The second wave of the Covid-19 pandemic and the additional restrictions imposed in December in various areas of life have not shaken the banking system. The financial sector has remained stable. Both citizens and businesses have continued to increase savings in their bank accounts. Although the risk assessment of banks at the end of the moratorium and the prudence of investment decisions slowed down the recovery of lending, there was no further decline in the loan portfolio.
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Tighter consumption restrictions, as well as deteriorating business and consumer sentiment, have stimulated forced and prudent savings, increasing the growth rate of deposits.
In February, the annual growth rate of domestic deposits reached 16.1% (the highest level since 2007).
The annual growth rate of corporate deposits reached 17.8%, and that of households – 14.9%.
In the period from December 2020 to February of this year, the total balance of deposits increased by 4.3%, including corporate deposits – by 2.4% and household deposits – by 5.6%. It was the limited opportunities to spend money according to one’s wishes at a time when wages continued to rise led to a faster rise in household deposits. Entrepreneurs, on the other hand, increased savings by refraining from new investment, although the export performance of goods was good.
The decline in the domestic loan portfolio in the conditions of pandemic and negative sentiment can be assessed as moderate: supportive monetary policy and banks’ approach to entrepreneurs in crisis sectors ensured that non-financial corporate and household loans shrank by only 1.5% between December 2020 and February 2021. with companies declining more, but only by 0.5% – loans to households.
The crisis and declining demand have not affected housing loans, which have risen by 0.5% in the last three months. The ratio of domestic loans to gross domestic product in 2020 remained at the level of the previous year (38%). The total domestic loan portfolio increased significantly in January this year at the expense of loans issued to financial institutions due to a one-off factor – when the bank acquired a leasing company, the loan of this financial institution was refinanced. As a result, the annual rate of change in domestic credit turned positive in January, standing at 3.9% in February. However, excluding the impact of changes in the banking sector’s structural and institutional sector changes and one-off factors, the annual rate of change in the loan portfolio was negative for both loans in general (-1.4%), loans to non-financial corporations (-2.2%) and loans to households (- 0.2%).
The still low lending activity was reflected in a further decline in new loans in general and in the household sector. In the last three months (December to February), new loans were issued 4.9% less than in the previous three months: to households 14.3% less, while non-financial corporations received 4.2% more.
Negative economic sentiment indicators do not lead to a significant credit recovery in the near future. The demand for credit could be dampened by the replacement role of government support measures for the sectors affected by the Covid-19 crisis, while household deposits could be boosted by a one-off payment of € 500 in support for families with children and € 200 in pensioners.
Annual change in domestic loans and deposits (%)
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* For comparison purposes, one-off effects related to structural changes in the Latvian commercial banking sector and changes in the classification of institutional sectors have been removed.
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