LONDON - Fitch Ratings, an international rating agency, said in a report released last week that Baltic banks are expected to continue to benefit from a strong operating environment and robust loan growth.
The agency noted, however, that liquidity could deteriorate if lending expands too rapidly.
Still, the upshot of the report was positive. Fitch analysts wrote that the three Baltic states are expected to undergo rapid economic growth, which, alongside a rise in personal income, would increase demand for banking products.
"Despite falling net interest margin environment, strong loan growth and increased card usage will maintain the strong growth in fee and commission income," said Banu Cartmell, director in Fitch's Financial Institutions group. "The increase in income will help the Baltic banks' cost-to-income ratio improve in the medium-term."
The agency expects the strong loan growth to continue, particularly in the mortgage loan sector 's and especially in Lithuania, where borrowing has been considerably lower than in Estonia and Latvia.
Nevertheless, though there has been no deterioration in asset quality to date, Fitch is concerned that asset quality may deteriorate as the loans season. At the same time analysts noted that the risk-assessment controls used by the region's large banks 's especially the Scandinavian-owned ones 's are relatively sophisticated.
If, on the other hand, lending continues to outpace deposit growth, banks' liquidity may come under further pressure, and this may affect ratings negatively in the medium-term, Fitch says. "As risk-weighted assets have increased across the Baltic banks, there has been a decline in capital adequacy ratios, except for Latvian banks," the agency notes.
However, in Fitch's view, the banks' ratios are still quite strong.
In the report, Fitch also notes that it will be monitoring the banks' increasing exposure to activities in lower-rated sovereigns, predominantly Russia and Ukraine. These risks are currently limited to only a small proportion of the banks' balance sheets but a substantial increase may negatively affect the ratings of Baltic banks.