"This year again, the banks will have to step out of their habitual comfort zones and adapt business strategies to provide for stable income, in view of the economic slowdown and low interest rates in Latvia, as well as fiercer competition from the fin-tech companies. Though the banking profitability indicators of last year are considerably higher than the average EU ratios, to a great extent because of successful sale of VISA Europe shares, we expect that this year the banks' profits will be lower than last year. Evaluation of bank strategies, business models and profitability will be the focus of FCMC oversight this year, i.e. to assess whether banks take into account the new circumstances for ensuring stable and sustainable operation," Pēters Putniņš, FCMC Chairman, points out.
"In 2016, we have reached historic high amounts of domestic deposits in Latvian banks, demonstrating a sound upward trend. This is, to a certain extent, evidence of changes in saving habits of Latvian residents and enterprises. At the same time, it may also indicate a cautious view of the future," says Ludmila Vojevoda, Director of Regulations and Statistics Department, Member of the FCMC Board.
Key performance indicators 2016
Banks maintained high capitalization level and the total capital adequacy ratio reached 21.6% at the end of September, while the Common Equity Tier 1 (CET1) ratio was 18.0%. All the banks met the regulatory minimum capital requirement (8%), minimum Tier 1 capital requirement (6%), as well as minimum CET1 capital requirement (4.5%). The high-level capital quality in the banking sector has been maintained by the key element of bank equity – CET1 capital that currently corresponds with the Tier 1 capital in Latvian banks.
With growing current liabilities and declining liquid assets, the total liquidity ratio of banking sector shrank almost by 5 pp, and reached 61.7% by the end of December 2016. Overall, the liquidity ratio remained high, more than twice as much as the minimum requirement for liquidity (30%).
Profit and loss
The banking sector continued to demonstrate sound profitability and reported a profit of 454 million euro (compared to profit of 416 million euro in 2015). Meanwhile all 16 Latvian banks and three foreign bank branches (covering nearly 98% of total banking sector assets) in total made a profit of 466 million euro in 2016. During the reporting year, profitability of the banking sector improved and return on equity (ROE) reached 14.25% by the end of December (compared to 12.5% by the end of 2015).
The increase in banking profitability was based on the revenues from the sale of VISA Europe shares, compensating both a decrease in key bank income items (net interest income shrank by ~4% or 20 million euro and net commission fee income fell by ~3% or 9 million euro during 2016) and increasing expenditures for loan loss provisions (by 26% or ~61 million euro). It should be reminded that last year VISA Europe changed its strategy and repurchased its shares from the banks that had issued VISA payment cards to their customers. By excluding the impact of above transaction, banking net operating income shrank by ~3% in comparison with 2015, but the amounts of the profit gained declined by almost 20% and without above transaction it would be about 335 million euro. By excluding the impact of VISA deal (according to the FCMC estimates) ROE was ~10.4% at the end of December.
During 2016, domestic deposits in Latvian banks showed a stable upward trend and soared to a historic high level. Over the year their amount increased by 1.4 billion euro or 12.6%, including household deposits up by 481 million euro or 8.9%, retail non-financial corporations by 357 million euro or 10.5% and government deposits by 577 million euro or 111%. Whereas domestic financial institution deposits amounted to 94 million euro by the end of the year, or down by 9.3% year-on-year.
Application of enhanced AML requirements and slow economic growth rates in the countries of foreign customers' origin reduced the volumes of deposits in Latvian banks by almost one third (-3.3 billion euro or 26.3%).
As a result of opposing trends in domestic and foreign deposits, the share of domestic deposits had increased from 42.6% to 57.4% over the year.
The downward trend in the aggregate bank loan portfolio was halted in 2016 by showing a stable growth by 3.1%, including an increase in domestic corporate portfolio by 7%, while domestic household loan portfolio shrank by 1.6%, but foreign customer loan portfolio grew by 1.3% due to the adjustments to the value of the US dollar.
The amount of new lending increased – credit institutions issued credits both to domestic households for housing (469 million euro), and domestic non-financial corporations (1.7 billion euro).
The share of loans that were past due more than 90 days in the total loan portfolio shrank to a historic low level and was 4.4% by the end of December (compared to 6.0% at the end of 2015). Such credits constituted 5.3% of domestic household portfolio and 2.3% of domestic corporate portfolio, indicating that the loan work-out process was practically completed in the domestic loan portfolio. The foreign customer loan portfolio showed contrary trends with an increase in the exposures more than 90 days past due. The aggregate share of overdue loans in the loan portfolio shrank from 10.9% to 8.1% during 2015. The balance of loan loss provisions made by the banks during 2015 contracted to 600 million euro or 4.0% of total loan portfolio (compared to 4.7% by the end of 2015).
Summary of balance sheet statements of Latvian banks for 2016 is available on the Financial and Capital Market Commission's website at www.fktk.lv/en; Statistics/Credit Institutions/.
Financial and Capital Market Commission