VILNIUS - During the fifteen years of independence, Lithuania has developed a banking system that meets international standards and practices, is competitive and recognized on an international scale. This process was greatly influenced by the overall growth of the Lithuanian economy and changes in the legal framework, making the Lithuanian market attractive to major foreign strategic investors, which today hold approximately 87 percent of the domestic banking sector. Most Lithuanian commercial banks are owned by European Union financial institutions with high reliability ratings.
The entry of foreign investors has significantly improved the quality of services in the sector. Sharing the experience of parent banks, our banks have taken on new risk management mechanisms, reshaped their information technologies and widened the range of provided services, which has been positively assessed by international rating agencies.
At the moment there are 10 commercial banks and two foreign bank branches in the country, providing universal banking services. As Lithuania became a full-fledged member state of the European Union, over 60 EU credit institutions have made use of the freedom to provide services and have notified the Bank of Lithuania of their intentions to provide financial services in Lithuania without establishing a branch.
The concentration in the Lithuanian banking sector has remained high, as the three largest commercial banks hold about two-thirds of the asset market, although this concentration has recently been decreasing due to the active operations of both foreign bank branches and other smaller banks.
Banks in Lithuania have been active in recent years in widening the range of electronic banking services, enlarging the payment card network and expanding the volume of insurance and leasing services through their subsidiary companies.
Credit has traditionally remained the key area of banking, and interest income accounts for the main share of earnings in banks. Ongoing growth of the domestic economy, favorable economic expectations and low interest rates, together with other factors, has influenced the expansion of demand for credit. The annual rate of loan portfolio growth on April 1, 2005 was 36.3 percent, 5.3 over the first quarter of the year. Loans to the population grew at the fastest rate. The process has been facilitated by favourable lending conditions with respect to long-term loans for house purchase, supported by government tax breaks on such loans. During the first quarter of the year loans to the population increased by 15.9 percent, of which loans for house purchase grew by 13.2 percent. Nonetheless, regardless of the fast rate of growth, loans to individuals make up only one-fifth of the total bank loan portfolio.
It should be noted that the ratio of the loan portfolio to GDP in Lithuania is quite low compared to other European countries, which is an indication of considerable room remaining for further development of the loan market. According to the data for April 1, 2005, the loan portfolio in banks (including loans for house purchase) accounted for approximately 30 percent of the projected GDP in 2005 (of which loans for house purchase made up 5.8 percent), while the same indicators were twice as high in some neighbouring countries and even higher in other EU countries.
To be sure, the quality of loans has remained good, while the sufficiently high capital adequacy ratio of 12 percent (required minimum ratio is 8 percent) reflected the strong capital base of the banks enabling them to offset losses and assume additional asset risk. The results of stress-testing of bank portfolio sensitivity to credit risk, using a range of negative assumptions, have shown that the banking sector would remain stable and the capital base stronger than the required minimum. Moreover, banks have started implementing progressive risk management methods for internal purposes, based on internal ratings assigned to borrowers and mathematical statistical elements.
Turning to other indicators, one should not fail to note that they have also reflected upward trends. At the end of the first quarter of 2005, the assets of operating domestic commercial banks made up 30.8 billion litas (8.9 billion euros), increasing over the quarter by 5.7 percent. Deposits amounted to 19.1 billion litas, up by 7.1 percent, of which individual deposits made up 10.4 billion litas, an increase over the quarter of 600 million litas (6.1 percent).
All domestic banks and foreign bank branches have been profitable. The total profit of the banking system in the first quarter of the year was 91.1 million litas, 59.6 percent higher than during the same period in 2004 when it reached 57.1 million litas. The total profit of the Lithuanian banking system last year was 299.3 million litas.
Lithuania's reliable and efficient financial system and strong banking sector are factors determining a favorable investment climate. The Bank of Lithuania also contributes to this process in its capacity as the supervisory authority of the country. Supervision of credit institutions is based on the requirements of EU directives regulating the business of credit institutions. Under the established practice, each bank is examined at least once a year. Examinations focus special attention on the quality of managing credit, market, operating, liquidity and other risks, organization of internal control and internal audit, and prevention of money laundering.
To ensure an effective credit institution supervisory mechanism, the Bank of Lithuania takes part in the work of European Union institutions responsible for the formation of the common EU supervisory mechanism and is involved in direct cooperation with supervisory authorities in many countries. The system's nearest goals and its supervision will to a large extent depend on the general processes developing in the EU, such as globalization of the financial sector, unification of supervisory processes and further convergence of the domestic market. Nevertheless, each country has its own national features and interests, which is why certain national variations will be retained, no matter what scope of globalization is attained.