Estonian cbank: Lower interest rates meant reduced profitability for banks

TALLINN - The net profit of the commercial banks operating in Estonia was 146 million euros in the second quarter, which means that given the dividends paid out last year and the income tax paid on them, the profit of the banking sector this year was about a quarter smaller than it was last year, according to Taavi Raudsaar, economist at the Bank of Estonia.

"This means that the profitability of the banks has returned to where it was before the rise in interest rates. Profits were mainly diminished because of the fall in Euribor, which reduced the interest income of the banks," Raudsaar said.

Banks in Estonia earned 146 million euros in net profit from the Estonian market in the second quarter. That is nine million euros more than they earned in the same quarter of 2024, but it should be noted that the banks paid out extraordinarily large dividends in that quarter and paid extraordinarily large amounts of income tax on them. Profit before income tax fell by 23 percent from 232 million euros in the second quarter of 2024 to 178 million euros in the second quarter of 2025.

Profits were down primarily because of the drop in Euribor, which reduced the interest income earned on loans issued faster than it did the funding costs of the banks themselves. The profitability of the banks measured as the ratio of profits to assets fell to 1.3 percent in the second quarter, which is around the average of the past decade. This means it has returned to about where it was before interest rates started their rapid rise," the economist noted.

Although the interest income of the banks has declined, the rapid growth in the housing loan and corporate loan portfolios is supporting their profits. The stock of housing loans in Estonia was about 10 percent larger than a year earlier by the end of June and the stock of corporate loans was 8.5 percent larger, while those indicators have risen more slowly in most other countries in the euro area. The average growth in the housing loan and corporate loan portfolios in the euro area as a whole was around 2 percent.

"The fast growth in lending in Estonia shows that the banks are well able to lend and that the confidence to invest has recovered both at companies and for individuals despite the difficult geopolitical circumstances. The rise in VAT at the start of July gave a temporary boost to the growth in housing loans. The growth in corporate borrowing was led by long-term investment loans, particularly in real estate and infrastructure. There was a small decline at the same time in short-term operating loans with maturity of less than one year. While growth has been rapid for housing loans to households, the growth in shorter-term loans, and particularly consumer loans, has remained quite moderate," Raudsaar said.