Outlook positive for Baltic banks

RIGA - The outlook for the banking systems in the three Baltic countries, Estonia, Latvia and Lithuania, has been upgraded to stable from negative, says Moody’s Investors Service in a new Banking System Outlook published on Sept. 23, reports LETA. The Outlook’s key drivers are the improving macroeconomic environment, falling problem loan levels, recovering profitability as loan demand slowly picks up, the positive impact on capitalization of an improved asset quality and profitability, and low reliance on market funding.

Moody’s expects that GDP growth will continue in all three countries which, combined with low inflation, will create a strong macroeconomic platform for the banking systems. The rating agency expects growth of 3 percent, 3.8 percent and 3.2 percent over 2013 in Estonia, Latvia and Lithuania, respectively. The improvement over the past few years was driven by increased competitiveness as a result of real wage decreases which, given the high unemployment rates across the region, are unlikely to rise significantly during the outlook period. However, high unemployment in itself creates negative pressures on debt repayment ability.

The rating agency says that with many of the region’s larger banks having undertaken severe write-downs during the financial crisis, problem loan levels are now falling, although absolute levels remain high. Improvements in problem loan levels have prompted write-backs that have underpinned some of the recent profitability improvements. Such write-backs will likely reduce in the future, although profitability will be helped by slowly increasing loan demand. The combination of improving asset quality, profitability, and increasing regulatory requirements will also help keep capital levels high.

The wholesale funding risk seen in many European banking systems is less pronounced in the Baltic countries where on aggregate, banks are funded through deposits and down-streamed parental funds. Moody’s sees no current indication that banks will look to increase their market funding in the short term, due to a lack of need in the case of the parental-funded larger banks and insufficient scale to access funding markets for many of the smaller banks. Instead, Moody’s views potential deposit instability and parent bank commitment to the Baltics as risks with respect to funding.