RIGA - The largest Nordic banks have raised concerns about the macroeconomic situation in the Baltics by drawing parrallels to the situation that led to their own financial crisis in the early 1990s.
"I do not know how bad it actually is, but Latvia's economic growth has come to a halt, falling from 10 percent growth to almost zero; inflation is high, costs have grown, all making the Baltic states less competitive in the international economy," said Carl Johan Granvik, vice-president of Nordea.
He pointed out that the similarities to the situation the Nordic countries faced are strong. They also had large problems caused by rapid economic growth, high inflation and large budget deficits. If the worst case scenario happens, recovery for Latvia's economy would take some 3-4 years, he said.
Granvik says that deterioration of the economic situation impacts the ability of companies and individuals to pay back loans, and this is already leaving a negative impression of the Baltics among Swedish bankers.
Nordea group President Christian Clausen, meanwhile, said that the Baltic states are in an economic slowdown which is more rapid and deeper than expected. He said that though delayed payments are growing and will continue growing, there are no large losses from loans yet.
Latvian Financial and Capital Market Commission FKTK spokeswoman Ieva Upleja says that Latvian bank capital adequacy and liquidity ratios are stable, and actually exceed the minimum requirements set by regulations.
She says that the liquidity figure of banks in late September was 49.1 percent, where the norm is 30 percent. The average equity capital adequacy figure for the Latvian banks reached 12.3 percent, with the minimum requirement of 8 percent. "The commission continues its monitoring of the banking sector's financial stability indicators," reports Upleja.
During the first nine months of 2008, Latvian banking assets rose by 4.1 percent from the same period in 2007, reaching 22.8 billion lats (32.4 billion euros), reports FKTK.
The banks are still lending. Loans outstanding reached 16.6 billion lats in September, up 4.4 percent from June. Loans to private businesses showed the steepest growth, up 4.9 percent, while loans to households increased by 2 percent.
Meanwhile deposits in Latvian banks in late September reached 10.1 billion lats, a drop of 2.1 percent from June. This, explains FKTK chairwoman Irina Krimane, is partly due to the rumors of the banking sector's instability, and that the drop in deposits "has to be assessed as a minor decline."
Nonetheless, the banking sector remains profitable. Latvian banks earned 205.7 million lats in profit for the first nine months of 2008, a 23 percent drop from the same period a year ago.
By the end of September 2008, Latvian banks had built up their loan loss reserves to 143.8 million lats to cover possible losses, an increase of 28.9 percent from June, reports the Latvian Association of Commercial Banks.
"As the economic situation weakens the quality of the banks' loan portfolios have also slightly worsened. According to the provisional data, the percentage of standard loans has slipped a bit, and the proportion of subprime loans has risen accordingly," the association said.
Upleja predicts that the reserves for bad loans will reach 2 percent of the total loan portfolio by the end of the year. As of now, reserves for bad loans are at 0.86 percent of the total loan portfolio, this is 0.16 percent higher than in June.
Sweden's Swedbank plans to focus on reducing its risks in the Baltic and Nordic countries, but in general it plans to continue its growth, said bank President Jan Liden in an interview with Latvian daily Diena.
"In the perspective of one year we would like to reduce risks in the Baltic states and Nordic countries as we are in the downward stage of the economic cycle. We should adapt the work flow and procedures to reduce risks to our customers and the bank. In five years, I am sure, we will continue growing in the Baltic and also Nordic countries," he said.
Liden said that the bank wants to retain balance in its lending. "We want to retain a balance, but we have not stopped issuing loans, only now we are more demanding, we have to defend business interests. We are interested in deposits as they are a good source of money," stressed Liden.
"Everything is alright in the Baltic and Nordic states. Profit is growing in the Baltics, which proves that we can absorb negative situations. There are not many banks in the world showing better profits this year than last year," he added.
Granvik also confirmed that Nordea maintains long-term plans in the Baltics. Latvia might see difficulties for a couple of years, but, if the economy adapts to the new situation, trust in the country will be renewed.
There are currently 26 banks, including five branches of foreign banks, operating in Latvia.