Economist: Estonian banks can boost their profits further still

SEB building in Tallinn.
SEB building in Tallinn. Source: Siim Lõvi /ERR

While banks reported bumper profits for the first half of 2023, coming close to, and in some cases exceeding, profits posted for the whole of last year, they still have wiggle room to earn greater margins still, according to a Tallinn University of Technology (TalTech) expert.

Triinu Tapver, doctor of economic analysis and finance, said while the economic picture must be viewed as a whole, the largest single impact on banks' profits was the rise in interest rates in the past year.

Tapver told AK: "At the moment, at least I see that the most important part has really come from raising the Euribor or the base interest rates in general, and it just manifests itself in such a multifaceted way, and ultimately it is transferred to the banks' profits."

The banks still have further opportunities to raise profits even more, Tapver added.

"We have been seeing that the difference between the interest paid on home loans, directly related to the Euribor, and interest rates granted on deposits, is still wide enough that banks can obtain profit from therefrom, one way or another."

Swedbank, the largest bank operating in Estonia, recently reported net profits of €214 million for the first six months of this year, just €10 million short of the bank's profits for the whole of 2022. 

Olavi Lepp, head of Swedbank Estonia, put this down to last year's negative to zero interest rates. "Which meant that we paid for the money we deposited in the central bank," he said, adding that now these deposits earn profits, as does the bank's loan portfolio.

Meanwhile, SEB reported €113 million profit to June this year, again almost at the 2022 figure all told (€116 million).

SEB board chair Allan Parik said that in addition to interest rates, customer uptake was a factor – though this in effect is related to interest rates anyway if talking about savers.

Estonian bank LHV saw profits in the first half of the year which even exceeded those of the whole of last year (€69 million versus €61 million)

Banks will be taxed on their profits, LHV CFO Meelis Paakspuu noted. "At present banks have an advance income tax rate of 18 percent, to come into effect from 2025, but the banking sector is the only sector that pays regular corporate income tax. No other sector in Estonia does so," he said.

Allan Parik at SEB said banks have already responded to the Euribor rises by, for instance, raising interest rates on deposits.

"On the other hand, what we are actually seeing now, if we now look at the aspects of the loans, there is also strong competition within the market, but interest rates and loan margins have decreased somewhat. For example, the loan interest rate for a property in the energy class A category is currently 1.4 percent. On average, the loan interest rate for new sales has been 1, It was 7 percent, but a year earlier it was almost two percent," Parik added.


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Editor: Andrew Whyte, Merili Nael

Source: 'Aktuaalne kaamera', reporter Liisbeth Rats.

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