OREANDA-NEWS. January 27, 2010. Jana Kask, Head of the Financial Sector Policy Division of Eesti Pank

Last year the corporate and household loan and leasing stock declined by 17 billion kroons, i.e., by 6.4%, year-on-year. The total volume of financing portfolios was 251 billion kroons at the end of 2009, reaching the level recorded at the start of 2008. Domestic demand oriented sectors underwent a larger-than-average decline in the credit volume.

 This was especially evident in the trading sector, where credit stock contracted by 23% year-on-year. The slight increase in the real estate market activity in the last quarter did not bring along an equivalent change in the housing loan market - the volume of housing loans issued in December remained at the same level as in previous months.

The volume of corporate and household deposits amounted to 108 billion kroons at end-December, having increased by about 2 billion kroons, i.e., by 2% year-on-year. The accumulation of deposits against the backdrop of the recession was supported by caution in making consumption and investment decisions, but also by the relatively high level of kroon deposit interest rates. But in the last quarter of 2009, banks lowered the interest rates on households' time deposits in kroons by an average of 1.8 pp, to the mid-2006 level of 2.3%.

The improving outlook for the Estonian economy has created favourable preconditions for the expected lowering of the loan interest margin. The average interest rates on housing loans and long-term corporate loans issued in December were 3.4% and 4%, respectively. The stable and very low level of the key interest rates, i.e., Euribor, has so far kept loan interest rates relatively small and the credit conditions of banks have not changed notably over the past half a year.

The share of loans overdue by more than 60 days increased somewhat in December, constituting 6.4% by the end of the month (compared to 6.3% in November). Since the volume of shorter-term arrears declined considerably over the same period, the volume of problem loans is not expected to increase dramatically in the next months.

However, given the complicated labour market situation, it is possible the quality of housing loans may continue to deteriorate. The share of problematic housing loans did not change in December, remaining at the November level of 4.2%. The inhibition in the growth of overdue loans and the high level of loan provisions mean that this year banks may need to make considerably less write-downs. In the fourth quarter, banks made write-downs in the amount of 2.2 billion kroons, which is less than in the previous two quarters. In total, loan write-downs accounted for 8.5 billion kroons, i.e., 3.7% of the loan portfolio in 2009.

If the economic environment continues to improve, it is possible the banking sector will start posting profits in the second half of 2010. The losses of banks operating in Estonia amounted to 4.7 billion kroons in December 2009. These were mostly caused by one-off write-downs of investments in subsidiaries. But a decline in loan write-downs provided a positive impetus on the results of banks. Profitability before write-downs improved also as a result of higher net interest income.
The capital adequacy ratio of the banking sector remained at the October level, since additional capital has been added previously to cover the write-downs of investments.
he financial sector statistics and publication calendar are available on the web site of Eesti Pank at www.bankofestonia.info/pub/en/dokumendid/statistika/pangandusstatistika/tabelid/.