Future results depend on loan growth, while costs can be cut by reducing deposit rates.

Leaving aside the impact of falling interest rates on profits, the commercial banks' results are quite solid, in the view of the Bank of Estonia (Eesti Pank).

"The profitability of banks operating in Estonia remains quite strong by international standards. If we look at the profitability of the last couple of quarters, then in Estonia it's been at a fairly typical level — one we've seen as the average over a longer period," Bank of Estonia economist Taavi Raudsaar told "Aktuaalne kaamera."

Since the financial markets expect the Euribor to remain at or near its current level over the long term, the effect of interest rate fluctuations on banks is now mostly a thing of the past, and going forward, profits will increasingly depend on how successfully the banks can expan

d their loan portfolios, Raudsaar noted.

"A bank's profit increasingly depends on how well it can grow its loan portfolio, and today we see that they have been managing to do so. Bank loan portfolios are growing quite rapidly — for example, the housing loan portfolio has expanded at a rate of about 10 percent; the corporate loan portfolio by around 8 to 9 percent. In the coming years, as the economic situation improves, loan growth will likely go on — perhaps not quite at around 10 percent, but likely somewhere between 5 percent and 10 percent," said Raudsaar.

Peter Priisalm, head of investments at Avaron Asset Management, said the banks can expect better results next year.

"If interest rates remain stable and the impact of credit risk doesn't grow significantly, then we can expect that banks' results will start to improve next year. As business volumes expand, and with lower interest rates already priced into the loan side, but with plenty of liquidity on the deposit side, banks have room to reduce interest expenses. Taken all together, all these factors could lead to a better year for banks next year," Priisalm said.

While lower interest rates on loans have already been priced in, cutting deposit interest rates offers banks significant savings potential, he added.

"Since liquidity on the market is currently so high that some banks have a loans-to-deposits ratio below 70 percent, they have no need to pay very high interest rates on deposits right now. The level of deposits in Estonia's banking sector has risen above €30 billion — the highest [level] ever. In this situation, it is commercially more advantageous to reduce deposit interest rates," Priisalm said.
The combined profits of Estonia's two largest lenders, Swedbank and SEB, fell by nearly €319 million on year to September.

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