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Jana Kask, Head of the Financial Sector Policy Division of Eesti Pank

In Estonia the total volume of banks' loan and leasing portfolio grew by 7.3 per cent in 2008. The total portfolio volume increased by 18 billion kroons during the year, amounting to 269 billion kroons. As a result of a decline in credit demand caused by economic adjustment and tightening lending conditions, the stock of loans and leasing to enterprises and households dropped by 2.3 billion kroons, i.e., 0.9 per cent, in December. A majority of the decline derived from the repayment of loans granted to trading sector enterprises. In December, the volume of new housing loans turned out smaller than the repayment amount of earlier loans, thus the mortgage loan portfolio decreased by approximately 200 million kroons.

Risks to the Estonian banking system arising from credit market constraints due to the international financial crisis are mitigated by smaller credit demand and household saving. Since the economy is adjusting, credit demand will remain modest throughout 2009.

In December the deposits of Estonian households and non-financial enterprises increased by 2.1 billion kroons, i.e., 2 per cent, amounting to 106 billion kroons. Owing to the annual increase in deposit interest rates, the share of households' and enterprises' time and saving deposits has grown, standing at 60 per-cent and 41 per cent, respectively, at end-December. Saving has also been encouraged by future uncertainty. Although the contraction of international money market interest rates is starting to impact the interest rates on kroon deposits, households and enterprises expectedly keep accumulating savings into their bank accounts.

The average capital adequacy of banks amounted to 18.8 per cent in December and has been substantially above the required 10 per cent level throughout the past six months. In 2008, banks operating in Estonia earned approximately 4 billion kroons as net profit. This was nearly 50 per cent less than in 2007, but still a tenth higher than in 2006. The net profit of banks was reduced by loan write-downs, which amounted to 1.9 billion kroons, i.e., to 0.8 per cent, of the loan portfolio in 2008.

The share of loans overdue by more than 60 days increased from the November 2.5 per cent level to 2.9 per cent by end-December. This was in line with the projected result of changes in the economic environment and does not threaten the reliability of banks. The share of overdue loans is the biggest in the property and construction sectors as regards enterprises and, in the case of households, in the segment of consumer credit. These three sectors in the aggregate make up over a half of the loans overdue for more than 60 days. The high capitalisation of banks enables them to cope even in the case of possible higher loan losses.

In coming months, the monthly loan repayments of borrowers will decline owing to the falling interest rates in the international money market. As key interest rates fell, the average interest rate on new housing loans and long-term corporate credit issued in December dropped to 5.4 per cent and 5.8 per cent, respectively. Thus, the interest rates on new loans have declined to the level of mid-2007. Since the euro-area money market interest rates continue to decline, the retail interest rates will decrease further and the interest repayment amounts of earlier borrowers will also be smaller.

Figure 1. The annual growth of household and corporate loans and leases in Estonia

Figure 2. The volume of corporate and household deposits (EEK million) in Estonia and the annual deposit growth rate

Figure 3. The weighted average interest rate on housing loans and long-term corporate loans issued within a month and the 6-month EURIBOR

Starting in 2009, Eesti Pank will disclose the consolidated balance sheet of credit institutions not on the 11^th banking day, but on the 17^th banking day, when more detailed banking statistics together with the respective comment by Eesti Pank will be published.
The financial sector statistics and publication calendar are available on the web site of Eesti Pank at www.eestipank.info/pub/en/dokumendid/statistika/pangandusstatistika/tabelid/.