Economic growth entails fewer bad loans
In the first half of this year, banks increased lending to enterprises and residents. An economic recovery reduced the amount of bad loans thereby improving banks’ profitability indicators.
‘Gradual economic growth has been improving the results of the banking sector, while banks in turn have been lending less cautiously. If previously banks searched for larger clients, now we see that, among corporates, lending to small and medium-sized businesses is growing fastest. Additional financial inflows may help activities within namely this business segment gain momentum,’ says Vytautas Valvonis, Director of the Supervision Service at the Bank of Lithuania.
In the first half of this year, banks’ loan value increased by almost 6 per cent year on year, to EUR 18.6 billion. The total value of loans granted to enterprises rose by more than 5 per cent, to EUR 8.8 billion, of which the amount of loans granted to small and medium-sized businesses increased by nearly 7 per cent, to EUR 3.5 billion.
Loans to households increased to EUR 8.4 billion in value, an increase of 8 per cent from last year. Nearly 80 per cent of this amount was comprised of loans for house purchase, which rose by over 8 per cent in value over the year, to EUR 6.7 billion.
‘We have been closely monitoring credit development. Should we identify that growth is too robust or other risks of overheating have occurred – we would take action. However, at the time of the upswing, banks must take, and are already taking, action to accumulate an additional reserve for the future,’ Mr. Valvonis claims.
The amount of deposits with banks augmented by more than a tenth over the year – from EUR 16.7 billion to EUR 18.7 billion. Most of this amount – EUR 11.2 billion – is comprised of household deposits, which rose by 7.3 per cent.
Loans granted contributed to the growth of bank assets, while growing deposits augmented liabilities. At the end of the first half-year, the assets of the banking system stood at EUR 26.4 billion, liabilities – 24.2 billion, an increase of 10.6 per cent and 9.9 per cent respectively over the year.
Over the first half of 2017, banks and foreign bank branches earned EUR 155.4 million in profits, a year-on-year increase of EUR 49.3 million (46.4%).
While income from lending and services posted growth, almost half of the banks’ gains on earnings resulted from the improving borrower situation: with a financial recovery of borrowers, they started repaying loans that had been considered hopeless, or the assets pledged rose in value.
The ratio between bad loans and total loans dropped to 3.48 per cent from the first half of 2016 (a year ago it was 4.67%). The largest share of bad loans was related to businesses engaged in the accommodation, catering and construction activities.
Capitalization of the banking sector remains sustainable: according to the data submitted by banks, the overall capital adequacy ratio was 19.8 per cent at the end of June, an increase of 0.5 p. p. from the first half of 2016.