Bad debts not a threat to lending

  • 2007-10-31
  • Staff and wire reports
TALLINN - The level of bad debts at Hansapank this year is expected to increase as the Estonian economy continues to slow, say bank managers. Management asserts however that they are prepared for any approaching weakness and have set for themselves the target of keeping the share of losses from bad loans to under 0.35 percent of the overall loan portfolio. The bank has in recent years maintained loan loss reserves at about a 0.2 percent level.

Bank CEO Priit Poldoja said that it will not be a problem if loan losses climb even to the 0.5 - 0.6 percent level, as he believes the bank will be able to continue increasing profits in parallel with the increase in bad loans.
The problem for the bank, and for all banks in the region, arises if the economy ends up performing worse than expected, and the big question mark involves what impact the continuing US credit market fallout will ultimately have on the global economy.
As the credit cycle in the Baltics turns from declining interest rates to the current tightening trend, banks need to consider padding their loan loss reserves.
According to the Bank of Estonia the average interest rates on euro loans rose to 5.64 percent at the end of September, an increase of 0.42 percent from the end of August, and are up an average of 0.84 percent from a year earlier.

The average interest rate for loans in local currency kroons was 8.32 percent at the end of September, 0.48 percent higher than the previous month.
The risk for banks, in determining how much to allocate to the reserve account, is that bad debts may increase at a rate faster than loan loss provisions are boosted.
The asset quality of Hansapank is holding up surprisingly well this year, says Poldoja. For the first nine months of the year the share of bad loans makes up just 0.10 percent of the total value of the loan portfolio. According to Hansapank problems are more likely to arise in the real estate market, as well as in the retail industry, where analysts are watching specifically what's happening in the durable goods sector.

Hansapank's loan portfolio at the end of September totaled 7.1 billion euros, and though loan growth has clearly slowed, the bank forecasts that it will keep expanding at an annual rate of 25 percent in the near term. The Estonian economy as a whole is visibly slowing and should continue to do so into the first half of 2008, says the bank.