2023-04-03
Lithuania’s banking sector in 2022: challenges addressed, increased lending and extraordinary circumstances leading to record profits
Last year, Lithuania’s banking sector underwent important structural changes, banks withstood challenges related to the economy and promoted it with loans to households and businesses, and the share of the so-called bad loans was historically low.
“Lithuania’s banking sector is heavily protected, which is very important in overcoming challenges that are abundant today and range from the impact of russia’s war in Ukraine on the economy to active anti-fraud measures. In addition, the country’s banks are becoming more active internationally, especially in terms of payment services, so the quality requirements are constantly increasing,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
There are currently 19 participants in the banking sector: 6 banks hold banking licences, 7 banks have specialised bank licences and 6 banks operate as foreign bank branches. The Lithuanian financial sector provides payment services to more than 25 million customers in 30 countries. One of the most significant events in the banking sector was the reorganisation of the Revolut group companies in Lithuania.
Lithuanian banks are adequately prepared for various challenges: they are well capitalised and have excess liquidity (almost four times higher than required). The growth in interest income will continue to have a positive impact on this. The Bank of Lithuania warns, however, that it is important to remain vigilant. Although there are no signs of deteriorating quality of bank assets, one of the main risks is that the number of insolvent customers, which is currently low, could grow due to economic slowdown, increased basic expenses and growing interest. Moreover, banks have to fight against fraudsters, and the uncertainty is fuelled by factors relating to the geopolitical situation, including cyberattacks.
In 2022, the portfolio of bank loans to households and businesses amounted to almost €26 billion, increasing by €3.5 billion (15.5%) year on year. The bulk of the portfolio (52.8%) consisted of loans to households, which grew by €1.6 billion (13.6%) to €13.7 billion over the year. The housing loan portfolio expanded by €1.2 billion (12%) to €11 billion. The consumer loan portfolio enlarged by as many as 36.6% to €1.5 billion, with banks specialised in this segment being more active.
Lending to businesses accounted for 41.5% of the total loan portfolio of banks. In 2022, it grew by €1.5 billion (16.7%) to €10.8 billion. The largest growth was recorded in loans to companies operating in real estate activities (almost €0.5 billion), energy, and wholesale and retail trade (more than €0.2 billion each). The growth rate of loans to small and medium-sized enterprises was slightly higher than to large companies.
With lending on the rise, the average interest rate on bank loans to businesses was 3.5% in 2022 (5.4% in February 2023), and the banks’ margin equalled 2.96% (2.72% in February 2023). The interest rate on housing loans stood at 2.8% (4.9% in February 2023), and the banks’ margin equalled 1.98% (1.8% in February 2023). In both cases, the total cost of loans grew over the year due to the increasing variable component (mostly the 6-month EURIBOR), while the banks’ margin decreased slightly.
Having eliminated the impact of the Revolut group, the growth of deposits amounted to nearly €3.8 billion (10.9%). Household deposits increased by €0.9 billion (4.3%) year on year, but almost 83% of the funds are held in current accounts. This means that no interest is paid on them. The Bank of Lithuania has begun announcing interest on time and other deposits offered by credit institutions, recommending them as an investment option for residents who have savings which they do not intend to use in the near future. At present, banks offer an annual interest of 2– 3% on 12-month time deposits.
Bank assets increased by €14.2 billion (33.2%) to €57.1 billion over the year. This was determined by the consolidation and reorganisation of the Revolut group companies into a bank. Following the elimination of the above factor, bank assets went up by €4.8 billion (11.5%) year on year.
According to unaudited data, in 2022 Lithuania’s banking sector earned a profit of €468 million, which was by almost €140 million or 42.7% higher than in 2021. 14 banks and foreign bank branches were profitable last year, while 4 suffered losses. All loss-making banks incurred a total loss of €10.7 million. Net interest income was by €291 million (55.9%) higher than in 2021 and amounted to €811 million.
This was the result of extraordinary circumstances that had no precedent in the euro area, i.e. a sharp rise in interest rates against the backdrop of excess liquidity. The preliminary results of the first months of 2023 available to the Bank of Lithuania show significant further growth of the banking sector’s income and profit.
Despite the challenges and uncertainty, the majority of loan quality indicators remained positive. The share of non-performing (bad loans) in the business loan portfolio remained virtually unchanged and accounted for 1.48% (€145.8 million), while that in the household loan portfolio contracted by 5.57% and accounted for 0.84% of the total household loan portfolio (€114.8 million).
Quarterly information about each bank’s key performance indicators and compliance with prudential requirements is available on the Bank of Lithuania website.
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