Ratings agencies look at Latvia

RIGA -- Rating agency Moody's has released a mixed overview of the Latvian banking sector. Mainly, Moody's believes that the sector's largely foreign ownership provides reassurance but warns that the full consequences of the recent credit boom in the country are yet to be understood.

"The stable outlook and ratings of Latvian banking institutions reflect their improving credit quality, their efforts to grow market share and their good profitability. On the other hand, they also incorporate the challenges the banks face in maintaining a good quality of assets in their fast-growing and unseasoned loan portfolios and controlling costs in a context of wage pressures, as well as the short-term average duration of their liquidity sources, the potential mismatches between their assets and liabilities and the need for further franchise investments," the report says.

On 12 September, Moody's downgraded the outlook on Latvia's long-term foreign and local currency bond ratings to 'stable' from 'positive' due to worsening macroeconomic imbalances.

The report also states what most commentators have known for years 's the adoption of the euro is still a long way away. On a more positive note, Moody's says it "views the ownership structure of the Latvian banking system as a source of strength for its participants. Latvia's largest banks are primarily owned by large Scandinavian banks that have adopted prudent rules for granting loans, provide significant funding for their Latvian subsidiaries and would be able to support them if needed."

However, one of Moody's primary concerns is the very rapid growth in loans. Despite banks' good credit quality and the introduction of more stringent checks, Moody's says it "will continue to closely monitor a potential negative impact on the banks' quality of assets, especially if the Latvian economy and real estate prices continue to deteriorate."

Meanwhile, rival credit rating agency CapitalIntelligence has changed Latvia's credit ratings outlook to 'negative' from'stable'.

The outlook change concerns credit ratings granted to Latvia for long termliabilities in foreign currencies (BBB+) and for long-term liabilities inlocal currency (A-).

"The negative outlook shows growing Latvia's vulnerability to external andfinancial threats as well as the growing risk that the current stepeconomic growth will be followed by sudden fall," Capital Intelligenceexperts say.