Estonian banks increase profits as lending and rates rise

Estonian banks earned 539 million euros in the first nine months of the year, about 42 million euros more than a year earlier, ERR reported. Profits rose 9%, supported by growth in loan portfolios and higher Euribor rates, which increased banks’ interest income, Eesti Pank economist Kristjan Mäe said.

Lower loan-loss provisions also boosted profits, as banks assessed potential losses as smaller than before. Administrative costs, particularly staff costs, increased somewhat.

Interest income grew much faster than interest expenses. Rates on long-term business loans and mortgages rose by 0.5 percentage points over the year, while banks’ average funding cost increased by just 0.1 percentage points. Higher deposit rates and a modest rise in the share of term deposits added to interest expenses, but these costs grew much more slowly than interest income.

Growth in lending also supported interest income. By the end of September, loans issued by banks operating in Estonia to businesses and households were up 9% year on year, or 2.5 billion euros. Property-related lending accounted for most of the increase. Mortgage lending growth has remained close to 10% for an extended period, while the loan portfolio of real estate and construction companies grew by more than 14% in September. Other household loans and leasing grew by 4%, while lending to other businesses increased by 5% overall.

Faster deposit growth in recent months has helped banks meet the funding needs created by expanding lending. Rising deposits also support the ability of households and businesses to meet their financial obligations. Mäe said future bank profitability will depend in part on how changes in interest rates pass through to loan and deposit portfolios. The full effect on banks’ interest income and expenses has not yet emerged.

Deposits at banks totalled 34.5 billion euros in September, down 19 million euros from the previous month but up 2.1 billion euros year on year. Term deposits held by Estonian households and businesses accounted for 8 billion euros and grew 16% over the year. Deposits by non-residents rose by 133 million euros year on year and made up 16% of all deposits.

Leasing companies’ total assets stood at 3.9 billion euros in September, down 5.8%, or 244 million euros, from a year earlier.