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Beginning of year should provide relief for lenders

Last year, Estonia's two largest banks made almost €600 million in net profit as higher interest rates increased loan payments. Analysts predict the year ahead to provide a break for borrowers. The six-month Euribor, now four percent, might fall below three percent by year's end.

Bank profits in Estonia were exceptional last year. Swedbank published a €385 million annual net profit on Wednesday. On Thursday, SEB reported a profit of €232 million. Both banks made twice as much as last year.

"Our income grew mostly due to a single factor: higher interest rates. Base rates and the Euribor climbed, affecting our income," Ainar Leppänen, a member of SEB's management board, said.

"The net profit trends among banks operating in Estonia are an unavoidable consequence of the increase in base interest rates, which has led to a corresponding rise in the Euribor," economist Kristjan Liivamägi, said.

Loans would be more affordable if the market were more competitive, Liivamagi continued.

"There could be more competition and increased competition could lower the risk margins of banks. We are noticing this trend in the market, but I think there is room for it to go even lower," he said.

SEB has confirmed that the worst is over for borrowers and that banks will earn less this year.

"At this point, revenue growth will not continue, will not be repeated and will decrease. It will fall since base rates are expected to fall. It is projected that by the end of this year, the level of the Euribor may decrease to somewhere close to or even below 3 percent," Leppänen said.

So all rests on the European Central Bank's actions. The central bank faces a tricky situation. High borrowing rates are affecting businesses and families as their prices rise. The end outcome is lower consumption, which leads to lower inflation, which is the goal of such policies. At the same time, the eurozone's economic situation is dismal, and the central bank wants to avoid an economic crisis.

The central bank's council met in Frankfurt on Thursday and kept interest rates unchanged, but most analysts expect a rate cut in April.

Swedbank's top economist, Tõnu Mertsina, predicts that interest rates would decrease from 4 percent to 2.5 percent by year-end.

"I believe the European Central Bank could begin reducing interest rates in June of this year. Market participants expect interest rates to fall sooner, but I believe inflation will remain too high for the ECB to continue cutting interest rates, and they will do so later rather than sooner," he said.

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Editor: Marko Tooming, Kristina Kersa

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