Financial Stability Review 1/2013

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


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


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


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


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


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


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


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


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%


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


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


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


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


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


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


• 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


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


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

Financial Stability Review 1/2013

Economy & Finance

Transcript of Financial Stability Review 1/2013