Financial Stability Review29.10.2014

The continuing accommodative monetary policy of major central banks affected financial markets

2009 2010 2011 2012 2013 20140.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

Interest rates on ten-year government bonds of Germany and the USA

Germany USASource: Bloomberg

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

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

100

120

140

160

180

200

220

240

Indices of house prices in Sweden (2005=100)

HOX Sweden HOX Stockholm Flats HOX Stockholm HousesSource: Valueguard

The Swedish financial supervisory authority has tightened their capital requirements

CET

1

requ

irem

ents

CET

1

requ

irem

ents

CET

1

requ

irem

ents

CET

1

requ

irem

ents

Handelsbanken Nordea SEB Swedbank

0%

5%

10%

15%

20%

25%

The major Swedish banks' CET 1 capital ratios and requirements in Q2 2014

CET1 ratio EU-wide CET1 minimum requirement 4.5% national requirements leverage ratioSources: public reports of banking groups, Finansinspektionen

The loan and lease portfolio of banks operating in Estonia grew faster in the second quarter

2009 2010 2011 2012 2013 2014-15%

-10%

-5%

0%

5%

10%

15%

Annual growth rates of banking sector loans and leases to businesses and households

corporate loans housing loans other household loans real sector

Growth in corporate loans was led by manufacturing and by real estate and construction

2011 2012 2013 2014-20%-15%-10%

-5%0%5%

10%15%20%

Annual growth in loans and leases to businesses

manufacturing real estate and construction corporate loans

The financial results of Estonian companies declined somewhatThe main risks are a slow recovery in economic growth in trading partners and a continuation in the adjustment of labour costs

2006

2007

2008

2009

2010

2011

2012

2013

2014

-40%-30%-20%-10%

0%10%20%30%40%50%

Profit growth by sectors

other manufacturing construction and real estate tradeSource: Statistics Estonia

Corporate liquidity, capitalisation and ability to pay remain strong

* The current ratio is the ratio of short-term financial assets to liabilities

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

30%35%40%45%50%55%60%65%70%75%

1.21.41.61.82.02.22.42.62.83.0

Indicators of the ability of companies to repay loans

debt-to-equity (left scale) current ratio* (right scale)

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

The ability of households to pay their loans remained good as incomes rose and interest rates remained low

2008

2009

2010

2011

2012

2013

2014

-10%

-5%

0%

5%

10%

15%

20%

25%Average gross wage and household deposit growth

annual growth of average monthly wagesannual growth of household depositsSources: Statistics Estonia, Eesti Pank

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

2008

2009

2010

2011

2012

2013

2014

2015

2016

-1%0%1%2%3%4%5%6%7%8%

Loans overdue by more than 60 days as a share of the loan portfolio

actual base scenario 5 pp 10 pp 15 ppforeign demand shock

Prices are rising more slowly in the housing market and the number of transactions has stabilised

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

500

1000

1500

2000

2500

3000

3500

0

200

400

600

800

1000

1200

1400

Number of transactions with apartments and median price

number of transactions (left scale) median price (right scale)

The role of banks in financing housing has remained stable

03/0

5

09/0

5

03/0

6

09/0

6

03/0

7

09/0

7

03/0

8

09/0

8

03/0

9

09/0

9

03/1

0

09/1

0

03/1

1

09/1

1

03/1

2

09/1

2

03/1

3

09/1

3

03/1

40100,000,000200,000,000300,000,000400,000,000500,000,000600,000,000700,000,000800,000,000900,000,000

0%

20%

40%

60%

80%

100%

120%

140%

Housing loans issued during the quarter and value of real estate transactions for housing

value of housing loansvalue of transactions for housingvalue of loans / value of transactions (right scale)Sources: Land Board, Eesti Pank

The liquid assets of the banks have increased and their content has changed

2008 2009 2010 2011 2012 2013 20140

1

2

3

4

5

6

0%

5%

10%

15%

20%

25%

30%Banks' liquid assets and their share in total assets

claims on banks (left scale) securities (left scale)claims on central bank (left scale) liquid assets to total assets (right scale)

EUR

mill

ion

The profitability of the banks has remained good as loan quality has been strong

2008

2009

2010

2011

2012

2013

2014

-500-400-300-200-100

0100200300400500

-10%

-5%

0%

5%

10%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)

EUR

mill

ion

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

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%The interest income and expenses of banks as a ratio to assets

interest income interest expenses difference

The capitalisation of the banks has been raised by profits and partly also by changes in calculation methodologies

* The leverage ratio is the ratio of CET1 to total assets

2008 2009 2010 2011 2012 2013 20145%

10%

15%

20%

25%

30%

35%

Capitalisation and leverage ratios

common equity tier 1 capital ratio capital adequacy ratio leverage ratio*

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

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 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

minor risk major risk

arrow indicates changes in the risk level from the assessment of April 2014

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

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

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

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

The requirements planned by Eesti Pank for housing loans

* Up to 90% for loans guaranteed by KredEx

LimitMaximum

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