This document summarizes the key topics of the Estonian financial sector stability review for spring 2013. It finds that while tensions in financial markets have eased, risks remain from the weak euro area economy. Estonia's banking sector remains stable due to balanced economic growth, strong bank capitalization, and a decline in the loan to deposit ratio. However, the main risks to Estonian financial stability come from uncertainty in the external environment and European banks' vulnerability due to the poor euro area economy. Ongoing European reforms, conservative banking practices, and regional cooperation are important to maintain stability.

1. Financial Stability Review
24.04.2013

2. Key topics
• The European and Nordic financial sectors
• The developments and risks of the Estonian financial sector
• Assessment of Estonian financial stability
Financial Stability Review / Spring 2013 2

3. Tensions on the financial markets have eased
The positive impact of the steps taken in Europe in autumn is still there
Financial Stability Review / Spring 2013 3
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2006 2007 2008 2009 2010 2011 2012 2013
Systemic Stress Composite Indicator, Index
Source: European Central Bank

4. The banking crisis in Cyprus increased market
uncertainty slightly but contagion was avoided
European banks’ CDS premiums rose by 50 basis points
Financial Stability Review / Spring 2013 4
0
50
100
150
200
250
300
350
400
2011 2012 2013
Basispoints
CDS premiums of Nordic banks and European financial institutions
Itraxx Europe Senior Financial Nordic Banks
Source: Bloomberg

5. The weak economy in the euro area makes debt servicing
harder and could worsen the state of European banks
Financial Stability Review / Spring 2013 5
Sources: European Central Bank, Eurostat
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2007 2008 2009 2010 2011 2012 2013 2014
other net exports domestic demand GDP forecast
Annual GDP growth in the euro area and contributions to growth

6. The financing of Swedish banks remains mainly
short term and based on financial markets
Sweden amended its liquidity requirements for banks this year
Financial Stability Review / Spring 2013 6
Sources: Swedish statistical office, European Central Bank, Eesti Pank’s calculations
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Rootsi euroala
Debt and equity structure of Swedish and euro area banks
equity other funds (incl market funding) deposits loans to total assets

7. Financial Stability Review / Spring 2013 7
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012
billioneuros
Corporate debt and equity
equity (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 companies
and households is supporting borrowing
The corporate total debt ratio has declined steadily with support from profits

8. The uncertain external environment reduces
the risk of excessive borrowing
Loan growth remains today lower than nominal economic growth
Financial Stability Review / Spring 2013 8
0
5
10
15
20
25
30
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
2004 2005 2006 2007 2008 2009 2010 2011 2012
billioneuros
Estonian corporate and household debt and debt as a ratio to GDP
debt / GDP (left scale) debt (right scale)

9. More than one tenth of households have housing loan
balances that are larger than the value of the collateral
This is particularly a problem for borrowers wanting to change their place of residence
Financial Stability Review / Spring 2013 9
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
by value of
loans
by number
of loans
Housing loan portfolio by loan and collateral value ratio at the end of 2012
up to 50% 51–70% 71–80% 81–90% 91–100% 101–150% over 150%

10. Buffers of households with loans have been increased
by growth in incomes and falls in base interest rates
Financial Stability Review / Spring 2013 10
44%
48%
52%
56%
60%
64%
2008 2009 2010 2012
Share of households with financial savings
all households households with loans
Source: TNS Emor, F-monitor 2012
*Financial savings after unavoidable spending on food, shelter and loan repayments

11. Despite the weak external environment, the ability of
companies and households to borrow has improved
The share of loans that are overdue is now 3.3%
Financial Stability Review / Spring 2013 11
0%
1%
2%
3%
4%
5%
6%
7%
8%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Share of loans in the portfolio that are more than 60 days overdue
actual forecast spring 2013 stress scenario

12. The profitability of banks is affected by the fall in base interest
rates and by the recording of earlier loan write-downs as profit
Financial Stability Review / Spring 2013 12
-3%
-2%
-1%
0%
1%
2%
3%
-800
-600
-400
-200
0
200
400
600
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
millioneuros
Net profits of banks and loan write-downs
net profit loan losses (net) net profit without extraordinary income net profit / total assets

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 Europe
Financial Stability Review / Spring 2013 13
-80 -60 -40 -20 0 20 40
Estonia
Latvia
Lithuania
Sweden
Finland
Germany
Ireland
Hungary
Netherlands
Belgium
Spain
France
Italy
pp
Changes in the loan to deposit ratio 2008-2012
Source: European Central Bank, Eesti Pank calculations

14. The volume of savings of non-residents is
somewhat smaller than it was in the autumn
Financial Stability Review / Spring 2013 14
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2007 2008 2009 2010 2011 2012 2013
millioneuros
Savings of residents and non-residents
resident deposits non-resident deposits

15. Low interest rates affect the lending
behaviour of borrowers and banks
Bank loan margins have increased
Financial Stability Review / Spring 2013 15
0%
1%
2%
3%
4%
5%
6%
7%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Interest rate components in housing loans
6m EURIBOR interest margin

16. Borrowers should ensure that their buffers are
enough to cope with a rise in interest rates
Financial Stability Review / Spring 2013 16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
01/2011
04/2011
07/2011
10/2011
01/2012
04/2012
07/2012
10/2012
Structure of the base interest rates for new housing loans
6-month EURIBOR 3-month EURIBOR 1-month EURIBOR prime rate fixed interest rate
Sources: Swedbank, SEB, Nordea branch, Eesti Pank calculations

17. Financial Stability Review / Spring 2013
Summary and Assessment

18. Balanced economic development and strong capitalisation
of banks aid Estonian financial stability
Financial Stability Review / Spring 2013 18
• Despite the increase in lending activity, the risk of excessive loan growth
in the short term is small
– Loan demand remains moderate and has a strong foundation in the
improved 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 the
loan portfolio

19. The Estonian banking sector is a fraction the size of that
in the Nordic countries given the size of the economies
Financial Stability Review / Spring 2013 19
Sources: European Central Bank, Eurostat, Eesti Pank calculations
1809%
809%
0%
100%
200%
300%
400%
500%
600%
700%
Luxembourg
Malta
Ireland
Cyprus
UnitedKingdom
Netherlands
Sweden
Austria
Denmark
Spain
France
Finland
Germany
Belgium
Portugal
Greece
Italy
Slovenia
Latvia
Estonia
Hungary
CzechRepublic
Bulgaria
Poland
Slovakia
Lithuania
Romania
Banking assets as a ratio to GDP (June 2012)

20. The main risks to Estonian financial stability
come from the external environment
• Even though the situation in financial markets has improved, new
tensions could cause major macroeconomic and political risks
– The weak economy in the euro area has worsened the credit
quality of European banks
• Nordic banks have got credit on better terms than other big
banks in Europe
– The financing of Swedish banks is largely based on the trust
of financial markets and this makes it very vulnerable
Financial Stability Review / Spring 2013 20

21. Conclusions (1)
• It continues to be of critical importance that member states contribute to
implementing European Union reforms and strengthen their public finances
• Assessments of the quality of banking assets should be conservative and
transparent
– Estonia’s experience shows that an immediate response to challenges
and larger write-downs of loans contribute to a speedier recovery
• A new capital regulation will come into force in 2014 and the euro area will
start joint banking supervision
– It is important for Estonia that the effective cooperation in the Nordic
and Baltic region continue
25.04.2013 Financial Stability Review / Spring 2013 21

22. Conclusions (2)
• The current low interest rates could increase the risks to Estonian financial
stability in the future
– Borrowers should assess the size of their financial buffers when considering
new loans, and should remember that it may be necessary to adjust
consumption if interest rates rise
– For the sake of financial stability it is important that banks do not take
excessive risks in order to increase their profits
– Margins must not endanger the long-term growth of the economy by
remaining high for too long
• The strength of the Nordic parent banks is a prerequisite for financial stability in
Estonia
– Measures taken by Sweden to strengthen liquidity are needed because of
the uncertainty in the external environment and the domestic vulnerability
of the financial sector
25.04.2013 Financial Stability Review / Spring 2013 22