Banking sector in the first half of the year: first instalment of the solidarity contribution, migration of deposits and rising interest rates
In the first half of the year, the Lithuanian banking sector continued to record unusually high profitability and banks already transferred the first instalment of the solidarity contribution to the budget. Against the backdrop of rising interest rates, the volume of current deposits decreased and that of term deposits enhanced, while the growth in the loan portfolio was triggered by loans to residents.
“Bank profit indicators are in line with the Bank of Lithuania’s calculations, and we see that the solutions we have proposed on how banks could contribute to the society’s needs in this context are also being implemented. The sector remains well capitalised and liquid. We pay a lot of attention to the quality of banking services and have initiated data exchanges in the fight against cyberattacks,” says Simonas Krėpšta, Member of the Board of the Bank of Lithuania.
Banks have already transferred the first instalment of the temporary solidarity contribution amounting to €56 million to strengthen defence capabilities. This contribution for 2023 may amount to around €250 million. This measure was proposed by the Bank of Lithuania in an environment of increased interest rates under exceptional circumstances.
The profits of the banking sector amounted to €515 million in the first half of the year, which is 2.5 times higher than in the same period in 2022 (€203 million). 15 market participants operated profitably and 3 operated at a loss. The latter incurred a loss of €5 million in total.
Interest income of the banking sector amounted to €1.1 billion in the first half of this year, up by nearly €700 million compared to the same period last year (or triple the amount). Significant growth in interest income has been recorded for the third consecutive quarter. Interest expenditure rose by €89 million to almost €134 million.
At the end of the first half of 2023, deposits with banks totalled €46.7 billion. Most of them consisted of resident deposits of €29.4 billion, of which €7.9 billion were non-resident current deposits held with Revolut bank. After eliminating the effects of Revolut, resident deposits went up by €0.4 billion, or 1.9%, over the quarter, while government and corporate deposits decreased by €0.45 billion, or 10.1% and 4% respectively.
At present, banks offer an annual interest rate of 3.5–4.5% for term deposits with a 12-month maturity, and at the end of February (when the Bank of Lithuania began publishing these data) they offered interest rates of 1.2–2.9%. As interest rates rose, term deposits increased rapidly: their share went up by 8 percentage points in six months, from 13% to 21%.
The loan portfolio amounted to over €26 billion at the end of June, up by €519 million (2%) quarter on quarter. Loans to residents made up the bulk of the growth, increasing by €395 million (2.8%) over the quarter to €14.4 billion.
Housing loans rose by €203 million (1.8%) to €11.4 billion during the quarter. Compared with the end of the first half of last year, the housing loan portfolio increased by almost one tenth year on year. Banks’ margin continues to slowly decline as interest rates rise. According to the latest (August) data, the average interest rate on housing loans equalled 5.8% (2.8% in August 2022, 2.3% in August 2020), and banks’ margin stood at 1.8% (1.9% in August 2022, 2.3% in August 2020).
Corporate loans grew by €25 million (0.2%) quarter on quarter to stand at €10.6 billion (32.4% of the total loan portfolio). The largest increase was recorded in loans to companies operating in the administrative and service activities and energy sectors. Compared to the end of the first half of last year, business loans increased by 6.8% year on year.
The housing loan segment has historically been dominated by three banks (accounting for 90.2% of the market share), while the involvement of other market participants is rising slowly (their share increased by 0.3 percentage points over the quarter). There are significantly more equal competitors in the consumer loan segment, with smaller market participants being more active.
The volume of higher risk loans rose slightly over the period under review, but the volume of non-performing (bad) loans changed modestly, and loan quality indicators remained strong.
All banks operating in Lithuania complied with prudential requirements: capital adequacy is high and top-tier capital instruments continue to dominate. Banks have large liquidity buffers: the liquidity coverage ratio (LCR) is nearly four times the minimum and is markedly higher than in other European countries.
One of the threats faced by banks was cyberattacks, both single and coordinated. Distributed denial-of-service (DDoS) attacks were the most common. In most cases, they had a short-term and insignificant impact on the availability of banking services in Lithuania. On the initiative of the Bank of Lithuania, the Lithuanian Banking Association and the National Cyber Security Centre, credit institutions have been sharing various cybersecurity information since mid-year. This measure is expected to increase resilience to cyber risks.
There are currently 18 participants in the Lithuanian banking sector: 13 banks hold banking licences and 5 banks operate as foreign bank branches. The Bank of Lithuania, in cooperation with the European Central Bank, is examining one application for a specialised bank licence.