Banks remain saddled with bad loans

RIGA - Latvia’s Financial and Capital Market Commission says that the amount of delinquent loans decreased in December for the first time since autumn 2008, reports Nozare.lv. Delinquent loans decreased by 7.5 percent during the month, totaling 3.9 billion lats (5.5 billion euros) at year-end. This is equal to 25.5 percent of the banks’ total loan portfolio. However, the amount of loans with payments delayed by over 90 days increased in the month by 3.2 percent; the proportion of such loans in the banks’ total loan portfolio stood at 16.4 percent at the end of the year. In November this figure stood at 15.8 percent.

The total amount of loans without late payments reached 11.5 billion lats at year-end 2009, which is 74.5 percent of the banking sector’s overall loan portfolio - up from 72.6 percent in November. The banking sector’s overall loan portfolio shrank by 0.7 percent in December and stood at 15.4 billion lats at the end of the month; the amount of loans for domestic businesses decreased slightly faster than that for domestic households - by 1.5 percent and 0.6 percent, respectively.

Swedish central bank First Deputy Governor Svante Oeberg adds that Swedish banks continue to face risks from their operations in the Baltics, reports news agency LETA. “Developments in the Baltic countries represent an ongoing problem for the Swedish banks,” Oeberg said in a speech last week. The global economic outlook also remains uncertain as governments discuss the timing of removing stimulus measures, he warned. There is still considerable uncertainty about the strength of the recovery, he said.

Latvia’s economic decline may have bottomed. “The economy is no longer in freefall and is stabilizing,” said senior analyst at Moody’s Investor Service Kenneth Orchard, reports Bloomberg. “Financial stress is down significantly and the Treasury’s liquidity position is good.”

Interbank lending rates have dropped, credit default swaps are down and industrial production grew the most in at least three years in November. “Sharp falls in interbank rates and government bond yields indicate that financial stress has also diminished sharply, particularly over the past couple of months,” Orchard said. Even so, “interbank spreads over Euribor, plus CDS levels, suggest that the risk of [currency] devaluation has not been discounted entirely by the markets.”
Asking rates on the three-month Rigibor, the interbank lending rate, have fallen to around 4.26 percent, the lowest since Jan. 30, 2007, when the rate was 4.18 percent. The three-month rate rose to a high of 29.8 percent on June 26 on speculation the country would be forced to devalue.

Credit default swaps on Latvian five-year debt have narrowed to around 503 basis points (5.03 percent), the EU’s highest level, from about 1,200 basis points in March 2009. One basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Industrial output grew 8.7 percent for the month in November, the biggest gain since the start of 2007. Latvia’s economy may contract between 2 percent and 2.5 percent this year, according to estimates from the central bank, after shrinking about 18 percent in 2009.

Latvia’s credit rating faces hurdles though if there is a serious rift that jeopardizes receiving further trances on its EU-IMF loan, Orchard said. Any economic slowdown in Western Europe, which buys most Latvian exports, would also have a negative effect, he said.