Bank of Estonia: Higher interest rates indicate reduced competition

The average interest rate on housing loans in Estonia was 2.6 percent in June.
The average interest rate on housing loans in Estonia was 2.6 percent in June. Source: Postimees/Scanpix

The average interest rate on housing loans in Estonia was 2.6 percent and the average rate for corporate loans 2.9 percent in June, which may indicate reduced competition in some segments of the loan market, Bank of Estonia economist Raido Kraavik said in the central bank's statement on June banking sector statistics.

The average rate of 2.6 percent for housing loans remained slightly above than the long-term average; the average rate for such loans was 2.4 percent in 2017 and 2.5 percent in 2018.

Interest rates for corporate loans have grown even faster, reaching 2.9 percent on average in June. This, among other things, may be indicative of reduced competition in some segments of the loan market. Borrowing remains rather favorable, however, said Kraavik.

According to banking sector statistics published on Tuesday, demand for loans generally remained at the usual level in June.

Businesses have begun leasing more vehicles again, however. The total value of car leases concluded over the past year grew 16 percent on year.

As of the end of June, the balance of companies' loans and leases was €9.5 billion, up just over 5 percent on year.

The portfolio of businesses' loans has grown at a similar pace in previous years as well. Loan growth has been supported by large borrowing transactions concluded by the energy sector at the end of last year and in early 2019, without which total growth would have been half as small.

Households'  demand for loans remained rather high in June. The balance of loans grew by 7.5 percent on year to €9.7 billion. In recent months, housing loans and car leases for private individuals have grown at a similar pace as a year ago. Of other consumption loans, one tenth more was issued than during the previous year. Demand for loans is facilitated by rapid wage growth and low unemployment, which increases households' feeling of security.

Households' deposits have continued to grow at a very rapid rate. Over the past year, the volume of deposits has grown by almost one tenth to €7.9 billion in total. Corporate deposits stood at €6.6 billion, remaining steady on year. The sum total of deposits in banks had increased 5 percent on year.

Not considering dividend income and income tax expenses, the banking sector's total profit amounted to €68 million in the second quarter of 2019, or 1 percent of total assets. This profit was boosted by a 10-percent increase in net interest income. Personnel expenses, meanwhile, have grown 15 percent.


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Editor: Aili Vahtla

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