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Bank of Estonia: Bank profits will decline due to rising interest costs

Central Tallinn high-rises housing the headquarters of several banks that operate in Estonia.
Central Tallinn high-rises housing the headquarters of several banks that operate in Estonia. Source: Siim Lõvi/ERR

Last year, commerical banks earned almost €1 billion in profits, but the Bank of Estonia (BoE) believes this will fall as interest rates rise. However, not all experts agree.

"Banks operating in Estonia were very profitable last year, earning a total net profit of around €940 million. This is about 60 percent more than the long-term average has been," said Bank of Estonia Economist Taavi Raudsaar.

Swedbank and SEB earned a total profit of more than €600 million. Their profits were twice as high as the previous year. Other banks will publish their financial results in February, but the BoE already knows their results.

Swedbank and SEB said last week that due to the rapid increase in interest rates, large income was earned from loans. This has now been confirmed by the BoE.

"Banks' interest income grew rapidly as the Euribor increased and most loan contracts in Estonia are linked to the Euribor. Secondly, banks' own funding costs grew less than their revenues," explained Raudsaar.

If the profits of banks rose from September 2022, profits and interest income have not increased since the second half of last year, BoE data show. Interest expense, however, comes from the interest paid to banks for deposits.

"Profitability will probably decrease in the future, because the previous interest rate increase has already been fully transferred to the banks' revenues, but the banks' interest costs will increase in the future, because more and more depositors' money will probably go to term deposits and less will remain in current accounts. But the term deposit is a more expensive resource for banks," Raudsaar explained.

However, Peter Priisalm, head of asset manager Avaron's investments, believes banks' profitability will decrease very little.

"To put it in very cherry-picked terms, the profitability of banks roughly doubled in 2023, and maybe in 2024 it will fall by 10 percent, but that is not a significant change compared to the rise that occurred before," he said.

Term deposits are currently offered for only one year with a very good interest rate. Priisalm said if Euribor falls as the markets predict, the interest on term deposits will also fall.

"And then, if a reduction in interest rates materializes, they will be able to bring the cost down very quickly with the end of shorter-term deposits," he said.

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Editor: Merili Nael, Helen Wright

Source: Aktuaalne kaamera

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