Bank performance in Latvia 2013 - balanced development and challenges posed by the euro

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Information about Bank performance in Latvia 2013 - balanced development and challenges...
Finance

Published on March 12, 2014

Author: FKTK_lv

Source: slideshare.net

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According to the Financial and Capital Market Commission's (hereinafter – the FCMC) preliminary data on the performance of Latvian banks, the year 2013 in the banking sector was a year of moderate development, with continuing improvements in the key performance ratios. This was evidenced by a number of trends: the banking sector capitalization and liquidity levels remained high, profitability and credit quality improved, the pace of decrease in loan portfolio declined, as well as a rapid growth in resident deposits a. o.

The banking sector still well-capitalized. Several banks had made use of the possibility to strengthen their capital base by including (interim) audited profit of current operational year, whereas reduction in the amount of banking risk-weighted assets was facilitated by a gradual improvement of the loan portfolio quality and still a slow lending development pace, and by the end of December the capital adequacy ratio was 18.9% (regulatory minimum capital requirement – 8%), whereas the tier 1 capital ratio stood at 17.3%1 (compared to 17.6% and 15.3% at the end of 2012). Over the year 2013, six banks increased the share capital in total of 41 million lats. Besides, following the repayment of subordinated loans by banks in 2013 the total amount of tier 2 capital shrank by 34%. Therefore the ratio of tier 1 capital had grown in the banking own capital structure (from 87% at the beginning of year to 91% at the end of December), thus complying with the regulatory capital adequacy requirements aimed at raising the tier 1 capital ratio in the level of own funds (in effect as from 01.01.2014).

Bank liquidity
Despite the increasing amount of demand deposits and their share in total deposits, with the growing amounts of liquid assets there was still a limited liquidity risk. By the end of December 2013, liquidity ratio was 64.4% (regulatory requirement – 30%), increasing by 4.7 percentage points during the year.

Profit and loss
In 2013, for the second year in a row (after the three loss making years) the banking sector reported profits of 173 million lats or 246.2 million euros (compared to profit of 122.3 million lats in 2012). Meanwhile, 15 Latvian banks and five foreign bank branches (in total covering almost 95% of banking sector assets) in 2013 posted a profit of 213.1 million lats overall. During 2013, profitability of the banking sector improved and return on equity (ROE) reached 8.65% at the end of December (compared to 5.56% at the end 2012).
The structure of banking income and expenditures has not changed significantly. As a result of a decrease in interest rates, interest income continued declining, while due to the shrinking of bank liabilities to the monetary financial institutions (MFI) by almost one-fourth over the year, as well as the low interest rate environment the banks were able to materially reduce their interest expenditures related to the leverage, and as a result net interest income grew by 10.4%.

BANK PERFORMANCE IN LATVIA: 2013 06.02.2014

Bank performance in Latvia: 2013 Ludmila Vojevoda, Director of Regulations and Statistics Department, FCMC Board Member Projections and key events: 2014 Kristaps Zakulis, FCMC Chairman Bank performance in Latvia: trends, environment and outlook Mārtiņš Bičevskis, President of the Association of Commercial Banks of Latvia AGENDA FOR MEDIA EVENT

THE YEAR OF BALANCED DEVELOPMENT 3

4 • On 1 January 2014, 17 banks and 9 branches of foreign banks operated in Latvia • In 2013, 3 credit institutions suspended operations: -  «GE Money Bank» -  «UniCredit Bank» -  «Latvijas Hipotēku un zemes banka» •  Number of financial institutions in total declined by 3.6% in EU. On 1 January 2014, there were 8 746 financial institutions in EU as a whole* NUMBER OF CREDIT INSTITUTIONS 26 credit institutions * (ECB; 21.01.2014).

5.4 11.8 54.0 9.5 3.5 7.1 8.7 Latvian State-owned Other Latvian investors Sweden Norway Ukraine Russia Other investors 5 STRUCTURE OF BANK SHAREHOLDERS: SHARE OF STATE CAPITAL DECLINES Structure of bank shareholders on 1 January 2014 (% of share capital) •  After transforming «Hipotēku banka» into the joint stock Latvijas Attīstības finanšu institūciju «Altum», the share of state-owned capital in the total banking share capital shrank from 17.2% in 2013 to 5.4% at the beginning of 2014. •  Significant presence of foreign capital: 82.8% of total foreign capital : •  6 foreign bank subsidiaries •  Market share of 3 EEA bank subsidiaries and 9 EEA bank branches made up 54% of banking sector assets and 82% of resident banking loan portfolio

LATVIAN FINANCIAL SECTOR AS PART OF THE EURO AREA •  In comparison with the euro area countries, the Latvian financial sector is comparatively small – almost three times less than the average in the euro area relative to GDP •  Return on equity (ROE) and capital adequacy ratio (CAR) are in excess of the average ratio of the euro area 6 * Data sources: ECB and Eurostat, FCMC calculations Ratio, % Latvia Euro area, on average CAR 18.94 15.0 ROE 8.65 5.2 Assets of MFI, % of GDP*

KEY BANKING INDICATORS IN 2013

60 -773 -361 -179 122 173 -1 800 -1 500 -1 200 -900 -600 -300 0 300 600 900 2008 2009 2010 2011 2012 2013 Net interest income Net fees and commissions Net gains/losses from financial instruments Net expenses for loan loss provisions Administrativeexpenses Net other income/expenses Profit/Loss IMPROVEMENT IN BANK PROFITABILITY CONTINUES 8 Dynamics of return on equity (ROE), % * Datu avots: ECB banku konsolidētie dati uz 30.06.2013.. Income and expenditure structure, million LVL •  After three years marked by losses, the year 2013 was the second in a row when the banking sector overall operated with profit •  All in all, 15 Latvian banks and 5 foreign bank branches reported profit, overall accounting for almost 95% of banking total assets. •  The banks’ income and expenditure structure has stabilized. The increase in profit was mostly due to a rise in net interest income (by 10.4%), increase in net commission fees (by 13.6%) and gradual improvement of loan portfolio quality (net provisions for loan impairment contracted by 10.9%) 3.7 -41.7 -21.2 -11.2 5.6 8.6 -50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 2008 2009 2010 2011 2012 2013

LOAN PORTFOLIO DECLINE DECELERATES 9 •  Though there were signs of recovery in new lending in 2013 and new loans granted to resident non-financial companies and households totalled LVL 1.6 billion, loan portfolio continued to decline Annual change in the loan portfolio by the category of borrower (percentage points) Loan portfolio structure by the category of borrower (31.12.2013) -10.9 -6.5 -8.3 -3.1 -12 -10 -8 -6 -4 -2 0 2 Non-residents Households, resident Non-financial companies, resident Finance and insurance industry, resident Government, resident Total(%) Total excluding write-offs (%) 1% 4% 44% 32% 6% 13% Government, resident Finance and insurance industry, resident Non-financial companies, resident Households, resident (housing) Households, resident (other) Non-residents

IMPROVING LOAN QUALITY 10 Overdue loans and provisions (% of the respective portfolio) Resident households Resident non-financial companies • Ongoing improvement in household loan quality while the credit risk level still higher than in non- financial companies loan portfolio •  The share of loans past due more than 90 days in all major industries under 10% of loan portfolio of respective industry – for the first time since 2009 15.2 14.8 14.2 13.5 12.0 0 200 400 600 800 0 5 10 15 20 25 More than 90 days (righ axis; mln LVL) Up to 30 days 31-90 days More than 90 days Loan loss provisions 9.8 9.1 9.2 8.5 7.0 0 200 400 600 800 0 5 10 15 20 25

STEEP INCREASE IN RESIDENT DEPOSITS BEFORE THE EURO ADOPTION •  In Q4 2013 before the introduction of the euro, there was a rapid growth both in household and corporate deposits, overall during the year resident deposits increased by LVL 848 million, or 13.3% •  Non-resident deposits rose by LVL 384 million in 2013, with growth rate significantly falling down to 6.3% (compared to 16.8% in 2012), it was also due to «Latvijas Hipotēku un zemes bankas» and «UniCredit Bank» leaving the market, as well as the US dollar becoming weaker. 11 Resident deposits grew by 13.3% Deposits with credit institutions Annual growth in deposits attracted by credit institutions, % 6 378 6 401 6 495 6 551 7 226 6 100 6 403 6 336 6 411 6 484 - 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 2012 III 2013 VI 2013 IX2013 XII 2013 Mln.LVL Residents Non-residents -20.0 -10.0 0.0 10.0 20.0 30.0 I 2012 III V VII IX XI I 2013 III V VII IX XI Residents Non-residents Non-resident deposits y-o-y (excluding USD/LVL exchange rate effect), %

BANK CAPITALIZATION AND LIQUIDITY LEVELS REMAIN HIGH 12 •  Banking sector CAR exceeds the regulatory minimum capital requirement more than twice •  Tier 1 capital ratio reached 17.3% on 31.12.2013 •  Despite the growing volume of demand deposits and their share in total deposits, upon an increase in liquid assets, liquidity risk remained limited Banks’ capital adequacy ratio Liquidity ratio 17.6 18.3 18.6 18.8 18.9 15.3 16.4 16.7 17.0 17.3 0 2 4 6 8 10 12 14 16 18 20 2012 III 2013 VI IX XII % Capitaladequacy (%) Tier I capitalratio (%) Minimum capitaladequacyrequirement 59.7 58.9 64.9 64.7 64.4 0 10 20 30 40 50 60 70 2012 III 2013 VI IX XII % Liquidity ratio Minimum liquidity requirement

KEY EVENTS AND PROJECTIONS: 2014

BANKING SECTOR TRENDS IN 2014 Forecast for 2014 Changes in loan portfolio Residents Non-residents New loans Residents Non-residents Changes in deposits Residents Non-residents Banks’ profitability Network of branches Remote services 14

CHALLENGES FACING BANKING SECTOR IN 2014 15 •  Most powerful market players strengthened in 2013 To retain accessibility of financial services in regions •  Resident deposit volume increased sharply with the euro adoption To retain the amount of resident deposits with banks •  Quality of household loans improved but not as noticeably as expected To continue improving quality of loan portfolio, with household financial situation stabilizing and continuing clean-up of banks’ balance sheets

PRIMARY TASKS IN 2014 •  Loan accessibility to the corporate and household segments •  Successful sale of the bank «Citadele» •  Ongoing enhancement of public financial literacy 16

SUPERVISORS’ HIGH AGENDA IN 2014

WORK ON BUILDING UP BANKING UNION CONTINUES 18 Single supervisory mechanism Single resolution mechanism Common deposit guarantee scheme •  Single Supervisory Mechanism to be launched in full on 4 November 2014 •  It is expected that the Single Resolution Mechanism will take effect in January 2015 •  Amendments to Directive on Deposit Guarantee Schemes to take effect in January 2015

SINGLE SUPERVISORY MECHANISM •  ECB in close cooperation with FCMC will exercise supervision of 3 largest banks in terms of assets – «Swedbank», «SEB Bank», «ABLV Bank» •  Work on comprehensive assessment of banks under way •  Public consultation launched on the draft of the European Central Bank Single Supervisory Mechanism Framework Regulation governing cooperation between the ECB and national competent authorities (NCAs) 19

NEW REQUIREMENTS FOR BANKS IN LINE WITH AMENDMENTS TO CREDIT INSTITUTION LAW •  New capital reserve rules on banks •  Changes in corporate governance (management remuneration and other requirements) •  Disclosure of sanctions imposed on banks by FCMC •  Amendments to the Credit Institution Law: first reading approved by Saeima on 30 January 2014 20

THANK YOU FINANŠU UN KAPITĀLA TIRGUS KOMISIJA Kungu ielā 1, Rīga LV 1050 T.+371 67774800 fktk@fktk.lv | www.fktk.lv

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