Last year, the Latvian banking sector demonstrated good resilience to the Covid-19 shock to the economy, the Financial and Capital Market Commission (FCMC) noted.
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At the same time, the commission pointed out that 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 were closed in Latvia and accordingly excluded from the overall banking sector. Following the implementation of the group’s strategic decision to discontinue business operations in the Baltics, the Latvian branches of Danske Bank and Svenska Handelsbanken were suspended, while the European Central Bank (ECB) decided on 18 February 2020 to revoke the license of PNB banka, which was effectively suspended since August 15, 2019.
Despite the impact of the closure of these credit institutions, the total assets of the Latvian banking sector increased by 1.9 billion euros or 8.4% during 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; an increase in the total amount of deposits by 1.4 billion euros or 7.6%, “explained the FCMC.
The commission also noted that the total amount of loans issued by the Latvian banking sector to non-bank customers decreased by 3.9% during the year, including domestic customers – by 3%. The loan portfolio of non-bank customers decreased by 1%, mainly due to a 2% decrease in the portfolio of domestic non-financial corporations and a 0.3% decrease in the loan portfolio of foreign customers, while the domestic household portfolio increased by 0.8%.
“However, the development of domestic non-financial lending in 2020 was 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, including banks that continued “In order to implement the change of business models, the portfolio of loans issued to domestic customers increased by 17.8% or 112 million euros during the year, thus confirming their involvement in the domestic customer lending market in accordance with the business strategy settings,” said the commission.
The FCMC noted that the quality of loans to non-bank customers continued to improve in all segments of the borrower, with the share of non-performing loans decreasing to 4.7% at the end of 2020. In the structure of non-performing loans, the share of loans overdue for more than 90 days decreased to 2.3% at the end of December (3.2% at the end of 2019), however, the share of doubtful loans in the structure of non-performing loans 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 in general – the Latvian banking sector closed the year with a profit of 154.1 million euros, which is 36% less than in 2019. The decline in profit was determined by higher expenses provisions (by 20.7 million euros or 44.4%) and a decrease in operating income (by 56.7 million euros or 7.4%), “the FCMC added.
According to the commission, banks’ operating income was significantly affected by lower profits from financial instruments transactions 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 was 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 with a view to continuing lending and providing capital buffers, several banks decided to capitalize retained earnings from previous years, significantly improving the banking sector’s overall capital ratios. there is 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, “the FCMC noted.
The Commission also noted that, as a result of these factors, the banking sector’s average CET1 ratio improved to 24.5% in the last quarter of the year, while its overall capital ratio improved to 25.6%, from 22.1% and 23.4% respectively at the end of 2019. %.
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