
20% 
40% 
400 
60% 
600 
80% 
100% 
800 
120% 
1,...
The liquid assets of the banks have increased and 
their content has changed 
30% 
25% 
20% 
15% 
10% 
5% 
0% 
6 
5 
4 
3 ...
The profitability of the banks has remained 
good as loan quality has been strong 
10% 
5% 
0% 
-5% 
-10% 
500 
300 
100 
...
The net interest income of the banks has 
remained stable because interest expenses 
have been low and the share of loans ...
The capitalisation of the banks has been 
raised by profits and partly also by 
changes in calculation methodologies 
Capi...
The results of the comprehensive assessment 
by the European Central Bank will increase 
confidence in European banks 
• T...
Main risks 
and 
requirements for housing loans
Most of the risks to financial stability 
in Estonia are low 
The main risks to Estonian financial stability 
A deteriorat...
Risks from the external environment 
• The weakness of the euro area economy and the conflict 
between Russia and Ukraine ...
Risks from the Nordic countries for the 
financing and liquidity of Estonian banks 
• The prospects for economic growth in...
The risks of excessive rises in 
Estonian real estate prices 
• Interest rates are low and incomes growing 
• The lending ...
Requirements for housing loans 
• A preventative measure to reduce the risk of a 
future lending boom 
• Loan volumes are ...
The requirements planned by 
Eesti Pank for housing loans 
Limit 
* Up to 90% for loans guaranteed by KredEx 
Maximum 
per...
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Financial Stability Review 2/2014

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29.10.2014

Published in: Economy & Finance
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Financial Stability Review 2/2014

  1. 1. Financial Stability Review 29.10.2014
  2. 2. The continuing accommodative monetary policy of major central banks affected financial markets 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Interest rates on ten-year government bonds of Germany and the USA 2009 2010 2011 2012 2013 2014 Germany USA Source: Bloomberg
  3. 3. Real estate prices in Sweden continued to rise and debt levels to increase The main risk is that economic growth will be lower than expectations 240 220 200 180 160 140 120 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Valueguard Indices of house prices in Sweden (2005=100) HOX Sweden HOX Stockholm Flats HOX Stockholm Houses
  4. 4. The Swedish financial supervisory authority has tightened their capital requirements 25% 20% 15% 10% 5% 0% The major Swedish banks' CET 1 capital ratios and requirements in Q2 2014 CET 1 requirements CET 1 requirements CET 1 requirements CET 1 requirements Handelsbanken Nordea SEB Swedbank CET1 ratio EU-wide CET1 minimum requirement 4.5% national requirements leverage ratio Sources: public reports of banking groups, Finansinspektionen
  5. 5. The loan and lease portfolio of banks operating in Estonia grew faster in the second quarter 15% 10% 5% 0% -5% -10% -15% Annual growth rates of banking sector loans and leases to businesses and households 2009 2010 2011 2012 2013 2014 corporate loans housing loans other household loans real sector
  6. 6. Growth in corporate loans was led by manufacturing and by real estate and construction 20% 15% 10% 5% 0% -5% -10% -15% -20% Annual growth in loans and leases to businesses 2011 2012 2013 2014 manufacturing real estate and construction corporate loans
  7. 7. The financial results of Estonian companies declined somewhat The main risks are a slow recovery in economic growth in trading partners and a continuation in the adjustment of labour costs 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Profit growth by sectors 2006 2007 2008 2009 2010 2011 2012 2013 2014 other manufacturing construction and real estate Source: Statistics Estonia
  8. 8. Corporate liquidity, capitalisation and ability to pay remain strong * The current ratio is the ratio of short-term financial assets to liabilities 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% Indicators of the ability of companies to repay loans debt-to-equity (left scale) current ratio* (right scale)
  9. 9. Possible impacts of the conflict between Russia and Ukraine on the banking industry • The impact of Russian restrictions on imports on the Estonian economy is estimated at 0.3% – the sectors affected most are food production, agriculture, transport and wholesale – the sectors affected account for a relatively small part of the loan portfolios of the banks and loan quality is good • The banks operating in Estonia have only a small share of their assets in Russia • The impact on the banking industry of the sanctions imposed so far remains modest • A widening of the conflict could have a larger impact as links to Russia are important for several sectors of the economy
  10. 10. The ability of households to pay their loans remained good as incomes rose and interest rates remained low 25% 20% 15% 10% 5% 0% -5% -10% Average gross wage and household deposit growth 2008 2009 2010 2011 2012 2013 2014 annual growth of average monthly wages Sources: Statistics Estonia, Eesti Pank annual growth of household deposits
  11. 11. The quality of the loan portfolio has mainly improved across all sectors It is forecast that the share of loans overdue will continue to decline 8% 6% 4% 2% 0% Loans overdue by more than 60 days as a share of the loan portfolio 2008 2009 2010 2011 2012 2013 2014 2015 2016 actual base scenario 5 pp 10 pp 15 pp foreign demand shock
  12. 12. Prices are rising more slowly in the housing market and the number of transactions has stabilised 1400 1200 1000 800 600 400 200 0 3500 3000 2500 2000 1500 1000 500 0 Number of transactions with apartments and median price 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 number of transactions (left scale) median price (right scale)
  13. 13. The role of banks in financing housing has remained stable 0 0% 200 20% 40% 400 60% 600 80% 100% 800 120% 1,000 140% 03/05 06/05 09/05 12/05 03/06 06/06 09/06 12/06 03/07 06.07 09/07 12/07 03/08 06/08 09/08 12/08 03/09 06/09 09/09 12/09 03/10 06/10 09/10 12/10 03/11 06/11 09/11 12/11 03/12 06/12 09/12 12/12 03/13 06/13 09/13 12/13 03/14 06/14 EUR million Sources: Land Board, Eesti Pank Housing loans issued during the quarter and value of real estate transactions for housing value of housing loans value of transactions for housing value of loans / value of transactions (right scale)
  14. 14. The liquid assets of the banks have increased and their content has changed 30% 25% 20% 15% 10% 5% 0% 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 EUR million Banks' liquid assets and their share in total assets claims on banks (left scale) securities (left scale)
  15. 15. The profitability of the banks has remained good as loan quality has been strong 10% 5% 0% -5% -10% 500 300 100 -100 -300 -500 2008 2009 2010 2011 2012 2013 2014 EUR million Banks' net profit and net loan losses net profit (left scale) loan losses (net, left scale) net profit without extraordinary financial income (left scale) return on assets (right scale)
  16. 16. The net interest income of the banks has remained stable because interest expenses have been low and the share of loans with higher margins has increased 7% 6% 5% 4% 3% 2% 1% 0% 7% 6% 5% 4% 3% 2% 1% 0% The interest income and expenses of banks as a ratio to assets 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 interest income interest expenses difference
  17. 17. The capitalisation of the banks has been raised by profits and partly also by changes in calculation methodologies Capitalisation and leverage ratios * The leverage ratio is the ratio of CET1 to total assets 35% 30% 25% 20% 15% 10% 5% 2008 2009 2010 2011 2012 2013 2014 common equity tier 1 capital ratio capital adequacy ratio leverage ratio*
  18. 18. The results of the comprehensive assessment by the European Central Bank will increase confidence in European banks • The comprehensive assessment by the ECB analysed the resilience of 130 of the biggest banks in the euro area as at the end of 2013 • The assessment revealed that 25 banks had a shortfall in capitalisation of a total of 24.6 billion euros – 15.2 billion euros of this has already been built up by the banks this year – the banks have two weeks to submit capital plans and 6-9 months to make good the shortfall – the banks operating in Estonia that were subject to the comprehensive assessment were Swedbank, SEB and DNB
  19. 19. Main risks and requirements for housing loans
  20. 20. Most of the risks to financial stability in Estonia are low The main risks to Estonian financial stability A deterioration in the external environment, including the effect of the conflict between Russia and Ukraine, could lead to a downturn in Estonia and worsen the loan quality of banks A reassessment of the risks to the Nordic economies and banks by financial markets will increase the financing and liquidity risks of the banks Low interest rates and rising incomes will help accelerate the rise in Estonian real estate prices, which will increase the risks to the financial system arrow indicates changes in the risk level from the assessment of April 2014 minor risk major risk
  21. 21. Risks from the external environment • The weakness of the euro area economy and the conflict between Russia and Ukraine pose risks • The impact of Russian sanctions on Estonian banks is small • The financial position of Estonian companies and households is good and the banks are well capitalised
  22. 22. Risks from the Nordic countries for the financing and liquidity of Estonian banks • The prospects for economic growth in the Nordic countries have worsened • Real estate prices are rising and debt levels increasing • The funding of large banking groups is vulnerable • Capital requirements for the banks have been tightened
  23. 23. The risks of excessive rises in Estonian real estate prices • Interest rates are low and incomes growing • The lending conditions of banks have not changed • Risk assessment by companies and households
  24. 24. Requirements for housing loans • A preventative measure to reduce the risk of a future lending boom • Loan volumes are currently growing slowly, real estate prices have stabilised and lending conditions have not changed • The requirements will not tighten the current lending conditions
  25. 25. The requirements planned by Eesti Pank for housing loans Limit * Up to 90% for loans guaranteed by KredEx Maximum permitted level Loan-to-value (LTV) limit 85%* Debt service-to-income (DSTI) limit 50% Maturity of a housing loan 30 years Allowed exceptions: up to 15% of the amount of housing loans issued in a month

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