The biggest possible risks to Estonian banking stem from the external environment, primarily the fast loan growth and real estate price increases in Nordic countries, the Estonian Financial Supervision Authority (EFSA) believes.
"Swedish banking groups make up a significant part of the local banking market," the regulator noted in a press release. "If the risks of the Swedish market were realized, their impact would seep down to the Estonian banking market as well." The risks are defused by banks' solid equity reserves.
Estonian banks and bank branches earned 81 million euros of profit in the third quarter of 2016, which marks a drop of 9 percent from the second quarter. Revenues of the banking sector were 10 percent smaller. Quarter on quarter, interest income increased by 3.5 percent and service fee income by 0.4 percent. The expenditure-income ratio showed a modest rise to 48.3 percent.
"Despite the negative Euribor rate, banks have managed to increase their interest income and stay profitable, mostly thanks to strong loan growth and introduced management measures," the EFSA. "As net interest income is growing at a slower pace than outstanding loans, net interest margins have declined."
The share of non-resident deposits decreased markedly during the third quarter, from 15.5 percent to 13.8 percent, the agency said, observing that since non-resident deposits are highly volatile by nature, such a trend increases the stability of bank resources and reduces the liquidity risk.
Yearly growth in Estonian banks' loan portfolio slowed down from 11.7 to 9.4 percent in the third quarter. At the same time, the growth in household loans accelerated from 4.4 to 4.6 percent.
Banks' loan quality remained good in the third quarter, with loans in arrears making up 3.7 percent and those over 90 days overdue accoounting for 1.3 percent of the total loan portfolio.
The banks' resources increased by 1.4 percent during the third quarter, totaling 20.8 billion euros at the end of the period. The strongest growth was recorded in deposits of credit institutions and the central government. The share of demand deposits, which has been stable at a little over 60 percent since the beginning of last year, stood at 62.6 percent at the end of the quarter.
The banks' return on equity remained at 12 percent during the period under review, approximately twice as high as the average for EU banks, which according to the European Banking Authority was 5.7 percent in the second quarter of 2016.
Editor: Editor: Aili Vahtla