RIGA - The losses of Latvian commercial banks could reach 700 - 800 million lats (1.0 – 1.1 billion euros) for 2009, say analysts, reports business portal Nozare.lv. Director of Parex Asset Management Market Analysis Zigurds Vaikulis estimates that losses in this range are equivalent to the cumulative earnings of the banks through all of the ‘prosperous’ years, from 2005 to 2008.
A similar forecast was also put forward by SEB macroeconomics expert Dainis Gaspuitis. “Banks which have given out credit less expansively and operate in a narrower market niche are experiencing fewer losses, or are even still making some profit, however small” said the analyst.
Latvijas Krajbanka board member Dzintars Pelcbergs says that losses will be more modest, though he allows that they could reach the 700 million lats level. In 2010, banks will continue to be building up their reserves, and it is possible that losses will be smaller than in 2009. Furthermore, it is possible that some market sectors will become more active and that the lowest point, linked to the level of property prices, will pass, he says.
Vaikulis adds that “The results are dramatic, but not surprising - to tell the truth, our forecasts for expected bad credit and necessary reserves in 2009 were already showing similar figures in the middle of last year. At that point, reserves were the main reason for losses, as over the year around 1.2 billion lats were written off, and at the moment they amount to over 10 percent of the credit portfolio.”
He points out that there has also been some deterioration in banks’ operational performance - net interest income margins and volumes in terms of money have decreased, and income from commissions has shrunk, but overall the picture is no longer as dramatic as it was previously.
“This year borrower solvency will be the factor which determines the necessity of building up reserves; however, the rate of growth of reserves will not be as rapid as last year. This means that the banking system will also operate at a loss this year, but this, most likely, will be smaller than that experienced last year,” says Gaspuitis.
In his opinion, banks will focus more on work within their existing loan portfolio, that is, with existing customers, their credit needs and the improvement of their financial difficulties, as well as on allocating finance for those new business projects which involve, for example, acquisition of European Union funds and the development of infrastructure.
Vaikulis points out that, based on simplified and provisional calculations, profit from banks’ overall operations this year could be around 550 million lats, with profit before changes in reserves at a little over 200 million lats. In his view, the amount of bad credit will continue to grow, but not as rapidly as last year, because the majority of potential and actual ‘default’ portfolios have already been identified as bad credit.
“It can be hoped that the process of building up reserves has not ended, but is close to completion. What is more, banks in 2010 will most likely begin to clean up their balance sheets, actively transferring assets to various funds and so on. How this will come about, at what tempo, this can only be guessed. So this unknown factor also fundamentally complicates the forecasting of overall banking sector results,” says Vaikulis.
Up to the end of November 2009, bank losses reached 719.8 million lats.