Financial Stability Review
24.04.2013
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
Tensions on the financial markets have easedThe positive impact of the steps taken in Europe in autumn is still there
Financial Stability Review / Spring 2013 3
2006 2007 2008 2009 2010 2011 2012 20130.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0Systemic Stress Composite Indicator, Index
Source: European Central Bank
The banking crisis in Cyprus increased market uncertainty slightly but contagion was avoidedEuropean banks’ CDS premiums rose by 50 basis points
Financial Stability Review / Spring 2013 4
2011 2012 20130
50
100
150
200
250
300
350
400CDS premiums of Nordic banks and European financial institutions
Itraxx Europe Senior Financial Nordic Banks
Bas
is p
oint
s
Source: Bloomberg
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
2007 2008 2009 2010 2011 2012 2013 2014-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
domestic demand net exports other GDP forecast
Annual GDP growth in the euro area and contributions to growth
The financing of Swedish banks remains mainly short term and based on financial marketsSweden 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
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012Rootsi euroala
0%
500000000%
1000000000%
1500000000%
2000000000%
2500000000%
3000000000%
3500000000%Debt and equity structure of Swedish and euro area banks
equity other funds (incl market funding) deposits loans to total assets
Financial Stability Review / Spring 2013 7
2005 2006 2007 2008 2009 2010 2011 20120
5
10
15
20
25
30
20%
30%
40%
50%
60%
70%
80%
90%
100%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)
billi
on e
uros
The improved financial state of Estonian companies and households is supporting borrowingThe corporate total debt ratio has declined steadily with support from profits
The uncertain external environment reduces the risk of excessive borrowingLoan growth remains today lower than nominal economic growth
Financial Stability Review / Spring 2013 8
2004 2005 2006 2007 2008 2009 2010 2011 20120%
20%
40%
60%
80%
100%
120%
140%
160%
180%
0
5
10
15
20
25
30
Estonian corporate and household debt and debt as a ratio to GDP
debt / GDP (left scale) debt (right scale)
billi
on e
uros
More than one tenth of households have housing loan balances that are larger than the value of the collateralThis is particularly a problem for borrowers wanting to change their place of residence
Financial Stability Review / Spring 2013 9
by value of loans
by number of loans
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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%
Buffers of households with loans have been increased by growth in incomes and falls in base interest rates
Financial Stability Review / Spring 2013 10
2008 2009 2010 201244%
48%
52%
56%
60%
64%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
Despite the weak external environment, the ability of companies and households to borrow has improvedThe share of loans that are overdue is now 3.3%
Financial Stability Review / Spring 2013 11
2006 2007 2008 2009 2010 2011 2012 2013 20140%
1%
2%
3%
4%
5%
6%
7%
8%
Share of loans in the portfolio that are more than 60 days overdue
actual forecast spring 2013 stress scenario
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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-800
-600
-400
-200
0
200
400
600
800
-3%
-2%
-1%
0%
1%
2%
3%Net profits of banks and loan write-downs
net profit loan losses (net) net profit without extraordinary income net profit / total assets
mill
ion
euro
s
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
Estonia
Latvia
Lithuania
Sweden
Finland
Germany
Ireland
Hungary
Netherlands
Belgium
Spain
France
Italy
-80 -60 -40 -20 0 20 40
Changes in the loan to deposit ratio 2008-2012
pp
Source: European Central Bank, Eesti Pank calculations
The volume of savings of non-residents is somewhat smaller than it was in the autumn
Financial Stability Review / Spring 2013 14
2007 2008 2009 2010 2011 2012 20130
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000Savings of residents and non-residents
resident deposits non-resident deposits
mill
ion
euro
s
Low interest rates affect the lending behaviour of borrowers and banksBank loan margins have increased
Financial Stability Review / Spring 2013 15
2005 2006 2007 2008 2009 2010 2011 2012 20130%
1%
2%
3%
4%
5%
6%
7%Interest rate components in housing loans
6m EURIBOR interest margin
Borrowers should ensure that their buffers are enough to cope with a rise in interest rates
Financial Stability Review / Spring 2013 16
01/2
011
04/2
011
07/2
011
10/2
011
01/2
012
04/2
012
07/2
012
10/2
012
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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
Financial Stability Review / Spring 2013
Summary and Assessment
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
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
Luxe
mbo
urg
Mal
ta
Irela
nd
Cypr
us
Unite
d Ki
ngdo
m
Net
herla
nds
Swed
en
Aust
ria
Denm
ark
Spai
n
Fran
ce
Finl
and
Germ
any
Belg
ium
Port
ugal
Gree
ce
Italy
Slov
enia
Latv
ia
Esto
nia
Hung
ary
Czec
h Re
publ
ic
Bulg
aria
Pola
nd
Slov
akia
Lithu
ania
Rom
ania
0%
100%
200%
300%
400%
500%
600%
700%1809%809%1809%809%
Banking assets as a ratio to GDP (June 2012)
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
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
11.04.2023 Financial Stability Review / Spring 2013 21
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
11.04.2023 Financial Stability Review / Spring 2013 22