Banking sector developments: increase in lending and earnings, better resilience to shocks
In 2021, the Lithuanian banking sector increased its lending to both businesses and households significantly, while also improving its financial resilience. This is particularly important as the test of the pandemic, which has been passed successfully, is being replaced by challenges relating to Russia’s military aggression in Ukraine.
“While the banking sector has been in good health and highly resilient to potential shocks in recent years, vigilance is needed to monitor the quality of the bank loan portfolio, liquidity situation and to respond promptly to developments. We are actively assessing how the banks comply with international sanctions imposed against Russia and Belarus and their anti-money laundering efforts. We also urge banks, together with other financial market participants, to ensure access to financial services for refugees from Ukraine,” says Gediminas Šimkus, Chair of the Board of the Bank of Lithuania.
The Bank of Lithuania estimates that commercial banks may face indirect challenges of Russia’s war against Ukraine this year such as the credit risk for Lithuanian companies that have or had business dealings with the affected countries, rising prices of raw materials, foodstuffs and energy, potential disruptions of payments due to international sanctions against Russia and cybersecurity threats.
Mr. Šimkus believes that the Lithuanian banking sector is well prepared to meet these challenges. Bank assets grew by €5.1 billion (13.5%) to €42.8 billion during the year. Their capital adequacy level continued to be high throughout 2021. This was supported by the decisions of bank shareholders to allocate most of the profits earned in 2020 specifically to strengthen the capital of banks. The liquidity ratio of banks is almost four times higher than required.
In 2021, the loan portfolio of banks increased by almost €3 billion to €22.5 billion, up nearly 15% compared to 2020. Loans to households (53.7%) accounted for the largest share of the loan portfolio of banks. During the year, they increased by €1.2 billion (10.8%) to €12.1 billion. This was driven by active housing lending, which increased by €1 billion (11.4%) to €9.8 billion.
Loans to business companies accounted for 41.1% of the total portfolio and increased by €1.4 billion (18.4%) to €9.2 billion in 2021. Loans to wholesale and retail trade, real estate (over €0.3 billion each) and manufacturing (over €0.2 billion) companies grew by the largest margin. Loans to large, small and medium-sized enterprises grew at a similar pace. The transfer of the portfolio of one leasing company to the balance sheet of a foreign bank branch also contributed to this market development.
As borrowing grew, average annual interest rates fell, with commercial lending rates averaging 2.7% in 2021, down by 0.3 percentage points from a year earlier (3%). Interest rates on housing loans fell from an average of 2.4% in 2020 to 2% at the end of 2021.
The quality of the loan portfolio continued to improve, with the share of non-performing (bad) loans in the commercial loan portfolio falling by 44% to 1.7% and by 40% to 1.0% in the household loan portfolio.
In 2021, deposits continued to increase but at a lower rate than in 2020. Last year, bank deposits increased by €3.2 billion (10.2%) to €35.1 billion. Almost 90% of deposits are current deposits. Household deposits grew by the largest margin of €3.2 billion (18%) to €21.2 billion and accounted for over 60% of total deposits.
In 2021, the Lithuanian banking sector earned an unaudited profit of €329 million, up by 17.6% from 2020. The main driver of the profit growth was the recovery of loan impairment expenses. Last year, 12 banks and branches of foreign banks were profitable and 5 were unprofitable with an aggregate loss of €8.3 million.
At the beginning of 2022, 12 banks held a banking or specialised bank licence and 6 banks operated as branches of foreign banks in Lithuania. Currently, the Bank of Lithuania, together with the European Central Bank, is examining seven applications for a specialised bank licence. Although the banking sector has remained concentrated, the new entrants that have begun operating in the last few years have been increasing their assets and currently already account for 3.2% of the market in terms of assets (compared to 0.9% a year ago). They are particularly active in payments and consumer credit.
Quarterly public information on each bank’s key performance indicators and compliance with prudential requirements is available on the website of the Bank of Lithuania.