The Latvian banking sector as a whole has demonstrated good resilience to the economic shock caused by Covid-19, according to data compiled by the Financial and Capital Market Commission (FCMC) on the banking sector’s performance in 2020.
When assessing the overall performance of the Latvian banking sector, it should be taken into account that in the first quarter of 2020, several credit institutions in Latvia were closed down and, accordingly, excluded from the overall performance of the banking sector, the FCMC explains. Following the implementation of the Group’s strategic decision to terminate its business activities in the Baltics, the Latvian branches of Danske Bank and Svenska Handelsbanken AB were terminated.
On 18 February 2020, the European Central Bank (ECB) decided to revoke the license of AS PNB Banka, which had been effectively suspended since 15 August 2019.
Despite the impact of the closure of these credit institutions, the total assets of the Latvian banking sector have grown by 1.9 billion euros or 8.4% over the year. Excluding the above effects from the closure of credit institutions, asset growth reached 10.9%.
The relatively strong increase in assets over the past year was due to two factors: first, the participation of several credit institutions in the ECB’s longer-term refinancing operations (TLTRO III) auctions; second, growing uncertainty about the economic outlook and declining consumption contributed to a sharp increase in domestic non-financial corporations ‘and households’ deposits, with total deposits growing by € 1.4 billion or 7.6%.
The total amount of loans issued by the Latvian banking sector to non-bank customers decreased by 3.9% during the year, incl. for domestic customers – by 3.0%. The loan portfolio of non-bank customers decreased by 1.0%, mainly due to a decrease in the portfolio of domestic non-financial corporations (by 2.0%) and a decrease in the loan portfolio of foreign customers (by 0.3%), while the domestic household portfolio increased slightly (by 0.8%).
However, the development of domestic non-financial lending in 2020 was generally characterized by significant differences between market participants – if the amount of loans issued to domestic customers in some credit institutions did not change significantly or even decreased, some banks saw a relatively rapid increase in loans to domestic customers, incl. In banks that continued to change their business models, the loan portfolio issued to domestic customers increased by 17.8% or 112 million lats over the year. euro, thus confirming their involvement in the domestic customer lending market in accordance with the settings of business strategies.
The quality of loans to non-bank customers continued to improve in all segments of the borrower, with the overall share of non-performing loans (NPLs) declining to 4.7% at the end of December 2020. In the structure of NPLs, the share of loans overdue for more than 90 days decreased, reaching 2.3% at the end of December (3.2% at the end of the previous year), however, the share of unlikely to pay loans in the structure of NPLs increased slightly to 2.4%.
Although the rate of decline in profit gradually slowed down in the second half of the year, in 2020 it remained significant overall – the Latvian banking sector closed the year with 154.1 million lats. euro profit, which is by 36.0% less than in 2019.
The decline in profit was due to both higher provisions for savings (by 20.7 million euros or 44.4%) and a decline in operating income (by 56.7 million euros or 7.4%). Operating income was significantly affected by a decline in profits from transactions in financial instruments and exchange rate fluctuations (-47.2%), which was mainly due to the adjustment of asset prices in the financial markets in the first quarter. Although to a lesser extent, the uncertainty created by Covid-19 and its impact on the economy as a whole is also reflected in a 1.7% decrease in net interest income and a 4.7% decrease in commission income.
Accordingly, profitability indicators also deteriorated: the ratio of expenses to income increased from 61.6 to 67.8%, while the return on capital decreased from 9.5 to 5.4%.
At the beginning of 2020, in line with the ECB’s and the FCMC’s call to refrain from paying dividends in order to continue lending and provide capital buffers to cover potential losses, several banks decided to capitalize retained earnings from previous years, significantly improving the banking sector’s overall capital performance. The last quarter of the year also saw a relatively significant improvement in capital ratios due to the return of some banks to profits, as well as a decrease in risk-weighted assets. Due to these factors, the average CET1 ratio of the banking sector improved to 24.5% in the last quarter of the year, while the total capital ratio improved to 25.6% (22.1% and 23.4% at the end of 2019, respectively).
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