Banking sector in 2023: reduction of loan margins, rise in interest on deposits and part of profit transferred for defence

“Banks were active and fuelled a stalling economy, but at the same time refused to compromise quality: the level of the so-called bad loans is one of the lowest in the euro area. We invite residents to take advantage of the environment of higher interest rates: to protect their savings from depreciation with increased interest on deposits or, as the margin on housing loans decreases, to reduce costs by refinancing loans,” says Simonas Krėpšta, Member of the Board of the Bank of Lithuania. 

In 2023, the bank loan portfolio expanded by €1.6 billion (6%) to €27.5 billion. Loans to residents, which constituted the bulk of the portfolio (55%), grew by €1.3 billion (nearly 10%) to €15 billion. The housing loan portfolio widened by €0.7 billion (6.1%) to €11.7 billion, while that of consumer loans grew by €0.6 billion (41%) to stand at €2.1 billion. The latter change was triggered by lending to both Lithuanian residents and residents of other EU countries. 

Following a drop in demand for lending, banks are more active in competing for customers, leading to a significant decline in housing loan margins. According to the data, the average margin on new housing loans with variable interest rates fell by almost a third from 2.4% in 2020 to 1.65% at the beginning of this year. It went down by 0.25 percentage points throughout 2023. The Bank of Lithuania recommends that residents take advantage of loan refinancing options and save money. In turn, the central bank will propose measures to make refinancing more simple and favourable for consumers.

Hypothetical example. A resident has a housing loan of €100,000, repayable by annuity with a margin of 2.1% and a variable interest rate. The residual maturity of the loan is 20 years. After refinancing, the bank’s margin is assumed to be 1.7%, representing a decrease of 0.4 percentage points. In such a case, refinancing could cost around €1,040 and the resident could save €4,600 over the remainder of the loan period.

Lending to businesses accounted for a third of the bank loan portfolio. In 2023 it grew by €0.5 billion (4.3%) to €11.2 billion. Loans to companies engaged in construction (€143 million), transportation and storage (€120 million) were the ones to expand the most, while loans to manufacturing companies (€69 million) suffered the biggest contraction. The total value of bank lending obligations to enterprises went up by 6.9% and amounted to €3.31 billion. 

Last year, deposits held in banks rose by €4.4 billion (9.4%) to €50.8 billion, whereas, after eliminating the Revolut Group’s contribution, deposits increased by €1.7 billion (4.4%). The most significant change was that residents began to employ their savings: the share of term deposits increased from 13% to 26% of customer deposits. Term deposits grew by €3 billion year on year, to stand at €6.6 billion, while current deposits declined by €1.1 billion, amounting to €16 billion. The development was caused by a rise in deposit interest rates from 1.05% (at the beginning of the year) to 3.53% (at the end of the year). At present, banks offer annual interest from 2% to 4.15% on 12-month term deposits. Since late February 2023, the Bank of Lithuania has been publishing regularly updated interest rates offered by credit institutions on term and other deposits.

According to unaudited data, banks (after the solidarity contribution and other fees) earned €986 million in 2023, twice as much as in 2022 (€491 million). The strong profit gains were driven by an unexpected outcome due to a sharp rise in interest rates in an environment of extraordinary and particularly high excess liquidity. 14 banks and foreign bank branches were profitable, while 4 operated at a loss. The latter banks incurred a loss of €9.7 million in total. Those are recently established specialised banks whose operating costs are currently higher than their revenue. Bank assets grew by €6.1 billion (11%) year on year, amounting to €61.7 billion.

Banks allocated part of their profit to the country’s defence, transferring to Lithuania’s budget a solidarity contribution of €250 million, which was proposed by the Bank of Lithuania at the beginning of last year. The solidarity contribution is expected to amount to €220 million in 2024. 

Due to higher interest rates in an environment of excess liquidity, bank interest income nearly tripled and amounted to €2.5 billion. Interest expenditure increased by almost five times to €464 million. Net interest income was higher by a factor of 2.5 compared to 2022, amounting to over €2 billion.

All banks significantly exceeded their capital adequacy requirements and liquidity ratios, which shows that they are well prepared to face potential challenges. While the economy slowed down and lending accelerated significantly, loan quality indicators remained robust. The share of non-performing (bad) loans in the total loan portfolio rose only by 0.09 percentage points and accounted for 1% of the total loan portfolio. Their share in the business loan portfolio and the resident loan portfolio was up by 1.85% and 60.3% respectively, totalling €149 million and €184 million respectively.

In 2023, the number of cyber incidents affecting banks decreased. In most cases, they only had a short-term impact on the availability of online banking services. However, the level of risk remains high, thus banks need to continue to pay due attention to this area. The scale of financial fraud has increased, with banks recording over 10,000 frauds per year (33% more than in 2022). Phishing and investment fraud were the most common types of fraud. Banks managed to avoid higher losses due to efforts to stop suspicious payment transactions worth more than €7 million. 

At present, there are 18 commercial banks and 5 foreign bank branches operating in Lithuania. One of the more important developments at the end of 2023 was that both Revolut Holdings Europe UAB and Revolut Bank UAB were included in the list of banks directly supervised by the European Central Bank. Until then, it included Swedbank, AB, AB SEB bankas and AB Šiaulių bankas.

Banking Activity Review

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. 

Supervision of financial market participants, Banks