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Banks lent much more in 2016, growing profits at the same time

March 14, 2017

Last year, banks granted many more loans to customers. This grew bank assets, increased their income and profits. Deposits with banks increased in number; as the economic condition improved, non-performing loans decreased. The banking system was well capitalised. Strengthening of capital was still relevant for domestic banks.

‘2015 was a low start year, while in 2016 lending already gained momentum. Banks granted more loans to both enterprises and residents, while the value of housing loans exceeded pre-crisis levels. Our forecast is that this year customer demand for loans will not decline; hence, lending will continue to grow,’ says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

According to him, the Bank of Lithuania will further monitor the market very closely and, having identified the threat of a growing credit bubble, will immediately respond by applying macro-prudential tools.

The net value of the portfolio of loans granted to bank customers grew by EUR 10.6 per cent over 2016, to EUR 18.1 billion. The value of loans granted to residents increased by 6.9 per cent, to almost EUR 8.1 billion.

The largest share of loans granted to households was comprised of housing loans, the value of which grew by 6.4 per cent over the year, to EUR 6.4 billion – reaching historical heights. Growth in housing credit was affected by real estate market activity, related resident expectations and strong income growth, as well as the improving economic situation and low interest rates environment. Nevertheless, the housing credit market was uneven at a national level. In 2016, more than half (55%) of the amount of new housing loans was designated for purchasing flats and houses in Vilnius County. The counties of Kaunas and Klaipėda accounted for 19 per cent and 14 per cent of the flow of new loans for house purchase respectively.

Loans to enterprises increased by 11.3 per cent in value over the year, to almost EUR 8.6 billion. This double-digit growth was driven by a few large loans.

The bank loan portfolio quality was higher. The share of non-performing debt instruments contracted by 1.7 p.p. over the year, to 3.8 per cent as of 1 January 2017. The quality indicators improved for both loans granted to non-financial corporations and households.

Strong credit growth grew bank assets, which went up by 10 per cent over the year, to EUR 25.8 billion.

Increased lending volumes, a decline in interest expenses increased banks’ net interest income, while these contributed the most to profit growth. According to unaudited data, in 2016, banks and foreign bank branches earned EUR 252.2 million in profits, a year-on-year increase of EUR 36.9 million (17.1%). Ten banks and foreign bank branches operated at a profit, three market participants incurred losses.

The banking sector capital continued to be in a stable condition in 2016. As of 31 December 2016, the capital adequacy ratio of the banking system was 19.4 per cent.

‘Based on reports from commercial banks submitted to the Bank of Lithuania, banks complied with the capital requirements. However, in our view, strengthening of capital continues to be most relevant for domestic banks; hence, this should be a priority task in their activities,’ says Vasiliauskas.

Despite intensified crediting, banks have retained a balanced funding structure relying on the deposits of residents and enterprises. Banks hit deposit records. The year 2016 was no exception. The amount of customer deposits with banks stood at EUR 18.8 billion as of 1 January 2017, an increase of 10.0 per cent year on year. The largest share of this amount – almost EUR 11.2 billion – was comprised of resident deposits. With a particularly low interest rates environment prevailing, about 70 per cent of this amount is simply held in current accounts, without concluding contracts.